Risk


The following is management's discussion and analysis of the financial condition
and results of operations (MD&A) of Northern 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 ended December 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 of Northern 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.
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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 and Other 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 $5.4 million of money market mutual fund fees for the three
months ended September 30, 2021 and 2020, respectively. These fee waivers, which
are impacted by the level of yields earned and account balances in certain
funds, are expected to continue in the current low-interest-rate environment as
the yields in these funds remain insufficient to pay the stated fees associated
with such funds. This is expected to adversely impact Trust, Investment and
Other Servicing Fees within the C&IS and Wealth Management reporting segments.
The components of Trust, Investment and Other Servicing Fees are provided below.
TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES
                                                 THREE MONTHS ENDED SEPTEMBER 30,
($ In Millions)                                         2021              2020               CHANGE
C&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            8
Total 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            4
Total 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 Services
Custody 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.
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