Northern Trust Corporation — Q1 2019 Form 10-Q
Business context and reporting period. Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted.
Key financial results
| Metric | Q1 2019 | Prior comparison |
|---|---|---|
| GAAP revenue | $1.481 billion | $1.476 billion; up about 0.3% |
| Noninterest income | $1.059 billion | $1.092 billion; down 3% |
| Net interest income | $422.0 million | $384.0 million; up 10% |
| Net interest margin | 1.55% GAAP; 1.58% FTE | 1.35% GAAP; 1.38% FTE |
| Noninterest expense | $1.029 billion | $995.3 million; up 3% |
| Provision for credit losses | $0 | $3.0 million credit |
| Income before taxes | $452.2 million | $483.7 million |
| Net income | $347.1 million | $381.6 million; down 9% |
| Diluted EPS | $1.48 | $1.58; down 6% |
| Return on average common equity / assets | 14.0% / 1.18% | 16.0% / 1.24% |
FTE (fully taxable equivalent) measures are non-GAAP. FTE revenue was $1.489 billion versus $1.485 billion a year earlier. The effective tax rate rose to 23.2% from 21.1%.
Balance sheet, funding, liquidity and capital
- At March 31, 2019, total assets were $121.9 billion, down 8% from December 31, 2018; deposits were $95.8 billion, down 8%. Stockholders’ equity was $10.6 billion, up 1% from year-end.
- Cash and due from banks totaled $5.1 billion and Federal Reserve and other central bank deposits $23.4 billion. Period-end earning assets were $111.1 billion.
- Loans and leases were $30.6 billion, down from $32.5 billion at year-end. Debt and other borrowings included $7.75 billion of other borrowings, $2.02 billion of senior notes, $1.13 billion of long-term debt and $0.28 billion of floating-rate capital debt. The filing provides no single total-debt measure.
- Regulatory capital remained above well-capitalized minimums. Corporation CET1 was 13.5% under the advanced approach and 13.0% under the standardized approach; total capital ratios were 16.6% and 16.3%, respectively.
- Operating cash flow was $293.7 million, investing cash flow provided $11.6 billion, and financing cash flow used $11.4 billion. Financing outflows included an $8.8 billion decrease in deposits and $257.4 million of share repurchases. Cash-flow totals reflect substantial movements in bank deposits, securities and client-related balances.
- Common dividends declared were $133.7 million; the declared quarterly dividend per common share was $0.60, versus $0.42 a year earlier. The Corporation repurchased 2.85 million shares for $257.4 million, including shares withheld for compensation.
Client assets and business segments
- Assets under custody/administration were $10.93 trillion, up 8% from year-end but up 1% year over year. Assets under management were $1.16 trillion, up 9% from year-end and approximately flat year over year.
- Quarterly AUM activity showed $22.3 billion of net inflows and $70.4 billion of favorable market performance and other effects, partly offset by $0.5 billion of currency impact.
- C&IS net income was $172.6 million versus $234.2 million; Wealth Management net income was $178.9 million versus $190.1 million. Segment comparisons are not fully like-for-like: Northern Trust changed its funds-transfer-pricing and revenue/expense allocation methodology in 2019 and did not restate prior periods.
Material changes and management commentary
- Higher net interest margin and rates lifted net interest income, but average earning assets fell 4% year over year to $110.7 billion, partly reflecting lower client deposits and loans.
- Noninterest income declined mainly because foreign exchange trading income fell 16%, trust, investment and servicing fees declined 1%, and securities commissions and trading income fell 14%. Management cited lower market volatility and reduced foreign-exchange swap activity.
- Expense growth reflected higher outside services, compensation, and equipment and software costs. Compensation included higher salaries and severance-related charges; outside services included higher technical services and legal costs.
- Nonperforming assets were $124.1 million, up from $117.7 million at year-end but below $128.9 million a year earlier. Nonperforming loans and leases were $116.1 million; residential real estate represented 89% of nonperforming loans and leases. The allowance for credit losses was $139.4 million.
- Net unrealized securities losses were $82.8 million at quarter-end, improved from $240.0 million at year-end. Management said it did not intend to sell securities in unrealized-loss positions and did not expect to be required to sell them before recovery of amortized cost.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management’s forward-looking statements identify exposure to market and interest-rate changes, fee sensitivity to client asset values, foreign exchange activity, deposit deployment and margins, credit quality, cybersecurity and operational risk, regulation, competition, and Brexit-related uncertainty.
- Interest-rate sensitivity estimates showed next-12-month net interest income increasing $73 million under a gradual 100-basis-point rate rise, increasing $116 million under a 200-basis-point rise, and decreasing $40 million under a 100-basis-point decline. These model estimates depend on assumptions and are not forecasts of actual results.
- Management estimated reasonably possible losses for certain legal and regulatory matters at zero to approximately $25 million in aggregate; other matters could not be reasonably estimated. No material litigation or regulatory accruals were recorded. The filing discusses a French appeal, CFTC and NFA compliance matters, and uncertainty related to Visa interchange-fee litigation and conversion of retained Visa Class B shares.
- Northern Trust adopted lease accounting on January 1, 2019, recognizing approximately $530 million of operating lease liabilities and $480 million of right-of-use assets at adoption; it reported no significant effect on operating results. It also completed purchase accounting for its BEx LLC acquisition, with a $37.9 million purchase price.
- The company plans to adopt the expected-credit-loss standard (CECL) on January 1, 2020 and was developing and validating models, with parallel testing planned for the second half of 2019.
Important facts for investors to verify
- Whether fee revenue and client asset levels sustain growth, and how market returns, currency movements and net flows affect AUC/A and AUM.
- Whether higher net interest margin can offset deposit declines, reduced earning assets and increased funding costs.
- How residential real estate nonperforming loans, allowance coverage and credit trends develop.
- How 2019 segment results compare after accounting for the revised allocation methodology.
- Capital levels, planned repurchases and dividend capacity, including applicable regulatory limits.
- Developments in the disclosed legal, regulatory and Visa-related contingencies, and the expected impact of CECL adoption.