NORTHERN TRUST CORPORATION Risk
SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS GeneralNorthern Trust Corporation (Corporation) is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Corporate & Institutional Services (C&IS ) and Wealth Management. Asset management and related services are provided to C&IS and Wealth Management clients primarily by the Asset Management business. Except where the context requires otherwise, the terms "Northern Trust ," "we," "us," "our, " "its," or similar terms mean the Corporation and its subsidiaries on a consolidated basis. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled "Forward-Looking Statements." COVID-19 Pandemic and Recent Events The COVID-19 global pandemic continued to present health and economic challenges on an unprecedented scale during the second quarter of 2020. During this time,Northern Trust continued to focus on the health and well-being of its workforce, meet its clients' needs and support its communities.Northern Trust established a COVID Executive Committee composed of senior leadership across various functions, under whose oversight the global business resiliency pandemic plan was implemented during the first quarter of 2020. Although planning is underway to return to the office when conditions permit, the vast majority of staff is expected to continue to work from home for some time to come. Workforce As many governments have begun implementing plans to reopen their respective jurisdictions,Northern Trust has begun its return-to-office (RTO) phase under the oversight of the COVID Executive Committee. Plans for RTO are being developed on a location-by-location basis based on business unit needs.Northern Trust is considering site readiness, transportation options, technology capabilities, and workforce alignment.Northern Trust plans for the return of a small portion (less than 20 percent) of each office's population in the initial RTO phase to allow for optimal social distancing. To ensure the health and well-being ofNorthern Trust's workforce, clients and visitors, several new social distancing elements and other protective measures, such as temperature screenings, where allowable by law, distribution of personal protective equipment, and workforce self-certification, have been implemented. Several offices began initiating a return of the workforce inJuly 2020 . Client ServiceNorthern Trust has offered assistance to its clients affected by the COVID-19 pandemic by lending under a government lending program and providing payment deferrals. The Corporation continues to assess developments in government actions meant to support the economy, as further discussed below.U.S. Small Business Administration's Paycheck Protection Program During the second quarter of 2020,Northern Trust became a lender under the Paycheck Protection Program (PPP), which is administered by theU.S. Small Business Administration (SBA), an agency of theU.S. Department of the Treasury , which works with financial institutions in providing loans to small businesses. The PPP, which is meant to aid small businesses during the COVID-19 pandemic, was created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was signed into law onMarch 27, 2020 . In the second quarter of 2020, the Paycheck Protection Program Flexibility Act was enacted to provide updates to the PPP. As ofJune 30, 2020 ,Northern Trust had funded loans totaling$213.8 million under the PPP. The Corporation accounts for PPP loans as loan receivables and amounts are disclosed in Note 6 - Loans and Leases to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited). The original timeframe for PPP lending expired onJune 30, 2020 , butCongress acted onJune 30, 2020 to provide a 5-week PPP extension for lending to allow small businesses additional time to apply for the remaining PPP funds allocated byCongress in connection with the CARES Act.Northern Trust expects to continue lending under the PPP through the new August deadline. 3
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Table of Contents SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued) COVID-19 Pandemic and Recent Events (continued)
Troubled Debt Restructuring (TDR) Relief Due to the economic environment arising from the COVID-19 pandemic, there have been two forms of relief provided to lenders exempting certain loan modifications which would otherwise be classified as TDRs from such classification. The first of these forms of relief is provided by certain interagency guidance from various banking regulators, including theBoard of Governors of theFederal Reserve System , theFederal Deposit Insurance Corporation , theNational Credit Union Administration , theOffice of the Comptroller of the Currency , and theConsumer Financial Protection Bureau (Interagency Guidance). The other is provided under section 4013 of the CARES Act.Northern Trust has elected to apply each of these forms of relief, when applicable, in providing borrowers with qualifying loan modifications, including payment deferrals, in response to the COVID-19 pandemic. For further information on TDRs, please refer to Note 6 - Loans and Leases to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited). Community Support COVID-19 Relief Support OnApril 8, 2020 ,Northern Trust announced that it was committing$3 million in COVID-19 relief support to numerous organizations serving those most affected by the pandemic. Grantees include theSolidarity Response Fund for theWorld Health Organization ,United Way Worldwide , the Global FoodBanking Network,Feeding America ,Meals on Wheels , and other COVID-19 relief funds sponsored by the city ofChicago and state ofIllinois . Small Business Support OnMay 11, 2020 ,Northern Trust announced it was providing$100 million in low-cost funding to assist Community Development Financial Institutions (CDFIs), which are instrumental in providing loans to small businesses and non-profit organizations under the PPP. The funding helps meet urgent demand among small businesses and non-profit groups by providing flexible terms and low rates. CDFIs provide loans, investments, financial services and technical assistance to underserved populations and communities. This funding to CDFIs, which is reported in Debt Securities Held to Maturity on the consolidated balance sheets, is separate and distinct from the$213.8 million in PPP funds that the Corporation has lent to its own small business clients. New Philanthropic Strategy OnJune 15, 2020 ,Northern Trust announced that it has pledged$20 million over the next 5 years with the goal of reducing the economic opportunity gap. The opportunity gap encompasses obstacles created by race, ethnicity, gender, and environmental and socioeconomic status that prohibit individuals from achieving their full potential. The Corporation's goal is to help shrink this gap by providing increased access to essential human needs, which include food, housing, health care and education. Additional COVID-19 economic and market-related impacts to the Corporation's financial condition and results of operations are discussed throughout this Form 10-Q. Overview of Financial Results Net income per diluted common share decreased in the current quarter to$1.46 from$1.75 in the second quarter of 2019. Net income decreased to$313.3 million in the current quarter as compared to$389.4 million in the prior-year quarter. Annualized return on average common equity was 12.2% in the current quarter and 15.9% in the prior-year quarter. The annualized return on average assets was 0.91% in the current quarter as compared to 1.34% in the prior-year quarter.
Revenue was relatively unchanged compared to the prior-year quarter, totaling
Trust, Investment and Other Servicing Fees increased$6.0 million , or 1%, from$955.5 million in the prior-year quarter to$961.5 million in the current quarter, primarily due to new business, favorable transaction fees, and increased securities lending fees, partially offset by the impact of unfavorable lagged markets. Other noninterest income increased$38.8 million , or 29%, from$133.7 million in the prior-year quarter to$172.5 million in the current quarter, primarily reflecting higher other operating income, foreign exchange trading income, and security commissions and trading income. Net interest income decreased$45.3 million , or 11%, to$372.1 million in the current quarter as compared to$417.4 million in the prior-year quarter, primarily due to a lower net interest margin, partially offset by an increase in average earning assets. There was a$66.0 million provision for credit losses in the current quarter, as compared to a credit provision of$6.5 million in the prior-year quarter calculated under the previous "incurred loss" model. The current quarter provision was primarily due to an increase in the reserve evaluated on a collective basis driven by downgrades in the portfolio and more severe projected 4
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Table of Contents SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued) Overview of Financial Results (continued)
economic conditions, both resulting from the ongoing COVID-19 pandemic and related market and economic impacts, with the largest increases in the commercial and institutional and commercial real estate portfolios. The Corporation adopted Accounting Standards Update (ASU) No. 2016-13, "Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments" (ASU 2016-13) onJanuary 1, 2020 , which significantly changed the way impairment of financial instruments is recognized by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of financial instruments. For more information on the adoption of ASU 2016-13, please refer to Note 2 - Recent Accounting Pronouncements to the consolidated financial statements provided in Item 1. Consolidated Financial Statements (unaudited). Noninterest expense increased$30.7 million , or 3%, to$1.04 billion in the current quarter from$1.01 billion in the prior-year quarter, primarily attributable to higher equipment and software expense, occupancy expense, other operating expense, and compensation expense, partially offset by lower outside services. The provision for income taxes in the current quarter totaled$89.9 million , representing an effective tax rate of 22.3%. The provision for income taxes in the prior-year quarter totaled$117.5 million , representing an effective tax rate of 23.2%. Trust, Investment andOther Servicing Fees Trust , investment and other servicing fees are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears.
The components of Trust, Investment and Other Servicing Fees are provided below. TABLE 1: TRUST, INVESTMENT AND OTHER SERVICING FEES
THREE MONTHS ENDED JUNE 30,
($ In Millions) 2020 2019 CHANGE
C&IS Trust , Investment and Other Servicing Fees
Custody and Fund Administration $ 376.3 $ 385.1 $ (8.8) (2) %
Investment Management 128.4 110.8 17.6 16
Securities Lending 27.3 21.8 5.5 25
Other 34.2 31.7 2.5 8
Total C&IS Trust , Investment and Other Servicing
Fees $ 566.2 $ 549.4 $ 16.8 3 %
Wealth Management Trust , Investment and Other
Servicing Fees
Central $ 142.1 $ 153.1 $ (11.0) (7) %
East 104.2 104.3 (0.1) -
West 80.0 82.8 (2.8) (3)
Global Family Office 69.0 65.9 3.1 5$ 395.3 $ 406.1 $ (10.8) (3) %Total Consolidated Trust , Investment and Other Servicing Fees$ 961.5 $ 955.5 $ 6.0 1 % 5
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Table of Contents SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued) Trust, Investment and Other Servicing Fees (continued)
Corporate & Institutional Services Custody and fund administration fees, the largest component of C&IS fees, are driven primarily by values of client assets under custody/administration (AUC/A), transaction volumes and number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment management fees are based generally on market values of client assets under management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag. Custody and fund administration fees decreased from the prior-year quarter, primarily due to unfavorable lagged markets and currency translation, partially offset by new business and favorable transaction fees. Investment management fees increased from the prior-year quarter, primarily due to new business. Securities lending fees increased from the prior-year quarter primarily due to higher spreads. Wealth Management Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Wealth Management fees decreased compared to the prior-year quarter, primarily due to unfavorable lagged markets, partially offset by new business. Market Indices The following tables present selected market indices and the percentage changes year over year to provide context regarding equity and fixed income market impacts on the Corporation's results. TABLE 2: EQUITY MARKET INDICES DAILY AVERAGES PERIOD-END THREE MONTHS ENDED JUNE 30, AS OF JUNE 30, 2020 2019 CHANGE 2020 2019 CHANGE S&P 500 2,926 2,882 2 % 3,100 2,942 5 % MSCI EAFE (U.S. dollars) 1,681 1,888 (11) 1,781 1,922 (7) MSCI EAFE (local currency) 1,002 1,115 (10) 1,050 1,123 (7)
TABLE 3: FIXED INCOME MARKET INDICES
AS OF JUNE 30,
2020 2019 CHANGE
Barclays Capital U.S. Aggregate Bond Index 2,362 2,172 9 %
Barclays Capital Global Aggregate Bond Index 527 506 4
Client Assets
As noted above, AUC/A and assets under management are two of the primary drivers
of our trust, investment and other servicing fees. For the purposes of
disclosing AUC/A, to the extent that both custody and administration services
are provided, the value of the assets is included only once. The following table
presents AUC/A by reporting segment.
TABLE 4: ASSETS UNDER CUSTODY / ADMINISTRATION BY REPORTING SEGMENT
($ In Billions) JUNE 30, 2020 MARCH 31, 2020
10,623.6 11 % 7 %
Wealth Management 751.2 640.1 698.4 17 8
Total Assets Under Custody /
Administration $ 12,098.3 $ 10,876.6 $ 11,322.0 11 % 7 %
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Table of Contents SECOND QUARTER CONSOLIDATED RESULTS OF OPERATIONS (continued) Trust, Investment and Other Servicing Fees (continued)
The following table presents
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