NORTHERN TRUST CORP annual report, FY2022

Northern Trust Corporation — FY2022 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report, and the supplied filing text does not provide a clear set of Q4-only financial results. Northern Trust provides asset servicing, wealth management, asset management and banking services. Its reporting segments are Asset Servicing and Wealth Management.

Financial performance and position

Revenue and earnings: Total revenue was $6.76 billion, up 5% from $6.46 billion in 2021. Net income was $1.34 billion, down 14%; diluted EPS was $6.14 versus $7.14. Return on average common equity declined to 12.7% from 13.9%.
Revenue mix and margins: GAAP net interest income rose 36% to $1.89 billion; FTE net interest margin increased to 1.39% from 0.99%. Noninterest income fell 4% to $4.87 billion, with servicing fees up 2% to $4.43 billion. Fees remained exposed to market levels and client asset flows.
Expenses and credit costs: Noninterest expense increased 10% to $4.98 billion, led by compensation, technology and outside services. Credit-loss provision was $12 million, compared with an $81.5 million reserve release in 2021.
Cash flow: Operating cash flow was $2.39 billion, investing cash flow was $25.93 billion, and financing cash flow was negative $26.44 billion. The investing inflow largely reflected lower central-bank deposits and net proceeds from HTM securities; financing outflow mainly reflected deposit declines. Cash and due from banks ended the year at $4.65 billion, versus $3.06 billion.
Balance sheet and funding: Total assets were $155.0 billion, down 16%; deposits were $123.9 billion, down from $159.9 billion. Loans and leases rose 6% to $42.9 billion. Total stockholders’ equity fell to $11.3 billion from $12.0 billion, primarily as accumulated other comprehensive loss widened.
Debt and capital: Year-end senior notes were $2.72 billion and long-term debt was $2.07 billion. During 2022, the Corporation issued $1.0 billion of 4.00% senior notes and $1.0 billion of 6.125% subordinated notes. Corporation CET1 ratios were 10.8% under the standardized approach and 11.5% under the advanced approach; the filing states capital ratios exceeded applicable well-capitalized requirements.
Liquidity: The Corporation and Bank reported compliance with LCR and NSFR requirements. The Bank had $46.2 billion of unencumbered securities at year-end. Parent-company liquidity was $601.4 million, down from $1.7 billion in 2021; the parent relies substantially on Bank dividends, and received none in 2022.
Client assets: AUC/A fell 16% to $13.60 trillion; assets under custody fell 16% to $10.60 trillion. Assets under management fell 22% to $1.25 trillion, reflecting net outflows, weaker markets and unfavorable currency translation.

Material changes versus 2021

Higher rates and a favorable balance-sheet mix lifted FTE net interest income and margin, while interest expense also rose sharply.
Lower market values and adverse currency translation reduced client asset balances and weighed on fee income; management also cited outflows and relative investment performance in certain products.
Expense growth outpaced revenue growth. Compensation expense rose 12%, and full-time equivalent headcount increased 12% to approximately 23,600.
Net unrealized losses in the investment securities portfolio increased to $3.2 billion from $187.1 million. AOCI ended at a loss of $1.57 billion, versus a loss of $35.6 million.
Deposits declined materially, particularly noninterest-bearing balances. The Corporation also issued new senior and subordinated debt.

Outlook, commentary, risks and unusual items

Guidance: The filing does not provide specific revenue, earnings or margin guidance. Management expected 2023 net pension expense to decrease by approximately $20.9 million, excluding any pension settlement charges.
Unusual securities loss: The Corporation recognized a $213 million pretax loss after deciding to sell certain AFS debt securities with approximately $2.3 billion amortized cost and $2.1 billion fair value. They were sold in January 2023, producing an additional $6.9 million gain relative to year-end fair value.
Other notable charges: 2022 results included $44.1 million of pension settlement charges, $32.0 million of severance-related charges and $14.0 million of occupancy charges from early lease exits.
Key risks: Market declines may reduce fee-generating assets; rapid rate changes can affect funding costs, securities values and capital; deposit outflows and reliance on subsidiary dividends create funding considerations. The filing also highlights credit, counterparty, cybersecurity, operational, regulatory, litigation, geopolitical and climate risks.
Credit and contingencies: Nonaccrual loans and leases declined to $45.9 million from $122.3 million; the loan allowance was $144.3 million, or 0.34% of loans. For selected matters where loss was reasonably possible and estimable, the aggregate range was zero to approximately $20 million; other matters could not be reasonably estimated. Russian-related restricted ruble cash for clients totaled $330.4 million at year-end.
Capital returns: The quarterly common dividend was raised to $0.75 per share. The Corporation declared $613 million of common dividends and repurchased 311,536 shares, all withheld for share-based compensation tax obligations; no shares were repurchased under the public program in Q4.

Most important facts for investors to verify

Whether deposit levels and parent-company liquidity stabilized after the year-end decline, and the extent to which the Corporation can rely on future Bank dividends.
How the securities portfolio’s unrealized losses, AOCI and capital ratios evolve, including the effects of securities repositioning and interest-rate changes.
Whether servicing-fee trends recover as markets and client assets change, and whether 2022 net outflows persist.
Whether expense growth moderates after higher compensation, technology investment and one-time charges.
Changes in credit quality, especially commercial real estate and commercial and institutional exposures, and any material developments in litigation, regulatory matters or restricted Russian-related balances.