Northern Trust Corporation — Q3 2022 Form 10-Q
Business context and reporting period. Northern Trust provides wealth management, asset servicing, asset management and banking services. This unaudited quarterly report covers the three and nine months ended September 30, 2022; comparisons are primarily with the corresponding 2021 periods, or with December 31, 2021 for balance-sheet data.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1,754.8 million | $1,633.8 million | $5,242.2 million | $4,797.5 million |
| Net interest income | $513.0 million | $346.4 million | $1,352.7 million | $1,022.1 million |
| Net income | $394.8 million | $395.7 million | $1,180.3 million | $1,138.9 million |
| Diluted EPS | $1.80 | $1.80 | $5.43 | $5.22 |
| Net interest margin, FTE | 1.58% | 0.98% | 1.32% | 0.99% |
| Noninterest expense | $1,229.8 million | $1,128.7 million | $3,659.3 million | $3,367.0 million |
Q3 revenue rose 7%, but net income was essentially flat as expenses grew 9% and servicing fees declined 3%. Higher net interest income, primarily reflecting higher rates and favorable balance-sheet mix, was the principal revenue driver. For the first nine months, revenue increased 9% and net income increased 4%. The effective tax rate was 24.7% for Q3 and 25.1% year to date.
Annualized Q3 return on average common equity was 14.9% (13.7% in Q3 2021); return on average assets was 1.07% (1.00%). The common dividend declared was $0.75 per share for Q3, versus $0.70 a year earlier.
Balance sheet, liquidity and capital
- At September 30, 2022, total assets were $159.8 billion, down 13% from year-end 2021; deposits were $128.5 billion, down 20%. Loans and leases were $44.0 billion, up 9%, while earning assets were $142.7 billion, down 17%.
- Period-end stockholders’ equity was $11.0 billion, down 8%. Total deposits fell $26.1 billion during the first nine months, mainly reflecting lower non-U.S. office client deposits. Federal funds purchased and other borrowings increased from year-end.
- Nine-month operating cash flow was negative $1.8 billion, investing cash flow was positive $21.8 billion, and financing cash flow was negative $18.2 billion. The filing attributes operating cash use mainly to higher net collateral deposited with derivative counterparties, investing inflows largely to reduced central-bank deposits, and financing outflows primarily to deposit declines.
- Regulatory capital ratios remained above applicable well-capitalized thresholds. Northern Trust Corporation’s standardized CET1 ratio was 10.1% and advanced-approach CET1 ratio was 11.4% at quarter-end. Accumulated other comprehensive loss reduced capital ratios.
Material changes and management commentary
- Q3 servicing fees decreased $32.3 million, mainly from unfavorable markets and currency translation, partly offset by lower money-market fee waivers. Assets under custody/administration fell 19% year over year to $12.8 trillion; assets under management fell 21% to $1.21 trillion, reflecting markets, currency and net outflows.
- Noninterest expense rose 9% in Q3. Compensation, equipment and software, outside services and employee benefits were the main increases; technology investment and amortization contributed to higher equipment and software expense.
- The credit-loss provision was $0.5 million in Q3, compared with a $13.0 million reserve release in Q3 2021. Management cited a weaker macroeconomic outlook, partly offset by improved credit quality. Nonaccrual loans and leases were $76.4 million, down from $122.3 million at year-end 2021.
- Unrealized losses across the investment securities portfolio reached $3.5 billion at September 30, 2022, compared with $187.1 million at year-end 2021, primarily due to higher interest rates. The company transferred $6.6 billion fair value of securities from available-for-sale to held-to-maturity in Q3 for capital management. AOCI was a loss of $1.785 billion, versus a loss of $35.6 million at year-end.
- A classification change moved certain fees into servicing-fee revenue from other operating income or as a reduction of expense. It increased Q3 servicing fees by $15.6 million, with corresponding offsets; management stated there was no effect on net income. Prior-year figures were not reclassified, limiting direct line-item comparability.
- The company recorded $17.0 million of U.S. qualified pension-plan settlement charges in Q3 and $37.3 million year to date; management expected another settlement charge in Q4 2022.
Outlook, risks and contingencies
The filing gives no specific quantitative earnings or revenue guidance. Management’s forward-looking statements identify exposure to market declines and volatility, interest-rate changes, deposit deployment and liquidity needs, credit losses and macroeconomic conditions, foreign exchange movements, operating and cybersecurity risks, technology investment, expense pressures, regulatory and tax changes, and litigation. Northern Trust reported no material accruals for pending litigation or regulatory matters; for certain matters it estimated reasonably possible losses of zero to approximately $20 million in aggregate, while noting other matters could not be reasonably estimated. A French appellate retrial involving a subsidiary is scheduled to begin in September 2023.
Important facts for investors to verify
- Whether rising net interest income can continue to offset weaker market-sensitive servicing fees and deposit outflows.
- How securities valuation losses, AOCI and any further rate moves affect capital, liquidity and reported equity.
- Whether expense growth moderates, particularly compensation, technology and pension-related charges.
- Trends in AUC/A, AUM and net client flows, and the resulting implications for fee revenue.
- Credit-reserve assumptions under a weaker economic outlook, alongside loan growth and nonaccrual trends.
- Developments in disclosed legal matters, including the French retrial and Visa-related litigation exposure.