Northern Trust Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $5.96 billion | $5.38 billion | Up 11% |
| Net interest income (GAAP) | $1.62 billion | $1.43 billion | Up 14% |
| Net interest margin (FTE) | 1.46% | 1.33% | Up 13 basis points |
| Net income | $1.56 billion | $1.20 billion | Up 30% |
| Diluted earnings per common share | $6.64 | $4.92 | Up 35% |
| Return on average common equity | 16.2% | 12.6% | Up 3.6 percentage points |
| Noninterest expense | $4.02 billion | $3.77 billion | Up 7% |
| Cash from operating activities | $1.77 billion | $1.72 billion | Up $47 million |
Fee income remained the largest revenue source: trust, investment and other servicing fees rose 9% to $3.75 billion. Foreign exchange trading income increased 46% to $307 million, while other operating income declined 19% to $128 million. Higher short-term rates and average earning assets lifted net interest income; FTE figures are non-GAAP measures.
Balance sheet, capital and liquidity
- At year-end, assets were $132.2 billion, down from $138.6 billion; deposits were $104.5 billion, down from $112.4 billion; and stockholders’ equity was $10.5 billion, up from $10.2 billion.
- Loans and leases were $32.5 billion, broadly unchanged. Nonperforming assets declined 24% to $117.7 million; net charge-offs were $1.1 million. The allowance for credit losses was $138.2 million.
- Capital ratios remained above applicable well-capitalized minimums. Corporation CET1 was 13.7% under the advanced approach and 12.9% under the standardized approach; the supplementary leverage ratio was 7.0%.
- Management reported that cash, central-bank deposits, short-term money-market assets and investment securities represented 68% of total assets. Unencumbered securities at the Bank totaled $47.3 billion; the Corporation and Bank met U.S. liquidity coverage requirements.
- Senior notes were $2.0 billion, long-term debt $1.1 billion and floating-rate capital debt $278 million. Other borrowings were $7.9 billion. The Corporation issued $500 million of 3.65% senior notes due 2028.
Changes versus prior period and segment results
- Client assets fell with unfavorable year-end markets, currency movements and net outflows: custody/administration assets declined 6% to $10.13 trillion, assets under custody declined 6% to $7.59 trillion, and assets under management declined 8% to $1.07 trillion.
- C&IS net income rose 47% to $903 million, supported by net interest income, servicing fees and foreign exchange income. Wealth Management net income rose 40% to $798 million, helped by fee and net interest income and lower taxes.
- Treasury and Other recorded a $145 million net loss, versus $12 million net income in 2017, primarily reflecting a $145 million FTE net interest loss.
- Reported results benefited from a lower effective tax rate: 20.5% versus 26.6%, principally reflecting the U.S. corporate tax-rate reduction and other tax items. 2018 net income included a $4.8 million net tax benefit associated with Tax Cuts and Jobs Act adjustments; 2017 included a $53.1 million benefit.
- Fourth-quarter 2018 net income was $409.9 million and diluted EPS was $1.80, compared with $356.6 million and $1.51 in fourth-quarter 2017.
Outlook, commentary and notable matters
- No specific revenue, earnings or margin guidance is provided. Management emphasized recurring fee-based growth, client service, conservative credit management and expense discipline.
- The “Value for Spend” initiative targets $250 million in expense run-rate savings by 2020; management noted progress but gave no assurance of achieving the target.
- Shareholder distributions increased: the quarterly common dividend rose 31% to $0.55 per share. The company repurchased 9.0 million shares during 2018 and returned approximately $1.36 billion to common shareholders through repurchases and dividends. A capital plan permitted up to $529.5 million of additional repurchases through June 2019.
- Market, interest-rate, currency, cyber and operational risks, fee pressure, global competition, Brexit uncertainty, regulatory change and LIBOR transition are identified as material risks. Fee revenue is sensitive to market values and client activity.
- Regulators had identified shortcomings in the Corporation’s 2015 resolution plan; no formal feedback on the 2017 submission was reported as of the filing. The Bank also reported NFA findings regarding its swap-dealer compliance program and a CFTC document request; the company said it was addressing findings and cooperating.
- Management said pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity, though they could affect results in a particular period. Estimated reasonably possible losses were $0–$20 million in aggregate for certain matters; other matters could not be reasonably estimated. A French appellate court acquitted a subsidiary in an estate-tax matter, but the decision was appealed to France’s highest court.
- Visa Class B share conversion and related litigation remain uncertain; Northern Trust held approximately 4.1 million shares at zero cost basis and had a $32.8 million related swap liability at year-end.
- The company expected to recognize approximately $530 million of operating lease liabilities upon adopting the new lease standard in 2019, with no significant effect on results of operations. CECL adoption was expected in 2020; its financial impact was still under evaluation.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether fee growth and earnings remain resilient if markets, client assets or transaction activity weaken, given the year-end decline in client assets.
- How the 2020 expense-savings target is progressing and how technology, acquisition and compensation costs affect expense growth.
- Deposit trends, funding costs and liquidity, including increased short-term borrowings and reliance on Bank dividends to fund the holding company.
- Regulatory feedback and any required remediation for the resolution plans and swap-dealer compliance findings.
- Developments in the Visa-related exposure, legal proceedings and the transition from LIBOR, as well as the eventual impact of CECL.