Northern Trust Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. Financial statements are unaudited.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue, GAAP | $1.588 billion | $1.481 billion | +7% |
| Noninterest income | $1.180 billion | $1.059 billion | +11% |
| Net interest income | $408.1 million | $422.0 million | −3% |
| Provision for credit losses | $61.0 million | None | Increased |
| Noninterest expense | $1.066 billion | $1.029 billion | +4% |
| Income before taxes | $461.1 million | $452.2 million | +2% |
| Net income | $360.6 million | $347.1 million | +4% |
| Diluted EPS | $1.55 | $1.48 | +5% |
Return on average common equity was 13.4%, versus 14.0%; return on average assets was 1.17%, versus 1.18%. GAAP net interest margin fell to 1.48% from 1.55% (FTE margin: 1.51% versus 1.58%). The effective tax rate declined to 21.8% from 23.2%. Common dividends declared were $0.70 per share, up from $0.60.
Balance sheet, liquidity and capital
| Metric | March 31, 2020 | December 31, 2019 | Change |
|---|---|---|---|
| Total assets | $161.7 billion | $136.8 billion | +18% |
| Total deposits | $131.5 billion | $109.1 billion | +21% |
| Loans and leases | $37.8 billion | $31.4 billion | +20% |
| Stockholders’ equity | $10.9 billion | $11.1 billion | −2% |
Period-end growth in deposits and the balance sheet was concentrated in the second half of March as clients responded to economic and market conditions. Cash and central-bank deposits totaled $50.5 billion. Short-term borrowings were $10.4 billion; senior notes were $2.7 billion and long-term debt $1.2 billion. Regulatory capital remained above applicable well-capitalized thresholds: Corporation CET1 ratios were 11.7% (standardized) and 12.9% (advanced). The Corporation contributed $500 million of capital to its bank subsidiary during the quarter.
Operating cash flow was negative $2.7 billion and investing cash flow negative $21.5 billion, largely reflecting increased collateral deposited with derivative counterparties, central-bank deposits, loans and client settlement receivables. Financing cash flow was positive $25.7 billion, principally from deposit and federal-funds inflows. These banking cash flows are affected by balance-sheet and client activity and should not be read as a standalone measure of liquidity.
Material changes and business trends
- Fee income benefited from higher trust, investment and servicing fees (+8%), foreign-exchange trading income (+34%) and securities commissions and trading income (+79%). Foreign-exchange results reflected higher client volumes and market volatility.
- Net interest income declined mainly because of lower interest rates and a lower net interest margin, despite reduced interest expense. Management expects recent rate cuts to continue pressuring net interest income and margin.
- Assets under custody/administration fell 10% from year-end to $10.88 trillion; assets under management fell 9% to $1.12 trillion. Market declines and currency effects were partly offset by net inflows. The filing notes servicing and management fees are often calculated using asset values from prior months or quarters, so Q1 did not fully reflect market declines.
- Noninterest expense rose 4%, driven by compensation, employee benefits, equipment and software, and outside services. Compensation included a one-time supplemental employee payment in response to COVID-19.
- Both reportable segments recorded higher year-over-year net income: C&IS $177.7 million (+3%) and Wealth Management $189.7 million (+6%).
Outlook, risks and unusual items
- Management said COVID-19’s effects were not fully reflected in Q1 because of fee-calculation lags and the timing of rate cuts. It expected further impacts on future revenue and warned that credit provisions could rise if actual economic conditions deteriorated more than forecasts. No specific earnings or revenue guidance was provided.
- The credit-loss provision was primarily a collective reserve increase reflecting current and projected COVID-related economic conditions, especially in commercial and institutional and commercial real estate exposures. The allowance for credit losses totaled $187.6 million at quarter-end, versus $124.4 million at year-end. Net charge-offs were $0.7 million.
- Northern Trust adopted the expected-credit-loss standard (CECL) on January 1, recording a $13.7 million increase in allowances and a $10.1 million after-tax reduction to retained earnings. Q1 comparatives were not restated.
- Nonaccrual assets were $105.5 million, up from $86.8 million at year-end; nonaccrual loans and leases were 0.27% of total loans and leases. Management cited three new commercial and institutional nonaccrual loans, partly offset by residential real-estate payoffs.
- Common-stock repurchases were temporarily suspended on March 16 to preserve capital and liquidity. The Corporation had repurchased $296.8 million of shares during Q1 before suspension.
- Legal matters: management recorded no material litigation or regulatory accruals. For a limited set of matters, estimated reasonably possible losses were $0–$20 million in aggregate; other matters could not be reasonably estimated. The filing says outcomes and timing remain uncertain.
- Key stated risks include prolonged pandemic-related disruption, lower fee revenue and rates, higher credit losses, securities impairment, deposit flows and client credit-line draws, market volatility, operational and cyber risks, and regulatory or legal developments.
Important facts for investors to verify
- Whether subsequent market declines and fee-calculation lags materially reduce trust, servicing and asset-management revenue.
- How rate cuts affect net interest income and margin, and whether deposit growth can be deployed profitably.
- Whether COVID-19 forecasts, credit quality and the allowance for credit losses require further revisions, particularly in commercial portfolios.
- Whether deposit movements, derivative collateral requirements and client line-of-credit draws affect liquidity or regulatory capital.
- Timing and conditions for any resumption of share repurchases, and the development of disclosed legal contingencies.