During the first quarter of 2020, the Corporation implemented a change in the classification of certain loans and leases to specific segments to enhance the consistency of its reporting across various regulatory regimes. The allowance for credit losses as of and prior to December 31, 2019 remains unadjusted, as the impact of the reclassification on the allowance was immaterial.

An opening balance sheet adjustment related to the adoption of ASU 2016-13 resulted in an increase to the allowance for credit losses of $13.7 million, with a corresponding adjustment to decrease retained earnings by $10.1 million, net of tax.

Allowance and Provision for Credit Losses. The allowance for credit losses — which represents management’s estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance-sheet credit exposure, and specific borrower relationships — is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. 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.



	THREE MONTHS ENDED MARCH 31,
	2020
(In Millions)	LOANS AND LEASES			UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT		DEBT SECURITIES HELD TO MATURITY		OTHER FINANCIAL ASSETS		TOTAL
Balance at End of Prior Period	$	104.5		$	19.9	$	—	$	—	$	124.4
Cumulative Effect Adjustment	(2.2		)	8.9		6.6		0.4		13.7
Balance at Beginning of Period	102.3			28.8		6.6		0.4		138.1
Charge-Offs	(1.8		)	—		—		—		(1.8		)
Recoveries	1.1			—		—		—		1.1
Net (Charge-Offs) Recoveries	(0.7		)	—		—		—		(0.7		)
Provision for Credit Losses⁽¹⁾	45.6			11.6		2.9		0.7		60.8
Balance at End of Period	$	147.2		$	40.4	$	9.5	$	1.1	$	198.2



	THREE MONTHS ENDED MARCH 31,
	2019
(In Millions)	LOANS AND LEASES			UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT			DEBT SECURITIES HELD TO MATURITY		OTHER FINANCIAL ASSETS		TOTAL
Balance at Beginning of Period	$	112.6		$	25.6		$	—	$	—	$	138.2
Charge-Offs	(1.0		)	—			—		—		(1.0		)
Recoveries	2.2			—			—		—		2.2
Net (Charge-Offs) Recoveries	1.2			—			—		—		1.2
Provision for Credit Losses	0.7			(0.7		)	—		—		—
Balance at End of Period	$	114.5		$	24.9		$	—	$	—	$	139.4

For credit exposure and the associated allowance related to fee receivables, please refer to Note 14 — Revenue from Contracts with Clients. For information related to the allowance for available for sale debt securities, please refer to Note 4 — Securities. For all other financial assets recognized at amortized cost, which include Cash and Due from Banks, Other Central Bank Deposits, Interest Bearing Deposits with Banks, Federal Funds Sold, and Other Assets, please refer to the Allowance for Other Financial Assets section within this footnote.

The provision for credit losses is the charge to current period earnings that is determined by management, through a disciplined credit review process, to be the amount needed to maintain the allowance for credit losses 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.

There was a $61.0 million provision for credit losses in the current quarter, as compared to no provision in the prior-year quarter. The provision for credit losses, excluding available for sale securities, was a provision of $60.8 million. There were net charge-offs of $0.7 million during the three months ended March 31, 2020, as compared to net recoveries of $1.2 million for the three months ended March 31, 2019. The provision in the current quarter was primarily due to an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increase in the commercial and institutional and commercial real estate portfolios.

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.

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. 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 portfolio 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.

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 during the three months ended March 31, 2020 and 2019.



	THREE MONTHS ENDED MARCH 31,
	2020
	LOANS AND LEASES									UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
(In Millions)	COMMERCIAL			PERSONAL			TOTAL			COMMERCIAL		PERSONAL			TOTAL
Balance at End of Prior Period	$	58.1		$	46.4		$	104.5		$	15.8	$	4.1		$	19.9
Cumulative Effect Adjustment	(5.9		)	3.7			(2.2		)	11.9		(3.0		)	8.9
Balance at Beginning of Period	52.2			50.1			102.3			27.7		1.1			28.8
Charge-Offs	(0.1		)	(1.7		)	(1.8		)	—		—			—
Recoveries	0.7			0.4			1.1			—		—			—
Net (Charge-Offs) Recoveries	0.6			(1.3		)	(0.7		)	—		—			—
Provision for Credit Losses	41.9			3.7			45.6			11.1		0.5			11.6
Balance at End of Period	$	94.7		$	52.5		$	147.2		$	38.8	$	1.6		$	40.4



	THREE MONTHS ENDED MARCH 31,
	2019
	LOANS AND LEASES									UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
(In Millions)	COMMERCIAL			PERSONAL			TOTAL			COMMERCIAL			PERSONAL			TOTAL
Balance at Beginning of Period	$	57.6		$	55.0		$	112.6		$	21.1		$	4.5		$	25.6
Charge-Offs	(0.1		)	(0.9		)	(1.0		)	—			—			—
Recoveries	0.4			1.8			2.2			—			—			—
Net (Charge-Offs) Recoveries	0.3			0.9			1.2			—			—			—
Provision for Credit Losses	0.2			0.5			0.7			(0.6		)	(0.1		)	(0.7		)
Balance at End of Period	$	58.1		$	56.4		$	114.5		$	20.5		$	4.4		$	24.9

The portion of the allowance attributable to loans and leases increased from $102.3 million at January 1, 2020 to $147.2 million at March 31, 2020. The portion of the allowance attributable to undrawn loan commitments and standby letters of credit increased from $28.8 million at January 1, 2020 to $40.4 million at March 31, 2020. The increase to the allowance for both loans and leases and undrawn loan commitments and standby letters of credit was primarily due to an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increase in the commercial and institutional and commercial real estate portfolios.

Allowance Related to Credit Exposure Evaluated on a Collective Level. 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 of Northern Trust’s loan and lease portfolio and undrawn loan commitments and standby letters of credit is mostly based on internally developed loss data specific to the Northern Trust loan and lease portfolio. The estimation methodology and the related qualitative adjustment framework segregate the loan and lease portfolio into homogenous 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 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 an adjustment to the quantitative allowance for each segment of the loan portfolio.

Allowance Related to Credit Exposure Evaluated on an Individual Level. The allowance is determined through an individual evaluation of loans, leases, and lending-related commitments considered impaired 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 impaired 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.

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 March 31, 2020 and December 31, 2019.



	MARCH 31, 2020						DECEMBER 31, 2019
(In Millions)	COMMERCIAL		PERSONAL		TOTAL		COMMERCIAL		PERSONAL		TOTAL
Loans and Leases
Evaluated on an Individual Level	$	35.6	$	68.3	$	103.9	$	10.4	$	81.8	$	92.2
Evaluated on a Collective Level	19,701.2		18,032.6		37,733.8		13,990.9		17,326.5		31,317.4
Total Loans and Leases	19,736.8		18,100.9		37,837.7		14,001.3		17,408.3		31,409.6
Allowance for Credit Losses on Credit Exposures
Evaluated on an Individual Level	5.3		0.4		5.7		3.4		1.6		5.0
Evaluated on a Collective Level	89.4		52.1		141.5		54.7		44.8		99.5
Allowance Assigned to Loans and Leases	94.7		52.5		147.2		58.1		46.4		104.5
Allowance for Undrawn Loan Commitments and Standby Letters of Credit
Evaluated on an Individual Level	3.0		—		3.0		1.9		—		1.9
Evaluated on a Collective Level	35.8		1.6		37.4		13.9		4.1		18.0
Allowance Assigned to Undrawn Loan Commitments and Standby Letters of Credit	38.8		1.6		40.4		15.8		4.1		19.9
Total Allowance Assigned to Loans and Leases and Undrawn Loan Commitments and Standby Letters of Credit	$	133.5	$	54.1	$	187.6	$	73.9	$	50.5	$	124.4

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. 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.

The portion of the allowance assigned to loans and leases is reported as a contra asset, directly following Loans and Leases 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.

Allowance for Debt Securities Held to Maturity Securities Portfolio. The following table provides information regarding changes in the total allowance for credit losses for debt securities held to maturity during the three months ended March 31, 2020.



	THREE MONTHS ENDED MARCH 31,
	2020
(In Millions)	CORPORATE DEBT		NON-U.S. GOVERNMENT		SUB-SOVEREIGN, SUPERNATIONAL, AND NON-U.S. AGENCY BONDS		CERTIFICATE OF DEPOSITS		COVERED BONDS		OTHER		TOTAL
Balance at End of Prior Period	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Cumulative Effect Adjustment	0.8		0.3		0.9		—		—		4.6		6.6
Balance at Beginning of Period	0.8		0.3		0.9		—		—		4.6		6.6
Charge-Offs	—		—		—		—		—		—		—
Recoveries	—		—		—		—		—		—		—
Net (Charge-Offs) Recoveries	—		—		—		—		—		—		—
Provision for Credit Losses	1.9		0.1		0.4		0.2		0.1		0.2		2.9
Balance at End of Period	$	2.7	$	0.4	$	1.3	$	0.2	$	0.1	$	4.8	$	9.5

Prior to the adoption of ASU 2016-13, 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 debt securities held to maturity 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.

The portion of the allowance attributable to debt securities held to maturity was $9.5 million at March 31, 2020 as compared to $6.6 million as of January 1, 2020. The increase to the allowance was primarily due to an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions resulting from the ongoing COVID-19 pandemic and related market and economic impacts.

The allowance estimation methodology for all other debt securities held to maturity 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 Other Financial Assets. The allowance for Other Financial Assets consists of the allowance for Cash and 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 Debt Securities

Held to Maturity 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 are expected to exhibit minimal to modest likelihood of loss. The allowance for credit losses related to Other Financial Assets was $1.1 million for the three months ended March 31, 2020. The allowance is reported as a contra asset in Allowance for Credit Losses on the consolidated balance sheets.