Northern Trust(NTRS) - 2024 Q2 - Quarterly Report

Consolidated Financial Highlights Financial Performance Overview Northern Trust reported a significant increase in net income for Q2 2024, reaching $896.1 million, a 170% year-over-year increase, largely driven by a substantial gain from Visa transactions. Diluted EPS rose to $4.34 from $1.56. Total assets grew to $156.8 billion, and client assets under custody/administration (AUC/A) increased by 14% YoY to $16.6 trillion. Capital ratios remained strong, with the Common Equity Tier 1 (CET1) ratio at 12.6% under the standardized approach Condensed Income Statement (Q2 & H1 2024 vs 2023) | CONDENSED INCOME STATEMENTS ($ in Millions) | THREE MONTHS ENDED JUNE 30, | % CHANGE | SIX MONTHS ENDED JUNE 30, | % CHANGE | | :--- | :--- | :--- | :--- | :--- | | | 2024 | 2023 | | 2024 | 2023 | | | Noninterest Income | $2,192.6 | $1,245.6 | 76% | $3,311.3 | $2,459.0 | 35% | | Net Interest Income | $522.9 | $511.5 | 2% | $1,051.0 | $1,042.7 | 1% | | Total Revenue | $2,715.5 | $1,757.1 | 55% | $4,362.3 | $3,501.7 | 25% | | Provision for Credit Losses | $8.0 | $(15.5) | N/M | $(0.5) | $(0.5) | N/M | | Noninterest Expense | $1,533.9 | $1,331.9 | 15% | $2,898.6 | $2,617.5 | 11% | | Net Income | $896.1 | $331.8 | 170% | $1,110.8 | $666.4 | 67% | | Net Income — Diluted (per share) | $4.34 | $1.56 | 179% | $5.28 | $3.07 | 72% | Selected Balance Sheet and Client Asset Data (as of June 30, 2024) | SELECTED DATA | June 30, 2024 | Dec 31, 2023 | % CHANGE | | :--- | :--- | :--- | :--- | | Total Assets ($ in Millions) | $156,797.1 | $150,783.1 | 4% | | Deposits ($ in Millions) | $122,990.9 | $116,164.0 | 6% | | Stockholders' Equity ($ in Millions) | $12,655.8 | $11,897.9 | 6% | | Assets Under Custody/Administration ($ in Billions) | $16,567.4 | $15,404.9 | 8% | | Assets Under Management ($ in Billions) | $1,526.7 | $1,434.5 | 6% | Key Financial Ratios | Financial Ratios | THREE MONTHS ENDED JUNE 30, 2024 | THREE MONTHS ENDED JUNE 30, 2023 | | :--- | :--- | :--- | | Return on Average Common Equity | 31.2% | 12.4% | | Return on Average Assets | 2.44% | 0.91% | | Net Interest Margin | 1.57% | 1.57% | Capital Ratios (Standardized Approach) - Northern Trust Corporation | Capital Ratios (Standardized) | June 30, 2024 | Dec 31, 2023 | Minimum Capital Ratios | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 12.6% | 11.4% | 4.5% | | Tier 1 Capital | 13.6% | 12.3% | 6.0% | | Total Capital | 15.5% | 14.2% | 8.0% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Q2 2024 Consolidated Results of Operations In Q2 2024, total revenue surged 55% YoY to $2.72 billion, primarily due to an $878.4 million net gain from Visa transactions. Trust fees grew 6% to $1.17 billion, driven by favorable markets. Net interest income saw a modest 2% increase to $522.9 million. Noninterest expense rose 15% to $1.53 billion, impacted by $182.2 million in restructuring charges, including severance and a charitable contribution. Consequently, net income increased 170% to $896.1 million, with diluted EPS at $4.34 - A significant one-time event, a net gain of $878.4 million related to Visa transactions, was the primary driver of the 55% YoY revenue growth[10] - Noninterest expense increased by $202.0 million (15%) YoY, largely due to $182.2 million in restructuring charges and other notable items, including $85.2 million in severance and a $70 million charitable commitment[10] Trust, Investment and Other Servicing Fees Total trust, investment, and other servicing fees increased by 6% YoY to $1.17 billion. This growth was broad-based, with Asset Servicing fees up 5% and Wealth Management fees up 8%. The increase was primarily attributed to favorable market conditions and new business. However, Securities Lending revenue declined by 24% due to lower spreads and volumes Trust, Investment and Other Servicing Fees by Segment (Q2 2024 vs Q2 2023) | ($ in Millions) | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Asset Servicing | | | | | Custody and Fund Administration | $445.9 | $427.4 | 4% | | Investment Management | $145.7 | $134.1 | 9% | | Securities Lending | $16.5 | $21.5 | (24)% | | Other | $42.5 | $38.2 | 11% | | Total Asset Servicing | $650.6 | $621.2 | 5% | | Wealth Management | $515.5 | $475.1 | 8% | | Total Consolidated | $1,166.1 | $1,096.3 | 6% | - Growth in Custody and Fund Administration fees was driven by favorable markets and new business, which was partially offset by lower transaction volumes[15] - Wealth Management fee income increased across all regions, primarily due to favorable markets. Global Family Office fees also benefited from asset inflows[16] Client Assets Client assets experienced strong growth, with total Assets Under Custody/Administration (AUC/A) rising 14% YoY to $16.6 trillion. Assets Under Management (AUM) also grew 12% YoY to $1.5 trillion. Both increases were primarily driven by favorable market performance Client Asset Growth (YoY) | ($ in Billions) | June 30, 2024 | June 30, 2023 | % Change YoY | | :--- | :--- | :--- | :--- | | Assets Under Custody / Administration | $16,567.4 | $14,478.9 | 14% | | Assets Under Custody | $13,041.4 | $11,284.8 | 16% | | Assets Under Management | $1,526.7 | $1,365.8 | 12% | - In Q2 2024, AUM saw net inflows of $4.4 billion, complemented by $21.6 billion from market performance and currency effects[30] Other Noninterest Income Other noninterest income surged to $1.03 billion in Q2 2024 from $149.3 million in the prior-year quarter. This was almost entirely due to an $878.4 million gain from Visa transactions. Foreign Exchange Trading Income also contributed positively, increasing 17% YoY Other Noninterest Income Components (Q2 2024 vs Q2 2023) | ($ in Millions) | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Foreign Exchange Trading Income | $58.4 | $50.1 | 17% | | Other Operating Income | $924.7 | $55.2 | N/M | | Total Other Noninterest Income | $1,026.5 | $149.3 | N/M | - The increase in Other Operating Income was primarily driven by the $878.4 million gain from Visa transactions, partially offset by a loss from a securities repositioning for the supplemental pension plan and certain investment impairments[34] Net Interest Income (NII) Net Interest Income (NII) increased by a modest 2% YoY to $522.9 million. The benefit of higher client deposits was largely offset by increased funding costs. The net interest margin (NIM) remained flat at 1.57% compared to the prior-year quarter. Average loans decreased by 3% YoY - NII on a fully taxable equivalent (FTE) basis increased by $5.2 million YoY, driven by a $10.5 million positive impact from higher rates, which was partially offset by a $5.3 million negative impact from changes in average balance/volume[39][40] - Average loans decreased by $1.4 billion (3%) YoY, primarily due to lower commercial and institutional loans (down 33%) and private client loans (down 5%)[39][42] - Average interest-bearing deposits grew 10% YoY to $96.8 billion, while other interest-bearing liabilities decreased 29% to $17.4 billion[43] Provision for Credit Losses A provision for credit losses of $8.0 million was recorded in Q2 2024, a reversal from the $15.5 million release in Q2 2023. The current provision reflects an increase in collective reserves, mainly due to modest credit quality deterioration in the Commercial & Institutional (C&I) portfolio and expectations of weaker Commercial Real Estate (CRE) prices - The company recorded an $8.0 million provision for credit losses in Q2 2024, compared to a negative provision (release) of $15.5 million in Q2 2023[44] - The provision was driven by increased reserves for the C&I portfolio due to modest credit quality deterioration and for the CRE portfolio due to expectations of weaker prices[44] Noninterest Expense Noninterest expense increased 15% YoY to $1.53 billion. The rise was primarily driven by higher compensation costs, which included an $81.8 million severance charge, increased equipment and software costs due to disposition charges, and a $70.0 million charitable commitment recorded in Other Operating Expense Noninterest Expense Components (Q2 2024 vs Q2 2023) | ($ in Millions) | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | Compensation | $665.2 | $604.5 | 10% | | Employee Benefits | $100.2 | $101.4 | (1)% | | Outside Services | $260.9 | $230.9 | 13% | | Equipment and Software | $277.5 | $229.3 | 21% | | Occupancy | $54.8 | $53.8 | 2% | | Other Operating Expense | $175.3 | $112.0 | 57% | | Total Noninterest Expense | $1,533.9 | $1,331.9 | 15% | - Key drivers of the expense increase include an $81.8 million severance charge, a $70.0 million charitable commitment, and a legal settlement[45][47] Provision for Income Taxes The provision for income taxes was $277.5 million, resulting in an effective tax rate of 23.6% for Q2 2024. This is a decrease from the 24.7% effective tax rate in Q2 2023, primarily due to a lower state effective tax rate following new legislation and the resolution of state tax audits - The effective tax rate for Q2 2024 was 23.6%, compared to 24.7% in Q2 2023[48] - The decrease in the effective tax rate was mainly due to a lower state effective tax rate resulting from tax legislation and the resolution of state income tax audits[48] H1 2024 Consolidated Results of Operations For the first six months of 2024, revenue increased 25% to $4.36 billion, and net income rose 67% to $1.11 billion, with diluted EPS at $5.28. Performance was significantly boosted by the $878.4 million Visa transaction gain. Trust fees grew 7%, while net interest income was up 1%. Noninterest expense increased 11% to $2.90 billion, reflecting restructuring charges. The provision for credit losses was a net negative $0.5 million, consistent with the prior year - Six-month revenue grew by $860.6 million (25%) YoY, driven by the Visa transaction gain and a 7% increase in Trust, Investment and Other Servicing Fees[49] - Noninterest expense for the six-month period increased by $281.1 million (11%) YoY, primarily due to $182.2 million in restructuring charges, a $70 million charitable commitment, and higher software-related costs[49] - Net income for H1 2024 was $1.11 billion, a 67% increase from $666.4 million in H1 2023[49] Reporting Segments Northern Trust operates through two main segments: Asset Servicing and Wealth Management. In H1 2024, Wealth Management's net income grew 11% YoY to $403.0 million, benefiting from higher fees and a favorable change in the internal funds transfer pricing (FTP) methodology. Asset Servicing's net income fell 20% to $262.3 million, negatively impacted by the FTP change and higher expenses. The 'Other' segment recorded $445.5 million in net income, almost entirely from the Visa transaction gain - Effective January 2024, a change in the funds transfer pricing (FTP) methodology shifted approximately $63 million in Net Interest Income for H1 2024 from the Asset Servicing segment to the Wealth Management segment. Prior periods were not revised[66] Segment Net Income (H1 2024 vs H1 2023) | ($ in Millions) | H1 2024 | H1 2023 | % Change | | :--- | :--- | :--- | :--- | | Asset Servicing | $262.3 | $328.3 | (20)% | | Wealth Management | $403.0 | $363.0 | 11% | | Other | $445.5 | $(24.9) | N/M | | Total Consolidated | $1,110.8 | $666.4 | 67% | Asset Servicing For H1 2024, the Asset Servicing segment's net income decreased by 20% YoY to $262.3 million. The decline was primarily due to higher noninterest expenses (up 7%) and lower net interest income (down 7%), which was impacted by the FTP methodology change. This offset the 5% growth in trust, investment, and other servicing fees - Net income for the six months ended June 30, 2024, decreased $66.0 million (20%) from the prior-year period, mainly due to higher Noninterest Expense and lower Net Interest Income[72] - Net Interest Income for the segment decreased by $42.3 million (7%) for the six-month period, primarily due to the change in the FTP allocation methodology[73] Wealth Management The Wealth Management segment's net income for H1 2024 increased by 11% YoY to $403.0 million. This growth was driven by an 8% increase in trust fees and a 9% rise in net interest income, the latter benefiting from the FTP methodology change. These gains were partially offset by a 7% increase in noninterest expenses - For the six months ended June 30, 2024, Net Income increased $40.0 million (11%) from the prior-year period, driven by higher Trust, Investment and Other Servicing Fees and higher Net Interest Income[76] - Net Interest Income for the segment increased by $38.5 million (9%) for the six-month period, primarily due to the change in the FTP allocation methodology[77] Other The 'Other' segment, which captures non-recurring corporate activities, reported a significant increase in noninterest income for H1 2024, primarily due to the gain from the Visa transactions. This was partially offset by a loss on the sale of AFS debt securities. Noninterest expense also rose, driven by a charitable commitment and a legal settlement - For H1 2024, Other Noninterest Income increased by $697.0 million, mainly due to the Visa transaction gain, partially offset by a loss on the sale of available-for-sale debt securities[80] - Other Noninterest Expense increased by $90.1 million for H1 2024, primarily due to a charitable commitment to the Northern Trust Foundation and a legal settlement[81] Consolidated Balance Sheet Analysis As of June 30, 2024, total assets stood at $156.8 billion, a 4% increase from year-end 2023, driven by a 6% rise in total deposits to $123.0 billion. Conversely, total loans decreased by 12% to $42.1 billion. The company actively managed its capital, repurchasing 4.6 million shares for $382.8 million in the first half of the year Selected Balance Sheet Data (Period-End) | ($ in Billions) | June 30, 2024 | Dec 31, 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $156.8 | $150.8 | 4% | | Total Earning Assets | $144.4 | $140.4 | 3% | | Total Deposits | $123.0 | $116.2 | 6% | | Loans | $42.1 | $47.6 | (12)% | | Total Stockholders' Equity | $12.7 | $11.9 | 6% | - Average interest-bearing deposits increased YoY for both the three- and six-month periods, primarily due to strategic pricing actions, while noninterest-bearing deposits decreased as clients migrated to higher-yield products[83] - During the six months ended June 30, 2024, the Corporation repurchased 4,648,742 shares of common stock at a total cost of $382.8 million (average price of $82.35 per share)[83] Asset Quality Northern Trust's asset quality remains strong. The securities portfolio is high-grade, with 96% of both AFS and HTM securities rated 'A' or better. Nonaccrual assets significantly decreased by 41% from year-end 2023 to $38.5 million. The allowance for credit losses on loans was 0.40% of total loans, reflecting a well-managed credit profile Securities Portfolio The debt securities portfolio remains high quality. As of June 30, 2024, 96% of the $26.9 billion AFS portfolio and 96% of the $22.8 billion HTM portfolio were rated 'A' or higher. Net unrealized losses in the total investment portfolio improved to $2.1 billion from $2.3 billion at year-end 2023, primarily due to changes in market interest rates - The Available for Sale (AFS) debt securities portfolio is high quality, with 96% of its fair value rated AAA or AA as of June 30, 2024[85] - The Held to Maturity (HTM) debt securities portfolio is also high quality, with 96% of its amortized cost rated A or higher as of June 30, 2024[87] - In January 2024, the Corporation sold certain AFS debt securities, recognizing a loss of $189.4 million[89] Nonaccrual Loans and Other Real Estate Owned Total nonaccrual assets decreased by 41% to $38.5 million at June 30, 2024, from $65.1 million at year-end 2023. This improvement was primarily due to a private client loan payoff and a commercial and institutional loan charge-off. The ratio of nonaccrual loans to total loans improved to 0.09% from 0.13% Nonaccrual Assets | ($ in Millions) | June 30, 2024 | Dec 31, 2023 | % Change | | :--- | :--- | :--- | :--- | | Total Nonaccrual Loans | $38.5 | $63.6 | (39.5)% | | Other Real Estate Owned | $0.0 | $1.5 | (100)% | | Total Nonaccrual Assets | $38.5 | $65.1 | (40.9)% | | Nonaccrual Loans to Total Loans | 0.09% | 0.13% | | Allowance for Credit Losses The total allowance for credit losses (for loans and commitments) was $197.2 million as of June 30, 2024, down from $205.6 million at year-end 2023. The allowance assigned to loans was $167.7 million, representing 0.40% of total loans. The commercial portfolio, particularly CRE, holds the largest portion of the collective allowance Allocation of Allowance for Credit Losses (Loans) | ($ in Millions) | June 30, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Commercial Portfolio Allowance | $163.5 | $160.3 | | Personal Portfolio Allowance | $31.2 | $31.9 | | Total Allowance (Collective Basis) | $194.7 | $192.2 | | Total Allowance for Loans | $167.7 | $178.7 | | Allowance for Loans to Total Loans | 0.40% | 0.38% | - The Commercial Real Estate (CRE) loan portfolio totaled $5.27 billion, with Apartment/Multi-family ($1.65B) and Office ($0.99B) being the largest components[97] Statements of Cash Flows Analysis For the first six months of 2024, net cash from operating activities was a strong inflow of $1.5 billion, a significant turnaround from a $264.3 million outflow in the prior-year period, mainly due to higher earnings. Investing activities used $3.8 billion, driven by increased deposits at central banks and net purchases of AFS securities. Financing activities provided $4.3 billion, primarily from a net increase in deposits Cash Flow Activity Summary (H1 2024 vs H1 2023) | (in Millions) | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $1,537.7 | $(264.3) | | Net cash used in investing activities | $(3,842.9) | $(431.4) | | Net cash provided by financing activities | $4,298.2 | $1,071.7 | Capital Management and Ratios Capital ratios remained robust and well above regulatory minimums as of June 30, 2024. The Common Equity Tier 1 (CET1) ratio under the standardized approach was 12.6%, up from 11.3% a year ago. The company noted that the proposed Basel III Endgame rules could increase its risk-weighted assets (RWAs) by an estimated 5% to 15% if fully implemented without mitigation Regulatory Capital Ratios (Standardized Approach) - Corporation | Capital Ratio | June 30, 2024 | June 30, 2023 | Minimum Requirement | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.6% | 11.3% | 4.5% | | Tier 1 Capital | 13.6% | 12.3% | 6.0% | | Total Capital | 15.5% | 14.4% | 8.0% | | Tier 1 Leverage | 8.0% | 7.4% | 4.0% | - The company estimates that the Basel III Endgame Proposal, if implemented as proposed, would increase its risk-weighted assets (RWAs) by approximately 5% to 15% on a fully phased-in basis[107] Risk Management Northern Trust maintains a highly liquid balance sheet, with 64% of assets in cash and short-term investments, to manage liquidity risk. Market risk is monitored through Net Interest Income (NII) and Market Value of Equity (MVE) sensitivity analyses. A 100 basis point gradual increase in rates is estimated to increase NII by $22 million over 12 months but decrease MVE by $383 million. Trading risk, measured by Value-at-Risk (VaR), remains low Liquidity Risk The company manages liquidity risk with a highly liquid balance sheet. As of June 30, 2024, 64% of total assets consisted of cash held at central banks, money market assets, and short-term investment securities. Furthermore, 87% of the securities portfolio is composed of U.S. Treasury, government-sponsored agency, and triple-A rated securities - The balance sheet is highly liquid, with 64% of total assets in cash and short-term investments as of June 30, 2024[112] - 87% of the securities portfolio is comprised of U.S. Treasury, government sponsored agency, and triple-A rated securities as of June 30, 2024[112] Market Risk Market risk is managed using NII sensitivity, MVE sensitivity, and VaR. As of June 30, 2024, a gradual 100 bps rate increase is estimated to boost NII by $22 million over 12 months, while a 100 bps rate decrease would lower NII by $41 million. The same rate shock is estimated to decrease MVE by $383 million or increase it by $396 million, respectively. VaR for the trading book remains low, with an average daily VaR of $0.6 million in Q2 2024 Net Interest Income (NII) Sensitivity (as of June 30, 2024) | Rate Change (vs. Forward Rates) | Estimated Impact on Next 12 Months NII ($M) | | :--- | :--- | | +100 Basis Points | $22 | | +200 Basis Points | $41 | | -100 Basis Points | $(41) | | -200 Basis Points | $(104) | Market Value of Equity (MVE) Sensitivity (as of June 30, 2024) | Rate Change (vs. Forward Rates) | Estimated Impact on MVE ($M) | | :--- | :--- | | +100 Basis Points | $(383) | | +200 Basis Points | $(850) | | -100 Basis Points | $396 | | -200 Basis Points | $596 | - The average daily Value-at-Risk (VaR) for the combined trading book was $0.6 million for the three months ended June 30, 2024[119] Consolidated Financial Statements (unaudited) Financial Statements This section presents the unaudited consolidated financial statements for Northern Trust Corporation as of and for the periods ended June 30, 2024. It includes the Consolidated Balance Sheets, Statements of Income, Statements of Comprehensive Income, Statements of Changes in Stockholders' Equity, and Statements of Cash Flows Notes to Consolidated Financial Statements The notes provide detailed disclosures supporting the consolidated financial statements. Key topics include the basis of presentation, fair value measurements, detailed breakdowns of securities and loans, allowance for credit losses, segment reporting, commitments and contingent liabilities (including the Visa transaction), and derivative financial instruments Note 20 – Commitments and Contingent Liabilities This note details significant off-balance sheet commitments, including a $100.1 billion guarantee to the FICC under its sponsored member program. It provides extensive information on the Visa share exchange, where Northern Trust tendered its Class B shares, received new Class B-2 and Class C shares, and subsequently sold a portion of the Class C shares for a $607.0 million gain. The company also entered into a Makewhole Agreement related to the transaction. For legal proceedings, the company estimates a range of reasonably possible loss for certain matters from zero to $20 million - As part of its sponsored member program, Northern Trust provides a guarantee to the Fixed Income Clearing Corporation (FICC) amounting to $100.1 billion as of June 30, 2024[266][267] - In May 2024, Northern Trust participated in a Visa share exchange offer, receiving new Visa Class B-2 and Class C shares. The company subsequently sold 546.3 thousand Class C shares, recording a realized gain of $607.0 million[271][273] - For a limited number of legal matters, the company estimates the range of reasonably possible loss to be from zero to approximately $20 million in aggregate as of June 30, 2024[271] Other Information Issuer Purchases of Equity Securities In the second quarter of 2024, Northern Trust repurchased approximately 3.0 million shares of its common stock at an average price of $83.56 per share, for a total cost of $250.8 million. As of June 30, 2024, approximately 16.7 million shares remain authorized for repurchase under the current plan Common Stock Repurchases (Q2 2024) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Remaining Under Plan | | :--- | :--- | :--- | :--- | | April 2024 | 479,482 | $83.46 | 19,260,407 | | May 2024 | 1,301,612 | $84.51 | 17,958,795 | | June 2024 | 1,210,728 | $82.58 | 16,748,067 | | Total Q2 | 2,991,822 | $83.56 | 16,748,067 |