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. For more information on the adoption of ASU 2016-13, please refer to Note 2 — Recent Accounting Pronouncements to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited).

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 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.

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 Design Committee, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework.


	THREE MONTHS ENDED SEPTEMBER 30, 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 Beginning of Period	$	210.2	$	49.0	$	6.5	$	1.3	$	267.0
Charge-Offs	(0.8)		—		—		—		(0.8)
Recoveries	1.2		—		—		—		1.2
Net Recoveries (Charge-Offs)	0.4		—		—		—		0.4
Provision for Credit Losses	4.8		(4.1)		0.4		(0.6)		0.5
Balance at End of Period	$	215.4	$	44.9	$	6.9	$	0.7	$	267.9


	NINE MONTHS ENDED SEPTEMBER 30, 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	(3.0)		—		—		—		(3.0)
Recoveries	5.3		—		—		—		5.3
Net Recoveries (Charge-Offs)	2.3		—		—		—		2.3
Provision for Credit Losses	110.8		16.1		0.3		0.3		127.5
Balance at End of Period	$	215.4	$	44.9	$	6.9	$	0.7	$	267.9


	THREE MONTHS ENDED SEPTEMBER 30, 2019
(In Millions)	LOANS AND LEASES		UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT		TOTAL
Balance at Beginning of Period	$	110.8	$	23.3	$	134.1
Charge-Offs	(1.1)		—		(1.1)
Recoveries	1.7		—		1.7
Net Recoveries (Charge-Offs)	0.6		—		0.6
Provision for Credit Losses	(5.7)		(1.3)		(7.0)
Balance at End of Period	$	105.7	$	22.0	$	127.7


	NINE MONTHS ENDED SEPTEMBER 30, 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	(2.7)		—		(2.7)
Recoveries	5.7		—		5.7
Net Recoveries (Charge-Offs)	3.0		—		3.0
Provision for Credit Losses	(9.9)		(3.6)		(13.5)
Balance at End of Period	$	105.7	$	22.0	$	127.7

The portion of the allowance assigned to loans and leases, debt securities held to maturity, and other financial assets is presented as a contra asset in Allowance for Credit Losses on the consolidated balance sheets. The portion of the allowance assigned to undrawn loan commitments and standby letters of credit is reported in Other Liabilities on the consolidated balance sheets. 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 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.

The Provision for Credit Losses on the consolidated statements of income represents the change in the Allowance for Credit Losses and 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 $0.5 million Provision for Credit Losses in the current quarter as calculated under the Current Expected Credit Losses (CECL) methodology, as compared to a $7.0 million credit provision in the prior-year quarter calculated under the previous “incurred loss” model. There were net recoveries of $0.4 million during the three months ended September 30, 2020, as compared to net recoveries of $0.6 million for the three months ended September 30, 2019. The provision in the current quarter 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 in the collective basis reserve was driven by projected economic conditions resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with increases in the private client, commercial real estate, and residential real estate portfolios, partially offset by a decrease in the commercial and institutional portfolio. The overall increase in the reserve on a collective basis was partially offset by a decrease in the reserve associated with loans evaluated on an individual basis.

There was a $127.5 million Provision for Credit Losses for the nine months ended September 30, 2020 as calculated under the CECL methodology, as compared to a $13.5 million credit provision in the prior-year period calculated under the previous “incurred loss” model. There were net recoveries of $2.3 million during the nine months ended September 30, 2020, as compared to net recoveries of $3.0 million for the nine months ended September 30, 2019. The provision in the current period was primarily due to an increase in the reserve evaluated on a collective basis driven by downgrades in the portfolio and current and projected economic conditions, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increases 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.

Interest income that would have been recorded for nonaccrual loans and leases in accordance with their original terms was $1.8 million for the three months ended September 30, 2019 and $5.7 million for the nine months ended September 30, 2019.

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 and nine months ended September 30, 2020 and 2019.


	THREE MONTHS ENDED SEPTEMBER 30, 2020
	LOANS AND LEASES										UNDRAWN LOAN COMMITMENTS AND STANDBY LETTERS OF CREDIT
(In Millions)	COMMERCIAL		PERSONAL		TOTAL		COMMERCIAL		PERSONAL		TOTAL
Balance at Beginning of Period	$	162.8	$	47.4	$	210.2	$	46.1	$	2.9	$	49.0
Charge-Offs	—		(0.8)		(0.8)		—		—		—
Recoveries	0.2		1.0		1.2		—		—		—
Net Recoveries (Charge-Offs)	0.2		0.2		0.4		—		—		—
Provision for Credit Losses	(15.4)		20.2		4.8		(6.0)		1.9		(4.1)
Balance at End of Period	$	147.6	$	67.8	$	215.4	$	40.1	$	4.8	$	44.9


	NINE MONTHS ENDED SEPTEMBER 30, 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)		(2.9)		(3.0)		—		—		—
Recoveries	2.2		3.1		5.3		—		—		—
Net Recoveries (Charge-Offs)	2.1		0.2		2.3		—		—		—
Provision for Credit Losses	93.3		17.5		110.8		12.4		3.7		16.1
Balance at End of Period	$	147.6	$	67.8	$	215.4	$	40.1	$	4.8	$	44.9


	THREE MONTHS ENDED SEPTEMBER 30, 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	$	59.9	$	50.9	$	110.8	$	18.5	$	4.8	$	23.3
Charge-Offs	—		(1.1)		(1.1)		—		—		—
Recoveries	—		1.7		1.7		—		—		—
Net Recoveries (Charge-Offs)	—		0.6		0.6		—		—		—
Provision for Credit Losses	(1.3)		(4.4)		(5.7)		(0.7)		(0.6)		(1.3)
Balance at End of Period	$	58.6	$	47.1	$	105.7	$	17.8	$	4.2	$	22.0


	NINE MONTHS ENDED SEPTEMBER 30, 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)		(2.6)		(2.7)		—		—		—
Recoveries	0.7		5.0		5.7		—		—		—
Net Recoveries (Charge-Offs)	0.6		2.4		3.0		—		—		—
Provision for Credit Losses	0.4		(10.3)		(9.9)		(3.3)		(0.3)		(3.6)
Balance at End of Period	$	58.6	$	47.1	$	105.7	$	17.8	$	4.2	$	22.0

The increase to the allowance for loans and leases for the three months ended September 30, 2020 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 in the collective basis reserve was driven by projected economic conditions resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with increases in the private client, commercial real estate, and residential real estate portfolios, partially offset by a decrease in the commercial and institutional portfolio. The overall increase in the reserve on a collective basis was partially offset by a decrease in the reserve associated with loans evaluated on an individual basis. The decrease to the allowance for undrawn loan commitments and standby letters of credit for the three months ended September 30, 2020 was primarily due to a decrease in the reserve evaluated on a collective basis driven

The increase to the allowance for both loans and leases and undrawn loan commitments and standby letters of credit for the nine months ended September 30, 2020 was primarily due to an increase in the reserve evaluated on a collective basis driven by downgrades in the portfolio and current and projected economic conditions, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increases 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 is primarily based on internally developed loss data specific to the Northern Trust financial asset portfolio from a historical observation period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan and lease portfolio into 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 September 30, 2020 and December 31, 2019.


	SEPTEMBER 30, 2020										DECEMBER 31, 2019
(In Millions)	COMMERCIAL		PERSONAL		TOTAL		COMMERCIAL		PERSONAL		TOTAL
Loans and Leases
Evaluated on an Individual Level	$	34.1	$	63.9	$	98.0	$	10.4	$	81.8	$	92.2
Evaluated on a Collective Level	14,547.6		18,120.7		32,668.3		13,990.9		17,326.5		31,317.4
Total Loans and Leases	14,581.7		18,184.6		32,766.3		14,001.3		17,408.3		31,409.6
Allowance for Credit Losses on Credit Exposures
Evaluated on an Individual Level	5.6		0.4		6.0		3.4		1.6		5.0
Evaluated on a Collective Level	142.0		67.4		209.4		54.7		44.8		99.5
Allowance Assigned to Loans and Leases	147.6		67.8		215.4		58.1		46.4		104.5
Allowance for Undrawn Loan Commitments and Standby Letters of Credit
Evaluated on an Individual Level	2.2		—		2.2		1.9		—		1.9
Evaluated on a Collective Level	37.9		4.8		42.7		13.9		4.1		18.0
Allowance Assigned to Undrawn Loan Commitments and Standby Letters of Credit	40.1		4.8		44.9		15.8		4.1		19.9
Total Allowance Assigned to Loans and Leases and Undrawn Loan Commitments and Standby Letters of Credit	$	187.7	$	72.6	$	260.3	$	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

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 and nine months ended September 30, 2020.


	THREE MONTHS ENDED SEPTEMBER 30, 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 Beginning of Period	$	0.5	$	0.4	$	0.7	$	—	$	—	$	4.9	$	6.5
Provision for Credit Losses	0.2		—		(0.1)		0.2		0.1		—		0.4
Balance at End of Period	$	0.7	$	0.4	$	0.6	$	0.2	$	0.1	$	4.9	$	6.9


	NINE MONTHS ENDED SEPTEMBER 30, 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
Provision for Credit Losses	(0.1)		0.1		(0.3)		0.2		0.1		0.3		0.3
Balance at End of Period	$	0.7	$	0.4	$	0.6	$	0.2	$	0.1	$	4.9	$	6.9

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 increase to the allowance attributable to debt securities held to maturity for the three and nine months ended September 30, 2020 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.

•Debt securities held to maturity classified as U.S. government, government sponsored agency, and certain securities classified as obligations of states and political subdivisions are considered to be guarantees of the U.S. government or an agency of the U.S. government and therefore an allowance for credit losses is not estimated for such investments as the expected probability of non-payment of the amortized cost basis is zero.

•Debt securities held to maturity classified as other asset-backed represent pools of underlying receivables from which the cash flows are used to pay the bonds that vary in seniority. Utilizing a qualitative estimation approach, the allowance for other asset-backed securities is assessed by evaluating underlying pool performance based on delinquency rates and available credit support.

•Debt securities held to maturity classified as other relates to investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area. The allowance for CRA investments is assessed using a qualitative estimation approach primarily based on internal historical performance experience and default history of the underlying CRA portfolios to determine a quantitative component of the allowance.

The allowance estimation methodology for all other 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.