Northern Trust(NTRS) - 2022 Q2 - Quarterly Report

Consolidated Financial Highlights Summary of Financial Highlights Q2 2022 net income increased 8% YoY to $396.2 million, driven by 12% revenue growth, while client assets declined due to unfavorable market conditions Q2 & Six Months 2022 Condensed Income Statement (YoY) | Indicator ($ in Millions) | Q2 2022 | Q2 2021 | % Change | 6M 2022 | 6M 2021 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total Revenue | 1,768.7 | 1,580.3 | 12% | 3,487.4 | 3,163.7 | 10% | | Noninterest Income | 1,310.0 | 1,244.7 | 5% | 2,647.7 | 2,488.0 | 6% | | Net Interest Income | 458.7 | 335.6 | 37% | 839.7 | 675.7 | 24% | | Net Income | 396.2 | 368.1 | 8% | 785.5 | 743.2 | 6% | | Diluted EPS | $1.86 | $1.72 | 8% | $3.63 | $3.42 | 6% | Selected Balance Sheet and Client Asset Data (vs. YE 2021) | Indicator ($ in Billions, except per share) | June 30, 2022 | Dec 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | 157.8 | 183.9 | (14)% | | Deposits | 133.7 | 159.9 | (16)% | | Stockholders' Equity | 11.1 | 12.0 | (8)% | | Assets Under Custody/Administration | 13,733.7 | 16,248.8 | (15)% | | Assets Under Management | 1,302.8 | 1,607.1 | (19)% | | Book Value Per Share | $48.87 | $52.49 (Q2'21) | (7)% | Key Ratios | Ratio | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Return on Average Common Equity | 15.7% | 13.7% | | Return on Average Assets | 1.03% | 0.96% | | Net Interest Margin (FTE) | 1.35% | 0.97% | Capital Ratios (Standardized Approach) | Ratio | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 10.5% | 11.9% | | Tier 1 Capital | 11.5% | 12.9% | | Total Capital | 12.6% | 14.1% | | Tier 1 Leverage | 6.7% | 6.9% | Management's Discussion and Analysis of Financial Condition and Results of Operations Second Quarter Consolidated Results of Operations In Q2 2022, net income rose 8% YoY to $396.2 million, driven by a 37% increase in Net Interest Income, partially offset by higher expenses and credit provisions Q2 2022 vs Q2 2021 Performance Summary | Metric ($ in Millions) | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 1,768.7 | 1,580.3 | 12% | | Net Interest Income | 458.7 | 335.6 | 37% | | Noninterest Expense | 1,223.6 | 1,120.8 | 9% | | Net Income | 396.2 | 368.1 | 8% | | Diluted EPS | $1.86 | $1.72 | 8% | - An accounting reclassification increased Trust, Investment and Other Servicing fees by $17.3 million in Q2 2022, with corresponding impacts on Other Operating Income and Expense, but no impact on Net Income[16] - The company recorded a $4.5 million provision for credit losses, compared to a $27.0 million release of reserves in Q2 2021, driven by a higher risk of recession[19][65] Trust, Investment and Other Servicing Fees Total Trust, Investment and Other Servicing Fees increased 6% YoY to $1.14 billion, primarily driven by significantly lower money market fund fee waivers and new business Trust, Investment and Other Servicing Fees by Segment (Q2 2022 vs Q2 2021) | Segment ($ in Millions) | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Asset Servicing | 642.7 | 611.5 | 5% | | Custody and Fund Administration | 433.8 | 454.9 | (5)% | | Investment Management | 148.4 | 100.7 | 47% | | Wealth Management | 500.7 | 463.9 | 8% | | Total Fees | 1,143.4 | 1,075.4 | 6% | - Money market fund fee waivers decreased significantly to $8.6 million in Q2 2022 from $79.8 million in Q2 2021, contributing to higher fee income[24] Client Assets Trend | Client Assets ($ in Billions) | June 30, 2022 | June 30, 2021 | YoY Change | | :--- | :--- | :--- | :--- | | Assets Under Custody / Administration | 13,733.7 | 15,727.1 | (13)% | | Assets Under Management | 1,302.8 | 1,539.4 | (15)% | Other Noninterest Income Total Other Noninterest Income decreased by 2% YoY to $166.6 million, driven by a drop in Other Operating Income partially offset by higher foreign exchange trading income Other Noninterest Income Components (Q2 2022 vs Q2 2021) | Component ($ in Millions) | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Foreign Exchange Trading Income | 77.6 | 70.6 | 10% | | Other Operating Income | 45.6 | 54.4 | (16)% | | Total Other Noninterest Income | 166.6 | 169.3 | (2)% | Net Interest Income Net Interest Income on a fully taxable equivalent basis increased 37% YoY to $469.8 million, driven by a significant expansion in net interest margin Net Interest Income Analysis (FTE Basis) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Interest Income ($M) | $469.8 | $343.9 | | Net Interest Margin | 1.35% | 0.97% | | Average Earning Assets ($B) | $139.9 | $142.0 | - The increase in NII was primarily due to a higher net interest margin, a favorable balance sheet mix shift, and nonrecurring interest received from certain nonaccrual loans[59] Noninterest Expense Noninterest expense rose 9% YoY to $1.22 billion, driven by higher compensation and technology investments Noninterest Expense Components (Q2 2022 vs Q2 2021) | Component ($ in Millions) | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Compensation | 546.5 | 486.3 | 12% | | Employee Benefits | 119.6 | 118.4 | 1% | | Outside Services | 213.1 | 218.1 | (2)% | | Equipment and Software | 203.5 | 178.3 | 14% | | Other Operating Expense | 89.9 | 67.5 | 33% | | Total Noninterest Expense | 1,223.6 | 1,120.8 | 9% | Six-Month Consolidated Results of Operations For the first six months of 2022, net income increased 6% YoY to $785.5 million, supported by a 24% increase in Net Interest Income Six-Month 2022 vs 2021 Performance Summary | Metric ($ in Millions) | 6M 2022 | 6M 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | 3,487.4 | 3,163.7 | 10% | | Net Interest Income | 839.7 | 675.7 | 24% | | Noninterest Expense | 2,429.5 | 2,238.3 | 9% | | Net Income | 785.5 | 743.2 | 6% | | Diluted EPS | $3.63 | $3.42 | 6% | - Money market fund fee waivers for the six-month period were $59.3 million, a significant reduction from $130.0 million in the same period of 2021, boosting fee income[85] Reporting Segments Asset Servicing net income grew 29% YoY, while Wealth Management net income decreased 4% YoY in Q2 2022 Net Income by Reporting Segment (Q2 2022 vs Q2 2021) | Segment ($ in Millions) | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Asset Servicing | 208.4 | 161.6 | 29% | | Wealth Management | 217.1 | 226.9 | (4)% | | Other | (29.3) | (20.4) | N/M | | Total Consolidated | 396.2 | 368.1 | 8% | Asset Servicing The Asset Servicing segment's net income increased 29% YoY in Q2 2022, driven by a 67% rise in Net Interest Income - Q2 Net Income increased by $46.8 million, or 29%, from the prior-year quarter, driven by higher Net Interest Income and Trust Fees[120] - Q2 Net Interest Income (FTE basis) increased by $102.0 million, or 67%, from the prior-year quarter, mainly due to a higher net interest margin[126] Wealth Management The Wealth Management segment's net income decreased by 4% YoY in Q2 2022, impacted by higher expenses and a provision for credit losses - Q2 Net Income decreased by $9.8 million, or 4%, from the prior-year quarter, mainly due to higher Noninterest Expense and a provision for credit losses[133] - Q2 Net Interest Income (FTE basis) increased by $23.9 million, or 13%, from the prior-year quarter, reflecting higher average loan and deposit balances[138][139] Consolidated Balance Sheets As of June 30, 2022, total assets stood at $157.8 billion, a 14% decrease from year-end 2021, driven by a decline in deposits Select Consolidated Balance Sheet Data | ($ in Billions) | June 30, 2022 | Dec 31, 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | 157.8 | 183.9 | (14)% | | Total Securities | 56.5 | 62.7 | (10)% | | Loans and Leases | 41.2 | 40.5 | 2% | | Total Deposits | 133.7 | 159.9 | (16)% | | Total Stockholders' Equity | 11.1 | 12.0 | (8)% | Asset Quality Asset quality remained strong with a high-quality debt securities portfolio and a 28% decrease in nonaccrual assets from year-end 2021 - The debt securities portfolio is high quality, with 86% of AFS securities rated AAA and 94% of HTM securities rated A or higher as of June 30, 2022[156][281] - Net unrealized losses within the investment securities portfolio increased to $3.0 billion at June 30, 2022, from $187.1 million at year-end 2021, largely due to higher interest rates[159] Nonaccrual Assets | ($ in Millions) | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Nonaccrual Loans and Leases | 89.7 | 122.3 | | Other Real Estate Owned | 0.1 | 3.0 | | Total Nonaccrual Assets | 89.8 | 125.3 | Statements of Cash Flows For the first six months of 2022, a net cash outflow from financing activities was largely offset by a net cash inflow from investing activities Six-Month Cash Flow Summary | Activity ($ in Millions) | 6M 2022 | 6M 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) Operating activities | (863.9) | (1,167.7) | | Net cash provided by (used in) Investing activities | 25,225.8 | (2,231.6) | | Net cash (used in) provided by Financing activities | (22,060.4) | 3,895.1 | | Change in Cash and Due from Banks | 2,063.0 | 409.8 | Capital Ratios Capital ratios remained strong and well above regulatory minimums, though the CET1 ratio decreased to 10.5% from 12.0% in the prior year Northern Trust Corporation Capital Ratios (Standardized Approach) | Ratio | June 30, 2022 | June 30, 2021 | Minimum Requirement | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 10.5% | 12.0% | 4.5% | | Tier 1 Capital | 11.5% | 13.1% | 6.0% | | Total Capital | 12.6% | 14.5% | 8.0% | | Tier 1 Leverage | 6.7% | 7.1% | 4.0% | - The 2022 Dodd-Frank Act Stress Test results kept Northern Trust's stress capital buffer at 2.5% and the effective CET1 minimum at 7.0%, effective October 1, 2022[190] Consolidated Financial Statements (unaudited) Financial Statements This section contains the unaudited consolidated financial statements for the periods ended June 30, 2022 and 2021 Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial data, including securities, loans, and commitments - Securities (Note 4): As of June 30, 2022, the Available for Sale (AFS) portfolio had gross unrealized losses of $1.86 billion, a significant increase from $248.6 million at year-end 2021, primarily due to rising interest rates[264][276] - Loans and Leases (Note 6): The total loan and lease portfolio was $41.2 billion, with no active COVID-19 related loan modifications as of June 30, 2022[287][291][323] - Allowance for Credit Losses (Note 7): The total allowance for credit losses was $198.2 million as of June 30, 2022, up from $184.7 million at year-end 2021[331] - Commitments and Contingencies (Note 22): Total off-balance sheet financial instruments were $187.6 billion, and the company estimates a range of reasonably possible loss for certain legal matters from zero to approximately $25 million[425][430][440] Controls and Procedures Summary of Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2022, with no material changes to internal controls - The CEO and CFO concluded that the Corporation's disclosure controls and procedures are effective as of June 30, 2022[481] - No changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, such controls were identified during the last fiscal quarter[482] Part II – Other Information Legal Proceedings The company does not expect pending legal or regulatory matters to have a material adverse effect on its financial position or liquidity - Information regarding legal proceedings is detailed in Note 22 — Commitments and Contingent Liabilities[485] Unregistered Sales of Equity Securities and Use of Proceeds The Corporation did not repurchase any shares of its common stock during the second quarter of 2022 Common Stock Repurchases (Q2 2022) | Period | Total Shares Purchased | Average Price Paid | Shares Purchased as Part of Plan | | :--- | :--- | :--- | :--- | | April 2022 | — | — | — | | May 2022 | — | — | — | | June 2022 | — | — | — | | Total Q2 | — | — | — |