Northern Trust Corporation — Q1 2015 Form 10-Q
Business context and period: The filing covers the unaudited three months ended March 31, 2015. Northern Trust provides asset servicing, administration, asset management, fiduciary and banking services through Corporate & Institutional Services (C&IS) and Wealth Management (WM), with Treasury and Other reported separately.
Financial results and key metrics
- Revenue: Management reported revenue of $1.13 billion, up 9% year over year. GAAP noninterest income was $873.9 million and GAAP net interest income was $260.6 million; together these equal $1,134.5 million. FTE net interest income was $266.8 million, producing FTE revenue of $1,140.7 million.
- Profit: Net income was $230.7 million, up 27% from $181.4 million. Diluted EPS was $0.94 versus $0.75. GAAP income before taxes was $350.0 million; the segment table presents $356.2 million on an FTE basis.
- Margins and returns: FTE net interest margin was 1.10%, down from 1.12%. Return on average common equity was 11.28% versus 9.28%; return on average assets was 0.87% versus 0.73%.
- Expenses and credit: Noninterest expense rose 3% to $789.0 million. The credit-loss provision was a $4.5 million credit, compared with a $3.0 million provision a year earlier. Net charge-offs were $4.6 million.
- Balance sheet and liquidity: March 31 assets were $107.0 billion, down 3% from year-end 2014; deposits were $86.7 billion, down 4%; and stockholders’ equity was $8.6 billion, up 2%. Loans and leases were $32.6 billion. Operating cash flow was $490.8 million; investing activities provided $2.8 billion and financing activities used $2.2 billion. Cash and due from banks ended at $4.1 billion.
- Debt and capital: Reported liabilities included $1.5 billion of senior notes, $1.4 billion of long-term debt and $2.9 billion of other borrowings. Corporation regulatory capital ratios were 11.8% CET1, 12.4% Tier 1 and 14.2% total under the Advanced Approach; supplementary leverage ratio was 6.4%. The filing states the Corporation and Bank exceeded applicable well-capitalized requirements.
- Client assets and shareholder returns: Assets under custody were $6.09 trillion, up 6% year over year; assets under management were $960.1 billion, up 5%. The quarterly common dividend declared was $0.33 per share. The company repurchased 1.56 million shares for $107.2 million.
Material changes versus the prior comparable period
- Higher servicing fees (+7%) and foreign-exchange trading income (+43%) drove much of the noninterest-income increase; the company attributed FX growth to greater currency volatility and client volumes.
- FTE net interest income increased 5%, primarily from 7% growth in average earning assets, but margin declined as earning-asset yields fell. Lower funding costs partly offset this pressure.
- Expense growth was led by compensation, employee benefits and equipment/software costs; lower outside-services expense partly offset the increases.
- Net income improved in both main segments: C&IS reported $122.7 million versus $85.9 million, and WM reported $107.2 million versus $86.8 million. Treasury and Other net income declined to $0.8 million from $8.7 million.
- Nonperforming assets were $228.1 million, down from $269.7 million a year earlier; nonperforming loans and leases were 0.67% of total loans versus 0.88%. The allowance for credit losses was $286.7 million, compared with $309.4 million.
- Some assets and related internal funds-pricing treatment were moved from C&IS to Treasury and Other, affecting segment comparisons. Standardized Approach capital ratios also began using revised Basel III calculations in Q1 2015.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or revenue guidance. Management identifies market levels, client activity, interest rates, margins, expense control and profitable deployment of deposits as important drivers and uncertainties.
- Interest-rate simulations estimated a $29 million increase in next-12-month pretax earnings for a 100-basis-point rise and a $14 million increase for a 200-basis-point rise; economic value of equity was estimated to decline $10 million and $266 million, respectively. Management cautions these are model estimates, not forecasts, and exclude mitigating actions.
- Key disclosed risks include financial-market and economic disruption, counterparty and credit risk, market and liquidity risk, regulatory changes, operational and cybersecurity risks, litigation, and sensitivity of fee revenue to equity markets.
- Management estimated the upper end of reasonably possible losses for certain legal matters at approximately $125 million in aggregate; no material accrual was recorded for pending litigation or regulatory matters. Other matters could not be reasonably estimated. Securities-lending litigation and an SEC investigation remained pending. In April 2015, a French magistrate charged a subsidiary with complicity in estate tax fraud; the subsidiary said it would contest the charge.
- No securities impairment losses were recorded in Q1 2015, versus $3.9 million of CRA-security impairment charges in Q1 2014. Unrealized securities losses totaled $49.2 million at quarter-end; management said it did not intend, and was not more likely than not required, to sell the affected securities before recovery.
- After quarter-end, the company replaced its prior share-repurchase authorization with authority to repurchase up to 15 million shares. Its capital plan permits up to $675 million of repurchases from April 2015 through June 2016. The Series C preferred stock carries a 5.85% non-cumulative dividend rate.
Important facts for investors to verify
- Reconcile GAAP revenue and pretax income to the FTE figures used in management and segment reporting.
- Assess whether fee growth and higher client assets can persist, and how equity markets, currency activity and client flows may affect fees.
- Monitor net interest margin, deposit mix and the profitability of deploying deposits as rates and funding costs change.
- Review credit trends, especially residential real estate’s 72% share of nonperforming loans, allowance coverage and the level of troubled debt restructurings.
- Track the legal matters, including securities-lending claims, the SEC inquiry, the French subsidiary charge and the estimated $125 million upper-end loss range.
- Confirm capital and liquidity trends, including the effects of deposit outflows, repurchases, dividends and applicable regulatory-capital calculation changes.