Northern Trust Corporation — Q2 2020 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2020; unaudited results compare primarily with Q2 2019, and balance-sheet amounts with December 31, 2019. Northern Trust provides wealth management, asset servicing, asset management and banking through Corporate & Institutional Services (C&IS) and Wealth Management.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Total revenue | $1.506 billion | $1.507 billion | Essentially flat |
| Net interest income | $372.1 million | $417.4 million | Down 11% |
| Net interest margin, GAAP | 1.20% | 1.58% | Down 38 bps |
| Provision for credit losses | $66.0 million | $(6.5) million credit | Higher provision |
| Noninterest expense | $1.037 billion | $1.006 billion | Up 3% |
| Net income | $313.3 million | $389.4 million | Down 20% |
| Diluted EPS | $1.46 | $1.75 | Down 16% |
| Return on average common equity | 12.2% | 15.9% | Down 3.7 pts |
- Trust, investment and other servicing fees rose 1% to $961.5 million. Other noninterest income increased 29% to $172.5 million, reflecting higher foreign exchange, securities commissions and trading, and other operating income.
- Net interest income fell as lower rates and balance-sheet mix reduced margin, partly offset by higher average earning assets. Management said low market rates were expected to continue adversely affecting net interest income.
- At June 30, assets were $151.4 billion, deposits $122.1 billion, loans and leases $33.8 billion, and stockholders’ equity $11.4 billion. Compared with year-end 2019, assets rose 11% and deposits 12%.
- Cash and due from banks was $4.5 billion; Federal Reserve and other central-bank deposits were $42.3 billion. The filing does not provide a single consolidated liquidity ratio in the supplied text.
- Six-month operating cash flow was $498.4 million; investing cash flow was $(14.3) billion and financing cash flow was $13.9 billion. Cash and due from banks increased $3.0 million. Large deposit inflows funded higher central-bank deposits, securities purchases and loan growth.
- Regulatory capital remained above well-capitalized minimums: Corporation CET1 was 13.4% under the standardized approach and 13.9% under the advanced approach. Total capital was 16.5% and 16.8%, respectively.
Material changes and unusual items
- The $66.0 million quarterly credit-loss provision reflected portfolio downgrades and more severe projected conditions related to COVID-19, with the largest increases in commercial and institutional and commercial real estate exposures. Allowance for credit losses was $267.0 million, including off-balance-sheet commitments, at quarter-end.
- Nonaccrual assets were $99.4 million, up from $86.8 million at year-end 2019; nonaccrual loans and leases were $98.5 million. The allowance assigned to loans and leases was $210.2 million.
- Northern Trust adopted the CECL expected-loss standard on January 1, 2020. Adoption increased the allowance by $13.7 million and reduced retained earnings by $10.1 million after tax; prior-year periods were not restated.
- Assets under custody/administration were $12.10 trillion and assets under management were $1.26 trillion at June 30. Both were higher than March 31, supported by favorable market performance and net inflows.
- Six-month net income was $673.9 million, down 8%; revenue rose 4% to $3.094 billion, while net interest income declined 7% and the credit-loss provision increased to $127.0 million.
Outlook, commentary and risks
- The filing gives no numerical earnings or revenue guidance. Management noted that low interest rates were expected to remain a headwind to net interest income.
- COVID-19 risks include weaker fee revenue, reduced net interest income, higher credit provisions, securities impairments, changes in client demand and possible liquidity or capital pressure. The duration and economic consequences of the pandemic were uncertain.
- The company funded $213.8 million of SBA Paycheck Protection Program loans by June 30 and expected to continue lending through the extended August deadline. It also reported 783 qualifying COVID-19 loan modifications totaling $1.16 billion; these were not classified as TDRs under applicable relief.
- Open-market share repurchases were suspended March 16. Federal Reserve measures prohibited repurchases in Q3 2020 and limited dividends to the Q2 amount, subject to a cap based on average net income for the preceding four quarters. The Q2 common dividend declared was $0.70 per share.
- Northern Trust issued $1.0 billion of 1.95% senior notes due 2030 in May. Legal proceedings were described as not expected to materially affect consolidated financial position or liquidity based on current knowledge; estimated reasonably possible losses for certain matters ranged from zero to approximately $20 million, while other matters could not be reasonably estimated.
Important facts for investors to verify
- Whether subsequent credit trends, loan modifications and economic forecasts require further allowance increases, particularly for commercial and institutional and commercial real estate lending.
- How persistent low interest rates affect net interest margin, deposit economics and earnings.
- Whether fee revenue tracks changes in client assets, market levels, transaction volumes and net flows.
- The impact of Federal Reserve capital-return restrictions on dividends and the timing of any share-repurchase resumption.
- Developments in COVID-19, contingent legal matters and the Visa Class B share-related litigation and swaps.