Northern Trust Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Northern Trust provides wealth management, asset servicing, asset management and banking services through its Asset Servicing and Wealth Management segments. Financial statements are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $1.769B (+12%) | $1.580B | $3.487B (+10%) | $3.164B |
| Net interest income | $458.7M (+37%) | $335.6M | $839.7M (+24%) | $675.7M |
| Net income | $396.2M (+8%) | $368.1M | $785.5M (+6%) | $743.2M |
| Diluted EPS | $1.86 | $1.72 | $3.63 | $3.42 |
| Noninterest expense | $1.224B (+9%) | $1.121B | $2.430B (+9%) | $2.238B |
| Provision for credit losses | $4.5M | $(27.0)M release | $6.5M | $(57.0)M release |
| Net interest margin, FTE | 1.35% | 0.97% | 1.19% | 0.99% |
Q2 return on average common equity was 15.7%, versus 13.7% a year earlier; return on average assets was 1.03%, versus 0.96%. The effective tax rate rose to 26.7% for Q2 and 25.3% for the first half, from 24.3% in each comparable 2021 period.
Balance sheet, liquidity and capital
- At June 30, 2022, total assets were $157.8B, down 14% from December 31, 2021; deposits were $133.7B, down 16%; and stockholders’ equity was $11.1B, down 8%.
- Period-end loans and leases were $41.2B, up 2% from year-end. Securities were $55.1B, down 10%. Total earning assets fell 17% to $142.2B.
- Total deposits declined $26.3B from year-end, including a $16.2B decrease in noninterest-bearing deposits. The filing attributes the first-half cash-flow decline in deposits principally to lower non-U.S. office deposits and savings, money market and other interest-bearing deposits.
- Borrowings included $3.3B of senior notes and $1.1B of long-term debt. In May, Northern Trust issued $1.0B of unsecured 4.00% senior notes due 2027.
- Regulatory capital ratios remained above applicable well-capitalized requirements. Corporation CET1 was 10.5% under the standardized approach and 11.6% under the advanced approach; the decline from year-end was partly due to higher AOCI losses on securities.
- Common dividends declared were $0.70 per share for the quarter. Q2 repurchases under the public authorization were zero; first-half repurchases were $34.1M and related to share-based compensation tax withholding.
Cash flow and client assets
- For the first six months, operating cash flow was $(863.9)M, investing cash flow was $25.2B, and financing cash flow was $(22.1)B; cash and due from banks increased $2.1B to $5.1B. Investing cash inflow primarily reflected lower Federal Reserve and other central-bank deposits; financing outflow primarily reflected lower deposits. Operating outflow was principally associated with higher net collateral deposited with derivative counterparties.
- At June 30, assets under custody/administration were $13.7T, down 15% from year-end; assets under custody were $10.7T, down 15%; and assets under management were $1.3T, down 19%. Year-over-year, AUC/A fell 13% and AUM fell 15%, reflecting unfavorable markets, currency translation and, for AUC/A and AUM, net outflows.
Material changes, outlook and risks
- Revenue growth reflected higher net interest income, lower money-market fee waivers and new business. Q2 net interest income also benefited from higher rates, balance-sheet mix and nonrecurring interest received on certain nonaccrual loans.
- Expense growth was led by compensation and equipment/software costs, including continued technology investment. A $20.3M pension settlement charge was recorded in Q2, compared with $17.6M in Q2 2021.
- A 2022 accounting reclassification increased Q2 servicing fees by $17.3M, while reducing other operating income by $6.9M and increasing other operating expense by $10.4M. Prior-year amounts were not reclassified; management said the change had no impact on net income.
- Unrealized losses on the investment securities portfolio rose to $3.0B from $187.1M at year-end, largely due to higher interest rates. AOCI was $(1.51)B at June 30, versus $(35.6)M at year-end. In July, after quarter-end, the company transferred securities with a $6.38B fair value and $889.5M unrealized loss from AFS to HTM for capital management purposes; the transfer included a $665.8M after-tax reduction in AOCI.
- Management cited recent market conditions and increased recession risk as drivers of higher collective credit reserves, partly offset by credit-quality improvement in commercial real estate and commercial and institutional portfolios. Nonaccrual assets were $89.8M, down from $125.3M at year-end.
- No specific earnings or revenue guidance is provided in the supplied filing text. The filing identifies risks including market and interest-rate volatility, recession, client-asset values and flows, deposit deployment and funding costs, credit quality, cybersecurity and operational resilience, regulation, tax matters, and litigation.
- Management said pending legal and regulatory matters are not expected, based on current knowledge, to materially adversely affect consolidated financial position or liquidity, although they could affect results in a particular period. For certain matters, estimated reasonably possible aggregate loss ranged from zero to approximately $25M; other matters could not be reasonably estimated.
Key facts for investors to verify
- Whether rising rates continue to support net interest income as deposit costs and funding mix adjust.
- How market movements, client flows and currency translation affect AUC/A, AUM and fee revenue.
- Whether the securities portfolio’s unrealized losses, AOCI and the July AFS-to-HTM transfer affect future capital flexibility or reported results.
- Credit-reserve trends and exposure to recession, particularly in commercial portfolios and off-balance-sheet commitments.
- Whether expense growth, including technology investment and compensation, remains consistent with revenue growth.
- Developments in disclosed litigation and regulatory matters, including the French trust proceeding and Visa-related litigation exposure.