Northern Trust Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Northern Trust provides asset servicing, wealth management, asset management and banking services. Results are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $1.757 billion | $1.769 billion | $3.502 billion | $3.487 billion |
| Net interest income | $511.5 million | $458.7 million | $1.043 billion | $839.7 million |
| Net income | $331.8 million | $396.2 million | $666.4 million | $785.5 million |
| Diluted EPS | $1.56 | $1.86 | $3.07 | $3.63 |
| Noninterest expense | $1.332 billion | $1.224 billion | $2.618 billion | $2.430 billion |
| Net interest margin, FTE | 1.57% | 1.35% | 1.60% | 1.19% |
- Q2 return on average common equity was 12.4%, versus 15.7%; return on average assets was 0.91%, versus 1.03%.
- Q2 included a $15.5 million release of credit-loss reserves, compared with a $4.5 million provision in Q2 2022. Six-month results included a $0.5 million reserve release, versus a $6.5 million provision.
- Common dividends declared were $0.75 per share for the quarter, up from $0.70. The company repurchased $99.3 million of shares in Q2 and $200.2 million in the first half.
Balance sheet, liquidity and capital
- At June 30, total assets were $156.8 billion, deposits $113.2 billion and stockholders’ equity $11.6 billion. Deposits declined 9% from December 31, 2022; total assets rose 1%.
- Period-end federal funds purchased were $9.3 billion and other borrowings $12.4 billion, up from $1.9 billion and $7.6 billion, respectively, at year-end. Total liabilities were $145.1 billion.
- For the first half, operating cash flow was negative $264.3 million, investing cash flow negative $431.4 million and financing cash flow positive $1.072 billion; cash and due from banks increased $243.5 million. Management attributed operating cash use primarily to increased net collateral deposited with derivative counterparties and financing inflows mainly to short-term borrowings, partly offset by deposit declines.
- Management reported that cash at the Federal Reserve and other central banks, money market assets and short-term investment securities represented 64% of total assets. Regulatory capital ratios exceeded applicable well-capitalized requirements; Corporation CET1 was 11.3% under the standardized approach and 13.0% under the advanced approach.
- Assets under custody/administration were $14.48 trillion and assets under management were $1.37 trillion at quarter-end, up 5% from June 2022 in each case.
Material changes and management commentary
- Q2 revenue fell 1% year over year: higher net interest income, primarily from higher rates, was offset by lower noninterest income. Servicing fees declined 4%, reflecting unfavorable lagged markets, outflows and lower transaction volumes; foreign-exchange trading income fell 35% on lower client volumes and unfavorable swap activity.
- Q2 noninterest expense rose 9%, including $36.7 million in severance-related charges, higher technology costs, and a $25.6 million write-off of an investment in a client capability. First-half expense also included a $9.8 million charge for early lease exits.
- First-half results included a $6.9 million gain on sale of available-for-sale securities. Money-market fee waivers were $4.3 million for the first half, compared with $59.3 million in the prior-year period.
- Management cited improved credit quality in some commercial and institutional and commercial real estate loans, while noting expectations of greater stress in commercial real estate, particularly office properties. Its credit-loss forecast assumes continued slow, steady growth in the primary scenario and also considers a recession scenario.
Outlook, risks and contingencies
- The filing provides no specific quantitative earnings or revenue guidance. Management cautions that interest-rate changes, deposit mix and pricing, client asset values and flows, expenses, and market conditions affect results.
- The securities portfolio had approximately $3.2 billion of net unrealized losses at June 30, primarily attributed to market interest-rate changes. The filing describes interest-rate risk to both net interest income and market value of equity; modeled impacts are estimates and exclude potential management actions.
- Commercial real estate exposure and office-market stress are identified credit concerns. Nonaccrual assets were $47.4 million at June 30; the loan allowance was $152.5 million.
- Off-balance-sheet commitments totaled $227.6 billion, including a $47.0 billion guarantee to the Fixed Income Clearing Corporation under its sponsored-member program; these contractual amounts are not presented as expected losses or funding needs. Securities lent with indemnification totaled $143.8 billion and were collateralized under the described arrangements.
- Management said pending legal and regulatory matters were not expected to materially affect consolidated financial position or liquidity, but could affect results in a particular period. For matters with estimable reasonably possible losses, the aggregate range was zero to approximately $25 million; other matters could not be reasonably estimated. A French appellate retrial involving a subsidiary was scheduled to begin in September 2023.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit outflows and higher-cost wholesale funding continue, and how they affect net interest income and liquidity.
- Whether servicing-fee trends improve or remain pressured by lagged markets, client outflows and transaction volumes.
- Developments in office commercial real estate exposures, credit quality, nonaccrual loans and reserve assumptions.
- How the securities portfolio’s unrealized losses, interest-rate sensitivity and any future securities sales affect capital and earnings.
- Whether expense growth, including technology investment and unusual charges, moderates; and developments in the legal matters and FICC sponsored-member guarantee exposure.