Northern Trust Corporation — Q3 2021 Form 10-Q
Business context and period. Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. This unaudited report covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $1.634 billion | $1.485 billion | $4.798 billion | $4.579 billion |
| Net interest income | $346.4 million | $328.6 million | $1.022 billion | $1.109 billion |
| Net income | $395.7 million | $294.5 million | $1.139 billion | $968.4 million |
| Diluted earnings per share | $1.80 | $1.32 | $5.22 | $4.34 |
| Net interest margin (GAAP) | 0.95% | 1.01% | 0.96% | 1.22% |
| Return on average assets | 1.00% | 0.83% | 0.98% | 0.96% |
- Q3 revenue rose 10% year over year, led by servicing fees, which increased 11% to $1.111 billion. Higher market values, new business and favorable currency effects supported fee growth; larger money-market fund fee waivers partially offset it.
- Net interest income increased 5% in Q3 as average earning assets grew, but the margin declined. For the nine-month period, net interest income fell 8%, primarily reflecting lower rates.
- Credit-loss provision was a $13.0 million release in Q3 and a $70.0 million release for the nine months, versus a $0.5 million provision and $127.5 million provision, respectively, in 2020. Management attributed releases to improved economic forecasts and portfolio credit quality.
- Noninterest expense increased 3% in Q3 and 5% year to date. Higher compensation, employee benefits, outside services, and software costs were partly offset by lower other operating expense.
- At September 30, total assets were $169.1 billion, deposits $141.9 billion, loans and leases $39.5 billion, and stockholders’ equity $11.9 billion. Assets and deposits were down 1% from December 31, 2020; loans rose 17%.
- Assets under custody/administration were $15.776 trillion, up 21% from September 2020; assets under management were $1.532 trillion, up 17% year over year. AUM was nearly flat versus June 2021, with modest net inflows offset by market and currency effects.
- Nine-month operating cash flow was negative $685.9 million, principally due to increased net collateral deposited with derivative counterparties. Investing cash flow was positive $188.4 million and financing cash flow positive $430.0 million. These banking cash-flow movements should be considered alongside balance-sheet activity.
- Common Equity Tier 1 capital was 11.9% under the standardized approach and 13.0% under the advanced approach; the Corporation reported capital ratios above applicable well-capitalized requirements. Common dividends declared were $0.70 per share per quarter. Q3 share repurchases totaled $100.0 million.
Material changes and notable items
- Q3 net income rose 34% year over year; nine-month net income rose 18%. Fee growth and reserve releases were important contributors, while nine-month net interest income weakened.
- Money-market mutual fund fee waivers reached $76.7 million in Q3 and $206.7 million year to date, compared with $5.4 million and $5.7 million in the 2020 periods. Management said waivers were expected to continue in the low-rate environment.
- Other operating expense was $45.8 million lower in Q3 year over year. The prior-year quarter included a $43.4 million charge related to a corporate action processing error.
- The company recognized pension settlement charges of $6.9 million in Q3 and $24.5 million year to date; management expected an additional settlement charge in Q4 2021.
- Northern Trust transferred $6.9 billion of government-sponsored agency securities from available-for-sale to held-to-maturity in Q2 for capital-management purposes. Net unrealized investment-security gains declined to $186.4 million from $872.6 million at year-end 2020, primarily reflecting market-value changes.
- Effective in Q3, Northern Trust joined the FICC sponsored-member program, guaranteeing sponsored clients’ covered obligations. The filing reports a $509 million guarantee amount before considering related collateral.
- On October 19, 2021, the board replaced the prior share repurchase authorization with a new authorization for up to 25 million shares.
Outlook, risks and contingencies
- The filing provides no specific quantitative earnings or revenue guidance. Management said low market interest rates were expected to continue to pressure net interest income and that money-market fee waivers were expected to persist while fund yields remained insufficient to cover stated fees.
- COVID-19 continued to affect operations: most employees remained remote, and a broader return to office planned for Q3 was delayed indefinitely. Pandemic-related loan assistance and deferrals had declined. Certain eligible COVID-19 modifications were excluded from TDR classification; the filing cautions this may delay recognition of nonaccruals or charge-offs.
- Nonaccrual assets were $141.2 million at September 30, 2021, versus $132.4 million at year-end 2020. The increase was primarily driven by two new commercial real estate nonaccrual loans. The allowance assigned to loans and leases was $143.9 million.
- Key risks identified include market and interest-rate movements, asset-value-sensitive fee revenue, credit quality, foreign exchange, liquidity and counterparty exposure, cybersecurity and operational controls, regulatory and legal matters, and the effects of COVID-19 and geopolitical or economic disruption.
- Management stated that pending litigation and regulatory matters were not expected to materially affect consolidated financial position or liquidity, though they could materially affect a particular period’s results. For a limited set of matters, the estimated aggregate reasonably possible loss range was zero to approximately $20 million; other matters could not be reasonably estimated. A French appellate retrial involving a subsidiary’s trustee services had not yet been scheduled.
- Subsequent to quarter-end, the company redeemed $278.8 million principal amount of floating-rate capital securities and related subordinated debentures on October 15, 2021.
Important facts for investors to verify
- Whether fee growth and client-asset trends can persist if equity markets weaken, and how ongoing money-market fee waivers affect revenue.
- How net interest income and margins respond to interest-rate changes, deposit mix and balance-sheet growth.
- Whether reserve releases are sustainable, particularly given higher commercial real estate nonaccruals and the timing effects of COVID-19 loan-modification relief.
- The drivers and potential recurrence of expense increases, pension settlement charges, and operational or technology spending.
- The liquidity, collateral and capital implications of derivative positions, FICC sponsorship guarantees, securities lending indemnifications and other off-balance-sheet commitments.
- Developments in the French retrial and other legal or regulatory matters, including any changes to the estimated loss range.