Risk


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 first quarter of 2021. The following should be read in conjunction with the
consolidated financial statements and related footnotes included in this report
as well as the Annual Report on Form 10-K for the year ended December 31, 2020.
Investors also should read the section entitled "Forward-Looking Statements."
FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS
General
The Corporation is a leading provider of wealth management, asset servicing,
asset management and banking solutions to corporations, institutions, families
and individuals. The Corporation focuses on managing and servicing client assets
through its two client-focused reporting segments: 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. Except where the context requires otherwise, the terms "Northern
Trust," "we," "us," "our," "its," or similar terms mean the Corporation and its
subsidiaries on a consolidated basis.
COVID-19 Pandemic and Recent Events
The COVID-19 pandemic continued to present health and economic challenges during
the first quarter of 2021. During this time, Northern Trust focused on the
health and well-being of its workforce, meeting its clients' needs and
supporting its communities.
Workforce
As governments implement plans to reopen their respective jurisdictions,
Northern Trust continues its return-to-office (RTO) planning under the oversight
of its COVID Executive Committee composed of senior leadership across various
functions. Plans for RTO have been developed on a location-by-location basis
based on business unit needs. Northern Trust continues to consider site
readiness, transportation options, technology capabilities, and workforce
alignment, and plans for the return of a small portion of each office's
population in the initial RTO phase to allow for optimal social distancing. To
ensure the health and well-being of Northern Trust's workforce, clients and
visitors, several social distancing elements and other protective measures,
distribution of personal protective equipment, and workforce health
self-certifications, have been implemented. Since the second half of 2020,
several locations returned portions of their workforce to offices.
Client Service
Northern Trust has offered assistance to its clients affected by the COVID-19
pandemic by lending under a government lending program and providing payment
deferrals. The Corporation continues to assess developments in government
actions meant to support the economy, as further discussed below.
U.S. Small Business Administration's Paycheck Protection Program
During the second quarter of 2020, Northern Trust became a lender under the
Paycheck Protection Program, as amended (PPP), which is administered by the U.S.
Small Business Administration (SBA), an agency of the U.S. Department of the
Treasury, which works with financial institutions in providing loans to small
businesses. The PPP, which is meant to aid small businesses during the COVID-19
pandemic, was created under the Coronavirus Aid, Relief, and Economic Security
(CARES) Act, which was signed into law on March 27, 2020.
As of March 31, 2021, Northern Trust had outstanding loans totaling $213.9
million under the PPP and 219 PPP loan forgiveness applications, totaling $34.2
million, went through the forgiveness process and were fully forgiven by the SBA
as of such date.
The Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the
Economic Aid Act) amended the PPP by extending the authority of the SBA to
guarantee loans and the ability of PPP lenders to disburse PPP loans until March
31, 2021. The PPP Extension Act of 2021, which was enacted on March 30, 2021,
extends the PPP application deadline to May 31, 2021 and provides the SBA
additional time to process applications through June 30, 2021. For further
information on the PPP, please refer to Note 6 - Loans and Leases to the
consolidated financial statements provided in Item 1. Consolidated Financial
Statements (unaudited).
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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
COVID-19 Pandemic and Recent Events (continued)
Troubled Debt Restructuring (TDR) Relief
Due to the economic environment arising from the COVID-19 pandemic, there have
been two forms of relief provided to lenders exempting certain loan
modifications which would otherwise be classified as TDRs from such
classification. The first of these forms of relief is provided by certain
interagency guidance from various banking regulators, including the Board of
Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit
Insurance Corporation, the National Credit Union Administration, the Office of
the Comptroller of the Currency, and the Consumer Financial Protection Bureau
(Interagency Guidance). The other is provided under section 4013 of the CARES
Act. Northern Trust has 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. For further information
on TDRs, please refer to Note 6 - Loans and Leases to the consolidated financial
statements provided in Item 1. Consolidated Financial Statements (unaudited).
Community Support
COVID-19 Relief Support
From the start of the pandemic through March 31, 2021, Northern Trust provided
$2.6 million in COVID-19 relief support to numerous organizations serving those
most affected by the pandemic. Grantees include Americares, Doctors Without
Borders, Feeding America, the Global FoodBanking Network, the Irish Red Cross,
Meals on Wheels, NHS Charities Together, the Solidarity Response Fund for the
World Health Organization, United Way Worldwide, World Food Program, and other
COVID-19 relief funds in Chicago and Illinois to benefit those in need.
Small Business Support
From the start of the pandemic through March 31, 2021, Northern Trust provided
$110.5 million in low-cost funding to assist Community Development Financial
Institutions (CDFIs), which are instrumental in providing loans to small
businesses and non-profit organizations under the PPP. The funding helps meet
urgent demand among small businesses and non-profit groups by providing flexible
terms and low rates. CDFIs provide loans, investments, financial services and
technical assistance to underserved populations and communities. This funding,
which is reported in Debt Securities Held to Maturity on the consolidated
balance sheets, is separate and distinct from the $213.9 million of outstanding
principal of loans made under the PPP.
Additional COVID-19 economic and market-related impacts to the Corporation's
financial condition and results of operations are discussed throughout this Form
10-Q.
Overview of Financial Results
Net Income per diluted common share increased in the current quarter to $1.70
from $1.55 in the first quarter of 2020. Net Income increased $14.5 million, or
4%, to $375.1 million in the current quarter from $360.6 million in the
prior-year quarter. Annualized return on average common equity was 13.7% in the
current quarter and 13.4% in the prior-year quarter. The annualized return on
average assets was 0.99% in the current quarter as compared to 1.17% in the
prior-year quarter.
Revenue slightly decreased to $1.58 billion in the current quarter from $1.59
billion in the prior-year quarter.
Trust, Investment and Other Servicing Fees increased $60.1 million, or 6%, from
$1.00 billion in the prior-year quarter to $1.06 billion in the current quarter,
primarily due to favorable markets, new business, and favorable currency
translation, partially offset by money market mutual fund fee waivers.
Other Noninterest Income increased $3.6 million, or 2%, from $176.0 million in
the prior-year quarter to $179.6 million in the current quarter, primarily
reflecting higher Other Operating Income, partially offset by lower Foreign
Exchange Trading Income and Security Commissions and Trading Income.
Net Interest Income decreased $68.0 million, or 17%, to $340.1 million in the
current quarter as compared to $408.1 million in the prior-year quarter,
primarily due to a lower net interest margin, partially offset by higher average
earning assets.
There was a $30.0 million release of credit reserves in the current quarter, as
compared to a provision of $61.0 million in the prior-year quarter. The current
quarter release of credit reserves 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 continued improvement in projected economic
conditions and portfolio credit quality relative to the prior quarter, with
decreases primarily in the commercial and institutional, commercial real estate,
and private client portfolios.
Noninterest Expense increased $51.9 million, or 5%, from $1.07 billion in the
prior-year quarter to $1.12 billion in the current quarter, primarily
attributable to higher Compensation, Equipment and Software, and Other Operating
Expense.
The Provision for Income Taxes in the current quarter totaled $120.8 million,
representing an effective tax rate of 24.4%. The Provision for Income Taxes
in the prior-year quarter totaled $100.5 million, representing an effective tax
rate of 21.8%. The effective tax rate increased compared to the prior-year
quarter primarily due to lower tax benefits related to share-based compensation.
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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Trust, Investment and Other Servicing Fees
Trust, Investment and Other Servicing Fees 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 $50.2 million
of money market mutual fund fees for the three months ended March 31, 2021
related to the low-interest-rate environment. These fee waivers, which are
impacted by the level of yields earned and account balances in certain funds,
are expected to continue in the current low-interest-rate environment as the
yields in these funds remain insufficient to pay the stated fees associated with
such funds. This is expected to adversely impact Trust, Investment and Other
Servicing Fees within the C&IS and Wealth Management reporting segments.

The components of Trust, Investment and Other Servicing Fees are provided below. TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES


                                                  THREE MONTHS ENDED MARCH

31,


($ In Millions)                                        2021             2020               CHANGE
C&IS Trust, Investment and Other Servicing Fees
Custody and Fund Administration                 $         446.0    $     394.9    $   51.1           13  %
Investment Management                                     115.9          120.8        (4.9)          (4)
Securities Lending                                         18.2           23.4        (5.2)         (22)
Other                                                      40.4           35.3         5.1           14
Total C&IS Trust, Investment and Other
Servicing Fees                                  $         620.5    $     574.4    $   46.1            8  %
Wealth Management Trust, Investment and Other
Servicing Fees
Central                                         $         164.2    $     159.4    $    4.8            3  %
East                                                      119.0          111.5         7.5            7
West                                                       90.8           87.0         3.8            4
Global Family Office                                       69.2           71.3        (2.1)          (3)
Total Wealth Management Trust, Investment and
Other Servicing Fees                            $         443.2    $     429.2    $   14.0            3  %
Total Consolidated Trust, Investment and Other
Servicing Fees                                  $       1,063.7    $   1,003.6    $   60.1            6  %


Corporate & Institutional Services
Custody and Fund Administration fees, the largest component of C&IS fees, are
driven primarily by values of client assets under custody/administration
(AUC/A), transaction volumes and the number of accounts. The asset values used
to calculate these fees vary depending on the individual fee arrangements
negotiated with each client. Custody fees related to asset values are
client-specific and are priced based on month-end market values, quarter-end
market values, or the average of month-end market values for the quarter. The
fund administration fees that are asset-value-related are priced using
month-end, quarter-end, or average daily balances. Investment Management fees
are based generally on market values of client 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.
Custody and Fund Administration fees increased from the prior-year quarter,
primarily due to new business, favorable currency translation and higher
transaction volumes. Investment Management fees decreased from the prior-year
quarter, primarily due to money market mutual fund fee waivers, partially offset
by new business and favorable markets. Securities Lending fees decreased from
the prior-year quarter, primarily due to lower spreads.
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 the prior-year quarter, due
to favorable markets, partially offset by higher money market mutual fund fee
waivers. Global Family Office fee income decreased from the prior-year quarter,
primarily due to higher money market mutual fund fee waivers, partially offset
by favorable markets.
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