Northern Trust
Annual Report 2021

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________________________________________________ FORM 10-K ____________________________________________________________ ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2021 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 001-36609 ____________________________________________________________ NORTHERN TRUST CORPORATION (Exact name of registrant as specified in its charter) ____________________________________________________________ Delaware (State or other jurisdiction of incorporation or organization) 36-2723087 (I.R.S. Employer Identification No.) 50 South La Salle Street Chicago, Illinois (Address of principal executive offices) 60603 (Zip Code) Registrant’s telephone number, including area code: (312) 630-6000 ____________________________________________________________ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Trading Symbol Name of Each Exchange On Which Registered Common Stock, $1.66 2/3 Par Value Depositary Shares, each representing 1/1,000th interest in a share of Series E Non-Cumulative Perpetual Preferred Stock NTRS NTRSO The NASDAQ Stock Market LLC The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None ____________________________________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer ☒ ☐ Accelerated filer Smaller reporting company ☐ ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☒ The aggregate market value of the registrant’s common stock as of June 30, 2021 (the last business day of the registrant’s most recently completed second quarter), based upon the last sale price of the common stock at June 30, 2021 as reported by The NASDAQ Stock Market LLC, held by non-affiliates was approximately $24.0 billion. Determination of stock ownership by non-affiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose. At January 31, 2022, 207,898,329 shares of common stock, $1.66 2/3 par value, were outstanding. Portions of the registrant’s Proxy Statement for its 2022 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. NORTHERN TRUST CORPORATION FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 PART I Item 1 Item 1A Item 1B Item 2 Item 3 Item 4 Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Supplemental Item Information About Our Executive Officers PART II Item 5 Item 6 Item 7 Item 7A Item 8 Item 9 Item 9A Item 9B Item 9C PART III Item 10 Item 11 Item 12 Item 13 Item 14 PART IV Item 15 Item 16 Signatures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Reserved Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Disclosure Regarding Foreign Jurisdictions that Prevent Inspections Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary Page 1 12 26 26 26 26 26 28 29 30 86 86 167 167 169 169 169 169 169 169 169 170 173 174 i 2021 Annual Report | Northern Trust Corporation When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below: Glossary of Terms AFS AIFMD ALCO AMA AML AOCI ARRC ASC ASU AUC/A Bank Banking book Basel Committee BMR BRRD C&IS CARES CCAR CCPA CDFIs CEOC CFA CFPB CFTC Commission Corporation CPRA CRA CRC CRD CRD V CRO CRR CRR II CSDR CSSF DE&I DFAST DGS DGSD Dodd-Frank Act EBA ECB Economic Aid Act EEA Available for Sale Alternative Investment Fund Managers Directive Asset and Liability Management Committee Basel Advanced Measurement Approach Anti-Money Laundering Accumulated Other Comprehensive Income Alternative Reference Rate Committee Accounting Standards Codification Accounting Standards Update Assets Under Custody/Administration The Northern Trust Company Northern Trust’s structural assets, liabilities, net investments, and off-balance sheet instruments subject to interest rate risk and/or foreign currency risk. It is distinct from the trading book. International Basel Committee on Banking Supervision European Union Benchmarks Regulation Bank Recovery and Resolution Directive (EU) Corporate & Institutional Services Coronavirus Aid, Relief, and Economic Security Act Comprehensive Capital Analysis and Review California Consumer Privacy Act Community Development Financial Institutions Compliance & Ethics Oversight Committee Criminal Finances Act (UK) Consumer Financial Protection Bureau U.S. Commodity Futures Trading Commission European Commission Northern Trust Corporation California Privacy Rights Act of 2020 Community Reinvestment Act Credit Risk Committee Capital Requirements Directive of June 26, 2013 (EU) European Commission revisions to the CRD, effective December 29, 2020 Chief Risk Officer Capital Requirements Regulation of June 26, 2013 (EU) European Commission revisions to the CRR, effective June 28, 2021 Central Securities Depositories Regulation (EU) Commission de Surveillance du Secteur Financier (Luxembourg) Diversity, Equity, and Inclusion Dodd-Frank Act Stress Tests Deposit Guarantee Schemes Deposit Guarantee Schemes Directive Dodd-Frank Wall Street Reform and Consumer Protection Act European Banking Authority European Central Bank The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act European Economic Area ii 2021 Annual Report | Northern Trust Corporation EMIR EOP ESG EU Exchange Act FASB FCA FDIA FDIC Federal Reserve Board FICC FINRA FRC FTE FTP FX GAAP GDPR GERC GFX GILTI HTM HQLAs IBA IBOR IR ISTRC ITS LCR LGD LIBOR MD&A MIFID MIFIR MLD5 MLRC MREL MROC MSDC MVE NAICS NAV NFA NFTS NII N/M NSFR ORC Glossary of Terms (continued) European Market Infrastructure Regulation 648/2012 End of Period Environmental, Social and Governance European Union Securities Exchange Act of 1934, as amended Financial Accounting Standards Board Financial Conduct Authority Federal Deposit Insurance Act Federal Deposit Insurance Corporation The Board of Governors of the Federal Reserve System Fixed Income Clearing Corporation Financial Industry Regulatory Authority Fiduciary Risk Committee Fully Taxable Equivalent Funds Transfer Pricing Foreign Exchange Generally Accepted Accounting Principles General Data Protection Regulation Global Enterprise Risk Committee Global Foreign Exchange Global Intangible Low-Taxed Income Held to Maturity High-Quality Liquid Assets ICE Benchmark Administration Interbank Offered Rates Interest Rate Information Security and Technology Risk Committee Implementing Technical Standards Liquidity Coverage Ratio Loss Given Default London Interbank Offered Rate Management’s Discussion and Analysis Market in Financial Instruments Directive Markets in Financial Instruments Regulation Fifth EU Money Laundering Directive Market & Liquidity Risk Committee Minimum requirements for own funds and eligible liabilities (EU) Model Risk Oversight Committee Macroeconomic Scenario Development Committee Market Value of Equity North American Industry Classification System Net Asset Value National Futures Association Northern Trust Fiduciary Services (Guernsey) Limited Net Interest Income Not Meaningful Net Stable Funding Ratio Operational Risk Committee iii 2021 Annual Report | Northern Trust Corporation Glossary of Terms (continued) Other Real Estate Owned Over-the-Counter Other-Than-Temporary Impairment Probability of Default Paycheck Protection Program Prudential Regulation Authority Economic Growth, Regulatory Relief, and Consumer Protection Act Right-of-use Regulatory Technical Standards Risk Weighted Assets U.S. Small Business Administration U.S. Securities and Exchange Commission OREO OTC OTTI PD PPP PRA Regulatory Relief Act ROU RTS RWA SBA SEC Series D Preferred Stock Series D Non-Cumulative Perpetual Preferred Stock Series E Preferred Stock Series E Non-Cumulative Perpetual Preferred Stock SOFR SFDR SRD II SFTR Taxonomy Regulations TDR Trading book Secured Overnight Finance Rate Sustainable Finance Disclosure Regulations (EU) Shareholder Rights Directive (EU) Securities Financing Transactions and Reuse of Collateral Regulation (EU) 2020/852 Troubled Debt Restructuring Foreign (non-U.S.) currency trading positions subject to foreign currency risk, as well as trading securities and interest rate derivative transactions, both subject to interest rate risk. UCITS UK USD LIBOR VaR VIE WM Undertakings for the Collective Investment in Transferable Securities United Kingdom U.S. Dollar LIBOR Value-at-Risk Variable Interest Entity Wealth Management iv 2021 Annual Report | Northern Trust Corporation PART I ITEM 1 – BUSINESS Northern Trust Corporation Northern Trust Corporation (Corporation) is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation is a financial holding company conducting business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (Bank). The Bank is an Illinois banking corporation headquartered in Chicago and the Corporation’s principal subsidiary. Founded in 1889, the Bank conducts its business through its U.S. operations and its various U.S. and non-U.S. branches and subsidiaries. At December 31, 2021, the Bank had consolidated assets of $183.7 billion and common bank equity capital of $11.1 billion. The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 23 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia- Pacific region. At December 31, 2021, the Corporation had consolidated total assets of $183.9 billion and stockholders’ equity of $12.0 billion. The Corporation expects that the Bank will continue in the foreseeable future to be the major source of the Corporation’s consolidated assets, revenues, and net income. Except where the context otherwise requires, references to “Northern Trust,” “we,” “us,” “our,” “its,” or similar terms mean Northern Trust Corporation and its subsidiaries on a consolidated basis. Business Overview Northern Trust focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS 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 C&IS and Wealth Management. Northern Trust reports certain income and expense items not allocated to C&IS and Wealth Management in a third reporting segment, Other. CORPORATE & INSTITUTIONAL SERVICES C&IS 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. At December 31, 2021, total C&IS assets under custody/administration, assets under custody, and assets under management were $15.18 trillion, $11.55 trillion, and $1.19 trillion, respectively. 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 to meet the complex financial 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 assets under custody/administration, assets under custody, and assets under management of $1.07 trillion, $1.06 trillion, and $416.1 billion, respectively, at December 31, 2021. 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. ASSET MANAGEMENT Asset Management, through the Corporation’s various subsidiaries, supports the C&IS 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 2021 Annual Report | Northern Trust Corporation 1 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 fully allocated to C&IS and Wealth Management. As discussed above, Northern Trust managed $1.61 trillion in assets as of December 31, 2021, including $1.19 trillion for C&IS clients and $416.1 billion for Wealth Management clients. Competition Northern Trust faces intense competition in all aspects and areas of its business. Competition comes from both regulated and unregulated financial services organizations, whose products and services span the local, national, and global markets in which Northern Trust conducts operations. Our competitors include a broad range of financial institutions and service companies, including other custodial banks, deposit-taking institutions, asset management firms, benefits consultants, trust companies, investment banking firms, insurance companies, investment counseling firms, and various financial technology companies, including software providers and data services firms. As our businesses grow and markets evolve, we may encounter increasing and new forms of competition around the world. Northern Trust’s business strategy is to provide quality financial services to targeted market segments in which it believes it has a competitive advantage and favorable growth prospects. As part of this strategy, Northern Trust seeks to differentiate itself from its competitors with premier, holistic solutions and exceptional experiences tailored to meet clients’ needs. In addition, Northern Trust emphasizes the development and growth of recurring sources of fee-based income and continual productivity improvements. Northern Trust also seeks to maintain its foundational strength with a strong, conservative balance sheet and a globally respected brand. Economic Conditions And Government Policies The earnings of Northern Trust are affected by numerous external influences. Chief among these are general economic conditions, both domestic and international, and actions that governments and their central banks take in managing their economies. These general conditions affect all of Northern Trust’s businesses, as well as the quality, value, and profitability of its loan and investment portfolios. The Board of Governors of the Federal Reserve System (Federal Reserve Board) implements monetary policy through its open market operations in United States Government securities, its setting of the discount rate at which member banks may borrow from Federal Reserve Banks, and its changes in the reserve requirements for deposits. The policies adopted by the Federal Reserve Board directly affect interest rates and therefore what banks earn on their loans and investments and what they pay on their savings and time deposits and other purchased funds. Supervision and Regulation Northern Trust is subject to extensive regulation under state and federal laws in the United States and in each of the jurisdictions in which it does business. The discussion below outlines significant elements of selected laws and regulations applicable to Northern Trust. Changes in laws or regulations applicable to Northern Trust may have a material effect on its businesses and results of operations. FINANCIAL HOLDING COMPANY REGULATION Under U.S. law, the Corporation is a bank holding company that has elected to be a financial holding company subject to the supervision, examination, and regulation of the Federal Reserve Board. A financial holding company is permitted to engage in a broader range of financial activities than a bank holding company. The Federal Reserve Board has authority to limit the activities that a financial holding company may conduct if any depository institution controlled by the financial holding company is found to no longer be “well-capitalized” and “well-managed” or has not received at least a “satisfactory” rating in its most recent Community Reinvestment Act (CRA) examination. Failure to meet one or more of these requirements may result in restrictions on the Corporation’s ability to exercise powers granted to financial holding companies, to engage in new activities, to continue current activities, or to make acquisitions. SUBSIDIARY REGULATION The Bank is a member of the Federal Reserve System, with deposits insured by the Federal Deposit Insurance Corporation (FDIC), and is subject to regulation by both agencies. As an Illinois banking corporation, the Bank is also subject to Illinois state laws and regulations and to examination and supervision by the Division of Banking of the Illinois Department of Financial and Professional Regulation. The Bank is also registered as a transfer agent with the Federal Reserve Board and is registered provisionally as a swap dealer with the U.S. Commodity Futures Trading Commission 2 2021 Annual Report | Northern Trust Corporation (CFTC) under the Commodity Exchange Act. As a result, the Bank is subject to supervision, examination and enforcement by certain other regulatory bodies, including the CFTC and the National Futures Association (NFA). The Corporation’s nonbanking affiliates are subject to examination by the Federal Reserve Board and, in certain circumstances, other functional regulators. The Corporation’s broker-dealer subsidiary is a member of the Financial Industry Regulatory Authority (FINRA), is registered with the U.S. Securities and Exchange Commission (SEC) as a broker-dealer, investment adviser, and municipal securities dealer, and is subject to the rules and regulations of these bodies. Certain nonbanking affiliates are registered with the CFTC as commodity trading advisors and commodity pool operators and subject to supervision and regulation by the CFTC and NFA. Other subsidiaries of the Corporation are registered with the SEC as investment advisers and are subject to regulation by the SEC. Subsidiaries may also be regulated by state regulators in various states. THE DODD-FRANK ACT, AS AMENDED The following items provide a brief description of certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as implemented through final rules promulgated by the Federal Reserve Board and other agencies and amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Regulatory Relief Act), most relevant to the Corporation and its subsidiaries, including the Bank. Enhanced Prudential Standards. The Dodd-Frank Act, as implemented by the Federal Reserve Board through various rulemakings and amended by the Regulatory Relief Act, generally imposes enhanced prudential requirements on U.S. bank holding companies with at least $100 billion in total consolidated assets, including the Corporation. The enhanced prudential standards include stringent risk-based capital, leverage, liquidity, risk management, and stress testing requirements and single counterparty credit limits for large bank holding companies, including the Corporation. The Federal Reserve Board also has the discretion to require these large U.S. bank holding companies to limit their short-term debt, to issue contingent capital instruments, and to provide enhanced public disclosures. In October 2019, the Federal Reserve Board finalized a proposed rule implementing changes made by the Regulatory Relief Act. This rule introduced a new four-category framework to determine which enhanced prudential standards and other requirements are applicable to institutions with total consolidated assets of at least $100 billion, based on asset thresholds and other risk-based factors. Under the new rules, the Corporation is classified as a Category II institution. The requirements under the new framework that apply to the Corporation are largely unchanged as a result of the Federal Reserve Board’s final tailoring rule for enhanced prudential standards. The Corporation must submit annual capital plans to the Federal Reserve Board, conduct supervisory and internal periodic stress tests to evaluate capital adequacy in adverse economic conditions, maintain enhanced risk management procedures, comply with a liquidity risk management framework (discussed below in “Liquidity Standards”) and aggregate credit exposure limits, conduct liquidity stress tests, and hold a buffer of liquid assets estimated to meet funding needs during a financial stress event. The Corporation is not subject to the total loss-absorbing capacity requirement, capital surcharge, enhanced supplementary leverage ratio, or aggregate credit exposure limit that apply to U.S. bank holding companies that are global systemically important bank holding companies. Resolution Planning. As required by Section 165(d) of the Dodd-Frank Act, the Corporation is required to submit periodically to regulators a resolution plan for its rapid and orderly resolution in the event of material financial distress or failure. In addition, under an FDIC rule (the CIDI Resolution Plan Rule) the Bank must submit to the FDIC periodic plans for resolution in the event of its failure. On March 29, 2019, the Federal Reserve Board and the FDIC provided joint written feedback to the Corporation regarding the resolution plan submitted by the Corporation in December 2017, pursuant to Section 165(d) of the Dodd- Frank Act (the 2017 165(d) Plan). The joint written feedback stated that the Federal Reserve Board and FDIC did not identify shortcomings or deficiencies in the 2017 165(d) Plan. On December 9, 2020, the Corporation received written guidance from the FDIC and Federal Reserve confirming that the 2021 resolution plan submission would be a targeted plan and include a targeted information request related to actions in response to events surrounding the COVID-19 pandemic. On December 17, 2021, the Corporation submitted its 2021 Section 165(d) resolution plan. In this submission, the Corporation addressed the requirements of a targeted resolution plan, as well as the targeted information request specified in the Federal Reserve Board and FDIC guidance letter. In addition, on June 27, 2018, the Bank submitted its resolution plan (the 2018 CIDI Plan) to the FDIC under the CIDI Resolution Plan Rule. To date, no formal written feedback or guidance has been received regarding the 2018 CIDI Plan. On January 19, 2021, the FDIC announced that it will resume requiring resolution plan submissions for insured depository institutions with $100 billion or more in assets. The FDIC announcement indicated that no firm will be required to submit a resolution plan without at least 12 months advance notice provided to the firm. To date, the Bank has not received notice from the FDIC indicating its next resolution plan submission date. Separately, the European Union Bank Recovery and Resolution Directive (BRRD) sets out the framework for the recovery and resolution of European Union (EU) credit institutions and investment firms, including certain of the Bank’s 2021 Annual Report | Northern Trust Corporation 3 subsidiaries and branches, effective January 1, 2015. The BRRD established a set of harmonized rules for early intervention measures, recovery and resolution planning, bail-in powers and requirements for total loss absorbing capital for EU institutions, collectively known as minimum requirements for own funds and eligible liabilities (MREL). The BRRD was materially amended, including with respect to the MREL requirements, with the amended directive coming into force in December 2020. Northern Trust Global Services SE, a Luxembourg-incorporated indirect subsidiary of the Bank, is authorized and supervised by the European Central Bank (ECB) and subject to the prudential supervision of the ECB and the Luxembourg Commission de Surveillance du Secteur Financier (CSSF). As such, Northern Trust Global Services SE falls within the scope of the BRRD and its recovery and resolution planning is overseen by the CSSF and Single Resolution Board (the resolution authority for ECB-supervised institutions). The United Kingdom (UK) has established a special resolution regime and a resolvability assessment framework overseen by the Bank of England (as the UK resolution authority) which has many similar features to the BRRD, which was substantially incorporated into UK law following the withdrawal of the UK from the EU. The special resolution regime applies to firms that are permitted to accept deposits under Part 4A of the Financial Services and Markets Act 2000. As such, the London branch of the Bank, as a UK branch of a third-country institution that accepts deposits, falls within the scope of the special resolution regime. Orderly Liquidation Authority. Under the Dodd-Frank Act, certain financial companies, such as the Corporation and certain of its covered subsidiaries, can be subjected to an orderly liquidation authority if in default or danger of default and their resolution under the U.S. Bankruptcy Code would have serious adverse effects on financial stability in the United States, among other requirements set by statute. If the Corporation were subject to orderly liquidation authority, the FDIC would be appointed as its receiver, which would give the FDIC considerable powers to resolve the Corporation. Absent such actions, the Corporation, as a bank holding company, would remain subject to the U.S. Bankruptcy Code. The Volcker Rule. The Volcker Rule bans proprietary trading subject to exceptions, such as for market-making, hedging, certain trading activities in U.S. and foreign sovereign debt, certain trading activities of non-U.S. banking entities trading outside the United States, and trading activities related to liquidity management. The Volcker Rule also imposes significant restrictions on sponsoring or investing in certain “covered funds,” such as hedge funds or private equity funds, again subject to exceptions. Northern Trust maintains an enterprise-wide compliance program to comply with the Volcker Rule. Swaps and Other Derivatives. The Dodd-Frank Act imposed a regulatory structure on the over-the-counter derivatives market, including requirements for clearing, exchange trading, capital, margin, trade reporting, and recordkeeping. The Dodd-Frank Act also requires certain entities to register as a “major swap participant,” a “swap dealer,” a “major-security- based swap participant” or a “security-based swap dealer.” The Bank is required to register as a swap dealer and its swap dealer activities are subject to the CFTC’s rules and regulations, including rules regarding internal and external business conduct standards, reporting and recordkeeping, mandatory clearing for certain swaps, trade documentation and confirmation requirements, and cross-border swap activities. The Bank is also subject to Federal Reserve Board regulations regarding mandatory posting and collection of margin by certain swap counterparties. The Corporation has not registered and does not expect that it, or any of its affiliates, will be required to register as a security-based swap dealer with the SEC. HOLDING COMPANY SUPPORT UNDER THE FEDERAL DEPOSIT INSURANCE ACT The Dodd-Frank Act amended the Federal Deposit Insurance Act (FDIA) to obligate the Federal Reserve Board to require bank holding companies, such as the Corporation, to serve as a source of financial and managerial strength for any subsidiary depository institution. Under this requirement, the Corporation in the future could be required to provide financial assistance to the Bank should the Bank experience financial distress. PAYMENT OF DIVIDENDS The Corporation may pay dividends, repurchase stock, and make other capital distributions only in accordance with the capital plan rules and capital adequacy standards of the Federal Reserve Board, including the stress capital buffer requirement, discussed further in “—Capital Adequacy Requirements” below. Dividends from the Bank are a significant source of funds for the Corporation, and the Corporation’s ability to pay dividends on its common stock therefore depends on the ability of the Bank to pay sufficient dividends to the Corporation. Various other federal and state laws and regulations limit the amount of dividends that may be paid by the Bank to the Corporation without regulatory consent. The Bank may not pay any dividends if it is undercapitalized, or if the payment of the dividend would cause it to become undercapitalized. In general, the amount of dividends that may be paid in a calendar year is limited to its “recent earnings” (the current year’s net income combined with the retained net income of the two preceding years), or its “undivided profits” (generally, accumulated net profits that have not been paid out as dividends or transferred to surplus), whichever is less. The ability of the Bank to pay dividends to the Corporation may also be affected by the capital adequacy standards applicable to the Bank (discussed further below), which include minimum requirements and buffers. 4 2021 Annual Report | Northern Trust Corporation CAPITAL PLANNING AND STRESS TESTING The Corporation’s capital distributions are subject to the Federal Reserve Board’s capital plan rules, which require the Corporation to submit annual capital plans to the Federal Reserve Board for review. The major components of that oversight are the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress tests (DFAST). These requirements involve both company-run and supervisory-run testing of capital under various scenarios, including baseline and severely adverse scenarios provided by the appropriate banking regulator. Results from the Corporation’s and the Bank’s annual company-run stress tests are reported to the appropriate regulators and made publicly available. Under the DFAST regulations, the Corporation is required to undergo regulatory stress tests conducted by the Federal Reserve Board annually. The Bank also is required to conduct its own annual internal stress test (although it is permitted to combine certain reporting and disclosure of its stress test results with the results of the Corporation). Results from the Corporation’s and the Bank’s annual company-run stress tests are reported to the appropriate regulators and made publicly available. Northern Trust published the results of its most recent company-run stress tests on June 24, 2021. CAPITAL ADEQUACY REQUIREMENTS The Corporation, as a bank holding company, is subject to risk-based and leverage capital guidelines implemented by the Federal Reserve Board that are based on industry-standard guidelines published by the International Basel Committee on Banking Supervision (Basel Committee), known as Basel III. The Bank, as an FDIC-insured depository institution, is also required to meet risk-based and leverage capital guidelines established by regulators which are generally similar to those established by the Federal Reserve Board for bank holding companies. Under the final Basel III rules, the Corporation, with the Bank, is a “core” banking organization that is required to use the advanced approaches methodologies to calculate and disclose publicly its risk-based capital ratios. The Corporation also is subject to a capital floor that is based on the Basel III standardized approach to calculating risk-based capital ratios. The Corporation is therefore required to calculate its risk-based capital ratios under both the standardized and advanced approaches, and is subject to the more stringent of the two in the assessment of its capital adequacy. The Bank’s risk-based and leverage capital ratios at December 31, 2021, were well above the regulatory requirements established by U.S. banking regulators. The risk-based and leverage capital ratios for the Corporation and the Bank, together with the regulatory minimum ratios and the ratios required for classification as “well-capitalized,” are provided in the following chart. TABLE 1: RISK-BASED AND LEVERAGE CAPITAL RATIOS AS OF DECEMBER 31, 2021 COMMON EQUITY TIER 1 CAPITAL TIER 1 CAPITAL TOTAL CAPITAL TIER 1 LEVERAGE SUPPLEMENTARY LEVERAGE(1) STANDARDIZED APPROACH ADVANCED APPROACH STANDARDIZED APPROACH ADVANCED APPROACH STANDARDIZED APPROACH ADVANCED APPROACH STANDARDIZED APPROACH ADVANCED APPROACH ADVANCED APPROACH 11.9 % 13.2 % 12.9 % 14.3 % 14.1 % 15.3 % 6.9 % 6.9 % 12.0 % 13.5 % 12.0 % 13.5 % 13.0 % 14.4 % 6.4 % 6.4 % 4.5 % 4.5 % 6.0 % 6.0 % 8.0 % 8.0 % 4.0 % 4.0 % 8.2 % 7.6 % 3.0 % N/A N/A 6.0 % 6.0 % 10.0 % 10.0 % N/A N/A N/A 6.5 % 6.5 % 8.0 % 8.0 % 10.0 % 10.0 % 5.0 % 5.0 % 3.0 % Northern Trust Corporation The Northern Trust Company Minimum required ratio “Well-capitalized” minimum ratios, as applicable Northern Trust Corporation The Northern Trust Company (1) In November 2019, the Federal Reserve Board and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total leverage exposures of custodial banking organizations, including the Corporation and the Bank, equal to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020. The supplementary leverage ratios at December 31, 2021 for the Corporation and the Bank reflect the impact of this final rule. Advanced approaches institutions, such as the Corporation and the Bank, are subject to a minimum supplementary leverage ratio of 3.0%. Advanced approaches institutions that are insured depository institutions, such as the Bank, also must maintain at least a 3.0% supplementary leverage ratio to be considered “well-capitalized.” The Corporation is also subject to a stress capital buffer, which integrates forward-looking stress test results with non-stress capital requirements, and the Bank is also subject to a capital conservation buffer, which respectively requires the Corporation and the Bank to hold a buffer of Common Equity Tier 1 capital above the minimum risk-based capital requirements in order to avoid constraints on dividends, equity repurchases and compensation. The minimum capital buffer requirement for advanced approaches banking organizations, such as the Corporation and the Bank, is 2.5%. 2021 Annual Report | Northern Trust Corporation 5 A “countercyclical buffer” of 0% to 2.5% of a banking organization’s total risk-weighted assets for advanced approaches banking organizations, such as the Corporation, is also a component of the capital adequacy framework. In general, the amount of the countercyclical capital buffer is a weighted average of the countercyclical capital buffer established in the various jurisdictions in which the banking organization has credit exposures. The U.S. countercyclical buffer is currently set at 0%. As a result of the stress test results published by the Federal Reserve Board on June 24, 2021, the Corporation’s stress capital buffer requirement for the 2021 capital plan cycle was set at 2.5%. The 2021 stress capital buffer became effective October 1, 2021, and results in an effective Common Equity Tier 1 capital ratio minimum requirement of 7.0% inclusive of this buffer. LIQUIDITY STANDARDS Northern Trust is subject to the U.S. liquidity coverage ratio (LCR) requirement, which is designed to ensure that covered banking organizations including the Corporation and the Bank maintain an adequate level of unencumbered high- quality liquid assets equal to their expected net cash outflow for a 30-day time horizon under a prescribed regulatory liquidity stress scenario. As of December 31, 2021, the Corporation and the Bank were in compliance with applicable LCR requirements. Northern Trust also is subject to the U.S. net stable funding ratio (NSFR) requirement, designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. As of December 31, 2021, the Corporation and the Bank were in compliance with applicable NSFR requirements. The enhanced prudential standards imposed by the Dodd-Frank Act, as amended by the Regulatory Relief Act, specify certain required liquidity risk management practices for large bank holding companies and banks. The Federal Reserve Board’s October 2019 final tailoring rule targets certain aspects of these requirements based on banking organizations’ business model and risk profile, as delineated into four risk-based categories. The Corporation, a Category II institution under the final tailoring rule, is subject to the liquidity risk management, monthly liquidity stress testing, liquidity buffer, and daily liquidity reporting requirements. PROMPT CORRECTIVE ACTION Federal banking regulators are required to take “prompt corrective action” with respect to a depository institution if that institution does not meet certain capital adequacy standards, and are also authorized to take appropriate action against a parent bank holding company of an under-capitalized banking subsidiary. In certain instances, the Corporation could be required to guarantee the performance of a capital restoration plan for the Bank if it were under-capitalized. RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES The Bank is subject to restrictions governing transactions between it and affiliated entities, including the Corporation, its affiliates, and its subsidiaries. These transactions must be on terms and conditions that are, or in good faith would be, offered to nonaffiliated companies (i.e., on terms not less favorable to the Bank than market terms). Further, extensions of credit must be secured fully with qualifying collateral and are limited to 10% of the Bank’s capital and surplus for transactions with a single affiliate and to 20% of the Bank’s capital and surplus for transactions with all affiliates. ANTI-MONEY LAUNDERING, ANTI-TERRORISM LEGISLATION, AND OFFICE OF FOREIGN ASSETS CONTROL The Corporation and certain of its subsidiaries are subject to the Bank Secrecy Act of 1970, as amended by the USA PATRIOT Act of 2001 and implemented in the regulation of the federal banking regulators and Financial Crimes Enforcement Network, which contain anti-money laundering (AML) and financial transparency requirements for conducting due diligence, verifying client and beneficial owner identification, and monitoring client transactions and detecting and reporting suspicious activities. AML laws outside the United States contain similar requirements. Various legal requirements prohibit Northern Trust entities from engaging in business in or with certain jurisdictions and parties, such as organizations and countries suspected of aiding, harboring or engaging in terrorist acts or undermining the sovereignty and territorial integrity of democratic countries. The U.S. Department of the Treasury’s Office of Foreign Assets Control publishes lists of these prohibited parties. If the Corporation or the Bank finds a sanctioned name or jurisdiction on any transaction or account, the Corporation or the Bank must reject or block such account or transaction and notify the appropriate authorities. Failure to comply with these requirements could result in fines, penalties, lawsuits, regulatory sanctions or difficulties in obtaining approvals, restrictions on their business activities or harm to reputation. Many other countries have imposed similar laws and regulations that apply to the Corporation’s non-U.S. offices. The Corporation has established policies and procedures to comply with these laws and the related regulations. DEPOSIT INSURANCE AND ASSESSMENTS The Bank accepts deposits, and eligible deposits have the benefit of FDIC insurance up to the applicable limit, which is currently $250,000 for each depositor account. Under the FDIA, insurance of deposits may be terminated by the FDIC 6 2021 Annual Report | Northern Trust Corporation upon a finding that the insured depository institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition, or has violated laws, regulations, or orders from a regulatory agency. Certain liquid assets are excluded from the deposit insurance assessment base of custody banks that satisfy certain institutional eligibility criteria. This has the effect of reducing the amount of deposit insurance fund insurance premiums payable by custody banks. The Bank qualifies as a custody bank for this purpose. COMMUNITY REINVESTMENT ACT The Bank is subject to the Community Reinvestment Act (CRA). The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their service areas, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. The Bank fulfills its CRA obligations by making qualified investments for the purposes of community development. The Bank received an “outstanding” CRA rating from the Federal Reserve Board in its most recent CRA examination. PRIVACY AND SECURITY Federal law establishes a minimum federal standard of financial privacy by, among other provisions, requiring financial institutions to adopt, disclose, and enforce privacy policies with respect to consumer information, setting limitations on disclosure to third parties of consumer information, setting standards for protecting client information and preventing unlawful access to such information, and requiring notice of data breaches in certain circumstances. Most states, the EU and other non-U.S. jurisdictions also have adopted their own statutes and/or regulations concerning data privacy and security and requiring notification of data breaches. For example, a European data protection framework—the General Data Protection Regulation (GDPR)—was adopted on April 8, 2016, and became effective in all European Economic Area (EEA) member states on May 25, 2018. GDPR also has been implemented into UK law as part of the arrangements following the UK’s withdrawal from the EU and operates in conjunction with other local data privacy requirements. GDPR is designed to harmonize data privacy laws across the EEA, to protect EEA citizens’ data privacy and to reshape the way organizations across the region approach data privacy. GDPR has extraterritorial effect as its scope includes all data controllers and processors outside the EEA whose processing activities relate to the offering of goods or services to, or monitoring the behavior of, EEA individuals. Organizations that violate certain provisions of GDPR could be fined up to €20 million or 4% of their annual worldwide revenue for the preceding fiscal year, whichever is greater. In the United States, the California Consumer Privacy Act (CCPA) was adopted by the State of California and became effective January 1, 2020, and then enforceable on July 1, 2020. The CCPA substantially increased the rights of California residents to understand how their personal data is collected and used by commercial businesses. The CCPA includes a private right of action (permitting lawsuits to be brought by private individuals instead of the state Attorney General or other government actor for breaches), and contemplates civil penalties of up to $2,500 for each violation and up to $7,500 for each intentional violation. On November 3, 2020, the California Privacy Rights Act of 2020 (CPRA), which amends and supersedes portions of the CCPA, was approved by a majority of California voters. Among other changes, the CPRA establishes the California Privacy Protection Agency to administer, implement, and enforce the CCPA and CPRA. The CPRA is expected to be fully operative beginning in 2023, and will apply to personal information collected on or after January 1, 2022. However, the CCPA, including its implementing regulations, remains in effect until the CPRA is operative. The Corporation has adopted and disseminated privacy policies and communicates required information relating to financial privacy and data security in accordance with applicable law. CONSUMER LAWS AND REGULATIONS The Corporation’s banking subsidiaries are subject to certain federal and state laws and regulations designed to protect consumers in transactions with banks. Failure to comply with these laws and regulations could lead to substantial penalties, operating restrictions and reputational damage to the financial institution. Consumer laws and regulations are enforced by the Consumer Financial Protection Bureau (CFPB) and other federal and state regulators. NON-U.S. REGULATION Northern Trust is subject to the laws and regulatory authorities of the jurisdictions in which its non-U.S. branches and subsidiaries operate. For example, branches and subsidiaries conducting banking and asset servicing businesses in the UK are authorized to do so pursuant to the UK Financial Services and Markets Act 2000. They are authorized by the Prudential Regulation Authority (PRA) and/or the Financial Conduct Authority (FCA). The PRA and FCA exercise broad supervisory and disciplinary powers that include the power to revoke temporarily or permanently authorization to conduct a regulated business upon breach of the relevant regulations, impose capital requirements, suspend registered employees, and impose censures and fines on both regulated businesses and their regulated employees. Northern Trust’s European branches and subsidiaries are subject to the laws and regulatory authorities of the EU and the member states in which they are domiciled. For example, Northern Trust Global Services SE as an EU-domiciled credit 2021 Annual Report | Northern Trust Corporation 7 institution in Luxembourg, is subject to the prudential supervision of the ECB and the CSSF. Moreover, Northern Trust’s non-EU branches and subsidiaries conducting financial services activities in the EU may fall within the scope of the laws of the EU and, given the increasing extraterritorial effect of EU legislation, non-EU branches and subsidiaries may still fall within the scope of EU law if they transact outside of the EU with EU clients. Since January 31, 2020, the UK has not been a member of the EU. EU legislation as it applied to the UK on December 31, 2020 is a part of UK domestic legislation, under the control of the UK’s parliament and assemblies. Most UK law relevant to the Corporation and its subsidiaries is still closely aligned with the EU legislative framework in place in December 2020. The following items provide a brief description of certain key regulatory requirements in the EU and the UK relevant to the Corporation and its subsidiaries, in addition to the BRRD and GDPR discussed under “The Dodd-Frank Act, as Amended—Resolution Planning” and “Privacy and Security,” respectively, above. EU and UK Prudential Regulatory Frameworks. The EU Capital Requirements Directive of June 26, 2013 (CRD) and the EU Capital Requirements Regulation of June 26, 2013 (CRR) set out the framework for prudential regulation of credit institutions in the EU, including, among other things, capital and liquidity requirements, leverage, and disclosure and reporting. CRR and CRD have been subject to extensive amendments by a new directive (CRD V) and the revised CRR (CRR II). CRD V and CRR II entered into force on June 27, 2019. CRD V has largely applied since December 29, 2020, and CRD II has largely applied since June 28, 2021. The key changes introduced by CRD V and CRR II include changes to the leverage ratio, the net stable funding ratio, large exposures, and market and counterparty credit risk. Since June 26, 2021, investment firms under the Markets in Financial Instruments Directive (MIFID) have been subject to a new prudential regime under the EU Investment Firm Directive and Investment Firm Regulation. In April 2021, the Financial Services Act came into force in the UK establishing among other things, (i) a framework for the new investment firm prudential framework to apply in the UK and (ii) the UK implementation of Basel III standards, including amendments to CRR implemented into the UK following the withdrawal from the EU. UK and EU branches and subsidiaries of the Corporation may also be subject to local rules on outsourcing and operational resilience. Markets Regulation. MIFID (which came into force in 2018), the linked Markets in Financial Instruments Regulation (MIFIR), and the European Market Infrastructure Regulation 648/2012 (EMIR) are the primary pieces of EU legislation which regulate, among other things, trading in derivative and securities markets, transaction reporting, investor protection, clearing and risk mitigation. MIFID, MIFIR and EMIR, with applicable amendments, now form part of UK law under the legislation implemented when the UK left the EU. Central Securities Depositories Regulation. On September 17, 2014, the EU Central Securities Depositories Regulation (CSDR) entered into force (subject to a number of transitional provisions). The CSDR aims principally to ensure that transactions between buyers and sellers of dematerialized securities are settled in a safe and timely manner by introducing common securities settlement standards across the EU. Key features of the CSDR include shorter settlement periods, settlement discipline measures (including mandatory cash penalties and ‘buy-ins’ for settlement fails and settlement fails reporting) and an obligation regarding dematerialization for most securities. In November 2021, EU legislators announced a delay to the implementation of the CSDR mandatory buy-in rules under the settlement discipline regime. Securities Financing Transactions and Reuse of Collateral Regulation. On November 25, 2015, the EU adopted a regulation on securities financing transactions and reuse of collateral (SFTR) as part of its approach to addressing shadow banking. The regulation includes provisions for enhanced transparency and reporting of securities financing transactions. The SFTR entered into force on January 12, 2016. The reporting obligations under the SFTR have been phased in since April 11, 2020, with the final phase commencing on January 11, 2021. UK Criminal Finances Act. On September 30, 2017, the UK Criminal Finances Act (CFA) entered into force. The CFA has extra-territorial effect, introducing certain new corporate criminal offenses in circumstances where a corporate entity or partnership (a relevant body) fails to prevent an “associated person” (broadly meaning an employee, agent or person who performs services for or on behalf of the relevant body) from criminally facilitating the evasion of tax, whether the tax evaded is owed (i) in the UK or (ii) in a foreign country if the relevant body has a nexus, or any conduct constituting part of the foreign tax evasion facilitation offense takes place, in the UK. These corporate offenses are strict liability offenses, such that in circumstances where an associated person of a relevant body criminally facilitates the evasion of tax and such relevant body has failed to prevent the associated person from committing such criminal facilitation of tax evasion, the relevant body will itself be guilty of a criminal offense carrying unlimited fines, unless it can show that it put in place reasonable prevention procedures (or by showing that it was not reasonable in all the circumstances to expect the relevant body to have any prevention procedures in place). Benchmarks Regulation. On January 1, 2018, the EU Benchmarks Regulation (BMR) became applicable in all EU member states. The principal objectives of the BMR are to restore investor confidence in the accuracy, robustness and integrity of indices used as benchmarks in financial instruments and financial contracts or to measure the performance of 8 2021 Annual Report | Northern Trust Corporation investment funds, and the benchmark-setting process itself. The BMR aims to achieve these objectives by ensuring that benchmarks are not subject to conflicts of interest, are used appropriately, and reflect the actual market or economic reality they are intended to measure. BMR has been incorporated into UK law following the withdrawal from the EU, with applicable amendments. In 2017, the FCA and the Bank of England’s Financial Policy Committee raised questions about the future sustainability of the London Interbank Offered Rate (LIBOR) benchmarks and began planning the transition to alternative reference rates beginning December 31, 2021. The UK and EU legislators have each taken legislative steps to manage the transition from LIBOR. In the UK, the FCA has exercised powers under the BMR to effect the publication of a synthetic LIBOR rate for one-month, three-month and six-month sterling and yen LIBOR beyond 2021. In December 2021, the Critical Benchmarks (References and Administrators’ Liability) Act 2021 was passed in the UK. That legislation includes “safe harbor” provisions to mitigate certain litigation risks associated with contractual continuity following the transition to synthetic LIBOR. Sustainable Finance Disclosure Regulations. On December 29, 2019, the EU Sustainable Finance Disclosure Regulations (SFDR) entered into force. SFDR aims to prevent “greenwashing” (conveying a misleading or false impression a product is more environmentally favorable than it actually is) by requiring disclosure of how sustainability risks and environmental, social and governance (ESG) factors are part of the investment and business processes of asset managers. Mandatory disclosures are required to be published at product and manager levels in a variety of ways, including on websites, in pre-contractual documents (e.g. prospectuses) and in annual reports. Certain significant provisions apply since March 10, 2021. In October 2021, the UK government announced that it will launch its own consultation with stakeholders on sustainable finance disclosures rules for certain UK market participants and certain investment products. Taxonomy Regulation. On July 12, 2020, Regulation (EU) 2020/852 (Taxonomy Regulations) entered into force. The Taxonomy Regulations are part of the EU’s recent measures designed to encourage environmentally sustainable investment decision making and introduce a technical framework to ascertain how sustainable an economic activity is. The Taxonomy Regulations apply to financial market participants including MiFID firms, Undertakings for the Collective Investment in Transferable Securities (UCITS) management companies, and alternative investment fund managers, and will require them to make further entity, pre-contractual and periodic disclosures. In October 2021, the UK government announced that it will launch its own consultation with stakeholders on sustainable finance disclosures rules for certain UK market participants. Deposit Guarantee Scheme. Eligible deposits held with EU credit institutions and certain other financial entities are subject to the recast Deposit Guarantee Schemes Directive (DGSD) implemented in 2014. It required EU member states to introduce legislation establishing at least one deposit guarantee scheme (DGS). A DGS which is established and recognized in one member state is obliged to cover the depositors (up to certain prescribed amounts) at branches of the same institution in other EU member states. In the UK, the Financial Services Compensation Scheme is the national DGS for the protection and reimbursement of depositors of failed financial institutions. Fifth EU Money Laundering Directive. On July 9, 2018, the Fifth EU Money Laundering Directive (MLD5) entered into force. MLD5 was required to be transposed into local law by EU member states by January 10, 2020 and introduced the following key changes to the previous EU AML regime: (i) EU member states must ensure that registers of ultimate beneficial owners of companies and other legal entities are accessible to the general public; (ii) the previous AML regime was extended to additional service providers, such as electronic wallet providers, virtual currency exchange service providers, and art dealers, and further specifications regarding the scope of application of MLD5 with respect to tax advisors and estate agents were provided; (iii) the threshold for identifying holders of prepaid cards was lowered to €150; and (iv) EU member states were required to implement enhanced due diligence measures to monitor suspicious transactions involving high-risk countries more strictly. In May 2018, the UK’s Sanctions and Anti-Money Laundering Act came into force. The UK government transposed MLD5 into UK law and, therefore, the UK anti-money laundering regime is currently broadly aligned with the EU. Shareholder Rights Directive. On May 17, 2017, the recast Shareholder Rights Directive (EU) 2017/828 was published (SRD II). Member states of the EU were required to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by June 10, 2019. SRD was designed to establish requirements in relation to the exercise of shareholder rights and, recognizing that shares are often held through complex chains of intermediaries, SRD II is designed to improve mechanisms for the identification of shareholders by companies, as well as improve the transmission of information along the chain of intermediaries to facilitate the exercise of shareholder rights. Non-EU intermediaries are required to comply with the requirements if they provide services with respect to shares of companies that have their registered office in the EU. The Commission Implementing Regulation (EU) 2018/1212 of September 3, 2018 set out minimum requirements for implementing SRD II, which have applied since September 3, 2020. SRD II has been incorporated into UK law and remains largely aligned with the EU. Depositary Books & Records. Following the European Securities and Markets Authority’s opinion on asset segregation and application of depositary delegation rules to central securities depositories published on July 20, 2017, and entered into force on April 1, 2020, changes were introduced by two EU regulations modifying the existing Alternative 2021 Annual Report | Northern Trust Corporation 9 Investment Fund Managers Directive (AIFMD) and UCITS Level 2 Regulations: Commission Delegated Regulation (EU) No 2018/1618 relating to the safe-keeping duties of depositaries of alternative investment funds and Commission Delegated Regulation (EU) No 2018/1619 relating to the safe-keeping duties of depositaries of UCITS. The changes aim to better define asset segregation requirements and to add additional safeguards, primarily focusing on information flow between the depositary and any third party to whom safe-keeping functions have been delegated. The key changes (i) impact the frequency of reconciliations between the depositary’s internal accounts and records and those of any third party in the custody chain, (ii) require the depositary to maintain an independent record separate from the record maintained by the third party, and (iii) increase due diligence obligations where custody of assets is delegated to third parties outside of the EU. AIFMD and the UCITS directive were incorporated into UK law and remain largely aligned with the EU. The changes impact Northern Trust’s subsidiaries providing depositary services to European-domiciled fund clients. In addition to the above, the Bank’s and the Corporation’s subsidiary banks located outside the United States are subject to regulatory capital requirements in the jurisdictions in which they operate. As of December 31, 2021, each of our non-U.S. banking subsidiaries had capital ratios above their specified minimum requirements. Human Capital Management At Northern Trust, our employees are our most important assets. Because the success of our company relies on the strength of the people we employ, our search for and retention of talent is critical. We invest in our employees holistically to continually develop a diverse pipeline of future leaders and to help employees advance their individual careers. The overview below outlines Northern Trust’s human capital objectives—talent management, total rewards, and diversity, equity and inclusion. EMPLOYEES Northern Trust employed approximately 21,100 full-time equivalent staff members as of December 31, 2021. The regional breakout of our workforce is 43% North America, 39% Asia-Pacific region, and 18% Europe, Middle East, and Africa. TALENT ACQUISITION, DEVELOPMENT, AND MANAGEMENT We pride ourselves in attracting strong talent and have identified the development of diverse talent as a strategic priority. Our focus on career development, work/life balance, diversity, and our unique culture of care and collaboration also contribute to our employer brand. Sourcing and Recruitment. We target our talent identification, sourcing methods, and recruitment strategies to specific locations using various channels such as job boards, colleges, professional networks, associations and online social networks. We base hiring decisions on a variety of factors including relevant experience and accomplishments, educational background, professional licensing, and strong evidence of integrity and ethical behavior. Onboarding. Northern Trust is committed to helping all new hires succeed from day one. New employees begin their onboarding  journey with a comprehensive learning roadmap that orients them to our history, brand, businesses, and culture.  Orientation programs also augment the  onboarding experience by providing global, regional, and/or local information along with networking activities to help connect new hires to each other and other colleagues. Learning and Development.  An integrated partnership between our enterprise-wide and functional learning and development teams ensure we deliver holistic training solutions. Through our online learning portal, Northern Trust University, all employees can access a portfolio of professional and functional training solutions most helpful to their role. Our training content is dynamic as we regularly evaluate and offer courses and resources that will allow our employees to develop skills most critical to servicing our clients and developing their careers. An emerging area of focus is helping expand digital, analytical and financial acumen and skills across the enterprise. Many of our programs are interactive, include peer networking, and offer direct access to expert facilitators.  Training is offered in both virtual and classroom instructor-led formats. Talent Cultivation and Review. Northern Trust is committed to identifying and developing a deep pipeline of diverse, future talent at all levels across the globe to meet our evolving business needs. Annually, managers conduct talent assessments, and business and regional leadership teams hold talent reviews focused on specific topics, such as workforce needs, diversity, top talent, development opportunities, readiness for promotion, internal movement, and succession plans. Robust talent discussions are held annually with our executive management team and Board of Directors. Performance Management. Northern Trust’s annual performance management process includes goal setting, mid-year check-ins, multi-rater feedback, and year-end reviews. Priorities are set by our Chief Executive Officer and applied to each business, department, team and individual. Managers are encouraged to provide regular feedback and real-time coaching to enhance performance outcomes and continually develop our talent. Engagement and Recognition. Building an inclusive, connected and engaged employee culture is essential to retaining our talent. We invite all employees to provide management with anonymous responses about their  everyday experiences at work through an annual Employee Engagement Survey and periodically through pulse surveys and other 10 2021 Annual Report | Northern Trust Corporation interactive feedback channels. Results are thoroughly evaluated to identify strengths, progress, and opportunities to further strengthen employee engagement, and are transparently shared with both employees and the Board of Directors. We also foster an “attitude of gratitude” through our online recognition platform that allows employees to recognize one another for everyday contributions. TOTAL REWARDS Our compensation and benefit programs are designed to be market competitive and positioned around the median of the local market, enabling us to attract and retain talent needed to deliver on Northern Trust’s strategy. Compensation Programs. Our compensation programs are intended to motivate our employees to deliver the highest- quality service to our clients and achieve the greatest collective business results. They are designed, implemented and communicated to promote behaviors that are consistent with Northern Trust’s desired culture, character and enduring values of service, expertise, and integrity. We also regularly review our compensation processes and programs and take appropriate measures to ensure we can attract and retain talent in relevant markets. Northern Trust’s base salary programs provide a competitive level of fixed pay reflecting each employee’s position, experience, qualifications and tenure. Additionally, all employees are eligible for incentive compensation to reward performance that delivers superior team or individual results. Incentive compensation is linked to both financial and non- financial performance criteria, including risk considerations, as determined by our Board of Directors and senior management. Select senior leaders and individual contributors may receive a percentage of their incentive in Northern Trust stock to encourage retention of key talent and to align rewards with company performance. Employee Benefits. While the exact composition of the employee benefit package varies by country, our benefit programs are designed to be locally competitive, to meet the needs of our employees and their families, and to reflect the cultural values of the organization. Typical benefit programs include retirement, health care, paid time off, income protection such as disability and life insurance, leaves of absence, and access to our Employee Assistance Program. We have expanded our focus on employee well-being by providing additional programs and resources to improve wellness. These programs focus on how to manage stress, build resiliency, and be attuned to mental health issues; access to flexible or voluntary benefits; and enhancements to various parental leave offerings. DIVERSITY, EQUITY, AND INCLUSION (DE&I) Northern Trust embraces the values of diversity, equity and inclusion and strives to create a work environment in which all individuals are welcomed, respected, supported, and valued so that they can fully participate in, and contribute to, our success and the success of our stakeholders. Embedding DE&I. Our DE&I strategy is designed to develop a diverse, equitable, and inclusive workforce that represents all perspectives, attributes, experiences and backgrounds. Our Board, through its Corporate Governance Committee, engages in active oversight of our DE&I strategies, programs, and principles. Our Head of Corporate Sustainability, Inclusion and Impact serves as an Executive Vice President, and reports directly to our Chairman and Chief Executive Officer. The following table presents detail with respect to the gender and ethnic diversity of our Board of Directors and executive officers. TABLE 2: BOARD OF DIRECTORS AND EXECUTIVE OFFICERS REPRESENTATION Board of Directors Executive Officers DECEMBER 31, 2021 FEMALE MALE WHITE BLACK HISPANIC ASIAN 25% 36% 75% 64% 59% 82% 25% 18% 8% —% 8% —% As of December 31, 2021, our global workforce was 46% female and 54% male, and 37% of our U.S. workforce self- identified as ethnically diverse. Progress and Accountability. We utilize a global DE&I dashboard to track the organization’s progress and integrate these metrics as part of our overall corporate strategy and goals. To drive accountability for increasing diverse representation across the organization, we measure representation in relation to our hiring, retention and promotion practices. Each business unit evaluates this data, and acts as needed, to improve overall diversity within their organization. Our executive leaders report their progress through the DE&I Executive Council co-chaired by our Chief Executive Officer and our Head of Corporate Sustainability, Inclusion and Impact. Our Global Executive DE&I Council is responsible for providing strategic oversight and defining and driving accountability on the global DE&I priorities. For information on our response to the COVID-19 pandemic, including with respect to human capital measures to preserve the health and safety of our workforce, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Pandemic and Recent Events.” 2021 Annual Report | Northern Trust Corporation 11 Available Information Through the Corporation’s website at www.northerntrust.com, the Corporation makes available free of charge its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all other reports and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after it files such material with, or furnishes such material to, the SEC. The contents of the Corporation’s website, the website of the SEC or any other website referenced herein are not a part of this Annual Report on Form 10-K. ITEM 1A - RISK FACTORS In the normal course of our business activities, we are exposed to a variety of risks. The following discussion sets forth the risk factors that we have identified as being most significant to Northern Trust. Although we discuss these risk factors primarily in the context of their potential effects on our business, financial condition or results of operations, you should understand that these effects can have further negative implications such as: reducing the price of our common stock and other securities; reducing our capital, which can have regulatory and other consequences; affecting the confidence that clients, counterparties and/or applicable regulators have in us, with a resulting negative effect on our ability to conduct and grow our businesses; and reducing the attractiveness of our securities to rating agencies and potential purchasers, which may affect adversely our ability to raise capital and secure other funding or the cost at which we are able to do so. Additional risks beyond those discussed below, elsewhere in this Annual Report on Form 10-K or in other of our reports filed with, or furnished to, the SEC also could affect us adversely. Further, we cannot assure you that the risk factors herein or elsewhere in our other reports address all potential risks that we may face and you should not interpret discussion of any risk to imply that such risk has not already materialized. These risk factors also serve to describe factors which may cause our results to differ materially from those described in forward-looking statements included herein or in other documents or statements that make reference to this Annual Report on Form 10-K. Forward-looking statements and other factors that may affect future results are discussed under “Forward-Looking Statements” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” COVID-19 Pandemic-Related Risks Our business and results of operations generally have been, and may continue to be, adversely affected by the ongoing COVID-19 pandemic. The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on global economic and market conditions, including heightened volatility in financial markets; global supply chain disruptions; and the institution of social distancing and travel restrictions that resulted in temporary closures of many businesses, lost revenues, and lower levels of employment. Although certain economic conditions have improved since their worst levels during the pandemic, the pandemic continues to evolve, as recently experienced with the rapid spread of variants and continuing outbreaks, and certain of the impacts of the pandemic may continue to affect aspects of our business and results of operations in the future. These conditions have impacted—or may in the future impact—our business, results of operations, and financial condition negatively, including through lower net interest income resulting from lower interest rates; increased provisions for credit losses; lower revenue from certain of our fee-based businesses; impairments on the securities we hold; and decreased demand for certain of our products and services. Additionally, our liquidity and regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets; volatility in foreign exchange rates; deposit flows; and client draws on lines of credit. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In some cases, the COVID-19 pandemic has accelerated the transition from traditional to digital financial services and heightened customer expectations in this area, and this transition may require us to invest greater resources in technological advancements. Further, work-from-home and other modified business practices may introduce additional operational risks, including resiliency, cybersecurity, and execution risks, which may result in inefficiencies or delays, and may affect our ability to, or the manner in which we, conduct our business activities. Governments have taken, and may in the future continue to take, measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth; the ultimate impact of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic and/or may result in consequences—intended or unintended—that negatively impact our business. The extent to which the COVID-19 pandemic continues to impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration, spread and severity of COVID-19 and the rise of variants, the actions to contain the virus or treat its impact, including vaccine and testing mandates, the acceptance and efficacy of a global vaccine distribution plan, and 12 2021 Annual Report | Northern Trust Corporation the timing and extent that normal economic and operating conditions resume. The ongoing pandemic may also have the effect of heightening many of the other risks described in this section entitled “Risk Factors” and any subsequent filings with the SEC. Market Risks We are dependent on fee-based business for a majority of our revenues, which may be affected adversely by market volatility, a downturn in economic conditions, underperformance and/or negative trends in investment preferences. Our principal operational focus is on fee-based business, which is distinct from commercial banking institutions that earn most of their revenues from loans and other traditional interest-generating products and services. Fees for many of our products and services are based on the market value of assets under management, custody or administration; the volume of transactions processed; securities lending volume and spreads; and fees for other services rendered, all of which may be impacted negatively by market volatility, a downturn in economic conditions, underperformance and/or negative trends in investment preferences. For example, downturns in equity markets and decreases in the value of debt-related investments resulting from market disruption, illiquidity or other factors historically have reduced the valuations of the assets we manage or service for others, which generally impacted our earnings negatively. Market volatility and/or weak economic conditions also may affect wealth creation, investment preferences, trading activities, and savings patterns, which impact demand for certain products and services that we provide. Our earnings also may be affected by poor investment returns or changes in investment preferences driven by factors beyond market volatility or weak economic conditions. For example, poor absolute or relative investment performance in funds or client accounts that we manage or in investment products that we design or provide could result in declines in the market values of portfolios that we manage and/or administer and may affect our ability to retain existing assets and to attract new clients or additional assets from existing clients. Further, broader changes in investment preferences that lead to less investment in mutual funds or other collective funds, such as the shift in investor preference to lower fee products, could impact our earnings negatively. Changes in interest rates can affect our earnings negatively. The direction and level of interest rates are important factors in our earnings. In response to the COVID-19 pandemic, the Federal Reserve Board further reduced interest rates, which generally had already been low relative to historical levels. While current market expectations are that interest rates will rise in the future, to the extent rates remain historically low, we may continue to experience a compressed net interest margin, which is the difference between what we earn on our assets and the interest rates we pay for deposits and other sources of funding. Low-interest-rate environments also have a negative impact on our fees earned on certain of our products. For example, we have waived certain fees associated with money market mutual funds due to the low level of short-term interest rates and expect to continue to do so until interest rates rise sufficiently. Low net interest margins and fee waivers each negatively impact our earnings. Conversely, in some circumstances, a rise in interest rates also may affect us negatively. For example, we may be impacted negatively if such an increase were to cause: market volatility and downturns in equity markets, resulting in a decrease in the valuations of the assets we manage or service for others, which generally impact our earnings negatively; our clients to transfer funds into investments with higher rates of return, resulting in decreased deposit levels and higher fund or account redemptions; our borrowers to experience difficulties in making higher interest payments, resulting in increased credit costs, provisions for loan and lease losses and charge-offs; reduced bond and fixed income fund liquidity, resulting in lower performance, yields and fees; a decline in the value of securities held in our portfolio of investment securities, resulting in decreased levels of capital and liquidity; or higher funding costs. Further, although we have policies and procedures in place to assess and mitigate potential impacts of interest rate risks, if our assumptions about any number of variables are incorrect, these policies and procedures to mitigate risk may be ineffective, which could impact earnings negatively. Please see “Market Risk” in the “Risk Management” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a more detailed discussion of interest rate and market risks we face. Changes in the monetary, trade and other policies of various regulatory authorities, central banks, governments and international agencies may reduce our earnings and affect our growth prospects negatively. The monetary, trade and other policies of U.S. and international governments, agencies and regulatory bodies have a significant impact on economic conditions and overall financial market performance. For example, the Federal Reserve Board regulates the supply of money and credit in the United States, and its policies determine in large part the level of interest rates and our cost of funds for lending and investing, and play a role in contributing to or moderating levels of inflation, all of which meaningfully impact our earnings. The actions of the Federal Reserve Board or other regulatory authorities also may reduce the value of financial instruments we hold. Further, their policies can affect our borrowers by 2021 Annual Report | Northern Trust Corporation 13 increasing interest rates or making sources of funding less available, which may increase the risk that borrowers fail to repay their loans from us. Changes in monetary, trade and other governmental policies are beyond our control and can be difficult to predict, and we cannot determine the ultimate effect that any such changes would have upon our business, financial condition or results of operations. Uncertainty about the financial stability of various regions or countries across the globe, including the risk of defaults on sovereign debt and related stresses on financial markets, could have a significant adverse effect on our earnings. Risks and concerns about the financial stability of various regions or countries across the globe could have a detrimental impact on economic and market conditions in these or other markets across the world. Foreign market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence of and default on consumer debt, and home prices. Additionally, financial markets may be adversely affected by the current or anticipated impact of military conflict, including current events involving Ukraine and Russia, terrorism or other geopolitical events. Economic challenges faced in various foreign markets, including negative interest rates in some jurisdictions, or lack of confidence in the financial markets may adversely affect certain portions of our business, financial condition, and results of operations. Declines in the value of securities held in our investment portfolio can affect us negatively. Our investment securities portfolio represents a greater proportion, and our loan and lease portfolios represent a smaller proportion, of our total consolidated assets in comparison to many other financial institutions. The value of securities available for sale and held to maturity within our investment portfolio, which is generally determined based upon market values available from third-party sources, may fluctuate as a result of market volatility and economic or financial market conditions. Declines in the value of securities held in our investment portfolio negatively impact our levels of capital and liquidity. Although we have policies and procedures in place to assess and mitigate potential impacts of market risks, including hedging-related strategies, those policies and procedures are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Accordingly, we could suffer adverse effects as a result of our failure to anticipate and manage these risks properly. Volatility levels and fluctuations in foreign currency exchange rates may affect our earnings. We provide foreign exchange services to our clients, primarily in connection with our global custody business. Foreign currency volatility influences our foreign exchange trading income as does the level of client activity. Foreign currency volatility and changes in client activity may result in reduced foreign exchange trading income. Fluctuations in exchange rates may raise the potential for losses resulting from foreign currency trading positions where aggregate obligations to purchase and sell a currency other than the U.S. dollar do not offset each other or offset each other in different time periods. We also are exposed to non-trading foreign currency risk as a result of our holdings of non-U.S. dollar denominated assets and liabilities, investments in non-U.S. subsidiaries, and future non-U.S. dollar denominated revenue and expense. We have policies and procedures in place to assess and mitigate potential impacts of foreign exchange risks, including hedging-related strategies. Any failure or circumvention of our procedures to mitigate risk may impact earnings negatively. Please see “Market Risk” in the “Risk Management” section included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a more detailed discussion of market risks we face. Changes in a number of particular market conditions can affect our earnings negatively. In past periods, reductions in the volatility of currency-trading markets, the level of cross-border investing activity, and the demand for borrowing securities or willingness to lend such securities have affected our earnings from activities such as foreign exchange trading and securities lending negatively. If these conditions occur in the future, our earnings from these activities may be affected negatively. In a few of our businesses, such as securities lending, our fee is calculated as a percentage of our clients’ earnings, such that market and other factors that reduce our clients’ earnings from investments or trading activities also reduce our revenues. 14 2021 Annual Report | Northern Trust Corporation Operational Risks Many types of operational risks can affect our earnings negatively. We regularly assess and monitor operational risk in our businesses. Despite our efforts to assess and monitor operational risk, our risk management program may not be effective in all cases. Factors that can impact operations and expose us to risks varying in size, scale and scope, some or all of which may be exacerbated by the shift to work-from-home arrangements implemented in recent years, include: • failures of technological systems or breaches of security measures, including, but not limited to, those resulting from computer viruses or cyber-attacks; human errors or omissions, including failures to comply with applicable laws or corporate policies and procedures; theft, fraud or misappropriation of assets, whether arising from the intentional actions of internal personnel or external third parties; defects or interruptions in computer or communications systems; breakdowns in processes, over-reliance on manual processes, which are inherently more prone to error than automated processes, breakdowns in internal controls or failures of the systems and facilities that support our operations; unsuccessful or difficult implementation of computer systems upgrades; defects in product design or delivery; difficulty in accurately pricing assets, which can be aggravated by market volatility and illiquidity and lack of reliable pricing from third-party vendors; negative developments in relationships with key counterparties, third-party vendors, employees or associates in our day-to-day operations; and external events that are wholly or partially beyond our control, such as pandemics, geopolitical events, political or social unrest, natural disasters or acts of terrorism. • • • • • • • • • While we have in place many controls and business continuity plans designed to address many of these factors, these plans may not operate successfully to mitigate these risks effectively. We also may fail to identify or fully understand the implications and risks associated with changes in the financial markets or our businesses—particularly as our geographic footprint, product pipeline and client types evolve—and consequently fail to enhance our controls and business continuity plans to address those changes in an adequate or timely fashion. If our controls and business continuity plans do not address the factors noted above and operate to mitigate the associated risks successfully, such factors may have a negative impact on our business (including operational resiliency), financial condition or results of operations. In addition, an important aspect of managing our operational risk is creating a risk culture in which all employees fully understand that there is risk in every aspect of our business and the importance of managing risk as it relates to their job functions. We continue to enhance our risk management program to support our risk culture, ensuring that it is sustainable and appropriate for our role as a major financial institution. Nonetheless, if we fail to provide the appropriate environment that sensitizes all of our employees to managing risk, our business could be impacted adversely. Failures of, or disruptions to, our technological systems or breaches of our security measures, including, but not limited to, those resulting from cyber-attacks, may result in losses. Any failure, interruption or breach in the security of our systems could severely disrupt our operations. Our systems involve the processing, storage and transmission of clients’ and our proprietary and confidential information, and security breaches, including cyber-attacks, could expose us to a risk of theft, loss or other misappropriation of this information. Our security measures may be breached due to the actions of outside parties, employee error, failure of our controls with respect to access to our systems, malfeasance or otherwise, and, as a result, an unauthorized party may obtain access to our or our clients’ proprietary and confidential information, resulting in the theft, loss, destruction, gathering, monitoring, or other misappropriation of this information. Additionally, we are subject to complex and evolving laws and regulations governing cybersecurity, data privacy and data protection, which may differ and potentially conflict, in various jurisdictions. Regulators globally are introducing the potential for greater monetary fines on institutions that suffer from breaches leading to the misappropriation of such information. Most states, the EU and other non-U.S. jurisdictions also have adopted their own statutes and/or regulations concerning data privacy and security and notification of data breaches. These and other changes in laws or regulations associated with the enhanced protection of personal and other types of information could greatly increase compliance costs and the size of potential fines related to the protection of such information. Information security and data privacy risks for large financial institutions like us are significant in part because of the evolving proliferation of new technologies, the use of the internet, mobile devices, and cloud technologies to conduct financial transactions and the increased sophistication and activities of hackers, terrorists, organized crime and other external parties, including foreign state actors. If we fail to continue to upgrade our technology infrastructure to ensure effective information security and data privacy relative to the type, size and complexity of our operations, we could become more vulnerable to cyber-attack and, consequently, subject to significant regulatory penalties. Also, like many large 2021 Annual Report | Northern Trust Corporation 15 enterprises, in response to the COVID-19 pandemic, we have shifted the majority of our professionals to remote work arrangements, and expect that many will continue to work remotely to some extent even as we begin to institute return-to- office plans. This change has enabled us successfully to continue business operations, but also introduces potential new vulnerabilities to cyber threats. Additionally, our computer, communications, data processing, networks, backup, business continuity or other operating, information or technology systems, including those that we outsource to other providers, may fail to operate properly or become disabled, overloaded or damaged as a result of a number of factors, including events that are wholly or partially beyond our control, which could have a negative effect on our ability to conduct our business activities. The third parties with which we do business also are susceptible to the foregoing risks (including regarding the third parties with which they are similarly interconnected or on which they otherwise rely), and our or their business operations and activities may therefore be affected adversely, perhaps materially, by failures, terminations, errors or malfeasance by, or attacks or constraints on, one or more financial, technology, infrastructure or government institutions or intermediaries with whom we or they are interconnected or conduct business. While we conduct security assessments on third-party vendors, we cannot be certain that their information security protocols are sufficient to withstand a cyber-attack or other security breach. In addition, our clients often use their own devices, such as computers, smart phones and tablets, as well as third parties with whom they share information used for authentication, to manage their accounts, which may heighten the risk of system failures, interruptions or security breaches. In recent years, several financial services firms suffered successful cyber-attacks launched both domestically and from abroad, resulting in the disruption of services to clients, loss or misappropriation of sensitive or private information, and reputational harm. We and our clients have been, and expect to continue to be, subject to a wide variety of cyber-attacks and threats, including computer viruses, ransomware and other malicious code, distributed denial of service attacks, and phishing attacks, and it is possible that we could suffer material losses resulting from a breach. Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques, to implement adequate preventative measures, or to address them until they are discovered. In addition, successful cyber-attacks may persist for an extended period of time before being detected. Because any investigation of an information security incident would be inherently unpredictable, the extent of a particular information security incident and the path of investigating the incident may not be immediately clear. It may take a significant amount of time before such an investigation can be completed and full and reliable information about the incident is known. While such an investigation is ongoing, we may not necessarily know the extent of the harm or how best to remediate it, certain errors or actions could be repeated or compounded before they are discovered and remediated, and communication to the public, regulators, clients and other stakeholders may be inaccurate, any or all of which could further increase the costs and consequences of an information security incident. We could be the subject of legal claims or proceedings related to security incidents, including regulatory investigations and actions. Further, the market perception of the effectiveness of our security measures could be harmed, our reputation could suffer and we could lose clients in conjunction with security incidents, each of which could have a negative effect on our business, financial condition and results of operations. A breach of our security also may affect adversely our ability to effect transactions, service our clients, manage our exposure to risk or expand our business. An event that results in the loss of information also may require us to reconstruct lost data or reimburse clients for data and credit monitoring services, which could be costly and have a negative impact on our business and reputation. Although we maintain insurance covering information theft, damage, or destruction from cyber breach incidents, there can be no assurance that liabilities or losses we may incur will be covered under such policies or that the amount of insurance will be adequate. Further, even if not directed at us, attacks on financial or other institutions important to the overall functioning of the financial system or on our counterparties could affect, directly or indirectly, aspects of our business. Errors, breakdowns in controls or other mistakes in the provision of services to clients or in carrying out transactions for our own account can subject us to liability, result in losses or have a negative effect on our earnings in other ways. In our asset servicing, investment management, fiduciary administration and other business activities, we effect or process transactions for clients and for ourselves that involve very large amounts of money. Failure to manage or mitigate operational risks properly can have adverse consequences, and increased volatility in the financial markets may increase the magnitude of resulting losses. Given the high volume of transactions we process, errors that affect earnings may be repeated or compounded before they are discovered and corrected. Our dependence on technology, and the need to update frequently our technology infrastructure, exposes us to risks that also can result in losses. Our businesses depend on information technology infrastructure, both internal and external, to record and process, among other things, a large volume of increasingly complex transactions and other data, in many currencies, on a daily basis, across numerous and diverse markets and jurisdictions. Due to our dependence on technology and the important role it 16 2021 Annual Report | Northern Trust Corporation plays in our business operations, we must constantly improve and update our information technology infrastructure. Upgrading, replacing, and modernizing these systems can require significant resources and often involves implementation, integration and security risks that could cause financial, reputational and operational harm. Failure to ensure adequate review and consideration of critical business and regulatory issues prior to and during the introduction and deployment of key technological systems or failure to align operational capabilities adequately with evolving client commitments and expectations may have a negative impact on our results of operations. The failure to respond properly to, and invest in, changes and advancements in technology and/or to compete for and retain employees with the necessary technical skills and expertise could limit our ability to attract and retain clients, prevent us from offering products and services comparable to those offered by our competitors, inhibit our ability to meet regulatory requirements or otherwise have a material adverse effect on our operations. The systems and models we employ to analyze, monitor and mitigate risks, as well as for other business purposes, are inherently limited, may not be effective in all cases and, in any case, cannot eliminate all risks that we face. We use various systems and models in analyzing and monitoring several risk categories, as well as for other business purposes. However, these systems and models are inherently limited because they involve techniques and judgments that cannot anticipate every economic and financial outcome in the markets in which we operate, nor can they anticipate the specifics and timing of such outcomes. Further, these systems and models may fail to quantify accurately the magnitude of the risks we face. Our measurement methodologies rely on many assumptions and historical analyses and correlations. These assumptions may be incorrect, and the historical correlations on which we rely may not continue to be relevant. Consequently, the measurements that we make may not adequately capture or express the true risk profiles of our businesses or provide accurate data for other business purposes, each of which ultimately could have a negative impact on our business, financial condition and results of operations. Errors in the underlying model or model assumptions, or inadequate model assumptions, could result in unanticipated and adverse consequences, including material loss or noncompliance with regulatory requirements or expectations. A failure or circumvention of our controls and procedures could have a material adverse effect on our business, financial condition and results of operations. We regularly review and update our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system will be met. Any failure or circumvention of our controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, financial condition and results of operations. If we identify material weaknesses in our internal control over financial reporting or are otherwise required to restate our financial statements, we could be required to implement expensive and time-consuming remedial measures and could lose investor confidence in the accuracy and completeness of our financial reports. In addition, there are risks that individuals, either employees or contractors, consciously circumvent established control mechanisms by, for example, exceeding trading or investment management limitations, or committing fraud. Failure of any of our third-party vendors (or their vendors) to perform can result in losses. Third-party vendors provide key components of our business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, and network access. Our use of third-party vendors exposes us to the risk that such vendors (or their vendors) may not comply with their servicing and other contractual obligations, including with respect to indemnification and information security, and to the risk that we may not satisfy applicable regulatory responsibilities regarding the management and oversight of third parties and outsourcing providers. While we have established risk management processes and continuity plans, any disruptions in service from a key vendor for any reason or poor performance of services could have a negative effect on our ability to deliver products and services to our clients and conduct our business. Replacing these third-party vendors or performing the tasks they perform for ourselves could create significant delay and expense. We are subject to certain risks inherent in operating globally which may affect our business adversely. In conducting our U.S. and non-U.S. business, we are subject to risks of loss from various unfavorable political, economic, legal, public health, or other developments, including social or political instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, price controls, capital controls, exchange controls, unfavorable tax rates and tax court rulings and changes in laws and regulations. Less mature and often less regulated business and investment environments heighten these risks in various emerging markets. Our non-U.S. operations accounted for 31% of our revenue in 2021. Our non-U.S. businesses are subject to extensive regulation by various non-U.S. regulators, including governments, securities exchanges, central banks and other regulatory bodies in the jurisdictions in 2021 Annual Report | Northern Trust Corporation 17 which those businesses operate. In many countries, the laws and regulations applicable to the financial services industry are uncertain and evolving and may be applied with extra scrutiny to foreign companies. Moreover, the regulatory and supervisory standards and expectations in one jurisdiction may not conform with standards or expectations in other jurisdictions. Even within a particular jurisdiction, the standards and expectations of multiple supervisory agencies exercising authority over our affairs may not be harmonized fully. Accordingly, it may be difficult for us to determine the exact requirements of local laws in every market or manage our relationships with multiple regulators in various jurisdictions. Our inability to remain in compliance with local laws in a particular market and manage our relationships with regulators could have an adverse effect not only on our businesses in that market but also on our reputation generally. The failure to mitigate properly such risks or the failure of our operating infrastructure to support such international activities could result in operational failures and regulatory fines or sanctions, which could affect our business and results of operations adversely. We actively strive to optimize our geographic footprint. This optimization may occur by establishing operations in lower-cost locations or by outsourcing to third-party vendors in various jurisdictions. These efforts expose us to the risk that we may not maintain service quality, control or effective management within these operations. In addition, we are exposed to the relevant macroeconomic, political, public health, and similar risks generally involved in doing business in those jurisdictions. The increased elements of risk that arise from conducting certain operating processes in some jurisdictions could lead to an increase in reputational risk. During periods of transition, greater operational risk and client concern exist with respect to maintaining a high level of service delivery. In addition, we are subject in our global operations to rules and regulations relating to corrupt and illegal payments, money laundering, and laws relating to doing business with certain individuals, groups and countries, such as the U.S. Foreign Corrupt Practices Act, the USA PATRIOT Act, the UK Bribery Act, and economic sanctions and embargo programs administered by the U.S. Office of Foreign Assets Control and similar agencies worldwide. While we have invested and continue to invest significant resources in training and in compliance monitoring, the geographic diversity of our operations, employees, clients and customers, as well as the vendors and other third parties with whom we deal, presents the risk that we may be found in violation of such rules, regulations, laws or programs and any such violation could subject us to significant penalties or affect our reputation adversely. Failure to control our costs and expenses adequately could affect our earnings negatively. Our success in controlling the costs and expenses of our business operations also impacts operating results. Through various parts of our business strategy, we aim to produce efficiencies in operations that help reduce and control costs and expenses, including the costs of losses associated with operating risks attributable to servicing and managing financial assets. Failure to control these and other costs, as a result of our failure to execute on our strategies successfully, an overall inflationary environment, or otherwise, could affect our earnings negatively and reduce our competitive position. Pandemics, natural disasters, global climate change, acts of terrorism and global conflicts may have a negative impact on our business and operations. Pandemics, natural disasters, global climate change, acts of terrorism, global conflicts (including current events involving Ukraine and Russia) or other similar events have had in the past, or may in the future have, a negative impact on our business and operations. While we have in place business continuity plans, such events may still damage our facilities, disrupt or delay the normal operations of our business (including communications and technology), result in harm to or cause travel limitations on our employees, and have a similar impact on our clients, suppliers, third-party vendors and counterparties. These events also could impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the United States or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations, and may have other adverse effects on us in ways that we are unable to predict. Please see “Strategic Risks” and “COVID-19 Pandemic-Related Risks” in this “Risk Factors” section for further description of risks associated with climate change and the ongoing COVID-19 pandemic, respectively. Credit Risks Failure to evaluate accurately the prospects for repayment when we extend credit or maintain an adequate allowance for credit losses can result in losses or the need to make additional provisions for credit losses, both of which reduce our earnings. We evaluate extensions of credit before we make them and then provide for credit risks based on our assessment of the credit losses inherent in our loan portfolio, including undrawn credit commitments. This process requires us to make difficult and complex judgments. Challenges associated with our credit risk assessments include identifying the proper factors to be used in assessments and accurately estimating the impacts of those factors. Allowances that prove to be 18 2021 Annual Report | Northern Trust Corporation inadequate may require us to realize increased provisions for credit losses or write down the value of certain assets on our balance sheet, which in turn would affect earnings negatively. Market volatility and/or weak economic conditions can result in losses or the need for additional provisions for credit losses, both of which reduce our earnings. Credit risk levels and our earnings also can be affected by market volatility and/or weakness in the economy in general and in the particular locales in which we extend credit, a deterioration in credit quality or a reduced demand for credit. Adverse changes in the financial performance or condition of our borrowers resulting from market volatility and/or weakened economic conditions could impact the borrowers’ abilities to repay outstanding loans, which could in turn impact our financial condition and results of operations negatively. The failure or perceived weakness of any of our significant counterparties could expose us to loss. The financial markets are characterized by extensive interconnections among financial institutions, including banks, broker/dealers, collective investment funds and insurance companies. As a result of these interconnections, we and many of our clients have counterparty exposure to other financial institutions. This counterparty exposure presents risks to us and to our clients because the failure or perceived weakness of any of our counterparties has the potential to expose us to risk of loss. Instability in the financial markets has resulted historically in some financial institutions becoming less creditworthy. During such periods of instability, we are exposed to increased counterparty risks, both as principal and in our capacity as agent for our clients. Changes in market perception of the financial strength of particular financial institutions can occur rapidly, are often based upon a variety of factors and can be difficult to predict. In addition, the criteria for and manner of governmental support of financial institutions and other economically important sectors remain uncertain. Further, the consolidation of financial services firms and the failures of other financial institutions has in the past increased, and may in the future increase, the concentration of our counterparty risk. These risks are heightened by the fact that our operating model relies on the use of unaffiliated sub-custodians to a greater degree than certain of our competitors that have banking operations in more jurisdictions than we do. We are not able to mitigate all of our and our clients’ counterparty credit risk. If a significant individual counterparty defaults on an obligation to us, we could incur financial losses that have a material and adverse effect on our business, financial condition and results of operations. The transition away from LIBOR or changes in the method pursuant to which other interest rate benchmarks are determined could adversely impact our business and results of operations. Many financial markets currently rely on interbank offered rates (each, an IBOR) as mutually agreed upon reference rates serving as the basis for the pricing and valuation of assets, trading positions, loans and other financial transactions. Global regulators have taken steps to discontinue the publication and use of IBOR rates, encourage the development and use of alternative reference rates, and examine the IBOR transition preparations of regulated entities such as Northern Trust. While there are multiple IBORs, LIBOR is the most widely used interest rate benchmark in the world and serves as the reference rate for our floating-rate funding, certain of the products that we own or offer, various lending and securities transactions in which we are involved, and many derivatives that we use to manage our or our clients’ risk. On March 5, 2021, ICE Benchmark Administration (IBA), the administrator of U.S. Dollar LIBOR (USD LIBOR) and other IBORs, announced that publication of 1-week and 2-month USD LIBOR would cease at the end of 2021. Publication of the remaining USD LIBOR tenors will continue until June 30, 2023 to provide additional time to wind down and negotiate existing contracts that reference these rates. Globally, financial market participants have begun to transition away from LIBOR and other IBORs to alternative reference rates, and in accordance with guidance from U.S. regulators, including the Federal Reserve Board, we stopped offering USD LIBOR in new contracts and began offering the Secured Overnight Finance Rate (SOFR) as an alternative to LIBOR in 2021. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of large banks and the Alternative Reference Rate Committee (ARRC) identified, and the Federal Reserve Bank of New York, in May 2018 started to publish, SOFR as its preferred alternative to LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. SOFR has different characteristics than LIBOR, and may demonstrate less predictable behavior over time and across different monetary, market, and economic environments; therefore, it is unclear whether and when markets will adopt SOFR as a widely accepted replacement for LIBOR. Various regulators, industry bodies and other market participants in the United States and other countries are engaged in initiatives to develop, introduce and encourage the use of other alternative rate benchmarks. The elimination of LIBOR or any other change in the availability or calculation of LIBOR or other interest rate benchmarks may affect adversely the cost or availability of floating-rate funding; the yield on loans or securities held by us; the amounts received and paid on derivative instruments we have entered into; the value of loans, securities, or derivative instruments held by us or our clients, which, in the case of assets held by our clients, could also negatively impact the amount of fees we earn in relation to such assets; the trading market for securities based on LIBOR or other benchmarks; the terms of new loans being made using different or modified 2021 Annual Report | Northern Trust Corporation 19 reference rates; or our ability to use derivative instruments to manage risk effectively. While we are working to facilitate an orderly transition from LIBOR to alternative interest rate benchmarks for us and our clients and have begun offering SOFR as a LIBOR alternative, there continues to be uncertainty regarding the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other interest rate benchmarks, or the establishment of alternative reference rates may have on LIBOR or other interest rate benchmarks. Further, the transition away from the use of LIBOR and the adoption of alternative interest rate benchmarks, or uncertainty related to any such transition or adoption, has caused, and may in the future cause, us to recognize additional costs. It may also cause us to experience operational disruptions or result in client disputes or litigation, which may negatively impact our business, financial condition or results of operations. Liquidity Risks If we do not manage our liquidity effectively, our business could suffer. Liquidity is essential for the operation of our business. Market conditions, unforeseen outflows of funds or other events could have a negative effect on our level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund new business transactions at a reasonable cost and in a timely manner. If our access to stable and low-cost sources of funding, such as customer deposits, is reduced, we may need to use alternative funding, which could be more expensive or of limited availability. Further evolution in the regulatory requirements relating to liquidity and risk management also may impact us negatively. Additional regulations may impose more stringent liquidity requirements for large financial institutions, including the Corporation and the Bank. Given the overlap and complex interactions of these regulations with other regulatory changes, the full impact of the adopted and proposed regulations remains uncertain until their full implementation. In addition, a significant portion of our business involves providing certain services to large, complex clients, which, by their nature, require substantial liquidity. Our failure to manage successfully the liquidity and balance sheet issues attendant to this portion of our business may have a negative impact on our ability to meet client needs and grow. For more information on regulations and other regulatory changes relating to liquidity, see “Supervision and Regulation—Liquidity Standards” in Item 1, “Business.” Any substantial, unexpected or prolonged changes in the level or cost of liquidity could affect our business adversely. If the Bank is unable to supply the Corporation with funds over time, the Corporation could be unable to meet its various obligations. The Corporation is a legal entity separate and distinct from the Bank and the Corporation’s other subsidiaries. The Corporation relies on dividends paid to it by the Bank to meet its obligations and to pay dividends to stockholders of the Corporation. There are various legal limitations on the extent to which the Bank and the Corporation’s other subsidiaries can supply funds to the Corporation by dividend or otherwise. Dividend payments by the Bank to the Corporation in the future will require continued generation of earnings by the Bank and could require regulatory approval under certain circumstances. For more information on dividend restrictions, see “Supervision and Regulation—Payment of Dividends” in Item 1, “Business.” We may need to raise additional capital in the future, which may not be available to us or may only be available on unfavorable terms. We may need to raise additional capital to provide sufficient resources to meet our business needs and commitments, to accommodate the transaction and cash management needs of our clients, to maintain our credit ratings in response to regulatory changes, including capital rules, or for other purposes. However, our ability to access the capital markets, if needed, will depend on a number of factors, including the state of the financial markets. Rising interest rates, disruptions in financial markets, negative perceptions of our business or our financial strength, or other factors may impact our ability to raise additional capital, if needed, on terms acceptable to us. Any diminished ability to raise additional capital, if needed, could subject us to liability, restrict our ability to grow, require us to take actions that would affect our earnings negatively or otherwise affect our business and our ability to implement our business plan, capital plan and strategic goals adversely. Any downgrades in our credit ratings, or an actual or perceived reduction in our financial strength, could affect our borrowing costs, capital costs and liquidity adversely. Rating agencies publish credit ratings and outlooks on our creditworthiness and that of our obligations or securities, including long-term debt, short-term borrowings, preferred stock and other securities. Our credit ratings are subject to ongoing review by the rating agencies and thus may change from time to time based on a number of factors, including our own financial strength, performance, prospects and operations as well as factors not under our control, such as rating- agency-specific criteria or frameworks for our industry or certain security types, which are subject to revision from time to time, and conditions affecting the financial services industry generally. 20 2021 Annual Report | Northern Trust Corporation Downgrades in our credit ratings may affect our borrowing costs, our capital costs and our ability to raise capital and, in turn, our liquidity adversely. A failure to maintain an acceptable credit rating also may preclude us from being competitive in certain products. Additionally, our counterparties, as well as our clients, rely on our financial strength and stability and evaluate the risks of doing business with us. If we experience diminished financial strength or stability, actual or perceived, a decline in our stock price or a reduced credit rating, our counterparties may be less willing to enter into transactions, secured or unsecured, with us, our clients may reduce or place limits on the level of services we provide them or seek other service providers, or our prospective clients may select other service providers, all of which may have other adverse effects on our business. The risk that we may be perceived as less creditworthy relative to other market participants is higher in a market environment in which the consolidation, and in some instances failure, of financial institutions, including major global financial institutions, could result in a smaller number of larger counterparties and competitors. If our counterparties perceive us to be a less viable counterparty, our ability to enter into financial transactions on terms acceptable to us or our clients, on our or our clients’ behalf, will be compromised materially. If our clients reduce their deposits with us or select other service providers for all or a portion of the services we provide to them, our revenues will decrease accordingly. Regulatory and Legal Risks Failure to comply with regulations and/or supervisory expectations can result in penalties and regulatory constraints that restrict our ability to grow or even conduct our business, or that reduce earnings. Virtually every aspect of our business around the world is regulated, generally by domestic and foreign governmental agencies that have broad supervisory powers and the ability to impose sanctions. These regulations cover a variety of matters, including prohibited activities, required capital levels, resolution planning, human trafficking and modern slavery, and privacy and data protection. Some of these requirements are directed specifically at protecting depositors of the Bank, the federal deposit insurance fund and the banking system as a whole, not our stockholders or other security holders. Regulatory violations or the failure to meet formal or informal commitments made to regulators could generate penalties, require corrective actions that increase costs of conducting business, result in limitations on our ability to conduct business, restrict our ability to expand or impact our reputation adversely. Failure to obtain necessary approvals from regulatory agencies, whether formal or based upon supervisory expectations, on a timely basis could affect proposed business opportunities and results of operations adversely. Similarly, changes in laws or failure to comply with new requirements or with future changes in laws or regulations may impact our results of operations and financial condition negatively. Changes by the U.S. and other governments to laws, regulations and policies applicable to the financial services industry may heighten the challenges we face and make regulatory compliance more difficult and costly. Various regulatory bodies have demonstrated heightened enforcement scrutiny of financial institutions through many regulatory initiatives. These initiatives have increased compliance costs and regulatory risks and may lead to financial and reputational damage in the event of a compliance violation. While we have programs in place, including policies, training and various forms of monitoring, designed to ensure compliance with legislative and regulatory requirements, these programs and policies may not always protect us from conduct by individual employees. Governments may take further actions to change significantly the way financial institutions are regulated, either through new legislation, new regulations, new applications of existing regulations or a combination of all of these methods. We cannot currently predict the impact, if any, of these changes to our business. Additionally, governments and regulators may take actions that increase intervention in the normal operation of our businesses and the businesses of our competitors in the financial services industry, and these likely would involve additional legislative and regulatory requirements imposed on banks and other financial services companies. Any such actions could increase compliance costs and regulatory risks, lead to financial and reputational damage in the event of a violation, affect our ability to compete successfully, and also may impact the nature and level of competition in the industry in unpredictable ways. The full scope and impact of possible legislative or regulatory changes and the extent of regulatory activity is uncertain and difficult to predict. For example, we are unable to predict what, if any, changes to financial services laws and regulations applicable to the financial services industry may be enacted by the U.S. Congress and what the impact of any such changes will be upon our business, financial condition, and results of operations. Moreover, the current U.S. presidential administration has made, and is expected to make further, changes in the leadership and senior staffs of the federal banking agencies which are likely to impact the rulemaking, supervision, examination and enforcement priorities and policies of such agencies, the potential impacts of which, if any, we cannot predict with certainty at this time. We may be impacted adversely by claims or litigation, including claims or litigation relating to our fiduciary responsibilities. Our businesses involve the risk that clients or others may sue us, claiming that we have failed to perform under a contract or otherwise failed to carry out a duty perceived to be owed to them. Our trust, custody and investment management 2021 Annual Report | Northern Trust Corporation 21 businesses are particularly subject to this risk. This risk is heightened when we act as a fiduciary for our clients and may be further heightened during periods when credit, equity or other financial markets are deteriorating in value or are particularly volatile, or when clients or investors are experiencing losses. In addition, regulators, tax authorities and courts have increasingly sought to hold financial institutions liable for the misconduct of their clients where such regulators and courts have determined that the financial institution should have detected that the client was engaged in wrongdoing, even though the financial institution had no direct knowledge of the wrongdoing. Claims made or actions brought against us, whether founded or unfounded, may result in injunctions, settlements, damages, fines or penalties, which could have a material adverse effect on our financial condition or results of operations or require changes to our business. Even if we defend ourselves successfully, the cost of litigation is often substantial, and public reports regarding claims made against us may cause damage to our reputation among existing and prospective clients or negatively impact the confidence of counterparties, rating agencies and stockholders, consequently affecting our earnings negatively. We may be impacted adversely by supervisory and/or regulatory enforcement matters. In the ordinary course of our business, we are subject to various governmental enforcement inquiries, supervisory examinations, investigations and subpoenas. These may be directed generally to participants in the businesses in which we are involved or may be directed specifically at us. In conjunction with both supervisory and enforcement matters, we may face limits on our ability to conduct or expand our business, be required to implement corrective actions that increase the costs of conducting business, or become subject to civil or criminal penalties or other remedial sanctions, any of which could result in reputational damage or otherwise have an adverse impact on us. Regulatory enforcement activity and supervisory expectations may heighten relative to the recent past as personnel from the current U.S presidential administration assume positions of leadership in the agencies that regulate or supervise us. We may fail to set aside adequate reserves for, or otherwise underestimate our liability relating to, pending and threatened claims, with a negative effect on our earnings. We estimate our potential liability for pending and threatened claims and record reserves when appropriate pursuant to generally accepted accounting principles (GAAP). The process is inherently subject to risk, including the risks that a judge or jury could decide a case contrary to our evaluation of the law or the facts or that a court could change or modify existing law on a particular issue important to the case. Our earnings will be adversely affected if our reserves are not adequate. The ultimate impact on us of the United Kingdom’s withdrawal from the European Union remains uncertain. While the UK’s withdrawal from the EU, commonly referred to as “Brexit,” officially became effective on December 31, 2020, certain items remain to be negotiated; therefore, the final impact remains uncertain. In December 2020, the UK and the EU agreed on a trade and cooperation agreement that entered into force on May 1, 2021. While the trade and cooperation agreement covers the general objectives and framework of the relationship between the UK and the EU, it generally does not address the regulation of financial services. Instead, in March 2021, the UK and the EU agreed upon a framework for voluntary regulatory cooperation and dialogue on financial services issues between the parties in a Memorandum of Understanding, which is expected to be signed after certain formal steps are completed. Consequently, the ultimate impact of Brexit on the Corporation and the Bank remains uncertain and will depend on the terms of the post-Brexit relationships that remain to be negotiated between the UK and other EU nations, particularly in the area of financial services. We have incurred, and may in the future continue to incur, additional costs associated with Brexit planning measures while unforeseen political, regulatory, or other developments related to Brexit, or operational issues associated with the organizational restructuring related thereto, also may result in additional costs and disruption to our UK and EU businesses. If we fail to comply with legal standards, we could incur liability to our clients or lose clients, which could affect our earnings negatively. Managing or servicing assets with reasonable prudence in accordance with the terms of governing documents and applicable laws is an important part of our business. Failure to comply with the terms of governing documents and applicable laws, manage adequately the risks or manage appropriately the differing interests often involved in the exercise of fiduciary responsibilities may subject us to liability or cause client dissatisfaction, which may impact negatively our earnings and growth. Strategic Risks If we are not able to attract, retain and motivate personnel, our business could be negatively affected. Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and continue to compensate our employees competitively. Competition for the best employees in most activities in which we 22 2021 Annual Report | Northern Trust Corporation engage can be intense, and there can be no assurance that we will be successful in our efforts to recruit and retain necessary personnel. Factors that affect our ability to attract and retain talented and diverse employees include our compensation and benefits programs, our profitability and our reputation for rewarding and promoting qualified employees. Our ability to attract and retain key executives and other employees may be hindered as a result of existing and potential regulations applicable to incentive compensation and other aspects of our compensation programs. These regulations may not apply to some of our competitors and to other institutions with which we compete for talent. In addition, our current or future approach to in-office and remote work arrangements may not meet the needs or expectations of our current or prospective employees, may not be perceived as favorable as compared to the arrangements offered by competitors and may not be conducive to a collaborative working environment, which could adversely affect our ability to attract, retain and motivate employees. The unexpected loss of services of necessary personnel, both in businesses and corporate functions, could have a material adverse impact on our business because of their skills, knowledge of our markets, operations and clients, years of industry experience and, in some cases, the difficulty of promptly finding qualified replacement personnel. Similarly, the loss of necessary employees, either individually or as a group, could affect our clients’ perception of our abilities adversely. The current competitive labor market may also have the effect of heightening many of these risks. Our operations, businesses and clients could be materially adversely affected by the effects of climate change or concerns related thereto. There is increasing concern over the risks that climate change presents to our business, financial condition, and results of operations. The physical risks of climate change include rising average global temperatures, rising sea levels, and an increase in the frequency and severity of extreme weather events. Such developments could disrupt our operations, those of our clients, or third parties on which we rely. Further, the consequences of climate change could negatively impact our clients’ ability to pay outstanding loans, reduce the value of collateral, or result in insurance shortfalls. Climate change could also result in transition risk. Changes in consumer and/or investor preferences, new legislation, and expanded regulatory requirements related to climate risk could adversely impact us or our clients. If we do not identify, quantify, and mitigate such risks successfully, we may experience financial losses, litigation, reputational harm, and losses of investor and stakeholder confidence. If we do not develop and execute strategic plans successfully, our growth may be impacted negatively. Our growth depends upon successful, consistent development and execution of our business strategies. A failure to develop and execute these strategies may impact growth negatively. A failure to grow organically or to integrate successfully an acquisition could have an adverse effect on our business. The challenges arising from generating organic growth or the integration of an acquired business may include preserving valuable relationships with employees, clients, suppliers and other business partners, delivering enhanced products and services, as well as combining accounting, data processing and internal control systems. To the extent we enter into transactions to acquire complementary businesses and/or technologies, we may not achieve the expected benefits of such transactions, which could result in increased costs, lowered revenues, ineffective deployment of capital, regulatory concerns, exit costs or diminished competitive position or reputation. These risks may be increased if the acquired company operates internationally or in a geographic location where we do not already have significant business operations. Execution of our business strategies also may require certain regulatory approvals or consents, which may include approvals of the Federal Reserve Board and other domestic and non-U.S. regulatory authorities. These regulatory authorities have the ability to impose conditions on the activities or transactions contemplated by our business strategies which may impact negatively our ability to realize fully the expected benefits of certain opportunities. Further, acquisitions we announce may not be completed, or completed in the time frame anticipated, if we do not receive the required regulatory approvals, if regulatory approvals are significantly delayed or if other closing conditions are not satisfied. We are subject to intense competition in all aspects of our businesses, which could have a negative effect on our ability to maintain satisfactory prices and grow our earnings. We provide a broad range of financial products and services in highly competitive markets. We compete against large, well-capitalized, and geographically diverse companies that are capable of offering a wide array of financial products and services at competitive prices. In certain businesses, such as foreign exchange trading, electronic networks present a competitive challenge. Additionally, technological advances and the growth of internet-based commerce have made it possible for other types of institutions to offer a variety of products and services competitive with certain areas of our business. Many of these nontraditional service providers have fewer regulatory constraints and some have lower cost structures. The same may be said for competitors based in non-U.S. jurisdictions, where legal and regulatory environments may be more favorable than those applicable to the Corporation and the Bank as U.S.-domiciled financial institutions. These competitive pressures may have a negative effect on our earnings and ability to grow. Pricing pressures, as a result of the willingness of competitors to offer comparable or improved products or services at a lower price, also may result in a 2021 Annual Report | Northern Trust Corporation 23 reduction in the price we can charge for our products and services, which could have, and in some cases has had, a negative effect on our ability to maintain or increase our profitability. Damage to our reputation could have a direct and negative effect on our ability to compete, grow and generate revenue. The failure or perceived failure to meet or appropriately address client expectations or fiduciary or other obligations, operational failures, legal and regulatory requirements, potential conflicts of interest, cybersecurity and privacy, social and sustainability concerns related to our business activities or any other of the risks discussed in this Item 1A could materially and adversely affect our reputation as well as our ability to attract and retain clients or employees. Additionally, the actual or alleged actions of our affiliates, vendors or other third parties with which we do business, the actual or alleged actions or statements of our employees or adverse publicity could negatively impact our reputation and significantly harm our business prospects. Damage to our reputation for delivery of a high level of service could undermine the confidence of clients and prospects in our ability to serve them and accordingly affect our earnings negatively. Damage to our reputation also could affect the confidence of rating agencies, regulators, stockholders and other parties in a wide range of transactions that are important to our business and the performance of our common stock. Failure to maintain our reputation ultimately could have an adverse effect on our ability to manage our balance sheet or grow our business. Actions by the financial services industry generally or by other members of or individuals in the financial services industry also could impact our reputation negatively or lead to a general loss of confidence in, or impact market perception of, financial institutions that could negatively affect us. Further, whereas negative public opinion once was driven primarily by adverse news coverage in traditional media, the proliferation of social media channels utilized by us and third parties, as well as the personal use of social media by our employees and others, may increase the risk of negative publicity, including through the rapid dissemination of inaccurate, misleading or false information, which could harm our reputation or have other negative consequences. We need to invest in innovation constantly, and the inability or failure to do so may affect our businesses and earnings negatively. Our success in the competitive environment in which we operate requires consistent investment of capital and human resources in innovation, particularly in light of the current “FinTech” environment, in which financial institutions are investing significantly in evaluating new technologies, such as artificial intelligence, machine learning, blockchain and other distributed ledger technologies, and developing potentially industry-changing new products, services and industry standards. Our investment is directed at generating new products and services, and adapting existing products and services to the evolving standards and demands of the marketplace. Among other things, investing in innovation helps us maintain a mix of products and services that keeps pace with our competitors and achieve acceptable margins. Our investment also focuses on enhancing the delivery of our products and services in order to compete successfully for new clients or gain additional business from existing clients, and includes investment in technological innovation as well. Effectively identifying gaps or weaknesses in our product offerings also is important to our success. Falling behind our competition in any of these areas could affect our business opportunities, growth and earnings adversely. There are substantial risks and uncertainties associated with innovation efforts, including an increased risk that new and emerging technologies may expose us to increased cybersecurity and other information technology threats. We must invest significant time and resources in developing and marketing new products and services, and expected timetables for the introduction and development of new products or services may not be achieved and price and profitability targets may not be met. Further, our revenues and costs may fluctuate because new products and services generally require start-up costs while corresponding revenues take time to develop or may not develop at all. Failure to understand or appreciate fully the risks associated with development or delivery of new product and service offerings may affect our businesses and earnings negatively. The success of our innovation efforts depends, in part, on the successful implementation of new product and service initiatives. Not only must we keep pace with competitors in the development of these new offerings, but we must accurately price them (as well as existing products) on a risk-adjusted basis and deliver them to clients effectively. Our identification of risks arising from new products and services, both in their design and implementation, and effective responses to those identified risks, including pricing, is key to the success of our efforts at innovation and investment in new product and service offerings. Our success with large, complex clients requires an understanding of the market and legal, regulatory and accounting standards in various jurisdictions. A significant portion of our business involves providing certain services to large, complex clients which require an understanding of the market and legal, regulatory and accounting standards in various jurisdictions. Any failure to understand, address or comply with those standards appropriately could affect our growth prospects or affect our reputation 24 2021 Annual Report | Northern Trust Corporation negatively. We identify and manage risk through our business strategies and plans and our risk management practices and controls. If we fail to identify and manage significant risks successfully, we could incur financial loss, suffer damage to our reputation that could restrict our ability to grow or conduct business profitably, or become subject to regulatory penalties or constraints that could limit some of our activities or make them significantly more expensive. In addition, our businesses and the markets in which we operate are continuously evolving. We may fail to understand fully the implications of changes in legal or regulatory requirements, our businesses or the financial markets or fail to enhance our risk framework to address those changes in a timely fashion. If our risk framework is ineffective, either because it fails to keep pace with changes in the financial markets, legal and regulatory requirements, our businesses, our counterparties, clients or service providers or for other reasons, we could incur losses, suffer reputational damage or find ourselves out of compliance with applicable regulatory or contractual mandates or expectations. These risks are magnified as client requirements become more complex and as our increasingly global business requires end-to-end management of operational and other processes across multiple time zones and many inter-related products and services. We may take actions to maintain client satisfaction that result in losses or reduced earnings. We may take action or incur expenses in order to maintain client satisfaction or preserve the usefulness of investments or investment vehicles we manage in light of changes in security ratings, liquidity or valuation issues or other developments, even though we are not required to do so by law or the terms of governing instruments. The risk that we will decide to take actions to maintain client satisfaction that result in losses or reduced earnings is greater in periods when credit or equity markets are deteriorating in value or are particularly volatile and liquidity in markets is disrupted. Other Risks Changes in tax laws and interpretations and tax challenges may affect our earnings negatively. Both U.S. and non-U.S. governments and tax authorities, including states and municipalities, from time to time issue new, or modify existing, tax laws and regulations. These authorities may also issue new, or modify existing, interpretations of those laws and regulations. These new laws, regulations or interpretations, and our actions taken in response to, or reliance upon, such changes in the tax laws may impact our tax position in a manner that affects our earnings negatively. In the course of our business, we are sometimes subject to challenges from U.S. and non-U.S. tax authorities, including states and municipalities, regarding the amount of taxes due. These challenges may result in adjustments to the timing or amount of taxable income, deductions, tax credits, or the allocation of income among tax jurisdictions, all of which may require a greater provision for taxes or otherwise affect earnings negatively. Changes in accounting standards may be difficult to predict and could have a material impact on our consolidated financial statements. New accounting standards, changes to existing accounting standards, or changes in the interpretation of existing accounting standards by the Financial Accounting Standards Board, the International Accounting Standards Board, the SEC or bank regulatory agencies, or otherwise reflected in GAAP, potentially could have a material impact on our financial condition and results of operations. These changes are difficult to predict and in some cases we could be required to apply a new or revised standard retroactively, resulting in the revised treatment of certain transactions or activities, or even the restatement of consolidated financial statements for prior periods. Our ability to return capital to stockholders is subject to the discretion of our Board of Directors and may be limited by U.S. banking laws and regulations, applicable provisions of Delaware law, or our failure to pay full and timely dividends on our preferred stock and the terms of our outstanding debt. Holders of our common stock are entitled to receive only such dividends and other distributions of capital as our Board of Directors may declare out of funds legally available for such payments under Delaware law. Although we have declared cash dividends on shares of our common stock historically, we are not required to do so. In addition to the approval of our Board of Directors, our ability to take certain actions, including our ability to pay dividends, repurchase stock, and make other capital distributions, is dependent upon, among other things, their payment being made in accordance with the capital plan rules and capital adequacy standards of the Federal Reserve Board. A significant source of funds for the Corporation is dividends from the Bank. As a result, our ability to pay dividends on the Corporation’s common stock will depend in large part on the ability of the Bank to pay dividends to the Corporation. There are various legal limitations on the extent to which the Bank and the Corporation’s other subsidiaries can supply funds to the Corporation by dividend or otherwise. Dividend payments by the Bank to the Corporation in the future will require continued generation of earnings by the Bank and could require regulatory approval under certain circumstances. If the Bank is unable to pay dividends to the Corporation in the future, our ability to pay dividends on the Corporation’s common stock would be affected adversely. 2021 Annual Report | Northern Trust Corporation 25 Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock or any of our shares that rank junior to our preferred stock as to the payment of dividends and/or the distribution of any assets on any liquidation, dissolution or winding-up of the Corporation also generally will be prohibited in the event that we do not declare and pay in full dividends on our Series D Non-Cumulative Perpetual Preferred Stock (Series D Preferred Stock) and Series E Non-Cumulative Perpetual Preferred Stock (Series E Preferred Stock). Further, in the future if we default on certain of our outstanding debt we will be prohibited from making dividend payments on our common stock until such payments have been brought current. Any reduction or elimination of our common stock dividend, or even our failure to maintain the common stock dividend level in a manner comparable to our competitors, likely would have a negative effect on the market price of our common stock. For more information on dividend restrictions, see “Supervision and Regulation—Payment of Dividends” and “Supervision and Regulation—Capital Planning and Stress Testing” in Item 1, “Business.” ITEM 1B – UNRESOLVED STAFF COMMENTS None. ITEM 2 – PROPERTIES The executive offices of the Corporation and the Bank are located at 50 South La Salle Street in Chicago. This Bank- owned building is occupied by various divisions of Northern Trust’s businesses. Adjacent to this building is one office building in which the Bank leases space principally for corporate support functions. Financial services are provided by the Bank and other subsidiaries of the Corporation through a network of offices in 23 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. The majority of those offices are leased. The Bank’s other primary U.S. operations are located in five facilities: a leased facility at 333 South Wabash Avenue in Chicago; a leased facility in Tempe, Arizona; and one leased and two Bank-owned supplementary operations/ data center buildings located in the western suburbs of Chicago. A majority of the Bank’s London-based staff is located at a leased facility at Canary Wharf in London. Additional support and operations activity originates from four facilities in India, two facilities in Ireland, and one facility in the Philippines, all of which are leased. The Bank and the Corporation’s other subsidiaries operate from various other facilities in North America, Europe, the Asia-Pacific region, and the Middle East, most of which are leased. The Corporation believes that its owned and leased facilities are suitable and adequate for its business needs. The Corporation continues to evaluate its owned and leased facilities and may determine from time to time that certain of its facilities are no longer necessary for its operations. There is no assurance that the Corporation will be able to dispose of any excess facilities or that it will not incur costs in connection with such dispositions, which could be material to its operating results in a given period. For additional information relating to properties and lease commitments, refer to Note 9, “Buildings and Equipment” and Note 10, “Lease Commitments,” included under Item 8, “Financial Statements and Supplementary Data,” and which information is incorporated herein by reference. ITEM 3 – LEGAL PROCEEDINGS The information presented under the caption “Legal Proceedings” in Note 26, “Commitments and Contingent Liabilities,” included under Item 8, “Financial Statements and Supplementary Data,” is incorporated herein by reference. ITEM 4 – MINE SAFETY DISCLOSURES Not applicable. SUPPLEMENTAL ITEM – INFORMATION ABOUT OUR EXECUTIVE OFFICERS The following sets forth certain information with regard to each executive officer of the Corporation. Michael G. O’Grady - Mr. O’Grady, age 56, joined Northern Trust in 2011 and has served as Chairman of the Board since January 2019, as Chief Executive Officer since 2018 and as President since 2017. Prior to that, Mr. O’Grady served as Executive Vice President and President of Corporate & Institutional Services from 2014 to 2016 and as Chief Financial 26 2021 Annual Report | Northern Trust Corporation Officer from 2011 to 2014. Before joining Northern Trust, Mr. O’Grady served as a Managing Director in Bank of America Merrill Lynch’s Investment Banking Group. Lauren E. Allnutt - Ms. Allnutt, age 45, joined Northern Trust in 2008 and has served as an Executive Vice President since November 2020 and as Controller since May 2019. Prior to that, Ms. Allnutt served as manager of Global Financial Control from 2014 to April 2019 and led International Accounting Policy and Control from 2013 to 2014. Peter B. Cherecwich - Mr. Cherecwich, age 57, joined Northern Trust in 2007 and has served as Executive Vice President and President of Corporate & Institutional Services since 2017. Prior to that, Mr. Cherecwich served as Executive Vice President and President of Global Fund Services from 2010 to 2017 and as Chief Operating Officer of Corporate & Institutional Services from 2008 to 2014. From 2007 to 2008, he served as Head of Institutional Strategy & Product Development. Before joining Northern Trust, Mr. Cherecwich served in several executive and operational roles at State Street Corporation. Steven L. Fradkin - Mr. Fradkin, age 60, joined Northern Trust in 1985 and has served as Executive Vice President and President of Wealth Management since 2014. Prior to that, Mr. Fradkin served as President of Corporate & Institutional Services from 2009 to 2014. From 2004 to 2009, he served as Chief Financial Officer. Mark C. Gossett - Mr. Gossett, age 60, joined Northern Trust in 1983 and has served as Executive Vice President and Chief Risk Officer since 2020. Prior to that, Mr. Gossett served as Chief Credit Officer and Head of Market and Liquidity Risk from 2014 to 2020 and as Co-Head of Global Foreign Exchange from 2012 to 2014. Mr. Gossett also previously served as the Chief Risk Officer of Asset Management from 2009 to 2012 and as the Chief Operating Officer of Asset Management from 2005 to 2009. Susan C. Levy - Ms. Levy, age 64, joined Northern Trust in 2014 and has served as Executive Vice President and General Counsel since that time. Ms. Levy also previously served as Corporate Secretary from 2018 to April 2021. Before joining Northern Trust, Ms. Levy served as Managing Partner of the law firm Jenner & Block from 2008 to 2014, where she was a partner since 1990. Teresa A. Parker - Ms. Parker, age 61, joined Northern Trust in 1982 and has served as Executive Vice President and President of Europe, Middle East and Africa since 2017. Prior to that, Ms. Parker served as Chief Operating Officer of Corporate & Institutional Services from 2014 to 2017. From 2009 to 2014, she served as Executive Vice President, Corporate & Institutional Services for the Asia-Pacific region. Thomas A. South - Mr. South, age 52, joined Northern Trust in 1999 and has served as Executive Vice President and Chief Information Officer since 2018. Prior to that, Mr. South served as Chief Business Architect from 2014 to 2018 and as Chief Operating Officer of Operations & Technology from 2013 to 2014. Joyce M. St. Clair - Ms. St. Clair, age 62, joined Northern Trust in 1992 and has served as Executive Vice President and Chief Human Resources Officer since 2018. Prior to that, Ms. St. Clair served as Executive Vice President and Chief Capital Management Officer from 2015 to 2018, as President of Enterprise Operations from 2014 to 2015, as President of Operations & Technology from 2011 to 2014, and as Chief Risk Officer from 2007 to 2011. Shundrawn A. Thomas - Mr. Thomas, age 48, joined Northern Trust in 2004 and has served as Executive Vice President and President of Asset Management since 2017. Prior to that, Mr. Thomas served as Executive Vice President and Head of the Funds and Managed Accounts Group from 2014 to 2017 and as Head of the Exchange-Traded Funds Group from 2010 to 2014. Mr. Thomas also previously served as President and Chief Executive Officer of Northern Trust Securities, Inc. from 2009 to 2010 and as Head of Corporate Strategy from 2006 to 2009. Jason J. Tyler - Mr. Tyler, age 50, joined Northern Trust in 2011 and has served as Executive Vice President and Chief Financial Officer since 2020. Prior to that, Mr. Tyler served as Chief Financial Officer of Wealth Management from 2018 to December 2019, as Global Head of Asset Management’s Institutional Group from 2014 to 2018, and as Global Head of Strategy from 2011 to 2014. Before joining Northern Trust, Mr. Tyler served in certain executive and operational roles at Ariel Investments and Bank One/American National Bank. All officers are appointed annually by the Board of Directors. Officers continue to hold office until their successors are duly elected or until their death, resignation or removal by the Board. 2021 Annual Report | Northern Trust Corporation 27 PART II ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on The NASDAQ Stock Market LLC under the symbol “NTRS.” There were 1,582 shareholders of record as of January 31, 2022. The following table shows certain information relating to the Corporation’s purchases of common stock for the three months ended December 31, 2021. TABLE 3: REPURCHASES OF COMMON STOCK IN THE FOURTH QUARTER OF 2021 PERIOD October 1 - 31, 2021 November 1 - 30, 2021 December 1 - 31, 2021 Total (Fourth Quarter) TOTAL NUMBER OF SHARES PURCHASED AVERAGE PRICE PAID PER SHARE — $ — — — $ — — — — TOTAL NUMBER OF SHARES PURCHASED AS PART OF A PUBLICLY ANNOUNCED PLAN MAXIMUM NUMBER OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLAN — — — — 25,000,000 25,000,000 25,000,000 25,000,000 Repurchases prior to October 19, 2021 were made pursuant to the repurchase program announced by the Corporation on July 17, 2018, under which the Corporation’s Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. On October 19, 2021, this program was terminated and replaced with a new repurchase program, under which the Corporation’s Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. The repurchase authorization approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to repurchase when circumstances warrant and applicable regulation permits. For more information, please refer to Note 15, “Stockholders’ Equity,” provided in Item 8, “Financial Statements and Supplementary Data.” 28 2021 Annual Report | Northern Trust Corporation COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN The following graph compares the cumulative total stockholder return on the Corporation’s common stock to the cumulative total return of the S&P 500 Index and the KBW Bank Index for the five fiscal years ended December 31, 2021. The cumulative total stockholder return assumes the investment of $100 in the Corporation’s common stock and in each index on December 31, 2016 and assumes reinvestment of dividends. The KBW Bank Index is a modified-capitalization- weighted index made up of 24 of the largest banking companies in the United States. The Corporation is included in the S&P 500 Index and the KBW Bank Index. Total Return Assumes $100 Invested on December 31, 2016 with Reinvestment of Dividends DECEMBER 31, $ 2016 100 $ 100 100 2017 114 $ 122 119 2018 97 $ 116 98 2019 127 $ 153 133 2020 115 $ 181 119 2021 152 233 165 Northern Trust S&P 500 KBW Bank Index ITEM 6 – [RESERVED] 2021 Annual Report | Northern Trust Corporation 29 Five-Year Cumulative Total ReturnNorthern TrustS&P 500KBW Bank Index201620172018201920202021$75$100$125$150$175$200$225$250 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2021. 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 two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. its 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 23 U.S. states and Washington, D.C., and across 23 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. COVID-19 PANDEMIC AND RECENT EVENTS During the COVID-19 pandemic, Northern Trust has remained focused on the health and well-being of its workforce, meeting its clients’ needs and supporting its communities. The majority of Northern Trust’s workforce continues to work remotely and the Corporation continues to adjust its response to the pandemic as needed. The timing of any return to office for our workforce will be driven by the operational, business, and client needs of each location, and will be guided by health and safety guidelines and relevant government mandates. In addition, as the prolonged public health crisis has unfolded, Northern Trust has responded by providing additional health and well-being resources to its employees, including expanded virtual access to health care and well-being programs and diversity, equity, and inclusion resources; a well-being learning center with tools for working effectively in a virtual environment; and virtual focus groups allowing employees to provide feedback and build connections with colleagues. Northern Trust also provided additional paid-time- off for a COVID-19 diagnosis and supported all employees electing to receive the COVID-19 vaccine with additional paid- time-off to obtain and recover from the primary series vaccine or booster shot. To facilitate COVID-19 vaccinations in India and the Philippines, Northern Trust hosted on-site vaccine drives (in India) and participated in a program which provided access to vaccines for our employees (in the Philippines). Northern Trust also reimbursed vaccine costs for employees and their immediate family members in India. During the pandemic, Northern Trust offered credit assistance to impacted clients under a government lending program and provided payment deferrals. In addition, there have been two forms of relief provided to lenders exempting certain loan modifications which would otherwise be classified as troubled debt restructuring from such classification. Northern Trust elected to apply each of these forms of relief, when applicable, in providing borrowers with qualifying loan modifications, including payment deferrals, in response to the COVID-19 pandemic. Both of these assistance measures have declined since the start of the pandemic. For further information, please refer to Note 6, “Loans and Leases,” provided in Item 8. “Financial Statements and Supplementary Data.” 30 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL OVERVIEW TABLE 4: FINANCIAL HIGHLIGHTS ($ In Millions) Noninterest Income Net Interest Income Total Revenue Provision for Credit Losses Noninterest Expense Income before Income Taxes Provision for Income Taxes Net Income Preferred Stock Dividends Net Income Applicable to Common Stock PER COMMON SHARE Net Income – Basic – Diluted Cash Dividends Declared Per Common Share Book Value – End of Period (EOP) Market Price – EOP SELECTED RATIOS AND METRICS Return on Average Common Equity Return on Average Assets Dividend Payout Ratio Average Stockholders’ Equity to Average Assets FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ $ $ $ $ $ 5,081.8 $ 4,657.6 $ 1,382.7 1,443.2 6,464.5 $ 6,100.8 $ (81.5) 4,535.9 125.0 4,348.2 2,010.1 $ 1,627.6 $ 464.8 418.3 1,545.3 $ 1,209.3 $ 41.8 56.2 1,503.5 $ 1,153.1 $ 7.16 $ 5.48 $ 7.14 2.80 53.58 119.61 13.9 % 0.99 39.2 7.5 5.46 2.80 51.87 93.14 11.2 % 0.88 51.3 8.2 4,395.2 1,677.9 6,073.1 (14.5) 4,143.5 1,944.1 451.9 1,492.2 46.4 1,445.8 6.66 6.63 2.60 46.82 106.24 14.9 % 1.27 39.2 9.1 Net Income increased $336.0 million, or 28%, to $1.55 billion in 2021 from $1.21 billion in 2020. Earnings per diluted common share was $7.14 in 2021 compared to $5.46 in 2020. Return on average common equity increased to 13.9% in 2021 from 11.2% in 2020. Revenue increased $363.7 million to $6.46 billion in 2021 from $6.10 billion in the prior year, primarily driven by increases in Trust, Investment and Other Servicing Fees of 9% and Other Operating Income of 26%, partially offset by a decrease in Net Interest Income of 4%. Client assets under custody/administration (AUC/A) increased 12% from $14.53 trillion as of December 31, 2020 to $16.25 trillion as of December 31, 2021, primarily reflecting favorable markets and net inflows, partially offset by unfavorable currency translation. Client assets under custody, a component of AUC/A, increased 12% from $11.26 trillion as of December 31, 2020 to $12.61 trillion as of December 31, 2021. Client assets under custody included $8.24 trillion of global custody assets as of December 31, 2021, which increased 11% from $7.42 trillion as of December 31, 2020. Client assets under management increased 14% to $1.61 trillion as of December 31, 2021 from $1.41 trillion at December 31, 2020 due to favorable markets and net inflows. The Provision for Credit Losses in 2021 was a release of credit reserves of $81.5 million as compared to a provision of $125.0 million in 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional portfolio. The prior-year provision primarily reflected an increase in the reserve evaluated on a collective basis. The increase in the collective basis reserve was primarily driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the COVID-19 pandemic and related market and economic impacts. Increases in the collective basis reserve were primarily in the commercial and institutional and commercial real estate portfolios. In addition, a $13.7 million increase in the allowance for credit losses, with a corresponding cumulative effect adjustment to decrease retained earnings by $10.1 million, net of income taxes, was recorded on January 1, 2020 upon adoption of the Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments.” 2021 Annual Report | Northern Trust Corporation 31 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Noninterest Expense of $4.54 billion in 2021 increased $187.7 million, or 4%, from $4.35 billion in 2020, primarily reflecting increased Outside Services, Compensation, Equipment and Software and Employee Benefits, partially offset by lower Other Operating Expense and Occupancy. Employee Benefits expense in 2021 included pension settlement charges of $27.9 million. The Provision for Income Taxes in 2021 totaled $464.8 million, representing an effective tax rate of 23.1%. The Provision for Income Taxes in 2020 totaled $418.3 million, representing an effective tax rate of 25.7%. The decrease in the effective tax rate was primarily driven by the lower net tax impact from international operations and $26.8 million of prior- year tax expense related to the reversal of tax benefits previously recognized through earnings. Northern Trust continued to maintain a strong capital position during 2021, 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 2021 compared to 2020. For a discussion related to the consolidated results of operations for 2020 compared to 2019, 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, 2020 (2020 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 23, 2021. 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 2021 of $6.46 billion increased $363.7 million, or 6%, from $6.10 billion in 2020. Noninterest Income represented 79% and 76% of total revenue in 2021 and 2020, respectively, and totaled $5.08 billion in 2021, which increased $424.2 million, or 9%, from $4.66 billion in 2020. Noninterest Income in 2021 increased primarily reflecting higher Trust, Investment and Other Servicing Fees and Other Operating Income. Trust, Investment and Other Servicing Fees of $4.36 billion in 2021 increased $366.1 million, or 9%, from $4.00 billion in 2020, primarily due to favorable markets and new business, partially offset by higher money market mutual fund fee waivers. Other Operating Income of $243.9 million in 2021 increased $49.9 million, or 26%, from $194.0 million in the prior year, primarily due to higher banking and credit-related service charges, distributions from investments in community development projects and gains from property sales. Net Interest Income on a fully taxable equivalent (FTE) basis in 2021 of $1.42 billion decreased $59.3 million, or 4%, from $1.48 billion in 2020, due to a decreased net interest margin, partially offset by higher levels of average earning assets. The net interest margin on an FTE basis decreased to 0.99% in 2021 from 1.19% in 2020, primarily due to lower average interest rates, partially offset by favorable balance sheet volume and mix shift. Average earning assets increased $19.7 billion, or 16%, from $124.1 billion in 2020 to $143.9 billion in 2021, primarily reflecting higher levels of short-term interest bearing deposits, Securities, and Loans and Leases. 32 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Additional information regarding Northern Trust’s revenue by type is provided in the following table. TABLE 5: REVENUE ($ In Millions) Noninterest Income Trust, Investment and Other Servicing Fees Foreign Exchange Trading Income Treasury Management Fees Security Commissions and Trading Income Other Operating Income Investment Security Losses, net Total Noninterest Income Net Interest Income (1) Total Revenue FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 4,361.1 $ 3,995.0 $ 3,852.1 292.6 44.3 140.2 243.9 290.4 45.4 133.2 194.0 (0.3) (0.4) 5,081.8 $ 4,657.6 $ 1,382.7 1,443.2 6,464.5 $ 6,100.8 $ $ $ 250.9 44.5 103.6 145.5 (1.4) 4,395.2 1,677.9 6,073.1 (1) Net Interest Income stated on a GAAP basis. Net Interest Income on an FTE basis includes FTE adjustments of $35.6 million, $34.4 million, and $32.8 million for 2021, 2020, and 2019, 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 2021 compared with $4.00 billion in 2020, 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. Low-interest-rate environments have historically had a negative impact on fees earned on certain products. Beginning in the second quarter of 2020, the Corporation began to waive a portion of certain fees associated with money market mutual funds due to the low-interest-rate environment. Northern Trust voluntarily waived $287.8 million and $29.3 million of money market mutual fund fees for the years ended December 31, 2021 and 2020, respectively. These fee waivers are impacted by the level of yields earned and account balances in certain funds, as the yields in these funds remain insufficient to pay the stated fees associated with such funds. If the level of short-term interest rates were to increase as currently expected, fee waivers would likely decline. The components of Trust, Investment and Other Servicing Fees are provided in the following table. TABLE 6: TRUST, INVESTMENT AND OTHER SERVICING FEES ($ In Millions) C&IS Trust, Investment and Other Servicing Fees FOR THE YEAR ENDED DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 Custody and Fund Administration $ 1,818.8 $ 1,586.1 $ 1,549.3 15 % 2 % Investment Management Securities Lending Other Total C&IS Trust, Investment and Other Servicing Fees Wealth Management Trust, Investment and Other Servicing Fees Central East West Global Family Office $ $ 443.5 76.7 148.3 511.1 88.0 136.4 445.7 87.2 129.3 2,487.3 $ 2,321.6 $ 2,211.5 (13) (13) 9 7 % 15 1 6 5 % 698.7 $ 607.3 $ 509.3 380.2 285.6 442.1 337.7 286.3 619.3 422.2 330.9 268.2 1,640.6 3,852.1 15 % (2) % 15 13 — 12 % 9 % 5 2 7 2 % 4 % Total Wealth Management Trust, Investment and Other Servicing Fees $ 1,873.8 $ 1,673.4 $ Total Consolidated Trust, Investment and Other Servicing Fees $ 4,361.1 $ 3,995.0 $ Corporate & Institutional Services C&IS 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 C&IS fees, are driven primarily by values of client assets under custody/administration, transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee 2021 Annual Report | Northern Trust Corporation 33 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 assets under management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag. 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 services fee category in C&IS 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 increased from 2020 to 2021 primarily due to favorable markets, new business and favorable currency translation. Investment Management fees decreased from 2020 to 2021 primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets and new business. The following tables provide a breakdown of the C&IS assets under custody and under management. TABLE 7: C&IS ASSETS UNDER CUSTODY ($ In Billions) North America Europe, Middle East, and Africa Asia Pacific Securities Lending Total Assets Under Custody TABLE 8: C&IS ASSETS UNDER MANAGEMENT ($ In Billions) North America Europe, Middle East, and Africa Asia Pacific Securities Lending DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ 6,566.4 $ 5,746.4 $ 4,516.0 14 % 27 % 3,894.3 3,478.2 2,998.5 898.5 195.6 976.2 186.9 820.3 163.0 12 (8) 5 16 19 15 $ 11,554.8 $ 10,387.7 $ 8,497.8 11 % 22 % DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ 789.2 $ 676.8 $ 148.5 57.7 195.6 143.5 50.3 186.9 588.4 125.2 40.9 163.0 917.5 17 % 15 % 4 15 5 15 23 15 13 % 15 % Total Assets Under Management $ 1,191.0 $ 1,057.5 $ 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 $195.6 billion and $186.9 billion at December 31, 2021 and 2020, respectively. Wealth Management Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Fee income in the regions (Central, East and West) increased from 2020 to 2021, primarily due to favorable markets and new business, partially offset by higher money market mutual fund fee waivers. Global Family Office fee income decreased slightly primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets and new business. The following tables provide a summary of Wealth Management assets under custody and under management. TABLE 9: WEALTH MANAGEMENT ASSETS UNDER CUSTODY ($ In Billions) Global Family Office Central East West DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ 742.6 $ 600.7 $ 139.1 105.0 70.8 120.0 89.1 65.3 474.1 115.1 81.7 64.8 24 % 27 % 16 18 8 4 9 1 Total Assets Under Custody $ 1,057.5 $ 875.1 $ 735.7 21 % 19 % 34 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE 10: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT ($ In Billions) Global Family Office Central East West DECEMBER 31, 2021 2020 $ 144.9 $ 114.0 $ 128.7 84.5 58.0 109.3 73.3 51.2 CHANGE 2021 / 2020 2020 / 2019 27 % 21 % 18 15 13 5 10 6 2019 94.2 104.4 66.8 48.4 Total Assets Under Management $ 416.1 $ 347.8 $ 313.8 20 % 11 % 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 S&P 500 MSCI EAFE (U.S. dollars) MSCI EAFE (local currency) DAILY AVERAGES YEAR-END 2021 4,271 2,289 1,294 2020 3,218 1,853 1,074 CHANGE 33 % 24 21 2021 4,766 2,336 1,362 2020 3,756 2,148 1,174 CHANGE 27 % 9 16 TABLE 12: FIXED INCOME MARKET INDICES Barclays Capital U.S. Aggregate Bond Index Barclays Capital Global Aggregate Bond Index 2021 2,355 532 AS OF DECEMBER 31, 2020 CHANGE 2,392 559 (2) % (5) 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 assets under management 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, 2021, AUC/A increased from December 31, 2020, primarily reflecting favorable markets and net inflows, partially offset by unfavorable currency translation. Assets under custody, a component of AUC/A, at December 31, 2021, increased from December 31, 2020, and included $8.24 trillion of global custody assets, compared to $7.42 trillion at December 31, 2020. The following table presents AUC/A by reporting segment. TABLE 13: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT ($ In Billions) Corporate & Institutional Services Wealth Management Total Assets Under Custody/Administration DECEMBER 31, CHANGE 2021 2020 2019 2021 /2020 2020 /2019 $ 15,183.2 $ 13,653.1 $ 11,311.6 1,065.6 879.4 738.8 $ 16,248.8 $ 14,532.5 $ 12,050.4 11 % 21 12 % 21 % 19 21 % 2021 Annual Report | Northern Trust Corporation 35 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table presents assets under custody, a component of AUC/A, by reporting segment. TABLE 14: ASSETS UNDER CUSTODY BY REPORTING SEGMENT ($ In Billions) Corporate & Institutional Services Wealth Management Total Assets Under Custody DECEMBER 31, CHANGE 2021 2020 2019 2021 /2020 2020 / 2019 $ 11,554.8 $ 10,387.7 $ 8,497.8 1,057.5 875.1 735.7 $ 12,612.3 $ 11,262.8 $ 9,233.5 11 % 21 12 % 22 % 19 22 % Consolidated assets under custody increased from the prior year, primarily reflecting favorable markets and net inflows, partially offset by unfavorable currency translation. The following table presents the investment allocation of Northern Trust’s custodied assets by reporting segment. TABLE 15: ALLOCATION OF ASSETS UNDER CUSTODY C&IS 2021 WM TOTAL C&IS DECEMBER 31, 2020 WM TOTAL C&IS 2019 WM TOTAL Equities 47 % 61 % 48 % 46 % 62 % 47 % 45 % 59 % 46 % Fixed Income Securities Cash and Other Assets Securities Lending Collateral 35 16 2 13 26 — 33 17 2 36 16 2 15 23 — 34 17 2 37 16 2 18 23 — 35 17 2 The following table presents Northern Trust’s assets under custody by investment type. TABLE 16: ASSETS UNDER CUSTODY BY INVESTMENT TYPE ($ In Billions) Equities Fixed Income Securities Cash and Other Assets Securities Lending Collateral Total Assets Under Custody DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ 6,049.1 $ 5,293.9 $ 4,298.6 14 % 23 % 4,139.6 2,228.0 195.6 3,870.9 1,911.1 186.9 3,236.5 1,535.3 163.1 7 17 5 20 24 15 $ 12,612.3 $ 11,262.8 $ 9,233.5 12 % 22 % The following table presents Northern Trust’s assets under management by reporting segment. TABLE 17: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT ($ In Billions) Corporate & Institutional Services Wealth Management Total Assets Under Management DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ $ 1,191.0 $ 1,057.5 $ 416.1 347.8 917.5 313.8 1,607.1 $ 1,405.3 $ 1,231.3 13 % 20 14 % 15 % 11 14 % Assets under management at the end of 2021 increased from 2020. The increase primarily reflected favorable markets and net inflows. 36 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following tables present the investment allocation and management style of Northern Trust’s assets under management by reporting segment. TABLE 18: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE C&IS 2021 WM TOTAL C&IS DECEMBER 31, 2020 WM TOTAL C&IS 2019 WM TOTAL Equities 53% 55% 53% 52% 52% 52% 53% 53% 53% Fixed Income Securities Cash and Other Assets Securities Lending Collateral 11 20 16 20 25 — 13 22 12 11 19 18 25 23 — 15 20 13 12 17 18 25 22 — 16 18 13 TABLE 19: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE Index Active Multi-Manager Other C&IS 2021 WM TOTAL C&IS DECEMBER 31, 2020 WM TOTAL C&IS 2019 WM TOTAL 60 % 24 % 50 % 58 % 24 % 50 % 59 % 27 % 51 % 37 3 — 39 9 28 38 5 7 38 4 — 39 8 29 38 5 7 37 4 — 36 8 29 37 5 7 Other Noninterest Income The components of other noninterest income, and a discussion of significant changes during 2021 and 2020, are provided below. TABLE 20: OTHER NONINTEREST INCOME ($ In Millions) Foreign Exchange Trading Income Treasury Management Fees Security Commissions and Trading Income Other Operating Income Investment Security Losses, net Total Other Noninterest Income FOR THE YEAR ENDED DECEMBER 31, CHANGE 2021 2020 $ 292.6 $ 290.4 $ 44.3 140.2 243.9 (0.3) 720.7 $ 45.4 133.2 194.0 (0.4) 662.6 $ $ 2019 250.9 44.5 103.6 145.5 (1.4) 543.1 2021 / 2020 2020 / 2019 1 % (3) 5 26 N/M 9 % 16 % 2 29 33 N/M 22 % 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 2021 increased from 2020, primarily driven by higher client volumes, partially offset by lower 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 2021 decreased from 2020. Security Commissions and Trading Income Security Commissions and Trading Income, generated primarily from securities brokerage services provided by Northern Trust Securities, Inc., in 2021 increased from 2020, primarily driven by higher revenue from core brokerage, partially offset by lower revenue from interest rate swaps. Other Operating Income Other Operating Income in 2021 increased from 2020 primarily due to higher banking and credit-related service charges, distributions from investments in community development projects and gains from property sales. Please refer to Note 20, “Other Operating Income” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to other operating income. 2021 Annual Report | Northern Trust Corporation 37 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Investment Security Losses, Net ASU 2016-13, adopted on January 1, 2020, replaced the legacy OTTI model with an estimated credit loss model. Refer to the caption "Investment Security Gains and Losses” in Note 4, “Securities,” and the caption “Allowance for Held to Maturity Debt Securities Portfolio” in Note 7, “Allowance for Credit Losses” included under Item 8, “Financial Statements and Supplementary Data.” 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 Banks, Federal Reserve and Other Central Bank Deposits and Other, Securities, and Loans and Leases — are financed by a large base of interest- bearing funds 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-related 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. 38 2021 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 21: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS) (1) ($ In Millions) 2021 2020 2019 INTEREST AVERAGE BALANCE AVERAGE RATE(7) INTEREST AVERAGE BALANCE AVERAGE RATE(7) INTEREST AVERAGE BALANCE AVERAGE RATE(7) INTEREST-EARNING ASSETS Federal Reserve and Other Central Bank Deposits and Other(2) $ Interest-Bearing Due from and Deposits with Banks(3) Federal Funds Sold Securities Purchased under Agreements to Resell Securities U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Other(4) Total Securities Loans and Leases(5) Total Interest-Earning Assets Cash and Due from Banks and Other Central Bank Deposits(6) Other Noninterest-Earning Assets Total Assets AVERAGE SOURCE OF FUNDS Deposits Savings, Money Market, and Other Savings Certificates and Other Time Non-U.S. Offices – Interest-Bearing Total Interest-Bearing Deposits Federal Funds Purchased Securities Sold under Agreements to Repurchase Other Borrowings Senior Notes Long-Term Debt Floating Rate Capital Debt Total Interest-Related Funds Interest Rate Spread Demand and Other Noninterest-Bearing Deposits Other Noninterest-Bearing Liabilities Stockholders’ Equity 11.3 $ 39,040.8 0.03 % $ 28.8 $ 27,921.4 0.10 % $ 181.7 $ 18,527.7 0.98 % 9.1 5,779.7 — 0.1 3.5 1,067.4 29.5 2,685.4 69.9 3,532.0 296.0 24,546.2 307.2 30,013.9 702.6 60,777.5 715.6 37,207.5 1,442.1 143,873.0 0.16 0.41 0.33 1.10 1.98 1.21 1.02 1.16 1.92 1.00 22.4 5,400.8 — 2.3 3.9 1,253.1 63.0 4,256.7 48.2 2,194.3 409.0 23,970.4 324.1 25,635.1 844.3 56,056.5 778.5 33,498.8 1,677.9 124,132.9 — 2,285.9 — — 10,204.3 — — 2,603.0 — 10,075.2 0.41 1.37 0.31 1.48 2.20 1.71 1.26 1.51 2.32 1.35 — — 72.4 5,996.7 0.4 17.5 12.8 835.0 110.4 5,296.5 24.4 980.5 583.6 22,634.1 381.6 21,773.3 1,100.0 50,684.4 1,160.7 31,052.8 2,532.7 107,109.4 — 2,393.6 — 8,048.4 1.21 2.73 2.10 2.09 2.49 2.58 1.75 2.17 3.74 2.36 — — $ — $ 156,363.2 — % $ — $ 136,811.1 — % $ — $ 117,551.4 — % $ 12.8 $ 28,339.0 0.05 % $ 47.6 $ 23,396.4 0.20 % $ 160.8 $ 16,577.8 0.97 % 4.8 887.2 0.55 16.5 1,266.4 1.30 16.2 867.5 (78.9) 69,713.4 (61.3) 98,939.6 (0.4) 0.2 190.6 232.0 14.2 5,049.8 48.3 2,856.4 21.1 1,166.1 1.7 218.4 23.8 108,652.9 — — (0.11) (0.06) (0.19) 0.07 0.28 1.69 1.81 0.78 0.02 0.98 — 31,143.5 — — 4,869.8 — — 11,697.0 — (15.7) 60,486.3 (0.03) 311.9 54,885.2 48.4 85,149.1 2.2 1.0 980.9 218.3 45.3 6,401.1 72.7 3,233.8 26.5 1,189.2 4.2 277.7 200.3 97,450.1 — — — 23,362.0 — 4,806.4 — 11,192.6 0.06 0.22 0.47 0.71 2.24 2.24 1.52 0.21 1.14 — — — 488.9 72,330.5 25.9 1,267.4 6.4 339.0 181.7 7,752.5 72.6 2,389.1 38.3 1,139.0 8.2 277.6 822.0 85,495.1 — — — 17,455.5 — 3,952.4 — 10,648.4 1.86 0.57 0.68 2.05 1.89 2.34 3.04 3.36 2.98 0.96 1.40 — — — — % 1.60 % 1.57 % Total Liabilities and Stockholders’ Equity $ — $ 156,363.2 — % $ — $ 136,811.1 — % $ — $ 117,551.4 Net Interest Income/Margin (FTE Adjusted) Net Interest Income/Margin (Unadjusted) $ 1,418.3 $ $ 1,382.7 $ — — 0.99 % $ 1,477.6 $ 0.96 % $ 1,443.2 $ — — 1.19 % $ 1,710.7 $ 1.16 % $ 1,677.9 $ — — (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 19%, 20% and 23% as of December 31, 2021, 2020 and 2019, respectively. On the basis of averages, the percentage of total liabilities attributable to foreign activities was 58%, 56% and 53% as of December 31, 2021, 2020 and 2019, respectively. For additional information, refer to the Geographic Area Information section of Note 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.” (2) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses, which are classified in Other Assets on the consolidated balance sheets. (3) 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. (4) Other securities include certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets. (5) Average balances include nonaccrual loans. Lease financing receivable balances are reduced by deferred income. (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) 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. 2021 Annual Report | Northern Trust Corporation 39 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE 22: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE(1) (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS) (In Millions) Increase (Decrease) in Net Interest Income (FTE) 2021/2020 CHANGE DUE TO 2020/2019 CHANGE DUE TO AVERAGE BALANCE AVERAGE RATE NET (DECREASE) INCREASE AVERAGE BALANCE AVERAGE RATE NET (DECREASE) INCREASE Federal Reserve and Other Central Bank Deposits and Other $ 7.8 $ 62.5 $ (215.4) $ (152.9) Interest-Bearing Due from and Deposits with Banks Federal Funds Sold Securities Purchased under Agreements to Resell Securities U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Other Total Securities Loans and Leases Total Interest Income Interest-Bearing Deposits Savings, Money Market and Other $ Savings Certificates and Other Time Non-U.S. Offices - Interest-Bearing Total Interest-Bearing Deposits Federal Funds Purchased Securities Sold under Agreements to Repurchase Other Borrowings Senior Notes Long-Term Debt Floating Rate Capital Debt Total Interest Expense (Decrease) Increase in Net Interest Income (FTE) 1.5 — (0.6) (19.8) 26.9 9.6 46.9 63.6 164.0 7.8 $ (4.0) 33.4 37.2 (0.8) 0.1 (8.1) (7.9) (0.5) (0.8) (25.3) $ (14.8) — 0.2 (17.5) $ (13.3) — (0.4) (13.7) (5.2) (122.6) (63.8) (205.3) (226.9) (33.5) 21.7 (113.0) (16.9) (141.7) (62.9) (6.5) (0.2) 6.1 (19.0) 26.9 32.7 61.6 102.2 177.6 (43.5) (0.2) (19.7) (28.4) (3.1) (207.3) (119.1) (357.9) (559.8) (50.0) (0.4) (13.6) (47.4) 23.8 (174.6) (57.5) (255.7) (382.2) (854.8) $ 236.3 $ (472.1) $ (235.8) $ 341.7 $ (1,196.5) $ (42.6) $ (34.8) $ 48.5 $ (161.7) $ (113.2) (7.7) (96.6) (11.7) (63.2) (146.9) (109.7) (1.8) (0.9) (23.0) (16.5) (4.9) (1.7) (2.6) (0.8) (31.1) (24.4) (5.4) (2.5) (9.3) 29.2 68.4 (4.8) (1.7) 9.6 (356.8) (508.9) (18.9) (3.7) 0.3 (327.6) (440.5) (23.7) (5.4) (27.3) (109.1) (136.4) 22.0 13.5 — (21.9) (25.3) (4.0) 0.1 (11.8) (4.0) (621.7) (233.1) $ $ 19.2 $ (195.7) $ (176.5) $ 70.1 $ (691.8) $ 217.1 $ (276.4) $ (59.3) $ 271.6 $ (504.7) $ (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 Adjusted), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans and securities. 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 $35.6 million in 2021, $34.4 million in 2020 and $32.8 million in 2019. 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 2021 decreased from 2020. Net Interest Income, stated on an FTE basis, decreased from 2020, due to a lower net interest margin, partially offset by higher levels of average earning assets. Average earning assets increased in 2021 from 2020, primarily reflecting higher levels of short-term interest bearing deposits, Securities, and Loans and Leases. Funding of the balance sheet reflected higher levels of client deposits. The net interest margin in 2021 decreased from 2020. The net interest margin on an FTE basis in 2021 decreased from 2020, primarily due to lower average interest rates, partially offset by favorable balance sheet volume and mix shift. Federal Reserve and Other Central Bank Deposits and Other averaged $39.0 billion in 2021, which increased $11.1 billion, or 40%, from $27.9 billion in 2020, which resulted from significant deposit inflows. The higher level of client deposits were primarily placed with the Federal Reserve and other central banks and in the securities portfolio and the loan portfolio. Average Securities were $60.8 billion and increased $4.7 billion, or 8%, from $56.1 billion in the prior-year period and include certain community development investments, Federal Home Loan Bank stock, and Federal Reserve stock of $925.5 million, $158.0 million and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $57.8 billion in 2021 and $50.9 billion in 2020. Average 40 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $3.0 billion in 2021 and $5.2 billion in 2020. Interest-Bearing Due From and Deposits with Banks averaged $5.8 billion in 2021 and $5.4 billion in 2020. Loans and Leases averaged $37.2 billion, which increased $3.7 billion, or 11%, from $33.5 billion in 2020, primarily reflecting higher levels of private client, commercial real estate, non-U.S. loans, commercial and institutional, and residential real estate loans. Private client loans averaged $13.7 billion and increased $2.2 billion, or 20%, from $11.5 billion for the prior-year period. Commercial real estate loans averaged $4.0 billion and increased $723.3 million, or 22%, from $3.3 billion for the prior-year period. Non-U.S. loans averaged $2.5 billion and increased $557.6 million, or 28%, from $2.0 billion for the prior-year period. Commercial and institutional loans averaged $10.4 billion and increased $81.5 million, or 1%, from $10.3 billion for the prior-year period. Residential real estate loans averaged $6.2 billion and increased $74.3 million, or 1%, from $6.1 billion for the prior-year period. Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits increased $13.8 billion, or 16%, to $98.9 billion in 2021 from $85.1 billion in 2020. Average Interest-Related Funds increased $11.2 billion, or 11%, to $108.7 billion in 2021 from $97.5 billion in 2020. 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-related funds increased $8.5 billion, or 32%, to $35.2 billion in 2021 from $26.7 billion in 2020, primarily resulting from higher levels of Demand and Other Noninterest-Bearing Deposits. Average Demand and Other Noninterest-Bearing Deposits increased $7.7 billion , or 33%, to $31.1 billion in 2021 from $23.4 billion in 2020. The average rate on total source of funds was 0.02% in 2021 and 0.16% in 2020. Interest expense for Interest-Bearing Deposits in the current year was driven by low and negative interest rates for Non-U.S. Offices Interest-Bearing Deposits and low interest rates on domestic Interest-Bearing Deposits. Average Non- U.S. Offices Interest-Bearing Deposits comprised 70% of total average Interest-Bearing Deposits for the year ended December 31, 2021. Stockholders’ Equity Stockholders’ Equity averaged $11.7 billion in 2021, compared with $11.2 billion in 2020. The increase in average Stockholders’ Equity of $504.4 million, or 5%, was primarily attributable to Retained Earnings, partially offset by lower Accumulated Other Comprehensive Income since the prior year, repurchases of common stock pursuant to the Corporation’s share repurchase program and decreased Additional Paid-in Capital. During the year ended December 31, 2021, the Corporation maintained its quarterly common stock dividend at $0.70 per share and repurchased 2,527,544 shares of common stock, returning $861.5 million in capital to common stockholders, compared to $891.8 million in 2020. The share repurchases were predominantly made pursuant to the repurchase program authorized by the Board of Directors in July 2018. In October 2021, this program was terminated and replaced with a new repurchase program, under which the Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. 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 15, “Stockholders’ Equity,” provided in Item 8, “Financial Statements and Supplementary Data.” Provision for Credit Losses There was an $81.5 million release of credit reserves in 2021, as compared to a provision of $125.0 million in 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional portfolio. The prior-year provision primarily reflected an increase in the reserve evaluated on a collective basis. The increase in the collective basis reserve was primarily driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the COVID-19 pandemic and related market and economic impacts. Increases in the collective basis reserve were primarily in the commercial and institutional and commercial real estate portfolios. In addition, a $13.7 million increase in the allowance for credit losses, with a corresponding cumulative effect adjustment to decrease retained earnings by $10.1 million, net of income taxes, was recorded on January 1, 2020 upon adoption of the Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments.” 2021 Annual Report | Northern Trust Corporation 41 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net recoveries in 2021 totaled $6.3 million resulting from $0.7 million of charge-offs and $7.0 million of recoveries, compared to net charge-offs of $3.2 million in the prior-year resulting from $9.7 million of charge-offs and $6.5 million of recoveries. Nonaccrual assets at December 31, 2021 decreased 5% from the prior year-end. Commercial real estate, residential real estate, and commercial and institutional accounted for 54%, 30%, and 16%, respectively, of total nonaccrual loans and leases at December 31, 2021. Residential real estate, commercial real estate, commercial and institutional, and private client loans accounted for 47%, 31%, 20%, and 2%, respectively, of total nonaccrual loans and leases at December 31, 2020. For additional discussion of the Allowance for Credit Losses, refer to the “Asset Quality” section. Noninterest Expense Noninterest Expense for 2021 increased from 2020, primarily reflecting increased Outside Services, Compensation, Equipment and Software and Employee Benefits, partially offset by lower Other Operating Expense and Occupancy. Employee Benefits expense in 2021 included pension settlement charges of $27.9 million. The components of Noninterest Expense and a discussion of significant changes during 2021 and 2020 are provided below. TABLE 23: NONINTEREST EXPENSE ($ In Millions) Compensation Employee Benefits Outside Services Equipment and Software Occupancy Other Operating Expense Total Noninterest Expense FOR THE YEAR ENDED DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ 2,011.0 $ 1,947.1 $ 1,859.0 3 % 5 % 431.4 849.4 736.3 208.7 299.1 387.7 763.1 673.5 230.1 346.7 355.2 774.5 612.1 212.9 329.8 11 11 9 (9) (14) 9 (1) 10 8 5 $ 4,535.9 $ 4,348.2 $ 4,143.5 4 % 5 % Compensation Compensation expense, the largest component of Noninterest Expense, increased in 2021 from 2020, primarily reflecting higher incentives and salary expense. The prior year reflects $52.5 million of severance-related charges. Staff on a full-time equivalent basis totaled approximately 21,100 at December 31, 2021, up 1% from approximately 20,900 at December 31, 2020. Employee Benefits Employee Benefits expense in 2021 increased from 2020, primarily reflecting higher retirement plan expenses, medical costs and payroll taxes. There were $27.9 million of pension settlement charges in 2021. Outside Services Outside Services expense in 2021 increased from 2020, primarily due to higher technical services costs, third-party advisory fees and sub-custodian expenses. Equipment and Software Equipment and Software expense in 2021 increased from 2020, primarily reflecting higher software support and rental costs and higher amortization. Occupancy Occupancy expense in 2021 decreased from 2020, primarily due to early lease exits arising from workplace real estate strategies in the prior year, which included $11.9 million of expense related to an early lease exit. Other Operating Expense Other Operating Expense in 2021 decreased from 2020 primarily due to lower charges associated with account servicing activities and a decline in other miscellaneous expenses. The account servicing activities in the prior year included a $43.4 million charge related to a corporate action processing error. Please refer to Note 21, “Other Operating Expense” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to other operating expenses. 42 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provision for Income Taxes The 2021 Provision for Income Taxes was $464.8 million, representing an effective rate of 23.1%. This compares with a Provision for Income Taxes of $418.3 million and an effective rate of 25.7% in 2020. The decrease in the effective tax rate was primarily driven by the lower net tax impact from international operations and $26.8 million of prior-year tax expense related to the reversal of tax benefits previously recognized through earnings. See Note 22, “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 2021 compared to 2020. For a discussion related to the consolidated results of operations by reporting segment for 2020 compared to 2019, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K, which was filed with the SEC on February 23, 2021. Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS 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 C&IS 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 an 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 C&IS and Wealth Management, with the exception of non- recurring activities such as certain costs 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. Effective January 1, 2021, Northern Trust implemented enhancements to its FTP methodology, including enhancements impacting the allocation of net interest income between C&IS and Wealth Management. These methodology enhancements affect the results of each of these reporting segments. Due to the lack of historical information, segment results for periods ended prior to January 1, 2021 have not been revised to reflect the methodology enhancements. 2021 Annual Report | Northern Trust Corporation 43 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 24: CONSOLIDATED FINANCIAL INFORMATION ($ In Millions) Noninterest Income FOR THE YEAR ENDED DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 Trust, Investment and Other Servicing Fees $ 4,361.1 $ 3,995.0 $ 3,852.1 9 % 4 % Foreign Exchange Trading Income Other Noninterest Income Total Noninterest Income Net Interest Income(1) Revenue(1) Provision for Credit Losses Noninterest Expense Income before Income Taxes(1) Provision for Income Taxes(1) Net Income Average Assets $ $ 292.6 428.1 5,081.8 1,418.3 6,500.1 (81.5) 4,535.9 2,045.7 500.4 290.4 372.2 4,657.6 1,477.6 6,135.2 125.0 4,348.2 1,662.0 452.7 1,545.3 $ 1,209.3 $ 250.9 292.2 4,395.2 1,710.7 6,105.9 1 15 9 (4) 6 (14.5) N/M 4,143.5 1,976.9 484.7 1,492.2 4 23 11 28 % 14 % 156,363.2 $ 136,811.1 $ 117,551.4 16 27 6 (14) — N/M 5 (16) (7) (19) % 16 % (1) Non-GAAP financial measures stated on an FTE basis. The consolidated figures include $35.6 million, $34.4 million, and $32.8 million of FTE adjustments for 2021, 2020, and 2019, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. Corporate & Institutional Services C&IS is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking; and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. The following table summarizes the results of operations of C&IS for the years ended December 31, 2021, 2020, and 2019 on a management-reporting basis. TABLE 25: C&IS RESULTS OF OPERATIONS ($ In Millions) Noninterest Income FOR THE YEAR ENDED DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 Trust, Investment and Other Servicing Fees $ 2,487.3 $ 2,321.6 $ 2,211.5 7 % 5 % Foreign Exchange Trading Income Other Noninterest Income Total Noninterest Income Net Interest Income(1) Revenue(1) Provision for Credit Losses Noninterest Expense Income before Income Taxes(1) Provision for Income Taxes(1) Net Income 279.0 261.2 3,027.5 637.2 3,664.7 (33.8) 2,863.0 835.5 194.1 641.4 $ 276.3 222.5 2,820.4 665.5 3,485.9 38.1 2,752.7 695.1 174.4 $ 520.7 $ 232.2 178.2 2,621.9 918.7 3,540.6 1.9 2,605.5 933.2 219.4 713.8 1 17 7 (4) 5 N/M 4 20 11 19 25 8 (28) (2) N/M 6 (26) (21) 23 % (27) % Percentage of Consolidated Net Income 41 % 43 % 48 % Average Assets $ 120,883.2 $ 104,790.6 $ 87,557.1 15 % 20 % (1) Non-GAAP financial measures stated on an FTE basis. C&IS Net Income Net Income increased in 2021 compared to 2020, primarily reflecting higher Trust, Investment and Other Servicing Fees, a release of credit reserves in the current year as compared to a provision in the prior year and higher Other Noninterest 44 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income, partially offset by higher Noninterest Expense, lower Net Interest Income and an increase in the Provision for Income Taxes. C&IS Trust, Investment and Other Servicing Fees For an explanation of C&IS 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. C&IS Foreign Exchange Trading Income Foreign Exchange Trading Income in 2021 increased from 2020, primarily driven by higher client volumes, partially offset by lower foreign exchange swap activity in Treasury. C&IS Other Noninterest Income Other Noninterest Income for 2021 increased from 2020, primarily due to Other Operating Income and Security Commissions and Trading Income. C&IS Net Interest Income Net Interest Income on an FTE basis decreased in 2021 from 2020, due to a lower net interest margin, partially offset by an increase in average earning assets. Net interest margin on an FTE basis decreased to 0.60% from 0.75%. Average earning assets of $111.0 billion, increased $16.4 billion, or 17%, from $94.6 billion in the prior year. The earning assets in C&IS consisted primarily of intercompany assets and Loans and Leases. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $69.7 billion in 2021 as compared to $60.5 billion in 2020. C&IS Provision for Credit Losses There was a release of credit reserves of $33.8 million for 2021 compared to a provision of $38.1 million for 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by improvements in projected economic conditions and portfolio credit quality. The 2020 provision reflected an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts on the commercial and institutional portfolio. C&IS Noninterest Expense Total C&IS 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 2021 from 2020. The increase primarily reflects higher expense allocations, Outside Services expense and Compensation expense including incentives. 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 to meet the complex financial 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 assets under custody/administration, assets under custody, and assets under management of $1.07 trillion, $1.06 trillion, and $416.1 billion, respectively, at December 31, 2021. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi. 2021 Annual Report | Northern Trust Corporation 45 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2021, 2020, and 2019 on a management-reporting basis. TABLE 26: WEALTH MANAGEMENT RESULTS OF OPERATIONS ($ In Millions) Noninterest Income FOR THE YEAR ENDED DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 Trust, Investment and Other Servicing Fees $ 1,873.8 $ 1,673.4 $ 1,640.6 12 % Foreign Exchange Trading Income Other Noninterest Income Total Noninterest Income Net Interest Income(1) Revenue(1) Provision for Credit Losses Noninterest Expense Income before Income Taxes(1) Provision for Income Taxes(1) Net Income 13.6 188.2 2,075.6 781.1 2,856.7 (47.7) 1,651.1 1,253.3 317.0 936.3 $ 14.1 168.0 1,855.5 812.1 2,667.6 86.9 1,559.7 1,021.0 291.8 $ 729.2 $ Percentage of Consolidated Net Income 61 % 60 % 53 % Average Assets $ 35,480.0 $ 32,020.5 $ 29,994.3 (1) Non-GAAP financial measures stated on an FTE basis. 18.7 131.1 1,790.4 792.0 2,582.4 (4) 12 12 (4) 7 (16.4) N/M 1,531.6 1,067.2 271.1 796.1 6 23 9 28 % 11 % 2 % (25) 28 4 3 3 N/M 2 (4) 8 (8) % 7 % Wealth Management Net Income Wealth Management Net Income increased in 2021, primarily reflecting higher Trust, Investment and Other Servicing Fees, a release of credit reserves in the current year as compared to a provision in the prior year and higher Other Noninterest Income, partially offset by higher Noninterest Expense, lower Net Interest Income and an increase in the 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 Other Noninterest Income Other Noninterest Income for 2021 increased from 2020, primarily due to higher Other Operating Income driven by gains on property sales. Wealth Management Net Interest Income Net Interest Income on an FTE basis for 2021 decreased from 2020, primarily attributable to a decrease in the net interest margin, partially offset by an increase in earning assets. Net interest margin on an FTE basis decreased to 2.47% from 2.94%. Average earning assets of $32.8 billion in 2021, increased $3.3 billion, or 11%, from $29.5 billion in 2020. Earning assets and funding sources for the year ended December 31, 2021 were primarily comprised of loans and domestic interest- bearing deposits, respectively. Wealth Management Provision for Credit Losses There was a release of credit reserves of $47.7 million for 2021 compared to a provision of $86.9 million in 2020. The release of credit reserves during 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional and private client portfolios. The 2020 provision reflected an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions at the time and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, primarily impacting the commercial real estate and commercial and institutional portfolios. Wealth Management Noninterest Expense Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2021 from 2020. 46 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The increase primarily reflects higher expense allocations, Compensation expense including incentives and Employee Benefits. Other Income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments are included within Other. The following table summarizes the results of operations of the Other segment for the years ended December 31, 2021, 2020, and 2019 on a management- reporting basis. TABLE 27: OTHER RESULTS OF OPERATIONS ($ In Millions) Noninterest Income Net Interest Income(1) Revenue(1) Noninterest Expense Income (Loss) before Income Taxes(1) Provision (Benefit) for Income Taxes(1) Net Income Percentage of Consolidated Net Income Average Assets (1) Non-GAAP financial measures stated on an FTE basis. FOR THE YEAR ENDED DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ (21.3) $ (18.3) $ — (21.3) 21.8 (43.1) (10.7) — (18.3) 35.8 (54.1) (13.5) (32.4) $ (40.6) $ (17.1) — (17.1) 6.4 (23.5) (5.8) (17.7) (2) % — $ (3) % — $ (1) % — $ $ N/M N/M N/M (39) N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M Other—Noninterest Income Noninterest Income in 2021 decreased from 2020 due to higher expenses for existing swap agreements related to Visa Inc. Class B common shares. Other—Noninterest Expense Noninterest Expense in 2021 decreased from 2020, primarily due to lower costs arising from prior-year workplace real estate strategies and a one-time supplemental payment to employees in response to COVID-19 pandemic in the prior year, offset by pension settlement charges in 2021. Asset Management Asset Management, through the Corporation’s various subsidiaries, supports the C&IS 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 C&IS and Wealth Management. 2021 Annual Report | Northern Trust Corporation 47 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At December 31, 2021, Northern Trust managed $1.61 trillion in assets for personal and institutional clients, including $1.19 trillion for C&IS clients and $416.1 billion for Wealth Management clients. The following table presents consolidated assets under management as of December 31, 2021, 2020 and 2019 by investment type. TABLE 28: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE ($ In Billions) Equities Fixed Income Securities Cash and Other Assets Securities Lending Collateral Total Assets Under Management DECEMBER 31, CHANGE 2021 2020 2019 2021 / 2020 2020 / 2019 $ 856.5 $ 733.7 $ 216.1 338.9 195.6 204.8 279.9 186.9 650.8 193.8 223.6 163.1 17 % 13 % 6 21 5 6 25 15 $ 1,607.1 $ 1,405.3 $ 1,231.3 14 % 14 % Assets under management increased at year-end 2021 from year-end 2020. The increase primarily reflected favorable markets and net inflows. The following table presents activity in consolidated assets under management by product during the years ended December 31, 2021, 2020 and 2019. TABLE 29: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT 2021 2020 2019 $ 1,405.3 $ 1,231.3 $ 1,069.4 292.9 63.7 810.2 270.6 193.0 65.0 802.4 268.8 193.6 48.1 551.6 260.5 1,437.4 1,329.2 1,053.8 (321.0) (56.2) (745.4) (261.9) (212.6) (68.5) (746.5) (245.0) (205.5) (49.7) (541.0) (247.3) (1,384.5) (1,272.6) (1,043.5) 52.9 56.6 10.3 159.8 (10.9) 148.9 109.1 8.3 117.4 151.1 0.5 151.6 $ 1,607.1 $ 1,405.3 $ 1,231.3 ($ In Billions) Balance as of January 1 Inflows by Product Equities Fixed Income Cash and Other Assets Securities Lending Collateral Total Inflows Outflows by Product Equities Fixed Income Cash and Other Assets Securities Lending Collateral Total Outflows Net Inflows (Outflows) Market Performance, Currency & Other Market Performance & Other Currency Total Market Performance, Currency & Other Balance as of December 31 48 2021 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 30: SELECT CONSOLIDATED BALANCE SHEET INFORMATION ($ In Billions) Assets Federal Reserve and Other Central Bank Deposits and Other(1) Interest-Bearing Due from and Deposits with Banks(2) Securities Purchased under Agreements to Resell Total Securities(3) Loans and Leases Total Earning Assets Total Assets Liabilities and Stockholders' Equity Total Interest-Bearing Deposits Demand and Other Noninterest-Bearing Deposits Federal Funds Purchased Securities Sold under Agreements to Repurchase Other Borrowings Total Stockholders’ Equity DECEMBER 31, 2021 DECEMBER 31, 2020 CHANGE $ 64.5 $ 55.4 $ 3.9 0.7 62.7 40.5 172.3 183.9 111.6 48.3 — 0.5 3.6 12.0 6.6 1.6 61.1 33.8 158.5 170.0 100.8 43.1 0.3 — 4.0 11.7 9.1 (2.7) (0.9) 1.6 6.7 13.8 13.9 10.8 5.2 (0.3) 0.5 (0.4) 0.3 16 % (42) (57) 3 20 9 8 11 12 N/M N/M (11) 3 (1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting earning assets; such deposits are presented in Other Assets on the consolidated balance sheets. (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) Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets. TABLE 31: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION ($ In Billions) Assets Federal Reserve and Other Central Bank Deposits and Other(1) Interest-Bearing Due from and Deposits with Banks(2) Securities Purchased under Agreements to Resell Total Securities(3) Loans and Leases Total Earning Assets Total Assets Liabilities and Stockholders' Equity Total Interest-Bearing Deposits Demand and Other Noninterest-Bearing Deposits Federal Funds Purchased Securities Sold under Agreements to Repurchase Other Borrowings Total Stockholders’ Equity TWELVE MONTHS ENDED DECEMBER 31, 2021 2020 CHANGE $ 39.0 $ 27.9 $ 5.8 1.1 60.8 37.2 143.9 156.4 98.9 31.1 0.2 0.2 5.0 11.7 5.4 1.2 56.1 33.5 124.1 136.8 85.1 23.4 1.0 0.2 6.4 11.2 11.1 0.4 (0.1) 4.7 3.7 19.8 19.6 13.8 7.7 (0.8) — (1.4) 0.5 40 % 7 (15) 8 11 16 14 16 33 (81) 6 (21) 5 (1) Federal Reserve and Other Central Bank Deposits and Other includes collateral deposits with certain securities depositories and clearing houses for the purpose of presenting earning assets; such deposits are presented in Other Assets on the consolidated balance sheets. (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) Total Securities includes certain community development investments and Federal Home Loan Bank and Federal Reserve stock, which are classified in Other Assets on the consolidated balance sheets. 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. The current growth in both the period-end and average consolidated balance sheets was primarily driven by higher customer deposit balances. 2021 Annual Report | Northern Trust Corporation 49 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. During the third quarter of 2021, Northern Trust became a Government Securities Division (GSD) netting and sponsoring member in the Fixed Income Clearing Corporation (FICC) sponsored member program. FICC, a wholly-owned subsidiary of The Depository Trust & Clearing Corporation, is a central counterparty and provides netting and settlement for the U.S. Government securities marketplace. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty. See Note 5, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” Note 26, “Commitments and Contingent Liabilities” and Note 28, “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 attributable to Retained Earnings, partially offset by lower Accumulated Other Comprehensive Income since the prior year, repurchases of common stock pursuant to the Corporation’s share repurchase program and decreased Additional Paid-in Capital. During the year ended December 31, 2021, the Corporation declared cash dividends totaling $593.9 million to common stockholders and repurchased 2,527,544 shares of common stock, including 394,326 shares withheld related to share-based compensation, at a total cost of $267.6 million ($105.90 average price per share). During the year ended December 31, 2021, the Corporation declared cash dividends totaling $41.8 million to preferred stockholders. 50 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Asset Quality Securities Portfolio The following table presents the remaining maturity and average yield of Northern Trust's held to maturity (HTM) debt securities and available for sale (AFS) debt securities by security type as of December 31, 2021. TABLE 32: REMAINING MATURITY AND AVERAGE YIELD OF HELD TO MATURITY AND AVAILABLE FOR SALE DEBT SECURITIES TOTAL ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD AVERAGE MATURITY DECEMBER 31, 2021 ($ in Millions) Held to Maturity Debt Securities U.S. Government $ 47.0 0.03% $ 47.0 0.03% $ — —% $ — — % $ — —% 2 mo. Obligations of States and Political Subdivisions Government Sponsored Agency Other – Fixed – Floating Total Held to Maturity Debt Securities Available for Sale Debt Securities 0.8 5.64 0.8 5.64 — — — — — — 0 mos. 5,927.6 14,695.6 2,893.5 2.04 0.36 0.96 1,161.5 6,759.2 629.0 2.32 0.23 0.68 2,101.4 6,655.2 1,984.0 2.11 0.49 1.03 1,848.8 1,163.0 280.5 1.88 0.33 1.14 815.9 118.2 1.85 0.85 — — 61 mos. 28 mos. 42 mos. $ 23,564.5 0.86% $ 8,597.5 0.55% $ 10,740.6 0.90% $ 3,292.3 1.27 % $ 934.1 1.72% 38 mos. U.S. Government $ 2,426.1 1.64% $ — —% $ 2,187.1 1.74% $ 239.0 0.68 % $ — —% 31 mos. Obligations of States and Political Subdivisions Government Sponsored Agency Asset-Backed – Fixed Asset-Backed – Floating Other – Fixed – Floating Total Available for Sale Debt Securities 3,876.1 2.07 23.0 2.31 462.1 2.24 3,262.6 2.04 128.4 1.93 85 mos. 18,075.6 4,403.0 2,963.3 5,410.5 855.9 0.86 1.72 1.17 1.75 0.51 2,713.2 876.1 28.1 995.9 392.6 0.93 1.86 1.15 2.18 0.48 8,121.1 2,775.9 1,747.6 4,062.1 362.2 0.73 1.53 1.15 0.13 0.57 6,053.4 702.3 1,019.2 347.9 101.1 0.92 2.30 1.25 1.17 0.39 1,187.9 48.7 168.4 4.6 1.33 2.73 0.88 1.21 — — 55 mos. 31 mos. 61 mos. 32 mos. 23 mos. $ 38,010.5 1.28% $ 5,028.9 1.31% $ 19,718.1 1.22% $ 11,725.5 1.34 % $ 1,538.0 1.35% 50 mos. Note: Yield is calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates. 2021 Annual Report | Northern Trust Corporation 51 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 33: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES BY CREDIT RATING ($ In Millions) U.S. Government AAA AA A BBB NOT RATED TOTAL AS OF DECEMBER 31, 2021 $ 2,426.1 $ — $ Obligations of States and Political Subdivisions 1,133.2 2,742.9 Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed 18,075.6 374.0 442.0 364.1 2,030.9 5,941.6 1,424.7 — — 466.2 — 783.7 — — $ — — — — 1,206.6 23.5 230.5 — — — — — — 29.4 — — — — $ — — — — 197.5 118.0 — — — $ 2,426.1 3,876.1 18,075.6 374.0 2,341.7 505.6 3,045.1 5,941.6 1,424.7 Total Percent of Total ($ In Millions) U.S. Government $ 32,212.2 $ 3,992.8 $ 1,460.6 $ 29.4 $ 315.5 $ 38,010.5 84 % 11 % 4 % — % 1 % 100 % AAA AA A BBB NOT RATED TOTAL AS OF DECEMBER 31, 2020 $ 2,799.9 $ — $ Obligations of States and Political Subdivisions 918.1 2,165.5 Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed Total Percent of Total 24,956.7 669.8 426.3 453.3 1,622.0 3,947.5 1,031.8 — 38.8 790.0 — 566.0 — — $ — — — 5.4 1,123.5 24.9 157.8 — — — — — — — — — — — — $ — — — — 199.8 74.9 — 50.0 — $ 2,799.9 3,083.6 24,956.7 714.0 2,539.6 553.1 2,345.8 3,997.5 1,031.8 $ 324.7 $ 42,022.0 $ 36,825.4 $ 3,560.3 $ 1,311.6 $ 88 % 8 % 3 % — % 1 % 100 % As of December 31, 2021, the 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 and covered bonds. As of December 31, 2020, the 1% of AFS debt securities not rated by Moody’s, S&P Global or Fitch Ratings consisted of corporate debt, covered bonds, and other asset-backed securities. 52 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE 34: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING Sub-Sovereign, Supranational and Non-U.S. Agency Bonds 4,207.6 1,858.0 ($ In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Certificates of Deposit Other Asset-Backed Other Total Percent of Total (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Certificates of Deposit Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Other Total Percent of Total AAA AA A BBB NOT RATED TOTAL AS OF DECEMBER 31, 2021 $ 47.0 $ — 5,927.6 398.0 2.3 2,942.4 — — 0.8 — 942.6 386.7 — — 682.6 — — — $ $ — — — $ — — — 4,088.8 343.9 512.8 — — 31.3 — — — — — 1.1 — — — — — — — — 674.7 — — 516.3 $ 47.0 0.8 5,927.6 5,773.3 901.8 2,942.4 674.7 6,098.0 682.6 516.3 $ 14,207.5 $ 3,188.1 $ 4,632.9 $ 345.0 $ 1,191.0 $ 23,564.5 60 % 14 % 20 % 1 % 5 % 100 % AAA AA A BBB NOT RATED TOTAL AS OF DECEMBER 31, 2020 $ 90.0 $ — 3.0 319.8 3.8 3,184.6 — 2,590.9 677.0 — $ — 1.0 — $ — — — 1,337.4 279.1 — — 1,057.1 — — 6,630.6 305.1 — — — — — $ — 1.1 — 48.8 — — — — — — — — — — — — 807.2 — — 454.6 $ 90.0 2.1 3.0 8,336.6 588.0 3,184.6 807.2 3,648.0 677.0 454.6 $ 6,869.1 $ 2,674.6 $ 6,935.7 $ 49.9 $ 1,261.8 $ 17,791.1 39 % 15 % 39 % — % 7 % 100 % As of December 31, 2021 and December 31, 2020, the 5% and 7%, respectively, of HTM debt securities not rated by Moody’s, S&P Global or Fitch Ratings 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 $187.1 million at December 31, 2021, compared to net unrealized gains of $872.6 million as of December 31, 2020. Net unrealized losses as of December 31, 2021 were comprised of $345.1 million and $532.2 million of gross unrealized gains and losses, respectively. Net unrealized gains as of December 31, 2020 were comprised of $981.9 million and $109.3 million of gross unrealized gains and losses, respectively. As of December 31, 2021, the $38.0 billion AFS debt securities portfolio had unrealized losses of $110.2 million related to government-sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 2020, the $42.0 billion AFS debt securities portfolio had unrealized losses of $26.9 million related to government-sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 2021 and December 31, 2020, 14% and 16%, respectively, of the AFS corporate debt securities portfolio was backed by guarantees provided by U.S. and non-U.S. government entities. As of December 31, 2021, the $23.6 billion HTM debt securities portfolio had an unrealized loss of $106.1 million, $80.0 million and $71.6 million related to government sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other residential mortgage-backed securities, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. As of December 31, 2020, the $17.8 billion HTM debt securities portfolio had an unrealized loss of $76.5 million related to other residential mortgage-backed securities, which is primarily attributable to changes in overall market interest rates and credit spreads since their purchase. 2021 Annual Report | Northern Trust Corporation 53 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2021, $6.9 billion of government sponsored agency securities were transferred from AFS to HTM for capital management purposes, all of which were transferred in the second quarter of 2021. 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 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. During the year ended December 31, 2020, $301.5 million of securities reflected in U.S. government were transferred from AFS to HTM, all of which were transferred in the second quarter of 2020. For additional information relating to the securities portfolio, refer to Note 4, “Securities,” provided in Item 8, “Financial Statements and Supplementary Data.” 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. For additional information relating to the securities sold under agreements to repurchase, refer to Note 5, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” provided in Item 8, “Financial Statements and Supplementary Data.” Loans and Leases For additional information relating to the loan and leases portfolio, refer to Note 6, “Loans and Leases,” and Note 8, “Concentrations of Credit Risk” provided in Item 8, “Financial Statements and Supplementary Data.” The following table presents the remaining maturity of loans and leases by segment and class as of December 31, 2021. TABLE 35: REMAINING MATURITY OF LOANS AND LEASES (In Millions) U.S.: Commercial DECEMBER 31, 2021 TOTAL ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO FIFTEEN YEARS OVER FIFTEEN YEARS Commercial and Institutional $ 11,489.2 $ 4,299.4 $ 6,591.7 $ 593.8 $ Commercial Real Estate Lease Financing, net Other Personal Private Client Residential Real Estate Other Total U.S. Non-U.S.: Non-U.S. - Commercial Non-U.S. - Personal Total Non-U.S. Total Loans and Leases 4,326.3 11.0 670.7 15,256.3 6,319.9 35.2 596.4 — 670.7 10,186.0 301.8 35.2 2,428.3 1,299.9 — — 4,697.4 345.4 — 11.0 — 371.3 880.8 — 4.3 1.7 — — 1.6 4,791.9 — $ $ $ $ 38,108.6 $ 16,089.5 $ 14,062.8 $ 3,156.8 $ 4,799.5 1,990.2 $ 1,799.4 $ 381.8 195.3 2,372.0 $ 1,994.7 $ 190.8 $ 136.6 327.4 $ — $ 17.4 17.4 $ — 32.5 32.5 40,480.6 $ 18,084.2 $ 14,390.2 $ 3,174.2 $ 4,832.0 Note: Non-U.S. loans primarily include short duration exposures related to custodied client investments. 54 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS TABLE 36: INTEREST RATE SENSITIVITY OF LOANS AND LEASES (In Millions) Fixed Rate: Commercial Commercial and Institutional Commercial Real Estate Non-U.S. Total Commercial Personal Private Client Residential Real Estate Non-U.S. Total Personal Total Fixed Rate Variable Rate: Commercial Commercial and Institutional Commercial Real Estate Non-U.S. Lease Financing, net Other Total Commercial Personal Private Client Residential Real Estate Non-U.S. Other Total Personal Total Variable Rate Total Loans and Leases DECEMBER 31, 2021 TOTAL ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO FIFTEEN YEARS OVER FIFTEEN YEARS $ $ $ $ $ 344.4 $ 35.9 $ 259.2 $ 48.0 $ 196.6 26.9 22.4 26.9 105.0 — 69.2 — 567.9 $ 85.2 $ 364.2 $ 117.2 $ 409.8 $ 84.6 $ 246.5 $ 77.8 $ 789.9 10.7 1,210.4 $ 1,778.3 $ 1.4 2.5 88.5 $ 173.7 $ 30.6 7.8 284.9 $ 649.1 $ 589.8 — 667.6 $ 784.8 $ $ 11,144.8 $ 4,263.5 $ 6,332.5 $ 545.8 $ 4,129.7 1,963.3 11.0 670.7 574.0 1,772.5 — 670.7 2,323.3 190.8 — — 1,230.7 — 11.0 — 17,919.5 $ 7,280.7 $ 8,846.6 $ 1,787.5 $ 14,846.5 $ 10,101.4 $ 4,450.9 $ 293.5 $ 5,530.0 371.1 35.2 300.4 192.8 35.2 314.8 128.8 — 20,782.8 $ 10,629.8 $ 4,894.5 $ 38,702.3 $ 17,910.5 $ 13,741.1 $ 40,480.6 $ 18,084.2 $ 14,390.2 $ 291.0 17.4 — 601.9 $ 2,389.4 $ 3,174.2 $ $ $ $ $ $ 1.3 — — 1.3 0.9 168.1 0.4 169.4 170.7 3.0 1.7 — — — 4.7 0.7 4,623.8 32.1 — 4,656.6 4,661.3 4,832.0 Nonaccrual Assets and 90 Days Past Due Loans Nonaccrual assets consist of nonaccrual loans and leases 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 6, “Loans and Leases,” provided in Item 8, “Financial Statements and Supplementary Data.” 2021 Annual Report | Northern Trust Corporation 55 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, 2021 and 2020. TABLE 37: NONACCRUAL ASSETS ($ In Millions) Nonaccrual Loans and Leases Commercial Commercial and Institutional Commercial Real Estate Total Commercial Personal Residential Real Estate Private Client Total Personal Total Nonaccrual Loans and Leases Other Real Estate Owned Total Nonaccrual Assets 90 Day Past Due Loans Still Accruing Nonaccrual Loans and Leases to Total Loans and Leases Allowance for Credit Losses Assigned to Loans and Leases to Nonaccrual Loans and Leases DECEMBER 31, 2021 2020 $ $ $ $ $ $ 19.5 66.6 86.1 $ $ 36.2 $ — 36.2 $ 122.3 3.0 125.3 28.3 0.30 % 1.1x $ $ 26.4 40.2 66.6 62.2 2.9 65.1 131.7 0.7 132.4 8.9 0.39 % 1.4x Nonaccrual assets as of December 31, 2021 decreased from December 31, 2020, primarily due to net payoffs in the residential real estate and commercial and institutional portfolios, partially offset by a net increase in the commercial real estate portfolio. 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 Credit Risk Management, Treasury, Corporate Finance, the Economic Research group, and each of Northern Trust’s business units. As of December 31, 2021, the allowance for credit losses related to loans and leases, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $138.4 million, $34.1 million, $11.2 million, and $1.0 million, respectively. As of December 31, 2020, the allowance for credit losses related to loans and leases, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $190.7 million, $61.1 million, $7.3 million, and $0.8 million, respectively. For additional information relating to the allowance for credit losses and the changes in the allowance for credit losses during the years ended December 31, 2021 and 2020 due to charge-offs, recoveries and provisions for credit losses, refer to Note 7, “Allowance for Credit Losses,” provided in Item 8, “Financial Statements and Supplementary Data.” 56 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows the net recoveries (charge-offs) to average loans and leases by segment and class at December 31, 2021, 2020, and 2019. TABLE 38: NET RECOVERIES (CHARGE-OFFS) TO AVERAGE LOANS AND LEASES ($ in Millions) Net Recoveries (Charge-Offs) to Average Loans and Leases Commercial Commercial and Institutional Commercial Real Estate Total Commercial Personal Private Client Residential Real Estate Total Personal 2021 2020 2019 0.01 % (0.01) — 0.01 0.07 0.03 0.02 % (0.18) (0.03) — 0.02 — (0.03) % 0.02 (0.02) — 0.04 0.02 Total Net Recoveries (Charge-Offs) to Select Average Loans and Leases 0.02 % (0.01) % — % Net Recoveries (Charge-Offs) Commercial Commercial and Institutional Commercial Real Estate Total Commercial Personal Private Client Residential Real Estate Total Personal Total Net Recoveries (Charge-Offs) Average Loans and Leases Commercial Commercial and Institutional Commercial Real Estate Total Select Commercial Personal Private Client Residential Real Estate Total Select Personal $ 0.9 $ 1.8 $ (0.3) 0.6 1.3 4.4 5.7 6.3 $ (5.7) (3.9) (0.5) 1.2 0.7 $ (3.2) $ (2.6) 0.5 (2.1) 0.3 2.5 2.8 0.7 $ 10,428.6 $ 10,347.1 $ 8,979.9 3,977.0 14,405.6 13,686.7 6,190.6 19,877.3 3,253.8 13,600.9 2,918.1 11,898.0 11,452.9 6,116.4 17,569.3 10,746.0 6,297.2 17,043.2 Total Select Average Loans and Leases $ 34,282.9 $ 31,170.2 $ 28,941.2 Net recoveries (charge-offs) for the following segments were zero and therefore excluded from the above table as the ratio of net recoveries (charge-offs) to average loans and leases is also zero: Lease Financing, net, Other, and Non-U.S. The average loans and leases balances were also not provided in the table for Lease Financing, net, Other, and Non-U.S. Total average loans and leases for all loan portfolio categories were $37.2 billion, $33.5 billion, and $31.1 billion for the years ended December 31, 2021, 2020, and 2019, respectively. The SEC requires the disclosure of the Allowance for Credit Losses that is applicable to international operations. The disclosure has been prepared in compliance with this disclosure requirement and is used in determining non-U.S. operating performance. The amounts disclosed should not be construed as being the only amounts that are available for non-U.S. loan charge-offs, since the entire Allowance for Credit Losses assigned to Loans and Leases is available to absorb losses on both U.S. and non-U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends. Please refer to the following table for the non-U.S. allowance balances. 2021 Annual Report | Northern Trust Corporation 57 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table shows the allowance evaluated on an individual and collective basis for the loans and leases portfolio by segment and class at December 31, 2021 and 2020. TABLE 39: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES ($ In Millions) Evaluated on an Individual Basis Evaluated on a Collective Basis Commercial Commercial and Institutional Commercial Real Estate Lease Financing, net Non-U.S. Other Total Commercial Personal Residential Real Estate Private Client Non-U.S. Other Total Personal Total Allowance Evaluated on a Collective Basis Total Allowance for Credit Losses Allowance Assigned to: Loans and Leases Undrawn Commitments and Standby Letters of Credit Total Allowance for Credit Losses DECEMBER 31, 2021 2020 ALLOWANCE AMOUNT $ 10.1 PERCENT OF LOANS TO TOTAL LOANS ALLOWANCE AMOUNT PERCENT OF LOANS TO TOTAL LOANS — % $ 10.7 — % 30 10 — 4 1 45 18 35 2 — 55 50.6 68.2 0.4 7.7 — 126.9 23.3 11.1 1.1 — 35.5 162.4 172.5 $ $ 27 11 — 5 2 45 16 38 1 — 55 100.6 70.7 0.4 17.7 — 189.4 28.9 20.6 2.2 — 51.7 241.1 251.8 $ $ $ 138.4 34.1 $ 172.5 $ 190.7 61.1 $ 251.8 Allowance Assigned to Loans and Leases to Total Loans and Leases 0.34 % 0.56 % Allowance Related to Credit Exposure Evaluated on an Individual Basis: The allowance is determined through an individual evaluation of loans, leases, and lending-related commitments that have defaulted, generally those with Borrower Ratings of 8 and 9, that is 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 and Leases decreased $0.6 million from $10.7 million at December 31, 2020 to $10.1 million at December 31, 2021, primarily attributable to a decrease in outstanding loans in the commercial real estate and residential real estate portfolios, partially offset by an increase in outstanding loans in the commercial and institutional 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 to not share similar risk characteristics, an individual assessment is warranted. The allowance evaluated on a collective basis for Loans and Leases decreased $78.7 million to $162.4 million at December 31, 2021, compared with $241.1 million at December 31, 2020, primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional portfolio. Overall Allowance: The evaluation of the reserve evaluated on an individual and collective basis resulted in a total allowance for credit losses of $184.7 million at December 31, 2021, compared with $259.9 million at the end of 2020. The allowance of $138.4 million assigned to Loans and Leases, as a percentage of total Loans and Leases, was 0.34% at December 31, 2021, which decreased from a $190.7 million allowance assigned to Loans and Leases, representing 0.56% of total Loans and Leases at December 31, 2020. Allowances assigned to undrawn loan commitments and standby letters of credit totaled $34.1 million and $61.1 million at December 31, 2021 and 2020, respectively, and are included in Other Liabilities on the consolidated balance sheets. 58 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Expenditures Capital expenditures in 2021 included continued investments to enhance Northern Trust’s software and hardware capabilities, the opening of new offices, and the renovation of several existing offices. Capital expenditures for 2021 totaled $515.1 million, of which $419.6 million was for software, $40.2 million was for building and leasehold improvements, $52.6 million was for computer hardware, and $2.7 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 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 2020 totaled $560.4 million, of which $424.6 million was for software, $66.6 million was for building and leasehold improvements, $65.4 million was for computer hardware, and $3.8 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, 2021. For additional information, refer to Note 12, “Deposits,” provided in Item 8, “Financial Statements and Supplementary Data.” TABLE 40: REMAINING MATURITY OF TIME DEPOSITS $250,000 OR MORE (In Millions) 3 Months or Less Over 3 Months through 6 Months Over 6 Months through 12 Months Over 12 Months Total U.S. OFFICE CERTIFICATES OF DEPOSIT DECEMBER 31, 2021 NON-U.S. OFFICES OTHER TIME TOTAL $ $ 223.5 $ 261.3 $ 81.2 320.6 16.4 27.0 95.2 — 484.8 108.2 415.8 16.4 641.7 $ 383.5 $ 1,025.2 Deposits not insured by the FDIC as of December 31, 2021 and 2020 totaled $150.3 billion and $135.5 billion, respectively. These deposit amounts are derived by adding estimated domestic office uninsured deposits as allowed by Federal Financial Institutions Examination Council instructions to all foreign office deposits. Estimated uninsured domestic 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 During the third quarter of 2021, Northern Trust became a Government Securities Division (GSD) netting and sponsoring member in the Fixed Income Clearing Corporation (FICC) sponsored member program. FICC, a wholly-owned subsidiary of The Depository Trust & Clearing Corporation, is a central counterparty and provides netting and settlement for the U.S. Government securities marketplace. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty. 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. See Note 5, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” Note 26, “Commitments and Contingent Liabilities” and Note 28, “Offsetting of Assets and Liabilities” provided in Item 8, “Financial Statements and Supplementary Data” for additional information on our repurchase and reverse repurchase agreements. 2021 Annual Report | Northern Trust Corporation 59 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 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.” TABLE 41: SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO NON-U.S. OPERATIONS ($ In Millions) Total Assets Time Deposits with Banks Loans Non-U.S. Investments Total Liabilities Deposits 2021 2020 $ 29,902.8 $ 26,908.5 3,619.3 1,496.1 18,252.5 84,230.9 83,001.7 3,258.5 1,742.5 16,018.5 70,001.5 68,828.9 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 32, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.” 60 2021 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, 2021, 2020, and 2019. TABLE 42: CASH FLOW ACTIVITY SUMMARY (In Millions) Net cash provided by (used in): Operating activities Investing activities Financing activities Effect of Foreign Currency Exchange Rates on Cash Change in Cash and Due from Banks FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ $ 1,356.0 $ 1,896.8 $ (18,602.6) 16,073.5 (159.6) (1,332.7) $ (29,923.0) 27,871.9 84.6 (69.7) $ 2,592.0 (3,405.0) 615.9 74.7 (122.4) Operating Activities Net cash provided by operating activities of $1.4 billion for the year ended December 31, 2021 was primarily attributable to period earnings and the impact of higher non-cash charges such as depreciation and amortization, partially offset by higher net collateral deposited with derivative counterparties and in receivables. For the year ended December 31, 2020, net cash provided by operating activities of $1.9 billion primarily reflected period earnings and the impact of higher non-cash charges such as depreciation and amortization and provision for credit losses. Investing Activities Net cash used in investing activities of $18.6 billion for the year ended December 31, 2021 was primarily attributable to increased levels of deposits with the Federal Reserve and other central banks, higher levels of loans and leases and net purchases of AFS debt securities, partially offset by lower levels of interest-bearing deposits with banks. For the year ended December 31, 2020, net cash used in investing activities of $29.9 billion primarily reflected higher levels of deposits with the Federal Reserve and other central banks, net purchases of HTM debt securities, higher levels of loans and leases, and net purchases of AFS debt securities. Financing Activities Net cash provided by financing activities of $16.1 billion for the year ended December 31, 2021 was primarily attributable to higher levels of total deposits and securities sold under agreements to repurchase, partially offset by dividends paid on common stock, repayment of the 3.375% senior notes previously issued by the Corporation that matured in August 2021, lower short-term other borrowings, and the repayment of floating rate capital debt. The increase in total deposits was primarily attributable to higher levels of savings, money market and other interest-bearing deposits, non-U.S. interest- bearing deposits, and demand and other noninterest-bearing deposits. For the year ended December 31, 2020, net cash provided by financing activities of $27.9 billion primarily reflected higher levels of total deposits and proceeds from the issuance by the Corporation of 1.95% senior notes, partially offset by lower short-term other borrowings, dividends paid on common stock, repayment of the 3.45% senior notes previously issued by the Corporation that matured in November 2020, lower securities sold under agreements to repurchase, and the redemption of the Series C Non-Cumulative Perpetual Preferred Stock. The increase in total deposits was primarily attributable to higher levels of non-U.S. office noninterest-bearing deposits, non-U.S. interest-bearing deposits, savings, money market and other interest-bearing deposits, and demand and other noninterest-bearing deposits. 2021 Annual Report | Northern Trust Corporation 61 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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, and the impact on credit ratings. Capital levels strengthened in 2021 as average stockholders’ equity increased $504.4 million, or 5%, reaching $11.7 billion. Total stockholders’ equity was $12.0 billion at December 31, 2021, as compared to $11.7 billion at December 31, 2020. Preferred dividends totaling $41.8 million were declared in 2021. During 2021, the Corporation maintained its quarterly common stock dividend of $0.70 per common share. Common dividends totaling $593.9 million were declared in 2021. During the year ended December 31, 2021, the Corporation repurchased 2,527,544 shares of common stock, including 394,326 shares withheld related to share-based compensation, at an average price per share of $105.90. 62 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced approaches. For each ratio, the lower of the result calculated under the standardized approach and the advanced approach serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the applicable U.S. regulatory rules as of December 31, 2021 and 2020. TABLE 43: CAPITAL ADEQUACY ($ In Millions) Common Equity Tier 1 Capital Common Stockholders’ Equity DECEMBER 31, 2021 DECEMBER 31, 2020 STANDARDIZED APPROACH ADVANCED APPROACH STANDARDIZED APPROACH ADVANCED APPROACH $ 11,131.9 $ 11,131.9 $ 10,803.4 $ 10,803.4 Goodwill and Other Intangible Assets, net of Deferred Tax Liability Other Total Common Equity Tier 1 Capital Additional Tier 1 Capital Preferred Stock Other Total Additional Tier 1 Capital Total Tier 1 Capital Tier 2 Capital Qualifying Allowance for Credit Losses Qualifying Subordinated Debt Floating Rate Capital Total Tier 2 Capital Total Risk-Based Capital Risk-Weighted Assets(1) Total Assets – End of Period (EOP) Adjusted Average Fourth Quarter Assets(2) Total Loans and Leases – EOP Common Stockholders’ Equity to: Total Loans and Leases – EOP Total Assets – EOP Risk-Based Capital Ratios Common Equity Tier 1 Capital Tier 1 Capital Total Capital (Tier 1 and Tier 2) Tier 1 Leverage Supplementary Leverage(3) (751.3) (103.5) (751.3) (103.5) 10,277.1 10,277.1 884.9 (19.8) 865.1 884.9 (19.8) 865.1 (775.7) (65.5) 9,962.2 884.9 (24.9) 860.0 (775.7) (65.5) 9,962.2 884.9 (24.9) 860.0 11,142.2 11,142.2 10,822.2 10,822.2 184.8 799.8 — 984.6 12,126.8 86,292.6 183,889.8 160,506.3 40,480.6 $ $ — 799.8 — 799.8 11,942.0 77,807.2 183,889.8 160,506.3 40,480.6 $ $ $ $ 259.9 949.7 53.9 1,263.5 12,085.7 77,662.5 170,003.9 142,457.6 33,759.7 $ $ — 949.7 53.9 1,003.6 11,825.8 74,460.4 170,003.9 142,457.6 33,759.7 27.50 % 6.05 27.50 % 6.05 32.00 % 6.35 32.00 % 6.35 11.9 % 13.2 % 12.8 % 13.4 % 12.9 14.1 6.9 N/A 14.3 15.3 6.9 8.2 13.9 15.6 7.6 N/A 14.5 15.9 7.6 8.6 (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. (3) In November 2019, the Federal Reserve Board and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total leverage exposures of custodial banking organizations, including the Corporation and the Bank, equal to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020. Further, on April 1, 2020, the Federal Reserve Board issued an interim final rule that requires bank holding companies, including the Corporation, to deduct, on a temporary basis, deposits with the Federal Reserve Board and investments in U.S. Treasury securities from their total leverage exposure. The U.S. Treasury securities deduction is applied in addition to the central bank deposits relief referred to above. This rule became effective on April 1, 2020 and expired on April 1, 2021. On May 15, 2020, the U.S. federal banking agencies released an interim final rule that permits insured depository institutions of bank holding companies also to temporarily exclude deposits with the Federal Reserve Board and investments in U.S. Treasury securities from their total leverage exposure. The Bank did not elect to take this deduction. The supplementary leverage ratios at December 31, 2021 and December 31, 2020 for the Corporation and the Bank reflect the impact of these final rules. 2021 Annual Report | Northern Trust Corporation 63 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of December 31, 2021 and 2020, the Corporation’s capital ratios exceeded the requirements for classification as “well-capitalized” under applicable U.S. regulatory requirements. As a result of the stress test results published by the Federal Reserve on June 25, 2020, Northern Trust’s stress capital buffer requirement for the 2020 Capital Plan cycle was set at 2.5%. The 2020 stress capital buffer became effective October 1, 2020, and resulted in an effective Common Equity Tier 1 capital ratio minimum requirement of 7.0% inclusive of this buffer. The results of the 2021 stress test, published by the Federal Reserve Board on June 24, 2021, resulted in Northern Trust’s stress capital buffer and effective Common Equity Tier 1 capital ratio minimum requirement remaining in effect for the 2021 Capital Plan cycle, which began on October 1, 2021. 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 33, “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 Corporation adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, which significantly changes the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. Upon adoption of ASU 2016-13, the Corporation recorded a $13.7 million increase in the allowance for credit losses with a corresponding cumulative effect adjustment to decrease retained earnings $10.1 million, net of income taxes. For more information on the adoption of ASU 2016-13, please refer to Note 2, “Recent Accounting Pronouncements,” provided in Item 8, “Financial Statements and Supplementary Data.” 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. 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. Due to the inherent imprecision in accounting estimates, other estimates or assumptions could reasonably have been used in 2021 and changes in estimates are reasonably likely to occur from period to period. The allowance for credit losses consists of the following components: 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 to not 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 and lease 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 64 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS factors are derived by applying quarterly macroeconomic projections using models developed from historical data on macroeconomic factors and loans with similar factors. 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. For each of the different parameters, specific credit models for the individual loan segments were developed. 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 the qualitative adjustment framework, through which management applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to compute adjustments to the quantitative allowance that may impact individual or multiple segments of the loan portfolio. ASU 2016-13 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. The forecasts are 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 and lease 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 and lease portfolio of approximately $128.3 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 $78.1 million if all C&I borrowers were downgraded by one performing rating class. The C&I collective allowance would decrease by approximately $21.3 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 Credit Risk Management, Treasury, Corporate Finance, the Economic Research group, and each of Northern Trust’s 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. Evaluated on an Individual Basis. The allowance is determined through an individual evaluation of financial assets that have defaulted that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s 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 Credit 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. 2021 Annual Report | Northern Trust Corporation 65 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 in 2021, Northern Trust utilized a discount rate of 2.75% as of December 31, 2020, 3.05% as of June 30, 2021, and 3.06% as of September 30, 2021, and 3.03% as of December 31, 2021. The application of settlement accounting in 2021 required interim re-measurements of the U.S. Qualified Plan throughout 2021. The discount rate utilized for the U.S. Non-Qualified Plan as of December 31, 2020 was 2.45% . 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 4.97%. The expected long-term rate of return on U.S. Qualified Plan assets was 5.25% as of both December 31, 2020 and June 30, 2021, and 5.00% as of September 30, 2021. In evaluating possible revisions to pension-related assumptions for the U.S. pension plans as of Northern Trust’s December 31, 2021 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 3.03% and 2.80% at December 31, 2021 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 4.97%. 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 is 5.25% for 2022. • Mortality Table: As of December 31, 2021, Northern Trust has 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. This assumption was updated at December 31, 2021 from improvement scale MP-2020. The updated improvement scale applies to annuity payments only and results in slightly higher projected mortality improvement rates than estimated by the MP-2020 improvement scale. Mortality assumptions on lump sum payments remain static and continue to be in line with the IRS prescribed table for minimum lump sums in 2022. Excluding pension settlement charges, net pension expense in 2022 is expected to decrease by approximately $10.1 million, primarily driven by lower loss amortization due to strong asset returns in previous years and the 2021 settlement recognition. 66 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In order to illustrate the sensitivity of these assumptions on the expected U.S pension plans’ periodic pension expense in 2022 and the projected benefit obligation as of December 31, 2021, the following table is presented to show the effect of increasing or decreasing each of these assumptions by 25 basis points. TABLE 44: SENSITIVITY OF U.S. PENSION PLANS ASSUMPTIONS ($ In Millions) Increase (Decrease) in 2022 Pension Expense Discount Rate Change Compensation Level Change Rate of Return on Plan Assets Change Increase (Decrease) in 2021 Projected Benefit Obligation Discount Rate Change Compensation Level Change 25 BASIS POINT INCREASE 25 BASIS POINT DECREASE $ (3.8) $ 2.6 (3.8) (50.3) 11.1 4.0 (2.5) 3.8 53.2 (10.7) 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 2021 plan year. The minimum required contribution to the U.S. Qualified Plan is expected to be zero in 2022. The maximum deductible contribution is estimated at $413.0 million for 2022. FAIR VALUE MEASUREMENTS The preparation of financial statements in conformity with GAAP requires certain assets and liabilities to be reported at fair value. As of December 31, 2021, approximately 21% of Northern Trust’s total assets and less than 1% of total liabilities were carried on the consolidated balance sheets at fair value. As of December 31, 2020, approximately 25% of Northern Trust’s total assets and approximately 1% of its total liabilities were carried on the consolidated balance sheets at fair value. As discussed more fully in Note 3, “Fair Value Measurements,” provided in Item 8, “Financial Statements and Supplementary Data,” GAAP requires entities to categorize financial assets and liabilities carried at fair value according to a three-level valuation hierarchy. The hierarchy gives the highest priority to quoted, active market prices for identical assets and liabilities (Level 1) and the lowest priority to valuation techniques that require significant management judgment because one or more of the significant inputs are unobservable in the market place (Level 3). Approximately 6% and 7% of Northern Trust’s assets carried at fair value are classified as Level 1 as of December 31, 2021 and 2020, respectively. Northern Trust typically does not hold equity securities or other instruments that are actively traded on an exchange. As of December 31, 2021, approximately 94% of Northern Trust’s assets and 96% of its liabilities carried at fair value are categorized as Level 2, as they are valued using models in which all significant inputs are observable in active markets. Investment debt securities classified as AFS make up 98% of Level 2 assets with the remaining 2% primarily consisting of derivative financial instruments. Level 2 liabilities are comprised solely of derivative financial instruments. As of December 31, 2020, approximately 93% of Northern Trust’s assets and 98% of its liabilities carried at fair value are categorized as Level 2, as they are valued using models in which all significant inputs are observable in active markets. Investment debt securities classified as AFS make up 97% of Level 2 assets with the remaining 3% primarily consisting of derivative financial instruments. Level 2 liabilities are comprised solely of derivative financial instruments. Northern Trust’s Level 2 assets include AFS and trading account securities, the fair values of which are determined predominantly by external pricing vendors. Northern Trust has a well-established process to validate prices received from pricing vendors as discussed more fully in Note 3, “Fair Value Measurements,” provided in Item 8, “Financial Statements and Supplementary Data.” As of December 31, 2021 and 2020, all derivative assets and liabilities, excluding the swap related to the sale of certain Visa Class B common shares described below, were classified as Level 2 and approximately 96% and 95%, respectively, were measured on a notional value basis, related to client-related and trading activities, predominantly consisting of foreign exchange contracts. Derivative instruments are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect contractual terms of contracts. Northern Trust evaluated the impact of counterparty credit risk and its own credit risk on the valuation of derivative instruments. Factors considered included the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments are not considered material. 2021 Annual Report | Northern Trust Corporation 67 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of December 31, 2021 and 2020, Northern Trust’s Level 3 liabilities consisted of swaps that Northern Trust entered into with the purchaser of 1.1 million and 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swaps also require periodic payments from Northern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swaps are determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 26, “Commitments and Contingent Liabilities,” provided in Item 8, “Financial Statements and Supplementary Data,” for further information. While Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate and consistent with other market participants, the use of different methodologies or assumptions, particularly as applied to Level 3 assets, could have a material effect on the computation of their estimated fair values. RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS In November 2021, the Financial Accounting Standards Board (FASB) issued ASU No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance” (ASU 2021-10). The amendments in ASU 2021-10 require annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other accounting guidance within Topic 958, Not-for-Profit Entities, or International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance. ASU 2021-10 is effective for interim and annual periods beginning after December 15, 2021, although early adoption is permitted. ASU 2020-10 is not expected to have a significant impact on Northern Trust’s consolidated financial condition or results of operations. RISK MANAGEMENT Risk Management Overview Northern Trust employs an integrated risk management framework to 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, market, liquidity, 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. 68 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 45: RISK GOVERNANCE STRUCTURE Northern Trust Corporation Board of Directors Audit Committee Business Risk Committee – Cybersecurity Risk Oversight Subcommittee Capital Governance Committee Compensation and Benefits Committee 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 Global Enterprise Risk Committee (GERC) 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 Compensation and Benefits Committee. 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 Compensation and Benefits 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 CRO and the Risk Management executive leadership team of Northern Trust, together with the Chief Financial Officer, Head of Capital and Resolution Planning, General Counsel and Chief Human Resources 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 his or her designee, also attends GERC meetings as a non-voting member. 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: 2021 Annual Report | Northern Trust Corporation 69 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. 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. 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. 70 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. Credit Risk Overview Credit risk is inherent in many of Northern Trust’s activities. A significant component of credit risk relates to loans, leases, securities, and counterparty-related exposures. 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 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, private-equity-originated acquisition financing or hedge fund leveraging. • Credit Risk Framework and Governance The Credit Risk Management function is the focal point of the credit risk framework and, while independent of the businesses, 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 relationship-based credit culture. This function also monitors adherence to corporate policies, standards, programs, and external regulations. The Credit Risk Management function provides a system of checks and balances for Northern Trust’s diverse credit- related activities by monitoring these activities and practices and promoting their uniform application throughout Northern Trust. The credit risk framework provides authorities 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 individual authority because of amount, rating, term or other conditions, are referred to the relevant Group Credit Approval Committee. Credit decisions involving exposure in excess of these limits require the approval of the Senior Credit Committee. The Capital Markets Credit Committee has sole credit authority for the approval, modification, or renewal of credit exposure to all wholesale market counterparties. The Credit Risk Committee establishes and monitors credit-related policies and programs throughout Northern Trust and promotes their uniform application. The Chief Credit Officer reports directly to the CRO and chairs the CRC. Independent oversight and review of the credit risk framework also is provided by Risk Control. Credit Risk Measurement 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 credit risk. Calculations include entity- specific information about the obligor’s or counterparty’s probability of default and exposure-specific information about loss given default, exposure at default and maturity. 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 26, “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 2021 Annual Report | Northern Trust Corporation 71 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2021. TABLE 46: UNDRAWN COMMITMENTS TO EXTEND CREDIT BY INDUSTRY SECTOR AS OF DECEMBER 31, 2021 ($ In Millions) Commercial Commercial and Institutional Finance and Insurance Holding Companies Manufacturing Mining Public Administration Retail Trade Services Transportation and Warehousing Utilities Wholesale Trade Other Commercial Commercial and Institutional(1) Commercial Real Estate Lease Financing, net Non-U.S. Other Total Commercial Personal Residential Real Estate Private Client Non-U.S. Other Total Personal Total COMMITMENT EXPIRATION TOTAL COMMITMENTS ONE YEAR AND LESS OVER ONE YEAR OUTSTANDING LOANS $ 4,778.8 $ 2,769.7 $ 2,009.1 $ — 6,721.6 758.0 100.0 812.7 5,742.0 279.6 1,208.0 797.7 230.4 — 786.2 236.0 50.0 207.3 2,126.0 1.5 25.4 171.5 197.9 — 5,935.4 522.0 50.0 605.4 3,616.0 278.1 1,182.6 626.2 32.5 21,428.8 6,571.5 14,857.3 357.9 — 1,514.4 97.2 23,398.3 665.9 2,499.5 858.5 — 4,023.9 61.8 — 1,096.1 97.2 7,826.6 118.4 766.4 855.6 — 296.1 — 418.3 — 15,571.7 547.5 1,733.1 2.9 — 1,740.4 2,283.5 $ 27,422.2 $ 9,567.0 $ 17,855.2 $ 4,950.5 34.6 1,602.2 94.1 14.6 235.5 3,532.6 262.8 21.5 396.4 344.4 11,489.2 4,326.3 11.0 1,990.2 670.7 18,487.4 6,319.9 15,256.3 381.8 35.2 21,993.2 40,480.6 (1) 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 effectiveness of management’s implementation of the 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 over-the-counter (OTC) currency and interest rate derivatives, and from indemnified securities lending 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 and indemnified securities lending transactions as repo-style transactions. Foreign exchange exposures and interest rate derivatives are treated as OTC derivatives. The exposure at default measurement methodology for each eligible type of counterparty credit exposure, including the use of netting and collateral as risk mitigants, is determined based on operational requirements, the characteristics of the contract type and the portfolio size and complexity. 72 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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: Northern Trust’s primary risk mitigation approaches include the requirement of collateral. Residential and commercial real estate exposures are typically secured by properly margined mortgages on the property. In cases where loans to commercial or certain Wealth Management 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 agreements. Netting is primarily related to foreign exchange transactions with major banks and institutional clients subject to eligible master netting agreements. Northern Trust has elected to take the credit risk mitigation capital benefit of netting within its regulatory capital calculation at this time. Guarantees: Personal and corporate guarantees are often taken to facilitate potential collection efforts and to protect Northern Trust’s claims relative to other creditors. Northern Trust has elected not to take the credit risk mitigation capital benefit of guarantors within its regulatory capital calculation at this time. 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 other catastrophes to result in losses. This includes the potential that continuity of service and resiliency 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 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 reduce future loss events. The Operational Risk Management function 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 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 a Basel Advanced Measurement Approach (AMA) capital quantification. 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, significant changes to operating processes, and related significant loss events. • • • 2021 Annual Report | Northern Trust Corporation 73 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • • • • • • • Outsourcing Risk Management Program - a program that provides processes for appropriate risk assessment, measurement, monitoring and management of outsourced technology and business process outsourcing. Global Fraud Risk - a program designed to prevent, detect and respond to attempted or actual fraud impacting the bank and its clients globally. Global 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. The Program is designed to guide Northern Trust to more effectively identify, assess, manage and mitigate privacy risks and privacy incidents. Information Security and Technology Risk Management - a framework that sets forth a consistent, global approach to communicate risk management processes and controls addressing information security, including cyber threats, technology and compliance risks to the organization. Operational Resiliency and Recovery Management Program - a program designed to protect life safety, minimize and manage the business impact and support the resumption of mission-critical and economic functions for clients following an incident. Physical Security - a program that provides for the life safety of Northern Trust partners, clients, and visitors worldwide. 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, 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 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. 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. Information Security and Technology Risk Management Effective management of risks related to the confidentiality, integrity and availability of information is crucial in an environment of increasing cyber threat and requires a structured approach to establish and communicate expectations and required practices. Northern Trust’s information security, technology, and cyber risk management framework provides the overall structure for managing the respective risks in a sustainable manner. The framework is supported by the Information Security, Technology, and Cyber Risk Management Policy, which is the highest-level governing document and is approved by the Business Risk Committee. In addition, the framework is supported by an organizational structure that reflects support from executive management and includes risk committees comprised of members from across the business, including the Information Technology Risk Committee (ITRC). The ITRC is chaired by the Chief Information Risk Officer, who regularly reports to the Board of Directors and its subcommittees, as appropriate, on the status of the information security, technology, and cyber risk profile. The governance process, internal controls and risk management practices are designed to keep risk at levels appropriate to Northern Trust’s overall risk appetite and the inherent risk in the markets in which Northern Trust operates. Northern Trust employees are responsible for promoting information security as well as adhering to applicable policies and standards and other means provided to them to safeguard electronic information and business systems within their care. In cases where Northern Trust relies on vendors to perform services, controls are routinely reviewed for alignment with industry standards and their ability to protect information. Any findings identified are remediated following a risk-based approach. In addition to the many information security controls managed and monitored within the organization, Northern Trust uses external third-party security teams on a regular basis to assess effectiveness. These teams perform program maturity 74 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS assessments, penetration tests, security assessments and reviews of Northern Trust’s vulnerability to cyber- attacks. Northern Trust operates a global security operations center for threat identification and response. This center aggregates security threat information from systems and platforms across the business, and alerts the organization in accordance with its documented Cyber Incident Response Plan. The Cyber Incident Response Plan is used to respond to cybersecurity incidents. A cybersecurity incident is defined as an incident caused by damaging activity, which requires actions to prevent and respond to disruptions, denials, compromises or exfiltration that impact the confidentiality, integrity and availability of the assets of Northern Trust or its clients. The plan provides a streamlined approach that can be invoked rapidly to address matters that raise enterprise concern and to communicate impact, actions and status to senior management, including the Chief Information Security Officer and Chief Information Risk Officer, and appropriate stakeholders. The plan is designed to work with enterprise- level response plans, and is reviewed, tested, and updated regularly. Northern Trust’s disclosure procedures and controls also address cybersecurity incidents and include elements to ensure that there is an analysis of potential disclosure obligations arising from any such incidents. Northern Trust maintains compliance programs to address the applicability of restrictions on securities trading while in possession of material, nonpublic information, including in instances in which such information may relate to cybersecurity incidents. Northern Trust also maintains a comprehensive Information and Cyber Security Training and Awareness practice providing baseline and targeted education and awareness for employees and contractors. This program includes at least one required annual online training class for all employees, supplemental refresher training throughout the year, targeted training based on roles and risk levels, multiple simulated phishing and vishing attacks with associated training, the distribution of regular information security awareness materials, and the designation of individuals as Information Security and Privacy champions within the businesses. Operational Resiliency and Recovery Management Northern Trust’s operational resiliency approach encompasses operational resiliency 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 mission-critical business and economic functions and fulfills all regulatory and legal requirements. Northern Trust’s operational resiliency 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, resiliency 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 their critical 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. In 2020 and 2021, Northern Trust utilized these business continuity plans to respond to the COVID-19 pandemic. Fiduciary Risk Fiduciary risks are risks arising from the failure in administering or managing financial and other assets in clients’ fiduciary accounts: i) to adhere to a fiduciary standard of care if required under the terms of governing documents or applicable laws; or ii) 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 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 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. 2021 Annual Report | Northern Trust Corporation 75 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. • 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 CEOC establishes and monitors adherence to Northern Trust’s Compliance and Ethics Program. 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 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. In recent years, market conditions have driven elevated levels of client deposits, which have been actively managed and monitored. 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 liquidity coverage ratio (LCR), the net stable funding ratio (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. The Market and Liquidity Risk Management Committee (MLRC), 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 and liquidity risk exposures, approving and monitoring risk metrics, and approving key methodologies and assumptions that drive liquidity risk measurement. 76 2021 Annual Report | Northern Trust Corporation 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. 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 2021. 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. Since the regulatory compliance date of July 1, 2021, both the Corporation and Bank each satisfied the U.S. net stable funding ratio requirements. 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 71% and 73% of total assets as of December 31, 2021 and 2020, respectively. The market value of unencumbered securities at the Bank, which include those placed at the Federal Reserve discount window, totaled $59.0 billion and $56.8 billion at December 31, 2021 and 2020, 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 C&IS 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, 2021 and 2020, the Bank had over $55.0 billion and $51.3 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 13, “Senior Notes and Long-Term Debt” and Note 14, “Floating Rate Capital Debt” provided in Item 8, “Financial Statements and Supplementary Data.” The Corporation received $751.1 2021 Annual Report | Northern Trust Corporation 77 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS million and $900.0 million of dividends from the Bank in 2021 and 2020, respectively. Dividends from the Bank are subject to certain restrictions, as discussed in further detail in Note 31, “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 $1.7 billion and $2.5 billion at December 31, 2021 and 2020, respectively. During, and at year-end, 2021 and 2020, 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 2021 and 2020 was $1.8 billion and $2.7 billion, respectively. The cash flows of the Corporation are shown in Note 34, “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 2021 were $583.3 million of common stock dividends, repayments of senior notes and floating rate capital debt of $500.0 million and $278.8 million, respectively and $267.6 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, 2021, provided in the following table, allow Northern Trust to access capital markets on favorable terms. TABLE 47: NORTHERN TRUST CREDIT RATINGS AS OF DECEMBER 31, 2021 Northern Trust Corporation: Senior Debt Subordinated Debt Preferred Stock Outlook The Northern Trust Company: Short-Term Deposit Long-Term Deposit/Debt Subordinated Debt Outlook CREDIT RATING STANDARD & POOR’S MOODY’S FITCH RATINGS A+ A BBB+ Stable A-1+ AA- A+ Stable A2 A2 Baa1 Stable P-1 Aa2 A2 Stable A+ A+ BBB Stable F1+ AA A+ Stable 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 28, “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, 2021, the net maximum amount of these termination payments that Northern Trust could have been required to pay was $27.3 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, 2021, that would be triggered by a significant downgrade in its debt ratings. 78 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Off-Balance Sheet Arrangements Please refer to Note 26, “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 Management 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. 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 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 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. To mitigate interest rate risk, 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. • 2021 Annual Report | Northern Trust Corporation 79 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 basis point ramp downward movements in interest rates relative to forward rates. Each rate movement is assumed to occur gradually over a one-year period. TABLE 48: NET INTEREST INCOME SENSITIVITY AS OF DECEMBER 31, 2021 ($ In Millions) INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES 100 Basis Points 200 Basis Points DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES 100 Basis Points INCREASE/(DECREASE) ESTIMATED IMPACT ON NEXT TWELVE MONTHS OF NET INTEREST INCOME $ $ 302 514 (229) 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. 80 2021 Annual Report | Northern Trust Corporation 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 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-related 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 a 100 basis point shock down from current market implied forward rates. TABLE 49: MARKET VALUE OF EQUITY SENSITIVITY AS OF DECEMBER 31, 2021 ($ In Millions) INCREASE IN INTEREST RATES ABOVE MARKET IMPLIED FORWARD RATES 100 Basis Points 200 Basis Points DECREASE IN INTEREST RATES BELOW MARKET IMPLIED FORWARD RATES 100 Basis Points INCREASE/(DECREASE) ESTIMATED IMPACT ON MARKET VALUE OF EQUITY $ $ 241 (60) (384) 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 Risk Overview Northern Trust’s balance sheet is exposed to nontrading 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. Foreign exchange contracts are also used to reduce Northern Trust’s currency exposure to future non-U.S. dollar denominated revenue and expense. In addition, Northern Trust provides global foreign exchange (GFX) services to clients. Most of these services are provided in connection with Northern Trust’s global custody business. In the normal course of business, Northern Trust also engages in trading of non-U.S. currencies for its own account. Both activities are considered trading activities. Foreign currency 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, and non-deliverable foreign currency transactions. For GFX, spot risk is driven primarily by foreign exchange rate (FX) risk, and forward risk is driven primarily by interest rate (IR) risk. 2021 Annual Report | Northern Trust Corporation 81 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Foreign Currency Risk Measurement 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 non-U.S. currency exchange rates and interest 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. VaR is computed for each trading desk and for the global portfolio. VaR measures are computed in a vendor software application which reads foreign exchange positions from Northern Trust’s trading systems each day. Data vendors provide foreign exchange rates and interest rates for all currencies. The Risk Management function monitors on a daily basis VaR model inputs and outputs for reasonableness. Foreign Currency Risk Monitoring, Reporting and Analysis Northern Trust monitors several variations of the GFX VaR measures to meet specific regulatory and internal management needs. Variations include different methodologies (historical simulation, Monte Carlo simulation and Taylor approximation), horizons of one day and ten days, confidence levels of 95% and 99%, subcomponent VaRs using only FX drivers and only IR 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 50: GLOBAL FOREIGN CURRENCY VALUE-AT-RISK ($ In Millions) FOR THE YEAR ENDED DECEMBER 31, High Low Average As of December 31, TOTAL VaR (FX AND IR DRIVERS) FX VaR (FX DRIVERS ONLY) IR VaR (IR DRIVERS ONLY) $ 2021 0.9 $ — 0.2 0.1 2020 1.8 $ — 0.3 0.3 2021 0.4 $ — 0.1 0.1 2020 1.9 $ — 0.1 0.3 2021 0.7 $ — 0.2 0.1 2020 1.0 — 0.2 0.2 During 2021 and 2020, Northern Trust did not incur an actual GFX trading loss in excess of the daily GFX VaR estimate. Other Nonmaterial Trading Activities Market risk associated with other trading activities is negligible. Northern Trust’s broker-dealer subsidiary, Northern Trust Securities, Inc., maintains a small portfolio of trading securities held for customer accommodation purposes, which averaged $0.6 million and $1.1 million for the year ended December 31, 2021 and 2020, respectively. Northern Trust is also party to interest rate derivative contracts consisting mostly of interest rate swaps and swaptions entered into to meet clients’ interest rate risk management needs, but also including a small number of caps and floors. All interest rate derivative transactions are executed by Northern Trust's Treasury department. When Northern Trust enters into client transactions, its practice is to mitigate the resulting market risk with offsetting interbank derivative transactions with matching terms and maturities. 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. 82 2021 Annual Report | Northern Trust Corporation MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 has become a growing strategic risk for the Corporation. Various regulatory agencies, investors, and other stakeholders have increased expectations and scrutiny in this area. Accordingly, the Risk Management function has been taking increasing account of the impact that climate change has, or may in the future have, on operations, credit conditions, and regulatory compliance across the globe. The Corporation has also established a cross-disciplinary group to monitor and react to developments related to climate risk, with the goal of ensuring that the organization takes it into proper account. 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: • the impact of the ongoing COVID-19 pandemic—and governmental and societal responses thereto—on Northern Trust’s business, financial condition, and results of operations; financial market disruptions or economic recession in the United States 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; the downgrade of U.S. government-issued and other securities; 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 decline in the value of securities held in Northern Trust’s investment portfolio, particularly asset-backed securities, 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 security, human errors or omissions, pricing or valuation of securities, fraud, operational resiliency (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; 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; • • • • • • • • • • • 2021 Annual Report | Northern Trust Corporation 83 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS • • • • • • • • • • • • • • • • • • • • • • 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; Northern Trust’s success in controlling the costs and expenses of its business operations and the impacts of any broader inflationary environment thereon; the transition away from LIBOR or changes in the calculation of alternative interest rate benchmarks; the pace and extent of continued globalization of investment activity and growth in worldwide financial assets; changes in interest rates or in the monetary or other policies of various regulatory authorities or central banks; changes in the legal, regulatory and enforcement framework and oversight applicable to financial institutions, including Northern Trust; 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 United States and other countries, such as anti-money laundering, anti-bribery, and data privacy; failure to satisfy regulatory standards or to obtain regulatory approvals when required, including for the use and distribution of capital; changes in tax laws, accounting requirements or interpretations and other legislation in the United States or other countries that could affect Northern Trust or its clients; geopolitical risks, risks related to global climate change and the risks of extraordinary events such as pandemics, natural disasters, terrorist events and war (including current events involving Ukraine and Russia), and the responses of the United States and other countries to those events; the departure of the United Kingdom from the European Union, commonly referred to as “Brexit;” 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; 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; risks associated with being a holding company, including Northern Trust’s dependence on dividends from its principal subsidiary; the risk of damage to Northern Trust’s reputation which may undermine the confidence of clients, counterparties, rating agencies, and stockholders; 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. 84 2021 Annual Report | Northern Trust Corporation 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 51: RECONCILIATION TO FULLY TAXABLE EQUIVALENT ($ In Millions) Net Interest Income Interest Income - GAAP Add: FTE Adjustment Interest Income (FTE) - Non-GAAP Net Interest Income - GAAP Add: FTE Adjustment Net Interest Income (FTE) - Non-GAAP Net Interest Margin - GAAP Net Interest Margin (FTE) - Non-GAAP Total Revenue Total Revenue - GAAP Add: FTE Adjustment Total Revenue (FTE) - Non-GAAP FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 1,406.5 $ 1,643.5 $ 35.6 34.4 1,442.1 $ 1,677.9 $ 1,382.7 $ 1,443.2 $ 35.6 34.4 1,418.3 $ 1,477.6 $ 2,499.9 32.8 2,532.7 1,677.9 32.8 1,710.7 0.96 % 0.99 % 1.16 % 1.19 % 1.57 % 1.60 % 6,464.5 $ 6,100.8 $ 35.6 34.4 6,500.1 $ 6,135.2 $ 6,073.1 32.8 6,105.9 $ $ $ $ $ $ 2021 Annual Report | Northern Trust Corporation 85 ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by this item is incorporated herein by reference to the “Risk Management” section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Northern Trust Corporation: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Northern Trust Corporation and subsidiaries (the Corporation) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2022 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Corporation has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses. Basis for Opinion These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 86 2021 Annual Report | Northern Trust Corporation Assessment of the allowance for credit losses for commercial loans and leases evaluated on a collective basis As discussed in Notes 1 and 7 to the consolidated financial statements, the Corporation’s allowance for credit losses for commercial loans and leases evaluated on a collective basis (the collective ACL) was $95.5 million of a total allowance for credit losses assigned to loans and leases of $138.4 million as of December 31, 2021. Expected credit losses are measured on a collective basis as long as the financial assets included in the respective pool share similar risk characteristics. 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 and lease portfolio into segments based on loan and obligor specific factors, including loan type, borrower type, collateral type, loan size, and borrower credit quality. The estimation methodology applies probability of default and loss given default assumptions to the projected exposure at default on a pool basis. For each segment, the probability of default (PD) and loss given default (LGD) 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 factors, including the borrower rating assigned to individual obligors, as applicable. For periods beyond the reasonable and supportable period, the Corporation reverts to its own long-run historical loss experience 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. Estimating expected lifetime credit losses requires the consideration of the effect of future economic conditions. The Corporation employs multiple scenarios over a reasonable and supportable period to project future conditions. The Corporation determines the probability weights assigned to each scenario at each quarter-end. The quantitative allowance is then reviewed within the qualitative adjustment framework, through which the Corporation applies judgment by assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to compute adjustments to the quantitative allowance that may impact individual or multiple segments of the loan portfolio. We identified the assessment of the quantitative component of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the quantitative component of the collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the quantitative component of the collective ACL methodology, including the methods and models used to estimate the PD and LGD and their significant assumptions, the multiple economic forecast scenarios and macroeconomic factors and their respective weightings, and borrower ratings for certain commercial loans and leases. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and operating effectiveness of certain internal controls related to the critical audit matter. This included controls related to the Corporation’s measurement of the quantitative component of the collective ACL estimate, including controls over: • • • • • development of the quantitative component of the collective ACL methodology performance monitoring of the PD and LGD models development and approval of the multiple economic forecast scenarios, macroeconomic factors and their respective weightings identification and determination of the significant assumptions used in the PD and LGD models analysis of the allowance for credit losses for loans and leases results. We evaluated the Corporation’s process to develop the quantitative component of the collective ACL estimate by testing certain sources of data, factors, and assumptions that the Corporation used, and considered the relevance and reliability of such data, factors and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in: • • • evaluating the quantitative component of the Corporation’s collective ACL methodology for compliance with U.S. generally accepted accounting principles evaluating judgments made by the Corporation relative to the assessment and performance monitoring of the PD and LGD models assessing the conceptual soundness and performance testing of the PD and LGD models by inspecting model documentation to determine whether the models were suitable for their intended use 2021 Annual Report | Northern Trust Corporation 87 • • assessing the economic forecast scenarios, the economic input variables and their respective weightings through comparison to publicly available forecasts and the Corporation’s business environment testing individual borrower ratings for a selection of commercial loan and lease relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral. We also assessed the sufficiency of the audit evidence obtained related to the quantitative component of the collective ACL by evaluating the: • • • cumulative results of the procedures qualitative aspects of the Corporation’s accounting practices potential bias in the accounting estimate We have served as the Corporation’s auditor since 2002. Chicago, Illinois February 28, 2022 88 2021 Annual Report | Northern Trust Corporation CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (In Millions Except Share Information) ASSETS Cash and Due from Banks Federal Reserve and Other Central Bank Deposits Interest-Bearing Deposits with Banks Securities Purchased under Agreements to Resell Debt Securities Available for Sale (Amortized cost of $37,948.5 and $41,155.7) Held to Maturity (Fair value of $23,315.4 and $17,797.4) Trading Account Total Debt Securities Loans and Leases Commercial Personal Total Loans and Leases (Net of unearned income of $10.4 and $9.8) Allowance for Credit Losses Buildings and Equipment Client Security Settlement Receivables Goodwill Other Assets Total Assets LIABILITIES Deposits Demand and Other Noninterest-Bearing Savings, Money Market and Other Interest-Bearing Savings Certificates and Other Time Non U.S. Offices — Noninterest-Bearing — Interest-Bearing Total Deposits Federal Funds Purchased Securities Sold Under Agreements to Repurchase Other Borrowings Senior Notes Long-Term Debt Floating Rate Capital Debt Other Liabilities Total Liabilities STOCKHOLDERS' EQUITY Preferred Stock, No Par Value; Authorized 10,000,000 shares: Series D, outstanding shares of 5,000 Series E, outstanding shares of 16,000 Common Stock, $1.66 2/3 Par Value; Authorized 560,000,000 shares; Outstanding shares of 207,761,875 and 208,289,178 Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock (37,409,649 and 36,882,346 shares, at cost) Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity See accompanying notes to consolidated financial statements on pages 93-166. DECEMBER 31, 2021 2020 $ 3,056.8 $ 4,389.5 64,582.2 55,503.6 1,949.4 686.4 4,372.6 1,596.5 38,010.5 42,022.0 23,564.5 17,791.1 0.3 0.5 61,575.3 59,813.6 18,487.4 15,262.0 21,993.2 18,497.7 40,480.6 33,759.7 (150.6) (198.8) 488.7 514.9 1,941.2 1,160.2 706.2 707.2 8,573.6 8,384.9 $ 183,889.8 $ 170,003.9 $ 22,028.2 $ 17,728.5 35,003.1 28,631.8 842.7 937.1 26,287.3 25,382.2 75,767.1 71,198.4 159,928.4 143,878.0 0.2 531.9 3,583.8 2,505.5 1,145.7 — 260.2 39.8 4,011.5 3,122.4 1,189.3 277.8 4,177.5 5,536.6 171,873.0 158,315.6 493.5 391.4 408.6 939.3 493.5 391.4 408.6 963.6 13,117.3 12,207.7 (35.6) 428.0 (3,297.7) (3,204.5) 12,016.8 11,688.3 $ 183,889.8 $ 170,003.9 2021 Annual Report | Northern Trust Corporation 89 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (In Millions Except Share Information) Noninterest Income FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 Trust, Investment and Other Servicing Fees $ 4,361.1 $ 3,995.0 $ 3,852.1 292.6 44.3 140.2 243.9 290.4 45.4 133.2 194.0 (0.3) (0.4) 5,081.8 4,657.6 1,406.5 23.8 1,382.7 (81.5) 1,464.2 1,643.5 200.3 1,443.2 125.0 1,318.2 250.9 44.5 103.6 145.5 (1.4) 4,395.2 2,499.9 822.0 1,677.9 (14.5) 1,692.4 2,011.0 1,947.1 1,859.0 431.4 849.4 736.3 208.7 299.1 4,535.9 2,010.1 464.8 387.7 763.1 673.5 230.1 346.7 4,348.2 1,627.6 418.3 1,545.3 $ 1,209.3 $ 41.8 56.2 355.2 774.5 612.1 212.9 329.8 4,143.5 1,944.1 451.9 1,492.2 46.4 1,503.5 $ 1,153.1 $ 1,445.8 7.16 $ 7.14 5.48 $ 5.46 6.66 6.63 208,075,522 208,319,412 214,525,547 208,899,230 209,007,986 215,601,149 $ $ $ FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 1,545.3 $ 1,209.3 $ 1,492.2 (534.7) 0.8 10.5 59.8 (463.6) 527.8 0.5 26.9 67.5 622.7 228.9 (7.7) 49.9 (12.1) 259.0 $ 1,081.7 $ 1,832.0 $ 1,751.2 Foreign Exchange Trading Income Treasury Management Fees Security Commissions and Trading Income Other Operating Income Investment Security Losses, net Total Noninterest Income Net Interest Income Interest Income Interest Expense Net Interest Income Provision for Credit Losses Net Interest Income after Provision for Credit Losses Noninterest Expense Compensation Employee Benefits Outside Services Equipment and Software Occupancy Other Operating Expense Total Noninterest Expense Income before Income Taxes Provision for Income Taxes NET INCOME Preferred Stock Dividends Net Income Applicable to Common Stock PER COMMON SHARE Net Income – Basic – Diluted Average Number of Common Shares Outstanding – Basic – Diluted CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Millions) Net Income Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) Net Unrealized Gains (Losses) on Available for Sale Debt Securities Net Unrealized Gains (Losses) on Cash Flow Hedges Net Foreign Currency Adjustments Net Pension and Other Postretirement Benefit Adjustments Other Comprehensive Income (Loss) Comprehensive Income See accompanying notes to consolidated financial statements on pages 93-166. 90 2021 Annual Report | Northern Trust Corporation CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (In Millions Except Per Share Information) PREFERRED STOCK COMMON STOCK ADDITIONAL PAID-IN CAPITAL RETAINED EARNINGS ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) TREASURY STOCK TOTAL Balance at January 1, 2019 $ 882.0 $ 408.6 $ 1,068.5 $ 10,776.8 $ (453.7) $ (2,173.9) $ 10,508.3 Net Income Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) Dividends Declared: Common Stock, $2.60 per share Preferred Stock Issuance of Preferred Stock, Series E Stock Awards and Options Exercised Stock Purchased — — — — 391.4 — — — — — — — — — — 1,492.2 — — 1,492.2 — — — — (55.4) — — 259.0 — 259.0 (565.9) (46.4) — — — — — — — — — — — 208.0 (565.9) (46.4) 391.4 152.6 (1,100.2) (1,100.2) Balance at December 31, 2019 $ 1,273.4 $ 408.6 $ 1,013.1 $ 11,656.7 $ (194.7) $ (3,066.1) $ 11,091.0 Cumulative Effect Adjustment related to the adoption of Accounting Standards Update 2016-13 Balance at January 1, 2020 Net Income Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) Dividends Declared: Common Stock, $2.80 per share Preferred Stock — — — — Redemption of Preferred Stock, Series C (388.5) Stock Awards and Options Exercised Stock Purchased — — — — — (10.1) — — (10.1) 1,273.4 408.6 1,013.1 11,646.6 (194.7) (3,066.1) 11,080.9 — — — — — — — — — — — — 1,209.3 — (592.0) (44.7) (11.5) (49.5) — — — — 622.7 — — — — — — — — — — 161.4 1,209.3 622.7 (592.0) (44.7) (400.0) 111.9 (299.8) (299.8) Balance at December 31, 2020 $ 884.9 $ 408.6 $ 963.6 $ 12,207.7 $ 428.0 $ (3,204.5) $ 11,688.3 Net Income Other Comprehensive Income (Loss) (Net of Tax and Reclassifications) Dividends Declared: Common Stock, $2.80 per share Preferred Stock Stock Awards and Options Exercised Stock Purchased — — — — — — — — — — — — — — — — (24.3) — 1,545.3 — (593.9) (41.8) — — — — 1,545.3 (463.6) — (463.6) — — — — — — 174.4 (593.9) (41.8) 150.1 (267.6) (267.6) Balance at December 31, 2021 $ 884.9 $ 408.6 $ 939.3 $ 13,117.3 $ (35.6) $ (3,297.7) $ 12,016.8 See accompanying notes to consolidated financial statements on pages 93-166. 2021 Annual Report | Northern Trust Corporation 91 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Investment Security (Losses) Gains, net Amortization and Accretion of Securities and Unearned Income, net Provision for Credit Losses Depreciation and Amortization Change in Accrued Income Taxes Pension Plan Contributions Deferred Income Tax Provision Change in Receivables Change in Interest Payable Change in Collateral With Derivative Counterparties, net Other Operating Activities, net Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Change in Federal Funds Sold Change in Securities Purchased under Agreements to Resell Change in Interest-Bearing Deposits with Banks Net Change in Federal Reserve and Other Central Bank Deposits Purchases of Held to Maturity Debt Securities Proceeds from Maturity and Redemption of Held to Maturity Debt Securities Purchases of Available for Sale Debt Securities Proceeds from Sale, Maturity and Redemption of Available for Sale Debt Securities Change in Loans and Leases Purchases of Buildings and Equipment Purchases and Development of Computer Software Change in Client Security Settlement Receivables Acquisition of a Business, Net of Cash Received Bank-Owned Life Insurance Policy Premiums Other Investing Activities, net Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits Change in Federal Funds Purchased Change in Securities Sold under Agreements to Repurchase Change in Short-Term Other Borrowings Redemption of Preferred Stock - Series C Proceeds from Senior Notes Repayments of Senior Notes Repayment of Floating Rate Capital Debt Proceeds from Issuance of Preferred Stock - Series E Treasury Stock Purchased Net Proceeds from Stock Options Cash Dividends Paid on Common Stock Cash Dividends Paid on Preferred Stock Other Financing Activities, net Net Cash Provided by Financing Activities Effect of Foreign Currency Exchange Rates on Cash Change in Cash and Due from Banks Cash and Due from Banks at Beginning of Period Cash and Due from Banks at End of Period SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest Paid Income Taxes Paid Transfers from Loans to OREO Transfers from Available for Sale Debt Securities to Held to Maturity Debt Securities Transfers to Leases Held For Sale from Leases See accompanying notes to consolidated financial statements on pages 93-166. 92 2021 Annual Report | Northern Trust Corporation FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 1,545.3 $ 1,209.3 $ 1,492.2 0.3 99.7 (81.5) 515.6 37.2 (11.2) 2.0 (460.9) (7.8) (466.5) 183.8 1,356.0 — 897.7 2,344.5 (9,970.4) (54,734.9) 54,902.6 (13,896.2) 10,079.0 (6,744.7) (95.5) (419.6) (801.4) — — (163.7) (18,602.6) 17,885.5 (260.0) 492.1 (426.5) — — (500.0) (278.8) — (267.6) 53.8 (583.3) (41.8) 0.1 16,073.5 $ $ (159.6) (1,332.7) 4,389.5 3,056.8 $ 30.8 $ 371.0 12.9 6,864.1 — 0.4 88.9 125.0 500.3 25.4 (15.6) 16.4 4.5 (23.6) (17.8) (16.4) 1,896.8 5.0 (700.9) 712.6 (19,845.2) (40,187.9) 35,658.6 (10,886.8) 8,748.2 (2,316.7) (135.8) (424.6) (226.8) — — (322.7) (29,923.0) 32,137.9 (292.7) (450.0) (2,698.3) (400.0) 993.2 (508.6) — — (299.8) 19.5 (584.6) (45.9) 1.2 27,871.9 84.6 (69.7) 4,459.2 4,389.5 $ 226.8 $ 327.7 0.2 301.5 — 1.4 64.6 (14.5) 458.9 (70.7) (6.1) 34.3 (50.3) (23.6) 1,154.0 (448.2) 2,592.0 129.0 357.3 (614.6) (3,683.2) (14,154.3) 16,290.9 (12,811.0) 11,057.2 1,087.9 (158.0) (441.8) 821.0 (10.5) (1,500.0) 225.1 (3,405.0) 4,263.6 (2,041.3) 320.9 (1,184.5) — 498.0 — — 392.5 (1,100.2) 44.0 (529.7) (46.4) (1.0) 615.9 74.7 (122.4) 4,581.6 4,459.2 845.5 437.0 3.5 160.8 53.6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Summary of Significant Accounting Policies The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) and reporting practices prescribed for the banking industry. A description of the more significant accounting policies follows. A. Basis of Presentation. The consolidated financial statements include the accounts of Northern Trust Corporation (Corporation) and its wholly-owned subsidiary, The Northern Trust Company (Bank), and various other wholly-owned subsidiaries of the Corporation and Bank. Throughout the notes to the consolidated financial statements, the term “Northern Trust” refers to the Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. The consolidated statements of income include results of acquired subsidiaries from the dates of acquisition. Certain prior-year balances have been reclassified consistent with the current year’s presentation. B. Nature of Operations. The Corporation is a bank holding company that has elected to be a financial holding company under the Bank Holding Company Act of 1956, as amended. The Bank is an Illinois banking corporation headquartered in Chicago and the Corporation’s principal subsidiary. The Corporation conducts business in the United States (U.S.) and internationally through various U.S. and non-U.S. subsidiaries, including the Bank. Northern Trust generates the majority of its revenue from its two client-focused reporting segments: Corporate & Institutional Services (C&IS) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. C&IS 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. 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 to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe. 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. C. Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions in the application of certain of our significant accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. D. Foreign Currency Remeasurement and Translation. Asset and liability accounts denominated in nonfunctional currencies are remeasured into functional currencies at period-end rates of exchange, except for certain balance sheet items including but not limited to buildings and equipment, goodwill and other intangible assets, which are remeasured at historical exchange rates. Results from remeasurement of asset and liability accounts are reported in Other Operating Income on the consolidated statements of income. Income and expense accounts are remeasured at period-average rates of exchange. Asset and liability accounts of entities with functional currencies that are not the U.S. dollar are translated at period- end rates of exchange. Income and expense accounts are translated at period-average rates of exchange. Translation adjustments, net of applicable taxes, are reported directly to accumulated other comprehensive income (AOCI), a component of stockholders’ equity. E. Securities. Available for Sale (AFS) Securities are reported at fair value, with unrealized gains and losses credited or charged, net of the tax effect, to AOCI. Realized gains and losses on AFS securities are determined on a specific identification basis and are reported within Investment Security Losses, net, on the consolidated statements of income. Interest income is recorded on the accrual basis, adjusted for the amortization of premium and accretion of discount. 2021 Annual Report | Northern Trust Corporation 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Held to Maturity (HTM) Securities consist of debt securities that management intends to, and Northern Trust has the ability to, hold until maturity. Such securities are reported at cost, adjusted for amortization of premium and accretion of discount. Interest income is recorded on the accrual basis adjusted for the amortization of premium and accretion of discount. Held for Trading Securities are reported at fair value. Realized and unrealized gains and losses on securities held for trading are reported within Security Commissions and Trading Income on the consolidated statements of income. Nonmarketable Securities primarily consist of Federal Reserve Bank of Chicago and Federal Home Loan Bank stock and community development investments, each of which are recorded in Other Assets on the consolidated balance sheets. Federal Reserve Bank of Chicago and Federal Home Loan Bank stock are reported at cost, which represents redemption value. Community development investments are typically reported at amortized cost. Those community development investments that are designed to generate a return primarily through realization of tax credits and other tax benefits, which are discussed in further detail in Note 29, “Variable Interest Entities,” are amortized over the lives of the related tax credits and other tax benefits. F. Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase. 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. G. Derivative Financial Instruments. Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients, as part of its trading activity for its own account, and as part of its risk management activities. These instruments generally include foreign exchange contracts, interest rate contracts, total return swap contracts and credit default swap contracts. All derivative financial instruments, whether designated as hedges or not, are recorded at fair value within Other Assets and Other Liabilities on the consolidated balance sheets. Derivative asset and liability positions with the same counterparty are reflected on a net basis on the consolidated balance sheets in cases where legally enforceable master netting arrangements or similar agreements exist. These derivative assets and liabilities are further reduced by cash collateral received from, and deposited with, derivative counterparties. The accounting for changes in the fair value of a derivative on the consolidated statements of income depends on whether or not the contract has been designated as a hedge and qualifies for hedge accounting under GAAP. Derivative financial instruments are recorded within the line item, Other Operating Activities, net, on the consolidated statement of cash flows, except for net investment hedges which are recorded within Other Investing Activities, net. Changes in the fair value of client-related and trading derivative instruments, which are not designated hedges under GAAP, are recognized currently in either Foreign Exchange Trading Income or Security Commissions and Trading Income on the consolidated statements of income. Changes in the fair value of derivative instruments entered into for risk management purposes but not designated as hedges are recognized currently in Other Operating Income on the consolidated statements of income. Certain derivative instruments used by Northern Trust to manage risk are formally designated and qualify for hedge accounting as fair value, cash flow, or net investment hedges. Derivatives designated as fair value hedges are used to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. Changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability attributable to the hedged risk are recognized currently in Interest Income or Interest Expense on the consolidated statements of income. For substantially all fair value hedges, Northern Trust applies the “shortcut” method of accounting, available under GAAP. As a result, changes recorded in the fair value of the hedged item are assumed to equal the offsetting gain or loss on the derivative. For fair value hedges that do not qualify for the “shortcut” method of accounting, Northern Trust utilizes regression analysis in assessing whether these hedging relationships are highly effective at inception and quarterly thereafter. Derivatives designated as cash flow hedges are used to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. Changes in the fair value of such derivatives are recognized in AOCI, a component of stockholders’ equity, and there is no change to the accounting for the hedged item. Balances in AOCI are reclassified to earnings when the hedged forecasted transaction impacts earnings, and are reflected in the same income statement line item. Northern Trust applies the “shortcut” method of accounting for cash flow hedges of certain available for sale investment securities. For cash flow hedges of certain other available for sale investment securities, foreign currency denominated investment securities, and forecasted foreign currency denominated revenue and expenditure transactions, Northern Trust closely matches all terms of the hedged item and hedging derivative at inception and on an ongoing basis. For cash flow hedges of available for sale investment securities, to the extent all 94 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS terms are not perfectly matched, effectiveness is assessed using regression analysis. For cash flow hedges of forecasted foreign currency denominated revenue and expenditure transactions and investment securities, to the extent all terms are not perfectly matched, effectiveness is assessed using the dollar-offset method. Foreign exchange contracts and qualifying non-derivative instruments designated as net investment hedges are used to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. Changes in the fair value of the hedging instrument are recognized in AOCI consistent with the related translation gains and losses of the hedged net investment. For net investment hedges, all critical terms of the hedged item and the hedging instrument are matched at inception and on an ongoing basis. Amounts recorded in AOCI are reclassified to earnings only upon the sale or liquidation of an investment in a non-U.S. branch or subsidiary. Fair value, cash flow, and net investment hedges are designated and formally documented as such contemporaneous with the transaction. The formal documentation describes the hedge relationship and identifies the hedging instruments and hedged items. Included in the documentation is a discussion of the risk management objectives and strategies for undertaking such hedges, the nature of the risk being hedged, and a description of the method for assessing hedge effectiveness at inception and on an ongoing basis. For hedges that do not qualify for the “shortcut” or the critical terms match methods of accounting, a formal assessment is performed on a calendar quarter basis to verify that derivatives used in hedging transactions continue to be highly effective in offsetting the changes in fair value or cash flows of the hedged item. Hedge accounting is discontinued if a derivative ceases to be highly effective, matures, is terminated or sold, if a hedged forecasted transaction is no longer expected to occur, or if Northern Trust removes the derivative’s hedge designation. Subsequent gains and losses on these derivatives are included in Foreign Exchange Trading Income or Security Commissions and Trading Income on the consolidated statements of income. For discontinued cash flow hedges, the accumulated gain or loss on the derivative remains in AOCI and is reclassified to earnings in the period in which the previously hedged forecasted transaction impacts earnings or is no longer probable of occurring. For discontinued fair value hedges, the previously hedged asset or liability ceases to be adjusted for changes in its fair value. Previous adjustments to the hedged item are amortized over the remaining life of the hedged item. H. Loans and Leases. Loans and leases are recognized assets that represent a contractual right to receive money either on demand or on fixed or determinable dates. Loans and leases are disaggregated for disclosure purposes by portfolio segment (segment) and by class. Northern Trust has defined its segments as commercial and personal. A class of loans and leases is a subset of a segment, the components of which have similar risk characteristics, measurement attributes, or risk monitoring methods. The classes within the commercial segment have been defined as commercial and institutional, commercial real estate, lease financing, net, non-U.S. and other. The classes within the personal segment have been defined as residential real estate, private client and other. Loan Classification. Loans that are held for investment are reported at the principal amount outstanding, net of unearned income. Loans classified as held for sale are reported at the lower of cost or fair value. Undrawn commitments relating to loans that are not held for sale are recorded in Other Liabilities and are carried at the amount of unamortized fees with an allowance for credit loss liability recognized for any estimated expected losses. Nonaccrual Loans and Recognition of Income. Interest income on loans and leases is recorded on an accrual basis unless, in the opinion of management, there is a question as to the ability of the debtor to meet the terms of the loan agreement, or interest or principal is more than 90 days contractually past due and the loan is not well-secured and in the process of collection. Loans meeting such criteria are classified as nonaccrual and interest income is recorded on a cash basis. Past due status is based on how long since the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans that are 29 days past due or less are reported as current. At the time a loan is determined to be nonaccrual, interest accrued but not collected is reversed against interest income in the current period. Interest collected on nonaccrual loans is applied to principal unless, in the opinion of management, collectability of principal is not in doubt. Management’s assessment of indicators of loan and lease collectability, and its policies relative to the recognition of interest income, including the suspension and subsequent resumption of income recognition, do not meaningfully vary between loan and lease classes. Nonaccrual loans are returned to performing status when factors indicating doubtful collectability no longer exist. Factors considered in returning a loan to performing status are consistent across all classes of loans and leases and, in accordance with regulatory guidance, relate primarily to expected payment performance. A loan is eligible to be returned to performing status when: (i) no principal or interest that is due is unpaid and repayment of the remaining contractual principal and interest is expected or (ii) the loan has otherwise become well-secured (possessing realizable value sufficient to discharge the debt, including accrued interest, in full) and is in the process of collection (through action reasonably expected to result in debt repayment or restoration to a current status in the near future). A loan that has not been brought fully current may be restored to performing status provided there has been a sustained period of repayment performance (generally a minimum of six payment periods) by the borrower in accordance with the contractual terms, and Northern Trust is reasonably assured of repayment within a reasonable period of time. Additionally, a loan that has been formally restructured so as to be reasonably assured of repayment and performance according to its modified terms may be returned to accrual status, provided there was a well-documented credit evaluation of the borrower’s financial 2021 Annual Report | Northern Trust Corporation 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS condition and prospects of repayment under the revised terms, and there has been a sustained period of repayment performance (generally a minimum of six payment periods) under the revised terms. Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt restructuring (TDR). All TDRs are reported starting in the calendar year of their restructuring. In subsequent years, a TDR may cease being reported if the loan was modified at a market rate and has performed according to the modified terms for at least six payment periods. A loan that has been modified at a below market rate will return to accrual status if it satisfies the six-payment- period performance requirement. The expected credit loss is measured based upon the present value of expected future cash flows, discounted at the effective interest rate based on the original contractual rate. If a loan’s contractual interest rate varies based on subsequent changes in an independent factor, such as an index or rate, the loan’s effective interest rate is calculated based on the factor as it changes over the life of the loan. Northern Trust elected not to project changes in the factor for purposes of estimating expected future cash flows. Further, Northern Trust elected not to adjust the effective interest rate for prepayments. If the loan is collateral dependent, the expected loss is measured based on the fair value of the collateral at the reporting date. If the loan valuation is less than the recorded value of the loan, either an allowance is established, or a charge-off is recorded, for the difference. Smaller balance (individually less than $1 million) homogeneous loans are collectively evaluated. Northern Trust’s accounting policies for material nonaccrual loans is consistent across all classes of loans and leases. All loans and leases with TDR modifications are evaluated for additional expected credit losses. The nature and extent of further deterioration in credit quality, including a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses. Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the collateral is usually the underlying real estate property. For collateral dependent financial assets, it is Northern Trust’s policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral. Premium, Discounts, Origination Costs and Fees. Premiums and discounts on loans are recognized as an adjustment of yield using the interest method based on the contractual terms of the loan. Certain direct origination costs and fees are netted, deferred and amortized over the life of the related loan as an adjustment to the loan’s yield. I. Allowance for Credit Losses. 2021 and 2020 Allowance for Credit Losses after the Adoption of Accounting Standards Update No. 2016-13 As of December 31, 2021 and 2020, the allowance for credit losses 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. 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. Forecasting and Reversion. Estimating expected lifetime credit losses requires the consideration of the effect of future economic conditions. Northern Trust employs multiple scenarios over a reasonable and supportable period (currently two years) to project future conditions. Management determines the probability weights assigned to each scenario at each quarter-end. Key variables determined to be relevant for projecting credit losses on the portfolios in scope include macroeconomic factors, such as corporate profits, unemployment, and real estate price indices, as well as financial market factors such as equity prices, volatility, and credit spreads. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters. Allowance for Loans and Leases. The allowance estimation methodology for the collective assessment is primarily based on internally developed loss data specific to the Northern Trust 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 and lease portfolio into homogeneous segments based on similar risk characteristics or risk monitoring methods. 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 of the different parameters, specific credit models for the individual loan segments were developed. For each segment, the probability of default and the loss given default are applied to the 96 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 of the loan portfolio. The allowance related to credit exposure evaluated on an individual basis is determined through an individual evaluation of loans, leases, and lending-related commitments that have defaulted, generally those with Borrower Ratings of 8 and 9, that is based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s 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. Northern Trust analyzes its exposure to credit losses from both on-balance sheet and off-balance sheet activity using a consistent methodology for the quantitative framework as well as the qualitative framework. As of December 31, 2021 and 2020, for purposes of estimating the allowance for credit losses for undrawn loan commitments and standby letters of credit, the exposure at default includes an estimated drawdown of unused credit based on credit utilization factors, resulting in a proportionate amount of expected credit losses. Allowance for HTM Securities. HTM debt securities classified as U.S. government, government sponsored agency, and certain securities classified as obligations of states and political subdivisions are considered to be guarantees of the U.S. government or an agency of the U.S. government and therefore an allowance for credit losses is not estimated for such investments as the expected probability of non-payment of the amortized cost basis is zero. HTM debt securities classified as other asset-backed represent pools of underlying receivables from which the cash flows are used to pay the bonds that vary in seniority. Utilizing a qualitative estimation approach, the allowance for other asset-backed securities is assessed by evaluating underlying pool performance based on delinquency rates and available credit support. HTM debt securities classified as other relates to 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. The allowance for CRA investments is assessed using a qualitative estimation approach primarily based on internal historical performance experience and default history of the underlying CRA portfolios to determine a quantitative component of the allowance. The allowance estimation methodology for all other HTM debt securities is developed using a combination of external and internal data. The estimation methodology groups securities with shared characteristics for which the probability of default and the loss given default are applied to the total exposure at default to determine a quantitative component of the allowance. Allowance for AFS Securities. AFS securities impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible credit losses. A determination as to whether a security’s decline in market value is related to credit impairment takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is credit related include, but are not limited to, the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer, which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that Northern Trust will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if a credit loss has occurred that is then based on the best estimate of cash flows to be collected from the security, discounted using the security’s effective interest rate. If the present value of the expected cash flows is found to be less than the current amortized cost of the security, an allowance for credit losses is generally recorded equal to the difference between the two amounts, limited to the amount the amortized cost basis exceeds the fair value of the security. Allowance for Other Financial Assets. The allowance for other financial assets consists of the allowance for those other financial assets presented in Due from Banks, Other Central Bank Deposits, Interest-Bearing Deposits with Banks, Federal Funds Sold, and Other Assets. The Other Assets category includes other miscellaneous credit exposures reported in Other Assets on the consolidated balance sheets. The allowance estimation methodology for other financial assets primarily utilizes a similar approach as used for the HTM debt securities portfolio. It consists of a combination of externally and internally developed loss data, adjusted for the appropriate contractual term. Northern Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category and expected to exhibit minimal to modest likelihood of loss. 2021 Annual Report | Northern Trust Corporation 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The portion of the allowance assigned to loans and leases, HTM debt securities, and other financial assets is presented as a contra asset in Allowance for Credit Losses on the consolidated balance sheets. The portion of the allowance assigned to undrawn loan commitments and standby letters of credit is reported in Other Liabilities on the consolidated balance sheets. The allowance for AFS securities is presented parenthetically with the amortized cost basis of AFS securities on the consolidated balance sheets. The Provision for Credit Losses on the consolidated statements of income represents the change in the Allowance for Credit Losses on the consolidated balance sheets and is the charge to current period earnings. It represents the amount needed to maintain the Allowance for Credit Losses on the consolidated balance sheets at an appropriate level to absorb lifetime expected credit losses related to financial assets in scope. Actual losses may vary from current estimates and the amount of the Provision for Credit Losses may be either greater than or less than actual net charge-offs. Contractual Term. Northern Trust estimates expected credit losses over the contractual term of the financial assets adjusted for prepayments, unless prepayments are not relevant to specific portfolios or sub-portfolios. Extension and renewal options are typically not considered since it is not Northern Trust’s practice to enter into arrangements where the borrower has the unconditional option to renew, or a conditional extension option whereby the conditions are beyond Northern Trust’s control. Accrued Interest. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables related to its loan and securities portfolios as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. Accrued interest is written off by reversing interest income during the quarter the financial asset is moved from an accrual to a nonaccrual status. 2019 Allowance for Credit Losses prior to the Adoption of Accounting Standards Update No. 2016-13 Allowance for Loans and Leases under the Previous “Incurred Loss” Model. As of December 31, 2019, the Allowance for Credit Losses represented management’s estimate of probable losses which occurred as of the date of the consolidated financial statements. The loan and lease portfolio and other lending-related credit exposures were regularly reviewed to evaluate the level of the Allowance for Credit Losses. In determining an appropriate allowance level, Northern Trust evaluated the allowance necessary for impaired loans and lending-related commitments and also estimated losses inherent in other lending-related credit exposures. The allowance for credit losses consisted of the following components: Specific Allowance. A loan was considered to be impaired when, based on existing information and events, management determined that it was probable that Northern Trust would be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans were identified through ongoing credit management and risk rating processes, including the formal review of past due and watch list credits. Payment performance and delinquency status were critical factors in identifying impairment for all loans and leases, particularly those within the residential real estate, private client and personal-other classes. Other key factors considered in identifying impairment of loans and leases within the commercial and institutional, lease financing, net, non-U.S., and commercial-other classes related to the borrower’s ability to perform under the terms of the obligation as measured through the assessment of future cash flows, including consideration of collateral value, market value, and other factors. The specific allowance was determined through an individual evaluation of loans and lending-related commitments considered impaired that was based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay. For impaired loans where the amount of specific allowance, if any, was determined based on the value of the underlying real estate collateral, third-party appraisals were typically obtained and utilized by management. These appraisals were generally less than twelve months old and were subject to adjustments to reflect management’s judgment as to the realizable value of the collateral. Inherent Allowance. The inherent allowance estimation methodology was based on internally developed loss data specific to the Northern Trust loan and lease portfolio. The estimation methodology and the related qualitative adjustment framework segregated the loan and lease portfolio into homogeneous segments. For each segment, the probability of default and the loss given default were applied to the total exposure at default to determine a quantitative inherent allowance. The quantitative inherent allowance was then reviewed within the qualitative adjustment framework, where management applied judgment by assessing internal risk factors, potential limitations in the quantitative methodology and environmental factors that were not fully contemplated in the quantitative methodology to compute an adjustment to the quantitative inherent allowance for each segment of the loan portfolio. The results of the inherent allowance estimation methodology were reviewed quarterly by Northern Trust’s Loan Loss Reserve Committee, which included representatives from Credit Risk Management, reporting segment management, and Corporate Finance. Loans, leases, and other extensions of credit deemed uncollectible were charged to the Allowance for Credit Losses. Subsequent recoveries, if any, were credited to the allowance. Northern Trust’s policies relative to the charging-off of uncollectible loans and leases were consistent across both loan and lease segments. Determinations as to whether loan balances for which the collectability was in question were charged-off or a specific reserve was established were based on 98 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS management’s assessment as to the level of certainty regarding the amount of loss. The Provision for Credit Losses, which was charged to income, was the amount necessary to adjust the allowance for credit losses to the level determined to be appropriate through the above processes. As of December 31, 2019, for purposes of estimating the allowance for credit losses for undrawn loan commitments and standby letters of credit, the exposure at default included an estimated drawdown of unused credit based on a credit conversion factor. The proportionate amount of the quantitative methodology calculation after any required adjustment in the qualitative framework resulted in the required allowance for undrawn loan commitments and standby letters of credit as of the reporting date. The portion of the allowance assigned to loans and leases was reported as a contra asset, directly following loans and leases in the consolidated balance sheets. The portion of the allowance assigned to undrawn loan commitments and standby letters of credit was reported in Other Liabilities on the consolidated balance sheets. Other-Than-Temporary Impairment (OTTI) related to Securities. As of December 31, 2019, a security was considered to be other-than-temporarily impaired if the present value of cash flows expected to be collected was less than the security’s amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security was less than the security’s amortized cost basis and the investor intended, or more-likely-than-not would have been required, to sell the security before recovery of the security’s amortized cost basis. If OTTI existed, the charge to earnings was limited to the amount of credit loss if the investor did not intend to sell the security, and it was more-likely-than-not that it would not have been required to sell the security, before recovery of the security’s amortized cost basis. Any remaining difference between fair value and amortized cost was recognized in AOCI, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost was charged to earnings. J. Standby Letters of Credit. Fees on standby letters of credit are recognized in Other Operating Income on the consolidated statements of income using the straight-line method over the lives of the underlying agreements. Northern Trust’s recorded other liability for standby letters of credit, reflecting the obligation it has undertaken, is measured as the amount of unamortized fees on these instruments. K. Buildings and Equipment. Buildings and equipment owned are carried at original cost less accumulated depreciation. The charge for depreciation is computed using the straight-line method based on the following range of lives: buildings – up to 30 years; equipment – 3 to 10 years; and leasehold improvements – the shorter of the lease term or 15 years. L. Other Real Estate Owned (OREO). OREO is comprised of commercial and residential real estate properties acquired in partial or total satisfaction of loans. OREO assets are carried at the lower of cost or fair value less estimated costs to sell and are recorded in Other Assets on the consolidated balance sheets. Fair value is typically based on third-party appraisals. Appraisals of OREO properties are updated on an annual basis and are subject to adjustments to reflect management’s judgment as to the realizable value of the properties. Losses identified during the 90-day period after the acquisition of such properties are charged against the Allowance for Credit Losses assigned to Loans and Leases. Subsequent write-downs that may be required to the carrying value of these assets and gains or losses realized from asset sales are recorded within Other Operating Expense on the consolidated statements of income. M. Goodwill and Other Intangible Assets. Goodwill is not subject to amortization. Separately identifiable acquired intangible assets with finite lives are amortized over their estimated useful lives, primarily on a straight-line basis. Purchased software, software licenses, and allowable internal costs, including compensation relating to software developed for internal use, are capitalized. Software is amortized using the straight-line method over the estimated useful lives of the assets, generally ranging from 3 to 10 years. Fees paid for the use of software services that do not convey a software license are expensed as incurred. Goodwill and other intangible assets are reviewed for impairment on an annual basis or more frequently if events or changes in circumstances indicate the carrying amounts may not be recoverable. N. Trust, Investment and Other Servicing Fees. Trust, investment and other servicing fees are recorded on an accrual basis, over the period in which the service is provided. Fees are primarily a function of the market value of assets custodied, managed and serviced, transaction volumes, and securities lending volume and spreads, as set forth in the underlying client agreement. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes. O. Client Security Settlement Receivables. These receivables result from custody client withdrawals from short-term investment funds that settle on the following business day as well as custody client security sales executed under contractual settlement date accounting that have not yet settled. Northern Trust advances cash to the client on the date of either client withdrawal or trade execution and awaits collection from either the short-term investment funds or via the settled trade. 2021 Annual Report | Northern Trust Corporation 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS P. Income Taxes. Northern Trust follows an asset and liability approach to account for income taxes. The objective is to recognize the amount of taxes payable or refundable for the current year, and to recognize deferred tax assets and liabilities resulting from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities. The measurement of tax assets and liabilities is based on enacted tax laws and applicable tax rates. Tax positions taken or expected to be taken on a tax return are evaluated based on their likelihood of being sustained upon examination by tax authorities. Only tax positions that are considered more-likely-than-not to be sustained are recorded on the consolidated financial statements. A valuation allowance is established for deferred tax assets if it is more- likely-than-not that all or a portion will not be realized. Northern Trust recognizes any interest and penalties related to unrecognized tax benefits in the Provision for Income Taxes on the consolidated statements of income. Q. Cash Flow Statements. Cash and cash equivalents in the cash flow statements have been defined as “Cash and Due from Banks” on the consolidated balance sheets. R. Pension and Other Postretirement Benefits. Northern Trust records the funded status of its defined benefit pension and other postretirement plans on the consolidated balance sheets. Funded pension and postretirement benefits are reported in Other Assets and unfunded pension and postretirement benefits are reported in Other Liabilities on the consolidated balance sheets. Plan assets and benefit obligations are measured annually at December 31, unless specific circumstances require an interim remeasurement. Plan assets are determined based on fair value generally representing observable market prices. The projected benefit obligations are determined based on the present value of projected benefit distributions at an assumed discount rate. Pension costs are recognized ratably over the estimated working lifetime of eligible participants. S. Share-Based Compensation Plans. Northern Trust recognizes as expense the grant-date fair value of stock and stock unit awards and other share-based compensation granted to employees as Compensation on the consolidated statements of income. The fair values of stock and stock unit awards, including performance stock unit awards and director awards, are based on the closing price of the Corporation’s stock on the date of grant adjusted for certain awards that do not accrue dividends while vesting. The fair value of stock options is estimated on the date of grant using the Black-Scholes option pricing model. The model utilizes weighted-average assumptions regarding the period of time that options granted are expected to be outstanding (expected term) based primarily on the historical exercise behavior attributable to previous option grants, the estimated yield from dividends paid on the Corporation’s stock over the expected term of the options, the historical volatility of Northern Trust’s stock price and the implied volatility of traded options on Northern Trust stock, and a risk free interest rate based on the U.S. Treasury yield curve at the time of grant for a period equal to the expected term of the options granted. Compensation expense for share-based award grants with terms that provide for a graded vesting schedule, whereby portions of the award vest in increments over the requisite service period, are recognized on a straight-line basis over the requisite service period for the entire award. Compensation expense for performance stock unit awards are recognized on a straight-line basis over the requisite service period of the award based on expected achievement of the performance condition. Adjustments are made for employees that meet certain eligibility criteria at the grant date or during the requisite service period. Northern Trust does not include an estimate of future forfeitures in its recognition of share-based compensation expense. Share-based compensation expense is adjusted based on forfeitures as they occur. Dividend equivalents are paid on a current basis for restricted stock units granted prior to February 21, 2017 that are not yet vested, and certain deferred stock unit awards that have vested but are not yet distributed. Dividend equivalents are accrued for performance stock unit awards, most restricted stock unit awards granted on or after February 21, 2017 and director awards not yet vested, and are paid upon vesting. Certain restricted stock units granted on or after February 20, 2018 are not entitled to dividend equivalents during the vesting period. Cash flows resulting from the realization of excess tax benefits are classified as operating cash flows on the consolidated statements of cash flows. T. Net Income Per Common Share. Basic net income per common share is computed by dividing net income/loss applicable to common stock by the weighted average number of common shares outstanding during each period. Diluted net income per common share is computed by dividing net income applicable to common stock and potential common shares by the aggregate of the weighted average number of common shares outstanding during the period and common share equivalents calculated for stock options outstanding using the treasury stock method. In a period of a net loss, diluted net income per common share is calculated in the same manner as basic net income per common share. Northern Trust has issued certain restricted stock unit awards, which are unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents. These units are considered participating securities. Accordingly, Northern Trust calculates net income applicable to common stock using the two-class method, whereby net income is allocated between common stock and participating securities. 100 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2 – Recent Accounting Pronouncements On January 1, 2021, Northern Trust adopted Accounting Standards Update (ASU) No. 2020-01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (ASU 2020-01). ASU 2020-01 addresses two accounting issues: (1) application of the measurement alternative under Topic 321 in correlation with the transition into and out of the equity method under Topic 323 and (2) the measurement of certain forward contracts and purchased options to acquire equity securities. ASU 2020-01 clarifies that an entity applying the measurement alternative under Topic 321 that must transition to the equity method under Topic 323 because of an observable transaction will remeasure its investment immediately before transition, whereas an entity applying the equity method under Topic 323 that must transition to Topic 321 because of an observable transaction will remeasure its investment immediately after transition. ASU 2020-01 also clarifies that certain forward contracts or purchased call options to acquire equity securities generally will be measured using the fair value principles of Topic 321 before settlement or exercise. Upon adoption of ASU 2020-01, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income. On January 1, 2021, Northern Trust adopted ASU No. 2020-08, “Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs” (ASU 2020-08). ASU 2020-08 clarifies the Codification related to the standard issued in ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” ASU 2020-08 clarifies that an entity should amortize premiums on purchased callable debt securities to the first call date and related call amount and at that point reassess if there is a remaining premium to amortize to a subsequent call date. Upon adoption of ASU 2020-08, there was no significant impact to Northern Trust’s consolidated balance sheets or consolidated statements of income. On January 7, 2021, Northern Trust retrospectively adopted ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope” (ASU 2021-01). ASU 2021-01 clarifies the scope of Topic 848 to explicitly include those derivative instruments affected by changes in interest rates used for margining, discounting, or contract price alignment as eligible for certain optional expedients and exceptions in Topic 848. Upon adoption of ASU 2021-01, Northern Trust elected the expedients provided in Topic 848 with no significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income. Note 3 – Fair Value Measurements Fair value under GAAP is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. Fair Value Hierarchy. The following describes the hierarchy of valuation inputs (Levels 1, 2, and 3) used to measure fair value and the primary valuation methodologies used by Northern Trust for financial instruments measured at fair value on a recurring basis. Observable inputs reflect market data obtained from sources independent of the reporting entity; unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. GAAP requires an entity measuring fair value to maximize the use of observable inputs and minimize the use of unobservable inputs and establishes a fair value hierarchy of inputs. Financial instruments are categorized within the hierarchy based on the lowest level input that is significant to their valuation. Northern Trust’s policy is to recognize transfers into and transfers out of fair value levels as of the end of the reporting period in which the transfer occurred. No transfers into or out of Level 3 occurred during the years ended December 31, 2021, or 2020. Level 1 – Quoted, active market prices for identical assets or liabilities. Northern Trust’s Level 1 assets are comprised of AFS investments in U.S. Treasury securities. Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. Northern Trust’s Level 2 assets include AFS and trading account debt securities, the fair values of which are determined predominantly by external pricing vendors. Prices received from vendors are compared to other vendor and third-party prices. If a security price obtained from a pricing vendor is determined to exceed pre-determined tolerance levels that are assigned based on an asset type’s characteristics, the exception is researched and, if the price is not able to be validated, an alternate pricing vendor is utilized, consistent with Northern Trust’s pricing source hierarchy. As of December 31, 2021, Northern Trust’s AFS debt securities portfolio included 2,547 Level 2 securities with an aggregate market value of $35.6 billion. All 2,547 debt securities were valued by external pricing vendors. As of December 31, 2020, Northern Trust’s AFS debt securities portfolio included 2,260 Level 2 debt securities with an aggregate market value of $39.2 billion. All 2,260 debt securities were valued by external pricing vendors. Trading 2021 Annual Report | Northern Trust Corporation 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS account debt securities, which totaled $0.3 million and $0.5 million as of December 31, 2021 and 2020, respectively were all valued using external pricing vendors. Northern Trust has established processes and procedures to assess the suitability of valuation methodologies used by external pricing vendors, including reviews of valuation techniques and assumptions used for selected securities. On a daily basis, periodic quality control reviews of prices received from vendors are conducted which include comparisons to prices on similar security types received from multiple pricing vendors and to the previous day’s reported prices for each security. Predetermined tolerance level exceptions are researched and may result in additional validation through available market information or the use of an alternate pricing vendor. Quarterly, Northern Trust reviews documentation from third-party pricing vendors regarding the valuation processes and assumptions used in their valuations and assesses whether the fair value levels assigned by Northern Trust to each security classification are appropriate. Annually, valuation inputs used within third-party pricing vendor valuations are reviewed for propriety on a sample basis through a comparison of inputs used to comparable market data, including security classifications that are less actively traded and security classifications comprising significant portions of the portfolio. Level 2 assets and liabilities also include derivative contracts which are valued internally using widely accepted income-based models that incorporate inputs readily observable in actively quoted markets and reflect the contractual terms of the contracts. Observable inputs include foreign exchange rates and interest rates for foreign exchange contracts; credit spreads, default probabilities, and recovery rates for credit default swap contracts; interest rates for interest rate swap contracts and forward contracts; and interest rates and volatility inputs for interest rate option contracts. Northern Trust evaluates the impact of counterparty credit risk and its own credit risk on the valuation of its derivative instruments. Factors considered include the likelihood of default by Northern Trust and its counterparties, the remaining maturities of the instruments, net exposures after giving effect to master netting arrangements or similar agreements, available collateral, and other credit enhancements in determining the appropriate fair value of derivative instruments. The resulting valuation adjustments have not been considered material. Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. Northern Trust’s Level 3 liabilities consist of swaps that Northern Trust entered into with the purchaser of 1.1 million and 1.0 million shares of Visa Inc. Class B common stock (Visa Class B common shares) previously held by Northern Trust and sold in June 2016 and 2015, respectively. Pursuant to the swaps, Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into shares of Visa Inc. Class A common stock (Visa Class A common shares), such that the counterparty will be compensated for any dilutive adjustments to the conversion ratio and Northern Trust will be compensated for any anti-dilutive adjustments to the ratio. The swaps also require periodic payments from Northern Trust to the counterparty calculated by reference to the market price of Visa Class A common shares and a fixed rate of interest. The fair value of the swaps is determined using a discounted cash flow methodology. The significant unobservable inputs used in the fair value measurement are Northern Trust’s own assumptions about estimated changes in the conversion rate of the Visa Class B common shares into Visa Class A common shares, the date on which such conversion is expected to occur and the estimated growth rate of the Visa Class A common share price. See “Visa Class B Common Shares” under Note 26, “Commitments and Contingent Liabilities,” for further information. Northern Trust believes its valuation methods for its assets and liabilities carried at fair value are appropriate; however, the use of different methodologies or assumptions, particularly as applied to Level 3 assets and liabilities, could have a material effect on the computation of their estimated fair values. Management of various businesses and departments of Northern Trust (including Corporate Market Risk, Credit Risk Management, Corporate Finance, C&IS and Wealth Management) reviews valuation methods and models for Level 3 assets and liabilities. Fair value measurements are performed upon acquisitions of an asset or liability. Management of the appropriate business or department reviews assumed inputs, especially when unobservable in the marketplace, in order to substantiate their use in each fair value measurement. When appropriate, management reviews forecasts used in the valuation process in light of other relevant financial projections to understand any variances between current and previous fair value measurements. In certain circumstances, third party information is used to support the fair value measurements. If certain third party information seems inconsistent with consensus views, a review of the information is performed by management of the respective business or department to determine the appropriate fair value of the asset or liability. The following table presents the fair values of Northern Trust’s Level 3 liabilities as of December 31, 2021 and 2020, as well as the valuation techniques, significant unobservable inputs, and quantitative information used to develop significant unobservable inputs for such liabilities as of such dates. 102 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 52: LEVEL 3 SIGNIFICANT UNOBSERVABLE INPUTS FINANCIAL INSTRUMENT Swaps Related to Sale of Certain Visa Class B Common Shares FAIR VALUE $37.5 million DECEMBER 31, 2021 VALUATION TECHNIQUE Discounted Cash Flow UNOBSERVABLE INPUTS Conversion Rate Visa Class A Appreciation INPUT VALUES 1.62x 10.10% WEIGHTED- AVERAGE INPUT VALUES(1) 1.62x 10.10% Expected Duration 12 - 33 months 20 months (1) Weighted average of expected duration based on scenario probability. FINANCIAL INSTRUMENT Swaps Related to Sale of Certain Visa Class B Common Shares FAIR VALUE $35.3 million DECEMBER 31, 2020 VALUATION TECHNIQUE Discounted Cash Flow UNOBSERVABLE INPUTS Conversion Rate Visa Class A Appreciation INPUT VALUES 1.62x 8.73% WEIGHTED- AVERAGE INPUT VALUES(1) 1.62x 8.73% Expected Duration 12 - 33 months 20 months (1) Weighted average of expected duration based on scenario probability. The following presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020, segregated by fair value hierarchy level. TABLE 53: RECURRING BASIS HIERARCHY LEVELING (In Millions) Debt Securities Available for Sale U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed Total Available for Sale Trading Account Total Available for Sale and Trading Debt Securities Other Assets Derivative Assets Foreign Exchange Contracts Interest Rate Contracts Total Derivative Assets Other Liabilities Derivative Liabilities Foreign Exchange Contracts Interest Rate Contracts Other Financial Derivatives(1) DECEMBER 31, 2021 LEVEL 1 LEVEL 2 LEVEL 3 NETTING ASSETS/ LIABILITIES AT FAIR VALUE $ 2,426.1 $ — $ — $ — $ — — — — — — — — 3,876.1 18,075.6 374.0 2,341.7 505.6 3,045.1 5,941.6 1,424.7 2,426.1 35,584.4 — 0.3 2,426.1 35,584.7 — — — — — — 2,207.4 140.0 2,347.4 1,998.8 98.9 — — — — — — — — — — — — — — — — — — — — — — — — — — (1,530.7) (3.1) (1,533.8) — — 37.5 (1,234.5) (48.1) (0.9) 2,426.1 3,876.1 18,075.6 374.0 2,341.7 505.6 3,045.1 5,941.6 1,424.7 38,010.5 0.3 38,010.8 676.7 136.9 813.6 764.3 50.8 36.6 851.7 Total Derivative Liabilities $ — $ 2,097.7 $ 37.5 $ (1,283.5) $ Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2021, derivative assets and liabilities shown above also include reductions of $389.4 million and $139.0 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties. (1) This line consists of swaps related to the sale of certain Visa Class B common shares. 2021 Annual Report | Northern Trust Corporation 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Millions) Debt Securities Available for Sale U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage Backed Total Available for Sale Trading Account Total Available for Sale and Trading Debt Securities Other Assets Derivative Assets Foreign Exchange Contracts Interest Rate Contracts Total Derivatives Assets Other Liabilities Derivative Liabilities Foreign Exchange Contracts Interest Rate Contracts Other Financial Derivative(1) DECEMBER 31, 2020 LEVEL 1 LEVEL 2 LEVEL 3 NETTING $ 2,799.9 $ — $ — $ — $ ASSETS/ LIABILITIES AT FAIR VALUE 2,799.9 3,083.6 24,956.7 714.0 2,539.6 553.1 2,345.8 3,997.5 1,031.8 42,022.0 0.5 42,022.5 — — — — — — — — — — — (3,505.3) (2.5) 755.4 295.0 (3,507.8) 1,050.4 — — 35.3 (2,718.6) 2,003.9 (98.5) — 26.5 35.3 — — — — — — — — — — — — — — — — — — — — — — 3,083.6 24,956.7 714.0 2,539.6 553.1 2,345.8 3,997.5 1,031.8 2,799.9 39,222.1 — 0.5 2,799.9 39,222.6 — — — — — — 4,260.7 297.5 4,558.2 4,722.5 125.0 — Total Derivative Liabilities $ — $ 4,847.5 $ 35.3 $ (2,817.1) $ 2,065.7 Note: Northern Trust has elected to net derivative assets and liabilities when legally enforceable master netting arrangements or similar agreements exist between Northern Trust and the counterparty. As of December 31, 2020, derivative assets and liabilities shown above also include reductions of $1,867.8 million and $1,177.2 million, respectively, as a result of cash collateral received from and deposited with derivative counterparties. (1) This line consists of swaps related to the sale of certain Visa Class B common shares. The following table presents the changes in Level 3 liabilities for the years ended December 31, 2021 and 2020. TABLE 54: CHANGES IN LEVEL 3 LIABILITIES LEVEL 3 LIABILITIES (In Millions) Fair Value at January 1 Total (Gains) Losses: Included in Earnings(1) Purchases, Issues, Sales, and Settlements Settlements Fair Value at December 31 Unrealized Losses (Gains) Included in Earnings Related to Financial Instruments Held at December 31(1) (1) Gains (losses) are recorded in Other Operating Income on the consolidated statements of income. SWAPS RELATED TO SALE OF CERTAIN VISA CLASS B COMMON SHARES 2021 35.3 $ 21.3 (19.1) 37.5 $ 22.0 $ 2020 33.4 18.3 (16.4) 35.3 18.6 $ $ $ Carrying values of assets and liabilities that are not measured at fair value on a recurring basis may be adjusted to fair value in periods subsequent to their initial recognition, for example, to record an impairment of an asset. GAAP requires entities to separately disclose these subsequent fair value measurements and to classify them under the fair value hierarchy. 104 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets measured at fair value on a nonrecurring basis at December 31, 2021 and 2020, all of which were categorized as Level 3 under the fair value hierarchy, were comprised of nonaccrual loans whose values were based on real estate and other available collateral, and of OREO properties. Fair values of real estate loan collateral were estimated using a market approach typically supported by third-party valuations and property-specific fees and taxes. The fair values of real estate loan collateral were subject to adjustments to reflect management’s judgment as to realizable value and consisted of discount factors ranging from 15.0% to 20.0% with a weighted average based on fair values of 15.4% and 16.8% as of December 31, 2021 and 2020, respectively. Other loan collateral, which typically consists of accounts receivable, inventory and equipment, is valued using a market approach adjusted for asset-specific characteristics and in limited instances third-party valuations are used. OREO assets are carried at the lower of cost or fair value less estimated costs to sell, with fair value typically based on third-party appraisals. Collateral-based nonaccrual loans that have been adjusted to fair value totaled $15.0 million and $24.6 million at December 31, 2021 and 2020, respectively. The following table presents the fair values of Northern Trust’s Level 3 assets that were measured at fair value on a nonrecurring basis as of December 31, 2021 and 2020, as well as the valuation technique, significant unobservable inputs, and quantitative information used to develop the significant unobservable inputs for such assets as of such dates. TABLE 55: LEVEL 3 NONRECURRING BASIS SIGNIFICANT UNOBSERVABLE INPUTS DECEMBER 31, 2021 FINANCIAL INSTRUMENT FAIR VALUE(1) VALUATION TECHNIQUE UNOBSERVABLE INPUTS INPUT VALUES WEIGHTED-AVERAGE INPUT VALUES Loans $15.0 million Market Approach Discount factor applied to real estate collateral-based loans to reflect realizable value 15.0% – 20.0% 15.4% (1) Includes real estate collateral-based loans and other collateral-based loans. DECEMBER 31, 2020 FINANCIAL INSTRUMENT FAIR VALUE(1) VALUATION TECHNIQUE UNOBSERVABLE INPUTS INPUT VALUES WEIGHTED-AVERAGE INPUT VALUES Loans $24.6 million Market Approach Discount factor applied to real estate 15.0% – 20.0% 16.8% collateral-based loans to reflect realizable value (1) Includes real estate collateral-based loans and other collateral-based loans. 2021 Annual Report | Northern Trust Corporation 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables summarize the fair values of all financial instruments. TABLE 56: FAIR VALUE OF FINANCIAL INSTRUMENTS DECEMBER 31, 2021 FAIR VALUE BOOK VALUE TOTAL FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 $ 3,056.8 $ 64,582.2 1,949.4 686.4 3,056.8 $ 64,582.2 1,949.4 686.4 3,056.8 $ — — — 38,010.5 23,564.5 0.3 40,319.3 12.3 1,941.2 140.1 959.6 218.4 38,010.5 23,315.4 0.3 40,208.2 24.5 1,941.2 140.1 959.6 222.9 2,426.1 47.0 — — — — — — 119.1 — $ 64,582.2 1,949.4 686.4 35,584.4 23,268.4 0.3 — 24.5 1,941.2 140.1 959.6 103.8 83,318.6 $ 842.7 75,767.1 0.2 531.9 3,583.8 2,505.5 83,318.6 $ 843.8 75,767.1 0.2 531.9 3,583.9 2,591.4 1,145.7 1,189.4 15.7 59.8 15.7 59.8 83,318.6 $ — $ — — — — — — — — — 843.8 75,767.1 0.2 531.9 3,583.9 2,591.4 1,189.4 — — $ 245.3 $ 25.5 245.3 $ 25.5 — $ — 245.3 $ 25.5 7.6 8.7 7.6 8.7 37.5 37.5 1,962.1 1,973.3 1,962.1 1,973.3 132.4 90.2 132.4 90.2 — — — — — — — 7.6 8.7 — 1,962.1 1,973.3 132.4 90.2 — — — — — — — 40,208.2 — — — — — — — — — — — — 15.7 59.8 — — — — 37.5 — — — — (In Millions) ASSETS Cash and Due from Banks Federal Reserve and Other Central Bank Deposits Interest-Bearing Deposits with Banks Securities Purchased under Agreements to Resell Debt Securities Available for Sale(1) Held to Maturity Trading Account Loans (excluding Leases) Held for Investment Held for Sale Client Security Settlement Receivables Other Assets Federal Reserve and Federal Home Loan Bank Stock Community Development Investments Employee Benefit and Deferred Compensation LIABILITIES Deposits Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing $ Savings Certificates and Other Time Non U.S. Offices Interest-Bearing Federal Funds Purchased Securities Sold Under Agreements to Repurchase Other Borrowings Senior Notes Long-Term Debt Subordinated Debt Other Liabilities Standby Letters of Credit Loan Commitments DERIVATIVE INSTRUMENTS Asset/Liability Management Foreign Exchange Contracts Assets Liabilities Interest Rate Contracts Assets Liabilities Other Financial Derivatives Liabilities(2) Client-Related and Trading Foreign Exchange Contracts Assets Liabilities Interest Rate Contracts Assets Liabilities (1) Refer to the table located on page 103 for the disaggregation of AFS debt securities. (2) This line consists of swaps related to the sale of certain Visa Class B common shares. 106 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Millions) ASSETS Cash and Due from Banks Federal Reserve and Other Central Bank Deposits Interest-Bearing Deposits with Banks Securities Purchased under Agreements to Resell Debt Securities Available for Sale(1) Held to Maturity Trading Account Loans (excluding Leases) Held for Investment Client Security Settlement Receivables Other Assets Federal Reserve and Federal Home Loan Bank Stock Community Development Investments Employee Benefit and Deferred Compensation LIABILITIES Deposits Demand, Noninterest-Bearing, Savings, Money Market and Other Interest-Bearing $ Savings Certificates and Other Time Non U.S. Offices Interest-Bearing Federal Funds Purchased Securities Sold Under Agreements to Repurchase Other Borrowings Senior Notes Long-Term Debt Subordinated Debt Floating Rate Capital Debt Other Liabilities Standby Letters of Credit Loan Commitments DERIVATIVE INSTRUMENTS Asset/Liability Management Foreign Exchange Contracts Assets Liabilities Interest Rate Contracts Assets Liabilities Other Financial Derivatives Liabilities(2) Client-Related and Trading Foreign Exchange Contracts Assets Liabilities Interest Rate Contracts Assets Liabilities DECEMBER 31, 2020 FAIR VALUE BOOK VALUE TOTAL FAIR VALUE LEVEL 1 LEVEL 2 LEVEL 3 $ 4,389.5 $ 55,503.6 4,372.6 1,596.5 4,389.5 $ 55,503.6 4,372.6 1,596.5 4,389.5 $ — — — 42,022.0 17,791.1 0.5 42,022.0 17,797.4 0.5 2,799.9 90.0 — — $ 55,503.6 4,372.6 1,596.5 39,222.1 17,707.4 0.5 — — — — — — — 33,558.0 1,160.2 34,017.5 1,160.2 — — — 1,160.2 34,017.5 — 275.0 919.6 215.8 275.0 919.6 228.9 — — 138.6 275.0 919.6 90.3 71,742.5 $ 937.1 71,198.4 260.2 39.8 4,011.5 3,122.4 71,742.5 $ 943.0 71,198.4 260.2 39.8 4,012.7 3,222.6 1,189.3 277.8 1,250.1 264.6 22.4 77.0 22.4 77.0 71,742.5 $ — $ 943.0 71,198.4 260.2 39.8 4,012.7 3,222.6 1,250.1 264.6 — — — — — — — — — — — — 22.4 77.0 $ 15.6 $ 311.8 15.6 $ 311.8 — $ — 15.6 $ 311.8 8.3 10.2 35.3 8.3 10.2 35.3 4,245.1 4,410.7 4,245.1 4,410.7 289.2 114.8 289.2 114.8 — — — — — — — 8.3 10.2 — 35.3 4,245.1 4,410.7 289.2 114.8 — — — — — — — — — — — — — — — — — — — — (1) Refer to the table located on page 104 for the disaggregation of AFS debt securities. (2) This line consists of swaps related to the sale of certain Visa Class B common shares. 2021 Annual Report | Northern Trust Corporation 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 – Securities Available for Sale Debt Securities. The following tables provide the amortized cost, fair values, and remaining maturities of AFS debt securities. TABLE 57: RECONCILIATION OF AMORTIZED COST TO FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed Total (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed Total DECEMBER 31, 2021 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES $ 2,406.2 $ 29.3 $ 9.4 $ 3,841.0 18,092.1 383.4 2,319.8 502.6 3,052.4 5,962.0 1,389.0 73.7 93.7 0.1 31.6 3.9 28.1 11.3 38.9 38.6 110.2 9.5 9.7 0.9 35.4 31.7 3.2 FAIR VALUE 2,426.1 3,876.1 18,075.6 374.0 2,341.7 505.6 3,045.1 5,941.6 1,424.7 $ 37,948.5 $ 310.6 $ 248.6 $ 38,010.5 DECEMBER 31, 2020 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES $ 2,728.8 $ 71.1 $ — $ 2,927.8 24,595.1 713.6 2,459.9 543.1 2,281.7 3,953.5 952.2 155.9 388.5 1.1 79.8 10.0 64.7 46.8 79.7 0.1 26.9 0.7 0.1 — 0.6 2.8 0.1 FAIR VALUE 2,799.9 3,083.6 24,956.7 714.0 2,539.6 553.1 2,345.8 3,997.5 1,031.8 $ 41,155.7 $ 897.6 $ 31.3 $ 42,022.0 TABLE 58: REMAINING MATURITY OF AVAILABLE FOR SALE DEBT SECURITIES DECEMBER 31, 2021 ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL (In Millions) U.S. Government Obligations of States and Political Subdivisions Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ — $ — $ 2,157.8 $ 2,187.1 $ 248.4 $ 239.0 $ — $ — $ 2,406.2 $ 2,426.1 22.8 23.0 448.3 462.1 3,239.7 3,262.6 130.2 128.4 3,841.0 3,876.1 Government Sponsored Agency 2,706.1 2,713.2 8,112.2 8,121.1 6,084.0 6,053.4 1,189.8 1,187.9 18,092.1 18,075.6 Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed 72.7 404.4 141.5 760.6 894.0 7.5 72.7 228.4 223.1 408.0 1,892.6 1,911.6 142.1 361.1 363.5 82.3 18.1 — 78.2 17.5 — 765.7 1,926.8 1,926.1 365.0 353.3 — 4.7 — — — 383.4 374.0 4.6 2,319.8 2,341.7 — 502.6 505.6 — 3,052.4 3,045.1 896.8 3,559.0 3,541.4 1,291.6 1,286.3 217.4 217.1 5,962.0 5,941.6 7.4 962.3 982.1 419.2 435.2 — — 1,389.0 1,424.7 Total $ 5,009.6 $ 5,028.9 $ 19,648.5 $ 19,718.1 $ 11,748.3 $ 11,725.5 $ 1,542.1 $ 1,538.0 $ 37,948.5 $ 38,010.5 Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments. 108 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Available for Sale Debt Securities with Unrealized Losses. The following table provides information regarding AFS debt securities with no credit losses reported that had been in a continuous unrealized loss position for less than twelve months and for twelve months or longer as of December 31, 2021 and 2020. TABLE 59: AVAILABLE FOR SALE DEBT SECURITIES IN UNREALIZED LOSS POSITION WITH NO CREDIT LOSSES REPORTED AS OF DECEMBER 31, 2021 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed Total FAIR VALUE UNREALIZED LOSSES FAIR VALUE UNREALIZED LOSSES FAIR VALUE UNREALIZED LOSSES $ 239.0 $ 9.4 $ — $ — $ 239.0 $ 1,699.5 8,207.3 230.0 693.7 92.1 1,116.8 3,815.5 566.8 37.4 90.2 9.5 9.7 0.9 31.9 31.4 3.2 31.6 1,821.4 — — — 172.3 11.7 — 1.2 20.0 1,731.1 10,028.7 — — — 3.5 0.3 — 230.0 693.7 92.1 1,289.1 3,827.2 566.8 9.4 38.6 110.2 9.5 9.7 0.9 35.4 31.7 3.2 $ 16,660.7 $ 223.6 $ 2,037.0 $ 25.0 $ 18,697.7 $ 248.6 AS OF DECEMBER 31, 2020 LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL (In Millions) FAIR VALUE UNREALIZED LOSSES FAIR VALUE UNREALIZED LOSSES FAIR VALUE UNREALIZED LOSSES Obligations of States and Political Subdivisions $ 52.3 $ 0.1 $ — $ — $ 52.3 $ Government Sponsored Agency 2,402.3 13.6 2,528.7 13.3 4,931.0 Non-U.S. Government Corporate Debt Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Commercial Mortgage-Backed Total 90.5 66.6 162.8 176.8 44.4 0.7 0.1 0.5 0.2 0.1 — — 49.9 792.3 — — — 0.1 2.6 — 90.5 66.6 212.7 969.1 44.4 $ 2,995.7 $ 15.3 $ 3,370.9 $ 16.0 $ 6,366.6 $ 31.3 0.1 26.9 0.7 0.1 0.6 2.8 0.1 As of December 31, 2021, 1,233 AFS debt securities with a combined fair value of $18.7 billion were in an unrealized loss position, with their unrealized losses totaling $248.6 million. As of December 31, 2021, unrealized losses in AFS debt securities of $110.2 million related to government sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 2020, 412 AFS debt securities with a combined fair value of $6.4 billion were in an unrealized loss position, with their unrealized losses totaling $31.3 million. As of December 31, 2020, unrealized losses in AFS debt securities of $26.9 million related to government-sponsored agency, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. 14% and 16% of the AFS corporate debt securities portfolio were backed by guarantees provided by U.S. and non-U.S. governmental entities as of December 31, 2021 and 2020, respectively. The remaining unrealized losses on Northern Trust’s AFS debt securities portfolio as of December 31, 2021 and 2020 are attributable to changes in overall market interest rates or credit spreads. As of December 31, 2021, Northern Trust did not intend to sell any AFS debt securities in an unrealized loss position and it was more likely than not that Northern Trust would not be required to sell any such investment before the recovery of its amortized cost basis, which may be maturity. AFS debt securities impairment reviews are conducted quarterly to identify and evaluate securities that have indications of possible credit losses. A determination as to whether a security’s decline in market value is related to credit impairment takes into consideration numerous factors and the relative significance of any single factor can vary by security. Factors Northern Trust considers in determining whether impairment is credit-related include, but are not limited to, the severity of the impairment; the cause of the impairment and the financial condition and near-term prospects of the issuer; activity in the market of the issuer, which may indicate adverse credit conditions; Northern Trust’s intent regarding the sale of the security as of the balance sheet date; and the likelihood that Northern Trust will not be required to sell the security for a period of time sufficient to allow for the recovery of the security’s amortized cost basis. For each security meeting the requirements of Northern Trust’s internal screening process, an extensive review is conducted to determine if a credit loss has occurred. 2021 Annual Report | Northern Trust Corporation 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS There was no provision for corporate debt AFS securities for the year ended December 31, 2021 and 2020, and no allowance for credit losses for corporate debt AFS securities as of December 31, 2021 and 2020. Held to Maturity Debt Securities. The following tables provide the amortized cost, fair values and remaining maturities of held to maturity (HTM) debt securities. TABLE 60: RECONCILIATION OF AMORTIZED COST TO FAIR VALUES OF HELD TO MATURITY DEBT SECURITIES (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Certificates of Deposit Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Other Total (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Certificates of Deposit Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Other Total DECEMBER 31, 2021 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES $ 47.0 $ — $ — $ 0.8 5,927.6 5,773.3 901.8 2,942.4 674.7 6,098.0 682.6 516.3 — 1.1 3.9 2.5 8.3 — 14.3 1.0 3.4 — 106.1 9.8 6.5 9.6 — 80.0 — 71.6 FAIR VALUE 47.0 0.8 5,822.6 5,767.4 897.8 2,941.1 674.7 6,032.3 683.6 448.1 $ 23,564.5 $ 34.5 $ 283.6 $ 23,315.4 DECEMBER 31, 2020 AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES $ 90.0 $ — $ — $ 2.1 3.0 8,336.6 588.0 3,184.6 807.2 3,648.0 677.0 454.6 0.1 0.3 7.3 6.5 24.6 — 43.5 0.9 1.1 — — 0.2 0.1 0.3 — 0.9 — 76.5 FAIR VALUE 90.0 2.2 3.3 8,343.7 594.4 3,208.9 807.2 3,690.6 677.9 379.2 $ 17,791.1 $ 84.3 $ 78.0 $ 17,797.4 As of December 31, 2021, the $23.6 billion HTM debt securities portfolio had an unrealized loss of $106.1 million, $80 million and $71.6 million related to government sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other residential mortgage-backed securities, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. As of December 31, 2020, the $17.8 billion HTM debt securities portfolio had an unrealized loss of $76.5 million related to other residential mortgage-backed securities, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. 110 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 61: REMAINING MATURITY OF HELD TO MATURITY DEBT SECURITIES DECEMBER 31, 2021 ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS OVER TEN YEARS TOTAL (In Millions) U.S. Government Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ 47.0 $ 47.0 $ — $ — $ — $ — $ — $ — $ 47.0 $ 47.0 Obligations of States and Political Subdivisions Government Sponsored Agency 1,161.5 0.8 0.8 — — — — — — 0.8 0.8 1,143.6 2,101.4 2,064.6 1,848.8 1,815.0 815.9 799.4 5,927.6 5,822.6 Non-U.S. Government 4,502.7 4,502.6 1,109.2 1,103.9 177.4 650.1 674.7 178.8 708.3 703.4 651.3 1,684.0 1,688.0 674.7 — — 161.4 16.1 608.3 — 160.9 15.6 601.8 — 1,086.9 1,091.5 4,507.7 4,451.4 503.4 489.4 190.4 106.0 190.6 104.1 398.0 232.0 398.7 221.8 94.2 60.1 94.3 58.4 Corporate Debt Covered Bonds Certificates of Deposit Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Other Total — — — — — — 118.2 — 5,773.3 5,767.4 — 901.8 897.8 — 2,942.4 2,941.1 — 674.7 674.7 — 6,098.0 6,032.3 — 63.8 682.6 516.3 683.6 448.1 $ 8,597.5 $ 8,585.0 $ 10,740.6 $ 10,631.8 $ 3,292.3 $ 3,235.4 $ 934.1 $ 863.2 $ 23,564.5 $ 23,315.4 Note: Mortgage-backed and asset-backed securities are included in the above table taking into account anticipated future prepayments. 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, 2021, $6.9 billion of government sponsored agency securities were transferred from AFS to HTM for capital management purposes, all of which were transferred in the second quarter of 2021. 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 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. During the year ended December 31, 2020, $301.5 million of securities reflected in U.S. government were transferred from AFS to HTM, all of which were transferred in the second quarter of 2020. Credit Quality Indicators. The following table provides the amortized cost of HTM debt securities by credit rating. TABLE 62: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Certificates of Deposit Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Other Total Percent of Total AAA AA A BBB NOT RATED TOTAL AS OF DECEMBER 31, 2021 $ 47.0 $ — 5,927.6 398.0 2.3 2,942.4 — 4,207.6 682.6 — $ — 0.8 — $ — — — 942.6 386.7 — — 1,858.0 — — 4,088.8 512.8 — — 31.3 — — — — — 343.9 — — — 1.1 — — $ — — — — — — 674.7 — — 516.3 $ 47.0 0.8 5,927.6 5,773.3 901.8 2,942.4 674.7 6,098.0 682.6 516.3 $ 14,207.5 $ 3,188.1 $ 4,632.9 $ 345.0 $ 1,191.0 $ 23,564.5 60 % 14 % 20 % 1 % 5 % 100 % 2021 Annual Report | Northern Trust Corporation 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Millions) U.S. Government Obligations of States and Political Subdivisions Government Sponsored Agency Non-U.S. Government Corporate Debt Covered Bonds Certificates of Deposit Sub-Sovereign, Supranational and Non-U.S. Agency Bonds Other Asset-Backed Other Total Percent of Total AAA AA A BBB NOT RATED TOTAL AS OF DECEMBER 31, 2020 $ 90.0 $ — 3.0 319.8 3.8 3,184.6 — 2,590.9 677.0 — $ — 1.0 — $ — — — 1,337.4 279.1 — — 1,057.1 — — 6,630.6 305.1 — — — — — $ — 1.1 — 48.8 — — — — — — — — — — — — 807.2 — — 454.6 $ 90.0 2.1 3.0 8,336.6 588.0 3,184.6 807.2 3,648.0 677.0 454.6 $ 6,869.1 $ 2,674.6 $ 6,935.7 $ 49.9 $ 1,261.8 $ 17,791.1 39 % 15 % 39 % — % 7 % 100 % Credit quality indicators are metrics that provide information regarding the relative credit risk of debt securities. Northern Trust maintains a high quality debt securities portfolio, with 94% and 93% of the HTM portfolio comprised of securities rated A or higher as of December 31, 2021 and 2020, respectively. The remaining HTM debt securities portfolio was comprised of 1% rated BBB at December 31, 2021, and 5% and 7% not rated by Moody’s, S&P Global, or Fitch Ratings at December 31, 2021 and 2020, respectively. Securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security. Investment Security Gains and Losses. Proceeds of $116.7 million, $879.9 million, and $1.2 billion in 2021, 2020, and 2019, respectively, from the sale of debt securities resulted in the following gains and losses shown in the following table. TABLE 63: INVESTMENT SECURITY GAINS AND LOSSES (In Millions) Gross Realized Debt Securities Gains Gross Realized Debt Securities Losses Changes in Other-Than-Temporary Impairment Losses(1) Net Investment Security Losses DECEMBER 31, 2021 1.4 $ (1.7) — (0.3) $ 2020 3.4 $ (3.8) — (0.4) $ 2019 2.4 (3.5) (0.3) (1.4) $ $ (1) Other-than-temporary impairment losses relate to certain Community Reinvestment Act (CRA) eligible HTM debt securities. Note 5 – Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase 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. During the third quarter of 2021, Northern Trust became a Government Securities Division (GSD) netting and sponsoring member in the Fixed Income Clearing Corporation (FICC) sponsored member program. FICC, a wholly-owned subsidiary of The Depository Trust & Clearing Corporation, is a central counterparty and provides netting and settlement for the U.S. Government securities marketplace. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty. The following tables summarize information related to Securities Purchased under Agreements to Resell and Securities Sold under Agreements to Repurchase. 112 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 64: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL ($ In Millions) Balance at December 31 Average Balance During the Year Average Interest Rate Earned During the Year Maximum Month-End Balance During the Year TABLE 65: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE ($ In Millions) Balance at December 31 Average Balance During the Year Average Interest Rate Paid During the Year Maximum Month-End Balance During the Year 2021 2020 $ 686.4 $ 1,596.5 1,067.4 1,253.1 0.33 % 0.31 % $ 1,819.1 $ 2,055.6 2021 2020 $ $ 531.9 232.0 39.8 218.3 0.07 % 0.47 % $ 892.6 $ 269.8 TABLE 66: REPURCHASE AGREEMENTS ACCOUNTED FOR AS SECURED BORROWINGS REMAINING CONTRACTUAL MATURITY OF THE AGREEMENTS December 31, 2021 December 31, 2020 ($ In Millions) OVERNIGHT AND CONTINUOUS UP TO 30 DAYS TOTAL OVERNIGHT AND CONTINUOUS UP TO 30 DAYS TOTAL U.S. Treasury and Agency Securities $ 32.4 $ 499.5 $ 531.9 $ Total Borrowings Net Amount of Recognized Liabilities for Repurchase Agreements in Note 28 Amounts related to agreements not included in Note 28 32.4 32.4 — 499.5 499.5 — 531.9 531.9 — 39.8 $ 39.8 39.8 — — $ — — — 39.8 39.8 39.8 — Note 6 – Loans and Leases Amounts outstanding for Loans and Leases, by segment and class, are shown in the following table. TABLE 67: LOANS AND LEASES (In Millions) Commercial Commercial and Institutional Commercial Real Estate Non-U.S. Lease Financing, net Other Total Commercial Personal Private Client Residential Real Estate Non-U.S. Other Total Personal Total Loans and Leases DECEMBER 31, 2021 2020 $ 11,489.2 $ 10,058.3 4,326.3 1,990.2 11.0 670.7 3,558.4 1,345.7 11.4 288.2 18,487.4 15,262.0 15,256.3 6,319.9 381.8 35.2 21,993.2 $ 40,480.6 $ 11,815.1 6,035.7 597.9 49.0 18,497.7 33,759.7 Residential real estate loans consist of traditional first lien mortgages and equity credit lines that generally require a loan- to-collateral value ratio of no more than 65% to 80% at inception. Northern Trust’s equity credit line products generally have draw periods of up to 10 years and a balloon payment of any outstanding balance is due at maturity. Payments are interest-only with variable interest rates. Northern Trust does not offer equity credit lines that include an option to convert the outstanding balance to an amortizing payment loan. As of December 31, 2021 and 2020, equity credit lines totaled $258.2 million and $304.4 million, respectively, and equity credit lines for which first liens were held by Northern Trust represented 97% of the total equity credit lines as of both of those dates. 2021 Annual Report | Northern Trust Corporation 113 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Included within the non-U.S., commercial-other, and personal-other classes are short duration advances, primarily related to the processing of custodied client investments, totaling $1.6 billion at December 31, 2021 and $1.1 billion at December 31, 2020. Demand deposit overdrafts reclassified as loan balances totaled $8.0 million and $26.4 million at December 31, 2021 and 2020, respectively. Loans classified as held for sale totaled $12.3 million at December 31, 2021 related to the decision to exit a non-strategic loan portfolio. There were no loans classified as held for sale at December 31, 2020. Loans classified as held for sale are recorded at the lower of cost or fair value. As of December 31, 2021 and 2020, there were no leases classified as held for sale. The components of the net investment in leveraged leases is as follows: TABLE 68: LEVERAGED LEASES (In Millions) Leveraged Leases Net Rental Receivable Residual Value Unearned Income Investment in Leveraged Leases Lease Financing, net DECEMBER 31, 2021 2020 $ $ 11.4 $ — (0.4) 11.0 11.0 $ 11.8 — (0.4) 11.4 11.4 Paycheck Protection Program. In response to the COVID-19 pandemic, Northern Trust became a lender under the Paycheck Protection Program, as amended (PPP), which was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is administered by the U.S. Small Business Administration (SBA). Loans issued under the PPP are funded by Northern Trust directly to participating borrowers. The PPP loans are guaranteed by the SBA and borrowers are eligible to apply for PPP loan forgiveness for up to the full principal amount and accrued interest of the PPP loan. To the extent a borrower uses PPP loan proceeds to cover eligible costs and has met all other SBA loan forgiveness requirements, the SBA will determine loan forgiveness under the CARES Act and will pay to Northern Trust the eligible PPP loan forgiven amount, which will be credited to the borrower’s loan to repay or pay down the PPP loan. The SBA forgiveness portal opened on August 10, 2020 and Northern Trust’s vendor portal opened on September 11, 2020 to begin processing the PPP loan forgiveness applications. When Northern Trust submits forgiveness applications to the SBA, the SBA has at least 90 days to respond as to the approval or denial of such application. 1,301 and 36 loans were forgiven through the PPP loan forgiveness process which resulted in $231.5 million and $6.7 million of loan principal and interest being forgiven during the year ended December 31, 2021 and 2020, respectively. As of December 31, 2021, Northern Trust had 213 outstanding loans totaling $56.9 million under the PPP in its commercial and institutional portfolio with an average loan balance of $0.3 million. For its origination efforts, Northern Trust received approximately $0.1 million and $2.6 million in SBA fees, net of service charges, during the year ended December 31, 2021 and 2020, respectively. Northern Trust accounts for loans originated under the PPP as loan receivables in accordance with Accounting Standards Codification (ASC) 310 and recognizes such loans at the principal amount less the net amount of loan origination fees. PPP loans are reported in Total Loans and Leases on the consolidated balance sheets. The SBA provides a 100% guarantee on PPP loans covering principal and interest. Northern Trust considers the risk mitigating effects of these guarantees, and accounts for them as a credit enhancement embedded in the contract. As a result, no allowance for credit losses is measured for Northern Trust’s exposure under the PPP. Credit Quality Indicators. Credit quality indicators are statistics, measurements or other metrics that provide information regarding the relative credit risk of loans and leases. Northern Trust utilizes a variety of credit quality indicators to assess the credit risk of loans and leases at the segment, class, and individual credit exposure levels. 114 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As part of its credit process, Northern Trust utilizes an internal borrower risk rating system to support identification, approval, and monitoring of credit risk. Borrower risk ratings are used in credit underwriting and management reporting. Risk ratings are used for ranking the credit risk of borrowers and the probability of their default. Each borrower is rated using one of a number of ratings models, which consider both quantitative and qualitative factors. The ratings models vary among classes of loans and leases in order to capture the unique risk characteristics inherent within each particular type of credit exposure. Provided below are the more significant performance indicator attributes considered within Northern Trust’s borrower rating models, by loan and lease class. • • • • • • • Commercial and Institutional: leverage, profit margin, liquidity, asset size and capital levels; Commercial Real Estate: debt service coverage, loan-to-value ratio, leasing status and guarantor support; Lease Financing and Commercial-Other: leverage, profit margin, liquidity, asset size and capital levels; Non-U.S.: leverage, profit margin, liquidity, return on assets and capital levels; Residential Real Estate: payment history, credit bureau scores and loan-to-value ratio; Private Client: cash-flow-to-debt and net worth ratios, leverage and liquidity; and Personal-Other: cash-flow-to-debt and net worth ratios. While the criteria vary by model, the objective is for the borrower ratings to be consistent in both the measurement and ranking of risk. Each model is calibrated to a master rating scale to support this consistency. Ratings for borrowers not in default range from “1” for the strongest credits to “7” for the weakest non-defaulted credits. Ratings of “8” or “9” are used for defaulted borrowers. Borrower risk ratings are monitored and are revised when events or circumstances indicate a change is required. Risk ratings are generally validated at least annually. Loan and lease segment and class balances as of December 31, 2021 are provided in the following table, segregated by borrower ratings into “1 to 3,” “4 to 5” and “6 to 9” (watch list and nonaccrual status) categories by year of origination at amortized cost basis. Loans that are held for investment are reported at the principal amount outstanding, net of unearned income. 2021 Annual Report | Northern Trust Corporation 115 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 69: CREDIT QUALITY INDICATOR AT AMORTIZED COST BASIS BY ORIGINATION YEAR DECEMBER 31, 2021 TERM LOANS AND LEASES 2021 2020 2019 2018 2017 PRIOR REVOLVING LOANS REVOLVING LOANS CONVERTED TO TERM LOANS TOTAL 1 to 3 Category 4 to 5 Category 6 to 9 Category 485.3 967.9 24.5 Total Commercial Real Estate 1,477.7 (In Millions) Commercial Commercial and Institutional Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Commercial and Institutional Commercial Real Estate Risk Rating: Non-U.S. Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Non-U.S. Lease Financing, net Risk Rating: 4 to 5 Category Total Lease Financing, net Other Risk Rating: 1 to 3 Category 4 to 5 Category Total Other Total Commercial Personal Private Client Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Private Client Residential Real Estate Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Residential Real Estate Non-U.S. Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Non-U.S. Other Risk Rating: 1 to 3 Category 4 to 5 Category Total Other Total Personal Total Loans and Leases 116 2021 Annual Report | Northern Trust Corporation $ 1,057.9 $ 469.7 $ 313.7 $ 156.6 $ 1,043.6 50.0 432.2 20.3 377.3 26.8 231.6 30.2 48.2 $ 535.8 $ 234.1 9.9 190.1 1.9 4,944.9 $ 1,219.0 62.2 0.1 $ 7,526.9 3,761.0 33.1 201.3 — 2,151.5 922.2 717.8 418.4 292.2 727.8 6,226.1 33.2 11,489.2 310.2 638.1 — 948.3 68.9 — — 68.9 260.6 460.1 50.6 771.3 38.4 — 23.1 61.5 824.1 160.2 2.9 987.2 — — — — — — 60.2 223.0 — 283.2 16.8 81.4 20.0 118.2 — 1.9 — 1.9 — — 9.1 — — 9.1 — — 79.3 364.1 8.5 451.9 — 191.1 — 191.1 11.0 11.0 67.5 182.3 2.5 252.3 582.0 73.3 13.4 668.7 — — 551.5 119.2 670.7 5,287.1 — — — 1,939.4 — — — 1,550.6 — — — 703.5 — — — 419.5 — — — 1,381.8 — — — 7,147.1 455.5 579.2 7.1 1,041.8 97.9 333.9 0.2 432.0 1,137.8 1,137.3 0.4 2,275.5 996.4 1,002.5 10.5 2,009.4 27.6 36.1 — 63.7 — 1.9 — 1.9 87.0 519.3 — 606.3 201.8 242.7 5.4 449.9 1.2 18.7 — 19.9 14.9 81.0 20.4 116.3 13.5 79.5 8.4 101.4 — 10.4 — 10.4 38.3 54.8 — 93.1 49.3 113.3 0.5 163.1 — — — — 129.8 39.9 — 169.7 505.8 369.8 58.2 933.8 1.0 3.8 0.2 5.0 7,592.8 4,979.8 1.5 12,574.1 161.5 218.1 5.0 384.6 44.1 229.0 — 273.1 13.4 21.8 35.2 3,416.2 $ 8,703.3 $ 4,382.7 $ 2,626.7 $ 931.6 $ 675.7 $ 2,490.3 $ 20,378.9 $ — — — 1,076.1 — — — 2,443.3 — — — 1,108.5 — — — 13,231.8 — — — 228.1 — — — 256.2 2.9 20.5 — 23.4 1,282.8 2,937.4 106.1 4,326.3 — 1.8 — 1.8 1,522.5 428.3 39.4 1,990.2 — — 11.0 11.0 — — — 58.4 551.5 119.2 670.7 18,487.4 44.7 178.3 — 223.0 8,460.9 6,766.2 29.2 15,256.3 — 2.2 — 2.2 3,066.1 3,165.4 88.4 6,319.9 — 7.8 — 7.8 73.9 307.7 0.2 381.8 13.4 — 21.8 — 35.2 — 233.0 21,993.2 291.4 $ 40,480.6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2020 (In Millions) Commercial Commercial and Institutional Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Commercial and Institutional Commercial Real Estate Risk Rating: TERM LOANS AND LEASES 2020 2019 2018 2017 2016 PRIOR REVOLVING LOANS REVOLVING LOANS CONVERTED TO TERM LOANS TOTAL $ 663.8 $ 546.0 $ 204.6 $ 505.1 119.8 793.4 34.3 354.1 37.3 96.0 $ 396.0 $ 448.8 $ 405.4 42.8 134.6 23.0 167.3 6.0 3,742.4 $ 1,238.7 61.1 5.5 $ 6,103.1 3,630.9 32.3 324.3 — 1,491.5 1,170.9 596.0 544.2 553.6 622.1 5,042.2 37.8 10,058.3 1 to 3 Category 4 to 5 Category 6 to 9 Category 406.3 703.1 15.3 Total Commercial Real Estate 1,124.7 109.2 811.8 55.2 976.2 16.8 0.7 23.1 40.6 555.2 313.1 — 868.3 — — — — 27.6 332.7 32.0 392.3 36.5 107.4 25.8 169.7 11.8 184.5 — 196.3 — 2.0 — 2.0 — — 11.1 — — 11.1 — — — — — — — — 99.4 382.8 12.2 494.4 — 157.9 — 157.9 11.4 11.4 124.3 60.4 — 184.7 78.5 39.2 146.3 264.0 — — 81.7 206.5 288.2 3,772.7 — — — 2,187.7 — — — 990.3 — — — 725.0 — — — 749.9 — — — 1,285.8 — — — 5,490.9 668.6 492.1 6.0 1,166.7 1,554.3 854.6 15.3 2,424.2 23.3 12.7 — 36.0 273.7 479.9 0.5 754.1 317.4 359.5 8.3 685.2 14.9 26.0 — 40.9 51.7 117.3 22.1 191.1 42.9 115.8 0.7 159.4 — 11.8 — 11.8 60.4 60.4 3.2 124.0 109.9 163.2 0.5 273.6 — 0.5 — 0.5 205.1 209.7 1.9 416.7 627.8 896.5 94.8 1,619.1 — 0.5 — 0.5 1.8 7.9 0.3 10.0 152.8 273.1 22.5 448.4 275.6 217.5 — 493.1 34.6 14.4 49.0 3,675.9 $ 7,448.6 $ 3,667.9 $ 1,352.6 $ 1,123.1 $ 1,254.8 $ 3,128.5 $ 15,453.6 $ — — — 1,480.2 — — — 1,842.7 — — — 9,962.7 — — — 398.1 — — — 362.3 — — — 504.9 Non-U.S. Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Non-U.S. Lease Financing, net Risk Rating: 4 to 5 Category Total Lease Financing, net Other Risk Rating: 1 to 3 Category 4 to 5 Category Total Other Total Commercial Personal Private Client Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Private Client Residential Real Estate Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Residential Real Estate Non-U.S. Risk Rating: 1 to 3 Category 4 to 5 Category 6 to 9 Category Total Non-U.S. Other Risk Rating: 1 to 3 Category 4 to 5 Category Total Other Total Personal Total Loans and Leases 8.7 11.4 — 20.1 823.8 2,594.1 140.5 3,558.4 — 1.8 — 1.8 661.6 514.7 169.4 1,345.7 — — 11.4 11.4 — — — 59.7 81.7 206.5 288.2 15,262.0 1.7 7.4 — 9.1 3,011.9 2,879.8 144.0 6,035.7 — 5.1 — 5.1 315.6 282.0 0.3 597.9 34.6 — 14.4 — 49.0 — 270.9 18,497.7 330.6 $ 33,759.7 10.2 77.5 — 87.7 136.1 77.5 — 213.6 5,392.8 3,564.7 63.7 9,021.2 47.9 207.3 1.5 256.7 6,641.4 5,076.7 97.0 11,815.1 2021 Annual Report | Northern Trust Corporation 117 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Loans and leases in the “1 to 3” category are expected to exhibit minimal to modest probabilities of default and are characterized by borrowers having the strongest financial qualities, including above average financial flexibility, cash flows and capital levels. Borrowers assigned these ratings are anticipated to experience very little to moderate financial pressure in adverse down-cycle scenarios. As a result of these characteristics, borrowers within this category exhibit a minimal to modest likelihood of loss. Loans and leases in the “4 to 5” category are expected to exhibit moderate to acceptable probabilities of default and are characterized by borrowers with less financial flexibility than those in the “1 to 3” category. Cash flows and capital levels are generally sufficient to allow for borrowers to meet current requirements, but have fewer financial resources to manage through economic downturns. As a result of these characteristics, borrowers within this category exhibit a moderate likelihood of loss. Loans and leases in the watch list category have elevated credit risk profiles that are monitored through internal watch lists, and consist of credits with borrower ratings of “6 to 9.” These credits, which include all nonaccrual credits, are expected to exhibit minimally acceptable probabilities of default, elevated risk of default, or are currently in default. Borrowers associated with these risk profiles that are not currently in default have limited financial flexibility. Cash flows and capital levels range from acceptable to potentially insufficient to meet current requirements, particularly in adverse down cycle scenarios. As a result of these characteristics, borrowers in this category exhibit an elevated to probable likelihood of loss. Past Due Status. Past due status is based on the length of time from the contractual due date a principal or interest payment has been past due. For disclosure purposes, loans and leases that are 29 days past due or less are reported as current. The following table provides balances and delinquency status of accrual and nonaccrual loans and leases by segment and class, as well as the other real estate owned and nonaccrual asset balances, as of December 31, 2021 and 2020. TABLE 70: DELINQUENCY STATUS ACCRUAL CURRENT 30 – 59 DAYS PAST DUE 60 – 89 DAYS PAST DUE 90 DAYS OR MORE PAST DUE TOTAL ACCRUAL NONACCRUAL TOTAL LOANS AND LEASES NONACCRUAL WITH NO ALLOWANCE (In Millions) December 31, 2021 Commercial Commercial and Institutional Commercial Real Estate Non-U.S. Lease Financing, net Other $ 11,434.7 $ 32.5 $ 2.1 $ 0.4 $ 11,469.7 $ 19.5 $ 11,489.2 $ 4,256.6 1,990.2 11.0 670.7 3.1 — — — — — — — 2.1 — — — — 4,259.7 1,990.2 11.0 670.7 66.6 — — — 4,326.3 1,990.2 11.0 670.7 0.4 18,401.3 86.1 18,487.4 Total Commercial 18,363.2 35.6 Personal Private Client 14,927.3 229.5 71.8 27.7 15,256.3 Residential Real Estate Non-U.S. Other 6,273.2 381.6 35.2 7.0 0.2 — 3.3 — — 0.2 — — 6,283.7 381.8 35.2 Total Personal 21,617.3 236.7 75.1 27.9 21,957.0 — 36.2 — — 36.2 15,256.3 6,319.9 381.8 35.2 21,993.2 Total Loans and Leases $ 39,980.5 $ 272.3 $ 77.2 $ 28.3 $ 40,358.3 $ 122.3 $ 40,480.6 $ Other Real Estate Owned $ Total Nonaccrual Assets $ 3.0 125.3 118 2021 Annual Report | Northern Trust Corporation 8.8 52.3 — — — 61.1 — 36.2 — — 36.2 97.3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCRUAL CURRENT 30 – 59 DAYS PAST DUE 60 – 89 DAYS PAST DUE 90 DAYS OR MORE PAST DUE TOTAL ACCRUAL NONACCRUAL TOTAL LOANS AND LEASES NONACCRUAL WITH NO ALLOWANCE (In Millions) December 31, 2020 Commercial Commercial and Institutional Commercial Real Estate Non-U.S. Lease Financing, net Other $ 9,877.0 $ 153.7 $ 1.2 $ — $ 10,031.9 $ 26.4 $ 10,058.3 $ 3,516.2 1,345.7 11.4 288.2 2.0 — — — — — — — 3,518.2 1,345.7 11.4 288.2 40.2 — — — 3,558.4 1,345.7 11.4 288.2 — 15,195.4 66.6 15,262.0 Total Commercial 15,038.5 155.7 Personal Private Client 11,765.4 Residential Real Estate Non-U.S Other 5,946.0 596.7 49.0 Total Personal 18,357.1 29.1 23.5 1.2 — 53.8 7.8 11,812.2 1.1 — — 5,973.5 597.9 49.0 12.8 8.9 18,432.6 2.9 62.2 — — 65.1 11,815.1 6,035.7 597.9 49.0 18,497.7 Total Loans and Leases $ 33,395.6 $ 209.5 $ 14.0 $ 8.9 $ 33,628.0 $ 131.7 $ 33,759.7 $ Other Real Estate Owned $ Total Nonaccrual Assets $ 0.7 132.4 — — — — 1.2 9.9 2.9 — — 9.1 32.3 — — — 41.4 2.9 53.8 — — 56.7 98.1 Interest income that would have been recorded for nonaccrual loans and leases in accordance with their original terms was $4.6 million in 2021, $4.6 million in 2020, and $7.3 million in 2019. Collateral Dependent Financial Assets. A financial asset is collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Most of Northern Trust’s collateral dependent credit exposure relates to its residential real estate portfolio for which the collateral is usually the underlying real estate property. For collateral dependent financial assets, it is Northern Trust’s policy to reserve or charge-off the difference between the amortized cost basis of the loan and the value of the collateral. The collateral dependent financial asset balance as of December 31, 2021 was immaterial to Northern Trust’s financial statements. Nonaccrual Loans and Troubled Debt Restructurings (TDRs). A loan that has been modified as a concession by Northern Trust or a bankruptcy court resulting from the debtor’s financial difficulties is referred to as a troubled debt restructuring. There were $76.7 million and $38.9 million of nonaccrual TDRs included within nonaccrual loans as of December 31, 2021 and 2020, respectively. There were $16.5 million and $29.3 million of accrual TDRs included within nonaccrual loans as of December 31, 2021 and 2020, respectively. There were $0.2 million and $10.4 million of aggregate undrawn loan commitments and standby letters of credit at December 31, 2021 and 2020, respectively, issued to borrowers with TDR modifications of loans. 2021 Annual Report | Northern Trust Corporation 119 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides, by segment and class, the number of TDR modifications of loans and leases during the years ended December 31, 2021, and 2020, and the recorded investments and unpaid principal balances as of December 31, 2021 and 2020. TABLE 71: TROUBLED DEBT RESTRUCTURINGS ($ In Millions) December 31, 2021 Commercial Commercial and Institutional Commercial Real Estate Total Commercial Personal Residential Real Estate Total Personal Total Loans and Leases Note: Period-end balances reflect all paydowns and charge-offs during the year. ($ In Millions) December 31, 2020 Commercial Commercial and Institutional Total Commercial Personal Residential Real Estate Total Personal Total Loans and Leases NUMBER OF LOANS AND LEASES RECORDED INVESTMENT UNPAID PRINCIPAL BALANCE 6 $ 19.6 $ 3 9 10 10 36.0 55.6 1.3 1.3 19 $ 56.9 $ 19.6 42.4 62.0 1.5 1.5 63.5 NUMBER OF LOANS AND LEASES RECORDED INVESTMENT UNPAID PRINCIPAL BALANCE 3 $ 3 22 22 24.3 $ 24.3 16.2 16.2 25 $ 40.5 $ 24.5 24.5 16.7 16.7 41.2 Note: Period-end balances reflect all paydowns and charge-offs during the year. TDR modifications involve extensions of term, deferrals of principal, interest rate concessions, and other modifications. Other modifications typically reflect other nonstandard terms which Northern Trust would not offer in non-troubled situations. During the year ended December 31, 2021, the TDR modifications of loans within residential real estate were primarily deferrals of principal, extension of term, and other modifications. During the year ended December 31, 2021, TDR modifications of loans within commercial and institutional were deferrals of principal. During the year ended December 31, 2021, TDR modifications of loans within commercial real estate were primarily deferrals of principal, interest rate concessions, other modifications, and extension of term. During the year ended December 31, 2020, the TDR modifications of loans within residential real estate were primarily extensions of term, other modifications, deferrals of principal, and interest rate concessions. During the year ended December 31, 2020, TDR modifications of loans within commercial and institutional were other modifications and extensions of term. There were two loan or lease TDR modifications during the previous twelve-month period which subsequently had a payment default during the year ended December 31, 2021. The total recorded investment for these loans was approximately $5.6 million and the unpaid principal balance for these loans was approximately $5.6 million. There were no loan or lease TDR modifications during the previous twelve-month period which subsequently had a payment default during the year ended December 31, 2020. Northern Trust may obtain physical possession of real estate via foreclosure on an in-substance repossession. As of December 31, 2021 and 2020, Northern Trust held foreclosed real estate properties with a carrying value of $3.0 million and $0.7 million, respectively, as a result of obtaining physical possession. In addition, as of December 31, 2021 and 2020, Northern Trust had loans with a carrying value of $2.6 million and $7.9 million, respectively, for which formal foreclosure proceedings were in process. TDR Relief — COVID-19. Due to the economic environment arising from the COVID-19 pandemic, there have been two forms of relief provided for classifying loans as TDRs: the Interagency Guidance (as defined below) and the CARES Act. 120 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Various banking regulators, including the Board of Governors of the Federal Reserve (Federal Reserve Board), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, issued guidance in the April 7, 2020 Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) on loan modification treatment (Interagency Guidance) pursuant to which financial institutions can apply ASC 310-40 Receivables – Troubled Debt Restructurings by Creditors. In accordance with the Interagency Guidance, a loan modification is not considered a TDR if: (a) the modification is related to COVID-19; (b) the borrower had been current (not more than 29 days past due) when the modification program was implemented; and (c) the modification includes payment deferrals for not more than 6 months. Under section 4013 of the CARES Act, relief provided to lenders exempting certain loan modifications which would otherwise be classified as TDRs from such classification applies for loans that were not more than 30 days past due as of December 31, 2019. The TDR relief under the CARES Act applies to COVID-19-related modifications that were made from March 1, 2020 until the earlier of (a) January 1, 2022 or (b) 60 days from the date the COVID-19 national emergency officially ends. Financial institutions may account for eligible loan modifications under the Interagency Guidance and/or the CARES Act. Northern Trust elected to apply both the CARES Act and the Interagency Guidance, as applicable, in providing borrowers with loan modification relief in response to the COVID-19 pandemic. All other types of modifications which do not meet the CARES Act or Interagency Guidance requirements continue to be governed by existing regulations and accounting policies. The following provides the number of total COVID-19-related loan modifications including the loan volume and deferred principal and interest balances as of December 31, 2021, for which Northern Trust applied an exemption from TDR classification that are in active deferral (loans currently in the deferral period) or completed deferral (loans that returned to their regular payment schedule). As of December 31, 2021, there were three residential real estate COVID-19- related loan modifications in active deferral status which totaled $2.0 million, with immaterial deferred principal and interest. TABLE 72: COVID-19 LOAN MODIFICATIONS NOT CONSIDERED TDRS THAT HAVE COMPLETED DEFERRAL ($ In Millions) Commercial Commercial and Institutional Commercial Real Estate Total Commercial Personal Private Client Residential Real Estate Total Personal Total Loans NUMBER OF COVID-19 RELATED MODIFICATIONS LOAN VOLUME DEFERRED PRINCIPAL AMOUNT DEFERRED INTEREST AMOUNT DECEMBER 31, 2021 73 $ 80 153 $ 29 $ 208 237 $ 390 $ 199.8 $ 390.7 590.5 $ 143.1 $ 102.0 245.1 $ 835.6 $ 0.1 $ — 0.1 $ — $ 1.1 1.1 $ 1.2 $ 1.6 2.4 4.0 1.0 1.3 2.3 6.3 Northern Trust continues to accrue and recognize interest income during the loan deferral period, and hence has not moved these loans to nonaccrual or reported them as past due. Further, these loan balances continue to be assessed on a collective basis for purposes of measuring an allowance for expected credit losses. While these loans are under the COVID-19 loan modification program, this may delay the recognition of nonaccruals and charge-offs. Loans which have exited the COVID-19 loan modification program may be placed on nonaccrual status or charged-off if borrowers were unable to resume their regular payment schedule. During the year ended December 31, 2021, 148 loans with an aggregate principal amount of $209.4 million that had been granted payment deferrals were paid off. As of December 31, 2021, less than 10% of loans that had been granted payment deferrals were either past due or in nonaccrual status. Note 7 – Allowance for Credit Losses Allowance and Provision 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 exposures, 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 2021 Annual Report | Northern Trust Corporation 121 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. Northern Trust employs multiple scenarios over a reasonable and supportable period of currently two years to project future conditions. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters. The primary forecast, consistent with Northern Trust’s economic outlook publications, assumes continued economic recovery from the challenges of COVID-19, with steady growth and a falling unemployment rate over the forecast horizon. An alternative scenario is also considered, which reflects a gradual and prolonged recession that incorporates the experiences of a wider set of historical economic cycles. The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Credit Risk Management, Treasury, Corporate Finance, the Economic Research group, and each of Northern Trust’s business units. The Credit Loss Reserve Committee determines the probability weights applied to each forecast approved by Northern Trust’s Macroeconomic Scenario Development Committee, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework. The following table provides information regarding changes in the total allowance for credit losses. TABLE 73: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES. (In Millions) Balance at Beginning of Period Charge-Offs Recoveries Net Recoveries (Charge-Offs) Provision for Credit Losses Balance at End of Period (In Millions) Balance at End of Prior Period Cumulative Effect Adjustment Balance at Beginning of Period Charge-Offs Recoveries Net Recoveries (Charge-Offs) Provision for Credit Losses Balance at End of Period $ $ $ LOANS AND LEASES UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT HELD TO MATURITY DEBT SECURITIES OTHER FINANCIAL ASSETS 2021 190.7 $ (0.7) 7.0 6.3 (58.6) 138.4 $ 61.1 $ 7.3 $ 0.8 $ — — — (27.0) 34.1 $ — — — 3.9 — — — 0.2 11.2 $ 1.0 $ LOANS AND LEASES UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT HELD TO MATURITY DEBT SECURITIES OTHER FINANCIAL ASSETS 2020 104.5 $ (2.2) 102.3 (9.7) 6.5 (3.2) 91.6 $ 190.7 $ 19.9 $ — $ — $ 8.9 28.8 — — — 32.3 61.1 $ 6.6 6.6 — — — 0.7 0.4 0.4 — — — 0.4 7.3 $ 0.8 $ LOANS AND LEASES UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT 2019 112.6 $ (6.5) 7.2 0.7 (8.8) 104.5 $ 25.6 $ — — — (5.7) 19.9 $ (In Millions) Balance at Beginning of Period $ Charge-Offs Recoveries Net Recoveries (Charge-Offs) Provision for Credit Losses Balance at End of Period $ 122 2021 Annual Report | Northern Trust Corporation TOTAL 259.9 (0.7) 7.0 6.3 (81.5) 184.7 TOTAL 124.4 13.7 138.1 (9.7) 6.5 (3.2) 125.0 259.9 TOTAL 138.2 (6.5) 7.2 0.7 (14.5) 124.4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS There was a $81.5 million release of credit reserves for the year ended December 31, 2021, as compared to a $125.0 million provision for the year ended December 31, 2020. There were net recoveries of $6.3 million for the year ended December 31, 2021, as compared to net charge-offs of $3.2 million for the year ended December 31, 2020. The release of credit reserves during 2021 mostly related to loans and leases and undrawn loan commitments and standby letters of credit. For further detail, please see the following Allowance for the Loan and Lease Portfolio section. For credit exposure and the associated allowance related to fee receivables, please refer to Note 18, “Revenue from Contracts with Clients.” For information related to the allowance for AFS debt securities, please refer to Note 4, “Securities.” For the allowance pertaining to all other financial assets recognized at amortized cost, which include Cash and Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, and Other Assets, please refer to the Allowance for Other Financial Assets section within this footnote. Allowance for the Loan and Lease Portfolio. The following table provides information regarding changes in the total allowance for credit losses, including undrawn loan commitments and standby letters of credit, by segment. TABLE 74: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO LOANS AND LEASES LOANS AND LEASES UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT 2021 (In Millions) COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL Balance at Beginning of Period $ Charge-Offs Recoveries Net Recoveries (Charge-Offs) Provision for Credit Losses Balance at End of Period $ 142.2 $ (0.3) 0.9 0.6 (37.2) 105.6 $ 48.5 $ (0.4) 6.1 5.7 (21.4) 32.8 $ 190.7 $ (0.7) 7.0 6.3 (58.6) 138.4 $ 2020 57.6 $ 3.5 $ — — — (26.2) 31.4 $ — — — (0.8) 2.7 $ TOTAL 61.1 — — — (27.0) 34.1 (In Millions) COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL TOTAL LOANS AND LEASES UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT Balance at End of Prior Period Cumulative Effect Adjustment Balance at Beginning of Period $ $ Charge-Offs Recoveries Net Recoveries (Charge-Offs) Provision for Credit Losses 58.1 $ (5.9) 52.2 $ (6.3) 2.4 (3.9) 93.9 Balance at End of Period $ 142.2 $ 46.4 $ 3.7 50.1 $ (3.4) 4.1 0.7 (2.3) 48.5 $ 104.5 $ (2.2) 102.3 $ (9.7) 6.5 (3.2) 91.6 190.7 $ 2019 15.8 $ 11.9 27.7 $ — — — 29.9 57.6 $ 4.1 $ (3.0) 1.1 $ — — — 2.4 3.5 $ 19.9 8.9 28.8 — — — 32.3 61.1 LOANS AND LEASES UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT (In Millions) COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL Balance at Beginning of Period $ Charge-Offs Recoveries Net Recoveries (Charge-Offs) Provision for Credit Losses Balance at End of Period $ 57.6 $ (3.0) 0.9 (2.1) 2.6 58.1 $ 55.0 $ (3.5) 6.3 2.8 (11.4) 46.4 $ 112.6 $ (6.5) 7.2 0.7 (8.8) 104.5 $ 21.1 $ 4.5 $ — — — (5.3) 15.8 $ — — — (0.4) 4.1 $ TOTAL 25.6 — — — (5.7) 19.9 The decrease to the allowance for both loans and leases and undrawn loan commitments and standby letters of credit for 2021 was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. The decrease in the collective basis reserve was primarily reflected in the commercial and institutional portfolio. 2021 Annual Report | Northern Trust Corporation 123 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides information regarding the recorded investments in loans and leases and the allowance for credit losses for loans and leases and undrawn loan commitments and standby letters of credit by segment as of December 31, 2021 and 2020. TABLE 75: RECORDED INVESTMENTS IN LOANS AND LEASES (In Millions) Loans and Leases Evaluated on an Individual Basis Evaluated on a Collective Basis Total Loans and Leases Allowance for Credit Losses on Credit Exposures Evaluated on an Individual Basis Evaluated on a Collective Basis Allowance Assigned to Loans and Leases Allowance for Undrawn Loan Commitments and Standby Letters of Credit Evaluated on an Individual Basis Evaluated on a Collective Basis Allowance Assigned to Undrawn Loan Commitments and Standby Letters of Credit Total Allowance Assigned to Loans and Leases and Undrawn Loan Commitments and Standby Letters of Credit DECEMBER 31, 2021 DECEMBER 31, 2020 COMMERCIAL PERSONAL TOTAL COMMERCIAL PERSONAL TOTAL $ 92.1 $ 74.5 $ 166.6 $ 66.6 $ 65.1 $ 131.7 18,395.3 21,918.7 40,314.0 15,195.4 18,432.6 33,628.0 18,487.4 21,993.2 40,480.6 15,262.0 18,497.7 33,759.7 10.1 95.5 105.6 — 31.4 31.4 — 32.8 32.8 — 2.7 2.7 10.1 128.3 138.4 — 34.1 34.1 8.8 133.4 142.2 1.6 56.0 57.6 0.3 48.2 48.5 — 3.5 3.5 9.1 181.6 190.7 1.6 59.5 61.1 $ 137.0 $ 35.5 $ 172.5 $ 199.8 $ 52.0 $ 251.8 Allowance for Held to Maturity Debt Securities Portfolio. The following table provides information regarding changes in the total allowance for credit losses for HTM debt securities during 2021 and 2020. TABLE 76: CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES RELATED TO HELD TO MATURITY DEBT SECURITIES (In Millions) Balance at Beginning of Period Provision for Credit Losses Balance at End of Period $ $ CORPORATE DEBT NON-U.S. GOVERNMENT 2021 SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS 0.8 $ 0.6 1.4 $ 0.2 $ 1.7 1.9 $ 1.2 $ 1.8 3.0 $ 2020 COVERED BONDS OTHER TOTAL 0.1 $ — 0.1 $ 5.0 $ (0.2) 4.8 $ 7.3 3.9 11.2 (In Millions) CORPORATE DEBT NON-U.S. GOVERNMENT SUB-SOVEREIGN, SUPRANATIONAL, AND NON-U.S. AGENCY BONDS COVERED BONDS OTHER TOTAL Balance at End of Prior Period $ — $ Cumulative Effect Adjustment Balance at Beginning of Period Provision for Credit Losses 0.8 0.8 — Balance at End of Period $ 0.8 $ — $ 0.3 0.3 (0.1) 0.2 $ — $ — $ — $ 0.9 0.9 0.3 — — 0.1 4.6 4.6 0.4 1.2 $ 0.1 $ 5.0 $ — 6.6 6.6 0.7 7.3 Prior to the adoption of ASU 2016-13 on January 1, 2020, Northern Trust recognized $4.4 million of cumulative Other- Than-Temporary-Impairment (OTTI) losses on the debt securities classified as other as of December 31, 2019. For debt securities with previous OTTI losses recorded, Northern Trust applied ASU 2016-13 on a prospective basis whereby the amortized cost basis of the impaired security remains unchanged immediately before and after adopting ASU 2016-13. The allowance recorded at January 1, 2020 for HTM debt securities equals the difference between the calculated expected loss and the amount of OTTI loss previously recorded and represents the cumulative effect adjustment required upon the adoption of ASU 2016-13. 124 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The increase in the allowance attributable to HTM debt securities for 2021 was due to an increase in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics, and was driven by an increase in exposure. Allowance for Other Financial Assets. The allowance for Other Financial Assets consists of the allowance for Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, and Other Assets. Northern Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category and is expected to exhibit minimal to modest likelihood of loss. The allowance for credit losses related to Other Financial Assets was $1.0 million and $0.8 million as of December 31, 2021 and 2020, respectively. Accrued Interest. Accrued interest balances are reported within Other Assets on the consolidated balance sheets. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables related to its loan and securities portfolios as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. Accrued interest is written off by reversing interest income during the period the financial asset is moved from an accrual to a nonaccrual status. The following table provides the amount of accrued interest excluded from the amortized cost basis of the following portfolios. TABLE 77: ACCRUED INTEREST (In Millions) Loans and Leases Debt Securities Held to Maturity Available for Sale Other Financial Assets Total DECEMBER 31, 2021 DECEMBER 31, 2020 62.6 $ 30.4 129.7 2.3 225.0 $ 55.3 26.5 153.6 1.4 236.8 $ $ The amount of accrued interest reversed through interest income for loans and leases was immaterial and there was no accrued interest reversed through interest income related to any other financial assets during the years ended 2021 and 2020. Note 8 – Concentrations of Credit Risk Concentrations of credit risk exist if a number of borrowers or other counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The fact that a credit exposure falls into one of these groups does not necessarily indicate that the credit has a higher than normal degree of credit risk. These groups are: banks and bank holding companies, residential real estate, and commercial real estate. Banks and Bank Holding Companies. At December 31, 2021, on-balance sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consisted primarily of Interest-Bearing Deposits with Banks of $1.9 billion, demand balances maintained at correspondent banks of $3.0 billion, and Securities Purchased under Agreements to Resell of $686.4 million. At December 31, 2020, on-balance sheet credit risk to banks and bank holding companies, both U.S. and non-U.S., consisted primarily of Interest-Bearing Deposits with Banks of $4.4 billion, demand balances maintained at correspondent banks of $4.3 billion, and Securities Purchased under Agreements to Resell of $1.6 billion. Credit risk associated with U.S. and non-U.S. banks and bank holding companies deemed to be counterparties by Credit Risk Management is managed by the Capital Markets Credit Committee. Credit limits are established through a review process that includes an internally- prepared financial analysis, use of an internal risk rating system and consideration of external ratings from rating agencies. Northern Trust places deposits with banks that have strong internal and external credit ratings and the average life to maturity of deposits with banks is maintained on a short-term basis in order to respond quickly to changing credit conditions. Residential Real Estate. Residential real estate loans totaled $6.3 billion at December 31, 2021 and $6.0 billion at December 31, 2020, representing 17% and 19%, respectively, of total U.S. loans and leases. Residential real estate loans consist of traditional first lien mortgages and equity credit lines, which generally require a loan-to-collateral value ratio of no more than 65% to 80% at inception. Revaluations of supporting collateral are obtained upon refinancing or default or when otherwise considered warranted. Collateral revaluations for mortgages are performed by independent third parties. Of 2021 Annual Report | Northern Trust Corporation 125 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the $6.3 billion residential real estate loans at December 31, 2021, $1.6 billion were in Florida, $1.4 billion were in California, and $0.7 billion were in the greater Chicago area, with the remainder distributed throughout the other geographic regions within the U.S. served by Northern Trust. Legally binding undrawn commitments to extend residential real estate credit, which are primarily equity credit lines, totaled $665.9 million and $676.1 million at December 31, 2021 and 2020, respectively. Commercial Real Estate. In managing its credit exposure, management has defined a commercial real estate loan as one where: (1) the borrower’s principal business activity is the acquisition or the development of real estate for commercial purposes; (2) the principal collateral is real estate held for commercial purposes, and loan repayment is expected to flow from the operation of the property; or (3) the loan repayment is expected to flow from the sale or refinance of real estate as a normal and ongoing part of the business. Unsecured lines of credit to firms or individuals engaged in commercial real estate endeavors are included without regard to the use of loan proceeds. The commercial real estate portfolio consists of commercial mortgages and construction, acquisition and development loans extended primarily to experienced investors well known to Northern Trust. Underwriting standards generally reflect conservative loan-to-value ratios and debt service coverage requirements. Recourse to borrowers through guarantees is also commonly required. Commercial mortgage financing is provided for the acquisition or refinancing of income-producing properties. Cash flows from the properties generally are sufficient to amortize the loan. These loans are primarily located in the California, Illinois, Florida, Texas, and New York markets. Construction, acquisition and development loans provide financing for commercial real estate prior to rental income stabilization. The intent is generally that the borrower will sell the project or refinance the loan through a commercial mortgage with Northern Trust or another financial institution upon completion. At December 31, 2021, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $357.9 million and $30.0 million, respectively. At December 31, 2020, legally binding commitments to extend credit and standby letters of credit to commercial real estate borrowers totaled $252.3 million and $4.5 million, respectively. The table below provides additional detail regarding commercial real estate loan types. TABLE 78: COMMERCIAL REAL ESTATE LOANS (In Millions) Commercial Mortgages Office Apartment/ Multi-family Retail Industrial/ Warehouse Other Total Commercial Mortgages Construction, Acquisition and Development Loans Total Commercial Real Estate Loans DECEMBER 31, 2021 2020 $ 1,011.4 $ 1,288.8 601.8 442.9 516.8 3,861.7 464.6 $ 4,326.3 $ 831.3 906.8 561.3 344.2 409.9 3,053.5 504.9 3,558.4 126 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 9 – Buildings and Equipment A summary of Buildings and Equipment is presented in the following table. TABLE 79: BUILDINGS AND EQUIPMENT (In Millions) Land and Improvements Buildings Equipment Leasehold Improvements Total Buildings and Equipment (In Millions) Land and Improvements Buildings Equipment Leasehold Improvements Total Buildings and Equipment ORIGINAL COST DECEMBER 31, 2021 ACCUMULATED DEPRECIATION NET BOOK VALUE $ 11.5 $ 0.3 $ 217.6 478.4 513.6 136.5 275.4 320.2 $ 1,221.1 $ 732.4 $ 11.2 81.1 203.0 193.4 488.7 ORIGINAL COST DECEMBER 31, 2020 ACCUMULATED DEPRECIATION NET BOOK VALUE $ 14.5 $ 0.5 $ 257.8 816.4 523.9 163.0 596.8 337.4 $ 1,612.6 $ 1,097.7 $ 14.0 94.8 219.6 186.5 514.9 The charge for depreciation amounted to $110.8 million in 2021, $116.5 million in 2020, and $103.2 million in 2019 on the consolidated statements of income. Note 10 – Lease Commitments At December 31, 2021, Northern Trust was obligated under a number of non-cancelable operating leases, primarily for real estate. Certain leases contain rent escalation clauses based on market indices, renewal option clauses calling for increased rentals, and rental payments based on usage. There are no restrictions imposed by any lease agreement regarding the payment of dividends, debt financing or Northern Trust entering into further lease agreements. The components of lease costs for the years ended December 31, 2021 and 2020 were as follows. TABLE 80: LEASE COST COMPONENTS (In Millions) Operating Lease Cost Variable Lease Cost Sublease Income Total Lease Cost DECEMBER 31, 2021 DECEMBER 31, 2020 $ $ 96.2 $ 37.3 (4.5) 129.0 $ 119.4 32.7 (4.8) 147.3 2021 Annual Report | Northern Trust Corporation 127 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents a maturity analysis of lease liabilities as of December 31, 2021. TABLE 81: MATURITY OF LEASE LIABILITIES (In Millions) 2022 2023 2024 2025 2026 Later Years Total Lease Payments Less: Imputed Interest Present Value of Lease Liabilities MATURITY OF LEASE LIABILITIES $ $ 93.2 88.9 80.3 82.6 61.7 346.5 753.2 (90.1) 663.1 As of December 31, 2021, Northern Trust had commitments for operating leases in addition to the above that have not yet commenced for approximately $22 million. These operating leases are for the use of office space with lease terms of between 10 and 12 years and are expected to commence between the first half of 2022 and mid-year 2023. Northern Trust uses its incremental borrowing rate to determine the present value of lease payments for operating leases. Operating lease right-of-use (ROU) assets and lease liabilities may include options to extend or terminate the lease only when it is reasonably certain that Northern Trust will exercise that option. Northern Trust elects not to separate lease and non-lease components of a contract for its real estate leases. The location and amount of ROU assets and lease liabilities recorded on the consolidated balance sheets as of December 31, 2021 and 2020 are presented in the following table. TABLE 82: LOCATION AND AMOUNT OF LEASE ASSETS AND LIABILITIES (In Millions) Assets Operating Lease Right-of-Use Asset Liabilities Operating Lease Liability LOCATION OF LEASE ASSETS AND LEASE LIABILITIES ON THE BALANCE SHEET DECEMBER 31, 2021 DECEMBER 31, 2020 Other Assets Other Liabilities $ $ 531.2 $ 560.5 663.1 $ 700.6 The weighted-average remaining lease term and weighted-average discount rate applied to leases as of December 31, 2021 and 2020 were as follows: TABLE 83: WEIGHTED-AVERAGE REMAINING LEASE TERM AND DISCOUNT RATE Operating Leases Weighted-Average Remaining Lease Term Weighted-Average Discount Rate DECEMBER 31, 2021 DECEMBER 31, 2020 9.6 years 2.4 % 10.0 years 2.5 % The following table provides supplemental cash flow information related to leases for the years ended December 31, 2021 and 2020. TABLE 84: SUPPLEMENTAL CASH FLOW INFORMATION (In Millions) Supplemental cash flow information Cash paid for amounts included in the measurement of lease liabilities - operating cash flows Supplemental non-cash information Right-of-use assets obtained in exchange for new operating lease liabilities DECEMBER 31, 2021 DECEMBER 31, 2020 $ $ 69.5 $ 58.5 $ 107.9 164.8 128 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 11 – Goodwill and Other Intangibles Goodwill. Changes by reporting segment in the carrying amount of Goodwill for the years ended December 31, 2021 and 2020, including the effect of foreign exchange rates on non-U.S.-dollar denominated balances, were as follows. TABLE 85: GOODWILL (In Millions) Balance at December 31, 2019(1) Foreign Exchange Rates Balance at December 31, 2020 Goodwill Acquired Foreign Exchange Rates Balance at December 31, 2021 CORPORATE & INSTITUTIONAL SERVICES WEALTH MANAGEMENT 616.4 $ 10.3 626.7 $ 4.2 (5.2) 80.4 $ 0.1 80.5 $ — — TOTAL 696.8 10.4 707.2 4.2 (5.2) 625.7 $ 80.5 $ 706.2 $ $ $ (1) $9.3 million of goodwill was moved from Corporate & Institutional Services to Wealth Management for reporting purposes, to better reflect the nature of the client base. In the second quarter of 2021, Northern Trust finalized the acquisition of Parilux Investment Technology, LLC, a provider of middle office software solutions for multi-manager investors, completing the investment in the firm that was initiated in 2018. The purchase price recorded in connection with the closing of the acquisition totaled $17.6 million. Goodwill and developed technology associated with the acquisition totaled $4.2 million and $13.4 million, respectively. The goodwill impairment test is performed at least annually at the reporting-unit level. The Corporation has determined its reporting units for this purpose to be Corporate & Institutional Services and Wealth Management. Goodwill was tested for impairment during the fourth quarter of 2021 using a quantitative assessment in which the estimated fair values of the reporting units are compared to their carrying values. Impairment is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair value. Based upon the quantitative assessments, there were no impairments to goodwill in 2021. Other Intangible Assets Subject to Amortization. The gross carrying amount and accumulated amortization of other intangible assets subject to amortization as of December 31, 2021 and 2020 were as follows. TABLE 86: OTHER INTANGIBLE ASSETS (In Millions) Gross Carrying Amount Less: Accumulated Amortization Net Book Value DECEMBER 31, 2021 206.4 $ 114.8 91.6 $ 2020 221.3 108.7 112.6 $ $ Other intangible assets consist primarily of the value of acquired client relationships and are included in Other Assets on the consolidated balance sheets. Amortization expense related to other intangible assets was $14.8 million, $16.9 million, and $16.6 million for the years ended December 31, 2021, 2020, and 2019, respectively. Amortization for the years 2022, 2023, 2024, 2025, and 2026 is estimated to be $9.9 million, $9.6 million, $9.5 million, $8.9 million, and $8.6 million respectively. Capitalized Software. The gross carrying amount and accumulated amortization of capitalized software as of December 31, 2021 and 2020 were as follows. TABLE 87: CAPITALIZED SOFTWARE (In Millions) Gross Carrying Amount Less: Accumulated Amortization Net Book Value DECEMBER 31, 2021 2,982.1 $ 1,299.5 1,682.6 $ 2020 4,337.4 2,744.5 1,592.9 $ $ Capitalized software, which is included in Other Assets on the consolidated balance sheets, consists primarily of purchased software, software licenses, and allowable internal costs, including compensation relating to software developed for internal use. Fees paid for the use of software licenses that are not hosted by Northern Trust are expensed as incurred. 2021 Annual Report | Northern Trust Corporation 129 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amortization expense, which is included in Equipment and Software on the consolidated statements of income, totaled $390.1 million in 2021, $366.9 million in 2020, and $339.1 million in 2019. Note 12 – Deposits The following table provides the scheduled maturity of total time deposits in denominations of $250,000 or greater at December 31, 2021. TABLE 88: REMAINING MATURITY OF TIME DEPOSITS $250,000 OR MORE (In Millions) 1 Year or Less Over 1 Year to 2 Years Over 2 Years to 3 Years Over 3 Years to 4 Years Over 4 Years to 5 Years Over 5 Years Total U.S. OFFICE DECEMBER 31, 2021 NON-U.S. OFFICES CERTIFICATES OF DEPOSIT OTHER TIME TOTAL $ $ 625.3 $ 13.8 1.5 0.3 0.8 — 383.5 $ — — — — — 1,008.8 13.8 1.5 0.3 0.8 — 641.7 $ 383.5 $ 1,025.2 As of December 31, 2020, there were $906.8 million of time deposits in denominations of $250,000 or greater, of which $701.4 million were Certificates of Deposit and $205.4 million were non-U.S. Note 13 – Senior Notes and Long-Term Debt Senior Notes. A summary of Senior Notes outstanding at December 31, 2021 and 2020 is presented in the following table. TABLE 89: SENIOR NOTES ($ In Millions) Corporation-Senior Notes (1) Fixed Rate Due Aug. 2021 (2) Fixed Rate Due Aug. 2022 (2) Fixed Rate Due Aug. 2028 (3)(4) Fixed Rate Due May 2029 (3)(4) Fixed Rate Due May 2030 (3)(4) Total Senior Notes DECEMBER 31, RATE 2021 2020 3.375 % $ — $ 2.375 3.65 3.15 1.95 499.8 548.5 533.9 923.3 499.8 499.6 584.4 567.9 970.7 $ 2,505.5 $ 3,122.4 (1) As of December 31, 2021, debt issuance costs of $2.9 million are included as a direct deduction from the carrying amount and amortized on a straight-line basis over the life of the Note. (2) Not redeemable prior to maturity. (3) Redeemable within three months of maturity. (4) Interest rate swap contracts were entered into to modify the interest expense from fixed rates to floating rates. The swaps are recorded as fair value hedges and increases in the carrying values of senior notes outstanding of $12.5 million and $130.7 million were recorded as of December 31, 2021 and 2020, respectively. See further detail in Note 27, “Derivative Financial Instruments.” 130 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-Term Debt. A summary of Long-Term Debt outstanding at December 31, 2021 and 2020 is presented in the following table. TABLE 90: LONG-TERM DEBT ($ In Millions) Corporation-Subordinated Debt (1) Fixed Rate Notes due Oct. 2025 (2)(3) Fixed-to-Floating Rate Notes due May 2032 (4) Total Long-Term Debt Long-Term Debt Qualifying as Risk-Based Capital DECEMBER 31, RATE 2021 2020 3.95 % $ 3.375 $ $ 796.2 $ 349.5 1,145.7 $ 799.8 $ 839.8 349.5 1,189.3 949.7 (1) As of December 31, 2021, debt issuance costs of $0.9 million are included as a direct deduction from the carrying amount and amortized on a straight-line basis over the life of the Note. (2) Not redeemable prior to maturity. (3) Interest rate swap contracts were entered into to modify the interest expense from fixed rates to floating rates. The swaps are recorded as fair value hedges and increases in the carrying values of the subordinated notes outstanding of $46.9 million and $90.8 million were recorded as of December 31, 2021 and 2020, respectively. See further detail in Note 27, “Derivative Financial Instruments.” (4) The subordinated notes will bear interest from the date they were issued to, but excluding, May 8, 2027, at an annual rate of 3.375%, payable semi-annually in arrears. From, and including, May 8, 2027, the subordinated notes will bear interest at an annual rate equal to three-month LIBOR plus 1.131%, payable quarterly in arrears. The subordinated notes are unsecured and may be redeemed, in whole but not in part, on, and only on, May 8, 2027, at a redemption price equal to 100% of the principal amount of the subordinated notes to be redeemed, plus accrued and unpaid interest, if any, up to but excluding the redemption date. Note 14 – Floating Rate Capital Debt In January 1997, the Corporation issued $150 million of Floating Rate Capital Securities, Series A, through a statutory business trust wholly owned by the Corporation (NTC Capital I) due in January 2027. In April 1997, the Corporation also issued, through a separate wholly owned statutory business trust (NTC Capital II), $120 million of Floating Rate Capital Securities, Series B due in April 2027. The sole assets of the trusts were subordinated debentures of the Corporation that had the same interest rates and maturity dates as the corresponding distribution rates and redemption dates of the Floating Rate Capital Securities. The Series A securities were issued at a discount to yield 60.5 basis points above the three-month LIBOR and the Series B securities were issued at a discount to yield 67.9 basis points above the three-month LIBOR. The holders of the Series A and B securities were entitled to receive preferential cumulative cash distributions quarterly in arrears (based on the liquidation amount of $1,000 per security) at an interest rate equal to three-month LIBOR plus 52.0 basis points and 59.0 basis points, respectively. On October 15, 2021, the Floating Rate Capital Securities Series A and Series B were redeemed at the principal amount plus accrued and unpaid interest and, concurrently with the redemption of the Floating Rate Capital Securities Series A and B, the corresponding subordinated debentures were fully redeemed for $278.8 million principal amount plus accrued and unpaid interest, with $154.9 million attributable to the Series A subordinated debentures and $123.9 million attributable to the Series B subordinated debentures. The following table summarizes the book values of the outstanding subordinated debentures as of December 31, 2021 and 2020. TABLE 91: SUBORDINATED DEBENTURES (In Millions) NTC Capital I Subordinated Debentures NTC Capital II Subordinated Debentures Total Subordinated Debentures Note 15 – Stockholders’ Equity DECEMBER 31, 2021 — $ — — $ 2020 154.3 123.5 277.8 $ $ Preferred Stock. The Corporation is authorized to issue 10 million shares of preferred stock without par value. The Board of Directors is authorized to fix the particular designations, preferences and relative, participating, optional and other special rights and qualifications, limitations or restrictions for each series of preferred stock issued. As of December 31, 2021, 5,000 shares of Series D Non-Cumulative Perpetual Preferred Stock (the “Series D Preferred Stock”) and 16,000 shares of Series E Non-Cumulative Perpetual Preferred Stock (the “Series E Preferred Stock”) were outstanding. Series D Preferred Stock. As of December 31, 2021, the Corporation had issued and outstanding 500,000 depositary shares, each representing a 1/100th ownership interest in a share of Series D Preferred Stock, issued in August 2016. Equity related to Series D Preferred Stock as of December 31, 2021 and 2020 was $493.5 million. Shares of the Series D 2021 Annual Report | Northern Trust Corporation 131 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Preferred Stock have no par value and a liquidation preference of $100,000 per share (equivalent to $1,000 per depositary share). Dividends on the Series D Preferred Stock, which are not mandatory, accrue and are payable on the liquidation preference amount, on a non-cumulative basis, at a rate per annum equal to (i) 4.60% from the original issue date of the Series D Preferred Stock to but excluding October 1, 2026; and (ii) a floating rate equal to three-month LIBOR plus 3.202% from and including October 1, 2026. Fixed rate dividends are payable in arrears on the first day of April and October of each year, through and including October 1, 2026, and floating rate dividends will be payable in arrears on the first day of January, April, July and October of each year, commencing on January 1, 2027. The Series D Preferred Stock has no maturity date and is redeemable at the Corporation’s option in whole, or in part, on any dividend payment date on or after October 1, 2026. The Series D Preferred Stock is redeemable at the Corporation’s option in whole, but not in part, including prior to October 1, 2026, within 90 days of a regulatory capital treatment event, as described in the Series D Preferred Stock Certificate of Designation. Shares of the Series D Preferred Stock rank senior to the Corporation’s common stock, and will rank at least equally with any other series of preferred stock it may issue (except for any senior series that may be issued with the requisite consent of the holders of the Series D Preferred Stock) and all other parity stock, with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up. Series E Preferred Stock. As of December 31, 2021, the Corporation had issued and outstanding 16 million depositary shares, each representing 1/1,000th ownership interest in a share of Series E Preferred Stock, issued in November 2019. Equity related to Series E Preferred Stock as of December 31, 2021 and 2020 was $391.4 million. Shares of the Series E Preferred Stock have no par value and a liquidation preference of $25,000 per share (equivalent to $25 per depositary share). Dividends on the Series E Preferred Stock, which are not mandatory, accrue and are payable on the liquidation preference amount, on a non-cumulative basis, quarterly in arrears on the first day of January, April, July and October of each year, at a rate per annum equal to 4.70%. On October 19, 2021, the Corporation declared a cash dividend of $293.75 per share of Series E Preferred Stock payable on January 1, 2022, to stockholders of record as of December 15, 2021. The Series E Preferred Stock has no maturity date and is redeemable at the Corporation’s option in whole, or in part, on any dividend payment date on or after January 1, 2025. The Series E Preferred Stock is redeemable at the Corporation’s option in whole, but not in part, including prior to January 1, 2025, within 90 days of a regulatory capital treatment event, as described in the Series E Preferred Stock Certificate of Designation. Shares of the Series E Preferred Stock rank senior to the Corporation’s common stock, and will rank at least equally with any other series of preferred stock it may issue (except for any senior series that may be issued with the requisite consent of the holders of the Series E Preferred Stock) and all other parity stock, with respect to the payment of dividends and distributions upon liquidation, dissolution or winding up. Common Stock. During the year ended December 31, 2021, the Corporation repurchased 2,527,544 shares of common stock, including 394,326 shares withheld related to share-based compensation, at a total cost of $267.6 million. These repurchases were made pursuant to the repurchase program authorized by the Board of Directors in July 2018. In October 2021, this program was terminated and replaced with a new repurchase program, under which the Corporation’s Board of Directors authorized the Corporation to repurchase up to 25.0 million shares of the Corporation’s common stock. 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 incentive plans. The repurchase authorization approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to repurchase when circumstances warrant and applicable regulation permits. The average price paid per share for common stock repurchased in 2021, 2020, and 2019 was $105.90, $91.49, and $93.40, respectively. An analysis of changes in the number of shares of common stock outstanding follows: TABLE 92: SHARES OF COMMON STOCK Balance at January 1 Incentive Plan and Awards Stock Options Exercised Treasury Stock Purchased Balance at December 31 132 2021 Annual Report | Northern Trust Corporation 2021 2020 2019 208,289,178 209,709,046 219,012,050 1,162,484 837,757 1,512,035 344,686 (2,527,544) (3,276,589) 207,761,875 208,289,178 1,688,931 786,931 (11,778,866) 209,709,046 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 16 – Accumulated Other Comprehensive Income (Loss) The following tables summarize the components of Accumulated Other Comprehensive Income (Loss) (AOCI) at December 31, 2021, 2020, and 2019, and changes during the years then ended. TABLE 93: SUMMARY OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (In Millions) Balance at December 31, 2018 Net Change Balance at December 31, 2019 Net Change Balance at December 31, 2020 Net Change Balance at December 31, 2021 NET UNREALIZED GAINS (LOSSES) ON AVAILABLE FOR SALE DEBT SECURITIES (1) NET UNREALIZED (LOSSES) GAINS ON CASH FLOW HEDGES NET FOREIGN CURRENCY ADJUSTMENT NET PENSION AND OTHER POSTRETIREMENT BENEFIT ADJUSTMENTS TOTAL $ $ $ $ (114.9) $ 228.9 114.0 $ 527.8 641.8 $ (534.7) 107.1 $ 4.0 $ (7.7) (3.7) $ 0.5 67.9 $ 49.9 117.8 $ 26.9 (410.7) $ (453.7) (12.1) 259.0 (422.8) $ (194.7) 67.5 622.7 428.0 (3.2) $ 144.7 $ (355.3) $ 0.8 10.5 59.8 (463.6) (2.4) $ 155.2 $ (295.5) $ (35.6) (1) Includes net unrealized gains (losses) on debt securities transferred from AFS to HTM. Refer to Note 4, “Securities” for further information. TABLE 94: DETAILS OF CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 (In Millions) Unrealized Gains (Losses) on Available for Sale Debt Securities Unrealized Gains (Losses) on Available for Sale Debt Securities Reclassification Adjustments for Losses (Gains) Included in Net Income: Interest Income on Debt Securities(1) Net Losses on Debt Securities(2) BEFORE TAX TAX EFFECT AFTER TAX BEFORE TAX TAX EFFECT AFTER TAX BEFORE TAX TAX EFFECT AFTER TAX $ (685.0) $ 177.5 $ (507.5) $ 706.8 $ (179.3) $ 527.5 $ 306.1 $ (78.0) $ 228.1 (36.6) 9.2 (27.4) 0.3 (0.1) 0.2 — 0.4 — (0.1) — 0.3 — 1.1 — (0.3) — 0.8 Net Change $ (721.3) $ 186.6 $ (534.7) $ 707.2 $ (179.4) $ 527.8 $ 307.2 $ (78.3) $ 228.9 Unrealized (Losses) Gains on Cash Flow Hedges Foreign Exchange Contracts Interest Rate Contracts $ 5.6 $ (1.4) $ 4.2 $ 28.9 $ (7.3) $ 21.6 $ 14.9 $ (3.7) $ 11.2 — — — — — — 1.5 (0.3) 1.2 Reclassification Adjustment for (Gains) Losses Included in Net Income(3) Net Change Foreign Currency Adjustments (4.5) 1.1 (3.4) (28.1) 7.0 (21.1) (26.7) 6.6 (20.1) $ 1.1 $ (0.3) $ 0.8 $ 0.8 $ (0.3) $ 0.5 $ (10.3) $ 2.6 $ (7.7) Foreign Currency Translation Adjustments $ (133.8) $ 4.1 $ (129.7) $ 169.1 $ (8.3) $ 160.8 $ 6.4 $ (1.6) $ 4.8 Long-Term Intra-Entity Foreign Currency Transaction (Losses) Gains 0.6 (0.1) 0.5 2.1 (0.5) 1.6 (0.5) 0.1 (0.4) Net Investment Hedge Gains (Losses) 186.6 (46.9) 139.7 (178.7) 43.2 (135.5) 59.7 (14.2) 45.5 Net Change $ 53.4 $ (42.9) $ 10.5 $ (7.5) $ 34.4 $ 26.9 $ 65.6 $ (15.7) $ 49.9 Pension and Other Postretirement Benefit Adjustments Net Actuarial (Losses) Gains $ 7.9 $ 0.2 $ 8.1 $ 47.4 $ (12.3) $ 35.1 $ (36.8) $ 7.9 $ (28.9) Reclassification Adjustment for Losses (Gains) Included in Net Income(4) Amortization of Net Actuarial Loss Amortization of Prior Service Cost (Credit) Settlement Loss(5) Net Change Total Net Change 41.4 (10.3) 31.1 42.2 (10.4) 31.8 22.4 (5.4) 17.0 (1.0) 0.3 (0.7) (0.1) — (0.1) (0.2) 28.3 (7.0) 21.3 0.8 (0.1) 0.7 — — — (0.2) — $ 76.6 $ (16.8) $ 59.8 $ 90.3 $ (22.8) $ 67.5 $ (14.6) $ 2.5 $ (12.1) $ (590.2) $ 126.6 $ (463.6) $ 790.8 $ (168.1) $ 622.7 $ 347.9 $ (88.9) $ 259.0 (1) The before-tax reclassification adjustment out of AOCI is related to the amortization of unrealized gains (losses) on AFS debt securities that were transferred to HTM debt securities during the second quarter of 2021. Refer to Note 4, “Securities” for further information. (2) The before-tax reclassification adjustment out of AOCI related to the realized gains (losses) on AFS debt securities is recorded in Investment Security Losses, net on the consolidated statements of income. (3) See Note 27, "Derivative Financial Instruments" for the location of the reclassification adjustment related to cash flow hedges. (4) The before-tax reclassification adjustment out of AOCI related to pension and other postretirement benefit adjustments is recorded in Employee Benefits expense on the consolidated statements of income. (5) This line includes the before-tax $27.9 million U.S. Qualified Plan pension settlement charge in 2021. Refer to Note 23, “Employee Benefits” for further information. 2021 Annual Report | Northern Trust Corporation 133 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 17 – Net Income per Common Share The computations of net income per common share are presented in the following table. TABLE 95: NET INCOME PER COMMON SHARE ($ In Millions Except Per Common Share Information) BASIC NET INCOME PER COMMON SHARE Average Number of Common Shares Outstanding Net Income Less: Dividends on Preferred Stock Net Income Applicable to Common Stock Less: Earnings Allocated to Participating Securities Earnings Allocated to Common Shares Outstanding Basic Net Income Per Common Share DILUTED NET INCOME PER COMMON SHARE Average Number of Common Shares Outstanding Plus Dilutive Effect of Share-based Compensation Average Common and Potential Common Shares FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 208,075,522 208,319,412 214,525,547 $ 1,545.3 $ 1,209.3 $ 1,492.2 41.8 1,503.5 12.9 56.2 1,153.1 12.1 46.4 1,445.8 16.9 $ 1,490.6 $ 1,141.0 $ 1,428.9 7.16 5.48 6.66 208,075,522 208,319,412 214,525,547 823,708 688,574 1,075,602 208,899,230 209,007,986 215,601,149 Earnings Allocated to Common and Potential Common Shares $ 1,490.6 $ 1,141.1 $ 1,428.9 Diluted Net Income Per Common Share 7.14 5.46 6.63 Note: For the years ended December 31, 2021, 2020, and 2019, there were no common stock equivalents excluded in the computation of diluted net income per share. Note 18 – Revenue from Contracts with Clients Trust, Investment, and Other Servicing Fees. Custody and Fund Administration income is comprised of revenues received from our core asset servicing business for providing custody, fund administration, and middle-office-related services, primarily to C&IS clients. Investment Management and Advisory income contains revenue received from providing asset management and related services to Wealth Management and C&IS clients and to Northern Trust sponsored funds. Securities Lending income represents revenues generated from securities lending arrangements that Northern Trust enters into as agent, mainly with C&IS clients. Other income largely consists of revenues received from providing employee benefit, investment risk and analytic and other services to C&IS and Wealth Management clients. Other Noninterest Income. Treasury management income represents revenues received from providing cash and liquidity management services to C&IS and Wealth Management clients. The portion of Security Commissions and Trading Income that relates to revenue from contracts with clients is primarily comprised of commissions earned from providing securities brokerage services to Wealth Management and C&IS clients. The portion of Other Operating Income that relates to revenue from contracts with clients is mainly comprised of service fees for banking-related services provided to Wealth Management and C&IS clients. Performance Obligations. Clients are typically charged monthly or quarterly in arrears based on the fee arrangement agreed to with each client; payment terms will vary depending on the client and services offered. Substantially all revenues generated from contracts with clients for asset servicing, asset management, securities lending, treasury management and banking-related services are recognized on an accrual basis, over the period in which services are provided. The nature of Northern Trust’s performance obligations is to provide a series of distinct services in which the customer simultaneously receives and consumes the benefits of the promised services as they are performed. Fee arrangements are mainly comprised of variable amounts based on market value of client assets managed and serviced, transaction volumes, number of accounts, and securities lending volume and spreads. Revenue is recognized using the output method in an amount that reflects the consideration to which Northern Trust expects to be entitled in exchange for providing each month or quarter of service. For contracts with multiple performance obligations, revenue is allocated to each performance obligation based on the price agreed to with the client, representing its relative standalone selling price. Security brokerage revenue is primarily represented by securities commissions received in exchange of providing trade execution related services. Control is transferred at a point in time, on the trade date of the transaction, and fees are typically variable based on transaction volumes and security types. Northern Trust’s contracts with its clients are typically open-ended arrangements and are therefore considered to have an original duration of less than one year. Northern Trust has elected the practical expedient to not disclose the value of remaining performance obligations for contracts with an original expected duration of one year or less. 134 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents revenues disaggregated by major revenue source. TABLE 96: REVENUE DISAGGREGATION (In Millions) Noninterest Income Trust, Investment and Other Servicing Fees Custody and Fund Administration Investment Management and Advisory Securities Lending Other Total Trust, Investment and Other Servicing Fees Other Noninterest Income Foreign Exchange Trading Income Treasury Management Fees Security Commissions and Trading Income Other Operating Income Investment Security Losses, net Total Other Noninterest Income Total Noninterest Income FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 1,917.5 $ 1,674.3 $ 2,140.0 76.9 226.7 2,029.3 88.3 203.1 1,636.4 1,930.6 87.7 197.4 $ $ $ $ 4,361.1 $ 3,995.0 $ 3,852.1 292.6 $ 290.4 $ 44.3 140.2 243.9 (0.3) 720.7 $ 45.4 133.2 194.0 (0.4) 662.6 $ 5,081.8 $ 4,657.6 $ 250.9 44.5 103.6 145.5 (1.4) 543.1 4,395.2 On the consolidated statements of income, Trust, Investment and Other Servicing Fees and Treasury Management Fees represent revenue from contracts with clients. For the year ended December 31, 2021, revenue from contracts with clients also includes $112.1 million of the $140.2 million total Security Commissions and Trading Income and $53.9 million of the $243.9 million total Other Operating Income. For the year ended December 31, 2020, revenue from contracts with clients also includes $102.4 million of the $133.2 million total Security Commissions and Trading Income and $42.8 million of the $194.0 million total Other Operating Income. For the year ended December 31, 2019, revenue from contracts with clients also includes $87.1 million of the $103.6 million total Security Commissions and Trading Income and $41.8 million of the $145.5 million total Other Operating Income. Receivables Balances. The following table represents receivables balances from contracts with clients, which are included in Other Assets on the consolidated balance sheets, at December 31, 2021 and 2020. TABLE 97: CLIENT RECEIVABLES (In Millions) Trust Fees Receivable, net(1) Other Total Client Receivables DECEMBER 31, 2021 925.2 $ 126.9 1,052.1 $ $ $ 2020 819.3 116.5 935.8 (1) Trust Fees Receivable is net of a $10.9 million and $7.2 million fee receivable allowance as of December 31, 2021 and 2020, respectively. 2021 Annual Report | Northern Trust Corporation 135 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 19 – Net Interest Income The components of Net Interest Income were as follows: TABLE 98: NET INTEREST INCOME (In Millions) Interest Income Loans and Leases Securities – Taxable – Non-Taxable(1) Interest-Bearing Due from and Deposits with Banks(2) Federal Reserve and Other Central Bank Deposits and Other Total Interest Income Interest Expense Deposits(3) Federal Funds Purchased Securities Sold under Agreements to Repurchase Other Borrowings Senior Notes Long-Term Debt Floating Rate Capital Debt Total Interest Expense Net Interest Income FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 713.5 $ 667.6 1.5 9.1 14.8 774.6 $ 812.4 1.4 22.4 32.7 1,406.5 $ 1,643.5 $ (61.3) $ (0.4) 0.2 14.2 48.3 21.1 1.7 48.4 $ 2.2 1.0 45.3 72.7 26.5 4.2 1,153.4 1,070.7 3.8 72.4 199.6 2,499.9 488.9 25.9 6.4 181.7 72.6 38.3 8.2 23.8 $ 200.3 $ 1,382.7 $ 1,443.2 $ 822.0 1,677.9 $ $ $ $ $ (1) Non-Taxable Securities represent securities that are exempt from U.S. federal income taxes. (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) Deposits were impacted by low and negative interest rates from Non-U.S. Offices Interest-Bearing Deposits, which was approximately 68% of total Interest-Bearing Deposits for the year ended December 31, 2021. Note 20 – Other Operating Income The components of Other Operating Income were as follows: TABLE 99: OTHER OPERATING INCOME (In Millions) Loan Service Fees Banking Service Fees Other Income Total Other Operating Income FOR THE YEAR ENDED DECEMBER 31, 2021 66.6 $ 50.9 126.4 2020 52.5 $ 46.1 95.4 2019 48.0 45.6 51.9 243.9 $ 194.0 $ 145.5 $ $ Other Operating Income in 2021 increased from 2020, primarily due to higher banking and credit-related service charges, distributions from investments in community development projects and gains from property sales. 136 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 21 – Other Operating Expense The components of Other Operating Expense were as follows: TABLE 100: OTHER OPERATING EXPENSE (In Millions) Business Promotion Staff Related FDIC Insurance Premiums Other Intangibles Amortization Other Expenses Total Other Operating Expense FOR THE YEAR ENDED DECEMBER 31, 2021 65.5 $ 33.9 14.6 14.8 170.3 299.1 $ 2020 59.2 $ 29.4 11.8 16.9 229.4 346.7 $ 2019 104.2 42.8 9.9 16.6 156.3 329.8 $ $ Other Operating Expense in 2021 decreased from 2020 primarily due to lower charges associated with account servicing activities and a decline in other miscellaneous expenses. The account servicing activities in the prior year included a $43.4 million charge related to a corporate action processing error. Note 22 – Income Taxes The following table reconciles the statutory federal tax rate with the effective tax rate for the periods presented below. TABLE 101: INCOME TAXES Statutory Federal Tax Rate Tax Exempt Income Foreign Tax Rate Differential Excess Tax Benefit Related to Share-Based Compensation Tax Credits Reversal of Tax Benefits Previously Recognized through Earnings State Taxes, net Valuation Allowance Other Effective Tax Rate FOR THE YEAR ENDED DECEMBER 31, 2021 21.0 % (0.6) 0.1 (0.4) (1.6) — 3.4 0.6 0.6 2020 21.0 % (0.9) 0.7 (0.6) (1.7) 1.6 3.2 1.6 0.8 2019 21.0 % (0.6) 0.2 (0.9) (1.0) — 2.8 1.5 0.2 23.1 % 25.7 % 23.2 % Income tax expense for the year ended December 31, 2021 and 2020 was $464.8 million and $418.3 million, representing an effective tax rate of 23.1% and 25.7%, respectively. For the year ended December 31, 2021, the decrease in the effective tax rate was primarily driven by the lower net tax impact from international operations and $26.8 million of prior-year tax expense related to the reversal of tax benefits previously recognized through earnings. For the year ended December 31, 2020, the increase in the effective tax rate was primarily driven by $26.8 million of tax expense related to the reversal of tax benefits previously recognized through earnings and higher taxes payable on the income of the Corporation’s non-U.S. branches. For the year ended December 31, 2019, the effective tax rate included an increase in the U.S. taxes payable on the income of the Corporation’s non-U.S. branches. This increase included a valuation allowance against deferred tax assets as management believes the foreign tax credit carryforward generated in 2019 will not be fully realized. The Corporation files income tax returns in the U.S. federal, various state, and foreign jurisdictions. The Corporation is no longer subject to income tax examinations by U.S. federal authorities before 2013, U.S. state or local tax authorities for years before 2011, or non-U.S. tax authorities for years before 2013. 2021 Annual Report | Northern Trust Corporation 137 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Included in Other Liabilities on the consolidated balance sheets at December 31, 2021 and 2020 were $25.3 million and $22.4 million of unrecognized tax benefits, respectively. If recognized, the amounts would reduce 2021 and 2020 income tax expense by $23.9 million and $20.7 million, respectively. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows. TABLE 102: UNRECOGNIZED TAX BENEFITS (In Millions) Balance at January 1 Additions for Tax Positions Taken in the Current Year Additions for Tax Positions Taken in Prior Years Reductions for Tax Positions Taken in Prior Years Reductions Resulting from Expiration of Statutes Balance at December 31 $ 2021 22.4 $ 1.2 4.2 (2.5) — 2020 25.3 $ 0.9 0.4 (4.2) — $ 25.3 $ 22.4 $ 2019 21.9 0.9 4.0 (1.5) — 25.3 It is possible that changes in the amount of unrecognized tax benefits could occur in the next 12 months due to changes in judgment related to recognition or measurement, settlements with taxing authorities, or expiration of statute of limitations. Management does not believe that future changes, if any, would have a material effect on the consolidated financial position or liquidity of Northern Trust, although they could have a material effect on operating results for a particular period. A benefit for interest and penalties of $0.4 million, net of tax, was included in the Provision for Income Taxes for the year ended December 31, 2021. This compares to a provision for interest and penalties of $1.2 million, net of tax, and a benefit of $1.3 million, net of tax, for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2021 and 2020, the liability for the potential payment of interest and penalties totaled $9.2 million and $9.6 million, net of tax, respectively. The components of the consolidated Provision for Income Taxes for each of the three years ended December 31 are as follows. TABLE 103: PROVISION FOR INCOME TAXES (In Millions) Current Tax Provision: Federal State Non-U.S. Total Deferred Tax Provision: Federal State Non-U.S. Total Provision for Income Taxes FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ $ $ $ $ 241.5 $ 203.0 $ 74.0 147.3 57.2 141.7 462.8 $ 401.9 $ (11.7) $ 8.8 $ 12.0 1.7 2.0 $ 464.8 $ 5.4 2.2 16.4 $ 418.3 $ 216.4 50.7 150.5 417.6 16.5 16.5 1.3 34.3 451.9 In addition to the amounts shown above, tax charges and benefits have been recorded directly to Stockholders’ Equity for the following. TABLE 104: TAX CHARGES AND BENEFITS RECORDED DIRECTLY TO STOCKHOLDERS’ EQUITY (In Millions) Tax Effect of Other Comprehensive Income FOR THE YEAR ENDED DECEMBER 31, 2021 2020 $ (126.6) $ 168.1 $ 2019 88.9 Deferred taxes result from temporary differences between the amounts reported on the consolidated financial statements and the tax bases of assets and liabilities. Deferred tax assets and liabilities have been computed as follows. 138 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 105: NET DEFERRED TAX LIABILITIES (In Millions) Deferred Tax Liabilities: Lease Financing Software Development Depreciation and Amortization Unrealized Gains on Securities, net Compensation and Benefits State Taxes, net Other Liabilities Gross Deferred Tax Liabilities Deferred Tax Assets: Allowance for Credit Losses Tax Credit and Loss Carryforwards Other Assets Gross Deferred Tax Assets Valuation Reserve Deferred Tax Assets, net of Valuation Reserve Net Deferred Tax Liabilities DECEMBER 31, 2021 2020 $ 7.0 $ 271.8 181.3 82.8 65.6 76.3 23.3 708.1 38.6 68.2 85.4 192.2 (68.2) 124.0 $ 584.1 $ 9.0 268.1 147.0 247.6 43.8 67.4 18.7 801.6 54.5 55.2 38.4 148.1 (55.2) 92.9 708.7 The Corporation generated a foreign tax credit carryforward during the years ended December 31, 2021 and 2020, expiring in 2031 and 2030, respectively. A cumulative valuation allowance related to the credit carryforward of $67.8 million and $54.7 million was recorded at December 31, 2021 and 2020, respectively, as management believes the foreign tax credit carryforwards will not be fully realized. Northern Trust had various state net operating loss carryforwards as of December 31, 2021 and 2020. The income tax benefits associated with these loss carryforwards were approximately $0.4 million as of December 31, 2021 and $0.5 million as of December 31, 2020. A valuation allowance related to the loss carryforwards of $0.4 million and $0.5 million was recorded at December 31, 2021 and 2020, respectively, as management believes the net operating losses will not be fully realized. Note 23 – Employee Benefits The Corporation and certain of its subsidiaries provide various benefit programs, including defined benefit pension, postretirement health care, and defined contribution plans. A description of each major plan and related disclosures are provided below. Pension. A noncontributory qualified defined benefit pension plan covers substantially all U.S. employees of Northern Trust. Employees of certain European subsidiaries retain benefits in local defined benefit plans, although those plans are closed to new participants and to future benefit accruals. Employees continue to accrue benefits under the Swiss pension plan, which is accounted for as a defined benefit plan under U.S. GAAP. Northern Trust also maintains a noncontributory supplemental pension plan for participants whose retirement benefits under the U.S. Qualified Plan are expected to exceed the limits imposed by federal tax law. Northern Trust has a nonqualified trust, referred to as a “Rabbi” Trust, used to hold assets designated for the funding of benefits in excess of those permitted in certain of its qualified retirement plans. This arrangement offers participants a degree of assurance for payment of benefits in excess of those permitted in the related qualified plans. As the “Rabbi” Trust assets remain subject to the claims of creditors and are not the property of the employees, they are accounted for as corporate assets and are included in Other Assets on the consolidated balance sheets. Total assets in the “Rabbi” Trust related to the nonqualified pension plan at December 31, 2021 and 2020 amounted to $117.8 million and $137.5 million, respectively. Contributions of $6.7 million and $10.6 million were made to the “Rabbi” Trust in 2021 and 2020, respectively. The following tables set forth the status, amounts included in AOCI, and net periodic pension expense of the U.S. Qualified Plan, Non-U.S. Pension Plans, and U.S. Non-Qualified Plan for 2021, 2020, and 2019. Prior service credits are being amortized on a straight-line basis over 11 years for the U.S. Qualified Plan and prior service costs are being amortized on a straight-line basis over 10 years for the U.S. Non-Qualified Plan. Prior service credits will be amortized in full during the first half of 2022 for the U.S. Qualified Plan and prior service costs were amortized in full as of December 31, 2021 for the U.S. Non-Qualified Plan. 2021 Annual Report | Northern Trust Corporation 139 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 106: EMPLOYEE BENEFIT PLAN STATUS ($ In Millions) 2021 2020 2021 2020 2021 2020 U.S. QUALIFIED PLAN (1) NON-U.S. PENSION PLANS U.S. NON-QUALIFIED PLAN Accumulated Benefit Obligation $ 1,246.6 $ 1,312.9 Projected Benefit Obligation Plan Assets at Fair Value Funded Status at December 31 Weighted-Average Assumptions: Discount Rates $ 1,401.3 $ 1,470.6 1,708.9 1,793.7 $ $ $ $ 204.5 210.1 198.7 $ $ 228.5 236.1 211.5 125.5 147.7 — $ $ 139.8 162.3 — $ 307.6 $ 323.1 $ (11.4) $ (24.6) $ (147.7) $ (162.3) 3.03 % 2.75 % 1.34 % 0.93 % 2.80 % 2.45 % Rate of Increase in Compensation Level Expected Long-Term Rate of Return on Assets 4.97 5.25 4.97 5.25 1.50 1.79 1.50 1.28 4.97 N/A 4.97 N/A (1) Discount rates of 3.05% and 3.06% and expected long-term rates of return on assets of 5.25% and 5.00% were utilized at the interim remeasurement dates as of June 30, 2021 and September 30, 2021, respectively. TABLE 107: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (In Millions) Net Actuarial Loss Prior Service (Credit) Cost Gross Amount in Accumulated Other Comprehensive Income Income Tax Effect Net Amount in Accumulated Other Comprehensive Income TABLE 108: NET PERIODIC PENSION EXPENSE U.S. QUALIFIED PLAN NON-U.S. PENSION PLANS U.S. NON-QUALIFIED PLAN 2021 2020 2021 2020 2021 $ 273.8 $ 332.4 $ 40.4 $ 49.0 $ 86.6 $ (0.1) (0.6) 273.7 68.7 331.8 82.1 0.6 41.0 5.2 2.2 51.2 6.4 — 86.6 21.7 2020 96.3 0.1 96.4 23.9 $ 205.0 $ 249.7 $ 35.8 $ 44.8 $ 64.9 $ 72.5 U.S. QUALIFIED PLAN (1) NON-U.S. PENSION PLANS U.S. NON-QUALIFIED PLAN ($ In Millions) Service Cost Interest Cost Expected Return on Plan Assets Amortization: Net Actuarial Loss Prior Service (Credit) Cost Net Periodic Pension Expense Settlement Expense Total Pension Expense Weighted-Average Assumptions: 2021 2020 2019 2021 2020 2019 2021 2020 $ 52.3 $ 47.4 $ 41.6 $ 2.2 $ 1.9 $ 2.0 $ 5.3 $ 4.6 $ 40.4 43.3 47.2 (79.0) (76.8) (86.9) 2.2 (3.2) 2.9 (3.1) 3.9 3.7 4.8 (4.4) — — — 2019 4.1 5.8 32.4 35.0 (0.4) (0.4) 17.2 (0.4) 1.0 0.2 0.8 0.4 0.6 0.3 8.2 0.1 7.0 0.2 5.6 0.2 45.7 $ 48.5 $ 18.7 $ 2.4 $ 2.9 $ 2.4 $ 17.3 $ 16.6 $ 15.7 27.9 — — 0.4 0.8 — — — — 73.6 $ 48.5 $ 18.7 $ 2.8 $ 3.7 $ 2.4 $ 17.3 $ 16.6 $ 15.7 $ $ Discount Rates 2.75 % / 3.05 % 3.37 % 4.47 % 0.93 % 1.40 % 2.16 % 2.45 % 3.37 % 4.47 % / 3.06 % / 3.03 % Rate of Increase in Compensation Level Expected Long-Term Rate of Return on Assets 4.97 4.97 4.39 1.50 1.50 1.75 4.97 4.97 4.39 5.25 / 5.00 5.25 6.00 1.28 1.72 2.39 N/A N/A N/A (1) In determining the pension expense for the U.S. Qualified Plan for 2021, Northern Trust utilized a discount rate of 2.75% as of December 31, 2020, 3.05% as of June 30, 2021, 3.06% as of September 30, 2021, and 3.03% as of December 31, 2021 and an expected long-term rate of return of 5.25% as of both December 31, 2020 and June 30, 2021, and 5.00% as of September 30, 2021. Northern Trust’s U.S. Qualified Plan provides participants the option to select lump-sum benefit payments upon retirement and termination of service. In the second quarter of 2021 it became probable that total lump-sum payments in 2021 would exceed the settlement threshold of the sum of annual service and interest cost. Northern Trust recognized settlement charges related to its U.S. Qualified Plan in the second, third, and fourth quarter of 2021, which required interim remeasurements of the U.S. Qualified Plan as of each respective quarter-end. The settlement charge represents the pro rata 140 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS amount of the net loss in AOCI that is charged to income based on the proportion of the Projected Benefit Obligation settled to the total Projected Benefit Obligation and amounted to a total of $27.9 million in 2021. The components of net periodic pension expense are included in Employee Benefits expense on the consolidated statements of income. TABLE 109: CHANGE IN PROJECTED BENEFIT OBLIGATION U.S. QUALIFIED PLAN NON-U.S. PENSION PLANS U.S. NON-QUALIFIED PLAN (In Millions) Beginning Balance Service Cost Interest Cost Employee Contributions Plan Amendment Actuarial Loss (Gain) Settlement Benefits Paid Foreign Exchange Rate Changes 2021 2020 2021 2020 2021 $ 1,470.6 $ 1,323.4 $ 236.1 $ 211.1 $ 162.3 $ 52.3 40.4 — — (19.1) (132.1) (10.8) — 47.4 43.3 — — 136.5 — (80.0) — 2.2 2.2 0.6 (1.4) (10.4) (9.4) (5.5) (4.3) 1.9 2.9 0.6 (0.5) 19.1 (5.4) (4.1) 10.5 5.3 3.7 — — (2.0) — (21.6) — Ending Balance $ 1,401.3 $ 1,470.6 $ 210.1 $ 236.1 $ 147.7 $ 2020 149.2 4.6 4.8 — — 20.4 — (16.7) — 162.3 Actuarial gains of $31.5 million in 2021 were primarily caused by increases in discount rates, while actuarial losses of $176.0 million in 2020 were primarily caused by decreases in discount rates. TABLE 110: ESTIMATED FUTURE BENEFIT PAYMENTS (In Millions) 2022 2023 2024 2025 2026 2027-2031 TABLE 111: CHANGE IN PLAN ASSETS (In Millions) Fair Value of Assets at Beginning of Period Actual Return on Assets(1) Employer Contributions Employee Contributions Settlement Benefits Paid Foreign Exchange Rate Changes Fair Value of Assets at End of Period U.S. QUALIFIED PLAN NON-U.S.PENSION PLANS U.S. NON-QUALIFIED PLAN $ 85.6 $ 4.4 $ 94.2 95.1 99.0 97.8 515.6 4.6 4.7 4.8 5.6 34.8 20.0 18.3 11.7 12.3 13.3 63.9 U.S. QUALIFIED PLAN NON-U.S PENSION PLANS 2021 2020 $ 1,793.7 $ 1,601.2 $ 58.1 — — (132.1) (10.8) — 272.5 — — — (80.0) — 2021 211.5 $ (0.8) 4.5 0.6 (9.4) (5.5) (2.2) 2020 190.1 17.9 5.0 0.6 (5.4) (4.1) 7.4 $ 1,708.9 $ 1,793.7 $ 198.7 $ 211.5 (1) The 2021 actual return on assets for the U.S. Qualified Plan includes a reimbursement of $0.1 million of historical investment expenses paid from the pension trust. The minimum required and maximum remaining deductible contributions for the U.S. Qualified Plan in 2022 are estimated to be zero and $413.0 million, respectively. The investment strategy employed for Northern Trust’s U.S. Qualified Plan utilizes a dynamic glide path based on a set of pre-approved asset allocations to return-seeking and liability-hedging assets that vary in accordance with the U.S. Qualified Plan’s projected benefit obligation funded ratio. In general, as the U.S. Qualified Plan’s projected benefit obligation funded ratio increases beyond an established threshold, the U.S. Qualified Plan’s allocation to liability-hedging assets will increase while the allocation to return-seeking assets will decrease. Conversely, a decrease in the U.S. Qualified Plan’s projected benefit obligation funded ratio beyond an established threshold will result in a decrease in the U.S. Qualified Plan’s allocation to liability-hedging assets and increase in the allocation to return-seeking assets. Liability- 2021 Annual Report | Northern Trust Corporation 141 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS hedging assets include U.S. long credit bonds, U.S. long government bonds, and a custom completion strategy used to hedge more closely the liability duration of projected plan benefits with bond duration across all durations. Return-seeking assets include: U.S. equity, international developed equity, emerging markets equity, real estate, high yield bonds, global listed infrastructure, emerging market debt, private equity and hedge funds. During 2021, the funded ratio increased beyond the threshold and the asset allocation of the U.S. Qualified Plan was adjusted to the next stage of the glide path to allow for a greater component of liability-hedging assets. Northern Trust utilizes an asset/liability methodology to determine the investment policies that will best meet its short and long-term objectives. The process is performed by modeling current and alternative strategies for asset allocation, funding policy and actuarial methods and assumptions. The financial modeling uses projections of expected capital market returns and expected volatility of those returns to determine alternative asset mixes having the greatest probability of meeting the U.S. Qualified Plan’s investment objectives. Risk tolerance is established through careful consideration of the U.S. Qualified Plan liabilities, funded status, and corporate financial condition. The intent of this strategy is to protect the U.S. Qualified Plan’s healthy funded status and generate returns, which in combination with minimal voluntary contributions are expected to outpace the U.S. Qualified Plan’s liability growth over the long run. The target allocation of the U.S. Qualified Plan assets had been adjusted in March 2021 and consists of 55% U.S. long credit bonds, 15% global equities (developed and emerging markets), 10% custom completion, 5% private equity, 4% high yield bonds, 3% emerging market debt, 3% global listed infrastructure, 3% private real estate, and 2% hedge funds. Global equity investments include common stocks that are listed on an exchange and investments in commingled funds that invest primarily in publicly traded equities. Equity investments are diversified across country, region, investment style and market capitalization. Fixed income securities held include U.S. treasury securities, corporate bonds, and investments in commingled funds that invest in a diversified blend of longer duration fixed income securities; the custom completion strategy uses U.S. treasury securities and interest rate futures (or similar instruments) to align more closely with the target hedge ratio across maturities. Diversifying investments, including private equity, hedge funds, private real estate, emerging market debt, high yield bonds, and global listed infrastructure, are used judiciously to enhance long-term returns while improving portfolio diversification. Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non-public equity or non-public debt positions. Direct or co-investment in non-public stock by the U.S. Qualified Plan is prohibited. The U.S. Qualified Plan’s private equity investments are limited to 20% of each of the total limited partnership or fund of funds and the maximum allowable loss cannot exceed the commitment amount. The U.S. Qualified Plan invests in one hedge fund of funds, which invests, either directly or indirectly, in diversified portfolios of funds or other pooled investment vehicles. Investments in private real estate, high yield bonds, emerging market debt, and global listed infrastructure are designed to provide income and added diversification. Derivatives may be used, depending on the nature of the asset class to which they relate, to gain market exposure in an efficient and timely manner, to hedge foreign currency exposure or interest rate risk, or to alter the duration of a portfolio. There were three and five derivatives held by the U.S. Qualified Plan at December 31, 2021 and 2020, respectively. Investment risk is measured and monitored on an ongoing basis through monthly liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews. Standards used to evaluate the U.S. Qualified Plan’s investment manager performance include, but are not limited to, the achievement of objectives, operation within guidelines and policy, and comparison against a benchmark. In addition, each manager of the investment funds held by the U.S. Qualified Plan is ranked against a universe of peers and compared to a benchmark. Total U.S. Qualified Plan performance analysis includes an analysis of the market environment, asset allocation impact on performance, risk and return relative to other ERISA plans, and manager impacts upon U.S. Qualified Plan performance. The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by Northern Trust for the U.S. Qualified Plan assets measured at fair value. Level 1 – Quoted, active market prices for identical assets or liabilities. The U.S. Qualified Plan’s Level 1 assets are comprised primarily of mutual funds and domestic common stocks. The U.S. Qualified Plan’s Level 1 investments that are exchange traded are valued at the closing price reported by the respective exchanges on the day of valuation. Level 2 – Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or similar assets in inactive markets, and model-derived valuations in which all significant inputs are observable in active markets. The U.S. Qualified Plan’s Level 2 assets are comprised of collective trust funds, corporate bonds, government obligations, and municipal and provincial bonds. The investments in collective trust funds fair values are calculated on a scheduled basis using the closing market prices and accruals of securities in the funds (total value of the funds) divided by the number of fund shares currently issued and outstanding. Redemptions of the collective trust funds occur by contract at the respective fund’s redemption date net asset value (NAV). Level 3 – Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The U.S. Qualified Plan did not hold Level 3 assets as of December 31, 2021 and 2020. 142 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets valued at fair value using NAV per share - The U.S. Qualified Plan’s assets valued at fair value using NAV per share include investments in private equity funds and a hedge fund, which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds’ investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair value of the underlying investments of each fund, the fund’s investment manager or general partner takes into account the estimated value reported by the underlying funds as well as any other considerations that may, in their judgment, increase or decrease such estimated value. The investments in the private equity funds and a hedge fund are considered to be long- term investments. There are no capital withdrawal options related to the investments in the private equity funds. However, capital is occasionally distributed as underlying investments are sold. It is estimated that the current private equity investments would be liquidated over 1 to 15 years, depending on the vintage year of a particular fund. With sixty-days advance notice, the Plan’s investment in the hedge fund can be withdrawn at the next calendar quarter end. The U.S. Qualified Plan’s assets valued at fair value using NAV per share also include investments in real estate funds, which invest in real estate assets. The investment in properties by the real estate funds are carried at fair value, which is estimated based on the price that would be received to sell an asset in an orderly transaction between marketplace participants at the measurement date. The valuation plan for each real estate investment is subject to review on an annual basis which is based on either an external appraisal from appraisal firms or internal valuations prepared by the real estate fund’s investment advisor. The Plan’s investment in real estate funds are considered to be long-term investments and, with forty-five days advance notice, can be withdrawn at the next calendar quarter end to the extent the real estate funds have liquid assets. As investments in the private equity funds, hedge fund, and real estate fund are valued at fair value using NAV per share, they are not required to be categorized within the fair value hierarchy. While Northern Trust believes its valuation methods for U.S. Qualified Plan assets are appropriate and consistent with other market participants, the use of different methodologies or assumptions could have a material effect on the computation of the estimated fair values. The following table presents the fair values of Northern Trust’s U.S. Qualified Plan assets, by major asset category, and their level within the fair value hierarchy defined by GAAP as of December 31, 2021 and 2020. TABLE 112: FAIR VALUE OF U.S. QUALIFIED PLAN ASSETS (In Millions) Domestic Common Stock Foreign Common Stock Domestic Corporate Bonds Foreign Corporate Bonds U.S. Government Obligations Non-U.S. Government Obligations Domestic Municipal and Provincial Bonds Foreign Municipal and Provincial Bonds Collective Trust Funds Mutual Funds Cash and Other DECEMBER 31, 2021 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 17.5 $ — $ — $ 0.3 — — — — — — — 108.9 46.7 — 341.7 60.9 103.9 20.0 21.0 0.3 837.2 — — — — — — — — — — — — 17.5 0.3 341.7 60.9 103.9 20.0 21.0 0.3 837.2 108.9 46.7 Total Assets at Fair Value in the Fair Value Hierarchy $ 173.4 $ 1,385.0 $ — $ 1,558.4 Assets Valued at NAV per share Northern Trust Private Equity Funds Northern Trust Hedge Fund Real Estate Funds Total Assets at Fair Value 34.5 36.7 79.3 $ 1,708.9 2021 Annual Report | Northern Trust Corporation 143 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Millions) Domestic Common Stock Domestic Corporate Bonds Foreign Corporate Bonds U.S. Government Obligations Non-U.S. Government Obligations Domestic Municipal and Provincial Bonds Foreign Municipal and Provincial Bonds Collective Trust Funds Mutual Funds Cash and Other DECEMBER 31, 2020 LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $ 13.5 $ — $ — $ — — 2.9 — — — — 167.0 7.5 314.4 43.6 113.1 22.9 22.4 0.3 985.5 — — — — — — — — — — — 13.5 314.4 43.6 116.0 22.9 22.4 0.3 985.5 167.0 7.5 Total Assets at Fair Value in the Fair Value Hierarchy $ 190.9 $ 1,502.2 $ — $ 1,693.1 Assets Valued at NAV per share Northern Trust Private Equity Funds Northern Trust Hedge Fund Real Estate Funds Total Assets at Fair Value 20.3 34.2 46.1 $ 1,793.7 A building block approach is employed for Northern Trust’s U.S. Qualified Plan in determining the long-term rate of return for plan assets. Historical markets and long-term historical relationships between equities, fixed income and other asset classes are studied using the widely accepted capital market principle that assets with higher volatility generate a greater return over the long-run. Current market factors such as inflation expectations and interest rates are evaluated before long- term capital market assumptions are determined. The long-term portfolio rate of return is established with consideration given to diversification and rebalancing. The rate is reviewed against peer data and historical returns to verify the return is reasonable and appropriate. Based on this approach and the U.S. Qualified Plan’s target asset allocation, the expected long- term rate of return on assets as of the U.S. Qualified Plan’s December 31, 2021 measurement date was set at 5.25%. Postretirement Health Care. Northern Trust maintains an unfunded postretirement health care plan under which those employees who retire at age 55 or older under the provisions of the U.S. defined benefit plan and had attained 15 years of service as of December 31, 2011 may be eligible for subsidized postretirement health care coverage. The provisions of this health care plan may be changed further at the discretion of Northern Trust, which also reserves the right to terminate these benefits at any time. Northern Trust changed the plan design of its post-retirement health care plan as of January 1, 2021, which resulted in the recognition of a prior service credit of $12.7 million at the time these changes were communicated to participants in August 2020. Concurrently, a further shift in population from active to inactive participants required an adjustment to the amortization period from the average remaining service period of active participants to the average life expectancy of the inactive participants. Prior service credits are being amortized on a straight-line basis over 13.9 years. The following tables set forth the postretirement health care plan status and amounts included in AOCI at December 31, 2021 and 2020, the net periodic postretirement benefit cost of the plan for 2021 and 2020, and the change in the accumulated postretirement benefit obligation during 2021 and 2020. TABLE 113: POSTRETIREMENT HEALTH CARE PLAN STATUS (In Millions) Accumulated Postretirement Benefit Obligation at Measurement Date: Retirees and Dependents Actives Eligible for Benefits Net Postretirement Benefit Obligation DECEMBER 31, 2021 $ $ 8.7 $ 1.5 10.2 $ 2020 13.2 2.5 15.7 144 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 114: AMOUNTS INCLUDED IN ACCUMULATED OTHER COMPREHENSIVE INCOME (In Millions) Net Actuarial (Gain) Loss Prior Service (Credit) Cost Gross Amount in Accumulated Other Comprehensive Income Income Tax Effect $ DECEMBER 31, 2021 (5.3) $ (11.5) (16.8) (4.2) Net Amount in Accumulated Other Comprehensive Income $ (12.6) $ TABLE 115: NET PERIODIC POSTRETIREMENT EXPENSE (BENEFIT) (In Millions) Service Cost Interest Cost Expected Return on Plan Assets Amortization Net Actuarial (Gain) Prior Service (Credit) Cost Net Periodic Postretirement Expense FOR THE YEAR ENDED DECEMBER 31, $ $ 2021 — $ 0.3 — (0.2) (0.9) (0.8) $ 2020 — $ 0.7 — (0.6) (0.3) (0.2) $ 2020 (4.9) (12.4) (17.3) (4.3) (13.0) 2019 — 1.2 — (1.1) — 0.1 TABLE 116: CHANGE IN ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (In Millions) Beginning Balance Service Cost Interest Cost Plan Amendment Actuarial (Gain) Net Claims Paid Ending Balance FOR THE YEAR ENDED DECEMBER 31, $ $ 2021 15.7 $ — 0.3 — (3.3) (2.5) 10.2 $ 2020 28.8 — 0.7 (12.7) (0.1) (1.0) 15.7 Northern Trust uses the aggregate Pri-2012 mortality table with a 2012 base year and proposed future improvements under scale MP-2021, as released by the Society of Actuaries in October 2021. The assumption for future mortality improvements was updated at December 31, 2021 from the prior year’s improvement scale MP-2020. TABLE 117: ESTIMATED FUTURE BENEFIT PAYMENTS (In Millions) 2022 2023 2024 2025 2026 2027-2031 $ TOTAL POSTRETIREMENT MEDICAL BENEFITS 1.5 1.4 1.3 1.2 1.1 4.3 The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 2.56% at December 31, 2021, and 2.16% at December 31, 2020. Due to the changes in the plan design as of January 1, 2021, the health care cost trend rate assumptions including the assumption for drug claims, are not currently impacting the measurement of the postretirement health care plan. Defined Contribution Plans. The Corporation and its subsidiaries maintain various defined contribution plans covering substantially all employees. The Corporation’s contribution to the U.S. plan and to certain European-based plans includes a 2021 Annual Report | Northern Trust Corporation 145 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS matching component. The expense associated with defined contribution plans is charged to Employee Benefits expense on the consolidated statements of income and totaled $65.3 million in 2021, $62.9 million in 2020, and $57.6 million in 2019. Note 24 – Share-Based Compensation Plans Northern Trust recognizes expense for the grant-date fair value of share-based compensation granted to employees and non-employee directors. Total compensation expense for share-based payment arrangements to employees and the associated tax impacts were as follows for the periods presented. TABLE 118: TOTAL COMPENSATION EXPENSE FOR SHARE-BASED PAYMENT ARRANGEMENTS TO EMPLOYEES (In Millions) Restricted Stock Unit Awards Stock Options Performance Stock Units Total Share-Based Compensation Expense Tax Benefits Recognized FOR THE YEAR ENDED DECEMBER 31, 2021 78.2 $ — 17.3 95.5 $ 24.0 $ 2020 78.1 $ 0.5 12.8 91.4 $ 22.9 $ 2019 81.4 1.4 25.1 107.9 26.7 $ $ $ As of December 31, 2021, there was $71.8 million of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Corporation’s share-based compensation plans. That cost is expected to be recognized as expense over a weighted-average period of approximately three years. The Northern Trust Corporation 2017 Long-Term Incentive Plan (2017 Plan) is administered by the Compensation and Benefits Committee (Committee) of the Board of Directors. All employees of the Corporation and its subsidiaries and all directors of the Corporation are eligible to receive awards under the 2017 Plan. The 2017 Plan provides for the grant of non-qualified and incentive stock options; tandem and free-standing stock appreciation rights; stock awards in the form of restricted stock, restricted stock units and other stock awards; and performance awards. Beginning with grants made on February 21, 2017 under the Northern Trust Corporation 2012 Stock Plan (2012 Plan), restricted stock unit and performance stock unit grants continue to vest in accordance with the original terms of the award if the applicable employee retires after satisfying applicable age and service requirements. Grants are outstanding under the 2017 Plan, the 2012 Plan, and the Amended and Restated Northern Trust Corporation 2002 Stock Plan (2002 Plan). The 2017 Plan was approved by stockholders in April 2017. Upon approval of the 2017 Plan, no additional shares have been or will be granted under the 2012 Plan or 2002 Plan. The total number of shares of the Corporation’s common stock authorized for issuance under the 2017 Plan is 20,000,000 plus shares forfeited under the 2012 Plan and 2002 Plan. As of December 31, 2021, shares available for future grant under the 2017 Plan, including shares forfeited under the 2012 Plan and 2002 Plan, totaled 16,181,087. The following describes Northern Trust’s share-based payment arrangements and applies to awards under the 2017 Plan, 2012 Plan and the 2002 Plan, as applicable. Stock Options. Stock options consist of options to purchase common stock at prices not less than 100% of the fair value thereof on the date the options are granted. Options have a maximum 10 years life and generally vest and become exercisable in 1 year to 4 years after the date of grant. All options terminate at such time as determined by the Committee and as provided in the terms and conditions of the respective option grants. There were no options granted during the years ended December 31, 2021, 2020, and 2019. 146 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides information about stock options granted, vested, and exercised in the years ended December 31, 2021, 2020, and 2019. TABLE 119: STOCK OPTIONS GRANTED, VESTED, AND EXERCISED (In Millions, Except Per Share Information) Grant-Date Fair Value of Stock Options Vested Stock Options Exercised Intrinsic Value as of Exercise Date Cash Received Tax Deduction Benefits Realized FOR THE YEAR ENDED DECEMBER 31, $ 2021 2.2 $ 2020 4.5 $ 41.3 53.8 41.3 13.6 19.5 13.4 2019 6.6 35.4 44.0 35.2 The following is a summary of changes in nonvested stock options for the year ended December 31, 2021. TABLE 120: CHANGES IN NONVESTED STOCK OPTIONS NONVESTED OPTIONS Nonvested at December 31, 2020 Granted Vested Forfeited or Cancelled Nonvested at December 31, 2021 WEIGHTED- AVERAGE GRANT-DATE FAIR VALUE PER SHARE 19.18 — 19.18 — — SHARES 114,829 $ — (114,829) — — $ A summary of the status of stock options at December 31, 2021, and changes during the year then ended, are presented in the following table. TABLE 121: STATUS OF STOCK OPTIONS AND CHANGES ($ In Millions Except Per Share Information) Options Outstanding, December 31, 2020 Granted Exercised Forfeited, Expired or Cancelled Options Outstanding, December 31, 2021 Options Exercisable, December 31, 2021 WEIGHTED AVERAGE EXERCISE PRICE PER SHARE SHARES WEIGHTED AVERAGE REMAINING CONTRACTUAL TERM (YEARS) AGGREGATE INTRINSIC VALUE 1,349,925 $ — (837,757) (2,280) 509,888 $ 509,888 $ 66.87 — 64.16 52.64 71.39 71.39 3.4 $ 3.4 $ 24.6 24.6 Restricted Stock Unit Awards. Restricted stock units may be granted to participants and entitles them to receive a payment in the Corporation’s common stock or cash and such other terms and conditions as the Committee deems appropriate. Each restricted stock unit provides the recipient the opportunity to receive one share of stock for each stock unit that vests. The restricted stock units granted in 2021 predominately vest at a rate equal to 25% per year for four years on the first day of the month following the month in which the grant date falls. Restricted stock unit grants totaled 846,433, 772,848, and 855,112, with weighted average grant-date fair values of $99.31, $99.58, and $91.89 per share, for the years ended December 31, 2021, 2020, and 2019, respectively. The total fair value of restricted stock units vested during the years ended December 31, 2021, 2020, and 2019, was $89.4 million, $100.2 million, and $89.3 million, respectively. A summary of the status of outstanding restricted stock unit awards at December 31, 2021, and changes during the year then ended, is presented in the following table. 2021 Annual Report | Northern Trust Corporation 147 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 122: OUTSTANDING RESTRICTED STOCK UNIT AWARDS ($ In Millions) Restricted Stock Unit Awards Outstanding, December 31, 2020 Granted Distributed Forfeited Restricted Stock Unit Awards Outstanding, December 31, 2021 Units Convertible, December 31, 2021 NUMBER AGGREGATE INTRINSIC VALUE 2,145,651 $ 199.8 846,433 (944,393) (46,175) 2,001,516 $ 19,526 $ 239.4 2.3 The following is a summary of nonvested restricted stock unit awards at December 31, 2021, and changes during the year then ended. TABLE 123: NONVESTED RESTRICTED STOCK UNIT AWARDS NONVESTED RESTRICTED STOCK UNITS Nonvested at December 31, 2020 Granted Vested Forfeited Nonvested at December 31, 2021 WEIGHTED AVERAGE GRANT- DATE FAIR VALUE PER UNIT WEIGHTED AVERAGE REMAINING VESTING TERM (YEARS) NUMBER 2,125,881 $ 846,433 (944,149) (46,175) 1,981,990 $ 95.61 99.31 94.70 98.31 97.56 2.1 2.3 Performance Stock Units. Each performance stock unit provides the recipient the opportunity to receive one share of the Corporation’s common stock for each stock unit based on the attainment of certain performance criteria over a three-year period. For performance stock unit awards granted in 2019, the number of units that will vest are based on the attainment of specified performance targets that are a function of average return on equity goals over a three-year period. For performance stock unit awards granted in 2020 and 2021, the number of units that will vest are subject to the attainment of specified performance targets that are a function of average return on equity goals and average return on equity performance relative to that of a performance peer group, each measured over a three-year period. For performance stock units outstanding as of December 31, 2021, the number of performance stock units that will vest ranges from 0% to 150% of the original award granted based on the achievement of both absolute and relative return on equity goals over a three- year period compared to performance targets. Distribution of the shares is then made after vesting. Performance stock unit grants totaled 204,539, 205,847, and 213,044 for the years ended December 31, 2021, 2020, and 2019, respectively, with weighted average grant-date fair values of $97.77, $100.83, and $93.00. Performance stock units outstanding at target level performance totaled 622,817, 660,510, and 667,741 at December 31, 2021, 2020, and 2019, respectively. Performance stock units had aggregate intrinsic values of $74.5 million, $61.5 million, and $70.9 million, and weighted average remaining vesting terms of 1.0 year each at December 31, 2021, 2020, and 2019, respectively. Non-employee Director Stock Awards. Stock units with total values of $1.5 million (13,968 units), $1.5 million (20,148 units), and $1.3 million (14,232 units) were granted to non-employee directors in 2021, 2020, and 2019, respectively, which vest or vested on the date of the annual meeting of the Corporation’s stockholders in the following years. Total expense recognized on these grants was $1.6 million, $1.6 million, and $1.4 million in 2021, 2020, and 2019, respectively. Stock units granted to non-employee directors do not have voting rights. Each stock unit entitles a director to one share of common stock at vesting, unless a director elects to defer receipt of the shares. Directors may elect to defer the payment of their annual stock unit grant and cash-based compensation until termination of services as director. Deferred cash compensation is converted into stock units representing shares of common stock of the Corporation. Distributions of deferred stock units are made in stock. For compensation deferred prior to January 1, 2018, distributions of the stock unit accounts that relate to cash-based compensation are made in cash based on the fair value of the stock units at the time of distribution. For compensation deferred on or after January 1, 2018, distributions of the stock unit accounts that relate to cash-based compensation are made in stock. 148 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 25 – Cash-Based Compensation Plans Various incentive plans provide for cash incentives and bonuses to selected employees based upon accomplishment of corporate net income objectives, goals of the reporting segments and support functions, and individual performance. The provision for awards under these plans is charged to Compensation expense and totaled $377.1 million in 2021, $296.2 million in 2020, and $326.1 million in 2019. Note 26 – Commitments and Contingent Liabilities Off-Balance Sheet Financial Instruments, Guarantees and Other Commitments. Northern Trust, in the normal course of business, enters into various types of commitments and issues letters of credit to meet the liquidity and credit enhancement needs of its clients. The contractual amounts of these instruments represent the maximum potential credit exposure should the instrument be fully drawn upon and the client default. To control the credit risk associated with entering into commitments and issuing letters of credit, Northern Trust subjects such activities to the same credit quality and monitoring controls as its lending activities. Northern Trust does not believe the total contractual amount of these instruments to be representative of its future credit exposure or funding requirements. The following table provides details of Northern Trust's off-balance sheet financial instruments as of December 31, 2021 and 2020. TABLE 124: SUMMARY OF OFF-BALANCE SHEET FINANCIAL INSTRUMENTS DECEMBER 31, 2021 2020 ($ In Millions) Undrawn Commitments(1) Standby Letters of Credit and Financial Guarantees(2)(3) Commercial Letters of Credit ONE YEAR AND LESS OVER ONE YEAR TOTAL ONE YEAR AND LESS OVER ONE YEAR TOTAL $ 9,567.0 $ 17,855.2 $ 27,422.2 $ 11,260.5 $ 17,678.0 $ 28,938.5 3,485.6 68.5 553.9 1.1 4,039.5 1,228.1 69.6 54.6 763.5 — 1,991.6 54.6 Custody Securities Lent with Indemnification 170,445.3 — 170,445.3 157,478.0 — 157,478.0 Total Off-Balance Sheet Financial Instruments $ 183,566.4 $ 18,410.2 $ 201,976.6 $ 170,021.2 $ 18,441.5 $ 188,462.7 (1) These amounts exclude $366.6 million and $384.7 million of commitments participated to others at December 31, 2021 and 2020, respectively. (2) These amounts include $30.5 million and $24.2 million of standby letters of credit secured by cash deposits or participated to others as of December 31, 2021 and 2020, respectively. (3) This amount includes a $2,309.6 million guarantee to the Fixed Income Clearing Corporation (FICC) under the sponsored member program, without taking into consideration the related collateral, as of December 31, 2021. As of December 31, 2020, there was no guarantee to the FICC as Northern Trust became a sponsored member during the third quarter of 2021. Undrawn Commitments 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. Standby Letters of Credit obligate Northern Trust to meet certain financial obligations of its clients, if, under the contractual terms of the agreement, the clients are unable to do so. These instruments are primarily issued to support public and private financial commitments, including commercial paper, bond financing, initial margin requirements on futures exchanges, and similar transactions. Northern Trust is obligated to meet the entire financial obligation of these agreements and in certain cases is able to recover the amounts paid through recourse against collateral received or other participants. Financial Guarantees are issued by Northern Trust to guarantee the performance of a client to a third party under certain arrangements. Commercial Letters of Credit are instruments issued by Northern Trust on behalf of its clients that authorize a third party (the beneficiary) to draw drafts up to a stipulated amount under the specified terms and conditions of the agreement and other similar instruments. Commercial letters of credit are issued primarily to facilitate international trade. Custody Securities Lent with Indemnification involves Northern Trust lending securities owned by clients to borrowers who are reviewed and approved by the Northern Trust Capital Markets Credit Committee, as part of its securities custody activities and at the direction of its clients. In connection with these activities, Northern Trust has issued indemnifications to certain clients against certain losses that are a direct result of a borrower’s failure to return securities when due, should the value of such securities exceed the value of the collateral required to be posted. Borrowers are required to collateralize fully securities received with cash or marketable securities. As securities are loaned, collateral is maintained at a minimum 100% of the fair value of the securities plus accrued interest. The collateral is revalued on a daily basis. The amount of securities loaned as of December 31, 2021 and 2020 subject to indemnification was $170.4 billion and $157.5 billion, respectively. Because of the credit quality of the borrowers and the requirement to fully collateralize securities borrowed, management believes that the exposure to credit loss from this activity is not significant and no liability was recorded at December 31, 2021, or 2020 related to these indemnifications. 2021 Annual Report | Northern Trust Corporation 149 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unsettled Repurchase and Reverse Repurchase Agreements. Northern Trust enters into repurchase agreements and reverse repurchase agreements which may settle at a future date. In repurchase agreements, Northern Trust receives cash from and provides securities as collateral to a counterparty. In reverse repurchase agreements, Northern Trust advances cash to and receives securities as collateral from a counterparty. These transactions are recorded on the consolidated balance sheets on the settlement date. As of December 31, 2021 and 2020, there were no unsettled repurchase or reverse repurchase agreements. Sponsored Member Program. Effective during the third quarter of 2021, Northern Trust became an approved Government Securities Division (GSD) netting and sponsoring member in the FICC sponsored member program, through which Northern Trust submits eligible repurchase and reverse repurchase transactions in U.S. Government securities between Northern Trust and its sponsored member clients for novation and clearing. Northern Trust may sponsor clients to clear their eligible repurchase transactions with the FICC. As a sponsoring member, Northern Trust guarantees to the FICC the prompt and full payment and performance of its sponsored member clients’ respective obligations under the FICC GSD’s rules. To mitigate Northern Trust’s credit exposure under this guarantee, Northern Trust obtains a security interest in its sponsored member clients’ collateral. Please refer to Note 28, “Offsetting of Assets and Liabilities” for additional information on Northern Trust’s repurchase and reverse repurchase agreements. Clearing and Settlement Organizations. The Bank is a participating member of various cash, securities and foreign exchange clearing and settlement organizations. It participates in these organizations on behalf of its clients and on its own behalf as a result of its own activities. A wide variety of cash and securities transactions are settled through these organizations, including those involving obligations of states and political subdivisions, asset-backed securities, commercial paper, dollar placements, and securities issued by the Government National Mortgage Association. Certain of these industry clearing and settlement exchanges require their members to guarantee their obligations and liabilities and/or to provide liquidity support in the event other members do not honor their obligations as stipulated in each clearing organization’s membership agreement. Exposure related to these agreements varies, primarily as a result of fluctuations in the volume of transactions cleared through the organizations. At December 31, 2021 and 2020, Northern Trust has not recorded any material liabilities under these arrangements as Northern Trust believes the likelihood that a clearing or settlement exchange (of which Northern Trust is a member) would become insolvent is remote. Controls related to these clearing transactions are closely monitored by management to protect the assets of Northern Trust and its clients. Legal Proceedings. In the normal course of business, the Corporation and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions, and are subject to regulatory examinations, information-gathering requests, investigations, and proceedings, both formal and informal. In certain legal actions, claims for substantial monetary damages are asserted. In regulatory matters, claims for disgorgement, restitution, penalties and/or other remedial actions or sanctions may be sought. Based on current knowledge, after consultation with legal counsel and after taking into account current accruals, management does not believe that losses, fines or penalties, if any, arising from pending litigation or threatened legal actions or regulatory matters either individually or in the aggregate, after giving effect to applicable reserves and insurance coverage will have a material adverse effect on the consolidated financial position or liquidity of the Corporation, although such matters could have a material adverse effect on the Corporation’s operating results for a particular period. Under GAAP, (i) an event is “probable” if the “future event or events are likely to occur”; (ii) an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely”; and (iii) an event is “remote” if “the chance of the future event or events occurring is slight.” The outcome of litigation and regulatory matters is inherently difficult to predict and/or the range of loss often cannot be reasonably estimated, particularly for matters that (i) will be decided by a jury, (ii) are in early stages, (iii) involve uncertainty as to the likelihood of a class being certified or the ultimate size of the class, (iv) are subject to appeals or motions, (v) involve significant factual issues to be resolved, including with respect to the amount of damages, (vi) do not specify the amount of damages sought or (vii) seek very large damages based on novel and complex damage and liability legal theories. Accordingly, the Corporation cannot reasonably estimate the eventual outcome of these pending matters, the timing of their ultimate resolution or what the eventual loss, fines or penalties, if any, related to each pending matter will be. In accordance with applicable accounting guidance, the Corporation records accruals for litigation and regulatory matters when those matters present loss contingencies that are both probable and reasonably estimable. When loss contingencies are not both probable and reasonably estimable, the Corporation does not record accruals. No material accruals have been recorded for pending litigation or threatened legal actions or regulatory matters. For a limited number of matters for which a loss is reasonably possible in future periods, whether in excess of an accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of possible loss. As 150 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS of December 31, 2021, the Corporation has estimated the range of reasonably possible loss for these matters to be from zero to approximately $20 million in the aggregate. The Corporation’s estimate with respect to the aggregate range of reasonably possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. In certain other pending matters, there may be a range of reasonably possible loss (including reasonably possible loss in excess of amounts accrued) that cannot be reasonably estimated for the reasons described above. Such matters are not included in the estimated range of reasonably possible loss discussed above. In 2015, Northern Trust Fiduciary Services (Guernsey) Limited (NTFS), an indirect subsidiary of the Corporation, was charged by a French investigating magistrate judge with complicity in estate tax fraud in connection with the administration of two trusts for which it serves as trustee. Charges also were brought against a number of other persons and entities related to this matter. In 2017, a French court found no estate tax fraud had occurred and NTFS and all other persons and entities charged were acquitted. The Public Prosecutor’s Office of France appealed the court decision and in June 2018 a French appellate court issued its opinion on the matter, acquitting all persons and entities charged, including NTFS. In January 2021, the Cour de Cassation, the highest court in France, reversed the June 2018 appellate court ruling, requiring a re-trial at the appellate court level. The re-trial proceedings in the appellate court have not yet been scheduled. As trustee, NTFS provided no tax advice and had no involvement in the preparation or filing of the challenged estate tax filings. Visa Class B Common Shares. Northern Trust, as a member of Visa U.S.A. Inc. (Visa U.S.A.) and in connection with the 2007 restructuring of Visa U.S.A. and its affiliates and the 2008 initial public offering of Visa Inc. (Visa), received certain Visa Class B common shares. The Visa Class B common shares are subject to certain selling restrictions until the final resolution of certain litigation related to interchange fees involving Visa (the covered litigation), at which time the shares are convertible into Visa Class A common shares based on a conversion rate dependent upon the ultimate cost of resolving the covered litigation. On June 28, 2018, September 27, 2019 and December 29, 2021, Visa deposited an additional $600 million, $300 million, and $250 million, respectively, into an escrow account previously established with respect to the covered litigation. As a result of the additional contributions to the escrow account, the rate at which Visa Class B common shares will convert into Visa Class A common shares was reduced. In September 2018, Visa reached a proposed class settlement agreement covering damage claims but not injunctive relief claims regarding the covered litigation. In December 2019, the district court granted final approval for the proposed class settlement agreement. Certain merchants have opted out of the class settlement and are pursuing claims separately, while other merchants have appealed the approval order granted by the district court. The ultimate resolution of the covered litigation, the timing for removal of the selling restrictions on the Visa Class B common shares and the rate at which such shares will ultimately convert into Visa Class A common shares are uncertain. In June 2016 and 2015, Northern Trust recorded a $123.1 million and $99.9 million net gain on the sale of 1.1 million and 1.0 million of its Visa Class B common shares, respectively. These sales do not affect Northern Trust’s risk related to the impact of the covered litigation on the rate at which such shares will ultimately convert into Visa Class A common shares. Northern Trust continued to hold approximately 4.1 million Visa Class B common shares, which are recorded at their original cost basis of zero, as of both December 31, 2021 and 2020. Note 27 – Derivative Financial Instruments Northern Trust is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients, as part of its trading activity for its own account; and as part of its risk management activities. These instruments may include foreign exchange contracts, interest rate contracts, total return swap contracts, and swaps related to the sale of certain Visa Class B common shares. Please refer to Note 1, “Summary of Significant Accounting Policies” for the significant accounting policies for derivative financial instruments. Foreign exchange contracts are agreements to exchange specific amounts of currencies at a future date, at a specified rate of exchange. Foreign exchange contracts are entered into primarily to meet the foreign exchange needs of clients. Foreign exchange contracts are also used for trading and risk management purposes. For risk management purposes, Northern Trust uses foreign exchange contracts to reduce its exposure to changes in foreign exchange rates relating to certain forecasted non-functional currency denominated revenue and expenditure transactions, foreign-currency- denominated assets and liabilities, including debt securities and net investments in non-U.S. affiliates. Interest rate contracts include swap and option contracts. Interest rate swap contracts involve the exchange of fixed and floating rate interest payment obligations without the exchange of the underlying principal amounts. Northern Trust enters into interest rate swap contracts with its clients and also may utilize such contracts to reduce or eliminate the 2021 Annual Report | Northern Trust Corporation 151 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS exposure to changes in the cash flows or fair value of hedged assets or liabilities due to changes in interest rates. Interest rate option contracts may include caps, floors, collars and swaptions, and provide for the transfer or reduction of interest rate risk, typically in exchange for a fee. Northern Trust enters into option contracts primarily as a seller of interest rate protection to clients. Northern Trust receives a fee at the outset of the agreement for the assumption of the risk of an unfavorable change in interest rates. This assumed interest rate risk is then mitigated by entering into an offsetting position with an outside counterparty. Northern Trust may also purchase or enter into option contracts for risk management purposes including to reduce the exposure to changes in the cash flows of hedged assets due to changes in interest rates. The following table shows the notional and fair values of all derivative financial instruments as of December 31, 2021 and 2020. TABLE 125: NOTIONAL AND FAIR VALUES OF DERIVATIVE FINANCIAL INSTRUMENTS 10.2 — 104.0 207.7 321.9 0.1 35.3 35.4 (In Millions) Derivatives Designated as Hedging under GAAP Interest Rate Contracts Fair Value Hedges Cash Flow Hedges Foreign Exchange Contracts Cash Flow Hedges Net Investment Hedges DECEMBER 31, 2021 DECEMBER 31, 2020 FAIR VALUE FAIR VALUE NOTIONAL VALUE ASSET(1) LIABILITY(2) NOTIONAL VALUE ASSET(1) LIABILITY(2) $ 4,430.5 $ — 3,697.9 4,161.8 7.6 $ — 8.7 $ 4,717.6 $ — 50.0 8.2 $ 0.1 61.8 183.3 12.6 12.3 6,554.4 3,480.3 15.4 0.1 Total Derivatives Designated as Hedging under GAAP $ 12,290.2 $ 252.7 $ 33.6 $ 14,802.3 $ 23.8 $ Derivatives Not Designated as Hedging under GAAP Non-Designated Risk Management Derivatives Foreign Exchange Contracts Other Financial Derivatives(3) Total Non-Designated Risk Management Derivatives Client-Related and Trading Derivatives $ $ 109.9 $ 738.5 848.4 $ 0.2 $ — 0.6 $ 67.7 $ 37.5 745.4 0.2 $ 38.1 $ 813.1 $ 0.1 $ — 0.1 $ Foreign Exchange Contracts Interest Rate Contracts $ 315,532.3 $ 1,962.1 $ 1,973.3 $ 320,563.4 $ 4,245.1 $ 4,410.7 11,570.1 132.4 90.2 10,573.3 289.2 114.8 Total Client-Related and Trading Derivatives $ 327,102.4 $ 2,094.5 $ 2,063.5 $ 331,136.7 $ 4,534.3 $ 4,525.5 Total Derivatives Not Designated as Hedging under GAAP Total Gross Derivatives Less: Netting(4) $ 327,950.8 $ 2,094.7 $ 2,101.6 $ 331,949.8 $ 4,534.4 $ 4,560.9 $ 340,241.0 $ 2,347.4 $ 2,135.2 $ 346,752.1 $ 4,558.2 $ 4,882.8 1,533.8 1,283.5 3,507.8 2,817.1 Total Derivative Financial Instruments $ 813.6 $ 851.7 $ 1,050.4 $ 2,065.7 (1) Derivative assets are reported in Other Assets on the consolidated balance sheets. (2) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets. (3) This line includes swaps related to sales of certain Visa Class B common shares. (4) See further detail in Note 28, "Offsetting of Assets and Liabilities." Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded on the consolidated balance sheets. They are used merely to express the volume of this activity. Northern Trust’s credit-related risk of loss is limited to the positive fair value of the derivative instrument, net of any collateral received, which is significantly less than the notional amount. Hedging Derivative Instruments Designated under GAAP. Northern Trust uses derivative instruments to hedge its exposure to foreign currency, interest rate, and equity price. Certain hedging relationships are formally designated and qualify for hedge accounting under GAAP as fair value, cash flow or net investment hedges. Other derivatives that are entered into for risk management purposes as economic hedges are not formally designated as hedges and changes in fair value are recognized currently in Other Operating Income within the consolidated statements of income (see below section “Derivative Instruments Not Designated as Hedging under GAAP”). Fair Value Hedges. Derivatives are designated as fair value hedges to limit Northern Trust’s exposure to changes in the fair value of assets and liabilities due to movements in interest rates. 152 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash Flow Hedges. Derivatives are also designated as cash flow hedges in order to minimize the variability in cash flows of earning assets or forecasted transactions caused by movements in interest or foreign exchange rates. There were no material gains or losses reclassified into earnings during the years ended December 31, 2021, 2020, and 2019 as a result of the discontinuance of forecasted transactions that were no longer probable of occurring. It is estimated that net losses of $4.3 million and net gains of $52.7 million will be reclassified into net income within the next twelve months relating to cash flow hedges of foreign-currency-denominated transactions and cash flow hedges of foreign- currency-denominated debt securities, respectively. As of December 31, 2021, 20 months was the maximum length of time over which the exposure to variability in future cash flows of forecasted foreign-currency-denominated transactions was being hedged. The following table provides fair value and cash flow hedge derivative gains and losses recognized in income during the years ended December 31, 2021, 2020 and 2019. TABLE 126: LOCATION AND AMOUNT OF FAIR VALUE AND CASH FLOW HEDGE DERIVATIVE GAINS AND LOSSES RECORDED IN INCOME (in Millions) INTEREST INCOME INTEREST EXPENSE OTHER OPERATING INCOME For the Year Ended December 31, 2021 2020 2019 2021 2020 2019 2021 2020 2019 Total amounts on the consolidated statements of income $ 1,406.5 $ 1,643.5 $ 2,499.9 $ 23.8 $ 200.3 $ 822.0 $ 243.9 $ 194.0 $ 145.5 Gains (Losses) on fair value hedges recognized on Interest Rate Contracts Recognized on derivatives Recognized on hedged items 39.1 (66.3) (95.9) (161.6) 100.2 99.4 (39.1) 66.3 95.9 161.6 (100.2) (99.4) Amounts related to interest settlements on derivatives (16.2) (13.2) 21.2 57.1 29.9 5.2 — — — — — — — — — Total gains (losses) recognized on fair value hedges $ (16.2) $ (13.2) $ 21.2 $ 57.1 $ 29.9 $ 5.2 $ — $ — $ — Gains (Losses) on cash flow hedges recognized on Foreign Exchange Contracts Net gains (losses) reclassified from AOCI to net income Interest Rate Contracts Net gains (losses) reclassified from AOCI to net income Total gains (losses) reclassified from AOCI to net income on cash flow hedges 10.5 27.4 26.4 — — — (6.0) 0.2 0.8 — 0.5 (0.5) — — — — — — $ 10.5 $ 27.9 $ 25.9 $ — $ — $ — $ (6.0) $ 0.2 $ 0.8 The following table provides the impact of fair value hedge accounting on the carrying value of the designated hedged items as of December 31, 2021 and 2020. TABLE 127: HEDGED ITEMS IN FAIR VALUE HEDGES DECEMBER 31, 2021 DECEMBER 31, 2020 (In Millions) Available for Sale Debt Securities(3) Senior Notes and Long-Term Subordinated Debt Total CARRYING VALUE OF THE HEDGED ITEMS CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(1) CARRYING VALUE OF THE HEDGED ITEMS CUMULATIVE HEDGE ACCOUNTING BASIS ADJUSTMENT(2) $ $ 1,677.4 $ 2,745.6 4,423.0 $ 11.1 $ 59.5 70.6 $ 2,075.1 $ 2,745.1 4,820.2 $ 48.8 221.5 270.3 (1) The cumulative hedge accounting basis adjustment includes $9.6 million related to discontinued hedging relationships of AFS debt securities as of December 31, 2021. There are no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2021. (2) The cumulative hedge accounting basis adjustment includes $10.4 million related to discontinued hedging relationships of AFS debt securities as of December 31, 2020. There were no amounts related to discontinued hedging relationships in the cumulative hedge accounting basis adjustment of senior notes and long-term debt as of December 31, 2020. (3) Carrying value represents amortized cost. Net Investment Hedges. Certain foreign exchange contracts are designated as net investment hedges to minimize Northern Trust’s exposure to variability in the foreign currency translation of net investments in non-U.S. branches and subsidiaries. Net investment hedge gains of $186.6 million and losses of $178.7 million were recognized in AOCI related to foreign exchange contracts for the years ended December 31, 2021 and 2020, respectively. 2021 Annual Report | Northern Trust Corporation 153 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Derivative Instruments Not Designated as Hedging under GAAP. Northern Trust’s derivative instruments that are not designated as hedging under GAAP include derivatives for purposes of client-related and trading activities, as well as other risk management purposes. These activities consist principally of providing foreign exchange services to clients in connection with Northern Trust’s global custody business. However, in the normal course of business, Northern Trust also engages in trading of currencies for its own account. Non-designated risk management derivatives include foreign exchange contracts entered into to manage the foreign currency risk of non-U.S.-dollar-denominated assets and liabilities, the net investment in certain non-U.S. affiliates, commercial loans, and forecasted foreign-currency-denominated transactions. Swaps related to sales of certain Visa Class B common shares were entered into pursuant to which Northern Trust retains the risks associated with the ultimate conversion of the Visa Class B common shares into Visa Class A common shares. Total return swaps are entered into to manage the equity price risk associated with certain investments. Changes in the fair value of derivative instruments not designated as hedges under GAAP are recognized currently in income. The following table provides the location and amount of gains and losses recorded on the consolidated statements of income for the years ended December 31, 2021, 2020, and 2019 for derivative instruments not designated as hedges under GAAP. TABLE 128: LOCATION AND AMOUNT OF GAINS AND LOSSES RECORDED IN INCOME FOR DERIVATIVES NOT DESIGNATED AS HEDGING UNDER GAAP (In Millions) Non-designated risk management derivatives Foreign Exchange Contracts Other Financial Derivatives(1) Gains (Losses) from non-designated risk management derivatives Client-related and trading derivatives Foreign Exchange Contracts Interest Rate Contracts Gains (Losses) from client-related and trading derivatives Total gains (losses) from derivatives not designated as hedging under GAAP DERIVATIVE GAINS (LOSSES) LOCATION RECOGNIZED IN INCOME AMOUNT OF DERIVATIVE GAINS (LOSSES) RECOGNIZED IN INCOME 2021 2020 2019 Other Operating Income Other Operating Income $ $ 1.2 $ (21.3) (20.1) $ 6.4 $ (18.3) (11.9) $ (1.6) (20.0) (21.6) Foreign Exchange Trading Income $ 292.6 $ 290.4 $ 250.9 Security Commissions and Trading Income 15.7 22.4 308.3 $ 312.8 $ 12.9 263.8 288.2 $ 300.9 $ 242.2 $ $ (1) This line includes swaps related to the sale of certain Visa Class B common shares and total return swap contracts. 154 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 28 – Offsetting of Assets and Liabilities The following table provides information regarding the offsetting of derivative assets and of securities purchased under agreements to resell within the consolidated balance sheets as of December 31, 2021 and 2020. TABLE 129: OFFSETTING OF DERIVATIVE ASSETS AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (In Millions) Derivative Assets(1) Foreign Exchange Contracts Over the Counter (OTC) Interest Rate Swaps OTC Total Derivatives Subject to a Master Netting Arrangement Total Derivatives Not Subject to a Master Netting Arrangement Total Derivatives Securities Purchased under Agreements to Resell(2) (In Millions) Derivative Assets(1) DECEMBER 31, 2021 GROSS RECOGNIZED ASSETS GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) NET AMOUNTS PRESENTED IN THE BALANCE SHEET GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) NET AMOUNT(5) $ 1,762.7 $ 1,530.7 $ 140.0 3.1 1,902.7 1,533.8 444.7 2,347.4 — 1,533.8 232.0 $ 136.9 368.9 444.7 813.6 2.8 $ — 2.8 — 2.8 $ 2,078.9 $ 1,392.5 $ 686.4 $ 686.4 $ 229.2 136.9 366.1 444.7 810.8 — DECEMBER 31, 2020 GROSS RECOGNIZED ASSETS GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) NET AMOUNTS PRESENTED IN THE BALANCE SHEET GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) NET AMOUNT(5) Foreign Exchange Contracts OTC $ 3,799.7 $ 3,505.3 $ 294.4 $ 0.9 $ Interest Rate Swaps OTC Interest Rate Swaps Exchange Cleared Total Derivatives Subject to a Master Netting Arrangement Total Derivatives Not Subject to a Master Netting Arrangement Total Derivatives 295.9 1.6 2.5 — 4,097.2 3,507.8 461.0 4,558.2 — 3,507.8 293.4 1.6 589.4 461.0 1,050.4 — — 0.9 — 0.9 Securities Purchased under Agreements to Resell $ 1,596.5 $ — $ 1,596.5 $ 1,596.5 $ 293.5 293.4 1.6 588.5 461.0 1,049.5 — (1) Derivative assets are reported in Other Assets on the consolidated balance sheets. Other Assets (excluding derivative assets) totaled $7.8 billion and $7.3 billion as of December 31, 2021 and 2020, respectively. (2) Offsetting of Securities Purchased under Agreements to Resell primarily relates to our involvement in FICC. (3) Including cash collateral received from counterparties. (4) Including financial assets accepted as collateral which are received from counterparties. (5) Northern Trust did not possess any cash collateral that was not offset on the consolidated balance sheets that could have been used to offset the net amounts presented on the consolidated balance sheets as of December 31, 2021 and 2020. 2021 Annual Report | Northern Trust Corporation 155 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides information regarding the offsetting of derivative liabilities and of securities sold under agreements to repurchase within the consolidated balance sheets as of December 31, 2021 and 2020. TABLE 130: OFFSETTING OF DERIVATIVE LIABILITIES AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (In Millions) Derivative Liabilities(1) DECEMBER 31, 2021 GROSS RECOGNIZED LIABILITIES GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) NET AMOUNTS PRESENTED IN THE BALANCE SHEET GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) NET AMOUNT(5) Foreign Exchange Contracts OTC $ 1,430.1 $ 1,234.5 $ 195.6 $ — $ Interest Rate Swaps OTC Interest Rate Swaps Exchange Cleared Other Financial Derivatives Total Derivatives Subject to a Master Netting Arrangement Total Derivatives Not Subject to a Master Netting Arrangement Total Derivatives Securities Sold under Agreements to Repurchase(2) 98.7 0.2 37.5 48.1 — 0.9 1,566.5 1,283.5 568.7 2,135.2 — 1,283.5 50.6 0.2 36.6 283.0 568.7 851.7 — — — — — — $ 1,924.4 $ 1,392.5 $ 531.9 $ 531.9 $ 195.6 50.6 0.2 36.6 283.0 568.7 851.7 — (In Millions) Derivative Liabilities(1) DECEMBER 31, 2020 GROSS RECOGNIZED LIABILITIES GROSS AMOUNTS OFFSET IN THE BALANCE SHEET(3) NET AMOUNTS PRESENTED IN THE BALANCE SHEET GROSS AMOUNTS NOT OFFSET IN THE BALANCE SHEET(4) NET AMOUNT(5) Foreign Exchange Contracts OTC $ 3,577.7 $ 2,718.6 $ 859.1 $ 0.5 $ Interest Rate Swaps OTC Other Financial Derivatives Total Derivatives Subject to a Master Netting Arrangement Total Derivatives Not Subject to a Master Netting Arrangement Total Derivatives 125.0 35.3 98.5 — 26.5 35.3 3,738.0 2,817.1 920.9 1,144.8 4,882.8 — 2,817.1 1,144.8 2,065.7 — — 0.5 — 0.5 Securities Sold under Agreements to Repurchase $ 39.8 $ — $ 39.8 $ 39.8 $ 858.6 26.5 35.3 920.4 1,144.8 2,065.2 — (1) Derivative liabilities are reported in Other Liabilities on the consolidated balance sheets. Other Liabilities (excluding derivative liabilities) totaled $3.3 billion and $3.5 billion as of December 31, 2021 and 2020, respectively. (2) Offsetting of Securities Sold under Agreements to Repurchase primarily relates to our involvement in FICC. (3) Including cash collateral deposited with counterparties. (4) Including financial assets accepted as collateral which are deposited with counterparties. (5) Northern Trust did not place any cash collateral with counterparties that was not offset on the consolidated balance sheets that could have been used to offset the net amounts presented on the consolidated balance sheets as of December 31, 2021 and 2020. All of Northern Trust’s securities sold under agreements to repurchase (repurchase agreements) and securities purchased under agreements to resell (reverse repurchase agreements) involve the transfer of financial assets in exchange for cash subject to a right and obligation to repurchase those assets for an agreed upon amount. In the event of a repurchase failure, the cash or financial assets are available for offset. All of Northern Trust’s repurchase agreements and reverse repurchase agreements are subject to a master netting arrangement, which sets forth the rights and obligations for repurchase and offset. Under the master netting arrangement, Northern Trust is entitled to set off receivables from and collateral placed with a single counterparty against obligations owed to that counterparty. In addition, collateral held by Northern Trust can be offset against receivables from that counterparty. Northern Trust’s repurchase agreements and reverse repurchase agreements, other than those in which the counterparty is FICC, do not meet the requirements to net under GAAP. Derivative asset and liability positions with a single counterparty can be offset against each other in cases where legally enforceable master netting arrangements or similar agreements exist. Derivative assets and liabilities can be further offset by cash collateral received from, and deposited with, the transacting counterparty. The basis for this view is that, upon termination of transactions subject to a master netting arrangement or similar agreement, the individual derivative receivables do not represent resources to which general creditors have rights and individual derivative payables do not represent claims that are equivalent to the claims of general creditors. Credit risk associated with derivative instruments relates to the failure of the counterparty and the failure of Northern Trust to pay based on the contractual terms of the agreement, and is generally limited to the unrealized fair value gains and 156 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS losses on these instruments, net of any collateral received or deposited. The amount of credit risk will increase or decrease during the lives of the instruments as interest rates, foreign exchange rates, or equity prices fluctuate. Northern Trust’s risk is controlled by limiting such activity to an approved list of counterparties and by subjecting such activity to the same credit and quality controls as are followed in lending and investment activities. Credit Support Annexes and other similar agreements are currently in place with a number of Northern Trust’s counterparties which mitigate the aforementioned credit risk associated with derivative activity conducted with those counterparties by requiring that significant net unrealized fair value gains be supported by collateral placed with Northern Trust. Additional cash collateral received from and deposited with derivative counterparties totaling $93.5 million and $43.4 million, respectively, as of December 31, 2021, and $111.0 million and $49.0 million, respectively, as of December 31, 2020, was not offset against derivative assets and liabilities on the consolidated balance sheets as the amounts exceeded the net derivative positions with those counterparties. Certain master netting arrangements Northern Trust enters into with derivative counterparties 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. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position was $111.5 million and $1,648.2 million at December 31, 2021 and 2020, respectively. Cash collateral amounts deposited with derivative counterparties on those dates included $84.2 million and $1,044.0 million, respectively, posted against these liabilities, resulting in a net maximum amount of termination payments that could have been required at December 31, 2021 and 2020 of $27.3 million and $604.2 million, respectively. Accelerated settlement of these liabilities would not have a material effect on the consolidated financial position or liquidity of Northern Trust. Note 29 – Variable Interest Entities Variable Interest Entities (VIEs) are defined within GAAP as entities which either (1) lack sufficient equity at risk to permit the entity to finance its activities without additional subordinated financial support, (2) have equity investors that lack attributes typical of an equity investor, such as the ability to make significant decisions through voting rights affecting the entity’s operations, or the obligation to absorb expected losses or the right to receive residual returns of the entity, or (3) are structured with voting rights that are disproportionate to the equity investor’s obligation to absorb losses or right to receive returns, and substantially all of the activities are conducted on behalf of the holder of the equity investment at risk with disproportionately few voting rights. Investors that finance a VIE through debt or equity interests are variable interest holders in the entity and the variable interest holder, if any, that has both the power to direct the activities that most significantly impact the entity’s economic performance and, through its variable interest, the obligation to absorb losses or the right to receive returns that could potentially be significant to the entity is deemed to be the VIE’s primary beneficiary and is required to consolidate the VIE. Tax Credit Structures. Northern Trust invests in qualified affordable housing projects and community development entities (collectively, community development projects) that are designed to generate a return primarily through the realization of tax credits. The community development projects are formed as limited partnerships and limited liability companies in which Northern Trust invests as a limited partner/investor member through equity contributions. The economic performance of the community development projects, some of which are VIEs, is subject to the performance of their underlying investment and their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. Northern Trust has determined that it is not the primary beneficiary of any community development project VIEs as it lacks the power to direct the activities that most significantly impact the economic performance of the underlying investments or to affect their ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners and managing members who exercise full and exclusive control of the operations of the community development project VIEs. Northern Trust’s maximum exposure to loss as a result of its involvement with community development projects is limited to the carrying amounts of its investments, including any undrawn commitments. As of December 31, 2021 and 2020, the carrying amounts of these investments in community development projects that generate tax credits, included in Other Assets on the consolidated balance sheets, totaled $959.6 million and $919.6 million, respectively, of which $922.8 million and $874.0 million are VIEs as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, liabilities related to unfunded commitments on investments in tax credit community development projects, included in Other Liabilities on the consolidated balance sheets, totaled $289.3 million and $351.6 million, respectively, of which $280.5 million and $335.9 million related to undrawn commitments on VIEs as of December 31, 2021 and 2020, respectively. 2021 Annual Report | Northern Trust Corporation 157 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Northern Trust’s funding requirements are limited to its invested capital and undrawn commitments for future equity contributions. Northern Trust has no exposure to loss from liquidity arrangements and no obligation to purchase assets of the community development projects. Tax credits and other tax benefits attributable to community development projects totaled $87.2 million and $78.9 million, respectively, as of December 31, 2021 and 2020. Investment Funds. Northern Trust acts as asset manager for various funds in which clients of Northern Trust are investors. As an asset manager of funds, Northern Trust earns a competitively priced fee that is based on assets managed and varies with each fund’s investment objective. Based on its analysis, Northern Trust has determined that it is not the primary beneficiary of these VIEs under GAAP. Some of the funds for which Northern Trust acts as asset manager comply or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds and therefore the funds are exempt from the consolidation requirements in ASC 810-10. Northern Trust voluntarily waived $287.8 million of money market mutual fund fees for the year ended December 31, 2021 related to the low-interest-rate environment and certain competitive factors. Northern Trust waived $36.4 million of money market mutual fund fees for the year ended December 31, 2020. Northern Trust does not have any contractual obligations to provide financial support to the funds. Any potential future support of the funds will be at the discretion of Northern Trust after an evaluation of the specific facts and circumstances. Periodically, Northern Trust makes seed capital investments to certain funds. As of December 31, 2021 and 2020, Northern Trust had no seed capital investments and no unfunded commitments related to seed capital investments. Note 30 – Pledged and Restricted Assets Pledged Assets. Certain of Northern Trust’s subsidiaries, as required or permitted by law, pledge assets to secure public and trust deposits, repurchase agreements and borrowings, as well as for other purposes, including support for securities settlement, primarily related to client activities, and for derivative contracts. The following table presents Northern Trust’s pledged assets. TABLE 131: TYPE OF PLEDGED ASSETS (In Billions) Securities Obligations of States and Political Subdivisions Government Sponsored Agency and Other Securities Loans Total Pledged Assets FOR THE YEAR ENDED DECEMBER 31, 2021 3.7 $ 35.6 15.3 54.6 $ 2020 2.9 32.5 12.1 47.5 $ $ Collateral required for these purposes totaled $5.6 billion and $5.7 billion at December 31, 2021 and 2020, respectively. The following table presents the AFS debt securities pledged as collateral that are included in pledged assets. TABLE 132: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES INCLUDED IN PLEDGED ASSETS (In Millions) Debt Securities Available for Sale SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE DERIVATIVE CONTRACTS DECEMBER 31, 2021 DECEMBER 31, 2020 DECEMBER 31, 2021 DECEMBER 31, 2020 $ 524.1 $ 33.0 $ 17.6 $ 27.1 The secured parties to these transactions have the right to repledge or sell the securities as it relates to $524.1 million and $33.5 million of the pledged collateral as of December 31, 2021 and 2020, respectively. Northern Trust accepts financial assets as collateral that it may, in some instances, be permitted to repledge or sell. The collateral is generally obtained under certain reverse repurchase agreements and derivative contracts. 158 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table presents the fair value of securities accepted as collateral. TABLE 133: ACCEPTED COLLATERAL (In Millions) Collateral that may be repledged or sold Reverse repurchase agreements(1) Derivative contracts Collateral that may not be repledged or sold Reverse repurchase agreements Total Collateral Accepted FOR THE YEAR ENDED DECEMBER 31, 2021 1,457.0 $ 2.8 650.0 2,109.8 $ 2020 1,179.8 0.9 500.0 1,680.7 $ $ (1) The fair value of securities collateral that was repledged or sold totaled $1,419.0 million at December 31, 2021. There was no repledged or sold collateral as of December 31, 2020. Restricted Assets. As a result of the economic environment arising from the COVID-19 pandemic, the Federal Reserve reduced the reserve requirement to zero percent on March 26, 2020. Deposits maintained to meet Federal Reserve Bank reserve requirements averaged $0.4 billion in 2020. Note 31 – Restrictions on Subsidiary Dividends and Loans or Advances Various federal and state statutory provisions limit the amount of dividends the Bank can pay to the Corporation without regulatory approval. Approval of the Federal Reserve Board is required for payment of any dividend by a state-chartered bank that is a member of the Federal Reserve System if the total of all dividends declared by the bank in any calendar year would exceed the total of its retained net income (as defined by regulatory agencies) for that year combined with its retained net income for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its “undivided profits,” as defined, without regulatory and stockholder approval. Under Illinois law, an Illinois state bank, prior to paying a dividend, must carry over to surplus at least one-tenth of its net profits since the date of the declaration of the last preceding dividend, until the bank’s surplus is equal to its capital. In addition, an Illinois state bank may not pay any dividend in an amount greater than its net profits then on hand, after deduction of losses and bad debts (defined as debts due to a state bank on which interest is past due and unpaid for a period of six months or more, unless the same are well secured and in the process of collection). The Bank is also prohibited under federal law from paying any dividends if the Bank is undercapitalized or if the payment of the dividends would cause the Bank to become undercapitalized. In addition, the federal regulatory agencies are authorized to prohibit a bank or bank holding company from engaging in an unsafe or unsound banking practice. The payment of dividends could, depending on the financial condition of the Bank, be deemed to constitute an unsafe or unsound practice. The Dodd-Frank Act and Basel III impose additional restrictions on the ability of banking institutions to pay dividends (e.g., the Corporation may pay dividends only in accordance with the capital plan rules and capital adequacy standards of the Federal Reserve). Under federal law, financial transactions by the Bank, the Corporation’s insured banking subsidiary, with the Corporation and its affiliates that are in the form of loans or extensions of credit, investments, guarantees, derivative transactions, repurchase agreements, securities lending transactions or purchases of assets, are restricted. These transactions must be on terms and conditions that are, or in good faith would be, offered to non-affiliated companies (i.e. on terms not less favorable to the Bank than market terms). Further, extensions of credit must be secured fully with qualifying collateral and are limited to 10% of the Bank’s capital and surplus for transactions with a single affiliate and to 20% of the Bank’s capital and surplus with all affiliates. Other state and federal laws may limit the transfer of funds by the Corporation’s banking subsidiaries to the Corporation and certain of its affiliates. Note 32 – Reporting Segments and Related Information Segment Information. Northern Trust is organized around its two client-focused reporting segments: C&IS and Wealth Management. Asset management and related services are provided to C&IS 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 C&IS 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 an FTE 2021 Annual Report | Northern Trust Corporation 159 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 C&IS and Wealth Management, with the exception of non- recurring activities such as certain costs 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. Effective January 1, 2021, Northern Trust implemented enhancements to its FTP methodology, including enhancements impacting the allocation of net interest income between C&IS and Wealth Management. These methodology enhancements affect the results of each of these reporting segments. Due to the lack of historical information, segment results for periods ended prior to January 1, 2021 have not been revised to reflect the methodology enhancements. Corporate & Institutional Services. C&IS 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. 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 to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe. 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. 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 tables reflect the earnings contribution and average assets of Northern Trust’s reporting segments for the years ended December 31, 2021, 2020, and 2019. 160 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 134: CORPORATE & INSTITUTIONAL SERVICES RESULTS OF OPERATIONS ($ In Millions) Noninterest Income Trust, Investment and Other Servicing Fees Foreign Exchange Trading Income Other Noninterest Income Total Noninterest Income Net Interest Income(1) Revenue(1) Provision for Credit Losses Noninterest Expense Income before Income Taxes(1) Provision for Income Taxes(1) Net Income Percentage of Consolidated Net Income Average Assets (1) Financial measures stated on an FTE basis. TABLE 135: WEALTH MANAGEMENT RESULTS OF OPERATIONS ($ In Millions) Noninterest Income Trust, Investment and Other Servicing Fees Foreign Exchange Trading Income Other Noninterest Income Total Noninterest Income Net Interest Income(1) Revenue(1) Provision for Credit Losses Noninterest Expense Income before Income Taxes(1) Provision for Income Taxes(1) Net Income Percentage of Consolidated Net Income Average Assets (1) Financial measures stated on an FTE basis. TABLE 136: OTHER RESULTS OF OPERATIONS ($ In Millions) Noninterest Income Net Interest Income(1) Revenue(1) Noninterest Expense Income (Loss) before Income Taxes(1) Provision (Benefit) for Income Taxes(1) Net Income Percentage of Consolidated Net Income Average Assets (1) Financial measures stated on an FTE basis. FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 2,487.3 $ 2,321.6 $ 2,211.5 279.0 261.2 3,027.5 637.2 3,664.7 (33.8) 2,863.0 835.5 194.1 641.4 $ 276.3 222.5 2,820.4 665.5 3,485.9 38.1 2,752.7 695.1 174.4 $ 520.7 $ 232.2 178.2 2,621.9 918.7 3,540.6 1.9 2,605.5 933.2 219.4 713.8 41 % 43 % 48 % $ 120,883.2 $ 104,790.6 $ 87,557.1 FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 1,873.8 $ 1,673.4 $ 1,640.6 13.6 188.2 2,075.6 781.1 2,856.7 (47.7) 1,651.1 1,253.3 317.0 936.3 $ 14.1 168.0 1,855.5 812.1 2,667.6 86.9 1,559.7 1,021.0 291.8 $ 729.2 $ 18.7 131.1 1,790.4 792.0 2,582.4 (16.4) 1,531.6 1,067.2 271.1 796.1 61 % 60 % 53 % $ 35,480.0 $ 32,020.5 $ 29,994.3 FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ (21.3) $ (18.3) $ — (21.3) 21.8 (43.1) (10.7) — (18.3) 35.8 (54.1) (13.5) $ $ (32.4) $ (40.6) $ (2) % — $ (3) % — $ (17.1) — (17.1) 6.4 (23.5) (5.8) (17.7) (1) % — 2021 Annual Report | Northern Trust Corporation 161 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 137: CONSOLIDATED FINANCIAL INFORMATION (In Millions) Noninterest Income Trust, Investment and Other Servicing Fees Foreign Exchange Trading Income Other Noninterest Income Total Noninterest Income Net Interest Income(1) Revenue(1) Provision for Credit Losses Noninterest Expense Income before Income Taxes(1) Provision for Income Taxes(1) Net Income Average Assets FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 4,361.1 $ 3,995.0 $ 3,852.1 292.6 428.1 5,081.8 1,418.3 6,500.1 (81.5) 4,535.9 2,045.7 500.4 290.4 372.2 4,657.6 1,477.6 6,135.2 125.0 4,348.2 1,662.0 452.7 1,545.3 $ 1,209.3 $ 250.9 292.2 4,395.2 1,710.7 6,105.9 (14.5) 4,143.5 1,976.9 484.7 1,492.2 156,363.2 $ 136,811.1 $ 117,551.4 $ $ (1) Financial measures stated on an FTE basis. The consolidated figures include $35.6 million, $34.4 million, and $32.8 million, of FTE adjustments for 2021, 2020, and 2019, respectively. 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 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. Therefore, certain subjective estimates and assumptions have been made to allocate revenues, expenses and assets between U.S. and non-U.S. operations. For purposes of this disclosure, all foreign exchange trading income has been allocated to non-U.S. operations. Interest expense is allocated to non-U.S. operations based on specifically matched or pooled funding. Allocations of indirect noninterest expenses, when made, are based on various methods such as time, space, and number of employees. The following table summarizes Northern Trust’s performance based on the allocation process described above without regard to guarantors or the location of collateral. TABLE 138: DISTRIBUTION OF TOTAL ASSETS AND OPERATING PERFORMANCE (In Millions) 2021 Non-U.S. U.S. Total 2020 Non-U.S. U.S. Total 2019 Non-U.S. U.S. Total TOTAL ASSETS TOTAL REVENUE(1) INCOME BEFORE INCOME TAXES NET INCOME $ $ $ $ $ $ 38,555.3 $ 145,334.5 183,889.8 $ 38,393.8 $ 131,610.1 170,003.9 $ 27,888.6 $ 108,939.8 136,828.4 $ 2,017.5 $ 4,447.0 6,464.5 $ 1,737.6 $ 4,363.2 6,100.8 $ 1,889.5 $ 4,183.6 6,073.1 $ 569.4 $ 1,440.7 2,010.1 $ 404.0 $ 1,223.6 1,627.6 $ 600.0 $ 1,344.1 1,944.1 $ 426.7 1,118.6 1,545.3 302.6 906.7 1,209.3 451.0 1,041.2 1,492.2 (1) Total revenue is comprised of net interest income and noninterest income. 162 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 33 – Regulatory Capital Requirements The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal bank regulatory authorities. Under these requirements, banks must maintain specific risk-based and leverage ratios in order to be classified as “well-capitalized.” The regulatory capital requirements impose certain restrictions upon banks that meet minimum capital requirements but are not “well-capitalized” and obligate the federal bank regulatory authorities to take “prompt corrective action” with respect to banks that do not maintain such minimum ratios. Such prompt corrective action could have a direct material effect on a bank’s financial statements. As of December 31, 2021 and 2020, the Bank had capital ratios above the levels required for classification as a “well- capitalized” institution and had not received any regulatory notification of a lower classification. As a result of the stress test results published by the Federal Reserve Board on June 25, 2020, Northern Trust’s stress capital buffer requirement for the 2020 Capital Plan cycle was set at 2.5%. The 2020 stress capital buffer became effective October 1, 2020, and resulted in a Common Equity Tier 1 capital ratio minimum requirement of 7.0% inclusive of this buffer. The results of the 2021 stress test, published by the Federal Reserve Board on June 24, 2021, resulted in Northern Trust’s stress capital buffer and effective Common Equity Tier 1 capital ratio minimum requirement remaining in effect for the 2021 Capital Plan cycle, which began on October 1, 2021. Additionally, Northern Trust’s subsidiary banks located outside the U.S. are subject to regulatory capital requirements in the jurisdictions in which they operate. As of December 31, 2021 and 2020, Northern Trust’s non-U.S. banking subsidiaries had capital ratios above their specified minimum requirements. There were no conditions or events since December 31, 2021, that management believes have adversely affected the capital categorization of any Northern Trust subsidiary bank. 2021 Annual Report | Northern Trust Corporation 163 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides capital ratios for the Corporation and the Bank determined by Basel III phased in requirements. TABLE 139: RISK-BASED AND LEVERAGE CAPITAL AMOUNTS AND RATIOS ($ In Millions) Common Equity Tier 1 Capital Northern Trust Corporation The Northern Trust Company Minimum to qualify as well-capitalized: DECEMBER 31, 2021 DECEMBER 31, 2020 STANDARDIZED APPROACH ADVANCED APPROACH STANDARDIZED APPROACH ADVANCED APPROACH BALANCE RATIO BALANCE RATIO BALANCE RATIO BALANCE RATIO $ 10,277.1 11.9 % $ 10,277.1 13.2 % $ 9,962.2 12.8 % $ 9,962.2 13.4 % 10,315.7 12.0 10,315.7 13.5 10,003.3 13.0 10,003.3 13.8 Northern Trust Corporation The Northern Trust Company N/A 5,578.7 N/A 6.5 N/A 4,964.5 N/A 6.5 N/A 4,994.4 N/A 6.5 N/A 4,717.1 N/A 6.5 Tier 1 Capital Northern Trust Corporation The Northern Trust Company 11,142.2 10,315.7 12.9 12.0 11,142.2 10,315.7 14.3 13.5 10,822.2 10,003.3 13.9 13.0 10,822.2 10,003.3 Minimum to qualify as well-capitalized: Northern Trust Corporation The Northern Trust Company 5,177.6 6,866.1 6.0 8.0 4,668.4 6,110.2 6.0 8.0 4,659.7 6,147.0 6.0 8.0 4,467.6 5,805.6 Total Capital Northern Trust Corporation The Northern Trust Company 12,126.8 11,158.4 14.1 13.0 11,942.0 10,973.7 15.3 14.4 12,085.7 11,123.1 15.6 14.5 11,825.8 10,863.3 Minimum to qualify as well-capitalized: Northern Trust Corporation The Northern Trust Company 8,629.3 8,582.6 10.0 10.0 7,780.7 7,637.8 10.0 10.0 7,766.2 7,683.7 10.0 10.0 7,446.0 7,257.0 Tier 1 Leverage Northern Trust Corporation The Northern Trust Company 11,142.2 10,315.7 6.9 6.4 11,142.2 10,315.7 6.9 6.4 10,822.2 10,003.3 7.6 7.0 10,822.2 10,003.3 Minimum to qualify as well-capitalized: Northern Trust Corporation The Northern Trust Company N/A 8,019.5 N/A 5.0 N/A 8,019.5 Supplementary Leverage(1) Northern Trust Corporation The Northern Trust Company Minimum to qualify as well-capitalized: Northern Trust Corporation The Northern Trust Company N/A N/A N/A N/A N/A 11,142.2 N/A 10,315.7 N/A N/A N/A 4,081.7 N/A 5.0 8.2 7.6 N/A 3.0 N/A 7,105.0 N/A 5.0 N/A 7,105.0 N/A N/A N/A N/A N/A 10,822.2 N/A 10,003.3 N/A N/A N/A 3,883.4 14.5 13.8 6.0 8.0 15.9 15.0 10.0 10.0 7.6 7.0 N/A 5.0 8.6 7.7 N/A 3.0 (1) In November 2019, the Federal Reserve Board and other U.S. federal banking agencies adopted a final rule that established a deduction for central bank deposits from the total leverage exposures of custodial banking organizations, including the Corporation and the Bank, equal to the lesser of (i) the total amount of funds the custodial banking organization and its consolidated subsidiaries have on deposit at qualifying central banks and (ii) the total amount of client funds on deposit at the custodial banking organization that are linked to fiduciary or custodial and safekeeping accounts. The rule became effective on April 1, 2020. Further, on April 1, 2020, the Federal Reserve Board issued an interim final rule that requires bank holding companies, including the Corporation, to deduct, on a temporary basis, deposits with the Federal Reserve Board and investments in U.S. Treasury securities from their total leverage exposure. The U.S. Treasury securities deduction is applied in addition to the central bank deposits relief referred to above. This rule became effective on April 1, 2020 and expired on April 1, 2021. On May 15, 2020, the U.S. federal banking agencies released an interim final rule that permits insured depository institutions of bank holding companies also to temporarily exclude deposits with the Federal Reserve Board and investments in U.S. Treasury securities from their total leverage exposure. The Bank did not elect to take this deduction. The supplementary leverage ratios at December 31, 2021 and December 31, 2020 for the Corporation and the Bank reflect the impact of these final rules. Under the final Basel III rules, the Corporation and the Bank are required to calculate and publicly disclose risk-based capital ratios using two methodologies: an advanced approach and a standardized approach. Under the advanced approach, credit risk weighted assets (RWA) are based on internal credit models and parameters. Additionally, the advanced approach incorporates operational risk RWA. Under the standardized approach, RWA are based on supervisory prescribed risk weights that are primarily dependent on counterparty type and asset class. Pursuant to the Federal Reserve Board's implementation in the final Basel III rules of a provision of the Dodd-Frank Act, the capital adequacy of the Corporation and the Bank is assessed based on the lower of the advanced approach or standardized approach capital ratios. 164 2021 Annual Report | Northern Trust Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 34 – Northern Trust Corporation (Corporation only) Condensed financial information is presented in the following tables. Investments in wholly-owned subsidiaries are carried on the equity method of accounting. TABLE 140: CONDENSED BALANCE SHEETS (In Millions) ASSETS Cash on Deposit with Subsidiary Bank Advances to Wholly-Owned Subsidiaries – Banks Investments in Wholly-Owned Subsidiaries – Banks – Nonbank Other Assets Total Assets LIABILITIES Senior Notes Long-Term Debt Floating Rate Capital Debt Other Liabilities Total Liabilities STOCKHOLDERS’ EQUITY Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity TABLE 141: CONDENSED STATEMENTS OF INCOME (In Millions) OPERATING INCOME Dividends – Bank Subsidiaries – Nonbank Subsidiaries Intercompany Interest and Other Charges Interest and Other Income Total Operating Income OPERATING EXPENSES Interest Expense Other Operating Expenses Total Operating Expenses Income before Income Taxes and Equity in Undistributed Net Income of Subsidiaries Benefit for Income Taxes Income before Equity in Undistributed Net Income of Subsidiaries Equity in Undistributed Net Income of Subsidiaries – Banks – Nonbank Net Income Preferred Stock Dividends Net Income Applicable to Common Stock DECEMBER 31, 2021 2020 $ 1,731.7 $ 2,810.0 11,120.9 185.3 890.2 2,516.0 2,670.0 10,799.9 172.8 900.9 $ $ 16,738.1 $ 17,059.6 2,505.5 $ 1,145.7 — 1,070.1 4,721.3 884.9 408.6 939.3 13,117.3 (35.6) 3,122.4 1,189.3 277.8 781.8 5,371.3 884.9 408.6 963.6 12,207.7 428.0 (3,297.7) (3,204.5) 12,016.8 $ 16,738.1 $ 11,688.3 17,059.6 FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 751.1 $ 900.0 $ 2,024.1 8.3 20.1 32.3 811.8 71.3 36.7 108.0 703.8 25.7 729.5 803.3 12.5 — 46.5 19.1 965.6 104.2 26.2 130.4 835.2 28.2 863.4 326.0 19.9 0.4 115.1 20.2 2,159.8 121.6 28.6 150.2 2,009.6 24.3 2,033.9 (559.9) 18.2 $ $ 1,545.3 $ 1,209.3 $ 1,492.2 41.8 56.2 46.4 1,503.5 $ 1,153.1 $ 1,445.8 2021 Annual Report | Northern Trust Corporation 165 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS TABLE 142: CONDENSED STATEMENTS OF CASH FLOWS (In Millions) CASH FLOWS FROM OPERATING ACTIVITIES Net Income FOR THE YEAR ENDED DECEMBER 31, 2021 2020 2019 $ 1,545.3 $ 1,209.3 $ 1,492.2 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Equity in Undistributed Net Income of Subsidiaries (815.8) (345.9) 1,565.9 1,889.5 0.1 2.2 236.6 968.4 398.5 3.7 300.3 — — (140.0) (800.0) — 5.1 — 1.8 (134.9) (798.2) — (500.0) (278.8) — — (267.6) 53.8 (583.3) (41.8) (0.1) (1,617.8) (784.3) 2,516.0 993.2 (508.6) — (400.0) — 19.5 (584.6) (45.9) 15.4 (810.8) (43.1) 2,559.1 $ 1,731.7 $ 2,516.0 $ 541.7 (400.4) 114.1 141.9 — 540.0 — 3.7 543.7 498.0 — — — 392.5 44.0 (529.7) (46.4) 0.9 (740.9) 1,692.3 866.8 2,559.1 (299.8) (1,100.2) Change in Prepaid Expenses Change in Accrued Income Taxes Other Operating Activities, net Net Cash Provided by Operating Activities CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sale, Maturity and Redemption of Available for Sale Debt Securities Investments in and Advances to Subsidiaries, net Acquisition of a Business, Net of Cash Received Other Investing Activities, net Net Cash (Used in) Provided by Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from Senior Notes Repayments of Senior Notes Repayment of Floating Rate Capital Debt Redemption of Preferred Stock - Series C Proceeds from Issuance of Preferred Stock - Series E Treasury Stock Purchased Net Proceeds from Stock Options Cash Dividends Paid on Common Stock Cash Dividends Paid on Preferred Stock Other Financing Activities, net Net Cash Used In Financing Activities Net Change in Cash on Deposit with Subsidiary Bank Cash on Deposit with Subsidiary Bank at Beginning of Year Cash on Deposit with Subsidiary Bank at End of Year 166 2021 Annual Report | Northern Trust Corporation ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A – CONTROLS AND PROCEDURES Disclosure Controls and Procedures As of December 31, 2021, the Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on such evaluation, such officers have concluded that, as of December 31, 2021, the Corporation’s disclosure controls and procedures are effective. Management’s Report on Internal Control Over Financial Reporting Management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance to the Corporation’s management and Board of Directors regarding the preparation of reliable published financial statements. This internal control includes monitoring mechanisms, and actions are taken to correct deficiencies identified. Management assessed the Corporation’s internal control over financial reporting as of December 31, 2021, based on the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that, as of December 31, 2021, the Corporation maintained effective internal control over financial reporting. Additionally, KPMG LLP, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements as of, and for the year ended, December 31, 2021, included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2021. Changes in Internal Control Over Financial Reporting There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. 2021 Annual Report | Northern Trust Corporation 167 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Northern Trust Corporation: Opinion on Internal Control Over Financial Reporting We have audited Northern Trust Corporation and subsidiaries’ (the Corporation) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Corporation as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 28, 2022 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Chicago, Illinois February 28, 2022 168 2021 Annual Report | Northern Trust Corporation ITEM 9B – OTHER INFORMATION Not applicable. ITEM 9C – DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. PART III ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information called for by this item is incorporated by reference to “Supplemental Item – Information About Our Executive Officers” in Part I of this Annual Report on Form 10-K, as well as the following sections of the Corporation’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders: “Item 1 – Election of Directors,” “Information about the Nominees for Director,” “Security Ownership by Directors and Executive Officers,” “Corporate Governance – Code of Business Conduct and Ethics,” “Corporate Governance – Director Nominations and Qualifications and Proxy Access,” “Board and Board Committee Information – Audit Committee” and “Board and Board Committee Information – Board Committees.” ITEM 11 – EXECUTIVE COMPENSATION The information called for by this item is incorporated herein by reference to the “Compensation Discussion and Analysis,” “Compensation and Benefits Committee Report,” “Executive Compensation,” and “Director Compensation” sections of the Corporation’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders. ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information called for by this item is incorporated herein by reference to the “Security Ownership by Directors and Executive Officers,” “Security Ownership of Certain Beneficial Owners,” and “Equity Compensation Plan Information” sections of the Corporation’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders. ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information called for by this item is incorporated herein by reference to the “Board and Board Committee Information,” “Corporate Governance – Director Independence” and the “Corporate Governance – Related Person Transactions Policy” sections of the Corporation’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders. ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES The information called for by this item is incorporated herein by reference to the “Audit Matters” section of the Corporation’s definitive Proxy Statement for the 2022 Annual Meeting of Stockholders. 2021 Annual Report | Northern Trust Corporation 169 PART IV ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES ITEM 15(a)(1) AND (2) – NORTHERN TRUST CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following financial statements of the Corporation and its Subsidiaries included in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K are incorporated herein by reference. For Northern Trust Corporation and Subsidiaries: Consolidated Balance Sheets - December 31, 2021 and 2020 Consolidated Statements of Income - Years Ended December 31, 2021, 2020, and 2019 Consolidated Statements of Comprehensive Income - Years Ended December 31, 2021, 2020, and 2019 Consolidated Statements of Changes in Stockholders’ Equity - Years Ended December 31, 2021, 2020, and 2019 Consolidated Statements of Cash Flows - Years Ended December 31, 2021, 2020, and 2019 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (KPMG LLP, Chicago, IL, Auditor Firm ID: 185) Financial statement schedules have been omitted for the reason that they are not required or are not applicable. ITEM 15(a)(3) – EXHIBITS Exhibit Number Description 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 Restated Certificate of Incorporation of Northern Trust Corporation, as amended to date (incorporated herein by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed April 19, 2006). Certificate of Designation of Series D Non-Cumulative Perpetual Preferred Stock of Northern Trust Corporation, dated August 4, 2016 (incorporated herein by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed August 8, 2016). Certificate of Designation of Series E Non-Cumulative Perpetual Preferred Stock of Northern Trust Corporation, dated October 31, 2019 (incorporated herein by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed November 5, 2019). By-laws of Northern Trust Corporation, as amended February 19, 2019 (incorporated herein by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K filed February 19, 2019). Deposit Agreement, dated August 8, 2016, among Northern Trust Corporation, Wells Fargo Bank, N.A., as depositary (which, effective February 1, 2018, was succeeded by Equiniti Trust Company), and the holders from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.2 to the Corporation’s Current Report on Form 8-K filed August 8, 2016). Deposit Agreement, dated November 5, 2019, among Northern Trust Corporation, Equiniti Trust Company, as depositary, and the holders from time to time of the depositary receipts described therein (incorporated by reference to Exhibit 4.2 to the Corporation’s Current Report on Form 8-K filed November 5, 2019). Description of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934. Certain instruments defining the rights of the holders of long-term debt of the Corporation and certain of its subsidiaries, none of which authorize a total amount of indebtedness in excess of 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis, have not been filed as exhibits. The Corporation hereby agrees to furnish a copy of any of these agreements to the SEC upon request. 170 2021 Annual Report | Northern Trust Corporation Exhibit Number 10.1** (i)** (ii)** 10.2** 10.3** (i)** (ii)** 10.4** 10.5** 10.6** (i)** Description Deferred Compensation Plans Trust Agreement, dated May 11, 1998, between Northern Trust Corporation and Harris Trust and Savings Bank as Trustee (which, effective August 31, 1999, was succeeded by U.S. Trust Company, N.A., which effective June 1, 2009, was succeeded by Evercore Trust Company, N.A., and, which, effective October 19, 2017, was succeeded by Newport Trust Company) regarding the Supplemental Employee Stock Ownership Plan for Employees of The Northern Trust Company, the Supplemental Thrift- Incentive Plan for Employees of The Northern Trust Company, the Supplemental Pension Plan for Employees of The Northern Trust Company, and the Northern Trust Corporation Deferred Compensation Plan (incorporated herein by reference to Exhibit 10(iv) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). Amendment, dated August 31, 1999 (incorporated herein by reference to Exhibit 10(vi) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999). Second Amendment, dated as of May 16, 2000 (incorporated herein by reference to Exhibit 10(v) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). Northern Trust Corporation Supplemental Employee Stock Ownership Plan, as amended and restated effective as of January 1, 2008 (incorporated herein by reference to Exhibit 10(vi) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). Northern Trust Corporation Supplemental Thrift-Incentive Plan, as amended and restated effective as of January 1, 2008 (incorporated herein by reference to Exhibit 10(vii) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). Amendment Number One, dated October 29, 2009 and effective January 1, 2010 (incorporated herein by reference to Exhibit 10(vi)(1) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009). Amendment Number Two, dated August 6, 2015 and effective January 1, 2015 (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015). Northern Trust Corporation Supplemental Pension Plan, as amended and restated effective January 1, 2009 (incorporated herein by reference to Exhibit 10(viii) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). Northern Trust Corporation Deferred Compensation Plan, as amended and restated effective as of October 18, 2021 (incorporated herein by reference to Exhibit 10.2 to the Corporation's Quarterly Report on Form 10- Q for the quarter ended September 30, 2021). Amended and Restated Northern Trust Corporation 2002 Stock Plan, effective as of January 1, 2008 (incorporated herein by reference to Exhibit 10(xiv) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008). Form of 2012 Executive Stock Option Award Terms and Conditions (incorporated herein by reference to Exhibit 10.7(xix) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011). 10.7** Northern Trust Corporation 2012 Stock Plan (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed April 19, 2012). (i)** (ii)** (iii)** (iv)** (v)** Form of Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10(iii) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012). Form of Director Prorated Stock Agreement (incorporated herein by reference to Exhibit 10(iv) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012). Form of New Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10(v) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012). Form of 2012 Executive Stock Option Terms and Conditions (incorporated herein by reference to Exhibit 10(i) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012). Form of 2013 Executive Stock Option Terms and Conditions (incorporated herein by reference to Exhibit 10.7(xii) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012). 2021 Annual Report | Northern Trust Corporation 171 Exhibit Number (vi)** (vii)** 10.8** 10.9** 10.10** 10.11** 10.12** 10.13** 10.14** 10.15** (i)** (ii)** (iii)** (iv)** (v)** (vi)** (vii)** (viii)** (ix)** 10.16** Description Form of 2014 Executive Stock Option Terms and Conditions (incorporated herein by reference to Exhibit 10.7(xi) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013). Form of 2017 Stock Option Award Terms and Conditions, as amended (incorporated herein by reference to Exhibit 10.7(x) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017). Northern Trust Corporation Management Performance Plan, as amended and restated effective October 16, 2012 (incorporated herein by reference to Exhibit 10(viii) to the Corporation’s Quarterly Report on Form 10- Q for the quarter ended September 30, 2012). Northern Trust Corporation 1997 Stock Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10(xix) to the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998). Northern Trust Corporation 1997 Deferred Compensation Plan for Non-Employee Directors, as amended and restated effective as of July 15, 2014 (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014). Northern Trust Corporation 2018 Deferred Compensation Plan for Non-Employee Directors (incorporated herein by reference to Exhibit 10.11 to the Corporation's Annual Report on Form 10-K for the year ended December 31, 2017). Northern Trust Corporation Key Officer Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K filed April 28, 2017). Northern Trust Corporation Executive Change in Control Severance Plan (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed April 28, 2017). Form of Non-Solicitation Agreement and Confidentiality Agreement (incorporated herein by reference to Exhibit 10(iii) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009). Northern Trust Corporation 2017 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K filed April 26, 2017). Form of Director Stock Unit Agreement (incorporated herein by reference to Exhibit 10.10 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). Form of Director Stock Unit Agreement (prorated) (incorporated herein by reference to Exhibit 10.11 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017). Form of 2019 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019). Form of 2020 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020). Form of 2021 Performance Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). Form of 2018 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.4 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018). Form of 2019 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.2 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019). Form of 2020 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.2 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020). Form of 2021 Stock Unit Award Terms and Conditions (incorporated herein by reference to Exhibit 10.2 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021). Northern Trust Corporation Wealth Planning and Tax Preparation Services Plan, as amended and restated effective January 1, 2021 (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021). 10.17** Northern Trust Corporation Non-Employee Director Compensation Plan, as amended. 10.18** Northern Partners Incentive Plan, as amended and restated on February 22, 2022. 172 2021 Annual Report | Northern Trust Corporation Exhibit Number 10.19** 10.20** (i)** (ii)** (iii)** 21 23 31.1 31.2 32 101 Description Letter Agreement with Frederick H. Waddell, dated January 23, 2019 (incorporated herein by reference to Exhibit 10.26 to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2018). The Northern Trust Company Death Benefit Plan (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019). Amendment Number One to The Northern Trust Company Death Benefit Plan, dated July 11, 2019 and effective May 17, 2019 (incorporated herein by reference to Exhibit 10.20(i) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020). Amendment Number Two to The Northern Trust Company Death Benefit Plan, dated July 29, 2019 and effective May 17, 2019 (incorporated herein by reference to Exhibit 10.20(ii) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020). Amendment Number Three to The Northern Trust Company Death Benefit Plan, dated March 18, 2020 and effective May 17, 2019 (incorporated herein by reference to Exhibit 10.20(iii) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020). Subsidiaries of the Registrant. Consent of Independent Registered Public Accounting Firm. Rule 13a-14(a)/15d-14(a) Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Rule 13a-14(a)/15d-14(a) Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Includes the following financial and related information from the Corporation’s Annual Report on Form 10- K for the fiscal year ended December 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements. 104 The cover page from this Annual Report on Form 10-K, formatted in Inline XBRL. ** Indicates a management contract or a compensatory plan or agreement. ITEM 16 – FORM 10-K SUMMARY None. 2021 Annual Report | Northern Trust Corporation 173 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 28, 2022 Northern Trust Corporation (Registrant) By: /s/ Michael G. O’Grady Michael G. O’Grady Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. 174 2021 Annual Report | Northern Trust Corporation Signature Capacity /s/ Michael G. O'Grady Michael G. O’Grady /s/ Jason J. Tyler Jason J. Tyler /s/ Lauren Allnutt Lauren Allnutt /s/ Linda Walker Bynoe Linda Walker Bynoe /s/ Susan Crown Susan Crown /s/ Dean M. Harrison Dean M. Harrison /s/ Jay L. Henderson Jay L. Henderson /s/ Marcy S. Klevorn Marcy S. Klevorn /s/ Siddharth N. (Bobby) Mehta Siddharth N. (Bobby) Mehta /s/ Jose Luis Prado Jose Luis Prado /s/ Martin P. Slark Martin P. Slark /s/ David H.B. Smith, Jr. David H.B. Smith, Jr. /s/ Donald Thompson Donald Thompson /s/ Charles A. Tribbett, III Charles A. Tribbett, III Chairman and Chief Executive Officer (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer) Executive Vice President and Controller (Principal Accounting Officer) Director Director Director Director Director Director Director Director Director Director Director Date: February 28, 2022 2021 Annual Report | Northern Trust Corporation 175 Exhibit 31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael G. O’Grady, certify that: I have reviewed this report on Form 10-K for the year ended December 31, 2021 of Northern Trust Corporation; 1. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 4. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the 5. registrant’s internal control over financial reporting. Date: February 28, 2022 /s/ Michael G. O’Grady Michael G. O’Grady Chief Executive Officer (Principal Executive Officer) Exhibit 31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Jason J. Tyler, certify that: I have reviewed this report on Form 10-K for the year ended December 31, 2021 of Northern Trust Corporation; 1. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 4. 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the 5. registrant’s internal control over financial reporting. Date: February 28, 2022 /s/ Jason J. Tyler Jason J. Tyler Chief Financial Officer (Principal Financial Officer) Exhibit 32 Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Annual Report of Northern Trust Corporation (the “Corporation”) on Form 10-K for the period ended December 31, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Michael G. O’Grady, as Chief Executive Officer of the Corporation, and Jason J. Tyler, as Chief Financial Officer of the Corporation, each hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Michael G. O’Grady Michael G. O’Grady Chief Executive Officer (Principal Executive Officer) February 28, 2022 /s/ Jason J. Tyler Jason J. Tyler Chief Financial Officer (Principal Financial Officer) February 28, 2022 This certification accompanies the Report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by Northern Trust Corporation for purposes of section 18 of the Securities Exchange Act of 1934.  BOARD OF DIRECTORS Michael G. O’Grady Chairman and Chief Executive Officer Northern Trust Corporation Linda Walker Bynoe President and Chief Executive Officer Telemat Limited LLC Project management and consulting firm Susan Crown Jose Luis Prado Chairman of the Board Tropicale Foods Group Manufacturer of frozen foods Executive Chairman Palmex Alimentos Manufacturer of snack product ingredients Martin P. Slark Retired Chief Executive Officer Chairman and Chief Executive Officer Molex LLC Owl Creek Partners, LLC Private equity firm Chairman and Founder Susan Crown Exchange Inc. Social investment organization Dean M. Harrison President and Chief Executive Officer Northwestern Memorial HealthCare Manufacturer of electronic, electrical, and fiber optic interconnection products and systems David H. B. Smith Jr. Executive Vice President, Policy & Legal Affairs and General Counsel Mutual Fund Directors Forum Nonprofit membership organization for investment company directors Primary teaching affiliate of Northwestern University Feinberg School of Medicine and parent corporation of Donald Thompson Northwestern Memorial Hospital Founder and Chief Executive Officer Cleveland Avenue, LLC Jay L. Henderson Food and beverage accelerator and investment company Retired Vice Chairman, Client Service Retired President and Chief Executive Officer PricewaterhouseCoopers LLP Professional services firm McDonald’s Corporation Global foodservice retailer Marcy S. Klevorn Charles A. Tribbett III Retired Executive Vice President and President, Vice Chairman Mobility Ford Motor Company Global automaker Siddharth N. (Bobby) Mehta Russell Reynolds Associates Global executive recruiting firm Advisory Director Retired President and Chief Executive Officer Lord Charles D. Powell of Bayswater KCMG TransUnion Former private secretary and advisor on foreign affairs Global risk and information solutions provider and defense to Prime Ministers Margaret Thatcher and John Major  MANAGEMENT GROUP Michael G. O’Grady Chairman and Chief Executive Officer Peter B. Cherecwich President – Corporate & Institutional Services Steven L. Fradkin President – Wealth Management Mark C. Gossett Executive Vice President Chief Risk Officer Susan C. Levy Executive Vice President General Counsel Teresa A. Parker Executive Vice President President – Europe, Middle East and Africa Thomas A. South Executive Vice President Chief Information Officer Joyce M. St. Clair Executive Vice President Chief Human Resources Officer Shundrawn A. Thomas President – Asset Management Jason J. Tyler Executive Vice President Chief Financial Officer  CORPORATE INFORMATION ANNUAL MEETING The 2022 Annual Meeting of Stockholders will be held on Tuesday, April 26, 2022, at 10:30 A.M. (Central Time). If you plan to attend the Annual Meeting, please review the information regarding attendance contained in the proxy statement relating to the Annual Meeting. STOCK LISTING The common stock of Northern Trust Corporation is traded on the NASDAQ Global Select Market under the symbol “NTRS”. STOCK TRANSFER AGENT, REGISTRAR, AND DIVIDEND DISBURSING AGENT EQ Shareowner Services 1110 Centre Pointe Curve, Suite 101 Mendota Heights, MN 55120 General Phone Number: 1-800-468-9716 Internet Site: shareowneronline.com AVAILABLE INFORMATION Through our website at northerntrust.com, we make available free of charge our Annual Report on Form 10- K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all other reports and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we file such material with, or furnish such material to, the SEC. The contents of our website, the website of the SEC or any other website referenced herein are not a part of this document. INVESTOR RELATIONS Please direct Investor Relations inquiries to: Mark M. Bette, Senior Vice President, at 312-444-2301 or mark_bette@ntrs.com; or Briar Rose, Vice President, at 312-557-5297 or br103@ntrs.com. NORTHERNTRUST.COM Information about the Corporation, including financial performance and products and services, is available on Northern Trust’s website at northerntrust.com. 

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