Northern Trust Corporation — 2021 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2021, and compares results primarily with 2020. Northern Trust is a global wealth management, asset servicing, asset management and banking company. Its reporting segments are Corporate & Institutional Services (C&IS) and Wealth Management; Asset Management revenue and expenses are allocated to those segments. The filing is an annual report, not a standalone fourth-quarter report.
Financial performance and position
- Revenue and earnings: GAAP revenue was $6.46 billion, up 6% from $6.10 billion. Net income rose 28% to $1.55 billion; diluted earnings per share increased to $7.14 from $5.46. Net income applicable to common stock was $1.50 billion.
- Revenue mix: Noninterest income was $5.08 billion, up 9%, and represented 79% of revenue. Trust, investment and other servicing fees increased 9% to $4.36 billion, reflecting favorable markets and new business, partly offset by higher money-market fee waivers. GAAP net interest income decreased 4% to $1.38 billion.
- Margins and returns: Fully taxable equivalent (FTE) net interest margin declined to 0.99% from 1.19%, primarily due to lower average interest rates. Return on average common equity rose to 13.9% from 11.2%; return on average assets rose to 0.99% from 0.88%. Net income margin, calculated as net income divided by GAAP revenue, was approximately 23.9%, versus 19.8% in 2020.
- Expenses and credit: Noninterest expense increased 4% to $4.54 billion, including $27.9 million of pension settlement charges. The company recorded an $81.5 million provision release, compared with a $125.0 million provision in 2020. Net recoveries were $6.3 million; nonaccrual loans and leases were $122.3 million, or 0.30% of loans and leases.
- Balance sheet and debt: Total assets were $183.9 billion, up 8%; loans and leases were $40.5 billion, up 20%. Deposits totaled $159.9 billion, up 11%. Senior notes were $2.51 billion, subordinated long-term debt $1.15 billion, and other borrowings $3.58 billion; floating-rate capital debt was fully redeemed in October. Total stockholders’ equity was $12.0 billion. These debt categories are not a complete measure of all potential funding obligations.
- Liquidity: Cash and due from banks was $3.1 billion; Federal Reserve and other central-bank deposits were $64.6 billion; total debt securities were $61.6 billion. Management reported compliance with applicable LCR and NSFR requirements. The company’s separate parent-company liquidity was $1.7 billion at year-end. Deposits not insured by the FDIC were $150.3 billion.
- Cash flow: Operating cash flow was $1.36 billion, investing cash flow was negative $18.60 billion, and financing cash flow was positive $16.07 billion. Cash and due from banks decreased $1.33 billion. Investing outflows primarily reflected increased central-bank deposits, loan growth and net purchases of available-for-sale securities; financing inflows mainly reflected deposit growth.
- Client assets: Assets under custody/administration rose 12% to $16.25 trillion; assets under custody rose 12% to $12.61 trillion; and assets under management rose 14% to $1.61 trillion. These are client assets, not assets on Northern Trust’s consolidated balance sheet.
Material changes versus 2020
- Higher servicing fees and other operating income lifted revenue, while lower net interest income reflected margin compression despite growth in average earning assets.
- Net income improved substantially, aided by the shift from a credit-loss provision to a reserve release. The allowance for credit losses ended the year at $184.7 million, down from $259.9 million.
- Expenses rose 4%, mainly from compensation, outside services, equipment and software, and employee benefits. The prior year included $52.5 million in severance charges and a $43.4 million account-servicing charge related to a corporate-action processing error; 2021 other operating expense was lower.
- Net unrealized losses in the securities portfolio were $187.1 million at year-end, compared with net unrealized gains of $872.6 million a year earlier. A $6.9 billion transfer of government-sponsored agency securities from available-for-sale to held-to-maturity occurred in 2021 for capital-management purposes.
- Common dividends were maintained at $0.70 per quarter ($2.80 for the year). The company repurchased 2.53 million shares during 2021 at an average price of $105.90; no shares were repurchased in the fourth quarter. A new authorization permits repurchases of up to 25 million shares, subject to circumstances and regulation.
Outlook, commentary, risks and unusual items
- Outlook: The filing does not provide formal revenue or earnings guidance. Management said money-market mutual fund fee waivers, which totaled $287.8 million in 2021, would likely decline if short-term rates rise sufficiently. Excluding settlement charges, 2022 net pension expense was expected to decrease by approximately $10.1 million. These are management expectations, not guaranteed outcomes.
- Interest rates and markets: Results depend heavily on markets and fee-bearing client assets. The filing’s modeled 12-month NII sensitivity estimated an increase of $302 million under a gradual 100-basis-point rate rise and a decrease of $229 million under a 100-basis-point decline; the estimates rely on assumptions and exclude possible management actions.
- Key risks: COVID-19 and its variants; market volatility and lower asset values; interest-rate and margin changes; credit and counterparty losses; cybersecurity, technology and third-party disruptions; fiduciary and regulatory claims; competition and expense inflation; climate and geopolitical events; and transition from LIBOR to alternative benchmarks. The company had begun offering SOFR in new contracts.
- Contingencies: Northern Trust said pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity, though they could materially affect results in a particular period. For matters where a range could be estimated, reasonably possible losses were estimated at zero to approximately $20 million in aggregate; other matters could not be reasonably estimated. A French appellate retrial involving a subsidiary’s trustee role in an estate-tax case had not yet been scheduled.
- Other notable items: The company recorded the $27.9 million pension settlement charge; voluntarily waived $287.8 million of money-market fund fees; and completed its Parilux Investment Technology acquisition, with a recorded purchase price of $17.6 million. The auditor issued unqualified opinions on the financial statements and internal controls; the allowance for commercial collective credit losses was identified as a critical audit matter.
Important facts for investors to verify
- How much of fee growth came from market appreciation versus net client inflows, and whether those drivers persist.
- How rising rates affect net interest margin, deposit costs, securities values, client balances and money-market fee waivers.
- Whether the 2021 credit-reserve release is sustainable; review commercial real estate exposures, nonaccrual trends and the allowance assumptions.
- The effect of unrealized securities losses and the AFS-to-HTM transfer on capital, liquidity and future earnings.
- Whether expense growth, technology investment and pension costs remain aligned with revenue growth.
- Potential outcomes and estimates for litigation, regulatory matters, FICC sponsorship guarantees and other off-balance-sheet commitments.
- Capital distributions, regulatory buffers and parent-company dependence on dividends from the Bank.