Northern Trust Corporation — FY2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; quarterly figures include the three months ended December 31, 2019. Northern Trust provides asset servicing, wealth management, asset management and banking services. Its principal reporting segments are Corporate & Institutional Services (C&IS) and Wealth Management. At year-end, assets were $136.8 billion and stockholders’ equity was $11.1 billion.
Financial performance and position
- Revenue and earnings: GAAP revenue was $6.07 billion, up 2% from 2018. Net income was $1.49 billion, down 4%; diluted EPS was $6.63 versus $6.64. Return on average common equity was 14.9%, compared with 16.2%.
- Revenue mix: Noninterest income was $4.40 billion, including trust, investment and servicing fees of $3.85 billion (+3%) and foreign-exchange trading income of $250.9 million (-18%). GAAP net interest income was $1.68 billion (+3%); fully taxable-equivalent net interest margin was 1.60%, up from 1.46%.
- Profitability and costs: Noninterest expense rose 3% to $4.14 billion. Calculated from reported GAAP figures, the expense-to-revenue ratio was approximately 68.2%, and net margin was approximately 24.6%. Income tax expense rose to $451.9 million; the effective tax rate increased to 23.2% from 20.5%.
- Cash flow: Operating activities provided $2.59 billion; investing activities used $3.41 billion; financing activities provided $616 million. Operating cash flow was higher than 2018’s $1.77 billion. Investing cash use included central-bank deposits, securities purchases and $1.5 billion of bank-owned life insurance premiums.
- Loans and credit: Loans and leases ended the year at $31.4 billion, down from $32.5 billion. Nonperforming assets declined 26% to $86.8 million. The allowance for credit losses was $124.4 million; the credit provision was a $14.5 million benefit, and net recoveries were $0.7 million.
- Debt, deposits and liquidity: Deposits were $109.1 billion, up from $104.5 billion. Senior notes were $2.57 billion, subordinated debt $1.15 billion, and floating-rate capital debt $278 million. The filing describes a liquid balance sheet: cash, central-bank deposits, short-term money-market assets and investment securities were 69% of total assets. The Corporation reported $2.6 billion of liquidity at year-end, up from $866.8 million.
- Capital and shareholder returns: Corporation CET1 ratios were 12.7% standardized and 13.2% advanced; total capital ratios were 16.3% and 16.8%, respectively. All reported capital ratios exceeded applicable “well-capitalized” thresholds. The company repurchased 11.8 million shares in 2019 and declared $2.60 per common share in dividends. It issued $391.4 million of Series E preferred stock; proceeds funded redemption of Series C preferred stock on January 2, 2020.
- Client assets: Assets under custody/administration rose 19% to $12.05 trillion; assets under custody increased 22% to $9.23 trillion; assets under management grew 15% to $1.23 trillion. Management attributed growth principally to favorable markets and net inflows.
Material changes versus comparable periods
- Revenue increased modestly, but net income declined as expenses and taxes rose. Lower foreign-exchange trading income partly offset higher servicing fees and net interest income.
- At the segment level, C&IS net income fell 21% to $713.8 million, primarily reflecting higher expenses and lower net interest income. Wealth Management net income was broadly flat at $796.1 million.
- Segment comparisons require caution: beginning in 2019, Northern Trust changed its funds-transfer-pricing methodology, including allocating contingent liquidity charges, and allocated revenues, expenses and average assets differently. Prior-period segment results were not restated.
- Average earning assets declined 6% to $107.1 billion, while the FTE net interest margin improved. Year-end deposits increased, although average deposits declined.
- Fourth-quarter 2019 net income was $371.1 million and diluted EPS was $1.70, versus $409.9 million and $1.80 in fourth-quarter 2018. Calculated quarterly revenue was approximately $1.55 billion, versus $1.50 billion a year earlier.
Outlook, commentary, risks and unusual items
- The filing provides no broad numerical revenue or earnings guidance. Management reported progress toward its “Value for Spend” goal of $250 million in expense run-rate savings by 2020, but did not quantify savings achieved in the text provided.
- For 2020, management expected pension expense to increase approximately $30.6 million, primarily due to lower discount-rate and expected-return assumptions. The minimum required U.S. qualified-plan contribution was expected to be zero.
- Northern Trust adopted the expected-credit-loss standard (CECL) on January 1, 2020 and expected an allowance increase of less than $20 million; it did not expect a material capital-ratio impact.
- Key exposures include fee sensitivity to market levels and client activity; interest-rate, foreign-exchange and securities-portfolio risk; credit and counterparty risk; cyber, technology, operational and fiduciary risk; regulatory and compliance costs; and global, Brexit and LIBOR-transition uncertainty. A 100-basis-point rate increase was estimated to raise next-12-month net interest income by $70 million but reduce market value of equity by $203 million; these are model estimates, not forecasts.
- Pending legal and regulatory matters are described as not expected to materially affect consolidated financial position or liquidity, though particular-period results could be affected. The estimated aggregate reasonably possible loss range was zero to approximately $20 million; some matters could not be reasonably estimated. The Visa Class B conversion and litigation outcome remain uncertain.
- Other notable items include the decision to sell substantially all of the lease portfolio, a $17.6 million acquisition of Belvedere Advisors, and a $29.5 million valuation allowance against foreign tax credit carryforwards. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification points
- Reconcile reported GAAP revenue with the filing’s FTE-based segment and consolidated presentations before comparing margins or segment trends.
- Assess whether market-driven client-asset growth and net inflows persist, and how fee revenue responds to market declines or pricing pressure.
- Review the C&IS earnings decline, expense growth, and the effect of the 2019 segment-allocation changes on comparability.
- Monitor CECL’s actual opening allowance adjustment, subsequent credit trends, residential real-estate concentrations and the private-client portfolio.
- Confirm future capital distributions against regulatory approvals, bank dividend capacity, and the remaining repurchase authorization.
- Track legal and contingent exposures, including Visa-related matters, and verify the disposition and financial impact of the lease portfolio sale.