Northern Trust Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports unaudited fourth-quarter results. Northern Trust provides asset servicing, asset management, fiduciary and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. Unless noted, dollar amounts are U.S. dollars.
Financial performance and position
- Revenue and earnings: GAAP revenue was $4.962 billion, up 6% from $4.703 billion in 2015. Net income was $1.033 billion, up 6%; diluted EPS was $4.32 versus $3.99. Return on average common equity rose to 11.9% from 11.5%. The filing’s FTE-adjusted revenue and net interest income are non-GAAP measures.
- Revenue drivers: Net interest income increased 15% to $1.235 billion GAAP ($1.260 billion FTE); FTE net interest margin improved to 1.18% from 1.07%. Trust, investment and other servicing fees rose 4% to $3.108 billion. Foreign-exchange trading income fell 10% to $236.6 million, mainly on lower client volumes.
- Expenses and credit: Noninterest expense rose 6% to $3.471 billion, reflecting compensation, outside services, and equipment and software costs. The provision for credit losses was a $26.0 million credit, compared with a $43.0 million credit in 2015. Net charge-offs were $15.2 million; nonperforming assets fell 12% to $165.4 million.
- Fourth quarter: Net income was $266.5 million, diluted EPS $1.11, net interest income $324.3 million, and noninterest expense $873.9 million. The quarter included a $22.0 million credit provision.
- Client assets and segments: Assets under custody/administration reached $8.54 trillion, up 10%; assets under custody were $6.72 trillion, up 11%; assets under management were $942.4 billion, up 8%. C&IS net income increased 3% to $497.2 million; Wealth Management net income increased 13% to $497.5 million.
- Balance sheet and capital: Year-end assets were $123.9 billion, deposits $101.7 billion, and stockholders’ equity $9.8 billion. Senior notes were $1.497 billion, long-term debt $1.331 billion, and floating-rate capital debt $277.4 million. Common equity Tier 1 ratios were 12.4% under the advanced approach and 11.8% under the standardized approach; both Corporation and Bank ratios exceeded well-capitalized thresholds.
- Liquidity and cash flow: Cash and due from banks ended at $5.3 billion. Cash-like assets and investment securities together represented 66% of total assets; unencumbered Bank securities were $41.7 billion. The Corporation and Bank met U.S. liquidity coverage ratio requirements during 2016. Operating cash flow was $1.510 billion, investing cash flow was negative $10.192 billion, and financing cash flow was positive $7.537 billion.
- Capital returns: The quarterly common dividend was increased to $0.38 per share; declared dividends totaled $1.48 per share for the year. The Corporation repurchased 6.1 million shares and returned $754.7 million to common stockholders through repurchases and dividends. It issued Series D preferred stock for net proceeds of $493.5 million.
Changes versus 2015 and notable items
- Revenue growth reflected higher net interest income, servicing fees, and client assets; fee growth was partly offset by lower foreign-exchange income and adverse foreign-exchange translation.
- 2016 included a Visa Class B share sale gain (reported as $123.1 million in other operating income; management describes the second-quarter revenue effect net of swap valuation adjustment as $118.2 million), a $46.5 million securities-lending litigation charge plus a further $3.5 million settlement charge, $18.6 million in client contractual-modification charges, and $17.5 million in severance and related charges. Management also reported leasing-portfolio impairment and sale charges. These items affect comparability.
- 2015 included a $99.9 million Visa share-sale gain and a $45.8 million voluntary contribution to certain constant-dollar NAV funds, as well as a leveraged-lease impairment. Management said net income excluding the identified year-specific items increased 8% in 2016.
- Assets under management increased from $875.3 billion to $942.4 billion, with $39.1 billion of net inflows and positive market performance and other effects partly offset by currency effects.
Outlook, risks and contingencies
- Outlook: The filing provides no specific earnings or revenue guidance. Management emphasized client service, recurring fee income, profitability and returns, and ongoing investment in technology and operations. It expected the qualified U.S. pension plan’s minimum required contribution to be zero in 2017.
- Subsequent acquisition: In February 2017, Northern Trust agreed to acquire UBS Asset Management’s Luxembourg and Switzerland fund-administration business for an initial approximately $175 million cash price, subject to adjustments and approvals. Closing was expected in the second half of 2017.
- Key business risks: Results are sensitive to asset values, transaction activity, interest rates, deposit funding costs, foreign exchange, securities-lending demand, and competition. The filing also highlights credit and counterparty exposure, operational and cyber risks, fiduciary and compliance obligations, regulation, and Brexit-related uncertainty.
- Legal matters: Management estimated reasonably possible losses for certain matters at zero to approximately $35 million in aggregate, but noted other matters for which a range could not be reasonably estimated. Securities-lending litigation settlements were completed, and the related SEC investigation was closed without an intended enforcement recommendation. In the Visa covered litigation, an appellate court reversed approval of the settlement; ultimate resolution and conversion terms for retained Visa Class B shares remained uncertain. A French court acquitted a subsidiary in an estate-tax case, but the prosecutor appealed.
- Audit and controls: The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the Visa sale gain and related swap valuation effects, and separate recurring revenue and earnings from other unusual items.
- Track whether servicing-fee growth and client-asset inflows persist, and how market levels, foreign exchange, and client activity affect fee income.
- Monitor expense growth relative to revenue, especially compensation, technology and outside services.
- Review capital and liquidity ratios against evolving regulatory requirements, including the LCR and Basel III implementation.
- Follow the Visa litigation, remaining legal contingencies, and the approval, price adjustments and integration of the proposed UBS fund-administration acquisition.