Northern Trust Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed April 23, 2024. Financial statements are unaudited. Northern Trust provides asset servicing, wealth management, asset management and banking services through Asset Servicing and Wealth Management segments.
Financial performance
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $1,646.8 million | $1,744.6 million | -6% |
| Net interest income | $528.1 million | $531.2 million | -1% |
| Net interest margin (FTE) | 1.61% | 1.62% | -1 bp |
| Provision for credit losses | $(8.5) million | $15.0 million | Negative provision in 2024 |
| Noninterest expense | $1,364.7 million | $1,285.6 million | +6% |
| Net income | $214.7 million | $334.6 million | -36% |
| Diluted EPS | $0.96 | $1.51 | -37% |
| Return on average common equity | 7.3% | 12.4% | Down |
| Return on average assets | 0.60% | 0.92% | Down |
Trust, investment and other servicing fees rose 7% to $1,142.9 million, supported by favorable markets and new business. The principal offset was a $189.4 million realized loss on available-for-sale (AFS) debt securities sold in a portfolio repositioning; the prior-year quarter recorded a $6.9 million gain. Higher funding costs largely offset improved interest income, leaving net interest income slightly lower. Compensation, outside services and equipment/software costs increased; Q1 also included a $12.5 million FDIC special assessment.
Wealth Management net income increased to $209.1 million from $172.1 million, while Asset Servicing net income declined to $160.6 million from $174.6 million. The company changed its funds-transfer-pricing methodology in January 2024, shifting approximately $31 million of Q1 net interest income allocation from Asset Servicing to Wealth Management; prior periods were not recast.
Balance sheet, liquidity and capital
- At March 31, 2024, total assets were $156.1 billion, up 4% from year-end 2023; deposits were $123.9 billion, up 7%; and stockholders’ equity was $12.1 billion, up 2%.
- Loans were $47.3 billion, down slightly from $47.6 billion at year-end. Total debt securities were $49.1 billion. Period-end cash and central-bank deposits included $40.3 billion at the Federal Reserve and other central banks.
- Interest-bearing deposits were $98.6 billion and noninterest-bearing deposits were $25.3 billion. Borrowings included $2.6 billion federal funds purchased, $0.5 billion repurchase agreements, $6.5 billion other borrowings, $2.7 billion senior notes and $4.1 billion long-term debt.
- Management reported cash, money-market assets and short-term investment securities at 61% of total assets, versus 59% at year-end. Capital remained above regulatory well-capitalized thresholds: Corporation standardized CET1 was 11.4%, Tier 1 capital 12.4% and total capital 14.2%.
- Client assets increased from year-end: assets under custody/administration were $16.47 trillion (+7%), assets under custody $12.80 trillion (+7%) and assets under management $1.50 trillion (+5%). Management attributed growth mainly to favorable markets and client inflows.
Cash flow and shareholder returns
For Q1, operating activities used $1.45 billion, investing activities used $4.79 billion and financing activities provided $6.94 billion; cash and due from banks increased $517 million. Deposit growth was the main source of financing cash, while operating cash use reflected, among other factors, higher net collateral deposited with derivative counterparties and pension contributions. These bank cash flows are influenced by balance-sheet and client activity and should not be read like operating cash flow at a nonfinancial company.
The common dividend declared was $0.75 per share, unchanged year over year. The company repurchased 1.65 million shares for $132.0 million, including shares withheld for employee tax obligations. The reported dividend payout ratio was 78.1%, compared with 49.7% a year earlier.
Material changes, risks and unusual items
- Securities repositioning and rate exposure: The $189.4 million AFS sale loss reduced current-period earnings. The securities portfolio had approximately $2.2 billion of net unrealized losses at quarter-end, including $1.86 billion on the HTM portfolio; management attributed losses primarily to interest rates. HTM securities had a $21.64 billion fair value against $23.50 billion amortized cost. AFS unrealized losses can affect accumulated other comprehensive income and regulatory capital.
- Credit: The negative credit-loss provision reflected lower individual and collective reserves, including improved portfolio quality and macroeconomic assumptions. Net charge-offs were $10.4 million, versus $2.9 million in Q1 2023. The allowance assigned to loans was $162.4 million, or 0.34% of loans. Nonaccrual assets fell to $37.0 million from $65.1 million at year-end.
- Interest-rate sensitivity: Management’s model estimated that a gradual 100-basis-point rate increase would add $31 million to next-12-month net interest income, while a 100-basis-point decrease would reduce it by $54 million. These estimates depend on assumptions and exclude potential management actions. A 100-basis-point upward shock was estimated to reduce market value of equity by $382 million.
- Contingencies: The company estimated reasonably possible losses on certain legal and regulatory matters at zero to approximately $25 million in aggregate, excluding matters for which a range cannot be reasonably estimated. A French appellate judgment against subsidiary NTFS included a €187,500 fine and potential joint liability for alleged taxes, penalties and interest; the company appealed, and the judgment is stayed pending appeal. Visa Class B share conversion and transfer restrictions remain subject to unresolved litigation and timing uncertainty.
- Off-balance-sheet exposures: Reported commitments and guarantees include $90.9 billion of standby letters of credit and financial guarantees, including an $89.3 billion FICC sponsored-member guarantee, and $138.3 billion of securities lent with indemnification. Management notes these contractual amounts are not necessarily representative of expected losses or funding needs; collateral and other protections apply.
- Regulatory outlook: The proposed Basel III Endgame rules could raise expanded-approach risk-weighted assets by an estimated 5%–15% versus current standardized RWA, before mitigation, if fully implemented. The proposal was not final in the filing.
Guidance and outlook: The filing does not provide quantified earnings or revenue guidance. Its credit-loss forecast assumes steady growth, stabilizing inflation and labor markets, and falling interest rates, while also considering a recession scenario. Management highlights risks from markets and rates, deposit outflows, costs, credit conditions, regulation, operations and technology, geopolitics, and client and counterparty activity.
Key facts for investors to verify
- How much of the year-over-year earnings decline reflects the one-time $189.4 million securities loss, and whether further portfolio repositioning is planned.
- Trends in deposit mix, funding costs and net interest margin, including sensitivity to rate changes and client deposit pricing.
- Whether servicing-fee growth and AUC/A and AUM inflows continue if markets weaken or client flows reverse.
- Credit performance and reserve adequacy, particularly commercial real estate exposures, charge-offs and nonaccrual trends.
- Realized impacts of securities marks, regulatory capital rules and the outstanding legal, Visa and off-balance-sheet exposures.