Northern Trust Corporation Reports Second Quarter Net Income of $191.1 Million, Earnings Per Common

Northern Trust Corporation Reports Second Quarter Net Income of $191.1 Million, Earnings Per Common Share of $0.78

CHICAGO--(BUSINESS WIRE)-- Northern Trust Corporation today reported second quarter net income per common share of $0.78, up from $0.73 in the second quarter of 2012 and $0.67 in the first quarter of 2013. Net income was $191.1 million in the current quarter, up 6% from $179.6 million in the prior year second quarter, and up 17% from $164.0 million in the prior quarter. Return on average common equity was 10.0% in the current quarter, compared to 9.9% in the prior year quarter and 8.8% in the prior quarter.


Frederick H. Waddell, Chairman and Chief Executive Officer, commented, "Second quarter performance featured solid improvement in net income and earnings per common share versus last year, reflecting increased revenues and disciplined expense management. Our productivity efforts remained on track and capital levels were very strong. We continued to generate growth across our businesses with trust, investment and other servicing fees increasing 8% from a year ago. Our quarterly results led to a 10.0% return on average common equity, our best since the second quarter of 2010."

SECOND QUARTER 2013 PERFORMANCE VS. SECOND QUARTER 2012

Net income per common share in the second quarter of 2013 was $0.78 compared to $0.73 per common share in the second quarter of 2012. Net income for the current quarter was $191.1 million compared to $179.6 million in the prior year quarter.

Consolidated revenue of $1.02 billion in the current quarter was up $32.0 million, or 3%, from $988.5 million in the prior year quarter. Noninterest income, which represented 78% of revenue, increased $66.0 million, or 9%, to $800.4 million from the prior year quarter's $734.4 million, primarily reflecting higher trust, investment and other servicing fees and increased foreign exchange trading income. Net interest income for the quarter on a fully taxable equivalent (FTE) basis decreased $36.3 million, or 14%, to $228.0 million compared to $264.3 million in the prior year quarter, primarily due to a continued decline in the net interest margin.

Trust, investment and other servicing fees were $657.3 million in the current quarter, up $51.5 million, or 8%, from $605.8 million in the prior year quarter. The increase primarily reflects the favorable impact of equity markets on fees and new business, partially offset by higher waived fees in money market mutual funds.

Assets under custody and assets under management are the primary drivers of our trust, investment and other servicing fees. The following table provides Northern Trust's assets under custody and assets under management by business segment.

           
 June 30, March 31, June 30, % Change % Change
($ In Billions) 2013 2013 2012 Q2-13/Q1-13 Q2-13/Q2-12
Assets Under Custody
Corporate & Institutional$4,538.9$4,569.1$4,152.7(1)%9%
Personal  452.6  455.3  411.2 (1)  10 
Total Assets Under Custody $4,991.5 $5,024.4 $4,563.9 (1)% 9%
 
Assets Under Management
Corporate & Institutional$600.5$604.2$528.4(1)%14%
Personal  202.5  206.0  175.9 (2)  15 
Total Assets Under Management $803.0 $810.2 $704.3 (1)% 14%
 

Trust, investment and other servicing fees in Corporate & Institutional Services (C&IS) increased $25.8 million, or 8%, to $364.2 million in the current quarter from the prior year quarter's $338.4 million.

       
 Q2 Q2 

Change Q2 2013

($ In Millions) 2013 2012 

from Q2 2012

C&IS Trust, Investment and Other Servicing Fees 
Custody and Fund Administration$234.4$215.0$19.49%
Investment Management73.971.82.13
Securities Lending31.130.70.41
Other  24.8  20.9  3.9 18 
Total $364.2 $338.4 $25.8 8%
 

Custody and fund administration fees, the largest component of C&IS fees, increased 9%, primarily reflecting the favorable impact of equity markets on fees and new business. C&IS investment management fees increased 3%, reflecting the favorable impact of markets and new business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $9.8 million in the current quarter, compared to waived fees of $7.0 million in the prior year quarter. Securities lending revenue increased slightly, reflecting higher loan volumes, partially offset by lower spreads in the current quarter.

Trust, investment and other servicing fees in Personal Financial Services (PFS) totaled $293.1 million in the current quarter, increasing $25.7 million, or 10%, from $267.4 million in the prior year quarter. The increased fees in the current quarter are primarily attributable to the favorable impact of equity markets on fees and new business, partially offset by higher waived fees in money market mutual funds. Money market mutual fund fee waivers in PFS totaled $12.9 million in the current quarter compared with $10.0 million in the prior year quarter.

Foreign exchange trading income totaled $71.3 million, up $11.9 million, or 20%, compared with $59.4 million in the prior year quarter. The current quarter increase is attributable to higher currency market volatility and trading volumes compared to the prior year quarter.

Other operating income totaled $36.3 million in the current quarter, up $2.3 million, or 6%, from $34.0 million in the prior year quarter, reflecting current quarter increases within various miscellaneous income categories.

Net interest income for the quarter on an FTE basis totaled $228.0 million, down $36.3 million, or 14%, compared to $264.3 million in the prior year quarter. The decrease reflects a continued decline in the net interest margin to 1.10% from 1.28% in the prior year quarter. The decline in the net interest margin primarily reflects lower yields on earning assets, partially offset by a lower cost of interest-related funds due to lower short-term interest rates. Average earning assets for the quarter were $83.1 billion, relatively unchanged from $83.2 billion in the prior year quarter.

The provision for credit losses was $5.0 million in both the current quarter and prior year quarter. Net charge-offs totaled $8.1 million for the current quarter resulting from $15.6 million of charge-offs and $7.5 million of recoveries, compared to $3.2 million of net charge-offs in the prior year quarter resulting from $16.2 million of charge-offs and $13.0 million of recoveries. Nonperforming loans and leases increased $26.9 million, or 11%, from the prior year quarter. Residential real estate loans and commercial real estate loans accounted for 66% and 23%, respectively, of total nonperforming loans at June 30, 2013.

The table below provides information regarding nonperforming assets, the allowance for credit losses, and associated ratios.

       
 June 30, March 31, June 30,
($ In Millions) 2013 2013 2012
 
Nonperforming Assets
Nonperforming Loans and Leases$266.7$251.7$239.8
Other Real Estate Owned  14.5  10.5  25.3
Total Nonperforming Assets  281.2  262.2  265.1
 
Allowance for Credit Losses
Allowance for Credit Losses Assigned to:
Loans and Leases290.4294.1300.3
Unfunded Loan Commitments and Standby Letters of Credit  30.3  29.7  29.6
Total Allowance for Credit Losses $320.7 $323.8 $329.9
 
Ratios
Nonperforming Loans and Leases to Total Loans and
Leases0.93%0.87%0.81%
Allowance for Credit Losses Assigned to Loans
and Leases to Total Loans and Leases1.01%1.02%1.01%
Allowance for Credit Losses Assigned to Loans and Leases to

 

 

 

Nonperforming Loans and Leases  

1.1x

  

1.2x

  

1.3x

 

Noninterest expense totaled $729.7 million in the current quarter, up $12.4 million, or 2%, from $717.3 million in the prior year quarter.

Compensation expense, the largest component of noninterest expense, equaled $326.9 million, up $13.1 million, or 4%, from $313.8 million in the prior year quarter. The increase is primarily attributable to higher staff levels and base pay adjustments. Staff on a full-time equivalent basis at June 30, 2013 totaled approximately 14,500, up 3% from a year ago.

Employee benefit expense equaled $64.2 million, down slightly from $64.9 million in the prior year quarter.

Expense associated with outside services totaled $136.2 million, up 2% from $133.7 million in the prior year quarter, primarily reflecting higher technical services and consulting expense in the current quarter.

Equipment and software expense totaled $92.1 million, down $7.3 million, or 7%, from $99.4 million in the prior year quarter. The prior year quarter included a $10.5 million software write-off. Excluding the prior period write-off, equipment and software expense increased 4% due to higher software amortization, partially offset by lower computer maintenance and repair expense.

Occupancy expense equaled $43.5 million, an increase of 2% from $42.6 million in the prior year quarter.

Other operating expense totaled $66.8 million compared with $62.9 million in the prior year quarter, an increase of 6%, reflecting current quarter increases within various miscellaneous expense categories.

Income tax expense was $94.7 million in the current quarter, representing an effective tax rate of 33.1%, and $86.6 million in the prior year quarter, representing an effective tax rate of 32.5%.

SECOND QUARTER 2013 PERFORMANCE VS. FIRST QUARTER 2013

Net income per common share was $0.78 in the current quarter, compared with $0.67 in the first quarter of 2013. Net income for the current quarter totaled $191.1 million, up 17% from $164.0 million in the prior quarter. The prior quarter included a $12.4 million write-off of certain fee receivables resulting from the correction of an accrual methodology followed in prior years.

Consolidated revenue of $1.02 billion for the current quarter was up $44.1 million, or 5%, from $976.4 million in the prior quarter. Noninterest income increased $50.1 million, or 7%, to $800.4 million from the prior quarter's $750.3 million, primarily reflecting higher trust, investment and other servicing fees and increased foreign exchange trading income. Net interest income for the current quarter on an FTE basis decreased $5.7 million, or 2%, to $228.0 million from $233.7 million in the prior quarter, due to a continued decline in the net interest margin.

Trust, investment and other servicing fees totaled $657.3 million in the current quarter, up $26.6 million, or 4%, from $630.7 million in the prior quarter. C&IS trust, investment and other servicing fees totaled $364.2 million in the current quarter, up $15.5 million, or 4%, from $348.7 million in the prior quarter.

       
 Q2 Q1 

Change Q2 2013

($ In Millions) 2013 2013 

from Q1 2013

C&IS Trust, Investment and Other Servicing Fees
Custody and Fund Administration$234.4$223.8$10.65%
Investment Management73.975.5(1.6)(2)
Securities Lending31.122.38.840
Other  24.8  27.1  (2.3)(8) 
Total $364.2 $348.7 $15.5 4 %
 

C&IS custody and fund administration fees increased 5%, primarily reflecting the favorable impact of equity markets on fees and new business.

Investment management fees decreased 2%, as the favorable impact of equity markets on fees was offset by higher waived fees on money market mutual funds. Money market mutual fund fee waivers, attributable to the low short-term interest rates, totaled $9.8 million in C&IS in the current quarter, up from $8.8 million in the prior quarter.

PFS trust, investment and other servicing fees were $293.1 million, up 4% from $282.0 million in the prior quarter, primarily driven by favorable equity markets and new business. Money market mutual fund fee waivers in PFS totaled $12.9 million in the current quarter, down slightly from $13.4 million in the prior quarter.

Foreign exchange trading income increased $11.8 million, or 20%, to $71.3 million compared to $59.5 million in the prior quarter. The current quarter increase is attributable to higher currency market volatility and trading volumes.

Other operating income in the current quarter totaled $36.3 million, up $11.5 million, or 47% from $24.8 million in the prior quarter. The prior quarter included the $12.4 million write-off of certain fee receivables.

Net interest income on an FTE basis in the current quarter totaled $228.0 million, down $5.7 million, or 2%, compared to $233.7 million in the prior quarter. The decrease primarily reflects a continued decline in the net interest margin. The net interest margin decreased to 1.10% in the current quarter from 1.15% in the prior quarter, reflecting lower yields on earning assets, partially offset by a lower cost of interest-related funds. Average earning assets totaled $83.1 billion in the current quarter, up $963.7 million compared to $82.2 billion in the prior quarter.

The provision for credit losses totaled $5.0 million in both the current quarter and prior quarter. Net charge-offs totaled $8.1 million for the current quarter resulting from $15.6 million of charge-offs and $7.5 million of recoveries, compared to $8.7 million of net charge-offs in the prior quarter resulting from $12.6 million of charge-offs and $3.9 million of recoveries. Nonperforming loans and leases increased $15.0 million, or 6%, as compared to the prior quarter. Residential real estate and commercial real estate loans accounted for 66% and 23%, respectively, of total nonperforming loans at June 30, 2013.

Noninterest expense totaled $729.7 million in the current quarter, up slightly from $728.9 million in the prior quarter.

Compensation expense totaled $326.9 million for the current quarter, up $6.6 million, or 2%, from $320.3 million in the prior quarter, primarily reflecting base pay adjustments in salaries and higher staff levels.

Employee benefit expense totaled $64.2 million for the current quarter, up from $63.3 million in the prior quarter.

Expense for outside services totaled $136.2 million, an increase of $6.3 million, or 5%, compared to $129.9 million in the prior quarter. The current quarter increase primarily reflects higher consulting, sub-custodian and technical services expense.

Equipment and software expense totaled $92.1 million in the current quarter, up slightly from $91.4 million in the prior quarter. The increase is primarily attributable to higher levels of software amortization and related software support costs, partially offset by lower computer maintenance and rental costs.

Occupancy expense totaled $43.5 million, relatively unchanged from $43.2 million in the prior quarter.

Other operating expense totaled $66.8 million, a decrease of $14.0 million, or 17%. The decrease primarily reflects higher business promotion expense incurred in the prior quarter and lower charges associated with account servicing activities in the current quarter.

Total income tax expense was $94.7 million for the current quarter, representing an effective tax rate of 33.1%. Income tax expense was $78.5 million in the prior quarter, representing an effective tax rate of 32.4%.

STOCKHOLDERS' EQUITY

Total stockholders' equity averaged $7.6 billion, up 5% from the prior year quarter's average of $7.3 billion. The increase primarily reflects earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation's share buyback program. During the three and six months ended June 30, 2013, the Corporation repurchased 281,326 shares at a cost of $15.3 million ($54.28 average price per share) and 1,684,692 shares at a cost of $89.8 million ($53.28 average price per share), respectively. The Corporation's common stock repurchase authorization was replaced in April of 2013, pursuant to which the Corporation is authorized to purchase up to 11.7 million additional shares after June 30, 2013.

As reflected in the table below, the risk-based capital ratios of Northern Trust and its principal subsidiary bank, The Northern Trust Company, remained strong at June 30, 2013, with all ratios exceeding the U.S. regulatory requirements for classification as a "well capitalized" institution.

       
  June 30, 2013 March 31, 2013 June 30, 2012
 Tier 1 Total Leverage Tier 1 Total Leverage Tier 1 Total Leverage
  Capital Capital Ratio Capital Capital Ratio Capital Capital Ratio
Northern Trust Corporation13.1%14.4%8.4%

13.3%

14.7%

8.4%

12.9%14.4%8.0%
The Northern Trust Company11.3%13.0%7.3%

12.2%

14.0%

7.7%

11.9%13.8%7.4%
Minimum to Qualify as
Well Capitalized 6.0% 10.0% 5.0% 

6.0%

 

10.0%

 

5.0%

 6.0% 10.0% 5.0%
 

The following table provides the Corporation's ratios of tier 1 capital and tier 1 common equity to risk-weighted assets, as well as a reconciliation of tier 1 capital calculated in accordance with applicable U.S. regulatory requirements and GAAP to tier 1 common equity.

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 June 30, March 31, June 30,
($ In Millions) 2013 2013 2012
 
Ratios
Tier 1 Capital13.1%13.3%12.9%
Tier 1 Common Equity  12.6%  12.8%  12.4%
 
Tier 1 Capital$7,776.1