NORTHERN TRUST CORP (NTRS) FY 2022 MD&A

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, 2022. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”

BUSINESS OVERVIEW

The Corporation is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Asset Servicing and Wealth Management. During the first quarter of 2022, the Corporation changed the name of its Corporate & Institutional Services segment to “Asset Servicing.” Asset management and related services are provided to Asset Servicing and Wealth Management clients primarily by the Asset Management business.

The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (the Bank). The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 25 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.

FINANCIAL OVERVIEW

TABLE 4: FINANCIAL HIGHLIGHTS

Net Income decreased $209.3 million, or 14%, to $1.34 billion in 2022 from $1.55 billion in 2021. Earnings per diluted common share was $6.14 in 2022 compared to $7.14 in 2021. Return on average common equity decreased to 12.7% in 2022 from 13.9% in 2021. Included in Net Income were impacts from the changes in monetary policy implemented by the Federal Reserve Board to address inflation, which positively impacted Net Interest Income while dampening equity market

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

indices, adversely impacting fees earned based on market values. Trust, Investment and Other Servicing Fees increased 2% in 2022, as compared to a 9% increase in 2021. The impacts of tightening in the labor market is reflected in our Compensation expense. Inflationary pressures were also reflected in higher Equipment and Software and Outside Services expense. Results in 2022 also included $213.0 million of pre-tax losses recognized in conjunction with an intent to sell certain available for sale debt securities, $44.1 million of pre-tax pension settlement charges, $32.0 million of pre-tax severance-related charges, and $14.0 million of pre-tax occupancy charges related to early lease exits.

Revenue increased $296.7 million to $6.76 billion in 2022 from $6.46 billion in the prior year, primarily driven by increases in Net Interest Income of 36% and Trust, Investment and Other Servicing Fees of 2%, partially offset by increased investment securities losses and a decrease in Other Operating Income of 22%. Beginning in 2022, Trust, Investment and Other Servicing Fees were impacted by the change in classification of certain fees that were previously recorded in Other Operating Income or as a reduction of Other Operating Expense. This change resulted in no impact to Net Income. The accounting reclassification increased Trust, Investment and Other Servicing Fees in the current year by $65.6 million, with a $25.6 million decrease in Other Operating Income and a $40.0 million increase in Other Operating Expense. The classification changes are considered by the Corporation’s management to be a better representation of the underlying nature of the business as they are directly tied to client asset levels and the related services are more akin to our core service offerings. Prior-year amounts have not been reclassified.

Client AUC/A decreased 16% from $16.25 trillion as of December 31, 2021 to $13.60 trillion as of December 31, 2022, primarily reflecting unfavorable markets and unfavorable currency translation. Client assets under custody, a component of AUC/A, decreased 16% from $12.61 trillion as of December 31, 2021 to $10.60 trillion as of December 31, 2022. Client assets under custody included $6.91 trillion of global custody assets as of December 31, 2022, which decreased 16% from $8.24 trillion as of December 31, 2021. Client assets under management decreased 22% to $1.25 trillion as of December 31, 2022 from $1.61 trillion as of December 31, 2021 due to net outflows, unfavorable markets and unfavorable currency translation.

The Provision for Credit Losses in 2022 was $12.0 million as compared to a release of credit reserves of $81.5 million in 2021. The provision during 2022 was primarily due to an increase in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The increase was driven by weaker macroeconomic conditions and portfolio growth, partially offset by improvements in credit quality. The increase in the collective basis reserve was primarily reflected in the commercial real estate and commercial and institutional portfolios. The prior-year release of credit reserves primarily reflected a decrease in the reserve evaluated on a collective basis, driven by improvements in projected economic conditions at the time 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.

Noninterest Expense of $4.98 billion in 2022 increased $447.0 million, or 10%, from $4.54 billion in 2021, primarily reflecting increased Compensation, Equipment and Software, Other Operating Expense and Outside Services.

The Provision for Income Taxes in 2022 totaled $430.3 million, representing an effective tax rate of 24.4%. The Provision for Income Taxes in 2021 totaled $464.8 million, representing an effective tax rate of 23.1%. The increase in the effective tax rate was primarily driven by a higher net impact from international operations, including limitations on the U.S. foreign tax credit and reserves for uncertain tax positions, partially offset by increased tax benefits from tax-credit investments and tax-exempt income.

Northern Trust continued to maintain a strong capital position during 2022, 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 2022 compared to 2021. For a discussion related to the consolidated results of operations for 2021 compared to 2020, 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, 2021 (2021 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 28, 2022.

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 2022 of $6.76 billion increased $296.7 million, or 5%, from $6.46 billion in 2021. Noninterest Income represented 72% and 79% of total revenue in 2022 and 2021, respectively, and totaled $4.87 billion in 2022, which decreased $207.8 million, or 4%, from $5.08 billion in 2021.

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

Noninterest Income in 2022 decreased primarily due to increased investment securities losses and lower Other Operating Income, partially offset by higher Trust, Investment and Other Servicing Fees. Investment Security Gains (Losses), net of $214.0 million of losses in 2022 increased $213.7 million from $0.3 million of losses in 2021 primarily due to a $213 million loss arising from an intent to sell certain available for sale debt securities, which were sold in January 2023. Other Operating Income of $191.3 million in 2022 decreased $52.6 million, or 22%, from $243.9 million in the prior year, primarily due to lower miscellaneous income, the accounting reclassification, and gains from property sales in the prior-year, partially offset by increased income related to a bank-owned life insurance program. Trust, Investment and Other Servicing Fees of $4.43 billion in 2022 increased $71.5 million, or 2%, from $4.36 billion in 2021, primarily due to lower money market fee waivers, the accounting reclassification and new business, partially offset by unfavorable markets and unfavorable currency translation.

Net Interest Income on a fully taxable equivalent (FTE) basis in 2022 of $1.93 billion increased $514.5 million, or 36%, from $1.42 billion in 2021, due to higher average interest rates and favorable balance sheet mix shift. The net interest margin on an FTE basis increased to 1.39% in 2022 from 0.99% in 2021, primarily due to higher average interest rates and favorable balance sheet mix shift. Average earning assets decreased $5.0 billion, or 3%, from $143.9 billion in 2021 to $138.8 billion in 2022, primarily reflecting lower levels of Securities and short-term interest bearing deposits, partially offset by higher levels of Loans.

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

TABLE 5: REVENUE

(1) Net Interest Income stated on a GAAP basis. Net Interest Income on an FTE basis includes FTE adjustments of $45.6 million, $35.6 million, and $34.4 million for 2022, 2021, and 2020, 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 $4.43 billion in 2022 compared with $4.36 billion in 2021, and are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears.

Northern Trust voluntarily waived $64.2 million of money market fund fees in 2022 and $287.8 million of money market fund fees in 2021.

Beginning in 2022, Trust, Investment and Other Servicing Fees were impacted by the change in classification of certain fees that were previously recorded in Other Operating Income or as a reduction of Other Operating Expense. The accounting reclassification increased Trust, Investment and Other Servicing Fees in the current year by $65.6 million, with a $25.6 million decrease in Other Operating Income and a $40.0 million increase in Other Operating Expense. Prior-year amounts have not been reclassified.

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

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

TABLE 6: TRUST, INVESTMENT AND OTHER SERVICING FEES

Asset Servicing

Asset Servicing Trust, Investment and Other Servicing Fees are primarily attributable to services related to custody, fund administration, investment management, and securities lending. Custody and Fund Administration fees, the largest component of Asset Servicing fees, are driven primarily by values of client AUC/A, transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment Management fees are based generally on market values of client 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 fee category in Asset Servicing includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.

Custody and Fund Administration fees decreased in 2022 from 2021 primarily due to unfavorable currency translation and unfavorable markets. Investment Management fees in 2022 increased from 2021 primarily due to lower money market fund fee waivers, partially offset by asset outflows, unfavorable currency translation and unfavorable markets. Other Trust, Investment and Other Servicing Fees increased in 2022 from 2021 primarily due to the accounting reclassification.

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

TABLE 7: ASSET SERVICING ASSETS UNDER CUSTODY

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

TABLE 8: ASSET SERVICING ASSETS UNDER MANAGEMENT

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 $148.3 billion and $195.6 billion at December 31, 2022 and 2021, 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) decreased in 2022 from 2021 primarily due to unfavorable markets, partially offset by lower money market fund fee waivers. Global Family Office fee income increased primarily due to lower money market fund fee waivers 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

TABLE 10: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT

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.

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

TABLE 11: EQUITY MARKET INDICES

TABLE 12: FIXED INCOME MARKET INDICES

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, 2022, AUC/A decreased from December 31, 2021, primarily reflecting unfavorable markets and unfavorable currency translation. Assets under custody, a component of AUC/A, at December 31, 2022, decreased from December 31, 2021 and included $6.91 trillion of global custody assets compared to $8.24 trillion at December 31, 2021.

The following table presents AUC/A by reporting segment.

TABLE 13: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT

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

TABLE 14: ASSETS UNDER CUSTODY BY REPORTING SEGMENT

Consolidated assets under custody decreased from the prior year, primarily reflecting unfavorable markets and unfavorable currency translation.

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

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

TABLE 15: ALLOCATION OF ASSETS UNDER CUSTODY

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

TABLE 16: ASSETS UNDER CUSTODY BY INVESTMENT TYPE

The following table presents Northern Trust’s assets under management by reporting segment.

TABLE 17: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT

Assets under management at the end of 2022 decreased from 2021. The decrease primarily reflected net outflows, unfavorable markets and unfavorable currency translation.

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

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

TABLE 19: ASSETS UNDER MANAGEMENT BY MANAGEMENT STYLE

Other Noninterest Income

The components of Other Noninterest Income, and a discussion of significant changes during 2022 and 2021, are provided below.

TABLE 20: OTHER NONINTEREST INCOME

Beginning in 2022, Other Operating Income was impacted by the change in classification of certain fees to Trust, Investment and Other Servicing Fees. The impact to Other Operating Income in the current year was a decrease of $25.6 million relating to amounts now recorded in Trust, Investment and Other Servicing Fees. Prior-year amounts have not been reclassified.

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 2022 decreased from 2021, primarily driven by lower foreign exchange swap activity in Treasury, partially offset by higher client volumes.

Treasury Management Fees

Treasury Management Fees, generated from cash and treasury management products and services provided to clients, in 2022 decreased from 2021, primarily due to an increase in the earnings credit rate applied to client balances.

Security Commissions and Trading Income

Security Commissions and Trading Income, generated primarily from securities brokerage services provided by Northern Trust Securities, Inc., in 2022 decreased from 2021, primarily driven by lower interest rate swap activity and lower bond underwriting referral fees, partially offset by higher revenue from core brokerage.

Other Operating Income

Other Operating Income in 2022 decreased from 2021 primarily due to lower miscellaneous income, the accounting reclassification, and gains from property sales in the prior-year, partially offset by increased income related to a bank-owned life insurance program.

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

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

Investment Security Gains (Losses), Net

Investment Security Gains (Losses), net included a $213.0 million loss arising from an intent to sell $2.1 billion of available for sale debt securities, which were sold in January 2023 as part of a balance sheet repositioning.

Please refer to Note 34, “Subsequent Event” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to the January 2023 sale of the available for sale debt securities.

Net Interest Income

Net Interest Income is defined as the total of Interest Income and amortized fees on earning assets, less Interest Expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Earning assets — including Federal Funds Sold, Securities Purchased under Agreements to Resell, Interest-Bearing Due from and Deposits with Banks, Federal Reserve and Other Central Bank Deposits, Securities, Loans and Leases, and Other Interest-Earning Assets — are financed by a large base of interest-bearing 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.

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)

(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 18%, 19%, and 20% as of December 31, 2022, 2021 and 2020, respectively. On the basis of averages, the percentage of total liabilities attributable to foreign activities was 55%, 58%, and 56% as of December 31, 2022, 2021 and 2020, respectively. For additional information, refer to the Geographic Area Information section of Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”

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

(3) Includes the impact of balance sheet netting under master netting arrangements of approximately $3.6 billion in 2022. Excluding the impact of netting, the average interest rate on Securities Purchased under Agreements to Resell would be approximately 2.23% in 2022. Excluding the impact of netting, the average interest rate on Securities Sold under Agreements to Repurchase would be approximately 2.27% in 2022. Beginning in the third quarter of 2021, Northern Trust became an approved Government Securities Division (GSD) netting and sponsoring member in the Fixed Income Clearing Corporation (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 nets securities sold under repurchase agreements against those purchased under resale agreements when FICC is the counterparty.

(4) Average balances include nonaccrual loans and leases.

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

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

(7) 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.

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

Notes:    Net Interest Income (FTE), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans, securities and other interest-earning assets. The adjustments are based on a federal income tax rate of 21.0%, where the rate is adjusted for applicable state income taxes, net of related federal tax benefit. Total taxable equivalent interest adjustments amounted to $45.6 million in 2022, $35.6 million in 2021 and $34.4 million in 2020. 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 2022 increased from 2021. Net Interest Income, stated on an FTE basis, increased from 2021, due to a higher net interest margin, partially offset by lower levels of average earning assets. Average earning assets in 2022 decreased from 2021, primarily reflecting lower levels of Securities and short-term interest bearing deposits, partially offset by higher levels of Loans. Funding of the balance sheet reflected lower levels of client deposits, partially offset by higher short-term borrowing activity.

The net interest margin in 2022 increased from 2021. The net interest margin on an FTE basis in 2022 increased from 2021, primarily due to higher average interest rates and favorable balance sheet mix shift.

Federal Reserve and Other Central Bank Deposits averaged $36.2 billion in 2022, which decreased $2.8 billion, or 7%, from $39.0 billion in 2021, due to deposit outflows. Average Securities were $55.0 billion and decreased $4.6 billion, or 8%, from $59.6 billion in 2021. Average Other Interest-Earning Assets include certain community development investments, Federal Home Loan Bank stock, Federal Reserve stock, and collateral deposits with certain securities depositories and clearing houses, of $936.2 million, $149.3 million, $70.0 million, and $44.6 million respectively, which are recorded in Other Assets on the consolidated balance sheets. Average taxable Securities were $52.4 billion in 2022 and

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

$56.6 billion in 2021. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $2.6 billion in 2022 and $3.0 billion in 2021. Interest-Bearing Due From and Deposits with Banks averaged $4.2 billion in 2022 and $5.8 billion in 2021.

Loans and Leases averaged $41.0 billion, which increased $3.8 billion, or 10%, from $37.2 billion in 2021, primarily reflecting higher levels of commercial and institutional, non-U.S., commercial real estate, private client and residential real estate loans. Commercial and institutional loans averaged $12.3 billion and increased $1.9 billion, or 18%, from $10.4 billion for 2021. Non-U.S. loans averaged $3.5 billion and increased $946.8 million, or 37%, from $2.5 billion for 2021. Commercial real estate loans averaged $4.4 billion and increased $455.2 million, or 11%, from $4.0 billion for 2021. Private client loans averaged $13.9 billion and increased $191.3 million, or 1%, from $13.7 billion for 2021. Residential real estate loans averaged $6.4 billion and increased $161.9 million, or 3%, from $6.2 billion for 2021.

Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits decreased $2.6 billion, or 3%, to $96.3 billion in 2022 from $98.9 billion in 2021. Average Interest-Related Funds decreased $1.1 billion, or 1%, to $107.6 billion in 2022 from $108.7 billion in 2021. 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 decreased $4.0 billion, or 11%, to $31.2 billion in 2022 from $35.2 billion in 2021, primarily resulting from lower levels of Demand and Other Noninterest-Bearing Deposits. Average Demand and Other Noninterest-Bearing Deposits decreased $1.9 billion , or 6%, to $29.3 billion in 2022 from $31.1 billion in 2021. The average rate on total source of funds was 0.70% in 2022 and 0.02% in 2021.

Interest expense for Interest-Bearing Deposits in the current year was driven by higher interest rates. Average Non-U.S. Offices Interest-Bearing Deposits comprised 68% and 70% of total average Interest-Bearing Deposits for the years ended December 31, 2022 and 2021, respectively.

Stockholders’ Equity

Stockholders’ Equity averaged $11.1 billion in 2022, compared with $11.7 billion in 2021. The decrease in average Stockholders’ Equity of $615.6 million, or 5%, was primarily attributable to lower Accumulated Other Comprehensive Income relative to the prior year, partially offset by higher Retained Earnings. During the year ended December 31, 2022, the Corporation, through common stock dividends and repurchase of 311,536 shares of common stock, returned $648.4 million in capital to common stockholders. 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.

The Corporation’s current stock repurchase authorization to repurchase up to 25.0 million shares was approved by the Board of Directors in October 2021. Shares are repurchased by the Corporation to, among other things, manage the Corporation’s capital levels. Repurchased shares are used for general purposes, including the issuance of shares under stock option and other equity incentive plans. The repurchase authorization approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to resume repurchases thereunder when circumstances warrant and applicable regulations permit. The 2021 purchases were predominantly made pursuant to the repurchase program authorized by the Board of Directors in July 2018. Please refer to Note 14, “Stockholders’ Equity,” provided in Item 8, “Financial Statements and Supplementary Data.”

Provision for Credit Losses

There was a $12.0 million Provision for Credit Losses in 2022, as compared to a release of credit reserves of $81.5 million in 2021. The provision during 2022 was primarily due to an increase in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The increase was driven by weaker macroeconomic conditions and portfolio growth, partially offset by improvements in credit quality. The increase in the collective basis reserve was primarily reflected in the commercial real estate and commercial and institutional portfolios. The prior-year release of credit reserves primarily reflected a decrease in the reserve evaluated on a collective basis, driven by improvements in projected economic conditions at the time 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.

Net recoveries in 2022 totaled $4.2 million resulting from $6.0 million of charge-offs and $10.2 million of recoveries, compared to net recoveries of $6.3 million in 2021 resulting from $0.7 million of charge-offs and $7.0 million of recoveries.

For additional discussion of the Allowance for Credit Losses, refer to the “Asset Quality” section.

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

Noninterest Expense

Beginning in 2022, Other Operating Expense was impacted by the change in classification of certain amounts previously reported as a reduction of Other Operating Expense to Trust, Investment and Other Servicing Fees. The impact to Other Operating Expense in 2022 was $40.0 million relating to amounts now recorded in Trust, Investment and Other Servicing Fees rather than as a reduction of Other Operating Expense. Prior-year amounts have not been reclassified.

Noninterest Expense for 2022 increased from 2021, primarily reflecting increased Compensation, Equipment and Software, Other Operating Expense and Outside Services. Employee Benefits expense in 2022 included pension settlement charges of $44.1 million as compared to $27.9 million for the U.S. Qualified Plan.

The components of Noninterest Expense and a discussion of significant changes during 2022 and 2021 are provided below.

TABLE 23: NONINTEREST EXPENSE

Compensation

Compensation expense, the largest component of Noninterest Expense, increased in 2022 from 2021, primarily reflecting higher salary expense and equity incentives. The current year reflects $30.4 million of severance-related charges. Staff on a full-time equivalent basis totaled approximately 23,600 at December 31, 2022, up 12% from approximately 21,100 at December 31, 2021.

Employee Benefits

Employee Benefits expense in 2022 increased from 2021, primarily due to higher medical costs and pension settlement charge, partially offset by lower ongoing pension expense associated with a plan remeasurement. There were $44.1 million and $27.9 million of pension settlement charges in 2022 and 2021, respectively.

Outside Services

Outside Services expense in 2022 increased from 2021, primarily due to higher technical services costs and consulting services, partially offset by lower third-party advisory fees.

Equipment and Software

Equipment and Software expense in 2022 increased from 2021, primarily reflecting higher software costs driven by continued technology investments as well as amortization.

Occupancy

Occupancy expense in 2022 increased from 2021, primarily due to a $14.0 million charge related to early lease exits in 2022.

Other Operating Expense

Other Operating Expense in 2022 increased from 2021 primarily due to the accounting reclassification, higher staff-related expense and business promotion, partially offset by lower supplemental compensation plan expense. Please refer to Note 20, “Other Operating Expense” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to other operating expenses.

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

Provision for Income Taxes

The 2022 Provision for Income Taxes was $430.3 million, representing an effective rate of 24.4%. This compares with a Provision for Income Taxes of $464.8 million and an effective rate of 23.1% in 2021. The increase in the effective tax rate was primarily driven by a higher net impact from international operations, including limitations on the U.S. foreign tax credit and reserves for uncertain tax positions, partially offset by increased tax benefits from tax-credit investments and tax-exempt income.

See Note 21, “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 2022 compared to 2021. For a discussion related to the consolidated results of operations by reporting segment for 2021 compared to 2020, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K, which was filed with the SEC on February 28, 2022.

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

Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Additionally, segment information is presented on 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 Asset Servicing 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.

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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

Segment results are stated on an FTE basis which has no impact on Net Income. Net Interest Income on an FTE basis includes FTE adjustments of $45.6 million, $35.6 million, and $34.4 million for 2022, 2021, and 2020, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.

Asset Servicing

Asset Servicing is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking; and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. The following table summarizes the results of operations of Asset Servicing for the years ended December 31, 2022, 2021, and 2020 on a management-reporting basis.

TABLE 25: ASSET SERVICING RESULTS OF OPERATIONS

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

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

Asset Servicing Net Income

Asset Servicing Net Income increased in 2022 compared to 2021, primarily reflecting higher Net Interest Income and Trust, Investment and Other Servicing Fees, partially offset by higher Noninterest Expense, Provision for Income Taxes, a provision for credit losses compared to a release in the prior year, and lower Other Noninterest Income.

Asset Servicing Trust, Investment and Other Servicing Fees

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

Asset Servicing Other Noninterest Income

Other Noninterest Income for 2022 decreased from 2021, primarily due to lower Other Operating Income and Treasury Management Fees, partially offset by higher Security Commissions and Trading Income.

Asset Servicing Net Interest Income

Net Interest Income on an FTE basis increased in 2022 from 2021, due to a higher net interest margin, partially offset by a decrease in average earning assets. Net interest margin on an FTE basis increased to 1.03% from 0.60%. Average earning assets of $104.8 billion, decreased $6.2 billion, or 6%, from $111.0 billion in the prior year. The earning assets in Asset Servicing consisted primarily of intercompany assets and loans. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $65.0 billion in 2022 as compared to $69.7 billion in 2021.

Asset Servicing Provision for Credit Losses

There was a Provision for Credit Losses of $2.4 million for 2022 compared to a release of credit reserves of $33.8 million for 2021. The 2022 Provision for Credit Losses was primarily due to weaker macroeconomic conditions. The release of credit reserves during 2021 reflected a decrease in the reserve evaluated on a collective basis driven by improvements in projected economic conditions at the time and portfolio credit quality.

Asset Servicing Noninterest Expense

Asset Servicing Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2022 from 2021. The increase primarily reflects higher expense allocations and Compensation expense.

Wealth Management

Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management also includes Global Family Office, which provides customized services, including but not limited to: investment consulting; global custody; fiduciary; and private banking; family office consulting, and technology solutions, to meet the complex financial and reporting needs of ultra-high-net-worth individuals and family offices across the globe. Wealth Management is one of the largest providers of advisory services in the United States with AUC/A, and assets under management of $898.5 billion, $892.3 billion, and $351.4 billion, respectively, at December 31, 2022. 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.

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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, 2022, 2021, and 2020 on a management-reporting basis.

TABLE 26: WEALTH MANAGEMENT RESULTS OF OPERATIONS

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

Wealth Management Net Income

Wealth Management Net Income decreased in 2022, primarily reflecting higher Noninterest Expense, a provision for credit losses compared to a release of credit reserves in the prior year, and lower Other Noninterest Income, partially offset by higher Net Interest Income and Trust, Investment and Other Servicing Fees.

Wealth Management Trust, Investment and Other Servicing Fees

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

Wealth Management Foreign Exchange Trading Income

Foreign Exchange Trading Income for 2022 decreased from 2021, primarily due to lower allocations.

Wealth Management Other Noninterest Income

Other Noninterest Income for 2022 decreased from 2021, primarily due to lower Other Operating Income due to prior-year gains on property sales and lower allocations.

Wealth Management Net Interest Income

Net Interest Income on an FTE basis for 2022 increased from 2021, primarily attributable to an increase in earning assets and net interest margin. Net interest margin on an FTE basis increased to 2.53% from 2.47%. Average earning assets of $34.0 billion in 2022, increased $1.2 billion, or 4%, from $32.8 billion in 2021. Earning assets and funding sources for the year ended December 31, 2022 were primarily comprised of loans and domestic interest-bearing deposits, respectively.

Wealth Management Provision for Credit Losses

There was a Provision for Credit Losses of $9.6 million for 2022 compared to a release of credit reserves of $47.7 million in 2021. The Provision for Credit Losses during 2022 was primarily due to an increase in the reserve evaluated on a collective basis, driven by weaker economic conditions and portfolio growth, partially offset by improvements in portfolio quality. The increase in the collective basis reserve was primarily reflected in the commercial and institutional and commercial real estate portfolios. The 2021 release of credit reserves reflected a decrease in the reserve evaluated on a collective basis driven by improvements in projected economic conditions at the time and portfolio credit quality, partially offset by portfolio growth.

Wealth Management Noninterest Expense

Wealth Management Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2022 from 2021. The increase primarily reflects higher expense allocations and Compensation expense.

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

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, 2022, 2021, and 2020 on a management-reporting basis.

TABLE 27: OTHER RESULTS OF OPERATIONS

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

Other—Noninterest Income

Noninterest Income in 2022 decreased from 2021 primarily due to a $213.0 million loss recognized in Investment Security Gains (Losses), net on the consolidated statements of income arising from an intent to sell available for sale debt securities, which were sold in January 2023.

Other—Noninterest Expense

Noninterest Expense in 2022 increased from 2021, primarily due to higher non-allocated occupancy expense due to early lease exits and higher pension settlement charges compared to the prior year.

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

Asset Management

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

At December 31, 2022, Northern Trust managed $1.25 trillion in assets for personal and institutional clients, including $898.1 billion for Asset Servicing clients and $351.4 billion for Wealth Management clients. The following table presents consolidated assets under management as of December 31, 2022, 2021 and 2020 by investment type.

TABLE 28: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE

Assets under management decreased at year-end 2022 from year-end 2021. The decrease primarily reflected net outflows, unfavorable markets and unfavorable currency translation. The following table presents activity in consolidated assets under management by product during the years ended December 31, 2022, 2021 and 2020.

TABLE 29: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT

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

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

(2)    Other Interest-Earning Assets includes certain community development investments, collateral deposits with certain securities depositories and clearing houses, 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

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

(2)    Other Interest-Earning Assets includes certain community development investments, collateral deposits with certain securities depositories and clearing houses, 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.

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

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

financings and recorded at the amounts at which the securities were sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. Securities Sold under Agreements to Repurchase are held by the counterparty until the repurchase. See Note 5, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” Note 25, “Commitments and Contingent Liabilities” and Note 27, “Offsetting of Assets and Liabilities” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data” for additional information on Northern Trust’s repurchase and reverse repurchase agreements.

Stockholders’ Equity. The decrease in average Stockholders’ Equity was primarily attributable to lower Accumulated Other Comprehensive Income relative to the prior year, partially offset by higher Retained Earnings.

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

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 to satisfy tax withholding obligations 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.

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, 2022.

TABLE 32: REMAINING MATURITY AND AVERAGE YIELD OF HELD TO MATURITY AND AVAILABLE FOR SALE DEBT SECURITIES

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

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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

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

As of December 31, 2021, the 1% of AFS debt securities not rated by Moody’s, S&P Global or Fitch Ratings consisted of corporate debt securities and covered bonds.

TABLE 34: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING

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

As of December 31, 2022 and December 31, 2021, 2% and 5%, 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 $3.2 billion at December 31, 2022, compared to net unrealized losses of $187.1 million as of December 31, 2021. Net unrealized losses as of December 31, 2022 were comprised of $9.1 million and $3.2 billion of gross unrealized gains and losses, respectively. 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.

As of December 31, 2022, the $26.7 billion AFS debt securities portfolio had unrealized losses of $351.6 million, $288.1 million, and $157.6 million related to government sponsored agency, other asset-backed, and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in market interest rates and credit spreads since their purchase. As of December 31, 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, 2022, the $25.0 billion HTM debt securities portfolio had an unrealized loss of $1.1 billion and $436.1 million related to government sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase. As of December 31, 2021, the $23.6 billion HTM debt securities portfolio had an unrealized loss of $106.1 million and $80.0 million related to government-sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase.

HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the year ended December 31, 2022, for capital management purposes, the Corporation transferred government sponsored agency and obligation of states and political subdivisions securities that had a fair value of $6.6 billion from the AFS to HTM classification, all of which were transferred in the third quarter of 2022. During the year ended December 31, 2021, the Corporation transferred government sponsored agency securities that had a fair value of $6.9 billion 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 Accumulated Other Comprehensive Income (Loss) (AOCI) and be amortized into Net Interest Income over the remaining life of the securities using the effective interest method. The amortization of amounts retained in AOCI will offset the effect on interest income of the amortization of the premium or discount resulting from transferring the securities at fair value.

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

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

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, 2022.

TABLE 35: REMAINING MATURITY OF LOANS AND LEASES

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

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

TABLE 36: INTEREST RATE SENSITIVITY OF LOANS AND LEASES