NORTHERN TRUST CORPORATION The following is management's discussion and analysis of the financial condition and results of operations (MD&A) ofNorthern Trust Corporation (Corporation) for the first quarter of 2022. 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, 2021 . Investors also should read the section entitled "Forward-Looking Statements."
Certain terms used in this report are defined in the Glossary included in our
Annual Report on Form 10-K for the year ended
FIRST 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: Asset Servicing and Wealth Management. During the first quarter of 2022, the Corporation changed the name of its Corporate & Institutional Services (C&IS ) segment to "Asset Servicing." Accordingly, the disclosures herein and all future disclosures regarding the Corporation's reporting segments filed with, or furnished to, theSEC will refer to this segment as Asset Servicing. Asset management and related services are provided to Asset Servicing 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 and Recent Events
Since the start of the COVID-19 pandemic,Northern Trust has remained focused on the health and well-being of our workforce, meeting our clients' needs and supporting our communities. With the overall improvement in COVID-19 virus trends, and guided by public health and safety recommendations and government regulations, we have begun to safely return to our offices in most locations, across all of our regions-consistent with our established protocols. We continue to provide our workforce with resources to facilitate this return to the office. We remain committed to closely monitoring the situation in all our locations and responding appropriately. During the pandemic,Northern Trust offered credit assistance to impacted clients under a government lending program and provided payment deferrals. The number of loans under the government lending program, as well as the number of pandemic-related payment deferrals, 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$1.77 from$1.70 in the first quarter of 2021. Net Income increased$14.2 million , or 4%, to$389.3 million in the current quarter from$375.1 million in the prior-year quarter. Annualized return on average common equity was 14.2% in the current quarter and 13.7% in the prior-year quarter. The annualized return on average assets was 0.97% in the current quarter as compared to 0.99% in the prior-year quarter.
Revenue increased
Beginning in 2022, Trust, Investment and Other Servicing fees were impacted by the change in classification of certain fees that were previously recorded in Other Operating Income or as a reduction of Other Operating Expense. This change resulted in no impact to Net Income. The accounting reclassification increased Trust, Investment and Other Servicing fees in the current quarter by$18.5 million , with a$6.9 million decrease in Other Operating Income and a$11.6 million increase in Other Operating Expense. The classification changes are considered by the Corporation's management to be a better representation of the underlying nature of the business as they are directly tied to client asset levels and the related services are more akin to our core service offerings. Prior-period amounts have not been reclassified. Trust, Investment and Other Servicing Fees increased$104.7 million , or 10%, from$1.06 billion in the prior-year quarter to$1.17 billion in the current quarter, primarily due to favorable markets, new business and the accounting reclassification previously discussed.
Other Noninterest Income decreased
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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Overview of Financial Results (continued)
Net Interest Income increased
There was a$2.0 million provision in the current quarter, as compared to a$30.0 million release of credit reserves in the prior-year quarter. The current quarter provision was primarily due to an increase in the reserve evaluated on an individual basis for two commercial borrowers, partially offset by a slight decrease in the reserve evaluated on a collective basis. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics. The decrease in the collective basis reserve was primarily due to continued improvements in credit quality mainly within the commercial real estate portfolio, partially offset by increases in the reserve driven by projected economic conditions. Noninterest Expense increased$88.4 million , or 8%, from$1.12 billion in the prior-year quarter to$1.21 billion in the current quarter, primarily attributable to higher Compensation, Outside Services, Equipment and Software expense, and Other Operating Expense. The Provision for Income Taxes in the current quarter totaled$121.5 million , representing an effective tax rate of 23.8%. The Provision for Income Taxes in the prior-year quarter totaled$120.8 million , representing an effective tax rate of 24.4%. The effective tax rate decreased compared to the prior-year quarter primarily due to 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. Certain fees associated with money market mutual funds were waived by the Corporation due to the low-interest-rate environment.Northern Trust voluntarily waived$50.7 million and$50.2 million of money market mutual fund fees for the three months endedMarch 31, 2022 and 2021, respectively. These fee waivers are impacted by the level of yields earned and account balances in certain funds, as the yields in these funds remained insufficient to pay the stated fees associated with such funds. Fee waivers are expected to decline to the extent the increase in short-term interest rates experienced during the first quarter of 2022 continues. Beginning in 2022, Trust, Investment and Other Servicing Fees were impacted by the change in classification of certain fees that were previously recorded in Other Operating Income or as a reduction of Other Operating Expense. The impact to Trust, Investment and Other Servicing Fees in the current quarter was$18.5 million , with$6.9 million relating to amounts previously recorded in Other Operating Income and$11.6 million relating to amounts previously reported as a reduction of Other Operating Expense. Prior-period amounts have not been reclassified.
The components of Trust, Investment and Other Servicing Fees are provided below.
TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES
THREE MONTHS ENDED MARCH 31,
($ In Millions) 2022 2021 CHANGEAsset Servicing Trust , Investment and Other Servicing Fees Custody and Fund Administration $ 452.7$ 446.0 $ 6.7 2 % Investment Management 146.9 115.9 31.0 27 Securities Lending 18.8 18.2 0.6 3 Other 44.0 40.4 3.6 9Total Asset Servicing Trust , Investment and Other Servicing Fees $ 662.4$ 620.5 $ 41.9 7 %Wealth Management Trust , Investment and Other Servicing Fees Central $ 181.7$ 164.2 $ 17.5 11 % East 134.0 119.0 15.0 13 West 101.4 90.8 10.6 12 Global Family Office 88.9 69.2 19.7 29Total Wealth Management Trust , Investment and Other Servicing Fees $ 506.0$ 443.2 $ 62.8 14 %Total Consolidated Trust , Investment and Other Servicing Fees$ 1,168.4 $ 1,063.7 $ 104.7 10 % 4
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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Trust, Investment and Other Servicing Fees (continued)
Asset ServicingCustody and Fund Administration fees, the largest component of Asset Servicing 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. Securities Lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The Other fee category in Asset Servicing includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.
Investment Management fees increased from the prior-year quarter, primarily due to new business, the accounting reclassification previously discussed, and favorable markets.
Other fees increased from the prior-year quarter primarily due to the accounting reclassification previously discussed.
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, new business and the accounting reclassification previously discussed. Global Family Office fee income increased from the prior-year quarter, primarily due to new business, favorable markets, and the accounting reclassification previously discussed. Market Indices The following tables present selected market indices and the percentage changes year over year to provide context regarding equity and fixed income market impacts on the Corporation's results.
TABLE 2: EQUITY MARKET INDICES
DAILY AVERAGES PERIOD-END
THREE MONTHS ENDED MARCH 31, AS OF MARCH 31,
2022 2021 CHANGE 2022 2021 CHANGE
S&P 500 4,469 3,864 16 % 4,530 3,973 14 %
MSCI EAFE (U.S. dollars) 2,212 2,200 1 2,182 2,208 (1)
MSCI EAFE (local currency) 1,304 1,220 7 1,302 1,255 4
TABLE 3: FIXED INCOME MARKET INDICES
AS OF MARCH 31,
2022 2021 CHANGE
Barclays Capital U.S. Aggregate Bond Index 2,215 2,311 (4) %
Barclays Capital Global Aggregate Bond Index 500 534 (6)
Client Assets
As noted above, AUC/A and assets under management are two of the primary drivers
of our Trust, Investment and Other Servicing Fees. For the purposes of
disclosing AUC/A, to the extent that both custody and administration services
are provided, the value of the assets is included only once in this amount. The
following table presents AUC/A by reporting segment.
TABLE 4: ASSETS UNDER CUSTODY / ADMINISTRATION BY REPORTING SEGMENT
DECEMBER 31,
($ In Billions) MARCH 31, 2022 2021 MARCH 31, 2021 CHANGE Q1-22/Q4-21 CHANGE Q1-22/Q1-21
Asset Servicing $ 14,513.0 $ 15,183.2 $ 13,876.3 (4) % 5 %
Wealth Management 1,031.1 1,065.6 918.8 (3) 12
Total Assets Under Custody /
Administration $ 15,544.1 $ 16,248.8 $ 14,795.1 (4) % 5 %
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FIRST QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued)
Trust, Investment and Other Servicing Fees (continued)
The following table presents
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