Northern Trust : Second Quarter 2022 Earnings Release

NEWS RELEASE

www.northerntrust.com

INVESTOR CONTACT: Jennifer Childe | 312-444-3290 | [e-mail]

MEDIA CONTACT: Doug Holt | 312-557-1571 | [e-mail]

NORTHERN TRUST CORPORATION REPORTS SECOND QUARTER NET INCOME OF $396.2 MILLION, EARNINGS PER DILUTED COMMON SHARE OF $1.86

	Total Revenue			Return on Average			Common Equity Tier 1
	$1.8 billion			Common Equity 15.7%			Capital 10.5%

CHICAGO, JULY 20, 2022 - Northern Trust Corporation today reported second quarter net income per diluted common share of $1.86, compared to $1.77 in the first quarter of 2022 and $1.72 in the second quarter of 2021. Net income was $396.2 million, compared to $389.3 million in the prior quarter and $368.1 million in the prior-year quarter.

MICHAEL O'GRADY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER:

"Northern Trust delivered a solid second quarter financial performance, including revenue growth of 12%, earnings per share growth of 8%, both compared to the prior year, and return on average common equity of 15.7%. The elimination of fee waivers and our continued new business generation contributed to a 6% increase in trust, investment and other servicing fees, while rising interest rates drove a 37% increase in net interest income. Expenses grew 9%, reflecting growth and investment in our business, coupled with continued inflationary pressures. This combination resulted in three points of positive operating leverage compared to the prior year. As announced yesterday, our Board of Directors increased our dividend 7% to $0.75 per share for the third quarter, reflecting the strength of our balance sheet and capital position. As we look to the second half of the year, we remain focused on serving our clients, executing on our long-term growth priorities, and investing prudently for the future."

FINANCIAL SUMMARY & KEY METRICS

								% Change Q2 2022
								vs.
($ In Millions except per share data)		Q2 2022		Q1 2022		Q2 2021		Q1 2022	Q2 2021
Trust, Investment and Other Servicing Fees	$	1,143.4	$	1,168.4	$	1,075.4	(2)%		6 %
Other Noninterest Income		166.6		169.3		169.3	(2)		(2)
Net Interest Income (FTE*)		469.8		387.7		343.9	21		37
Total Revenue (FTE*)	$	1,779.8	$	1,725.4	$	1,588.6		3 %		12 %
Noninterest Expense	$	1,223.6	$	1,205.9	$	1,120.8	1 %		9 %
Provision for Credit Losses		4.5		2.0		(27.0)	125		N/M
Provision for Income Taxes		144.4		121.5		118.4	19		22
FTE Adjustment*		11.1		6.7		8.3	68		35
Net Income	$	396.2	$	389.3	$	368.1		2 %		8 %
Earnings Allocated to Common and	$	388.3	$	370.0	$	360.2	5 %		8 %
Potential Common Shares
Diluted Earnings per Common Share	$	1.86	$	1.77	$	1.72		5 %		8 %
Return on Average Common Equity		15.7 %		14.2 %		13.7 %
Return on Average Assets		1.03 %		0.97 %		0.96 %
Average Assets	$	154,084.1	$	162,143.0	$	154,300.1		(5)%		- %

N/M - Not meaningful

1. Net interest income and total revenue presented on a fully taxable equivalent (FTE) basis are non-generally accepted accounting principle financial measures that facilitate the analysis of asset yields. Please refer to the Reconciliation to Fully Taxable Equivalent section for further detail.

NORTHERN TRUST CORPORATION SECOND QUARTER 2022 RESULTS

ACCOUNTING RECLASSIFICATION

Beginning in the first quarter of 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 but resulted in no impact to net income. The accounting reclassification increased Trust, Investment and Other Servicing fees in the current-year quarter by $17.3 million, with a $6.9 million decrease in Other Operating Income and a $10.4 million increase in Other Operating Expense. The classification changes are deemed 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-year amounts have not been reclassified.

CLIENT ASSETS

Assets under custody/administration (AUC/A) and assets under management are a driver of the Corporation's trust, investment and other servicing fees, the largest component of noninterest income.

				As of				% Change June 30, 2022 vs.
($ In Billions)	June 30, 2022*	March 31, 2022		June 30, 2021		March 31, 2022	June 30, 2021
Assets Under Custody/Administration
Asset Servicing	$	12,812.2	$	14,513.0	$	14,754.1	(12)%	(13)%
Wealth Management		921.5		1,031.1		973.0	(11)	(5)
Total Assets Under Custody/Administration	$	13,733.7	$	15,544.1	$	15,727.1		(12)%	(13)%
Assets Under Custody(1)
Asset Servicing	$	9,771.2	$	10,987.5	$	11,260.8	(11)%	(13)%
Wealth Management		913.0		1,022.9		967.8	(11)	(6)
Total Assets Under Custody	$	10,684.2	$	12,010.4	$	12,228.6		(11)%	(13)%
Assets Under Management
Asset Servicing	$	950.0	$	1,091.6	$	1,168.3	(13)%	(19)%
Wealth Management		352.8		396.2		371.1	(11)	(5)
Total Assets Under Management	$	1,302.8	$	1,487.8	$	1,539.4		(12)%	(15)%

1. Assets Under Custody are a component of Assets Under Custody/Administration.

1. Client assets for the current quarter are considered preliminary until the Form 10-Q is filed with the Securities and Exchange Commission.

TRUST, INVESTMENT AND OTHER SERVICING FEES

								% Change Q2 2022 vs.
($ In Millions)		Q2 2022		Q1 2022		Q2 2021		Q1 2022	Q2 2021
Asset Servicing Trust, Investment and Other Servicing Fees
Custody and Fund Administration	$	433.8	$	452.7	$	454.9	(4)%	(5)%
Investment Management		148.4		146.9		100.7	1	47
Securities Lending		21.6		18.8		19.5	14	11
Other		38.9		44.0		36.4	(11)	7
Total Asset Servicing	$	642.7	$	662.4	$	611.5		(3)%	5 %
Wealth Management Trust, Investment and Other Servicing Fees
Central	$	177.4	$	181.7	$	174.3	(2)%	2 %
East		128.1		134.0		127.2	(4)	1
West		98.7		101.4		93.8	(3)	5
Global Family Office (GFO)		96.5		88.9		68.6	9	41
Total Wealth Management	$	500.7	$	506.0	$	463.9		(1)%	8 %
Total Consolidated Trust, Investment and Other Servicing Fees	$	1,143.4	$	1,168.4	$	1,075.4		(2)%	6 %

Asset Servicing and Wealth Management trust, investment and other servicing fees are impacted by both one-month and one- quarter lagged asset values.

Total Asset Servicing trust, investment and other servicing fees decreased sequentially and increased from the prior-year quarter.

• Custody and fund administration decreased sequentially primarily due to unfavorable currency translation and unfavorable markets. Custody and fund administration decreased from the prior-year quarter primarily due to unfavorable currency translation, partially offset by new business.
• Investment management fees increased sequentially primarily due to lower money market mutual fund fee waivers, partially offset by client outflows and unfavorable markets. Investment management fees increased from the prior-year quarter primarily due to lower money market mutual fund fee waivers and the accounting reclassification previously discussed, partially offset by client outflows.
• Other trust, investment and other servicing fees decreased sequentially primarily due to prior quarter fees associated with seasonal benefit payment services.

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NORTHERN TRUST CORPORATION SECOND QUARTER 2022 RESULTS

Total Wealth Management trust, investment and other servicing fees decreased sequentially and increased from the prior- year quarter.

• Fees in the regions (Central, East and West) decreased sequentially primarily due to unfavorable markets, partially offset by lower money market mutual fund fee waivers. Fees in the regions increased from the prior-year quarter primarily due to lower money market mutual fund fee waivers and new business.
• Fees in GFO increased sequentially primarily due to lower money market mutual fund fee waivers, partially offset by unfavorable markets. Fees in GFO increased from the prior-year quarter primarily due to lower money market mutual fund fee waivers, new business and favorable markets.

OTHER NONINTEREST INCOME

								% Change Q2 2022 vs.
($ In Millions)		Q2 2022		Q1 2022		Q2 2021		Q1 2022	Q2 2021
Other Noninterest Income
Foreign Exchange Trading Income	$	77.6	$	80.9	$	70.6	(4)%	10 %
Treasury Management Fees		10.6		11.1		11.3	(5)	(6)
Security Commissions and Trading Income		32.8		36.2		33.0	(9)	(1)
Other Operating Income		45.6		41.1		54.4	11	(16)
Investment Security Gains (Losses), net		-		-		-		N/M	N/M
Total Other Noninterest Income	$	166.6	$	169.3	$	169.3		(2)%	(2)%

N/M - Not meaningful

Foreign exchange trading income decreased sequentially primarily driven by lower client volumes and increased from the prior-year quarter primarily due to higher client volumes.

Security commissions and trading income decreased sequentially primarily due to lower revenue from core brokerage.

Other operating income increased sequentially primarily driven by nonrecurring items. Other operating income decreased compared to the prior-year quarter primarily driven by lower miscellaneous income and the accounting reclassification previously discussed, partially offset by other nonrecurring items. The lower miscellaneous income in the prior-year quarter comparison was primarily associated with a market value decrease in the supplemental compensation plans, which also resulted in a related decrease in supplemental compensation plan expense reported in other operating expense.

NET INTEREST INCOME

								% Change Q2 2022 vs.
($ In Millions)		Q2 2022		Q1 2022		Q2 2021		Q1 2022	Q2 2021
Net Interest Income
Interest Income (FTE*)	$	535.9	$	390.2	$	351.4	37 %	52 %
Interest Expense		66.1		2.5		7.5		N/M	N/M
Net Interest Income (FTE*)	$	469.8	$	387.7	$	343.9		21 %	37 %
Average Earning Assets	$	139,902	$	149,768	$	142,024	(7)%	(1)%
Net Interest Margin (FTE*)		1.35 %		1.05 %		0.97 %		30 bps	38 bps

1. Interest income, net interest income and net interest margin presented on an FTE basis are non-generally accepted accounting principle financial measures that facilitate the analysis of asset yields. Please refer to the Reconciliation to Fully Taxable Equivalent section for further detail.

bps - basis points

Net interest income on an FTE basis increased sequentially primarily due to a higher net interest margin and nonrecurring interest received from certain nonaccrual loans, partially offset by lower average earning assets. Net interest income on an FTE basis increased from the prior-year quarter primarily due to a higher net interest margin, a favorable balance sheet mix shift and nonrecurring interest received from certain nonaccrual loans.

The net interest margin on an FTE basis increased sequentially and from the prior year primarily due to higher average interest rates, favorable balance sheet mix and nonrecurring interest received from certain nonaccrual loans.

Average earning assets decreased sequentially primarily due to lower levels of short-terminterest-bearing deposits with banks and lower levels of securities, partially offset by higher levels of loans. Average earning assets decreased from the prior-year quarter primarily due to lower levels of securities and short-terminterest-bearing deposits with banks, partially offset by higher levels of loans. The decline in the size of the average balance sheet was primarily the result of lower levels of client deposits.

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NORTHERN TRUST CORPORATION SECOND QUARTER 2022 RESULTS

PROVISION FOR CREDIT LOSSES

		As of and for the three-months ended,			% Change June 30, 2022 vs.
($ In Millions)	June 30, 2022	March 31, 2022	June 30, 2021		March 31,	June 30, 2021
	2022
Allowance for Credit Losses
Beginning Allowance for Credit Losses	$	189.9	$	184.7	$	230.8	3 %	(18)%
Provision for Credit Losses		4.5		2.0		(27.0)	125	N/M
Net Recoveries (Charge-Offs)		5.5		3.2		3.2		N/M	N/M
Ending Allowance for Credit Losses	$	199.9	$	189.9	$	207.0	5 %	(3)%
Allowance assigned to:
Loans and Leases	$	138.2	$	136.3	$	148.8	1 %	(7)%
Undrawn Loan Commitments and		43.5		37.5		46.5	16	(6)
Standby Letters of Credit
Debt Securities and Other Financial Assets		18.2		16.1		11.7		13	56
Ending Allowance for Credit Losses	$	199.9	$	189.9	$	207.0		5 %	(3)%

N/M - Not meaningful

Q2 2022

The provision in the current quarter was primarily due to an increase in the reserve evaluated on a collective basis, partially offset by recoveries in the current quarter. The reserve evaluated on a collective basis relates to pooled financial assets sharing similar risk characteristics. The increase in the collective basis reserve was primarily driven by a projected decline in economic conditions as compared to the previous period, partially offset by improvements in credit quality mainly within the commercial real estate and commercial and institutional portfolios.

Q1 2022

The provision in the prior quarter 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 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 at the time.

Q2 2021

The release of credit reserves in the prior-year quarter was primarily due to a decrease in the reserve evaluated on a collective basis, driven by continued improvements in overall projected economic conditions at the time, as well as improved industry- specific conditions, partially offset by credit deterioration associated with a limited number of commercial real estate loans and overall portfolio growth.

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NORTHERN TRUST CORPORATION SECOND QUARTER 2022 RESULTS

NONINTEREST EXPENSE

								% Change Q2 2022 vs.
($ In Millions)		Q2 2022		Q1 2022		Q2 2021		Q1 2022	Q2 2021
Noninterest Expense
Compensation	$	546.5	$	563.9	$	486.3	(3)%	12 %
Employee Benefits		119.6		104.3		118.4	15	1
Outside Services		213.1		213.4		218.1		-	(2)
Equipment and Software		203.5		193.5		178.3	5	14
Occupancy		51.0		51.1		52.2		-	(2)
Other Operating Expense		89.9		79.7		67.5	13	33
Total Noninterest Expense	$	1,223.6	$	1,205.9	$	1,120.8		1 %	9 %
End of Period Full-Time Equivalent Staff		22,500		21,700		20,600	4 %	9 %

Compensation expense decreased sequentially primarily due to lower equity incentives, partially offset by higher salary expense. Compensation expense increased compared to the prior-year quarter primarily due to higher salary expense and cash- based incentives, partially offset by favorable currency translation.

Employee benefits expense increased sequentially primarily due to a $20.3 million pension settlement charge in the current quarter.

Outside services expense decreased compared to the prior-year quarter primarily due to lower third-party advisory fees and technical services costs, partially offset by higher consulting services.

Equipment and software expense increased sequentially and compared to the prior-year quarter primarily due to higher software costs driven by continued technology investments as well as amortization.

Other operating expense increased sequentially primarily due to higher business promotion and staff-related expense. Other operating expense increased compared to the prior-year quarter primarily due to the accounting reclassification previously discussed, higher business promotion, and other miscellaneous expense, partially offset by lower supplemental compensation plan expense. The lower supplemental compensation plan expense in the prior-year quarter comparison resulted in a related decrease in miscellaneous income reported in noninterest income.

PROVISION FOR INCOME TAX

								% Change Q2 2022 vs.
($ In Millions)		Q2 2022		Q1 2022		Q2 2021		Q1 2022		Q2 2021
Net Income
Income before Income Taxes	$	540.6	$	510.8	$	486.5	6	%	11	%
Provision for Income Taxes		144.4		121.5		118.4	19		22
Net Income	$	396.2	$	389.3	$	368.1		2	%	8	%
Effective Tax Rate		26.7 %		23.8 %		24.3 %		291 bps	236 bps

bps - basis points

The effective tax rate increased sequentially primarily due to a higher net tax impact from international operations in the current period, which includes a change in the earnings mix in tax jurisdictions in which the Corporation operates, limitations on the U.S. foreign tax credit, and reserves for uncertain tax positions. The effective tax rate increased compared to the prior-year quarter primarily due to a higher net tax impact from international operations, which includes a change in the earnings mix in tax jurisdictions in which the Corporation operates, limitations on the U.S. foreign tax credit, and reserves for uncertain tax positions, partially offset by the deferred tax impact of the UK statutory tax rate increase enacted in the prior-year quarter.

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