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.

The Corporation adopted Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13) on January 1, 2020, which significantly changed the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. 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 best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposures, and specific borrower relationships — is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.

Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts. Northern Trust employs multiple scenarios over a reasonable and supportable period of currently two years to project future conditions. For periods beyond the reasonable and supportable period, Northern Trust reverts to its own historical loss experiences on a straight-line basis over four quarters. The primary forecast, consistent with Northern Trust’s economic outlook publications, assumes continued economic recovery from the challenges of COVID-19, with steady growth and a falling unemployment rate over the forecast horizon. An alternative scenario is also considered, which contemplates a resurgence of the virus, causing a double-dip recession.

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


	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	(9.7)		—		—		—		(9.7)
Recoveries	6.5		—		—		—		6.5
Net Recoveries (Charge-Offs)	(3.2)		—		—		—		(3.2)
Provision for Credit Losses	91.6		32.3		0.7		0.4		125.0
Balance at End of Period	$	190.7	$	61.1	$	7.3	$	0.8	$	259.9


	2019
(In Millions)	LOANS AND LEASES		UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT		TOTAL
Balance at Beginning of Period	$	112.6	$	25.6	$	138.2
Charge-Offs	(6.5)		—		(6.5)
Recoveries	7.2		—		7.2
Net Recoveries (Charge-Offs)	0.7		—		0.7
Provision for Credit Losses	(8.8)		(5.7)		(14.5)
Balance at End of Period	$	104.5	$	19.9	$	124.4


	2018
(In Millions)	LOANS AND LEASES		UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT		TOTAL
Balance at Beginning of Period	$	131.2	$	22.6	$	153.8
Charge-Offs	(10.1)		—		(10.1)
Recoveries	9.0		—		9.0
Net Recoveries (Charge-Offs)	(1.1)		—		(1.1)
Provision for Credit Losses	(17.5)		3.0		(14.5)
Balance at End of Period	$	112.6	$	25.6	$	138.2

The current-year provision primarily reflected an increase in the reserve evaluated on a collective basis. The increase in the collective basis reserve was primarily driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with increases primarily in the commercial and institutional and commercial real estate portfolios.

For credit exposure and the associated allowance related to fee receivables, please refer to Note 18, “Revenue from Contracts with Clients.” For information related to the allowance for debt securities available for sale, 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.

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.


	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	(6.3)		(3.4)		(9.7)		—		—		—
Recoveries	2.4		4.1		6.5		—		—		—
Net Recoveries (Charge-Offs)	(3.9)		0.7		(3.2)		—		—		—
Provision for Credit Losses	93.9		(2.3)		91.6		29.9		2.4		32.3
Balance at End of Period	$	142.2	$	48.5	$	190.7	$	57.6	$	3.5	$	61.1


	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	(3.0)		(3.5)		(6.5)		—		—		—
Recoveries	0.9		6.3		7.2		—		—		—
Net Recoveries (Charge-Offs)	(2.1)		2.8		0.7		—		—		—
Provision for Credit Losses	2.6		(11.4)		(8.8)		(5.3)		(0.4)		(5.7)
Balance at End of Period	$	58.1	$	46.4	$	104.5	$	15.8	$	4.1	$	19.9


	2018
	LOANS AND LEASES						UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
(In Millions)	COMMERCIAL		PERSONAL		TOTAL		COMMERCIAL		PERSONAL		TOTAL
Balance at Beginning of Period	$	63.5	$	67.7	$	131.2	$	17.3	$	5.3	$	22.6
Charge-Offs	(0.9)		(9.2)		(10.1)		—		—		—
Recoveries	1.7		7.3		9.0		—		—		—
Net Recoveries (Charge-Offs)	0.8		(1.9)		(1.1)		—		—		—
Provision for Credit Losses	(6.7)		(10.8)		(17.5)		3.8		(0.8)		3.0
Balance at End of Period	$	57.6	$	55.0	$	112.6	$	21.1	$	4.5	$	25.6

The increase to the allowance for both loans and leases and undrawn loan commitments and standby letters of credit for 2020 was primarily due to an increase in the reserve evaluated on a collective basis driven by current and projected economic conditions and downgrades in the portfolio, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts. The largest increases were in the commercial and institutional and commercial real estate portfolios for the allowance for loans and leases and the commercial and institutional portfolio for the allowance for undrawn loan commitments and standby letters of credit.

The following table provides information regarding the recorded investments in loans and leases and the allowance for credit losses for loans and leases and undrawn loan commitments and standby letters of credit by segment as of December 31, 2020 and 2019.


	DECEMBER 31, 2020						DECEMBER 31, 2019
(In Millions)	COMMERCIAL		PERSONAL		TOTAL		COMMERCIAL		PERSONAL		TOTAL
Loans and Leases
Evaluated on an Individual Basis	$	66.6	$	65.1	$	131.7	$	10.4	$	81.8	$	92.2
Evaluated on a Collective Basis	15,195.4		18,432.6		33,628.0		13,990.9		17,326.5		31,317.4
Total Loans and Leases	15,262.0		18,497.7		33,759.7		14,001.3		17,408.3		31,409.6
Allowance for Credit Losses on Credit Exposures
Evaluated on an Individual Basis	8.8		0.3		9.1		3.4		1.6		5.0
Evaluated on a Collective Basis	133.4		48.2		181.6		54.7		44.8		99.5
Allowance Assigned to Loans and Leases	142.2		48.5		190.7		58.1		46.4		104.5
Allowance for Undrawn Loan Commitments and Standby Letters of Credit
Evaluated on an Individual Basis	1.6		—		1.6		1.9		—		1.9
Evaluated on a Collective Basis	56.0		3.5		59.5		13.9		4.1		18.0
Allowance Assigned to Undrawn Loan Commitments and Standby Letters of Credit	57.6		3.5		61.1		15.8		4.1		19.9
Total Allowance Assigned to Loans and Leases and Undrawn Loan Commitments and Standby Letters of Credit	$	199.8	$	52.0	$	251.8	$	73.9	$	50.5	$	124.4

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 2020.


	2020
(In Millions)	CORPORATE DEBT		NON-U.S. GOVERNMENT		SUB-SOVEREIGN, SUPERNATIONAL, AND NON-U.S. AGENCY BONDS		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
Provision for Credit Losses	—		(0.1)		0.3		0.1		0.4		0.7
Balance at End of Period	$	0.8	$	0.2	$	1.2	$	0.1	$	5.0	$	7.3

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 allowance attributable to debt securities held to maturity for the twelve months ended December 31, 2020 was primarily due to 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.

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. Northern Trust’s portfolio is composed mostly of institutions within the “1 to 3” internal borrower rating category and expected to exhibit minimal to modest likelihood of loss. The allowance for credit losses related to Other Financial Assets was $0.8 million as of December 31, 2020.

Accrued Interest. Northern Trust elected not to measure an allowance for credit losses for accrued interest receivables related to its loan and securities portfolios as its policy is to write-off uncollectible accrued interest receivable balances in a timely manner. The following table provides the amount of accrued interest excluded from the amortized cost basis of the following portfolios.

The amount of accrued interest reversed through interest income for loans and leases was immaterial and there was no accrued interest reversed through interest income related to any other financial assets during 2020.