Northern Trust Corporation — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports unaudited fourth-quarter results; comparisons below distinguish full-year results from Q4 where relevant.
Business context
Northern Trust is a financial holding company focused on asset servicing, fund administration, asset management, fiduciary services and banking. Its principal businesses are Corporate & Institutional Services (C&IS) and Wealth Management. At year-end, consolidated assets were $116.7 billion. Client assets under custody were $6.07 trillion, assets under custody/administration were $7.80 trillion, and assets under management were $875.3 billion.
Financial results and key metrics
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Total revenue (GAAP) | $4.703 billion | $4.331 billion |
| Net income | $973.8 million | $811.8 million |
| Diluted earnings per common share | $3.99 | $3.32 |
| Net interest income (GAAP) | $1.070 billion | $1.006 billion |
| Net interest margin (FTE) | 1.07% | 1.08% |
| Noninterest expense | $3.281 billion | $3.135 billion |
| Provision for credit losses | $(43.0) million credit | $6.0 million expense |
| Return on average common equity | 11.54% | 10.02% |
| Return on average assets | 0.88% | 0.78% |
Revenue rose 9% and net income rose 20%. Fee income, the largest revenue source, increased 5% to $2.981 billion. Foreign-exchange trading income increased 25% to $261.8 million, while net interest income increased 6%, primarily due to higher average earning assets. The FTE margin remained pressured by low yields and was 1.09% excluding a $17.8 million aircraft-lease residual-value impairment.
For Q4 2015, net income was $239.3 million and diluted EPS was $0.99, versus $244.0 million and $0.98 in Q4 2014. Q4 revenue was approximately $1.157 billion, calculated from the quarterly components reported in the filing, compared with approximately $1.130 billion a year earlier.
Balance sheet, cash flow and capital
- Year-end deposits were $96.9 billion, up from $90.8 billion. Loans and leases were $33.2 billion, up 5%; total stockholders’ equity was $8.7 billion.
- Senior notes were $1.497 billion; long-term debt was $1.371 billion. Other borrowings were $4.055 billion. These categories are presented separately in the balance sheet.
- Operating cash flow was $1.834 billion; investing activities used $6.901 billion; financing activities provided $8.534 billion. Year-end cash and due from banks was $6.445 billion.
- Management reported cash, central-bank deposits, short-term money-market assets and investment securities equal to 65% of total assets. Unencumbered securities at the Bank were $33.3 billion; more than $35.4 billion of securities and loans were available as discount-window collateral.
- Regulatory capital ratios remained above “well-capitalized” thresholds. Corporation CET1 was 11.9% under the advanced approach and 10.8% under the standardized approach; total capital was 14.2% and 13.2%, respectively. Supplementary leverage ratio was 6.2% under the advanced approach.
- The quarterly common dividend was increased 9% to $0.36 per share. The Corporation repurchased 6.9 million shares during 2015. The 2015 capital plan received no Federal Reserve objection; future distributions remained subject to regulatory review.
Material changes and unusual items
- Assets under custody increased 2% to $6.07 trillion, while assets under management declined 6% to $875.3 billion. AUM declined primarily due to net outflows, including sovereign wealth fund equity outflows and a significant fixed-income mandate outflow, as well as market and currency effects.
- The year included a $99.9 million pretax gain from selling 1.0 million Visa Class B shares. Northern Trust retained approximately 5.2 million such shares, recorded at zero cost, and remains exposed to uncertainty over their eventual conversion terms.
- Northern Trust contributed $45.8 million to four constant-dollar NAV funds to restore their NAVs to $1.00. It also recorded a $17.8 million aircraft-lease impairment. In connection with exiting part of a non-strategic loan and lease portfolio, it recorded a $25.9 million gain on loan and lease sales and a $27.0 million fair-value adjustment on leases held for sale.
- The credit-loss provision was a $43.0 million credit, reflecting improved credit quality and a change in the methodology used to estimate inherent losses. The allowance for credit losses fell to $233.3 million from $295.9 million; nonperforming assets declined 19% to $188.3 million.
- Reported segment results were affected by a 2015 transfer of certain assets from C&IS to Treasury and Other and a change in internal funds pricing, limiting direct segment comparisons.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management noted that low interest rates could continue to pressure net interest margins and money-market fund fees. Fee income is also sensitive to asset values, client activity, foreign exchange markets and securities-lending demand. Management expected to submit its 2016 capital plan by April 5, 2016, with the Federal Reserve’s decision expected by June 30, 2016.
Principal risks include market and interest-rate movements, weak or volatile financial markets, AUM outflows, credit and counterparty exposure, cyber and technology failures, operational and fiduciary errors, regulatory change and compliance costs, competition, and dependence on Bank dividends for parent-company funding. Unfunded credit commitments were $37.2 billion; standby letters of credit were $4.3 billion. The company also indemnified securities lending transactions involving $94.5 billion of client securities; management reported full collateralization and recorded no liability for these indemnifications.
In litigation and regulatory matters, management estimated the upper end of reasonably possible losses for certain matters at approximately $125 million in aggregate, while noting that some exposures could not be reasonably estimated. Securities-lending litigation remains pending and an SEC investigation is ongoing. A French court charged a Northern Trust subsidiary with complicity in estate-tax fraud; the trial was postponed pending review of constitutional questions, with no new trial date reported. Management did not believe pending matters would materially affect consolidated financial position or liquidity, but said they could materially affect results in a particular period.
The independent auditor issued an unqualified opinion on the financial statements and concluded that internal control over financial reporting was effective as of December 31, 2015.
Important facts for investors to verify
- Whether AUM outflows persist, particularly among institutional and sovereign wealth fund mandates, and how they affect fee revenue.
- The sustainability of earnings growth after considering the Visa gain, NAV-fund contribution, lease impairment and loan-portfolio exit adjustments.
- The effect of the revised credit-loss estimation methodology on future allowance levels and provision expense.
- Developments in securities-lending litigation, the SEC investigation, the French proceedings and the estimated $125 million aggregate upper-end reasonably possible loss.
- Capital and liquidity headroom under evolving Basel III, liquidity and stress-testing rules, and the effect of regulatory approval on planned distributions.
- Potential exposure from the Visa Class B share conversion and related swap, alongside the remaining shareholding.