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The following is management's discussion and analysis of the financial condition and results of operations (MD&A) ofNorthern Trust Corporation (Corporation) for the third quarter of 2021. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report as well as the Annual Report on Form 10-K for the year endedDecember 31, 2020 . Investors also should read the section entitled "Forward-Looking Statements." THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS General The Corporation is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS ) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the terms "Northern Trust ," "we," "us," "our," "its," or similar terms mean the Corporation and its subsidiaries on a consolidated basis. COVID-19 Pandemic During the COVID-19 pandemic,Northern Trust has remained focused on the health and well-being of its workforce, meeting its clients' needs and supporting its communities. The majority ofNorthern Trust's workforce continues to work remotely and the Corporation continues to adjust its response to the pandemic as needed. The timing of any return to the office (RTO) will be driven by the operational, business, and client needs of each location, and will be guided by health and safety guidelines. Given the recent trend of the virus, a broader RTO that had been planned for the third quarter of 2021 has been delayed indefinitely. During the pandemic,Northern Trust offered assistance to affected clients by lending under a government lending program and providing payment deferrals. In addition, there have been two forms of relief provided to lenders exempting certain loan modifications which would otherwise be classified as troubled debt restructuring from such classification.Northern Trust elected to apply each of these forms of relief, when applicable, in providing borrowers with qualifying loan modifications, including payment deferrals, in response to the COVID-19 pandemic. Both of these assistance measures have declined since the start of the pandemic. For further information, please refer to Note 6 - Loans and Leases to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited). Overview of Financial Results Net Income per diluted common share increased in the current quarter to$1.80 from$1.32 in the third quarter of 2020. Net Income increased$101.2 million , or 34%, to$395.7 million in the current quarter from$294.5 million in the prior-year quarter. Annualized return on average common equity was 13.7% in the current quarter and 10.5% in the prior-year quarter. The annualized return on average assets was 1.00% in the current quarter as compared to 0.83% in the prior-year quarter. Revenue increased$148.7 million , or 10%, to$1.63 billion in the current quarter from$1.49 billion in the prior-year quarter. Trust, Investment and Other Servicing Fees increased$107.2 million , or 11%, from$1.00 billion in the prior-year quarter to$1.11 billion in the current quarter, primarily due to favorable markets, new business, and favorable currency translation, partially offset by higher money market mutual fund fee waivers. Other Noninterest Income increased$23.7 million , or 16%, from$152.7 million in the prior-year quarter to$176.4 million in the current quarter, primarily reflecting higher Security Commissions and Trading Income and Other Operating Income. Net Interest Income increased$17.8 million , or 5%, to$346.4 million in the current quarter as compared to$328.6 million in the prior-year quarter, primarily due to higher average earning assets, partially offset by a lower net interest margin. There was a$13.0 million release of credit reserves in the current quarter, as compared to a provision of$0.5 million in the prior-year quarter. The current quarter release of credit reserves was primarily due to a decrease in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was driven by continued improvements in projected economic conditions and portfolio credit quality, partially offset by portfolio growth. Decreases in the collective basis reserve were primarily in the commercial and institutional and commercial real estate portfolios. Noninterest Expense increased$34.0 million , or 3%, from$1.09 billion in the prior-year quarter to$1.13 billion in the current quarter, primarily attributable to higher Compensation, Outside Services, Equipment and Software expense, and Employee Benefits, offset by lower Other Operating Expense. 3 -------------------------------------------------------------------------------- THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued) Overview of Financial Results (continued) The Provision for Income Taxes in the current quarter totaled$122.4 million , representing an effective tax rate of 23.6%. The Provision for Income Taxes in the prior-year quarter totaled$95.4 million , representing an effective tax rate of 24.5%. The effective tax rate decreased compared to the prior-year quarter primarily due to an increase in allocated tax credits related to community development projects and a lower net tax impact from international operations. Trust, Investment andOther Servicing Fees Trust , Investment and Other Servicing Fees are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears. Low-interest-rate environments have historically had a negative impact on fees earned on certain products. Beginning in the second quarter of 2020, the Corporation began to waive a portion of certain fees associated with money market mutual funds due to the low-interest-rate environment.Northern Trust voluntarily waived$76.7 million and$5.4 million of money market mutual fund fees for the three months endedSeptember 30, 2021 and 2020, respectively. These fee waivers, which are impacted by the level of yields earned and account balances in certain funds, are expected to continue in the current low-interest-rate environment as the yields in these funds remain insufficient to pay the stated fees associated with such funds. This is expected to adversely impact Trust, Investment and Other Servicing Fees within the C&IS and Wealth Management reporting segments. The components of Trust, Investment and Other Servicing Fees are provided below. TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES THREE MONTHS ENDED SEPTEMBER 30, ($ In Millions) 2021 2020 CHANGEC&IS Trust , Investment and Other Servicing Fees Custody and Fund Administration $ 460.2$ 395.0 $ 65.2 17 % Investment Management 113.6 136.8 (23.2) (17) Securities Lending 20.2 19.7 0.5 2 Other 36.2 33.4 2.8 8Total C&IS Trust , Investment and Other Servicing Fees $ 630.2$ 584.9 $ 45.3 8 %Wealth Management Trust , Investment and Other Servicing Fees Central $ 178.8$ 151.1 $ 27.7 18 % East 130.2 110.9 19.3 17 West 97.0 84.7 12.3 15 Global Family Office 74.8 72.2 2.6 4Total Wealth Management Trust , Investment and Other Servicing Fees $ 480.8$ 418.9 $ 61.9 15 %Total Consolidated Trust , Investment and Other Servicing Fees $ 1,111.0$ 1,003.8 $ 107.2 11 % Corporate & Institutional ServicesCustody and Fund Administration fees, the largest component of C&IS fees, are driven primarily by values of client assets under custody/administration (AUC/A), transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client-specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment Management fees are based generally on market values of client assets under management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag.Custody and Fund Administration fees increased from the prior-year quarter, primarily due to favorable markets and new business. Investment Management fees decreased from the prior-year quarter, primarily due to higher money market mutual fund fee waivers, partially offset by favorable markets and new business. Wealth Management Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Fee income in the regions (Central, East and West) increased from the prior-year quarter, primarily due to favorable markets and new business, partially offset by higher money market mutual fund fee waivers. Global Family Office fee income increased from the prior-year quarter, primarily due to favorable markets and new business, partially offset by higher money market mutual fund fee waivers. 4
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