Northern Trust Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Northern Trust provides asset servicing, wealth management, asset management and banking services. The former Corporate & Institutional Services segment was renamed Asset Servicing; the change did not alter segment allocation methods.
Financial performance and position
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Total revenue | $1.719 billion | Up 9% year over year |
| Net interest income | $381.0 million | Up 12%; GAAP net interest margin was 1.03%, versus 0.98%. FTE margin was 1.05%, versus 1.00%. |
| Net income | $389.3 million; diluted EPS $1.77 | Net income up 4%; diluted EPS up from $1.70 |
| Provision for credit losses | $2.0 million | Compared with a $30.0 million reserve release in Q1 2021 |
| Noninterest expense | $1.206 billion | Up 8% year over year |
| Returns | ROE 14.2%; ROA 0.97% | ROE was 13.7% and ROA 0.99% in Q1 2021 |
| Operating cash flow | $746.9 million | Compared with $68.3 million in Q1 2021 |
At March 31, total assets were $172.6 billion, deposits $149.6 billion and stockholders’ equity $11.4 billion, down 6%, 6% and 5%, respectively, from December 31, 2021. Cash and due from banks was $3.8 billion and central bank deposits were $55.7 billion. Reported debt and borrowing balances included $2.4 billion of senior notes, $1.1 billion of long-term debt, $3.5 billion of other borrowings and $0.3 billion of repurchase agreements.
Period-end client assets were $15.54 trillion in assets under custody/administration and $1.49 trillion in assets under management. Versus year-end, these declined 4% and 7%, respectively. Regulatory capital remained above well-capitalized requirements; Corporation standardized CET1 was 11.4%, down from 11.9% at year-end.
Material changes and notable items
- Trust, investment and other servicing fees rose 10% to $1.168 billion, with favorable markets, new business and an accounting reclassification contributing. The reclassification added $18.5 million to this fee line; prior-year amounts were not reclassified and there was no net income impact.
- Average earning assets grew 7% year over year, including average loans and leases up 16%. Management attributed higher net interest income to higher average earning assets and improved margin.
- Noninterest expense rose 8%, led by compensation, outside services, and equipment and software costs.
- Net unrealized investment-security losses increased to $1.9 billion from $187.1 million at year-end, primarily reflecting higher market rates and wider credit spreads. Accumulated other comprehensive loss widened to $907.0 million from $35.6 million; Q1 comprehensive loss was $482.1 million despite positive net income.
- Quarter-end assets, deposits and client asset balances declined from year-end. Cash flow from financing was negative $10.3 billion, primarily reflecting lower deposits and repurchase agreements; cash and due from banks increased $726.4 million over the quarter.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided in the supplied filing text. Management said NIM is expected to benefit from recent and anticipated short-term rate increases, and expects money-market fee waivers to decline if higher short-term rates persist. Q1 waivers totaled $50.7 million.
- Interest-rate sensitivity estimates show next-12-month NII increasing $107 million under a gradual +100-basis-point ramp and $234 million under +200 basis points, but decreasing $154 million under a -100-basis-point ramp. These are model estimates, not forecasts, and exclude possible management actions. MVE sensitivity estimates were negative $329 million for a +100-basis-point shock and negative $859 million for +200 basis points.
- Key stated risks include market and foreign-exchange volatility, interest-rate changes, inflation and expense pressure, geopolitical events including the war involving Ukraine and Russia, credit and liquidity risks, cybersecurity and operational risks, regulatory changes, and the effects of COVID-19.
- Management reported no material accrued legal contingencies. For a limited number of matters with reasonably possible losses, the aggregate estimated range was $0 to approximately $25 million; other matters were not included because a range could not be reasonably estimated. A French appellate retrial involving a subsidiary’s trustee activities had not been scheduled.
- Off-balance-sheet commitments included $28.9 billion of undrawn commitments and $4.4 billion of standby letters of credit and financial guarantees. Securities lent with client indemnification totaled $155.7 billion; the company stated these were fully collateralized and it recorded no related liability.
Most important facts for investors to verify
- How much of servicing-fee growth reflects underlying business and markets versus the $18.5 million classification change, given prior periods were not recast.
- Whether higher rates translate into sustained net interest income and margin gains, and how actual deposit pricing and balances compare with the filing’s sensitivity assumptions.
- The duration and credit implications of the $1.9 billion net unrealized securities losses, and any further effect on AOCI and regulatory capital.
- Trends in deposits, AUC/A and AUM after their quarter-end declines, including market movements, client flows and currency effects.
- Whether credit quality, provisions and nonaccrual assets remain consistent with current estimates, and developments in legal matters and off-balance-sheet exposures.