# NORTHERN TRUST CORP (NTRS) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from NORTHERN TRUST CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/73124/000007312424000073/ntrs-20231231.htm
Accession: 0000073124-24-000073
Filing date: 2024-02-27
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/NTRS/
All MD&A years: /company/NTRS/mda/
Previous year: /company/NTRS/mda/fy2022/ (FY 2022)
Next year: /company/NTRS/mda/fy2024/ (FY 2024)

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of the financial condition and results of operations (MD&A) of Northern Trust Corporation (Corporation) for the year ended December 31, 2023. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”

BUSINESS OVERVIEW

The Corporation is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Asset Servicing and Wealth Management. Asset management and related services are provided to Asset Servicing and Wealth Management clients primarily by the Asset Management business.

The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (the Bank). The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 24 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our,” “its,” or similar terms refers to the Corporation and its subsidiaries on a consolidated basis.

FINANCIAL OVERVIEW

TABLE 4: FINANCIAL HIGHLIGHTS

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,"],["($ In Millions)","2023","2022","2021"],["Noninterest Income","$","4,791.5","","$","4,874.0","","$","5,081.8"],["Net Interest Income","1,982.0","","1,887.2","","1,382.7"],["Total Revenue","$","6,773.5","","$","6,761.2","","$","6,464.5"],["Provision for Credit Losses","24.5","","12.0","","(81.5)"],["Noninterest Expense","5,284.2","","4,982.9","","4,535.9"],["Income before Income Taxes","$","1,464.8","","$","1,766.3","","$","2,010.1"],["Provision for Income Taxes","357.5","","430.3","","464.8"],["Net Income","$","1,107.3","","$","1,336.0","","$","1,545.3"],["Preferred Stock Dividends","41.8","","41.8","","41.8"],["Net Income Applicable to Common Stock","$","1,065.5","","$","1,294.2","","$","1,503.5"],["PER COMMON SHARE"],["Net Income \u2013 Basic","$","5.09","","$","6.16","","$","7.16"],["\u2013 Diluted","5.08","","6.14","","7.14"],["Cash Dividends Declared Per Common Share","3.00","","2.90","","2.80"],["Book Value \u2013 End of Period (EOP)","53.69","","49.78","","53.58"],["Market Price \u2013 EOP","84.38","","88.49","","119.61"],["SELECTED RATIOS AND METRICS"],["Return on Average Common Equity","10.0","%","12.7","%","13.9","%"],["Return on Average Assets","0.78","","0.88","","0.99"],["Dividend Payout Ratio","59.1","","47.2","","39.2"],["Average Stockholders\u2019 Equity to Average Assets","8.1","","7.3","","7.5"]]
[[/GREPCENT_TABLE]]

Net Income decreased $228.7 million, or 17%, to $1.11 billion in 2023 from $1.34 billion in 2022. Earnings per diluted common share was $5.08 in 2023 compared to $6.14 in 2022. Return on average common equity decreased to 10.0% in 2023 from 12.7% in 2022. Trust, Investment and Other Servicing Fees decreased 2% in 2023, as compared to a 2% increase in 2022.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 39"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Revenue increased $12.3 million to $6.77 billion in 2023 from $6.76 billion in the prior year, primarily driven by an increase in Net Interest Income of 5%, partially offset by a decrease in Foreign Exchange Trading Income of 29%.

Client AUC/A increased 13% from $13.60 trillion as of December 31, 2022 to $15.40 trillion as of December 31, 2023, primarily reflecting favorable markets. Client assets under custody, a component of AUC/A, increased 12% from $10.60 trillion as of December 31, 2022 to $11.92 trillion as of December 31, 2023. Client assets under custody included $8.01 trillion of global custody assets as of December 31, 2023, which increased 16% from $6.91 trillion as of December 31, 2022. Client AUM increased 15% to $1.43 trillion as of December 31, 2023 from $1.25 trillion as of December 31, 2022. The increase primarily reflected favorable markets, net inflows, and favorable currency translation.

The Provision for Credit Losses in 2023 was $24.5 million as compared to a Provision for Credit Losses of $12.0 million in 2022. For additional information, please refer to Provision for Credit Losses within the “Consolidated Results of Operations” section.

Noninterest Expense of $5.28 billion in 2023 increased $301.3 million, or 6%, from $4.98 billion in 2022, primarily reflecting increased Other Operating Expense, Equipment and Software, and Compensation. Please refer to Note 19, “Other Operating Expense” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to the $84.6 million FDIC special assessment.

The Provision for Income Taxes in 2023 totaled $357.5 million, representing an effective tax rate of 24.4%. The Provision for Income Taxes in 2022 totaled $430.3 million, representing an effective tax rate of 24.4%.

Northern Trust continued to maintain a strong capital position during 2023, with all capital ratios exceeding those required for classification as “well-capitalized” under federal bank regulatory capital requirements. For additional information, please refer to the “Capital Management” section.

CONSOLIDATED RESULTS OF OPERATIONS

The following information summarizes our consolidated results of operations for 2023 compared to 2022. For a discussion related to the consolidated results of operations for 2022 compared to 2021, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 28, 2023.

Revenue

Northern Trust generates the majority of its revenue from Noninterest Income that primarily consists of Trust, Investment and Other Servicing Fees. Net Interest Income comprises the remainder of revenue and consists of Interest Income generated by earning assets, net of Interest Expense on deposits and borrowed funds.

Revenue in 2023 of $6.77 billion increased $12.3 million from $6.76 billion in 2022. Noninterest Income represented 71% and 72% of total revenue in 2023 and 2022, respectively, and totaled $4.79 billion in 2023, which decreased $82.5 million, or 2%, from $4.87 billion in 2022.

Noninterest Income in 2023 decreased primarily due to lower Foreign Exchange Trading Income and lower Trust, Investment and Other Servicing Fees, partially offset by lower investment securities losses compared to the prior year and higher Other Operating Income. Investment Security Gains (Losses), net reflected $169.5 million of losses in 2023 as compared to $214.0 million of losses in 2022. Both losses in Investment Security Gains (Losses), net in 2023 and 2022 were due to a repositioning of the available for sale debt securities portfolio. Other Operating Income of $228.7 million in 2023 increased $37.4 million, or 19%, from $191.3 million in the prior year, primarily due to higher income associated with a market value increase in supplemental compensation plans and higher banking and credit-related services fees. Trust, Investment and Other Servicing Fees of $4.36 billion in 2023 decreased $70.8 million, or 2%, from $4.43 billion in 2022, primarily due to net asset outflows and unfavorable markets, partially offset by lower money market fee waivers and favorable currency translation.

Net Interest Income on a fully taxable equivalent (FTE) basis in 2023 of $2.04 billion increased $106.7 million, or 6%, from $1.93 billion in 2022, primarily due to higher average interest rates, partially offset by an unfavorable balance sheet mix. The net interest margin on an FTE basis increased to 1.56% in 2023 from 1.39% in 2022, primarily due to higher average interest rates, partially offset by an unfavorable funding mix shift. Average earning assets decreased $8.0 billion, or 6%, from $138.8 billion in 2022 to $130.8 billion in 2023, primarily due to lower client deposits, partially offset by higher borrowing activity, the net of which resulted in lower funding of earning assets.

40 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Additional information regarding Northern Trust’s revenue by type is provided in the following table.

TABLE 5: REVENUE

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,"],["(In Millions)","2023","2022","2021"],["Noninterest Income"],["Trust, Investment and Other Servicing Fees","$","4,361.8","","$","4,432.6","","$","4,361.1"],["Foreign Exchange Trading Income","203.9","","288.6","","292.6"],["Treasury Management Fees","31.6","","39.3","","44.3"],["Security Commissions and Trading Income","135.0","","136.2","","140.2"],["Other Operating Income","228.7","","191.3","","243.9"],["Investment Security Gains (Losses), net","(169.5)","","(214.0)","","(0.3)"],["Total Noninterest Income","$","4,791.5","","$","4,874.0","","$","5,081.8"],["Net Interest Income(1)","1,982.0","","1,887.2","","1,382.7"],["Total Revenue","$","6,773.5","","$","6,761.2","","$","6,464.5"]]
[[/GREPCENT_TABLE]]

(1) Net Interest Income stated on a GAAP basis. Net Interest Income on an FTE basis includes FTE adjustments of $57.5 million, $45.6 million, and $35.6 million for 2023, 2022, and 2021, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Trust, Investment and Other Servicing Fees

Trust, Investment and Other Servicing Fees were $4.36 billion in 2023 compared with $4.43 billion in 2022, and are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears.

Northern Trust voluntarily waived $8.8 million of money market fund fees in 2023 and $64.2 million of money market fund fees in 2022.

The components of Trust, Investment and Other Servicing Fees are provided in the following table.

TABLE 6: TRUST, INVESTMENT AND OTHER SERVICING FEES

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,","CHANGE"],["($ In Millions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Asset Servicing Trust, Investment and Other Servicing Fees"],["Custody and Fund Administration","$","1,689.5","","$","1,700.1","","$","1,818.8","","(1)","%","(7)","%"],["Investment Management","528.1","","555.1","","443.5","","(5)","","25"],["Securities Lending","83.0","","81.4","","76.7","","2","","6"],["Other","161.3","","159.7","","148.3","","1","","8"],["Total Asset Servicing Trust, Investment and Other Servicing Fees","$","2,461.9","","$","2,496.3","","$","2,487.3","","(1)","%","\u2014","%"],["Wealth Management Trust, Investment and Other Servicing Fees"],["Central","$","673.8","","$","692.6","","$","698.7","","(3)","%","(1)","%"],["East","491.5","","504.0","","509.3","","(2)","","(1)"],["West","378.0","","382.1","","380.2","","(1)","","\u2014"],["Global Family Office","356.6","","357.6","","285.6","","\u2014","","25"],["Total Wealth Management Trust, Investment and Other Servicing Fees","$","1,899.9","","$","1,936.3","","$","1,873.8","","(2)","%","3","%"],["Total Consolidated Trust, Investment and Other Servicing Fees","$","4,361.8","","$","4,432.6","","$","4,361.1","","(2)","%","2","%"]]
[[/GREPCENT_TABLE]]

Asset Servicing

Asset Servicing Trust, Investment and Other Servicing Fees are primarily attributable to services related to custody, fund administration, investment management, and securities lending. Custody and Fund Administration fees, the largest component of Asset Servicing fees, are driven primarily by values of client AUC/A, transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment Management fees are based generally on market values of client AUM management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 41"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Securities Lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The Other fee category in Asset Servicing includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.

Custody and Fund Administration fees decreased in 2023 from 2022 primarily due to unfavorable lagged markets. Investment Management fees in 2023 decreased from 2022 primarily due to asset outflows, partially offset by lower money market fund fee waivers.

The following tables provide a breakdown of the Asset Servicing assets under custody and AUM.

TABLE 7: ASSET SERVICING ASSETS UNDER CUSTODY

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["North America","$","6,373.4","","$","5,703.1","","$","6,566.4","","12","%","(13)","%"],["Europe, Middle East, and Africa","3,493.9","","3,037.6","","3,894.3","","15","","(22)"],["Asia Pacific","847.3","","823.3","","898.5","","3","","(8)"],["Securities Lending","167.4","","148.3","","195.6","","13","","(24)"],["Total Assets Under Custody","$","10,882.0","","$","9,712.3","","$","11,554.8","","12","%","(16)","%"]]
[[/GREPCENT_TABLE]]

TABLE 8: ASSET SERVICING ASSETS UNDER MANAGEMENT

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["North America","$","681.3","","$","586.0","","$","789.2","","16","%","(26)","%"],["Europe, Middle East, and Africa","141.8","","121.3","","148.5","","17","","(18)"],["Asia Pacific","41.5","","42.5","","57.7","","(2)","","(26)"],["Securities Lending","167.4","","148.3","","195.6","","13","","(24)"],["Total Assets Under Management","$","1,032.0","","$","898.1","","$","1,191.0","","15","%","(25)","%"]]
[[/GREPCENT_TABLE]]

Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by Northern Trust and are included in assets under custody and under management. This securities lending collateral totaled $167.4 billion and $148.3 billion at December 31, 2023 and 2022, respectively.

Wealth Management

Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Fee income in the regions decreased in 2023 from 2022 primarily due to product-related asset outflows, partially offset by favorable lagged markets. Global Family Office fee income was relatively flat primarily due to unfavorable lagged markets, partially offset by lower money market fund fee waivers and asset inflows. The following tables provide a summary of Wealth Management assets under custody and under management.

TABLE 9: WEALTH MANAGEMENT ASSETS UNDER CUSTODY

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Global Family Office","$","728.0","","$","614.9","","$","742.6","","18","%","(17)","%"],["Central","120.7","","124.2","","139.1","","(3)","","(11)"],["East","119.8","","92.0","","105.0","","30","","(12)"],["West","66.0","","61.2","","70.8","","8","","(13)"],["Total Assets Under Custody","$","1,034.5","","$","892.3","","$","1,057.5","","16","%","(16)","%"]]
[[/GREPCENT_TABLE]]

TABLE 10: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Global Family Office","$","144.3","","$","119.9","","$","144.9","","20","%","(17)","%"],["Central","102.8","","110.2","","128.7","","(7)","","(14)"],["East","100.0","","71.4","","84.5","","40","","(16)"],["West","55.4","","49.9","","58.0","","11","","(14)"],["Total Assets Under Management","$","402.5","","$","351.4","","$","416.1","","15","%","(16)","%"]]
[[/GREPCENT_TABLE]]

42 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Wealth Management regions shown are comprised of the following: Central includes Illinois, Michigan, Minnesota, Missouri, Ohio and Wisconsin; East includes Connecticut, Delaware, Florida, Georgia, Massachusetts, New York, Pennsylvania, and Washington, D.C.; West includes Arizona, California, Colorado, Nevada, Texas, and Washington. Global Family Office provides customized services, including but not limited to investment consulting, global custody, fiduciary, and private banking, to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe.

Market Indices

The following tables present selected market indices and the percentage changes year-over-year to provide context regarding equity and fixed income market impacts on the Corporation’s results.

TABLE 11: EQUITY MARKET INDICES

[[GREPCENT_TABLE]]
[["","DAILY AVERAGES","YEAR-END"],["","2023","2022","CHANGE","2023","2022","CHANGE"],["S&P 500","4,282","","4,101","","4","%","4,770","","3,840","","24","%"],["MSCI EAFE (U.S. dollars)","2,092","","1,976","","6","","2,236","","1,944","","15"],["MSCI EAFE (local currency)","1,331","","1,249","","7","","1,393","","1,232","","13"]]
[[/GREPCENT_TABLE]]

TABLE 12: FIXED INCOME MARKET INDICES

[[GREPCENT_TABLE]]
[["","AS OF DECEMBER 31,"],["","2023","2022","CHANGE"],["Barclays Capital U.S. Aggregate Bond Index","2,162","","2,049","","6","%"],["Barclays Capital Global Aggregate Bond Index","471","","446","","6"]]
[[/GREPCENT_TABLE]]

Client Assets

Northern Trust, in the normal course of business, holds assets under custody/administration and management in a fiduciary or agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not included in its consolidated balance sheets. AUC/A and AUM are a driver of our Trust, Investment and Other Servicing Fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services are provided, the value of the assets is included only once in this amount.

At December 31, 2023, AUC/A increased from December 31, 2022, primarily reflecting favorable markets. Assets under custody, a component of AUC/A, at December 31, 2023, increased from December 31, 2022 and included $8.01 trillion of global custody assets compared to $6.91 trillion at December 31, 2022.

The following table presents AUC/A by reporting segment.

TABLE 13: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 /2022","2022 /2021"],["Asset Servicing","$","14,362.6","","$","12,705.5","","$","15,183.2","","13","%","(16)","%"],["Wealth Management","1,042.3","","898.5","","1,065.6","","16","","(16)"],["Total Assets Under Custody/Administration","$","15,404.9","","$","13,604.0","","$","16,248.8","","13","%","(16)","%"]]
[[/GREPCENT_TABLE]]

The following table presents assets under custody, a component of AUC/A, by reporting segment.

TABLE 14: ASSETS UNDER CUSTODY BY REPORTING SEGMENT

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 /2022","2022 / 2021"],["Asset Servicing","$","10,882.0","","$","9,712.3","","$","11,554.8","","12","%","(16)","%"],["Wealth Management","1,034.5","","892.3","","1,057.5","","16","","(16)"],["Total Assets Under Custody","$","11,916.5","","$","10,604.6","","$","12,612.3","","12","%","(16)","%"]]
[[/GREPCENT_TABLE]]

Consolidated assets under custody increased from the prior year, primarily reflecting favorable markets.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 43"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the investment allocation of Northern Trust’s custodied assets by reporting segment.

TABLE 15: ALLOCATION OF ASSETS UNDER CUSTODY

[[GREPCENT_TABLE]]
[["","DECEMBER 31,"],["","2023","2022","2021"],["","AS","WM","TOTAL","AS","WM","TOTAL","AS","WM","TOTAL"],["Equities","46","%","60","%","47","%","44","%","56","%","45","%","47","%","61","%","48","%"],["Fixed Income Securities","33","","13","","31","","33","","15","","32","","35","","13","","33"],["Cash and Other Assets","19","","27","","21","","21","","29","","22","","16","","26","","17"],["Securities Lending Collateral","2","","\u2014","","1","","2","","\u2014","","1","","2","","\u2014","","2"]]
[[/GREPCENT_TABLE]]

The following table presents Northern Trust’s assets under custody by investment type.

TABLE 16: ASSETS UNDER CUSTODY BY INVESTMENT TYPE

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Equities","$","5,652.5","","$","4,810.7","","$","6,049.1","","17","%","(20)","%"],["Fixed Income Securities","3,737.1","","3,386.1","","4,139.6","","10","","(18)"],["Cash and Other Assets","2,359.5","","2,259.5","","2,228.0","","4","","1"],["Securities Lending Collateral","167.4","","148.3","","195.6","","13","","(24)"],["Total Assets Under Custody","$","11,916.5","","$","10,604.6","","$","12,612.3","","12","%","(16)","%"]]
[[/GREPCENT_TABLE]]

The following table presents Northern Trust’s AUM by reporting segment.

TABLE 17: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Asset Servicing","$","1,032.0","","$","898.1","","$","1,191.0","","15","%","(25)","%"],["Wealth Management","402.5","","351.4","","416.1","","15","","(16)"],["Total Assets Under Management","$","1,434.5","","$","1,249.5","","$","1,607.1","","15","%","(22)","%"]]
[[/GREPCENT_TABLE]]

AUM at the end of 2023 increased from 2022. The increase primarily reflected favorable markets, net inflows, and favorable currency translation.

The following table presents the investment allocation of Northern Trust’s AUM by reporting segment.

TABLE 18: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE

[[GREPCENT_TABLE]]
[["","DECEMBER 31,"],["","2023","2022","2021"],["","AS","WM","TOTAL","AS","WM","TOTAL","AS","WM","TOTAL"],["Equities","55","%","55","%","55","%","54","%","53","%","54","%","53","%","55","%","53","%"],["Fixed Income Securities","11","","22","","14","","12","","23","","15","","11","","20","","13"],["Cash and Other Assets","18","","23","","19","","17","","24","","19","","20","","25","","22"],["Securities Lending Collateral","16","","\u2014","","12","","17","","\u2014","","12","","16","","\u2014","","12"]]
[[/GREPCENT_TABLE]]

44 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Noninterest Income

The components of Other Noninterest Income, and a discussion of significant changes during 2023 and 2022, are provided below.

TABLE 19: OTHER NONINTEREST INCOME

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,","CHANGE"],["($ In Millions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Foreign Exchange Trading Income","$","203.9","","$","288.6","","$","292.6","","(29)","%","(1)","%"],["Treasury Management Fees","31.6","","39.3","","44.3","","(20)","","(11)"],["Security Commissions and Trading Income","135.0","","136.2","","140.2","","(1)","","(3)"],["Other Operating Income","228.7","","191.3","","243.9","","19","","(22)"],["Investment Security Gains (Losses), net","(169.5)","","(214.0)","","(0.3)","","N/M","N/M"],["Total Other Noninterest Income","$","429.7","","$","441.4","","$","720.7","","(3)","%","(39)","%"]]
[[/GREPCENT_TABLE]]

Foreign Exchange Trading Income

Northern Trust provides foreign exchange services in the normal course of business as an integral part of its global custody services. Active management of currency positions, within conservative limits, also contributes to foreign exchange trading income. Foreign Exchange Trading Income in 2023 decreased from 2022, primarily driven by lower volatility, a decline in client volumes, and an unfavorable impact from foreign exchange swap activity in Treasury.

Treasury Management Fees

Treasury Management Fees, generated from cash and treasury management products and services provided to clients, in 2023 decreased from 2022, primarily due to an increase in the earnings credit rate applied to client balances.

Security Commissions and Trading Income

Security Commissions and Trading Income, generated primarily from securities brokerage services provided by Northern Trust Securities, Inc., in 2023 decreased from 2022, primarily driven by lower equity commissions from lower equity trading volumes.

Other Operating Income

Other Operating Income in 2023 increased from 2022 primarily due to higher income associated with a market value increase in supplemental compensation plans and higher banking and credit-related services fees.

Please refer to Note 18, “Other Operating Income” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to Other Operating Income.

Investment Security Gains (Losses), Net

Investment Security Gains (Losses), net reflects a $176.4 million available for sale debt security loss arising from a repositioning of the portfolio during the fourth quarter of 2023 and a $6.9 million gain upon sale of certain available for sale debt securities in the first quarter of 2023. In the prior year, there was a $213.0 million loss related to an intent to sell available for sale debt securities also arising from a repositioning of the portfolio.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 45"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net Interest Income

Net Interest Income is defined as the total of Interest Income and amortized fees on earning assets, less Interest Expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Earning assets—including Federal Funds Sold, Securities Purchased under Agreements to Resell, Interest-Bearing Due from and Deposits with Banks, Federal Reserve and Other Central Bank Deposits, Securities, Loans and Leases, and Other Interest-Earning Assets—are financed by a large base of interest-bearing liabilities that include client deposits, short-term borrowings, Senior Notes and Long-Term Debt. Short-term borrowings include Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Other Borrowings. Earning assets also are funded by noninterest-bearing funds, which include demand deposits and Stockholders’ Equity. Net Interest Income is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest rates. In addition, the levels of nonaccruing assets and client compensating deposit balances used to pay for services impact Net Interest Income.

Net interest margin is the difference between what we earn on our assets and what we pay for deposits and other sources of funding. The direction and level of interest rates are important factors in our earnings. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets.

Net Interest Income stated on an FTE basis is a non-GAAP financial measure that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on Net Income. A reconciliation of Net Interest Income on a GAAP basis to Net Interest Income on an FTE basis is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

46 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables present an analysis of average daily balances and interest rates affecting Net Interest Income and an analysis of Net Interest Income changes.

TABLE 20: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)(1)

[[GREPCENT_TABLE]]
[["","2023","2022","2021"],["($ In Millions)","INTEREST","AVERAGE BALANCE","AVERAGE RATE(8)","INTEREST","AVERAGE BALANCE","AVERAGE RATE(8)","INTEREST","AVERAGE BALANCE","AVERAGE RATE(8)"],["INTEREST-EARNING ASSETS"],["Federal Reserve and Other Central Bank Deposits","$","1,462.3","","$","31,205.4","","4.69","%","$","472.0","","$","36,248.8","","1.30","%","$","11.3","","$","39,028.2","","0.03","%"],["Interest-Bearing Due from and Deposits with Banks(2)","130.1","","4,333.9","","3.00","","46.6","","4,192.5","","1.11","","9.1","","5,779.7","","0.16"],["Federal Funds Sold","0.3","","6.1","","4.92","","0.1","","5.5","","3.22","","\u2014","","0.1","","0.41"],["Securities Purchased under Agreements to Resell(3)","1,585.2","","950.9","","166.71","","103.7","","1,071.2","","9.68","","3.5","","1,067.4","","0.33"],["Debt Securities"],["Available For Sale","1,059.7","","24,356.6","","4.35","","612.8","","32,060.2","","1.91","","497.6","","38,986.9","","1.28"],["Held To Maturity","478.0","","25,511.9","","1.87","","289.5","","22,970.0","","1.26","","164.3","","20,617.0","","0.80"],["Trading Account","0.1","","0.5","","13.50","","0.4","","12.1","","3.84","","\u2014","","0.6","","1.59"],["Total Debt Securities","1,537.8","","49,869.0","","3.08","","902.7","","55,042.3","","1.64","","661.9","","59,604.5","","1.11"],["Loans and Leases(4)","2,556.8","","42,177.0","","6.06","","1,348.0","","41,030.6","","3.28","","715.6","","37,207.5","","1.92"],["Other Interest-Earning Assets(5)","110.0","","2,259.0","","4.87","","50.2","","1,248.1","","4.03","","40.7","","1,185.6","","3.43"],["Total Interest-Earning Assets","7,382.5","","130,801.3","","5.64","","2,923.3","","138,839.0","","2.11","","1,442.1","","143,873.0","","1.00"],["Cash and Due from Banks and Other Central Bank Deposits(6)","\u2014","","1,771.6","","\u2014","","\u2014","","2,069.5","","\u2014","","\u2014","","2,285.9","","\u2014"],["Other Noninterest-Earning Assets","\u2014","","10,076.3","","\u2014","","\u2014","","11,643.4","","\u2014","","\u2014","","10,204.3","","\u2014"],["Total Assets","$","\u2014","","$","142,649.2","","\u2014","%","$","\u2014","","$","152,551.9","","\u2014","%","$","\u2014","","$","156,363.2","","\u2014","%"],["AVERAGE SOURCE OF FUNDS"],["Deposits"],["Savings, Money Market, and Other","$","689.2","","$","24,172.4","","2.85","%","$","222.3","","$","30,205.0","","0.74","%","$","12.8","","$","28,339.0","","0.05","%"],["Savings Certificates and Other Time","151.9","","3,341.2","","4.54","","17.8","","1,059.7","","1.68","","4.8","","887.2","","0.55"],["Non-U.S. Offices \u2013 Interest-Bearing","1,844.2","","60,008.6","","3.07","","362.7","","65,031.3","","0.56","","(78.9)","","69,713.4","","(0.11)"],["Total Interest-Bearing Deposits","2,685.3","","87,522.2","","3.07","","602.8","","96,296.0","","0.63","","(61.3)","","98,939.6","","(0.06)"],["Federal Funds Purchased","256.9","","5,144.3","","4.99","","34.1","","1,407.8","","2.43","","(0.4)","","190.6","","(0.19)"],["Securities Sold under Agreements to Repurchase(3)","1,541.1","","401.5","","383.84","","90.7","","433.6","","20.94","","0.2","","232.0","","0.07"],["Other Borrowings(7)","542.5","","10,339.5","","5.25","","126.2","","5,463.5","","2.31","","14.2","","5,049.8","","0.28"],["Senior Notes","170.0","","2,734.0","","6.22","","92.7","","2,756.0","","3.36","","48.3","","2,856.4","","1.69"],["Long-Term Debt","147.2","","2,586.0","","5.69","","44.0","","1,258.9","","3.49","","21.1","","1,166.1","","1.81"],["Floating Rate Capital Debt","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","1.7","","218.4","","0.78"],["Total Interest-Bearing Liabilities","5,343.0","","108,727.5","","4.91","","990.5","","107,615.8","","0.92","","23.8","","108,652.9","","0.02"],["Interest Rate Spread","\u2014","","\u2014","","0.73","","\u2014","","\u2014","","1.19","","\u2014","","\u2014","","0.98"],["Demand and Other Noninterest-Bearing Deposits","\u2014","","17,723.3","","\u2014","","\u2014","","29,296.4","","\u2014","","\u2014","","31,143.5","","\u2014"],["Other Noninterest-Bearing Liabilities","\u2014","","4,701.6","","\u2014","","\u2014","","4,558.3","","\u2014","","\u2014","","4,869.8","","\u2014"],["Stockholders\u2019 Equity","\u2014","","11,496.8","","\u2014","","\u2014","","11,081.4","","\u2014","","\u2014","","11,697.0","","\u2014"],["Total Liabilities and Stockholders\u2019 Equity","$","\u2014","","$","142,649.2","","\u2014","%","$","\u2014","","$","152,551.9","","\u2014","%","$","\u2014","","$","156,363.2","","\u2014","%"],["Net Interest Income/Margin (FTE Adjusted)","$","2,039.5","","$","\u2014","","1.56","%","$","1,932.8","","$","\u2014","","1.39","%","$","1,418.3","","$","\u2014","","0.99","%"],["Net Interest Income/Margin (Unadjusted)","$","1,982.0","","$","\u2014","","1.52","%","$","1,887.2","","$","\u2014","","1.36","%","$","1,382.7","","$","\u2014","","0.96","%"]]
[[/GREPCENT_TABLE]]

(1) Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision revenues, expenses and assets between U.S. and non-U.S.-domiciled customers. On the basis of averages, the percentage of total assets attributable to foreign activities was 17%, 18%, and 19% as of December 31, 2023, 2022 and 2021, respectively. On the basis of averages, the percentage of total liabilities attributable to foreign activities was 52%, 55%, and 58% as of December 31, 2023, 2022 and 2021, respectively. For additional information, refer to the Geographic Area Information section of Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.

(3) Includes the impact of balance sheet netting under master netting arrangements of approximately $29.1 billion and $3.6 billion in 2023 and 2022, respectively. Excluding the impact of netting, the average interest rate on Securities Purchased under Agreements to Resell would be approximately 5.27% and 2.23% in 2023 and 2022, respectively. Excluding the impact of netting, the average interest rate on Securities Sold under Agreements to Repurchase would be approximately 5.22% and 2.27% in 2023 and 2022, respectively. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when there is a legally enforceable master netting arrangement.

(4) Average balances include nonaccrual loans.

(5) Other Interest-Earning Assets include certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.

(6) Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits on the consolidated balance sheets.

(7) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.

(8) Rate calculations are based on actual balances rather than the rounded amounts presented in the average consolidated balance sheets with analysis of Net Interest Income.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 47"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 21: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE(1)

[[GREPCENT_TABLE]]
[["(INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)","2023 VS. 2022 CHANGE DUE TO","2022 VS. 2021 CHANGE DUE TO"],["(In Millions)","AVERAGE BALANCE","AVERAGE RATE","NET (DECREASE) INCREASE","AVERAGE BALANCE","AVERAGE RATE","NET (DECREASE) INCREASE"],["Increase (Decrease) in Net Interest Income (FTE)"],["Federal Reserve and Other Central Bank Deposits","$","(74.4)","","$","1,064.7","","$","990.3","","$","(0.9)","","$","461.6","","$","460.7"],["Interest-Bearing Due from and Deposits with Banks","1.7","","81.8","","83.5","","(3.1)","","40.6","","37.5"],["Federal Funds Sold","\u2014","","0.2","","0.2","","0.1","","\u2014","","0.1"],["Securities Purchased under Agreements to Resell","(12.9)","","1,494.4","","1,481.5","","\u2014","","100.2","","100.2"],["Debt Securities"],["Available For Sale","(176.9)","","623.8","","446.9","","(78.2)","","193.4","","115.2"],["Held To Maturity","34.9","","153.6","","188.5","","20.6","","104.6","","125.2"],["Trading Account","(0.7)","","0.4","","(0.3)","","0.4","","\u2014","","0.4"],["Total Debt Securities","(142.7)","","777.8","","635.1","","(57.2)","","298.0","","240.8"],["Loans and Leases","38.6","","1,170.2","","1,208.8","","80.1","","552.3","","632.4"],["Other Interest-Earning Assets","47.5","","12.3","","59.8","","2.2","","7.3","","9.5"],["Total Interest Income","$","(142.2)","","$","4,601.4","","$","4,459.2","","$","21.2","","$","1,460.0","","$","1,481.2"],["Interest-Bearing Deposits"],["Savings, Money Market and Other","$","(52.8)","","$","519.7","","$","466.9","","$","1.0","","$","208.5","","$","209.5"],["Savings Certificates and Other Time","74.9","","59.2","","134.1","","1.1","","11.9","","13.0"],["Non-U.S. Offices - Interest-Bearing","(30.2)","","1,511.7","","1,481.5","","(3.6)","","445.2","","441.6"],["Total Interest-Bearing Deposits","(8.1)","","2,090.6","","2,082.5","","(1.5)","","665.6","","664.1"],["Federal Funds Purchased","159.3","","63.5","","222.8","","7.7","","26.8","","34.5"],["Securities Sold under Agreements to Repurchase","(7.2)","","1,457.6","","1,450.4","","0.2","","90.3","","90.5"],["Other Borrowings","171.8","","244.5","","416.3","","1.3","","110.7","","112.0"],["Senior Notes","(0.7)","","78.0","","77.3","","(1.8)","","46.2","","44.4"],["Long-Term Debt","64.6","","38.6","","103.2","","1.8","","21.1","","22.9"],["Floating Rate Capital Debt","\u2014","","\u2014","","\u2014","","(1.7)","","\u2014","","(1.7)"],["Total Interest Expense","$","379.7","","$","3,972.8","","$","4,352.5","","$","6.0","","$","960.7","","$","966.7"],["(Decrease) Increase in Net Interest Income (FTE)","$","(521.9)","","$","628.6","","$","106.7","","$","15.2","","$","499.3","","$","514.5"]]
[[/GREPCENT_TABLE]]

(1) Changes not due solely to average balance changes or rate changes are allocated proportionately to average balance and rate based on their relative absolute magnitudes.

Notes:    Net Interest Income (FTE), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans, securities and other interest-earning assets. The adjustments are based on a federal income tax rate of 21.0%, where the rate is adjusted for applicable state income taxes, net of related federal tax benefit. Total taxable equivalent interest adjustments amounted to $57.5 million in 2023, $45.6 million in 2022 and $35.6 million in 2021. A reconciliation of Net Interest Income and net interest margin on a GAAP basis to Net Interest Income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. Net interest margin is calculated by dividing annualized net interest income by average interest-earning assets.

Interest revenue on cash collateral positions is reported above within Interest-Bearing Due from and Deposits with Banks and within Loans and Leases. Interest expense on cash collateral positions is reported above within Non-U.S. Offices Interest-Bearing Deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract in Other Assets and Other Liabilities, respectively.

Net Interest Income in 2023 increased from 2022. Net Interest Income, stated on an FTE basis, increased from 2022, due to a higher net interest margin, partially offset by lower levels of average earning assets. Average earning assets in 2023 decreased from 2022, primarily due to lower client deposits, partially offset by higher borrowing activity, the net of which resulted in lower funding of earning assets.

The net interest margin in 2023 increased from 2022. The net interest margin on an FTE basis in 2023 increased from 2022, primarily due to higher average interest rates, partially offset by an unfavorable funding mix shift.

Federal Reserve and Other Central Bank Deposits averaged $31.2 billion in 2023, which decreased $5.0 billion, or 14%, from $36.2 billion in 2022, due to deposit outflows. Interest-Bearing Due From and Deposits with Banks averaged $4.3 billion in 2023 and $4.2 billion in 2022. Average Securities were $49.9 billion and decreased $5.1 billion, or 9%, from $55.0 billion in 2022. Average taxable Securities were $46.8 billion in 2023 and $52.4 billion in 2022. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $3.1 billion in 2023 and $2.6 billion in 2022.

48 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Loans averaged $42.2 billion in 2023, which increased $1.2 billion, or 3%, from $41.0 billion in 2022, primarily reflecting higher levels of commercial real estate, commercial and institutional, and private client loans, partially offset by non-U.S. loans. Commercial real estate loans averaged $5.0 billion in 2023 and increased $549.4 million, or 12%, from $4.4 billion for 2022. Commercial and institutional loans averaged $12.4 billion in 2023 and increased $180.0 million, or 1%, from $12.3 billion for 2022. Private client loans averaged $14.0 billion in 2023 and increased $122.3 million, or 1%, from $13.9 billion for 2022. Non-U.S. loans averaged $3.4 billion in 2023 and decreased $101.8 million, or 3%, from $3.5 billion for 2022. Residential real estate loans averaged $6.4 billion in 2023 and was relatively unchanged from $6.4 billion for 2022.

Average Other Interest-Earning Assets include certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank stock, money market investments, and Federal Reserve stock of $899.2 million, $825.2 million, $364.6 million, $84.3 million, and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits decreased $8.8 billion, or 9%, to $87.5 billion in 2023 from $96.3 billion in 2022. Interest expense for Interest-Bearing Deposits in the current year was driven by higher interest rates. Average Non-U.S. Offices Interest-Bearing Deposits comprised 69% and 68% of total average Interest-Bearing Deposits for the years ended December 31, 2023 and 2022, respectively. Average Total Interest-Bearing Liabilities increased $1.1 billion, or 1%, to $108.7 billion in 2023 from $107.6 billion in 2022. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-bearing funds decreased $9.1 billion, or 29%, to $22.1 billion in 2023 from $31.2 billion in 2022, primarily resulting from lower levels of Demand and Other Noninterest-Bearing Deposits. Average Demand and Other Noninterest-Bearing Deposits decreased $11.6 billion, or 40%, to $17.7 billion in 2023 from $29.3 billion in 2022. The average rate on total source of funds was 4.07% in 2023 and 0.70% in 2022.

Stockholders’ Equity

Stockholders’ Equity averaged $11.5 billion in 2023, compared with $11.1 billion in 2022. The increase in average Stockholders’ Equity of $415.4 million, or 4%, was primarily due to higher Retained Earnings. During the year ended December 31, 2023, the Corporation maintained its quarterly common stock dividend at $0.75 per share. During the year ended December 31, 2023, the Corporation, through common stock dividends and repurchase of 4,384,678 shares of common stock, returned $977.7 million in capital to common stockholders. During the year ended December 31, 2022, the Corporation increased its quarterly common stock dividend to $0.75 per share in the third quarter from $0.70 per share in the second quarter. During the year ended December 31, 2022, the Corporation, through common stock dividends and repurchase of 311,536 shares of common stock, returned $648.4 million in capital to common stockholders.

The Corporation’s current stock repurchase authorization to repurchase up to 25.0 million shares was approved by the Board of Directors in October 2021. Shares are repurchased by the Corporation to, among other things, manage the Corporation’s capital levels. Repurchased shares are used for general purposes, including the issuance of shares under stock option and other equity incentive plans. The repurchase authorization approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to resume repurchases thereunder when circumstances warrant and applicable regulations permit. Please refer to Note 13, “Stockholders’ Equity,” provided in Item 8, “Financial Statements and Supplementary Data.”

Provision for Credit Losses

There was a $24.5 million Provision for Credit Losses in 2023, as compared to a Provision for Credit Losses of $12.0 million in 2022. The provision during 2023 was primarily due to a $16.5 million increase in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The increase in the provision for loans was primarily seen in the commercial real estate portfolio, driven by an increase in the size and duration of the portfolio, weaker economic projections for the industry, methodology updates, and credit quality deterioration on a small number of loans. The release of credit reserves in undrawn loan commitments and letters of credit during the year ended December 31, 2023 is primarily in the commercial and institutional portfolio, reflecting a combination of credit quality improvements, an improved macroeconomic outlook for that segment, and methodology updates. The remainder of the provision was due to $5.0 million in charge-offs and a $3.0 million increase in the individual reserve. The prior-year provision primarily reflected an increase in the reserve evaluated on a collective basis, driven by weaker macroeconomic conditions at the time and portfolio growth, partially offset by improvements in credit quality. The increase in the collective basis reserve was primarily reflected in certain commercial portfolios.

Net charge-offs in 2023 totaled $5.0 million resulting from $8.7 million of charge-offs and $3.7 million of recoveries, compared to net recoveries of $4.2 million in 2022 resulting from $6.0 million of charge-offs and $10.2 million of recoveries. For additional discussion of the Allowance for Credit Losses, refer to the “Asset Quality” section.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 49"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Noninterest Expense

Noninterest Expense for 2023 increased from 2022, primarily reflecting increased Other Operating Expense, Equipment and Software, and Compensation.

The components of Noninterest Expense and a discussion of significant changes during 2023 and 2022 are provided below.

TABLE 22: NONINTEREST EXPENSE

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,","CHANGE"],["($ In Millions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Compensation","$","2,321.8","","$","2,248.0","","$","2,011.0","","3","%","12","%"],["Employee Benefits","405.2","","437.4","","431.4","","(7)","","1"],["Outside Services","906.5","","880.3","","849.4","","3","","4"],["Equipment and Software","945.5","","838.8","","736.3","","13","","14"],["Occupancy","232.3","","219.1","","208.7","","6","","5"],["Other Operating Expense","472.9","","359.3","","299.1","","32","","20"],["Total Noninterest Expense","$","5,284.2","","$","4,982.9","","$","4,535.9","","6","%","10","%"]]
[[/GREPCENT_TABLE]]

Compensation

Compensation expense, the largest component of Noninterest Expense, increased in 2023 from 2022, primarily reflecting higher salary expense, partially offset by lower incentives. Severance-related charges were $36.7 million in 2023 as compared to $30.4 million in 2022. Full-time equivalent employees totaled approximately 23,100 at December 31, 2023, down 2% from approximately 23,600 at December 31, 2022.

Employee Benefits

Employee Benefits expense in 2023 decreased from 2022, primarily due to a $44.1 million pension settlement charge in 2022.

Outside Services

Outside Services expense in 2023 increased from 2022, primarily reflecting higher technical services costs, partially offset by lower consulting services.

Equipment and Software

Equipment and Software expense in 2023 increased from 2022, primarily due to higher software amortization and higher software costs.

Occupancy

Occupancy expense in 2023 increased from 2022, primarily due to net rent increases and charges related to reducing Northern Trust’s real estate footprint.

Other Operating Expense

Other Operating Expense in 2023 increased from 2022 primarily reflecting an $84.6 million FDIC special assessment and a $25.6 million charge related to the write-off of an investment in a client capability.

In November 2023, the FDIC issued a final rule to implement a special assessment to recoup losses to the deposit insurance fund associated with bank failures in the first half of 2023. In conjunction with the special assessment, $84.6 million was recognized as an accrued liability and related expense in the fourth quarter of 2023. The final amount of the total special assessment incurred by Northern Trust may be adjusted as the FDIC's loss estimates change. The final rule becomes effective on April 1, 2024, with the first payment due on June 28, 2024.

Please refer to Note 19, “Other Operating Expense” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to other operating expenses.

50 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Provision for Income Taxes

The 2023 Provision for Income Taxes was $357.5 million, representing an effective rate of 24.4%. This compares with a Provision for Income Taxes of $430.3 million and an effective rate of 24.4% in 2022.

See Note 20, “Income Taxes,” provided in Item 8, “Financial Statements and Supplementary Data,” for more information on income taxes.

REPORTING SEGMENTS AND RELATED INFORMATION

The following information summarizes our consolidated results of operations by reporting segment for 2023 compared to 2022. For a discussion related to the consolidated results of operations by reporting segment for 2022 compared to 2021, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2022 Form 10-K, which was filed with the SEC on February 28, 2023.

    Northern Trust is organized around its two client-focused reporting segments: Asset Servicing and Wealth Management. Asset management and related services are provided to Asset Servicing and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to Asset Servicing and Wealth Management.

Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Additionally, segment information is presented on a fully taxable equivalent (FTE) basis as management believes an FTE presentation provides a clearer indication of net interest income. The adjustment to an FTE basis has no impact on Net Income.

Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, “Summary of Significant Accounting Policies.” Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between reporting segments. Northern Trust’s presentations are not necessarily consistent with similar information for other financial institutions.

Revenues, expenses and average assets are allocated to Asset Servicing and Wealth Management, with the exception of non-recurring activities such as certain corporate transactions and costs incurred associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment, which are reported within the Other segment.

Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 51"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the earnings and average assets for the Corporation.

TABLE 23: CONSOLIDATED FINANCIAL INFORMATION

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,","CHANGE"],["($ In Millions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Noninterest Income"],["Trust, Investment and Other Servicing Fees","$","4,361.8","","$","4,432.6","","$","4,361.1","","(2)","%","2","%"],["Foreign Exchange Trading Income","203.9","","288.6","","292.6","","(29)","","(1)"],["Other Noninterest Income","225.8","","152.8","","428.1","","48","","(64)"],["Total Noninterest Income","4,791.5","","4,874.0","","5,081.8","","(2)","","(4)"],["Net Interest Income","1,982.0","","1,887.2","","1,382.7","","5","","36"],["Revenue","6,773.5","","6,761.2","","6,464.5","","\u2014","","5"],["Provision for (Release of) Credit Losses","24.5","","12.0","","(81.5)","","N/M","N/M"],["Noninterest Expense","5,284.2","","4,982.9","","4,535.9","","6","","10"],["Income before Income Taxes","1,464.8","","1,766.3","","2,010.1","","(17)","","(12)"],["Provision for Income Taxes","357.5","","430.3","","464.8","","(17)","","(7)"],["Net Income","$","1,107.3","","$","1,336.0","","$","1,545.3","","(17)","%","(14)","%"],["Average Assets","$","142,649.2","","$","152,551.9","","$","156,363.2","","(6)","%","(2)","%"]]
[[/GREPCENT_TABLE]]

Segment results are stated on an FTE basis which has no impact on Net Income. Net Interest Income on an FTE basis includes FTE adjustments of $57.5 million, $45.6 million, and $35.6 million for 2023, 2022, and 2021, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Asset Servicing

Asset Servicing is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking; and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. The following table summarizes the results of operations of Asset Servicing for the years ended December 31, 2023, 2022, and 2021 on a management-reporting basis.

TABLE 24: ASSET SERVICING RESULTS OF OPERATIONS

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,","CHANGE"],["($ In Millions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Noninterest Income"],["Trust, Investment and Other Servicing Fees","$","2,461.9","","$","2,496.3","","$","2,487.3","","(1)","%","\u2014","%"],["Foreign Exchange Trading Income","213.0","","281.0","","279.0","","(24)","","1"],["Other Noninterest Income","263.4","","250.7","","261.2","","5","","(4)"],["Total Noninterest Income","2,938.3","","3,028.0","","3,027.5","","(3)","","\u2014"],["Net Interest Income(1)","1,197.3","","1,072.7","","637.2","","12","","68"],["Revenue(1)","4,135.6","","4,100.7","","3,664.7","","1","","12"],["Provision for (Release of) Credit Losses","0.5","","2.4","","(33.8)","","N/M","N/M"],["Noninterest Expense","3,273.2","","3,092.7","","2,863.0","","6","","8"],["Income before Income Taxes(1)","861.9","","1,005.6","","835.5","","(14)","","20"],["Provision for Income Taxes(1)","187.1","","243.2","","194.1","","(23)","","25"],["Net Income","$","674.8","","$","762.4","","$","641.4","","(11)","%","19","%"],["Percentage of Consolidated Net Income","61","%","57","%","41","%"],["Average Assets","$","101,472.6","","$","115,646.4","","$","120,883.2","","(12)","%","(4)","%"]]
[[/GREPCENT_TABLE]]

(1) Non-GAAP financial measures stated on an FTE basis.

52 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Asset Servicing Net Income

Asset Servicing Net Income decreased in 2023 compared to 2022, primarily reflecting higher Noninterest Expense and lower Foreign Exchange Trading Income, partially offset by higher Net Interest Income and lower Provision for Income Taxes.

Asset Servicing Trust, Investment and Other Servicing Fees

For an explanation of Asset Servicing Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment, and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.

Asset Servicing Foreign Exchange Trading Income

Foreign Exchange Trading Income for 2023 decreased from 2022, primarily driven by lower volatility, a decline in client volumes, and an unfavorable impact from foreign exchange swap activity in Treasury that is allocated to Asset Servicing.

Asset Servicing Other Noninterest Income

Other Noninterest Income for 2023 increased from 2022, primarily due to higher Other Operating Income, partially offset by lower Treasury Management Fees.

Asset Servicing Net Interest Income

Net Interest Income on an FTE basis increased in 2023 from 2022, primarily due to higher average interest rates. Net interest margin on an FTE basis increased to 1.29% from 1.03%. Average earning assets of $92.5 billion, decreased $12.3 billion, or 12%, from $104.8 billion in the prior year. The earning assets in Asset Servicing consisted primarily of intercompany assets and loans. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $60.0 billion in 2023 as compared to $65.0 billion in 2022.

Asset Servicing Provision for Credit Losses

There was a Provision for Credit Losses of $0.5 million for 2023 compared to a Provision for Credit Losses of $2.4 million for 2022. The 2023 Provision for Credit Losses was primarily due to credit quality deterioration on a small number of loans, offset by a better overall macroeconomic outlook. The Provision for Credit Losses during 2022 primarily reflected weaker macroeconomic conditions at the time.

Asset Servicing Noninterest Expense

Asset Servicing Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2023 from 2022. The increase primarily reflects higher expense allocations.

Wealth Management

Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management also includes Global Family Office, which provides customized services, including but not limited to: investment consulting; global custody; fiduciary; and private banking; family office consulting, and technology solutions, to meet the complex financial and reporting needs of ultra-high-net-worth individuals and family offices across the globe. Wealth Management is one of the largest providers of advisory services in the United States with AUC/A, assets under custody, and AUM of $1.04 trillion, $1.03 trillion, and $402.5 billion, respectively, at December 31, 2023. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 53"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2023, 2022, and 2021 on a management-reporting basis.

TABLE 25: WEALTH MANAGEMENT RESULTS OF OPERATIONS

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,","CHANGE"],["($ In Millions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Noninterest Income"],["Trust, Investment and Other Servicing Fees","$","1,899.9","","$","1,936.3","","$","1,873.8","","(2)","%","3","%"],["Foreign Exchange Trading Income (Loss)","(9.1)","","7.6","","13.6","","N/M","(44)"],["Other Noninterest Income","150.8","","137.7","","188.2","","10","","(27)"],["Total Noninterest Income","2,041.6","","2,081.6","","2,075.6","","(2)","","\u2014"],["Net Interest Income(1)","842.2","","860.1","","781.1","","(2)","","10"],["Revenue(1)","2,883.8","","2,941.7","","2,856.7","","(2)","","3"],["Provision for (Release of) Credit Losses","24.0","","9.6","","(47.7)","","N/M","N/M"],["Noninterest Expense","1,882.3","","1,815.5","","1,651.1","","4","","10"],["Income before Income Taxes(1)","977.5","","1,116.6","","1,253.3","","(12)","","(11)"],["Provision for Income Taxes(1)","245.9","","310.0","","317.0","","(21)","","(2)"],["Net Income","$","731.6","","$","806.6","","$","936.3","","(9)","%","(14)","%"],["Percentage of Consolidated Net Income","66","%","60","%","61","%"],["Average Assets","$","41,176.6","","$","36,905.5","","$","35,480.0","","12","%","4","%"]]
[[/GREPCENT_TABLE]]

(1) Non-GAAP financial measures stated on an FTE basis.

Wealth Management Net Income

Wealth Management Net Income decreased in 2023, primarily reflecting higher Noninterest Expense, lower Trust, Investment and Other Servicing Fees, lower Net Interest Income, and lower Foreign Exchange Trading Income, partially offset by a lower Provision for Income Taxes.

Wealth Management Trust, Investment and Other Servicing Fees

For an explanation of Wealth Management Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment, and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.

Wealth Management Foreign Exchange Trading Income (Loss)

Foreign Exchange Trading Income for 2023 decreased from 2022, primarily due to an unfavorable impact from foreign exchange swap activity in Treasury that is allocated to Wealth Management.

Wealth Management Other Noninterest Income

Other Noninterest Income for 2023 increased from 2022, primarily due to higher Other Operating Income.

Wealth Management Net Interest Income

Net Interest Income on an FTE basis for 2023 decreased from 2022, primarily attributable to lower deposit balances. Net interest margin on an FTE basis decreased to 2.20% from 2.53%. Average earning assets of $38.3 billion in 2023, increased $4.3 billion, or 13%, from $34.0 billion in 2022. Earning assets and funding sources for the year ended December 31, 2023 were primarily comprised of loans and domestic interest-bearing deposits, respectively.

Wealth Management Provision for Credit Losses

There was a Provision for Credit Losses of $24.0 million for 2023 compared to a Provision for Credit Losses of $9.6 million in 2022. The Provision for Credit Losses during 2023 was primarily due to an increase in the reserve evaluated on a collective basis relating to the commercial real estate portfolio, driven by an increase in the size and duration of the portfolio, weaker economic projections for the industry, methodology updates, and credit quality deterioration on a small number of loans. The Provision for Credit Losses during 2022 reflected an increase in the reserve evaluated on a collective basis driven by weaker economic conditions at the time and portfolio growth, partially offset by improvements in portfolio quality. The 2022 increase in the collective basis reserve was primarily reflected in certain commercial portfolios.

Wealth Management Noninterest Expense

Wealth Management Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services,

54 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

increased in 2023 from 2022. The increase primarily reflects higher expense allocations, Compensation expense, and Other Operating Expense.

Other

Income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments are included within Other. The following table summarizes the results of operations of the Other segment for the years ended December 31, 2023, 2022, and 2021 on a management-reporting basis.

TABLE 26: OTHER RESULTS OF OPERATIONS

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,","CHANGE"],["($ In Millions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Noninterest Income (Loss)","$","(188.4)","","$","(235.6)","","$","(21.3)","","N/M","N/M"],["Net Interest Income(1)","\u2014","","\u2014","","\u2014","","N/M","N/M"],["Revenue(1)","(188.4)","","(235.6)","","(21.3)","","N/M","N/M"],["Noninterest Expense","128.7","","74.7","","21.8","","N/M","N/M"],["Income (Loss) before Income Taxes(1)","(317.1)","","(310.3)","","(43.1)","","N/M","N/M"],["Provision (Benefit) for Income Taxes(1)","(18.0)","","(77.3)","","(10.7)","","N/M","N/M"],["Net Income (Loss)","$","(299.1)","","$","(233.0)","","$","(32.4)","","N/M","N/M"],["Percentage of Consolidated Net Income (Loss)","(27)","%","(17)","%","(2)","%"],["Average Assets","$","\u2014","","$","\u2014","","$","\u2014","","N/M","N/M"]]
[[/GREPCENT_TABLE]]

(1) Non-GAAP financial measures stated on an FTE basis.

Other—Noninterest Income (Loss)

Noninterest Income (Loss) in 2023 primarily reflected an $176.4 million available for sale debt security loss and a $6.9 million available for sale debt security gain recognized in Investment Security Gains (Losses), net, where securities were sold in conjunction with a repositioning of the portfolio. In the prior year, there was a $213.0 million loss recognized in Investment Security Gains (Losses), net arising from an intent to sell available for sale debt securities in conjunction with a repositioning of the portfolio.

Other—Noninterest Expense

Noninterest Expense in 2023 increased from 2022, primarily reflecting an $84.6 million FDIC special assessment and higher non-allocated occupancy expense due to early lease exits on vacant space, partially offset by a $44.1 million pension settlement charge in 2022.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 55"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Asset Management

Asset Management, through the Corporation’s various subsidiaries, supports the Asset Servicing and Wealth Management reporting segments by providing a broad range of asset management and related services and other products to clients around the world. Investment solutions are delivered through separately managed accounts, bank common and collective funds, registered investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private investment funds. Asset Management’s capabilities include active and passive equity; active and passive fixed income; cash management; multi-asset and alternative asset classes (such as private equity and hedge funds of funds); and multi-manager advisory services and products. Asset Management’s activities also include overlay services and other risk management services. Asset Management operates internationally through subsidiaries and distribution arrangements and its revenue and expense are allocated fully to Asset Servicing and Wealth Management.

At December 31, 2023, Northern Trust managed $1.43 trillion in assets for personal and institutional clients, including $1.03 trillion for Asset Servicing clients and $402.5 billion for Wealth Management clients. The following table presents consolidated AUM as of December 31, 2023, 2022 and 2021 by investment type.

TABLE 27: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE

[[GREPCENT_TABLE]]
[["","DECEMBER 31,","CHANGE"],["($ In Billions)","2023","2022","2021","2023 / 2022","2022 / 2021"],["Equities","$","785.5","","$","671.3","","$","856.5","","17","%","(22)","%"],["Fixed Income Securities","203.4","","186.5","","216.1","","9","","(14)"],["Cash and Other Assets","278.2","","243.4","","338.9","","14","","(28)"],["Securities Lending Collateral","167.4","","148.3","","195.6","","13","","(24)"],["Total Assets Under Management","$","1,434.5","","$","1,249.5","","$","1,607.1","","15","%","(22)","%"]]
[[/GREPCENT_TABLE]]

AUM increased at year-end 2023 from year-end 2022. The increase primarily reflected favorable markets, net inflows, and favorable currency translation. The following table presents activity in consolidated AUM by product during the years ended December 31, 2023, 2022 and 2021.

TABLE 28: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT

[[GREPCENT_TABLE]]
[["(In Billions)","2023","2022","2021"],["Balance as of January 1","$","1,249.5","","$","1,607.1","","$","1,405.3"],["Inflows by Product"],["","Equities","206.4","","187.7","","292.9"],["","Fixed Income","57.8","","48.7","","63.7"],["","Cash and Other Assets","2,012.5","","643.2","","810.2"],["","Securities Lending Collateral","238.3","","235.3","","270.6"],["Total Inflows","2,515.0","","1,114.9","","1,437.4"],["Outflows by Product"],["","Equities","(224.5)","","(231.9)","","(321.0)"],["","Fixed Income","(57.1)","","(55.5)","","(56.2)"],["","Cash and Other Assets","(1,970.3)","","(743.2)","","(745.4)"],["","Securities Lending Collateral","(219.2)","","(282.6)","","(261.9)"],["Total Outflows","(2,471.1)","","(1,313.2)","","(1,384.5)"],["Net Inflows (Outflows)","43.9","","(198.3)","","52.9"],["Market Performance, Currency & Other"],["","Market Performance & Other","133.8","","(143.0)","","159.8"],["","Currency","7.3","","(16.3)","","(10.9)"],["Total Market Performance, Currency & Other","141.1","","(159.3)","","148.9"],["Balance as of December 31","$","1,434.5","","$","1,249.5","","$","1,607.1"]]
[[/GREPCENT_TABLE]]

56 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CONSOLIDATED BALANCE SHEET REVIEW

The following tables summarize selected consolidated balance sheet information.

TABLE 29: SELECT CONSOLIDATED BALANCE SHEET INFORMATION

[[GREPCENT_TABLE]]
[["($ In Billions)","DECEMBER 31, 2023","DECEMBER 31, 2022","CHANGE"],["Assets"],["Federal Reserve and Other Central Bank Deposits","$","34.3","","$","40.0","","$","(5.7)","","(14)","%"],["Interest-Bearing Due from and Deposits with Banks(1)","5.3","","4.9","","0.4","","6"],["Securities Purchased under Agreements to Resell","0.8","","1.1","","(0.3)","","(27)"],["Total Debt Securities","49.3","","51.8","","(2.5)","","(5)"],["Loans","47.6","","42.9","","4.7","","11"],["Other Interest-Earning Assets(2)","3.1","","1.8","","1.3","","77"],["Total Earning Assets","140.4","","142.5","","(2.1)","","(1)"],["Total Assets","150.8","","155.0","","(4.2)","","(3)"],["Liabilities and Stockholders' Equity"],["Total Interest-Bearing Deposits","93.3","","98.6","","(5.3)","","(5)"],["Demand and Other Noninterest-Bearing Deposits","22.8","","25.3","","(2.5)","","(10)"],["Federal Funds Purchased","3.0","","1.9","","1.1","","61"],["Securities Sold under Agreements to Repurchase","0.8","","0.6","","0.2","","38"],["Other Borrowings(3)","6.6","","7.6","","(1.0)","","(13)"],["Total Stockholders\u2019 Equity","11.9","","11.3","","0.6","","6"]]
[[/GREPCENT_TABLE]]

(1)    Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.

(2)    Other Interest-Earning Assets includes certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.

(3) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.

TABLE 30: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION

[[GREPCENT_TABLE]]
[["","TWELVE MONTHS ENDED DECEMBER 31,"],["($ In Billions)","2023","2022","CHANGE"],["Assets"],["Federal Reserve and Other Central Bank Deposits","$","31.2","","$","36.2","","$","(5.0)","","(14)","%"],["Interest-Bearing Due from and Deposits with Banks(1)","4.3","","4.2","","0.1","","3"],["Securities Purchased under Agreements to Resell","1.0","","1.1","","(0.1)","","(11)"],["Total Debt Securities","49.9","","55.0","","(5.1)","","(9)"],["Loans","42.2","","41.0","","1.2","","3"],["Other Interest-Earning Assets(2)","2.2","","1.3","","0.9","","81"],["Total Earning Assets","130.8","","138.8","","(8.0)","","(6)"],["Total Assets","142.6","","152.6","","(10.0)","","(6)"],["Liabilities and Stockholders' Equity"],["Total Interest-Bearing Deposits","87.5","","96.3","","(8.8)","","(9)"],["Demand and Other Noninterest-Bearing Deposits","17.7","","29.3","","(11.6)","","(40)"],["Federal Funds Purchased","5.1","","1.4","","3.7","","N/M"],["Securities Sold under Agreements to Repurchase","0.4","","0.4","","\u2014","","(7)"],["Other Borrowings(3)","10.3","","5.5","","4.8","","89"],["Total Stockholders\u2019 Equity","11.5","","11.1","","0.4","","4"]]
[[/GREPCENT_TABLE]]

(1)    Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.

(2)    Other Interest-Earning Assets includes certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.

(3) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.

Average balances are considered to be a better measure of balance sheet trends, as period-end balances can be impacted by the timing of deposit and withdrawal activity involving large client balances. Average earning assets decreased from the

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 57"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

prior year primarily due to lower client deposits, partially offset by higher borrowing activity, the net of which resulted in lower funding of earning assets.

Select Earning Assets. Average securities decreased from the prior year, reflecting the impact of repositioning. For additional discussion relating to the securities portfolio, refer to the “Asset Quality” section in this MD&A and to Note 4, “Securities” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data”.

Client Deposits. Average Interest-Bearing Deposits and Demand and Other Noninterest-Bearing Deposits decreased from the prior year as clients migrated into higher yielding products.

Short-Term Borrowings. Short-term borrowings includes Federal Funds Purchased, Securities Sold under Agreements to Repurchase, and Other Borrowings. Securities Sold under Agreements to Repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. Securities Sold under Agreements to Repurchase are held by the counterparty until the repurchase. See Note 24, “Commitments and Contingent Liabilities,” Note 26, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” and Note 27, “Offsetting of Assets and Liabilities” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data” for additional information on Northern Trust’s repurchase and reverse repurchase agreements.

Stockholders’ Equity. The increase in average Stockholders’ Equity was primarily due to higher Retained Earnings.    

During the year ended December 31, 2023, the Corporation declared cash dividends totaling $630.2 million to common stockholders and repurchased 4,384,678 shares of common stock, including 378,130 shares withheld to satisfy tax withholding obligations related to share-based compensation, at a total cost of $347.5 million ($79.26 average price per share). During the year ended December 31, 2023, the Corporation declared cash dividends totaling $41.8 million to preferred stockholders.

During the year ended December 31, 2022, the Corporation declared cash dividends totaling $613.0 million to common stockholders and repurchased 311,536 shares of common stock, all of which were shares withheld to satisfy tax withholding obligations related to share-based compensation, at a total cost of $35.4 million ($113.70 average price per share). During the year ended December 31, 2022, the Corporation declared cash dividends totaling $41.8 million to preferred stockholders.

58 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Asset Quality

Securities Portfolio

The following table presents the remaining maturity and average yield of Northern Trust's held to maturity (HTM) debt securities and available for sale (AFS) debt securities by security type as of December 31, 2023. Depending on market conditions, Northern Trust continuously seeks to optimize its securities portfolio, including through purchases and sales of AFS debt securities from time to time.

TABLE 31: REMAINING MATURITY AND AVERAGE YIELD OF HELD TO MATURITY AND AVAILABLE FOR SALE DEBT SECURITIES

[[GREPCENT_TABLE]]
[["","DECEMBER 31, 2023"],["","TOTAL","ONE YEAR OR LESS","ONE TO FIVE YEARS","FIVE TO TEN YEARS","OVER TEN YEARS","AVERAGE MATURITY"],["($ in Millions)","BOOK","YIELD","BOOK","YIELD","BOOK","YIELD","BOOK","YIELD","BOOK","YIELD"],["Held to Maturity Debt Securities"],["U.S. Government","$","\u2014","","\u2014%","$","\u2014","","\u2014%","$","\u2014","","\u2014%","$","\u2014","","\u2014","%","$","\u2014","","\u2014%","0 mos."],["Obligations of States and Political Subdivisions","2,563.9","","3.47","45.7","","3.21","1,100.7","","3.41","1,126.3","","3.41","","291.2","","3.97","70 mos."],["Government Sponsored Agency","9,355.3","","2.13","984.3","","2.52","3,381.4","","2.27","3,248.6","","1.94","","1,741.0","","1.97","75 mos."],["Non-U.S. Government","4,789.1","","0.72","3,376.0","","0.69","1,379.3","","0.81","33.8","","0.28","","\u2014","","\u2014","10 mos."],["Corporate Debt","646.1","","0.76","276.8","","0.14","353.7","","1.29","15.6","","(0.20)","","\u2014","","\u2014","19 mos."],["Covered Bonds","2,208.6","","2.61","345.4","","2.68","1,623.1","","2.64","240.1","","2.29","","\u2014","","\u2014","32 mos."],["Certificates of Deposit","585.1","","4.37","585.1","","4.37","\u2014","","\u2014","\u2014","","\u2014","","\u2014","","\u2014","0 mos."],["Sub-Sovereign, Supranational and Non-U.S. Agency Bonds","5,245.5","","1.45","1,080.8","","2.17","4,159.0","","1.27","5.7","","(0.35)","","\u2014","","\u2014","24 mos."],["Other Asset-Backed","214.2","","6.91","14.7","","5.28","102.0","","7.29","97.5","","6.76","","\u2014","","\u2014","62 mos."],["Commercial Mortgage-Backed","37.6","","6.66","\u2014","","\u2014","37.6","","6.66","\u2014","","\u2014","","\u2014","","\u2014","41 mos."],["Other","576.3","","1.63","47.8","","1.34","319.0","","2.10","30.7","","2.30","","178.8","","0.76","103 mos."],["Total Held to Maturity Debt Securities","$","26,221.7","","1.96%","$","6,756.6","","1.62%","$","12,455.8","","1.95%","$","4,798.3","","2.38","%","$","2,211.0","","2.14%","46 mos."],["Available for Sale Debt Securities"],["U.S. Government","$","3,622.2","","3.95%","$","197.8","","4.64%","$","3,424.4","","3.91%","$","\u2014","","\u2014","%","$","\u2014","","\u2014%","39 mos."],["Obligations of States and Political Subdivisions","295.8","","2.07","\u2014","","\u2014","106.8","","1.97","189.0","","2.13","","\u2014","","\u2014","69 mos."],["Government Sponsored Agency","11,553.0","","5.51","2,357.0","","5.65","5,237.5","","5.42","3,282.8","","5.65","","675.7","","5.09","52 mos."],["Non-U.S. Government","264.4","","0.59","66.1","","0.95","198.3","","0.48","\u2014","","\u2014","","\u2014","","\u2014","30 mos."],["Corporate Debt","279.5","","2.82","103.8","","2.77","175.7","","2.85","\u2014","","\u2014","","\u2014","","\u2014","15 mos."],["Covered Bonds","347.1","","3.74","89.2","","3.03","257.9","","3.98","\u2014","","\u2014","","\u2014","","\u2014","27 mos."],["Sub-Sovereign, Supranational and Non-U.S. Agency Bonds","2,899.9","","3.18","277.8","","2.08","2,567.1","","3.34","55.0","","1.43","","\u2014","","\u2014","34 mos."],["Other Asset-Backed","2,962.6","","5.03","212.8","","2.22","2,631.1","","5.18","107.8","","6.87","","10.9","","6.87","37 mos."],["Commercial Mortgage-Backed","865.3","","4.88","39.3","","3.15","708.2","","5.31","117.8","","2.83","","\u2014","","\u2014","37 mos."],["Total Available for Sale Debt Securities","$","23,089.8","","4.73%","$","3,343.8","","4.79%","$","15,307.0","","4.54%","$","3,752.4","","5.36","%","$","686.6","","5.12%","44 mos."]]
[[/GREPCENT_TABLE]]

Note: Yield is calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 59"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Northern Trust maintains a high quality debt securities portfolio. Debt securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security. The following tables provide the fair value of AFS debt securities and amortized cost of HTM debt securities by credit rating.

TABLE 32: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES BY CREDIT RATING

[[GREPCENT_TABLE]]
[["","AS OF DECEMBER 31, 2023"],["($ In Millions)","AAA","AA","A","BBB","NOT RATED","TOTAL"],["U.S. Government","$","3,622.2","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","3,622.2"],["Obligations of States and Political Subdivisions","38.1","","257.7","","\u2014","","\u2014","","\u2014","","295.8"],["Government Sponsored Agency","11,553.0","","\u2014","","\u2014","","\u2014","","\u2014","","11,553.0"],["Non-U.S. Government","264.4","","\u2014","","\u2014","","\u2014","","\u2014","","264.4"],["Corporate Debt","24.7","","87.0","","157.4","","\u2014","","10.4","","279.5"],["Covered Bonds","325.3","","\u2014","","21.8","","\u2014","","\u2014","","347.1"],["Sub-Sovereign, Supranational and Non-U.S. Agency Bonds","2,353.5","","334.0","","212.4","","\u2014","","\u2014","","2,899.9"],["Other Asset-Backed","2,962.6","","\u2014","","\u2014","","\u2014","","\u2014","","2,962.6"],["Commercial Mortgage-Backed","865.3","","\u2014","","\u2014","","\u2014","","\u2014","","865.3"],["Total","$","22,009.1","","$","678.7","","$","391.6","","$","\u2014","","$","10.4","","$","23,089.8"],["Percent of Total","95","%","3","%","2","%","\u2014","%","\u2014","%","100","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","AS OF DECEMBER 31, 2022"],["($ In Millions)","AAA","AA","A","BBB","NOT RATED","TOTAL"],["U.S. Government","$","2,747.4","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","2,747.4"],["Obligations of States and Political Subdivisions","136.4","","651.2","","\u2014","","\u2014","","\u2014","","787.6"],["Government Sponsored Agency","11,545.2","","\u2014","","\u2014","","\u2014","","\u2014","","11,545.2"],["Non-U.S. Government","360.0","","\u2014","","\u2014","","\u2014","","\u2014","","360.0"],["Corporate Debt","302.5","","462.6","","938.7","","19.6","","24.2","","1,747.6"],["Covered Bonds","367.0","","\u2014","","21.7","","\u2014","","\u2014","","388.7"],["Sub-Sovereign, Supranational and Non-U.S. Agency Bonds","1,816.3","","451.5","","211.6","","\u2014","","\u2014","","2,479.4"],["Other Asset-Backed","5,256.2","","\u2014","","\u2014","","\u2014","","\u2014","","5,256.2"],["Commercial Mortgage-Backed","1,387.8","","\u2014","","\u2014","","\u2014","","\u2014","","1,387.8"],["Total","$","23,918.8","","$","1,565.3","","$","1,172.0","","$","19.6","","$","24.2","","$","26,699.9"],["Percent of Total","90","%","6","%","4","%","\u2014","%","\u2014","%","100","%"]]
[[/GREPCENT_TABLE]]

As of both December 31, 2023 and December 31, 2022, the less than 1% of AFS debt securities not rated by Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings (S&P Global) or Fitch Ratings, Inc. (Fitch Ratings) consisted of corporate debt securities.

TABLE 33: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING

[[GREPCENT_TABLE]]
[["","AS OF DECEMBER 31, 2023"],["($ In Millions)","AAA","AA","A","BBB","NOT RATED","TOTAL"],["U.S. Government","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014"],["Obligations of States and Political Subdivisions","954.7","","1,609.0","","\u2014","","\u2014","","0.2","","2,563.9"],["Government Sponsored Agency","9,355.3","","\u2014","","\u2014","","\u2014","","\u2014","","9,355.3"],["Non-U.S. Government","813.3","","1,179.6","","2,463.3","","332.9","","\u2014","","4,789.1"],["Corporate Debt","2.1","","302.6","","341.4","","\u2014","","\u2014","","646.1"],["Covered Bonds","2,208.6","","\u2014","","\u2014","","\u2014","","\u2014","","2,208.6"],["Certificates of Deposit","545.9","","\u2014","","\u2014","","\u2014","","39.2","","585.1"],["Sub-Sovereign, Supranational and Non-U.S. Agency Bonds","4,047.9","","1,166.5","","30.0","","1.1","","\u2014","","5,245.5"],["Other Asset-Backed","214.2","","\u2014","","\u2014","","\u2014","","\u2014","","214.2"],["Commercial Mortgage-Backed","37.6","","\u2014","","\u2014","","\u2014","","\u2014","","37.6"],["Other","54.8","","\u2014","","\u2014","","\u2014","","521.5","","576.3"],["Total","$","18,234.4","","$","4,257.7","","$","2,834.7","","$","334.0","","$","560.9","","$","26,221.7"],["Percent of Total","70","%","16","%","11","%","1","%","2","%","100","%"]]
[[/GREPCENT_TABLE]]

60 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[[GREPCENT_TABLE]]
[["","AS OF DECEMBER 31, 2022"],["(In Millions)","AAA","AA","A","BBB","NOT RATED","TOTAL"],["U.S. Government","$","50.0","","$","\u2014","","$","\u2014","","$","\u2014","","$","\u2014","","$","50.0"],["Obligations of States and Political Subdivisions","926.8","","1,638.5","","\u2014","","\u2014","","\u2014","","2,565.3"],["Government Sponsored Agency","9,407.7","","\u2014","","\u2014","","\u2014","","\u2014","","9,407.7"],["Non-U.S. Government","762.2","","926.5","","1,223.0","","322.3","","\u2014","","3,234.0"],["Corporate Debt","2.1","","305.7","","405.5","","\u2014","","\u2014","","713.3"],["Covered Bonds","2,530.3","","\u2014","","\u2014","","\u2014","","\u2014","","2,530.3"],["Certificates of Deposit","\u2014","","\u2014","","\u2014","","\u2014","","35.9","","35.9"],["Sub-Sovereign, Supranational and Non-U.S. Agency Bonds","4,171.3","","1,502.0","","28.9","","1.1","","\u2014","","5,703.3"],["Other Asset-Backed","263.7","","\u2014","","\u2014","","\u2014","","\u2014","","263.7"],["Other","65.8","","\u2014","","\u2014","","\u2014","","466.8","","532.6"],["Total","$","18,179.9","","$","4,372.7","","$","1,657.4","","$","323.4","","$","502.7","","$","25,036.1"],["Percent of Total","73","%","17","%","7","%","1","%","2","%","100","%"]]
[[/GREPCENT_TABLE]]

As of both December 31, 2023 and December 31, 2022, 2% of HTM debt securities not rated by Moody’s, S&P Global or Fitch Ratings primarily consisted of certificates of deposit with a remaining life of less than six months, as well as investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area.

Net unrealized losses within the investment securities portfolio totaled $2.3 billion at December 31, 2023, compared to net unrealized losses of $3.2 billion as of December 31, 2022. Net unrealized losses as of December 31, 2023 were comprised of $20.1 million and $2.3 billion of gross unrealized gains and losses, respectively. Net unrealized losses as of December 31, 2022 were comprised of $9.1 million and $3.2 billion of gross unrealized gains and losses, respectively.

As of December 31, 2023, the $23.1 billion AFS debt securities portfolio had unrealized losses of $200.3 million, $105.8 million, and $100.0 million related to government sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other asset-backed, respectively, which are primarily attributable to lower yields and tighter spreads. As of December 31, 2022, the $26.7 billion AFS debt securities portfolio had unrealized losses of $351.6 million, $288.1 million, and $157.6 million related to government-sponsored agency, other asset-backed, and sub-sovereign supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in market interest rates and credit spreads since their purchase.

As of December 31, 2023, the $26.2 billion HTM debt securities portfolio had an unrealized loss of $1.0 billion and $294.9 million related to government sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to lower yields and tighter spreads. As of December 31, 2022, the $25.0 billion HTM debt securities portfolio had an unrealized loss of $1.1 billion and $436.1 million related to government-sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase.

HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the year ended December 31, 2023, there were no securities transferred from AFS to HTM. During the year ended December 31, 2022, the Corporation transferred government sponsored agency and obligation of states and political subdivisions securities that had a fair value of $6.6 billion from AFS to HTM classification for capital management purposes, all of which were transferred in the third quarter of 2022. Upon transfer of a debt security from the AFS to HTM classification, the amortized cost is reset to fair value. Any net unrealized gain or loss at the date of transfer will remain in Accumulated Other Comprehensive Income (Loss) (AOCI) and be amortized into Net Interest Income over the remaining life of the securities using the effective interest method. The amortization of amounts retained in AOCI will offset the effect on interest income of the amortization of the premium or discount resulting from transferring the securities at fair value.

For additional information relating to the securities portfolio, refer to Note 4, “Securities,” provided in Item 8, “Financial Statements and Supplementary Data.”

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 61"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Loans

For additional information relating to the loan portfolio, refer to Note 5, “Loans,” and Note 7, “Concentrations of Credit Risk” provided in Item 8, “Financial Statements and Supplementary Data.”

The following table presents the remaining maturity of loans by segment and class as of December 31, 2023.

TABLE 34: REMAINING MATURITY OF LOANS

[[GREPCENT_TABLE]]
[["","DECEMBER 31, 2023"],["(In Millions)","TOTAL","ONE YEAR OR LESS","ONE TO FIVE YEARS","FIVE TO FIFTEEN YEARS","OVER FIFTEEN YEARS"],["U.S.:"],["Commercial"],["Commercial and Institutional","$","11,555.3","","$","4,906.4","","$","6,362.2","","$","285.8","","$","0.9"],["Commercial Real Estate","5,134.2","","787.3","","3,439.1","","907.8","","\u2014"],["Other","5,944.8","","5,944.8","","\u2014","","\u2014","","\u2014"],["Personal"],["Private Client","14,360.0","","9,170.2","","5,060.1","","129.4","","0.3"],["Residential Real Estate","6,327.1","","260.7","","926.8","","1,621.2","","3,518.4"],["Other","1,088.3","","1,088.3","","\u2014","","\u2014","","\u2014"],["Total U.S.","$","44,409.7","","$","22,157.7","","$","15,788.2","","$","2,944.2","","$","3,519.6"],["Non-U.S.:"],["Non-U.S. - Commercial","$","2,778.5","","$","2,686.2","","$","92.3","","$","\u2014","","$","\u2014"],["Non-U.S. - Personal","428.8","","316.8","","51.9","","29.4","","30.7"],["Total Non-U.S.","$","3,207.3","","$","3,003.0","","$","144.2","","$","29.4","","$","30.7"],["Total Loans","$","47,617.0","","$","25,160.7","","$","15,932.4","","$","2,973.6","","$","3,550.3"]]
[[/GREPCENT_TABLE]]

Note: Non-U.S. and Other U.S. loans primarily include short duration exposures related to custodied client investments.

62 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 35: INTEREST RATE SENSITIVITY OF LOANS

[[GREPCENT_TABLE]]
[["","DECEMBER 31, 2023"],["(In Millions)","TOTAL","ONE YEAR OR LESS","ONE TO FIVE YEARS","FIVE TO FIFTEEN YEARS","OVER FIFTEEN YEARS"],["Fixed Rate:"],["Commercial"],["Commercial and Institutional","$","294.5","","$","114.3","","$","135.8","","$","43.5","","$","0.9"],["Commercial Real Estate","180.6","","35.1","","128.6","","16.9","","\u2014"],["Non-U.S.","26.9","","26.9","","\u2014","","\u2014","","\u2014"],["Total Commercial","$","502.0","","$","176.3","","$","264.4","","$","60.4","","$","0.9"],["Personal"],["Private Client","$","426.1","","$","91.7","","$","333.7","","$","0.5","","$","0.2"],["Residential Real Estate","773.6","","70.3","","266.2","","421.9","","15.2"],["Non-U.S.","9.8","","0.1","","9.7","","\u2014","","\u2014"],["Total Personal","$","1,209.5","","$","162.1","","$","609.6","","$","422.4","","$","15.4"],["Total Fixed Rate","$","1,711.5","","$","338.4","","$","874.0","","$","482.8","","$","16.3"],["Variable Rate:"],["Commercial"],["Commercial and Institutional","$","11,260.8","","$","4,792.1","","$","6,226.4","","$","242.3","","$","\u2014"],["Commercial Real Estate","4,953.6","","752.2","","3,310.5","","890.9","","\u2014"],["Non-U.S.","2,751.6","","2,659.3","","92.3","","\u2014","","\u2014"],["Other","5,944.8","","5,944.8","","\u2014","","\u2014","","\u2014"],["Total Commercial","$","24,910.8","","$","14,148.4","","$","9,629.2","","$","1,133.2","","$","\u2014"],["Personal"],["Private Client","$","13,933.9","","$","9,078.5","","$","4,726.4","","$","128.9","","$","0.1"],["Residential Real Estate","5,553.5","","190.4","","660.6","","1,199.3","","3,503.2"],["Non-U.S.","419.0","","316.7","","42.2","","29.4","","30.7"],["Other","1,088.3","","1,088.3","","\u2014","","\u2014","","\u2014"],["Total Personal","$","20,994.7","","$","10,673.9","","$","5,429.2","","$","1,357.6","","$","3,534.0"],["Total Variable Rate","$","45,905.5","","$","24,822.3","","$","15,058.4","","$","2,490.8","","$","3,534.0"],["Total Loans","$","47,617.0","","$","25,160.7","","$","15,932.4","","$","2,973.6","","$","3,550.3"]]
[[/GREPCENT_TABLE]]

Nonaccrual Assets and 90 Days Past Due Loans

Nonaccrual assets consist of nonaccrual loans and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans. Loans that are delinquent 90 days or more and still accruing interest can fluctuate widely at any reporting period based on the timing of cash collections, renegotiation and renewals. For additional information relating to nonaccrual loans, refer to Note 5, “Loans,” provided in Item 8, “Financial Statements and Supplementary Data.”

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 63"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents nonaccrual assets and loans that were delinquent 90 days or more and still accruing interest at December 31, 2023 and 2022.

TABLE 36: NONACCRUAL ASSETS

[[GREPCENT_TABLE]]
[["($ In Millions)","DECEMBER 31, 2023","% OF 2023 NONACCRUAL LOANS TO TOTAL NONACCRUAL LOANS","DECEMBER 31, 2022","% OF 2022 NONACCRUAL LOANS TO TOTAL NONACCRUAL LOANS"],["Nonaccrual Loans"],["Commercial"],["Commercial and Institutional","$","16.3","","26","%","$","17.4","","38","%"],["Commercial Real Estate","\u2014","","\u2014","","10.2","","22"],["Total Commercial","$","16.3","","26","%","$","27.6","","60","%"],["Personal"],["Private Client","$","20.3","","32","%","$","\u2014","","\u2014","%"],["Residential Real Estate","27.0","","42","","18.3","","40"],["Total Personal","$","47.3","","74","%","$","18.3","","40","%"],["Total Nonaccrual Loans","63.6","","","45.9"],["Other Real Estate Owned","1.5","","","\u2014"],["Total Nonaccrual Assets","$","65.1","","","$","45.9"],["90 Day Past Due Loans Still Accruing","$","20.1","","","$","54.2"],["Nonaccrual Loans to Total Loans","0.13","%","","0.11","%"],["Allowance for Credit Losses Assigned to Loans to Nonaccrual Loans","2.8","x","","3.1x"]]
[[/GREPCENT_TABLE]]

Nonaccrual assets as of December 31, 2023 increased from December 31, 2022, primarily due to one new private client nonaccrual loan and two new residential real estate nonaccrual loans, partially offset by one commercial real estate nonaccrual loan upgrade to accrual status and one commercial real estate nonaccrual loan pay-down/charge-off. In addition to the negative impact on Net Interest Income and the risk of credit losses, nonaccrual assets also increase operating costs due to the expense associated with collection efforts. Changes in the level of nonaccrual assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment of the allowance evaluated on an individual basis and the quantitative and qualitative factors used in the determination of the allowance evaluated on a collective basis within the allowance for credit losses.

Allowance for Credit Losses

The Allowance for Credit Losses—which represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.

Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts.

The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Financial Risk Management, Treasury, Corporate Finance, the Economic Research Department, and each of Northern Trust’s reporting business units.

As of December 31, 2023, the Allowance for Credit Losses related to loans, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $178.7 million, $26.9 million, $12.7 million, and $0.9 million, respectively. As of December 31, 2022, the Allowance for Credit Losses related to loans, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $144.3 million, $38.5 million, $16.0 million, and $0.8 million, respectively. For additional information relating to the Allowance for Credit Losses and the changes in the Allowance for Credit Losses during the years ended December 31, 2023 and 2022 due to

64 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

charge-offs, recoveries and provisions for credit losses, refer to Note 6, “Allowance for Credit Losses,” provided in Item 8, “Financial Statements and Supplementary Data.”

The following table shows the net recoveries (charge-offs) to average loans and leases by segment and class at December 31, 2023, 2022, and 2021.

TABLE 37: NET RECOVERIES (CHARGE-OFFS) TO AVERAGE LOANS AND LEASES

[[GREPCENT_TABLE]]
[["($ in Millions)","2023","2022","2021"],["Net Recoveries (Charge-Offs) to Select Average Loans and Leases(1)"],["Commercial"],["Commercial and Institutional","\u2014","%","\u2014","%","0.01","%"],["Commercial Real Estate","(0.10)","","0.05","","(0.01)"],["Lease Financing, net(2)","\u2014","","(61.3)","","\u2014"],["Total Commercial","(0.03)","","(0.02)","","\u2014"],["Personal"],["Private Client","\u2014","","\u2014","","0.01"],["Residential Real Estate","0.02","","0.11","","0.07"],["Total Personal","0.01","","0.03","","0.03"],["Total Net Recoveries (Charge-Offs) to Select Average Loans and Leases(1)","(0.01)","%","0.01","%","0.02","%"],["Net Recoveries (Charge-Offs)"],["Commercial"],["Commercial and Institutional","$","0.2","","$","0.1","","$","0.9"],["Commercial Real Estate","(5.2)","","2.2","","(0.3)"],["Lease Financing, net","\u2014","","(4.9)","","\u2014"],["Total Select Commercial(3)","(5.0)","","(2.6)","","0.6"],["Personal"],["Private Client","0.4","","\u2014","","1.3"],["Residential Real Estate","1.3","","6.8","","4.4"],["Total Personal","1.7","","6.8","","5.7"],["Total Net Recoveries (Charge-Offs)(3)","$","(3.3)","","$","4.2","","$","6.3"],["Average Loans and Leases"],["Commercial"],["Commercial and Institutional","$","12,438.9","","$","12,258.9","","$","10,428.6"],["Commercial Real Estate","4,981.6","","4,432.2","","3,977.0"],["Lease Financing, net","\u2014","","8.0","","11.2"],["Total Select Commercial(1)","17,420.5","","16,699.1","","14,416.8"],["Personal"],["Private Client","14,000.2","","13,877.9","","13,686.7"],["Residential Real Estate","6,390.7","","6,352.5","","6,190.6"],["Total Select Personal(1)","20,390.9","","20,230.4","","19,877.3"],["Total Select Average Loans and Leases(1)","$","37,811.4","","$","36,929.5","","$","34,294.1"]]
[[/GREPCENT_TABLE]]

(1) The table excludes the Other and Non-U.S. average loan segments.

(2) The ratio reflects a charge-off in the third quarter of 2022 in association with a sale of the last lease remaining in Northern Trust’s lease portfolio. As of December 31, 2022, there were no leases outstanding.

(3) As of December 31, 2023, there was a $0.5 million net charge-off in other commercial which was not reflected as the segment is excluded from the table above.

Net recoveries (charge-offs) for the Non-U.S. segment was zero and therefore the ratio of net recoveries (charge-offs) to average loans and leases was excluded from the above table. Total average loans and leases for all loan portfolio categories were $42.2 billion, $41.0 billion, and $37.2 billion for the years ended December 31, 2023, 2022, and 2021, respectively.

The following disclosure has been prepared in compliance with the SEC requirement to disclose the Allowance for Credit Losses that is applicable to international operations; however, the amounts disclosed should not be construed as being the only amounts available to cover future non-U.S. loan charge-offs, since the entire Allowance for Credit Losses assigned to Loans is available to absorb losses on both U.S. and non-U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends. Please refer to Table 38 in the following section for the non-U.S. allowance balances.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 65"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table provides the allowance evaluated on an individual and collective basis for the loans portfolio by segment and class at December 31, 2023 and 2022.

TABLE 38: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

[[GREPCENT_TABLE]]
[["","DECEMBER 31,"],["","2023","2022"],["($ In Millions)","ALLOWANCE AMOUNT","PERCENT OF LOANS TO TOTAL LOANS","ALLOWANCE AMOUNT","PERCENT OF LOANS TO TOTAL LOANS"],["Evaluated on an Individual Basis","$","13.4","","\u2014","%","$","10.4","","\u2014","%"],["Evaluated on a Collective Basis"],["Commercial"],["Commercial and Institutional","57.2","","24","","57.0","","29"],["Commercial Real Estate","101.4","","11","","76.5","","11"],["Non-U.S.","1.6","","6","","8.3","","7"],["Other","0.1","","13","","0.3","","3"],["Total Commercial","160.3","","54","","142.1","","50"],["Personal"],["Private Client","12.0","","30","","11.2","","33"],["Residential Real Estate","18.8","","13","","18.0","","15"],["Non-U.S.","1.1","","1","","1.1","","1"],["Other","\u2014","","2","","\u2014","","1"],["Total Personal","31.9","","46","","30.3","","50"],["Total Allowance Evaluated on a Collective Basis","$","192.2","","","$","172.4"],["Total Allowance for Credit Losses","$","205.6","","","$","182.8"],["Allowance Assigned to:"],["Loans","$","178.7","","","$","144.3"],["Undrawn Commitments and Standby Letters of Credit","26.9","","","38.5"],["Total Allowance for Credit Losses","$","205.6","","","$","182.8"],["Allowance Assigned to Loans to Total Loans","0.38","%","","0.34","%"]]
[[/GREPCENT_TABLE]]

Allowance Related to Credit Exposure Evaluated on an Individual Basis: The individual allowance is determined through individual evaluations of loans and lending-related commitments that have defaulted, generally those with Borrower Ratings of 8 and 9, that are based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay.

The allowance evaluated on an individual basis for Loans increased $3.0 million from $10.4 million at December 31, 2022 to $13.4 million at December 31, 2023, primarily attributable to a net increase in outstanding loans in the private client portfolio and commercial portfolio.

Allowance Related to Credit Exposure Evaluated on a Collective Basis: Expected credit losses are measured on a collective basis as long as the financial assets included in the respective pool share similar risk characteristics. If financial assets are deemed not to share similar risk characteristics, an individual assessment is warranted.

The allowance evaluated on a collective basis for loans increased $31.4 million to $165.3 million at December 31, 2023, compared with $133.9 million at December 31, 2022, primarily seen in the commercial real estate portfolio, driven by an increase in the size and duration of the portfolio, weaker economic projections for the industry, and methodology updates. The remainder of the provision was due to charge-offs. The allowance evaluated on a collective basis for undrawn loan commitments and letters of credit decreased $11.6 million to $26.9 million at December 31, 2023, compared with $38.5 million at December 31, 2022, primarily in the commercial and institutional portfolio, reflecting a combination of credit quality improvements, an improved macroeconomic outlook for that segment, and methodology updates.

Overall Allowance: The reserve evaluated on an individual and collective basis resulted in a total Allowance for Credit Losses of $220.4 million at December 31, 2023, compared with $200.9 million at the end of 2022. The allowance of $178.7 million assigned to Loans, as a percentage of total Loans, was 0.38% at December 31, 2023, which increased from a $144.3 million allowance assigned to Loans, representing 0.34% of total Loans at December 31, 2022. Allowances assigned to undrawn loan commitments and standby letters of credit totaled $26.9 million and $38.5 million at December 31, 2023 and 2022, respectively, and are included in Other Liabilities on the consolidated balance sheets.

66 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Expenditures

Capital expenditures in 2023 included continued investments in public cloud technologies and to enhance Northern Trust’s software capabilities, as well as renovation and relocation projects to reduce our real estate footprint and modernize our existing offices for new ways of working. Capital expenditures for 2023 totaled $675.8 million, of which $559.3 million was for software, $56.4 million was for computer hardware, $56.0 million was for building and leasehold improvements, and $4.1 million was for furnishings. These capital expenditures principally support, enhance, and protect Northern Trust’s investment management, asset servicing and wealth management systems and capabilities, with focus on delivering secure, highly available and innovative solutions to better serve our clients. Additional capital expenditures committed for technology platforms will result in future expense for the depreciation of hardware and amortization of software. Software amortization and depreciation on computer hardware are charged to Equipment and Software expense. Depreciation on building and leasehold improvements and on furnishings is charged to Occupancy expense and equipment expense, respectively. Capital expenditures for 2022 totaled $723.5 million, of which $594.9 million was for software, $84.0 million was for computer hardware, $35.5 million was for building and leasehold improvements, and $9.1 million was for furnishings.

Deposits

The following table provides the scheduled maturity of total time deposits in denominations of $250,000 or greater at December 31, 2023. For additional information, refer to Note 11, “Deposits,” provided in Item 8, “Financial Statements and Supplementary Data.”

TABLE 39: REMAINING MATURITY OF TIME DEPOSITS $250,000 OR MORE

[[GREPCENT_TABLE]]
[["","DECEMBER 31, 2023"],["","U.S. OFFICE","NON-U.S. OFFICES"],["(In Millions)","CERTIFICATES OF DEPOSIT","OTHER TIME","TOTAL"],["3 Months or Less","$","2,029.4","","$","2,557.5","","$","4,586.9"],["Over 3 Months through 6 Months","798.2","","22.6","","820.8"],["Over 6 Months through 12 Months","566.4","","\u2014","","566.4"],["Over 12 Months","58.0","","\u2014","","58.0"],["Total","$","3,452.0","","$","2,580.1","","$","6,032.1"]]
[[/GREPCENT_TABLE]]

Deposits not insured by the FDIC as of December 31, 2023 and 2022 totaled $109.9 billion and $116.1 billion, respectively. These deposit amounts are derived by adding estimated U.S. office uninsured deposits as allowed by Federal Financial Institutions Examination Council instructions to all non-U.S. office deposits. Estimated uninsured U.S. office deposits are determined by calculating and totaling the deposits in excess of the deposit insurance limit on an individual account basis.

Short-Term Borrowings

Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are either directly held by, or pledged to the counterparty until the repurchase. Northern Trust nets securities sold under agreements to repurchase against those purchased under agreements to resell when the requirements to net are met. See Note 24, “Commitments and Contingent Liabilities,” Note 26, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” and Note 27, “Offsetting of Assets and Liabilities” provided in Item 8, “Financial Statements and Supplementary Data” for additional information on our repurchase and reverse repurchase agreements.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 67"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Geographic Area Information

Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source assets. Non-U.S. source assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision assets between U.S. and non-U.S.-domiciled customers. Therefore, certain subjective estimates and assumptions have been made to allocate assets between U.S. and non-U.S. operations.

The following tables present selected average assets and liabilities attributable to non-U.S. operations (based on the obligor’s domicile) and the percent of those balances to total consolidated average assets. For additional information refer to Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

TABLE 40: SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO NON-U.S. OPERATIONS

[[GREPCENT_TABLE]]
[["(In Millions)","2023","2022"],["Total Assets","$","24,927.8","","$","26,904.3"],["Time Deposits with Banks","1,847.7","","2,082.2"],["Loans","2,349.5","","2,562.7"],["Non-U.S. Investments","14,565.0","","16,002.1"],["Total Liabilities","67,964.2","","77,481.6"],["Deposits","66,232.9","","75,808.6"]]
[[/GREPCENT_TABLE]]

Non-U.S. Outstandings

As used in this discussion, non-U.S. outstandings are cross-border outstandings as defined by the SEC. They consist of loans, securities, interest-bearing deposits with financial institutions, accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and non-U.S. office local currency claims on residents. Non-U.S. outstandings related to a country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral realizable outside the country. However, transactions with branches of non-U.S. banks are included in these outstandings and are classified according to the country location of the non-U.S. bank’s head office.

Short-term interbank time deposits with non-U.S. banks represent the largest category of non-U.S. outstandings. Northern Trust actively participates in the interbank market with U.S. and non-U.S. banks.

Northern Trust places deposits with non-U.S. counterparties that have strong internal (Northern Trust) risk ratings and external credit ratings. These non-U.S. banks are approved and monitored by Northern Trust’s Capital Markets Credit Committee, which has credit authority for exposure to all non-U.S. banks and approves credit limits. This process includes financial analysis of the non-U.S. banks, use of an internal risk rating system and consideration of external market indicators. Each counterparty is reviewed at least annually and potentially more frequently based on credit fundamentals or general market conditions. Separate from the entity-specific review process, the average life to maturity of deposits with non-U.S. banks is deliberately maintained on a short-term basis in order to respond quickly to changing credit conditions. Northern Trust also utilizes certain risk mitigation tools and agreements that may reduce exposures through use of collateral and/or balance sheet netting. Additionally, the Capital Markets Credit Committee oversees country-risk analyses and imposes limits on country exposure. For additional information refer to Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

68 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

STATEMENTS OF CASH FLOWS

The following discusses the statement of cash flow activities for the years ended December 31, 2023, 2022, and 2021.

TABLE 41: CASH FLOW ACTIVITY SUMMARY

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,"],["(In Millions)","2023","2022","2021"],["Net cash provided by (used in):"],["Operating activities","$","2,625.6","","$","2,392.4","","$","1,356.0"],["Investing activities","4,784.1","","25,929.8","","(18,602.6)"],["Financing activities","(7,182.6)","","(26,437.4)","","16,073.5"],["Effect of Foreign Currency Exchange Rates on Cash","(89.8)","","(287.4)","","(159.6)"],["Change in Cash and Due from Banks","$","137.3","","$","1,597.4","","$","(1,332.7)"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net cash provided by operating activities of $2.6 billion for the year ended December 31, 2023 was primarily attributable to period earnings and the impact of other operating activities, net.

For the year ended December 31, 2022, net cash provided by operating activities of $2.4 billion was primarily attributable to period earnings and lower net collateral deposited with derivative counterparties, partially offset by the impact of other operating activities, net.

Investing Activities

Net cash provided by investing activities of $4.8 billion for the year ended December 31, 2023 was primarily attributable to lower levels of deposits with the Federal Reserve and other central banks and net proceeds from available for sale debt securities arising from a repositioning of the portfolio, partially offset by higher levels of loans.

For the year ended December 31, 2022, net cash provided by investing activities of $25.9 billion primarily reflected lower levels of deposits with the Federal Reserve and other central banks and net proceeds from held to maturity debt securities, partially offset by higher levels of loans.

Financing Activities

Net cash used in financing activities of $7.2 billion for the year ended December 31, 2023 was primarily attributable to decreased levels of total deposits. The decrease in total deposits was primarily attributable to lower levels of savings, money market and other interest-bearing.

For the year ended December 31, 2022, net cash used in financing activities of $26.4 billion primarily reflected decreased levels of total deposits, partially offset by higher short-term other borrowings, proceeds from the issuance of 4.00% senior notes and 6.125% subordinated notes, and higher federal funds purchased. The decrease in total deposits was primarily attributable to lower levels of non-U.S. office noninterest-bearing deposits, non-U.S. office interest-bearing deposits, and demand and other noninterest-bearing deposits.

CAPITAL MANAGEMENT

One of Northern Trust’s primary objectives is to maintain a strong capital position to merit the confidence of clients, counterparties, creditors, regulators and stockholders. A strong capital position helps Northern Trust execute its strategies and withstand unforeseen adverse developments.

Senior management, with oversight from the Capital Governance Committee of the Board of Directors and the full Board of Directors, is responsible for capital management and planning. Northern Trust manages its capital on both a total Corporation basis and a legal entity basis. The Capital Committee is responsible for measuring and managing capital metrics against levels set forth within the Capital Policy approved by the Capital Governance Committee of the Board of Directors. In establishing the metrics related to capital, a variety of factors are taken into consideration, including the unique risk profiles of Northern Trust’s businesses, regulatory requirements, capital levels relative to peers, economic and market forecasts, and the impact on credit ratings.

Capital levels increased in 2023 as average stockholders’ equity increased $415.4 million, or 4%, to $11.5 billion. Total stockholders’ equity was $11.9 billion at December 31, 2023, as compared to $11.3 billion at December 31, 2022. Preferred dividends totaling $41.8 million were declared in 2023. During 2023, the Corporation maintained its quarterly common stock dividend at $0.75 per common share. Common dividends totaling $630.2 million were declared in 2023. During the year ended December 31, 2023, the Corporation repurchased 4,384,678 shares of common stock, including 378,130 shares withheld related to share-based compensation, at an average price per share of $79.26.

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 69"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced approaches. As required by the Dodd-Frank Act, the lower of each capital ratio calculated under the standardized approach and the advanced approach serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the applicable U.S. regulatory rules as of December 31, 2023 and 2022.

TABLE 42: CAPITAL ADEQUACY

[[GREPCENT_TABLE]]
[["($ In Millions)","DECEMBER 31, 2023","DECEMBER 31, 2022"],["","STANDARDIZED APPROACH","ADVANCED APPROACH","STANDARDIZED APPROACH","ADVANCED APPROACH"],["Common Equity Tier 1 Capital"],["Common Stockholders\u2019 Equity","$","11,013.1","","$","11,013.1","","$","10,374.6","","$","10,374.6"],["Goodwill and Other Intangible Assets, net of Deferred Tax Liability","(722.2)","","(722.2)","","(719.7)","","(719.7)"],["Other","(111.5)","","(111.5)","","(115.2)","","(115.2)"],["Total Common Equity Tier 1 Capital","10,179.4","","10,179.4","","9,539.7","","9,539.7"],["Additional Tier 1 Capital"],["Preferred Stock","884.9","","884.9","","884.9","","884.9"],["Other","(40.4)","","(40.4)","","(27.2)","","(27.2)"],["Total Additional Tier 1 Capital","844.5","","844.5","","857.7","","857.7"],["Total Tier 1 Capital","11,023.9","","11,023.9","","10,397.4","","10,397.4"],["Tier 2 Capital"],["Qualifying Allowance for Credit Losses","219.2","","\u2014","","199.6","","\u2014"],["Qualifying Subordinated Debt","1,490.8","","1,490.8","","1,648.5","","1,648.5"],["Total Tier 2 Capital","1,710.0","","1,490.8","","1,848.1","","1,648.5"],["Total Risk-Based Capital","$","12,733.9","","$","12,514.7","","$","12,245.5","","$","12,045.9"],["Risk-Weighted Assets(1)","$","89,527.4","","$","75,980.0","","$","88,107.7","","$","83,181.2"],["Total Assets \u2013 End of Period (EOP)","150,783.1","","150,783.1","","155,036.7","","155,036.7"],["Adjusted Average Fourth Quarter Assets(2)","135,701.9","","135,701.9","","146,883.8","","146,883.8"],["Total Loans \u2013 EOP","47,617.0","","47,617.0","","42,893.3","","42,893.3"],["Common Stockholders\u2019 Equity to:"],["Total Loans \u2013 EOP","23.13","%","23.13","%","24.19","%","24.19","%"],["Total Assets \u2013 EOP","7.30","","7.30","","6.69","","6.69"],["Risk-Based Capital Ratios"],["Common Equity Tier 1 Capital","11.4","%","13.4","%","10.8","%","11.5","%"],["Tier 1 Capital","12.3","","14.5","","11.8","","12.5"],["Total Capital (Tier 1 and Tier 2)","14.2","","16.5","","13.9","","14.5"],["Tier 1 Leverage","8.1","","8.1","","7.1","","7.1"],["Supplementary Leverage","N/A","8.6","","N/A","7.9"]]
[[/GREPCENT_TABLE]]

(1) Risk-weighted assets exclude, as applicable under each regulatory approach, amounts primarily related to goodwill, certain other intangible assets, and net unrealized gains or losses on securities and reflect adjustments for excess allowances for credit losses that have been excluded from Tier 1 and Tier 2 capital, if any.

(2) Adjusted average fourth quarter assets exclude amounts primarily related to goodwill, other intangible assets, and net unrealized gains or losses on securities.

As of December 31, 2023 and 2022, the Corporation’s capital ratios exceeded the requirements for classification as “well-capitalized” under applicable U.S. regulatory requirements.

Northern Trust is a Category II institution as defined by the Federal Reserve Board which requires us to adhere to regulatory capital standards. In adhering to these standards, Northern Trust engages in a range of reporting and activities with regulators to affirm our financial strength and stability, including but not limited to, capital adequacy reporting that deducts any unrealized losses related to AFS securities from reported capital, and stringent, annual company-run and supervisory stress testing in the form of Comprehensive Capital Analysis and Review (CCAR) exercises, which confirms our ability to remain solvent under severely adverse market conditions.

The results of the 2023 DFAST, published by the Federal Reserve Board on June 28, 2023, resulted in Northern Trust’s stress capital buffer and effective Common Equity Tier 1 capital ratio minimum requirement remaining constant at 2.5% and 7.0%, respectively, for the annual capital plan cycle, which began on October 1, 2023 and continues through September 30, 2024.

70 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

On July 27, 2023, the U.S. banking regulators issued the Basel III Endgame Proposal, which would change how risk-based capital requirements are determined for banking organizations including Northern Trust. The proposal would eliminate the existing advanced approach methodologies for determining RWAs and replace it with a new expanded risk based approach. The new requirements would be phased in over a three year period beginning July 1, 2025. Based on our current understanding of the proposed rule, we estimate that, if the expanded risk-based approach had applied on a fully phased-in basis as of December 31, 2023, and in the absence of taking any actions to mitigate its impact, our expanded risk-based approach RWAs as of that date would have been approximately 5% to 15% higher than our actual standardized approach RWAs as of that date.

Further information regarding the Corporation’s and the Bank’s capital ratios and the minimum requirements for classification as “well-capitalized” is provided in the “Supervision and Regulation—Capital Adequacy Requirements” section of Item 1, “Business,” and Note 32, “Regulatory Capital Requirements,” provided in Item 8, “Financial Statements and Supplementary Data.”

CRITICAL ACCOUNTING ESTIMATES

Our significant accounting policies are described in Note 1, “Summary of Significant Accounting Policies,” provided in Item 8, “Financial Statements and Supplementary Data.” The use of estimates and assumptions is required in the preparation of financial statements in conformity with GAAP and actual results could differ from those estimates. The SEC has issued guidance relating to the disclosure of critical accounting estimates. Critical accounting estimates are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on Northern Trust’s future financial condition and results of operations.

For Northern Trust, accounting estimates that are viewed as critical are those relating to the allowance for credit losses and pension plan accounting. Management has discussed the development and selection of each critical accounting estimate with the Audit Committee of the Board of Directors (Audit Committee).

Allowance for Credit Losses

The Allowance for Credit Losses—which represents management’s estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. The allowance for a financial asset that does not share similar risk characteristics with other financial assets is determined through an individual evaluation.

Management’s estimates utilized in establishing an appropriate level of Allowance for Credit Losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts. Due to the inherent imprecision in accounting estimates, other estimates or assumptions could reasonably have been used in 2023 and changes in estimates are reasonably likely to occur from period to period.

The Allowance for Credit Losses consists of the following components:

Allowance Evaluated on a Collective Basis. Expected credit losses are measured on a collective basis as long as the financial assets included in the respective pool share similar risk characteristics. If financial assets are deemed not to share similar risk characteristics, an individual assessment is warranted.

The allowance estimation methodology for the collective assessment is based on data representative of the Corporation’s financial asset portfolio from a historical observation period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan portfolio into segments based on loan and obligor-specific factors, including loan type, borrower type, collateral type, loan size, and borrower credit quality. For each segment, the probability of default and loss given default are derived for each quarter of the remaining life of each instrument. For the first two years (the reasonable and supportable period), these factors are derived by applying quarterly macroeconomic projections using models developed from historical data on macroeconomic factors and loans with similar characteristics. For periods beyond the reasonable and supportable period, Northern Trust reverts to its long-run historical loss experiences on a straight-line basis over four quarters. The projected exposure at default for every quarter is based on contractual balance projections as of each quarter-end, with adjustments made for potential draws on off-balance sheet commitments.

Northern Trust utilizes a quantitative probability of default/loss given default approach for the calculation of its credit allowance on a collective basis. For each segment, the probability of default and the loss given default are applied to the exposure at default for each projected quarter to determine the quantitative component of the allowance. The quantitative allowance is then reviewed within a qualitative adjustment framework, through which management applies judgment by

[[GREPCENT_TABLE]]
[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 71"]]
[[/GREPCENT_TABLE]]

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to compute an adjustment to the quantitative allowance for each segment and class of the loan portfolio.

ASC 326-20-30 requires the use of projected macroeconomic factors. The Corporation uses multiple forecasts approved by Northern Trust’s Macroeconomic Scenario Development Committee (MSDC). The baseline forecast aligns with the Corporation’s latest thinking on macroeconomic projections for the next eight quarters. An alternative scenario is also considered, which reflects a recession that incorporates the experiences of a wider set of historical economic cycles. The forecasts are probability-weighted at each evaluation period and are management’s best estimate of future economic projections at that time.

The allowance estimate is sensitive to changes in portfolio composition, portfolio quality, and macroeconomic forecasts. Increases in the amount of borrowing and material downgrades to the quality of the lending portfolio will increase the reserve, all else equal. Similarly, deteriorating projections for macroeconomic conditions will increase the reserve. Macroeconomic factors that are particularly correlated to Northern Trust’s loan portfolio are equity market values, market volatility, corporate profits, residential and commercial real estate price indices, unemployment, and disposable income. To demonstrate the sensitivity to changes in macroeconomic conditions, Northern Trust applied a 100% probability weighting to downturn conditions, resulting in an increase to the collective component of the allowance for the loan portfolio of approximately $121.2 million. The investment security and other financial assets portfolios are less sensitive to macroeconomic factors in terms of overall reserve impact due to factors such as high credit quality, short duration, and low historical losses.

The commercial and institutional (C&I) portfolio utilizes Northern Trust’s internal borrower rating assessments to determine initial credit quality. A sensitivity analysis was performed to determine the impact of upgrades or downgrades by shifting the rating up or down by one rating class, assuming no changes to other factors, such as macroeconomic projections or qualitative adjustments. The analysis excludes defaulted loans and does not assume a default event; hence, borrowers at the lowest non-default rating were not downgraded. Similarly, those at the highest rating could not be upgraded. Assuming the final forecast probability weighting, the collective component of the allowance assigned to the C&I portfolio would increase by approximately $82.3 million if all C&I borrowers were downgraded by one performing rating class. The C&I collective allowance would decrease by approximately $32.4 million if borrower ratings were upgraded by one rating class (if possible).

The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Financial Risk Management, Treasury, Corporate Finance, the Economic Research Department, and each of Northern Trust’s reporting business units. The Credit Loss Reserve Committee determines the probability weights applied to each forecast approved by MSDC, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework.

Allowance Evaluated on an Individual Basis. The individual allowance is determined through individual evaluations of financial assets that have defaulted, based on expected future cash flows, the value of collateral, and other factors that may impact the borrowers’ ability to pay. For defaulted loans for which the amount of allowance, if any, is determined based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management’s judgment as to the realizable value of the collateral.

Analysis and Controls. The quarterly analysis of the individual and collective allowance components and the control process maintained by Financial Risk Management and the lending staff are the principal methods relied upon by management for the timely identification and estimation of individual expected credit losses. In addition to Northern Trust’s own experience, management also considers regulatory guidance. Control processes and analyses employed to determine an appropriate level of allowance for credit losses are reviewed at least annually and modified as considered appropriate.

Management believes that the Allowance for Credit Losses adequately considers these uncertainties and has been established at an appropriate level. Actual losses may vary from current estimates and the amount of the provision for credit losses may be greater or less than actual net charge-offs in any particular period.

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Pension Plan Accounting

Northern Trust maintains a noncontributory defined benefit pension plan covering substantially all U.S. employees (U.S. Qualified Plan) and a U.S. noncontributory supplemental pension plan (U.S. Non-Qualified Plan). Certain European-based employees also retain benefits in local defined benefit pension plans, of which the majority are closed to new employees and to future benefit accruals. Measuring cost and reporting liabilities resulting from defined benefit pension plans requires the use of several assumptions regarding future interest rates, asset returns, compensation increases, mortality rates, and other actuarial-based projections relating to the plans. Due to the long-term nature of this obligation and the estimates that are required to be made, the assumptions used in determining the periodic pension expense and the projected benefit obligation are closely monitored and reviewed annually for adjustments that may be required. Pension accounting guidance requires that differences between estimates and actual experience be recognized as other comprehensive income in the period in which they occur. The differences are amortized into net periodic pension expense from accumulated other comprehensive income over the average remaining service period of eligible participants. As a result, differences between the estimates made in the calculation of periodic pension expense and the projected benefit obligation and actual experience affect stockholders’ equity in the period in which they occur but continue to be recognized as expense systematically and gradually over subsequent periods.

Northern Trust recognizes the significant impact that these pension-related assumptions have on the determination of the pension obligations and related expense and has established procedures for monitoring and setting these assumptions each year. These procedures include an annual review of actual demographic and investment experience with the pension plans’ actuaries. In addition to actual experience, adjustments to these assumptions consider observable yields on fixed income securities, known compensation trends and policies, as well as economic conditions and investment strategies that may impact the estimated long-term rate of return on plan assets.

In determining the pension expense for the U.S. Qualified Plan and for the U.S. Non-Qualified Plan in 2023, Northern Trust utilized a discount rate of 5.22% and 5.15% as of December 31, 2022, respectively. For both plans, the rate of increase in the compensation level is based on a graded schedule from 9.00% to 2.50% that averaged 5.56%. The expected long-term rate of return on U.S. Qualified Plan assets was 7.25% as of December 31, 2022.

In evaluating possible revisions to pension-related assumptions for the U.S. pension plans as of Northern Trust’s December 31, 2023 measurement date, the following were considered:

•Discount Rate: Northern Trust estimates the discount rate for its U.S. pension plans by applying the plan specific projected cash flows for future benefit payments for each plan to the Aon AA Above Median yield curve as of the measurement date. This yield curve is composed of individual zero-coupon interest rates for 198 different time periods over a 99-year time horizon. Zero-coupon rates utilized by the yield curve are mathematically derived from observable market yields for AA-rated corporate bonds. This yield curve model referenced by Northern Trust in establishing the discount rate resulted in a rate of 5.03% and 4.95% at December 31, 2023 for the U.S. Qualified and U.S. Non-Qualified Plans, respectively.

•Compensation Level: Based on a review of actual and anticipated salary experience, the compensation scale assumption is based on a graded schedule from 9.00% to 2.50% that averages 5.56%.

•Rate of Return on Plan Assets: The expected return on plan assets is based on an estimate of the long-term (30 years) rate of return on plan assets, which is determined using a building block approach that considers the current asset mix and estimates of return by asset class based on historical experience, giving proper consideration to diversification and rebalancing. Current market factors such as inflation and interest rates are also evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonability and appropriateness. As a result of these analyses, Northern Trust’s rate of return assumption for the U.S. Qualified Plan will continue to be 7.25% for 2024.

•Mortality Table: Northern Trust had adopted the aggregate Pri-2012 mortality table with a 2012 base year, which was released by the Society of Actuaries in October 2019. Northern Trust’s pension obligations reflect proposed future improvement under scale MP-2021, which was released by the Society of Actuaries in October 2021. As was the case in 2022, no change to these assumptions was made in 2023 since the Society of Actuaries did not release any updates to its mortality tables and improvement scales in 2023. Mortality assumptions on lump sum payments remain static and continue to be in line with the IRS prescribed table for minimum lump sums in 2024.

The net pension expense in 2024 is expected to slightly increase, primarily driven by higher amortization of prior year’s asset losses, offset by the positive effects of the cash contribution made to the U.S. Qualified Plan at the beginning of 2024.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In order to illustrate the sensitivity of these assumptions on the expected U.S pension plans’ 2024 periodic pension expense and the projected benefit obligation as of December 31, 2023, the following table is presented to show the effect of increasing or decreasing each of these assumptions by 25 basis points.

TABLE 43: SENSITIVITY OF U.S. PENSION PLANS ASSUMPTIONS

[[GREPCENT_TABLE]]
[["(In Millions)","25 BASIS POINT INCREASE","25 BASIS POINT DECREASE"],["Increase (Decrease) in 2024 Pension Expense"],["Discount Rate Change","$","(2.9)","","$","3.0"],["Compensation Level Change","2.3","","(2.3)"],["Rate of Return on Plan Assets Change","(4.0)","","4.0"],["Increase (Decrease) in December 31, 2023 Projected Benefit Obligation"],["Discount Rate Change","(32.7)","","34.3"],["Compensation Level Change","9.1","","(8.9)"]]
[[/GREPCENT_TABLE]]

Pension Contributions. The deduction limits specified by the Internal Revenue Code for contributions made by sponsors of defined benefit pension plans are based on a “Target Liability” under the provisions of the Pension Protection Act of 2006. There were no contributions to the U.S. Qualified Plan for the 2023 plan year. $200.0 million was contributed to the U.S. Qualified Plan for the 2024 plan year at the beginning of 2024.

The minimum required contribution to the U.S. Qualified Plan is expected to be zero in 2024. The remaining 2024 maximum deductible contribution, after considering the cash contribution of $200.0 million, is estimated at $220.0 million.

RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS

In March 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method—a consensus of the Emerging Issues Task Force” (ASU 2023-02). The amendments in ASU 2023-02 permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). In addition, ASU 2023-02 requires specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method in accordance with Subtopic 323-740. ASU 2023-02 is effective for interim and annual periods beginning after December 15, 2023. Northern Trust adopted ASU 2023-02 as of January 1, 2024 using the modified retrospective method. The adoption of ASU 2023-02 is not expected to impact significantly Northern Trust’s consolidated balance sheets or consolidated statements of income.

In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (ASU 2023-07). ASU 2023‐07 significantly expands disclosures about a public entity’s reportable segments, primarily through more frequent and enhanced disclosures about significant segment expenses. ASU 2023-07 does not change how a public entity identifies its operating segments, aggregates those operating segments or applies the quantitative thresholds to determine its reportable segments. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Early adoption is permitted. Upon adoption, the impact of ASU 2023-07 will be limited to certain enhancements within the notes to the consolidated financial statements and therefore is not expected to have an impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.

In December 2023, the FASB issued ASU No. 2023-08, “Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets” (ASU 2023-08). ASU 2023-08 requires entities to subsequently measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period. In addition, ASU 2023-08 requires the presentation of crypto assets separately from other intangible assets on the face of the balance sheet and changes in fair value of crypto assets separately from changes in the carrying amount of other intangible assets on the statement of income. ASU 2023-08 also requires enhanced disclosures about in-scope crypto assets and respective activities. ASU 2023-08 is effective for interim and annual periods beginning after December 15, 2024, although

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early adoption is permitted. Upon adoption, ASU 2023-08 is not expected to have a significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.    

In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (ASU 2023-09). ASU 2023-09 enhances disclosures by further disaggregating existing annual income tax disclosures related to the effective tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, although early adoption is permitted. Upon adoption, the impact of ASU 2023-09 will be limited to certain enhancements within the notes to the consolidated financial statements and therefore is not expected to have an impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.

RISK MANAGEMENT

Risk Management Overview

Northern Trust employs an integrated risk management framework to enable a risk informed profile and support its business decisions and the execution of its corporate strategies. The framework provides a methodology to identify, manage, report and govern both internal and external risks to Northern Trust, and promotes a culture of risk awareness and good conduct across the organization. Northern Trust’s risk culture encompasses the general awareness, attitude and conduct of employees with respect to risk and the management of risk across all lines of defense within the organization. Northern Trust cultivates a culture of effective risk management by defining and embedding risk management accountabilities in all employee performance expectations and provides training, development and performance rewards to reinforce this culture.

Northern Trust’s risk management framework contains three inter-related elements, designed to support consistent enterprise risk identification, management and reporting: a comprehensive risk inventory, a static taxonomy of risk categories and a dynamic taxonomy of risk themes. The risk inventory is a detailed register of the risks inherently faced by Northern Trust. The risk categories and risk themes are classification systems used for classifying and managing the risk inventory and enabling different risk profile views. All identified risks inherent in Northern Trust’s business activities are cataloged into the following risk categories: credit, operational, fiduciary, compliance, liquidity, market, and strategic risk. All material risks are also dynamically cataloged into various risk themes which are defined groupings that share common characteristics, focus on business outcomes and span across risk categories.

Northern Trust implements its risk management framework through a “three lines of defense” operating model, embedding a robust risk management capability within its businesses. The model, used to communicate risk management expectations across the organization, contains three roles, each with a complementary level of risk management accountability. Within this operating model, Northern Trust’s businesses are the first line of defense for protecting it against the risks inherent in its businesses and are supported by dedicated business risk management teams. The Risk Management function, the second line of defense, sets the direction for Northern Trust’s risk management activities and provides aggregate risk oversight and reporting in support of risk governance. Audit Services, the third line of defense, provides independent assurance as to the effectiveness of the integrated risk framework.

Risk Governance and Oversight Overview

Risk governance is an integral aspect of corporate governance at Northern Trust, and includes clearly defined accountabilities, expectations, internal controls and processes for risk-based decision-making and escalation of issues. The following diagram provides a high-level overview of Northern Trust’s risk governance structure, highlighting oversight by the Board of Directors and key risk-related committees.

TABLE 44: RISK GOVERNANCE STRUCTURE

[[GREPCENT_TABLE]]
[["Northern Trust Corporation Board of Directors"],["Audit Committee","Business Risk Committee","Capital Governance Committee","Human Capital and Compensation Committee"],["\u2013Cybersecurity Risk Oversight Subcommittee"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Global Enterprise Risk Committee (GERC)"],["Credit Risk Committee","Market & Liquidity Risk Committee","Operational Risk Committee","Fiduciary Risk Committee","Compliance & Ethics Oversight Committee","Information Technology Risk Committee","Model Risk Oversight Committee","Workforce Risk Committee"]]
[[/GREPCENT_TABLE]]

The Board of Directors provides oversight of risk management directly and through certain of its committees: the Audit Committee, the Business Risk Committee, the Capital Governance Committee and the Human Capital and Compensation Committee.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Board of Directors annually approves Northern Trust’s Risk Management Framework and Corporate Risk Appetite Statement.

The Audit Committee provides oversight with respect to financial reporting and legal risk.

The Business Risk Committee assumes primary responsibility and oversight with respect to the credit risk, operational risk, fiduciary risk, compliance risk, market risk, liquidity risk, strategic risk, and associated risk themes. The Cybersecurity Risk Oversight Subcommittee is a subcommittee of the Business Risk Committee and assists the Business Risk Committee in discharging its duties with respect to risks related to cybersecurity inherent in Northern Trust’s businesses.

The Human Capital and Compensation Committee oversees the development and operation of Northern Trust’s incentive compensation program. The Committee annually reviews management’s assessment of the effectiveness of the design and performance of Northern Trust’s incentive compensation arrangements and practices in providing incentives that are consistent with Northern Trust’s safety, soundness, and culture. This assessment includes an evaluation of whether Northern Trust’s incentive compensation arrangements and practices discourage inappropriate risk-taking behavior by participants.

The Capital Governance Committee assists the Board of Directors in discharging its oversight duties with respect to capital management and resolution planning activities. Among other responsibilities, the Capital Governance Committee oversees Northern Trust’s capital management assessments, forecasting, and stress testing processes and activities, including the annual CCAR exercise, and challenges management, as appropriate, on various elements of such processes and activities. Accordingly, the Capital Governance Committee provides oversight with respect to Northern Trust’s linkage of material risks to the capital adequacy assessment process.

The Chief Risk Officer (CRO) oversees Northern Trust’s management of risk and compliance, promotes risk awareness and fosters a proactive risk management environment wherein risks inherent in the business strategy are identified, understood, appropriately monitored and mitigated. The CRO reports directly to the Business Risk Committee and the Corporation’s Chief Executive Officer. The CRO regularly advises the Business Risk Committee and reports to the Committee at least quarterly on risk exposures, risk management deficiencies and emerging risks. In accordance with the risk management framework, the Chief Risk Officer, Chief Compliance and Ethics Officer, Head of Financial Risk, Head of Non-Financial Risk, Head of Strategic Risk, Chief Fiduciary Risk Officer, International Chief Risk Officer, Chief Executive Officer, President—Asset Management, President—Asset Servicing, President—Wealth Management, Chief Financial Officer and Chief Information Officer, meet as the Global Enterprise Risk Committee (GERC) to provide executive management oversight and guidance with respect to the management of the categories of risk and risk themes within Northern Trust. The Chief Audit Executive, or such officer’s designee, and the General Counsel, or such officer’s designee, shall be invited to attend each GERC meeting as a non-voting member. All other members of the executive management team of the Corporation will also be standing invitees. Among other risk management responsibilities, GERC receives reports, escalations, or recommendations from senior risk committees that are responsible for the management of risk, and from time to time may delegate responsibility to such committees for risk issues. Senior risk committees include:

The Credit Risk Committee (CRC) establishes and monitors credit-related policies and practices throughout Northern Trust and promotes their uniform application.

The Market & Liquidity Risk Committee (MLRC) oversees activities relating to the management of market and liquidity risks by facilitating a focused review of market and liquidity risk exposures and providing rigorous challenge of related policies, key assumptions, and practices.

The Operational Risk Committee (ORC) provides independent oversight and is responsible for setting the operational risk-related policies and developing and implementing the operational risk management framework and programs that support coordination of operational risk activities.

The Fiduciary Risk Committee (FRC) is responsible for establishing and reviewing the fiduciary risk policies and establishing the fiduciary risk framework, governance and programs that support the coordination of fiduciary risk activities.

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The Compliance & Ethics Oversight Committee (CEOC) provides oversight and direction with respect to compliance policies, implementation of the compliance and ethics program, and the coordination of regulatory compliance initiatives across the Corporation.

The Information Technology Risk Committee (ITRC) provides oversight and direction with respect to information security, technology and cyber risk. The committee is responsible for recommending the policies related to, and overseeing development and implementation of the risk management framework, standards and processes supporting coordination and governance of, information security, technology and cyber risk management activities.

The Model Risk Oversight Committee (MROC) is responsible for providing management attention, direction, and oversight of the model risk management framework and model risk within Northern Trust.

The Workforce Risk Committee (WRC) is responsible for assessing workforce risk and monitoring initiatives associated with workforce risk management.

In addition to the aforementioned committees, Northern Trust establishes business and regional risk committees that also report into GERC.

Risk Assessment, Appetite and Reporting Processes

As part of the integrated risk framework, Northern Trust has established key risk identification and risk management processes, embedded within its businesses to enable a risk-informed profile that supports its business decisions and the execution of its corporate strategies. Northern Trust’s risk assessment process consists of a series of programs across the first and second lines of defense that identify, measure, manage and report risks in line with risk appetite and guidelines.

Northern Trust defines its risk appetite as the aggregate level and types of risk the Board of Directors and senior management are willing to assume to achieve the Corporation’s strategic objectives and business plan, consistent with prudent management of risk and applicable capital, liquidity, and other regulatory requirements. It includes consideration of the likelihood and impact of risks, using both monetary loss and non-financial measures across risk themes to monitor against tolerance thresholds and guideline levels that trigger escalation to risk committees, senior management, and the Board of Directors or committees thereof, as appropriate.

Risk Control

Risk Control is an internal, independent review function within the Risk Management function. Risk Control is managed by the Head of Risk Control and is comprised of Model Risk Management, Credit Review, and Global Compliance Testing groups, each with its own risk focus and oversight. Model Risk Management is responsible for the implementation and management of the enterprise-wide model risk framework and independently validating new models and reviewing and re-validating existing models. Credit Review provides an independent, ongoing assessment of credit exposure and related credit risk management processes across Northern Trust. Lastly, Global Compliance Testing evaluates the effectiveness of procedures and controls designed to comply with relevant laws and regulations, as well as corresponding Northern Trust policies governing regulatory compliance activities. The Business Risk Committee has oversight responsibility with respect to Risk Control generally as well as each of these groups.

Audit Services

Audit Services is an independent control function that assesses and validates controls within Northern Trust’s risk management framework. Audit Services is managed by the Chief Audit Executive with oversight from the Audit Committee. Audit Services tests the overall adequacy and effectiveness of the system of internal controls associated with the framework on an ongoing basis and reports the results of these audits directly to the Audit Committee. Audit Services includes professionals with a broad range of audit and industry experience, including risk management expertise. The Chief Audit Executive reports directly to the Audit Committee and administratively reports to the Corporation’s Chief Executive Officer and is a non-voting member of GERC.

Credit Risk

Credit risk is the risk to interest income or principal from the failure of a borrower, issuer, or counterparty to perform on an obligation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Credit Risk Overview

Credit risk is inherent in many of Northern Trust’s activities. The bulk of credit risk relates to loans, securities, and wholesale counterparty-related exposures, such as over-the-counter (OTC) derivatives and securities financing activities. Northern Trust’s loan portfolio differs significantly from those of other large U.S. financial institutions in that Northern Trust is generally:

•not an originator of loan products intended to be sold into a secondary market or to be bundled into asset securitizations;

•not an agent bank or syndicator of loans, where risk management is achieved post-close through the sale of participations; and

•not a participant in leveraged financial transactions, such as project finance, hedge fund leveraging, loans to private equity sponsored companies, or prime brokerage activities.

Credit Risk Framework and Governance

The CRC is the most senior credit committee at Northern Trust, with responsibility for establishing, approving, and monitoring credit-related policies and programs throughout the Bank. The Chief Credit Officer reports directly to the CRO, chairs the CRC, and heads the Credit Risk Management function at Northern Trust.

The Credit Risk Management function is the focal point of the credit risk framework and, while independent of the business units that manage client relationships, it works closely with them to achieve the goal of assuring proactive management of credit risk. To monitor and control credit risk, the Credit Risk Management function maintains a framework that consists of policies, standards, and programs designed to promote a prudent credit culture and monitors adherence to those internal policies, standards, and programs, as well as external regulations. Independent oversight and review of the credit risk framework also is provided by Risk Control.

The credit risk framework stipulates authority levels for approval of the extension of credit. Individual credit authority for commercial and personal loans is limited to specified amounts and maturities. Credit requests exceeding policies or standards because of amount, maturity, rating, or other conditions, are referred to the relevant Group Credit Approval Committee. Credit decisions involving requests in excess of Group Credit Approval Committee limits require the approval of the Senior Credit Committee. The Capital Markets Credit Committee has sole authority for the approval, modification, or renewal of credit exposure limits to all wholesale market counterparties. The Senior Credit Committee and Capital Markets Credit Committee are both direct sub-committees of the CRC. The Treasury Credit Committee provides similar approval for investments in assets subject to credit risk, such as bonds and equities.

Credit Risk Measurement

The credit risk framework covers a number of different measurements of credit risk at Northern Trust, including RWA, the allowance for credit losses, and stress tests using various macroeconomic scenarios, such as the internal capital adequacy approval program and CCAR.

An integral component of credit risk measurement is Northern Trust’s internal risk rating system. Northern Trust’s internal risk rating system enables identification, measurement, approval and monitoring of the Corporation’s credit risk. Calculations include entity-specific information about the obligor’s or counterparty’s probability of default (PD) and exposure-specific information about loss given default (LGD), exposure at default (EAD), and maturity. Northern Trust’s internal risk rating system is intended to rank its credit risk without any direct linkage to external credit ratings.

Obligors are assigned PDs after consideration of both quantitative and qualitative factors. Although the criteria vary, the objective is for assigned PDs to be consistent in the measurement and ranking of risk. LGD and EAD are assigned based on obligor, product, collateral and instrument characteristics.

Risk ratings are assigned at the time a counterparty or an obligation is approved, renewed, or amended. Risk ratings are reviewed annually or when new information relevant to the rating is received. Risk ratings are utilized for credit underwriting, management reporting, and the calculation of regulatory capital.

The Credit Risk Management function is responsible for the ongoing oversight of each model that supports the internal risk-rating system. Independent model governance and oversight is further supported by the activities of Risk Control.

Loans and Other Extensions of Credit

A significant component of credit risk relates to the loan portfolio, including contractual obligations such as legally binding commitments to extend credit, commercial letters of credit, and standby letters of credit. These contractual obligations and arrangements are discussed in Note 24, “Commitments and Contingent Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data.”

Undrawn commitments to extend credit generally have fixed expiration dates or other termination clauses. Since a significant portion of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future loans or liquidity requirements. The following table provides information about the industry sector and expiration dates of undrawn commitments to extend credit as of December 31, 2023 and 2022.

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TABLE 45: UNDRAWN COMMITMENTS TO EXTEND CREDIT BY INDUSTRY SECTOR

[[GREPCENT_TABLE]]
[["","DECEMBER 31, 2023","","DECEMBER 31, 2022"],["","COMMITMENTS","","","COMMITMENTS"],["(In Millions)","TOTAL","ONE YEAR AND LESS","OVER ONE YEAR","OUTSTANDING LOANS","","TOTAL","ONE YEAR AND LESS","OVER ONE YEAR","OUTSTANDING LOANS"],["Commercial"],["Commercial and Institutional"],["Finance and Insurance","$","3,536.8","","$","1,664.0","","$","1,872.8","","$","1,109.3","","","$","3,394.7","","$","1,598.0","","$","1,796.7","","$","953.8"],["Holding Companies","\u2014","","\u2014","","\u2014","","28.9","","","\u2014","","\u2014","","\u2014","","45.0"],["Manufacturing","6,551.9","","1,104.3","","5,447.6","","1,619.1","","","6,063.3","","764.2","","5,299.1","","1,855.0"],["Mining","461.8","","29.8","","432.0","","29.8","","","499.0","","36.8","","462.2","","60.7"],["Private Equity","2,740.4","","1,888.9","","851.5","","3,248.9","","","3,300.1","","2,383.3","","916.8","","4,091.1"],["Public Administration","50.0","","50.0","","\u2014","","28.1","","","50.0","","50.0","","\u2014","","13.3"],["Retail Trade","1,003.8","","382.2","","621.6","","244.2","","","1,158.2","","369.0","","789.2","","203.7"],["Services","6,133.1","","2,528.1","","3,605.0","","4,041.7","","","5,860.6","","2,357.7","","3,502.9","","4,099.0"],["Transportation and Warehousing","239.9","","3.7","","236.2","","273.2","","","243.9","","\u2014","","243.9","","251.8"],["Utilities","1,246.3","","8.5","","1,237.8","","36.8","","","1,220.7","","67.7","","1,153.0","","8.6"],["Wholesale Trade","759.2","","60.0","","699.2","","510.4","","","741.4","","118.8","","622.6","","484.7"],["Other Commercial","159.7","","49.5","","110.2","","384.9","","","147.5","","89.4","","58.1","","348.3"],["Commercial and Institutional(1)","22,882.9","","7,769.0","","15,113.9","","11,555.3","","","22,679.4","","7,834.9","","14,844.5","","12,415.0"],["Commercial Real Estate","413.0","","58.3","","354.7","","5,134.2","","","449.3","","124.4","","324.9","","4,773.0"],["Non-U.S."],["Other Non-US","1,340.4","","677.7","","662.7","","1,543.0","","","1,562.4","","1,046.0","","516.4","","1,627.9"],["Private Equity","446.2","","446.2","","\u2014","","1,235.5","","","575.2","","526.5","","48.7","","1,503.2"],["Non-U.S.","1,786.6","","1,123.9","","662.7","","2,778.5","","","2,137.6","","1,572.5","","565.1","","3,131.1"],["Other","87.5","","87.5","","\u2014","","5,944.8","","","91.4","","91.4","","\u2014","","1,316.5"],["Total Commercial","25,170.0","","9,038.7","","16,131.3","","25,412.8","","","25,357.7","","9,623.2","","15,734.5","","21,635.6"],["Personal"],["Private Client","3,876.2","","2,033.6","","1,842.6","","14,360.0","","","3,970.0","","3,090.4","","879.6","","14,119.0"],["Residential Real Estate","804.2","","251.3","","552.9","","6,327.1","","","783.4","","125.6","","657.8","","6,413.5"],["Non-U.S.","908.7","","525.9","","382.8","","428.8","","","849.5","","800.0","","49.5","","510.0"],["Other","\u2014","","\u2014","","\u2014","","1,088.3","","","\u2014","","\u2014","","\u2014","","215.2"],["Total Personal","5,589.1","","2,810.8","","2,778.3","","22,204.2","","","5,602.9","","4,016.0","","1,586.9","","21,257.7"],["Total","$","30,759.1","","$","11,849.5","","$","18,909.6","","$","47,617.0","","","$","30,960.6","","$","13,639.2","","$","17,321.4","","$","42,893.3"]]
[[/GREPCENT_TABLE]]

(1) The commercial and institutional industry sector information is presented on the basis of the North American Industry Classification System (NAICS).

As part of Northern Trust’s credit processes, the Credit Risk Management function oversees a range of portfolio reviews that focus on significant and/or weaker-rated credits. This approach allows management to take remedial action in an effort to deal with potential problems. An integral part of the Credit Risk Management function is a formal review of past due and potential problem loans to determine which credits, if any, need to be placed on nonaccrual status or charged off. Northern Trust maintains a loan portfolio “watch list” for adversely classified credit exposures that includes all nonaccrual credits as well as other loans with elevated risk of default. Independent from the Credit Risk Management function, Credit Review undertakes both on-site and off-site file reviews that evaluate the effectiveness of management’s implementation of Credit Risk Management’s requirements.

Counterparty Credit Risk

Counterparty credit risk for Northern Trust primarily arises from a variety of funding, treasury, trading and custody-related activities, including trading OTC foreign exchange and interest rate derivatives, indemnified securities lending transactions, and sponsored repurchase and reverse repurchase transactions. Credit exposure to counterparties is managed by use of a framework for setting limits by product type and exposure tenor.

To calculate exposure, Northern Trust treats repurchase agreements, reverse repurchase agreements, indemnified securities lending, and sponsored repurchase and reverse repurchase transactions as repo-style transactions. Foreign exchange exposures and interest rate derivatives are treated as OTC derivatives. The exposure at default measurement

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

methodology for each eligible type of counterparty credit exposure, including the use of netting and collateral as risk mitigants, is determined based on regulatory requirements.

Credit Risk Mitigation

Northern Trust considers cash flow to be the primary source of repayment for client-related credit exposures. However, Northern Trust employs several different types of credit risk mitigants to manage its overall credit risk in the event cash flow is not sufficient to repay a credit exposure. Northern Trust broadly groups its risk mitigation techniques into the following three primary categories.

Physical and Financial Collateral: One of Northern Trust’s primary credit risk mitigation approaches is the requirement of collateral. Residential and commercial real estate exposures are typically secured by properly margined mortgages on the property. Various other types of physical and financial collateral are also accepted for certain commercial and personal loans, in line with Northern Trust’s lending standards. In cases where loans to clients are secured by marketable securities, the daily values of the securities are monitored closely to ensure adherence to collateral coverage policies.

Netting: On-balance sheet netting is employed where applicable for counterparties with master netting arrangements. Netting is primarily related to foreign exchange transactions with major banks and institutional clients subject to eligible master netting arrangements.

Guarantees: Personal and corporate guarantees are accepted, as warranted, to reduce risk of default, facilitate potential collection efforts, and protect Northern Trust’s claims relative to other creditors.

Another important risk management practice is the avoidance of undue concentrations of exposure, such as in any single (or small number of related) obligor/counterparty, loan type, industry, geography, country or risk mitigant. Processes are in place to establish limits on certain concentrations and the monitoring of adherence to the limits.

Operational Risk

Operational risk is the risk of loss from inadequate or failed internal processes, human factors and systems, or from external events.

Operational Risk Overview

Operational risk is inherent in each of Northern Trust’s businesses and corporate functions and reflects the potential for inadequate information systems, operating problems, challenges related to reliance on third parties, product design and delivery difficulties, potential legal actions or catastrophes to result in losses. This includes the potential that continuity of service and resilience may be impacted.

Operational risk includes information technology and cybersecurity, compliance, fiduciary and legal risks, which under the Corporation’s risk structure are governed and managed explicitly.

Operational Risk Framework and Governance

To monitor and control operational risk, Northern Trust maintains a framework consisting of risk management policies, programs and practices designed to promote a sound operational environment and maintain the Corporation’s operational risk profile and losses within approved risk appetites and guidelines. The framework implements a structured approach to establishing and communicating operational risk management practices and responsibilities. This structured approach to measuring and managing operational risk addresses operational resilience which requires that Northern Trust minimize service disruptions and limit systemic impacts from adverse events as well as risk quantification. The framework is deployed consistently and globally across all businesses and its objective is to identify and measure the factors that influence risk and drive action to maintain operational resilience and reduce future loss events. The Operational Risk Management function operates within the independent Non-Financial Risk function and is responsible for defining the operational risk management framework and providing independent oversight of the framework implementation and application across Northern Trust. It is the responsibility of each business to implement the enterprise-wide operational risk framework and business-specific risk management programs to identify, monitor, measure, manage and report on operational risk and mitigate Northern Trust’s exposure to service disruptions and loss. Several key programs support the operational risk framework, including:

•Loss Event Data Program - a program that collects internal and external loss data for use in monitoring operational risk exposure, various business analyses and the Basel Advanced Measurement Approach (AMA) capital quantification. Both internal and external loss data are used in the operational risk capital quantification. Thresholds

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drive analysis, action and escalation through Northern Trust’s businesses and the Operational Risk Management function.

•Risk and Control Self-Assessment - a comprehensive, structured risk management process used by Northern Trust’s businesses to identify, measure, monitor and mitigate operational risk exposures throughout the enterprise.

•Operational Risk Scenario Analysis - a systematic process of obtaining expert opinions from business managers and risk management experts to derive reasoned assessments of the likelihood of occurrence and the potential loss impact of plausible operational losses.

•Product and Process Risk Management Program - a program used for evaluating and managing risks associated with the introduction of new and modified noncredit products and services and with significant changes to operating processes.

•Operational Resilience - a program designed to ensure the resilience and continuity of service delivery of Northern Trust’s most important business services.

•Third-Party Risk Management Program - a program that provides processes for evaluating, quantifying and qualifying appropriate risk assessment, measurement, monitoring and management of third and fourth parties (inclusive of external and internal, e.g., Northern Trust legal entity to legal entity relationships).

•Global Fraud Risk - a program designed to prevent, detect and respond to attempted or actual fraud impacting the bank and its clients globally.

•Data Management - a program that embeds data management and data governance related activities into Northern Trust processes in order to manage data risk.

•Data Privacy Program - a program that sets forth a consistent, global approach to compliance with all applicable laws, rules, and regulations relating to privacy and establishes overarching principles for the responsible use and protection of confidential information.

•Cyber and Technology Risk Management - a program that sets forth a consistent, global approach to communicate risk management processes and controls addressing cybersecurity (inclusive of information security), technology, and related compliance risks to the organization. Please see Item 1C, “Cybersecurity,” for a detailed discussion of cybersecurity risk management, strategy, and governance.

•Business Continuity Management Program - a program designed to protect life safety, minimize and manage the business impact and support the recovery of critical functions for clients following an incident.

•Physical Security - a program that provides for the life safety of Northern Trust partners, clients, and visitors worldwide by setting and enforcing standards, providing training, establishing partnerships, and encouraging continual improvement in workplace security.

•Insurance Management Program - a program designed to reduce the monetary impact of certain operational loss events through the securing of appropriate insurance policy protection.

As discussed in “Risk Control” above, Model Risk Management also is part of the operational risk framework.

The ORC is responsible for overseeing the activities of Northern Trust related to the management of operational risk including establishing and maintaining the Corporate Operational Risk Management Policy and approving the operational risk framework and programs. This committee has the expanded role of coordinating operational risk issues related to information technology, cybersecurity, compliance and fiduciary risks. The purpose of this committee is to provide executive management’s insight and guidance to the management of existing and emerging operational risks. This includes identification and assessment of evolving risk trends across the operational risk framework and how these can be best managed.

Operational Risk Measurement

Northern Trust utilizes the AMA capital quantification process to estimate required capital for the Corporation and applicable U.S. banking subsidiaries. Northern Trust’s AMA capital quantification process incorporates outputs from the Loss Event Data, Risk and Control Self-Assessment and Operational Risk Scenario Analysis programs to derive required capital. While internal loss data is the foundation for the capital quantification, external loss event data and qualitative risk and control self-assessments are also utilized to inform the creation of scenario analysis data employed in the capital quantification process. Business environment factor information is used to estimate loss frequency. The AMA capital quantification process uses a Loss Distribution Approach methodology to combine frequency and severity distributions to arrive at an estimate of the potential aggregate loss at the 99.9th percentile of the aggregate loss distribution over a one-year time horizon.

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[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 81"]]
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Operational Resilience and Recovery Management

Northern Trust’s operational resilience approach encompasses operational resilience and recovery processes enterprise-wide (including staff, technology and facilities) to anticipate and limit disruptions and to ensure that following a disaster or business interruption Northern Trust is able to resume critical business functions and fulfill all regulatory and legal requirements.

Northern Trust’s operational resilience mitigation and preventative measures include sophisticated physical security, resilient designs and peer capacity for its corporate data centers, a highly redundant global network, robust network security, resilience centers that offer alternative workstations and transfer of work and work-from-home programs that provide further capability.

All of Northern Trust’s businesses are required to risk-assess all of their functions regularly and develop business continuity plans covering resource requirements (people, systems, vendor relationships and other assets), arrangements for obtaining these resources and prioritizing the resumption of each function in compliance with corporate standards. The business continuity programs of all critical third-party vendors to Northern Trust are reviewed on a regular basis. All of Northern Trust’s businesses test their plans at least annually. The ORC annually reviews and presents the corporate business continuity plan to the Business Risk Committee.

Fiduciary Risk

Fiduciary risks are risks arising from the failure: (a) in administering or managing financial and other assets in clients’ fiduciary accounts; (b) to adhere to a fiduciary standard of care if required under the terms of governing documents or applicable laws; or (c) to properly discharge fiduciary duties. Fiduciary status may hinge on the nature of a particular function being performed and fiduciary standards may vary by jurisdiction, type of relationship, and governing document.

Fiduciary Risk Overview

The fiduciary risk management framework identifies, assesses, measures, monitors, and reports on fiduciary risk matters deemed significant. Fiduciary risk is best managed at the source of the risk, and is mitigated through internal controls and risk management practices that are designed to identify, understand, and keep such risk at levels consistent with the organization’s overall risk appetite while also managing the inherent risk in each client relationship for which Northern Trust serves in a fiduciary capacity. Each business is responsible for complying with all corporate policies and external regulations and for establishing specific procedures, standards, and guidelines to manage fiduciary risk within the desired risk appetite.

Fiduciary Risk Framework and Governance

The FRC is responsible for overseeing activities related to the exercise of fiduciary powers throughout the organization, and for establishing and reviewing the fiduciary risk policies and the fiduciary risk framework that supports the coordination of activities to identify, monitor, manage, and report on fiduciary risk. In addition, the FRC serves as an escalation point for significant issues raised by its subcommittees or elsewhere in the organization.

Compliance Risk

Compliance risk is the risk of legal or regulatory sanctions, financial loss, or damage to reputation resulting from failure to comply with laws, regulations, rules, other regulatory requirements, or codes of conduct and other standards of self-regulatory organizations applicable to Northern Trust. Compliance risk includes the following two subcategories:

•Regulatory risk - risk arising from failure to comply with prudential and conduct of business or other regulatory requirements.

•Financial crime risk - risk arising from financial crime (e.g., money laundering, sanctions violations, fraud, insider dealing, theft, etc.) in relation to the products, services, or accounts of the institution, its clients, or others associated with the same.

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Compliance Risk Framework and Governance

The compliance risk management framework identifies, assesses, controls, measures, monitors and reports on compliance risk. The framework is designed to minimize compliance risk and maintain an environment in which criminal or regulatory violations do not occur. The framework includes a comprehensive governance structure and a Compliance and Ethics Program approved by the Business Risk Committee.

Each business is responsible for the implementation and effectiveness of the Compliance and Ethics Program and specific compliance policies within their respective businesses. Each business is responsible for its respective employees’ compliance with corporate policies and external regulations and for establishing specific procedures, standards and guidelines to manage compliance risk in accordance with Northern Trust’s Compliance and Ethics Program.

The Compliance and Ethics Oversight Committee (“CEOC”) oversees and provides direction with respect to the implementation of Northern Trust’s Compliance and Ethics Program and the coordination of compliance initiatives across the enterprise. The CEOC approves policies necessary to effectively manage Regulatory and Financial Crime Risk. The Chief Compliance and Ethics Officer reports to the Business Risk Committee, as appropriate, and chairs the CEOC.

Liquidity Risk Management

Liquidity Risk Overview

Liquidity risk is the risk of not being able to raise sufficient funds or maintain collateral to meet balance sheet and contingent liability cash flow obligations when due, because of firm-specific or market-wide stress events. Northern Trust is a Category II institution as defined by the Federal Reserve Board which requires us to adhere to the same regulatory liquidity standards as U.S. GSIBs. In adhering to these standards, Northern Trust engages in a range of reporting and activities with regulators to affirm our financial strength and stability, including but not limited to, daily Liquidity Coverage Ratio and Net Stable Funding Ratio calculations to regulators.

Northern Trust maintains a strong liquidity position and liquidity risk profile. Northern Trust’s balance sheet is primarily liability-driven. That is, the main driver of balance sheet changes comes from changing levels of client deposits, which are generally related to the level of custody assets serviced and commercial and personal deposits and can also be influenced by market conditions. This liability-driven business model differs from a typical asset-driven business model, where increased levels of deposits and wholesale borrowings are required to support, for example, increased levels of lending. Northern Trust’s balance sheet is generally comprised of high-quality assets that are managed to meet anticipated obligations under stress, resulting in low liquidity risk.

Liquidity Risk Framework and Governance

Northern Trust maintains a liquidity risk framework consisting of risk management policies and practices to keep its risk profile within the Board-approved Corporate Risk Appetite Statement. All liquidity risk activities are overseen by the Risk Management function, which is independent of the businesses undertaking the activities.

The Liquidity Management Policy and exposure limits for liquidity risk are set by the Board of Directors, and committee structures have been established to implement and monitor adherence to corporate policies, external regulations and established procedures. Limits are monitored based on measures such as the LCR, the NSFR, and the liquidity stress-testing buffer across a range of time horizons. Treasury, in the first line of defense, proposes liquidity risk management strategies and is responsible for performing liquidity management activities. The Asset and Liability Management Committee (ALCO) provides first-line management oversight and is responsible for approving strategies and activities within the risk appetite, monitoring risk metrics, overseeing balance sheet resources, and reviewing reporting such as cash flows, LCR, NSFR, and stress test results.

Market and Liquidity Risk Management, in the second line of defense, provides challenge to the first-line activities, evaluates compliance with regulatory requirements and process effectiveness, and escalates material items for corrective action. The Market and Liquidity Risk Committee (MLRC) provides second-line oversight and is responsible for reviewing market and liquidity risk exposures, approving and monitoring risk metrics, and approving key methodologies and assumptions that drive liquidity risk measurement.

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[["","","2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 83"]]
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity Risk Analysis, Monitoring, and Reporting

Liquidity risk is analyzed and monitored in order to ensure compliance with the approved risk appetite. Various liquidity analysis and monitoring activities are employed by Northern Trust to understand better the nature and sources of its liquidity risks, including: liquidity stress testing, liquidity metric monitoring, collateral management, intraday management, cash flow projections, operational deposit modeling, liquid asset buffer measurement, funds transfer pricing, and contingency funding planning.

The liquidity risk management process is supported through management and regulatory reporting. Both Northern Trust’s Treasury and Market and Liquidity Risk Management functions produce management reports that enable oversight bodies to make informed decisions and support management of liquidity risk within the approved risk appetite. Holistic liquidity metrics such as LCR, NSFR and internal liquidity stress testing are actively monitored, along with a suite of other metrics that provide early warning indicators of changes in the risk profile.

Regulatory Environment

Northern Trust actively follows regulatory developments and regularly evaluates its liquidity risk management framework against proposed rule-making and industry best practices in order to comply with applicable regulations and further enhance its liquidity policies. Please refer to “Supervision and Regulation—Liquidity Standards” in Item 1, “Business,” for a discussion of applicable liquidity standards.

U.S. Liquidity Coverage Ratio (LCR)

The LCR Final Rule requires covered banking organizations, which include the Corporation, to maintain an amount of high-quality liquid assets (HQLAs) equal to or greater than 100% of the banking organization’s total net cash outflows over a 30 calendar-day standardized supervisory liquid stress scenario. The requirements of the LCR Final Rule are intended to promote the short-term resilience of the liquidity risk profile of covered banking organizations, improve the banking industry’s ability to absorb shocks arising from financial and economic stress, and improve the measurement and management of liquidity risk. The Corporation and the Bank each satisfied the U.S. liquidity coverage ratio requirements during 2023.

U.S. Net Stable Funding Ratio (NSFR)

The NSFR Final Rule requires covered banking organizations, which include the Corporation, to maintain an amount of available stable funding (ASF) equal to or greater than the banking organization’s projected minimum funding needs, or required stable funding (RSF), over a one-year time horizon. The NSFR is designed to reduce the likelihood that disruptions to a banking organization’s regular sources of funding will compromise its liquidity position, promote effective liquidity risk management, and support the ability of banking organizations to provide financial intermediation to businesses and households across a range of market conditions. The NSFR supports financial stability by requiring banking organizations to fund their activities with stable sources of funding on an ongoing basis, reducing the possibility that funding shocks would substantially increase distress at individual banking organizations. The Corporation and the Bank each satisfied the NSFR requirements during 2023.

Funding

Northern Trust maintains a very liquid balance sheet, with cash and due from banks, deposits with the Federal Reserve and other central banks, short-term money market assets and investment securities in aggregate representing 59% and 63% of total assets as of December 31, 2023 and 2022, respectively. The market value of unencumbered securities at the Bank, which include those placed at the central bank discount window, totaled $39.0 billion and $46.2 billion at December 31, 2023 and 2022, respectively.

As the Corporation’s principal subsidiary encompassing all of Northern Trust’s banking activities, the Bank centrally manages liquidity for all U.S. and international banking operations. Liquidity is provided by a variety of sources, including client deposits (institutional and personal) from the Asset Servicing and Wealth Management businesses, wholesale funding from the capital markets, maturities of short-term investments, interest earned on investment securities and money market assets, Federal Home Loan Bank advances, and unencumbered liquid assets that can be sold or pledged to secure additional funds. While management does not view central bank discount windows as primary sources of liquidity, at December 31, 2023 and 2022, the Bank had over $34.7 billion and $39.0 billion, respectively of securities and loans readily available as collateral to support discount window borrowings. The Bank also is active in the U.S. interbank funding market, providing an important source of additional liquidity and low-cost funds.

The liquidity of the Corporation is managed separately from that of the Bank. The primary sources of cash for the Corporation are issuances of debt or equity and dividend payments from the Bank. For further information on issuances or redemptions of debt or equity, please refer to Note 12, “Senior Notes and Long-Term Debt” provided in Item 8, “Financial Statements and Supplementary Data.” The Corporation received $850.0 million of dividends and no dividends from the

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Bank in 2023 and 2022, respectively. Dividends from the Bank are subject to certain restrictions, as discussed in further detail in Note 30, “Restrictions on Subsidiary Dividends and Loans or Advances,” provided in Item 8, “Financial Statements and Supplementary Data.”

The Corporation’s liquidity, defined as the amount of cash and highly marketable assets, was $795.6 million and $601.4 million at December 31, 2023 and 2022, respectively. During, and at year-end, 2023 and 2022, these assets were comprised almost entirely of cash in a demand deposit account at the Bank or overnight money market placements, both of which were fully available to the Corporation to support its own cash flow requirements or those of its subsidiaries, as needed. Average liquidity during 2023 and 2022 was $797.2 million and $1.2 billion, respectively. The cash flows of the Corporation are shown in Note 33, “Northern Trust Corporation (Corporation only),” provided in Item 8, “Financial Statements and Supplementary Data.”

Uses of Liquidity

Liquidity supports a variety of activities, including client withdrawals, purchases of securities, net loan growth, and draws on commitments to extend credit.

The Corporation’s uses of cash consist mainly of dividend payments to the Corporation’s stockholders; the payment of principal and interest to note holders; repurchases of its common stock; and investments in, or loans to, its subsidiaries. The most significant uses of cash by the Corporation during 2023 were $621.5 million of common stock dividends and $347.5 million of common stock repurchases. The most significant uses of cash by the Corporation during 2022 were $750.2 million of common stock dividends and $35.4 million of common stock repurchases.    

Credit Ratings

A significant source of liquidity for both the Corporation and the Bank is the ability to draw funding from capital markets globally. The credit ratings of the Corporation and the Bank as of December 31, 2023, provided in the following table, allow Northern Trust to access capital markets on favorable terms.

TABLE 46: NORTHERN TRUST CREDIT RATINGS AS OF DECEMBER 31, 2023

[[GREPCENT_TABLE]]
[["","CREDIT RATING"],["","STANDARD & POOR\u2019S","MOODY\u2019S","FITCH RATINGS"],["Northern Trust Corporation:"],["Senior Debt","A+","A2","A+"],["Subordinated Debt","A","A2","A+"],["Preferred Stock","BBB+","Baa1","BBB"],["Outlook","Stable","Stable","Stable"],["The Northern Trust Company:"],["Short-Term Deposit","A-1+","P-1","F1+"],["Long-Term Deposit/Debt","AA-","Aa2","AA"],["Subordinated Debt","A+","A2","A+"],["Outlook","Stable","Stable","Stable"]]
[[/GREPCENT_TABLE]]

A significant downgrade in one or more of these ratings could limit Northern Trust’s access to capital markets and/or increase the rates paid for short-term borrowings, including deposits, and future long-term debt issuances. The size of these rate increases would depend on multiple factors, including the extent of the downgrade, Northern Trust’s relative debt rating compared to other financial institutions, current market conditions, and other factors. In addition, as discussed in Note 27, “Offsetting of Assets and Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data,” Northern Trust enters into certain master netting arrangements with derivative counterparties that contain credit-risk-related contingent features in which the counterparty has the option to declare Northern Trust in default and accelerate cash settlement of net derivative liabilities with the counterparty in the event Northern Trust’s credit rating falls below specified levels. At December 31, 2023, the net maximum amount of these termination payments that Northern Trust could have been required to pay was $52.2 million. Other than these credit-risk-related contingent derivative counterparty payments, Northern Trust had no long-term debt covenants or other credit-risk-related payments at December 31, 2023, that would be triggered by a significant downgrade in its debt ratings.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Off-Balance Sheet Arrangements

Please refer to Note 24, “Commitments and Contingent Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data” for information on off-balance sheet arrangements and the Credit Risk discussion in the “Risk Management” section for further detail on undrawn commitments.

Market Risk

There are two types of market risk, interest rate risk associated with the banking book and trading risk. Interest rate risk associated with the banking book is the potential for movements in interest rates to cause changes in Net Interest Income and the market value of equity, including Accumulated Other Comprehensive Income (Loss) from the AFS debt securities portfolio. Trading risk is the potential for movements in market variables such as foreign exchange and interest rates to cause changes in the value of trading positions.

Market Risk Framework and Governance

Northern Trust maintains a market risk framework consisting of risk management policies and practices to keep its risk profile within the Board-approved Corporate Risk Appetite Statement. All market risk activities are overseen by the Risk Management function, which is independent of the businesses undertaking the activities.

The Asset and Liability Management Policy, Policy on Dealer Trading Activities, and exposure limits for market risk are set by Board-level committees, and committee structures have been established to implement and monitor adherence to corporate policies, external regulations and established procedures. Limits are monitored based on measures such as sensitivity of Net Interest Income (NII), sensitivity of market value of equity (MVE), and value-at-risk (VaR) across a range of time horizons.

Treasury, in the first line of defense, proposes market risk management strategies and is responsible for performing market risk management activities. The ALCO provides first-line management oversight and is responsible for approving strategies and activities within the risk appetite, monitoring risk metrics, overseeing balance sheet resources, overseeing the execution of strategies, and reviewing reporting such as cash flows, the liquidity coverage ratio and stress test results.

The Market and Liquidity Risk Management function, in the second line of defense, provides challenge to the first-line activities, evaluates compliance with regulatory requirements and process effectiveness, and escalates material items for corrective action. The MLRC provides second-line oversight and is responsible for reviewing market risk exposures, establishing and monitoring risk metrics, and approving key methodologies and assumptions that drive market risk measurement.

Interest Rate Risk Overview

Interest rate risk in the banking book is the potential for deterioration in Northern Trust's financial position (e.g., interest income, market value of equity, or capital) due to changes in interest rates. NII and MVE sensitivity are the primary metrics used for measurement and management of interest rate risk. Changes in interest rates can have a positive or negative impact on NII depending on the positioning of assets, liabilities and off-balance sheet instruments. Changes in interest rates also can impact the values of assets, liabilities and off-balance sheet positions, which directly impact the MVE. Higher interest rates may impact the fair value of available for sale debt securities which in turn affects Accumulated Other Comprehensive Income (Loss) that can impact regulatory capital ratios. To mitigate interest rate risk, the structure of the balance sheet is managed so that movements of interest rates on assets and liabilities (adjusted for hedges) are sufficiently correlated, which allows Northern Trust to manage its interest rate risk within its risk appetite.

There are four commonly recognized types of structural interest rate risk in the banking book:

•repricing risk, which arises from differences in the maturity and repricing terms of assets and liabilities;

•yield curve risk, which arises from changes in the shape of the yield curve;

•basis risk, which arises from imperfect correlation in the adjustment of the rates earned and paid on different financial instruments with otherwise similar repricing characteristics; and

•embedded optionality risk, which arises from client or counterparty behavior in response to interest rate changes.

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Interest Rate Risk Analysis, Monitoring, and Reporting

Northern Trust uses two primary measurement techniques to manage interest rate risk: NII and MVE sensitivity. NII sensitivity provides management with a short-term view of the impact of interest rate changes on NII. MVE sensitivity provides management with a long-term view of interest rate changes on MVE based on the period-end balance sheet.

Northern Trust limits aggregate interest rate risk (as measured by the NII sensitivity and MVE sensitivity simulation techniques) to an acceptable level within the context of risk appetite. A variety of actions may be used to implement risk management strategies to modify interest rate risk including:

•purchase of investment securities;

•sale of investment securities that are classified as available for sale;

•issuance of senior notes and subordinated notes;

•collateralized borrowings from the Federal Home Loan Bank; and

•hedging with various types of derivative financial instruments.

NII Sensitivity

The modeling of NII sensitivity incorporates on-balance sheet positions, as well as derivative financial instruments (principally interest rate swaps) that are used to manage interest rate risk. Northern Trust uses market implied forward interest rates as the base case and measures the sensitivity (i.e., change) of a static balance sheet to changes in interest rates. Stress testing of interest rates is performed to include such scenarios as immediate parallel shocks to rates, nonparallel (i.e., twist) changes to yield curves that result in their becoming steeper or flatter, and changes to the relationship among the yield curves (i.e., basis risk).

The NII sensitivity analysis incorporates certain critical assumptions such as interest rates and client behaviors under changing rate environments. These assumptions are based on a combination of historical analysis and future expected pricing behavior. The simulation cannot precisely estimate NII sensitivity given uncertainty in the assumptions. The following key assumptions are incorporated into the NII simulation:

•the balance sheet size and mix remains constant over the simulation horizon with maturing assets and liabilities replaced with instruments with similar terms as those that are maturing, with the exception of certain nonmaturity deposits that are considered short-term in nature and therefore receive a more conservative interest-bearing treatment;

•prepayments on mortgage loans and securities collateralized by mortgages are projected under each rate scenario using a third-party mortgage analytics system that incorporates market prepayment assumptions;

•cash flows for structured securities are estimated using a third-party vendor in conjunction with the prepayments provided by the third-party mortgage analytics vendor;

•nonmaturity deposit pricing is projected based on Northern Trust’s actual historical patterns and management judgment, depending upon the availability of historical data and current pricing strategies/or judgment; and

•new business rates are based on current spreads to market indices.

The following table shows the estimated NII impact over the next twelve months of 100 and 200 basis point ramps upward and 100 and 200 basis point ramps downward movements in interest rates relative to forward rates as of December 31, 2023 and 2022. Each rate movement is assumed to occur gradually over a one-year period.

TABLE 47: NET INTEREST INCOME SENSITIVITY

[[GREPCENT_TABLE]]
[["INCREASE (DECREASE) ESTIMATED IMPACT ON NEXT TWELVE MONTHS OF NET INTEREST INCOME"],["(In Millions)","DECEMBER 31, 2023","DECEMBER 31, 2022"],["INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES"],["100 Basis Points","$","43","","$","41"],["200 Basis Points","82","","80"],["DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES"],["100 Basis Points","$","(63)","","$","(31)"],["200 Basis Points","(150)","","(64)"]]
[[/GREPCENT_TABLE]]

The NII sensitivity analysis does not incorporate certain management actions that may be used to mitigate adverse effects of actual interest rate movement. For that reason and others, the estimated impacts do not reflect the likely actual results but serve as estimates of interest rate risk. NII sensitivity is not comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MVE Sensitivity

MVE is defined as the present value of assets minus the present value of liabilities, net of the value of financial derivatives that are used to manage the interest rate risk of balance sheet items. The MVE looks at the whole balance sheet, which includes AFS debt securities, HTM debt securities, money market accounts, deposits, loans and wholesale borrowings. The potential effect of interest rate changes on MVE is derived from the impact of such changes on projected future cash flows and the present value of these cash flows and is then compared to the established limit. Northern Trust uses current market rates (and the future rates implied by these market rates) as the base case and measures MVE sensitivity under various rate scenarios. Stress testing of interest rates is performed to include such scenarios as immediate parallel shocks to rates, nonparallel (i.e., twist) changes to yield curves that result in their becoming steeper or flatter, and changes to the relationship among the yield curves (i.e., basis risk).

The MVE sensitivity analysis incorporates certain critical assumptions such as interest rates and client behaviors under changing rate environments. These assumptions are based on a combination of historical analysis and future expected pricing behavior. The simulation cannot precisely estimate MVE sensitivity given uncertainty in the assumptions. Many of the assumptions that apply to NII sensitivity also apply to MVE sensitivity simulations, with the following separate key assumptions incorporated into the MVE simulation:

•the present value of nonmaturity deposits are estimated using dynamic decay methodologies or estimated remaining lives, which are based on a combination of Northern Trust’s actual historical runoff patterns and management judgment—some balances are assumed to be core and have longer lives while other balances are assumed to be temporary and have comparatively shorter lives;

•the present values of most noninterest-bearing balances (such as receivables, equipment, and payables) are the same as their book values; and

•Monte Carlo simulation is used to generate forward interest rate paths.

The following table shows the estimated impact on MVE of 100 and 200 basis point shocks up and 100 and 200 basis point shocks down from current market implied forward rates at December 31, 2023 and 2022. Each rate movement is assumed to occur gradually over a one-year period.

TABLE 48: MARKET VALUE OF EQUITY SENSITIVITY

[[GREPCENT_TABLE]]
[["INCREASE (DECREASE) ESTIMATED IMPACT ON MARKET VALUE OF EQUITY"],["(In Millions)","DECEMBER 31, 2023","DECEMBER 31, 2022"],["INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES"],["100 Basis Points","$","(360)","","$","(472)"],["200 Basis Points","(817)","","(965)"],["DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES"],["100 Basis Points","$","430","","$","596"],["200 Basis Points","725","","842"]]
[[/GREPCENT_TABLE]]

The MVE simulations do not incorporate certain management actions that may be used to mitigate adverse effects of actual interest rate movements. For that reason and others, the estimated impacts do not reflect the likely actual results but serve as estimates of interest rate risk. MVE sensitivity is not comparable to actual results disclosed elsewhere or directly predictive of future values of other measures provided.

Foreign Currency Market Risk

Foreign Currency Non-Trading Risk Overview

Northern Trust’s balance sheet is exposed to non-trading foreign currency risk as a result of its holdings of non-U.S.-dollar-denominated assets and liabilities, investment in non-U.S. subsidiaries, and future non-U.S.-dollar-denominated revenue and expense. To manage currency exposures on the balance sheet, Northern Trust attempts to match its assets and liabilities by currency. If those currency offsets do not exist on the balance sheet, Northern Trust will use foreign exchange derivative contracts to mitigate its currency exposure.

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Trading Market Risk

Within Market Risk, trading risk arises from providing foreign exchange, interest rate derivatives, and securities brokerage services to clients. Securities positions are limited and their trading risks are de minimis. For regulatory capital purposes, trading risk also includes foreign currency balances from business operations.

Trading Book Composition and Risk Drivers

Northern Trust’s trading book is composed of positions arising from activity in four business areas: Global Foreign Exchange (GFX), which includes Treasury foreign exchange trades; Interest rate derivative (IRD) trades; Northern Trust Securities Inc. (NTSI) inventory; and foreign currency balances (FCBs) accrued on the balance sheet.

GFX desks execute foreign exchange transactions for client accommodation purposes and mitigate most of the exposure via offsetting trades. In addition, Northern Trust’s Treasury department executes foreign exchange transactions to manage balance sheet flows. The risk system includes these within GFX and applies FX and interest rate (IR) drivers to produce VaR for regulatory capital.

Northern Trust’s Treasury Department executes IRD trades for client accommodation purposes and mitigates the exposure via offsetting trades. The risk system applies IR and volatility drivers to produce VaR for regulatory capital.

FCBs arise not from executing trades but rather in the course of regular business operations, from non-U.S.-dollar-denominated revenues and expenses accruing onto the Corporation’s balance sheet. Prior to September 1, 2023, FX risk from these positions were mitigated through hedging activity. This hedging activity was discontinued on September 1, 2023. The risk system applies FX drivers to produce VaR for regulatory capital.

NTSI, a brokerage subsidiary of the Corporation, executes fixed-income securities trades directly for client accounts. A small inventory of securities remains held in inventory overnight. This portfolio exposure is de minimis, and VaR calculations are not required. The valuation of the securities serves as the basis for calculating regulatory capital.

Foreign Currency Trading Risk Overview

Foreign currency or foreign exchange trading positions exist when aggregate obligations to purchase and sell a currency other than the U.S. dollar do not offset each other in amount, or offset each other over different time periods. The GFX trading portfolio at Northern Trust is composed of spot, forward, non-deliverable forward, and foreign exchange rate (FX) swap transactions.

For FCBs, the daily high, low, average, and quarter-end VaR values were all less than $1.5 million for the year ended December 31, 2023.

Interest Rate Derivatives Trading Risk Overview

IRD positions exist when aggregate interest cash inflows and outflows do not offset each other in amount or offset each other over different time periods. The IRD trading portfolio at Northern Trust is composed mostly of interest rate swaps entered into to meet clients’ interest rate risk management needs, but also including a small number of swaptions, caps, and floors. IRD risk measures during the second quarter of 2023 became temporarily inflated as a result of transitions of IRD contracts from LIBOR to SOFR referencing. The risk measures declined in the third quarter of 2023 as the bulk of transitions was completed. For the IRD portfolio, the daily high, low, average, and as of December 31 VaR values were all less than $0.6 million for the year ended December 31, 2023.

Other Non-material Trading Activities

Northern Trust’s broker-dealer subsidiary, NTSI, maintains a portfolio of trading securities held for customer accommodation purposes and invests excess cash balances in short-term investment vehicles. The portfolio averaged $0.5 million and $12.1 million for the year ended December 31, 2023 and 2022, respectively.

Trading Book Risk Measurement

For trading book activities other than NTSI, Northern Trust measures daily the risk of loss associated with all non-U.S. currency positions using a VaR model and applying the historical simulation methodology. This statistical model provides estimates, based on high confidence levels, of the potential loss in value that might be incurred if an adverse shift in interest rates and non-U.S. currency exchange rates were to occur over a small number of days. The model incorporates foreign currency and interest rate volatilities and correlations in price movements among the currencies and interest rates. VaR is computed for each trading desk and for the global portfolio.

VaR measures are computed daily in a vendor software application which reads positions from Northern Trust’s trading systems and foreign currency balances from the general ledger. Data vendors provide foreign exchange rates, interest rates, and volatilities for all currencies. The Risk Management function monitors on a daily basis VaR model inputs and outputs for reasonableness.

Trading Book Risk Monitoring, Reporting and Analysis

Northern Trust monitors several variations of the VaR measures to meet specific regulatory and internal management needs. Variations include different methodologies (historical simulation, Monte Carlo simulation and Taylor

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approximation), horizons of one day and ten days, confidence levels of 95% and 99%, subcomponent VaRs using only FX drivers, only IR drivers, and only volatility drivers, and look-back periods of one year, two years, and four years. Those alternative measures provide management an array of corroborating metrics and alternative perspectives on Northern Trust’s market risks.

Automated daily reports are produced and distributed to business managers and risk managers. The Risk Management function also reviews and reports several variations of the VaR measures in historical time series format to provide management with a historical perspective on risk.

The following table presents the levels of total regulatory VaR and its subcomponents for GFX in the years indicated below, based on the historical simulation methodology, a 99% confidence level, a one-day horizon and equally-weighted volatility. The total VaR for GFX is typically less than the sum of its two subcomponents due to diversification benefits derived from the two subcomponents.

TABLE 49: GLOBAL FOREIGN CURRENCY VALUE-AT-RISK

[[GREPCENT_TABLE]]
[["(In Millions)","TOTAL VaR (FX AND IR DRIVERS)","FX VaR (FX DRIVERS ONLY)","IR VaR (IR DRIVERS ONLY)"],["FOR THE YEAR ENDED DECEMBER 31,","2023","2022","2023","2022","2023","2022"],["High","$","0.7","","$","0.2","","$","0.7","","$","0.2","","$","0.4","","$","0.3"],["Low","0.1","","0.1","","\u2014","","\u2014","","\u2014","","\u2014"],["Average","0.2","","0.1","","0.1","","0.1","","0.1","","0.1"],["As of December 31,","0.2","","0.1","","0.2","","0.1","","0.1","","0.1"]]
[[/GREPCENT_TABLE]]

During 2023 and 2022, Northern Trust did not incur an actual GFX trading loss in excess of the daily GFX VaR estimate.

Strategic Risk

Strategic risk is the vulnerability of the organization to internal or external developments that render corporate strategy ineffective or unachievable. The consequences of strategic risk can be diminished long-term earnings and capital, as well as reputational damage to the firm. Strategic risk encompasses two main areas:

•Macroeconomic and geopolitical risk centers on external events or developments that would have a detrimental impact on financial markets and/or financial services firms.

•Business risk arises from internal, secular, competitive, or regulatory trends that impact Northern Trust’s stated strategy or its achievability.

Strategic Risk Framework and Governance

The Corporate Strategic Risk Framework has been developed in conjunction with the Corporation’s risk appetite and risk management policies, and defines the mission and expectations of the Strategic Risk Management function to identify and analyze the sources and consequences of strategic risk.

This is achieved through participation in the establishment and review of business line strategy, coordination of risk input to the evaluation of key strategic opportunities, and developing and maintaining a risk inventory and set of metrics which attempt to gauge the level of strategic risk within the organization.

In addition, the Strategic Risk Management function maintains the Global Event Response Program, which aims to anticipate and prepare for stress scenarios, and provide an outline for responding to them when they occur.

Both GERC and the Business Risk Committee are responsible for reviewing the general methods, guidelines and frameworks by which Northern Trust monitors and evaluates strategic risk.

Climate Risk

Climate risk continues to be an evolving strategic risk for the Corporation. Climate risk refers to the risk of loss arising from climate change and is comprised of physical risk, liability risk and transition risk. Physical risk refers to risks to banks and the financial system emanating from the increased severity of extreme weather events (e.g., cyclones, droughts, floods, and fires). It can also refer to longer-term shifts in precipitation and temperature and increased variability in weather patterns (e.g., sea level rise). Liability risk stems from the potential for litigation where institutions and boards do not adequately consider or respond to the impacts of climate change. Transition risk reflects the risks to banks and financial systems of transitioning to a lower-carbon economy that may entail extensive policy, legal, technological, and market changes. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to banks and the financial system.

Effective management of climate risk requires coordinated governance, clearly defined roles and responsibilities and well-developed processes to identify, measure, monitor and control risks. We continue to build out and enhance our climate risk management capabilities. Our climate risk management efforts are overseen by the Chief Climate and Sustainability

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Risk Officer who reports directly to the CRO. The Risk Management function has created a dedicated climate and sustainability risk unit to monitor, oversee and take account of the increasing impact that climate change has, or may in the future have, on financial risk, nonfinancial risk, and regulatory compliance across the globe. The climate and sustainability risk unit works to evolve the risk management framework to ensure the Corporation meets the expectations of all stakeholders as well as all climate-related commitments made by the Corporation to external agencies.

The Board of Directors, and in particular its Corporate Governance Committee, engages in active oversight of ESG matters of significance to the Corporation and its subsidiaries. In addition, the Business Risk Committee provides oversight of certain financial and operational risks associated with climate change and other environmental factors through its oversight of the Corporation’s global risk management framework and risk management policies. The Business Risk Committee also engages in periodic discussions with management and members of the Risk Management function regarding strategic risks, including climate-related risk.

The Corporation expects that climate change will increasingly impact the risk types it manages, and the Corporation will continue to integrate climate considerations into its risk management framework as its understanding of climate change and risks driven by it evolve. Various regulatory agencies, investors, and other stakeholders have increased expectations and scrutiny in this area. The Corporation is committed to helping mitigate the impacts of climate change related to its activities and to partner with key stakeholders to do the same.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report may include statements which constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified typically by words or phrases such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “likely,” “plan,” “goal,” “target,” “strategy,” and similar expressions or future or conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Forward-looking statements include statements, other than those related to historical facts, that relate to Northern Trust’s financial results and outlook; capital adequacy; dividend policy and share repurchase program; accounting estimates and assumptions; credit quality including allowance levels; future pension plan contributions; effective tax rate; anticipated expense levels; contingent liabilities; acquisitions; strategies; market and industry trends; and expectations regarding the impact of accounting pronouncements and legislation. These statements are based on Northern Trust’s current beliefs and expectations of future events or future results, and involve risks and uncertainties that are difficult to predict and subject to change. These statements are also based on assumptions about many important factors, including:

•financial market disruptions or economic recession in the U.S. or other countries across the globe resulting from any of a number of factors;

•volatility or changes in financial markets, including debt and equity markets, that impact the value, liquidity, or credit ratings of financial assets in general, or financial assets held in particular investment funds or client portfolios, including those funds, portfolios, and other financial assets with respect to which Northern Trust has taken, or may in the future take, actions to provide asset value stability or additional liquidity;

•the impact of equity markets on fee revenue;

•changes in interest rates or in the monetary or other policies of various regulatory authorities or central banks;

•Northern Trust’s success in controlling the costs and expenses of its business operations and the impacts of any broader inflationary environment thereon;

•a decline in the value of securities held in Northern Trust’s investment portfolio, the liquidity and pricing of which may be negatively impacted by periods of economic turmoil and financial market disruptions;

•Northern Trust’s ability to address operating risks, including those related to cybersecurity, data privacy and security, human errors or omissions, pricing or valuation of securities, fraud, operational resilience (including systems performance), failure to maintain sustainable business practices, and breakdowns in processes or internal controls;

•Northern Trust's success in responding to and investing in changes and advancements in technology;

•geopolitical risks, risks related to global climate change and the risks of extraordinary events such as pandemics, natural disasters, terrorist events and war (including the continuing military conflicts involving Ukraine and the Russian Federation and Israel and Hamas and other evolving events in the Middle East), and the responses of the U.S. and other countries to those events;

•unexpected deposit outflows;

•the effectiveness of Northern Trust’s management of its human capital, including its success in recruiting and retaining necessary and diverse personnel to support business growth and expansion and maintain sufficient expertise to support increasingly complex products and services;

•changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions, including Northern Trust;

•changes in foreign exchange trading client volumes and volatility in foreign currency exchange rates, changes in the valuation of the U.S. dollar relative to other currencies in which Northern Trust records revenue or accrues expenses, and Northern Trust’s success in assessing and mitigating the risks arising from all such changes and volatility;

•a significant downgrade of any of Northern Trust’s debt ratings;

•the health and soundness of the financial institutions and other counterparties with which Northern Trust conducts business;

•uncertainties inherent in the complex and subjective judgments required to assess credit risk and establish appropriate allowances therefor;

•increased costs of compliance and other risks associated with changes in regulation, the current regulatory environment, and areas of increased regulatory emphasis and oversight in the U.S. and other countries, such as anti-money laundering, anti-bribery, and data privacy and security;

•failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and distribution of capital;

•Northern Trust’s success in continuing to enhance its risk management practices and controls and managing risks inherent in its businesses, including credit risk, operational risk, market and liquidity risk, fiduciary risk, compliance risk and strategic risk;

•risks and uncertainties inherent in the litigation and regulatory process, including the possibility that losses may be in excess of Northern Trust’s recorded liability and estimated range of possible loss for litigation exposures;

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•the risk of damage to Northern Trust’s reputation which may undermine the confidence of clients, counterparties, rating agencies, and stockholders;

•the downgrade of U.S. government-issued and other securities;

•changes in tax laws, accounting requirements or interpretations and other legislation in the U.S. or other countries that could affect Northern Trust or its clients;

•the pace and extent of continued globalization of investment activity and growth in worldwide financial assets;

•changes in the nature and activities of Northern Trust’s competition;

•Northern Trust’s success in maintaining existing business and continuing to generate new business in existing and targeted markets and its ability to deploy deposits in a profitable manner consistent with its liquidity requirements;

•Northern Trust’s ability to address the complex needs of a global client base and manage compliance with legal, tax, regulatory and other requirements;

•Northern Trust’s ability to maintain a product mix that achieves acceptable margins;

•Northern Trust’s ability to continue to generate investment results that satisfy clients and to develop an array of investment products;

•uncertainties inherent in Northern Trust’s assumptions concerning its pension plan, including discount rates and expected contributions, returns and payouts;

•risks associated with being a holding company, including Northern Trust’s dependence on dividends from its principal subsidiary; and

•other factors identified elsewhere in this Annual Report on Form 10-K, including those factors described in Item 1A, “Risk Factors,” and other filings with the SEC, all of which are available on Northern Trust’s website.

Actual results may differ materially from those expressed or implied by forward-looking statements. The information contained herein is current only as of the date of that information. All forward-looking statements included in this document are based upon information presently available, and Northern Trust assumes no obligation to update its forward-looking statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SUPPLEMENTAL INFORMATION

Reconciliation to Fully Taxable Equivalent

The following table presents a reconciliation of Interest Income, Net Interest Income, net interest margin, and total revenue prepared in accordance with GAAP to such measures on an FTE basis, which are non-GAAP financial measures. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets. Management believes this presentation provides a clearer indication of these financial measures for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on Net Income.

TABLE 50: RECONCILIATION TO FULLY TAXABLE EQUIVALENT

[[GREPCENT_TABLE]]
[["","FOR THE YEAR ENDED DECEMBER 31,"],["($ In Millions)","2023","2022","2021"],["Net Interest Income"],["Interest Income - GAAP","$","7,325.0","","$","2,877.7","","$","1,406.5"],["Add: FTE Adjustment","57.5","","45.6","","35.6"],["Interest Income (FTE) - Non-GAAP","$","7,382.5","","$","2,923.3","","$","1,442.1"],["Net Interest Income - GAAP","$","1,982.0","","$","1,887.2","","$","1,382.7"],["Add: FTE Adjustment","57.5","","45.6","","35.6"],["Net Interest Income (FTE) - Non-GAAP","$","2,039.5","","$","1,932.8","","$","1,418.3"],["Net Interest Margin - GAAP","1.52","%","1.36","%","0.96","%"],["Net Interest Margin (FTE) - Non-GAAP","1.56","%","1.39","%","0.99","%"],["Total Revenue"],["Total Revenue - GAAP","$","6,773.5","","$","6,761.2","","$","6,464.5"],["Add: FTE Adjustment","57.5","","45.6","","35.6"],["Total Revenue (FTE) - Non-GAAP","$","6,831.0","","$","6,806.8","","$","6,500.1"]]
[[/GREPCENT_TABLE]]

94 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION