Northern Trust Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited consolidated results; comparisons are generally with Q1 2013. Northern Trust provides asset servicing, asset management, fiduciary and banking services through Wealth Management and Corporate & Institutional Services.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue (GAAP) | $1,040.5 million | $976.4 million; up 7% |
| Net income | $181.4 million | $164.0 million; up 11% |
| Diluted earnings per share | $0.75 | $0.67; up 12% |
| Net interest income | $245.7 million | $226.1 million; up 9% |
| Net interest margin (FTE) | 1.12% | 1.15% |
| Provision for credit losses | $3.0 million | $5.0 million |
| Noninterest expense | $768.0 million | $728.9 million; up 5% |
| Effective tax rate | 32.7% | 32.4% |
| Return on average common equity | 9.28% | 8.82% |
| Return on average assets | 0.73% | 0.73% |
Trust, investment and other servicing fees rose 8% to $679.5 million, supported by new business and higher equity markets. Foreign-exchange trading income fell 16% to $50.1 million amid lower currency-market volatility. FTE net interest income increased on higher average earning assets, while margin declined as asset yields fell.
Balance sheet, liquidity and capital
- At March 31, 2014, assets were $103.8 billion, deposits $86.3 billion, loans and leases $29.7 billion, securities $33.8 billion, and stockholders’ equity $7.95 billion.
- Period-end deposits rose 3% from December 31, 2013; total assets increased 1%. Cash and due from banks was $3.68 billion. The filing does not provide a single summary liquidity ratio.
- Reported borrowings included $1.01 billion of federal funds purchased, $736.6 million of repurchase agreements, $652.4 million of other borrowings, $2.00 billion of senior notes, $1.73 billion of long-term debt and $277.2 million of floating-rate capital debt.
- Corporation capital ratios were 13.0% Tier 1, 15.5% total capital, 7.8% leverage and 12.8% common equity Tier 1 under Basel III. The Corporation and its bank subsidiary exceeded regulatory “well-capitalized” thresholds.
- Assets under custody were $5.75 trillion and assets under management $915.4 billion, each up 3% from year-end 2013. The company repurchased 2.62 million shares for $163.0 million in the quarter and declared dividends of $0.31 per common share.
Cash flow and changes versus prior period
Operating activities provided $538.5 million, compared with $312.5 million in Q1 2013. Investing activities used $822.1 million, versus $4.44 billion provided in the prior-year quarter, principally reflecting securities purchases and increases in client settlement receivables and loans. Financing activities provided $788.1 million, compared with $4.67 billion used in Q1 2013; current-quarter deposit growth was partly offset by lower short-term borrowings. Cash and due from banks increased $513.9 million during the quarter.
Revenue growth and lower credit provisions supported higher earnings, although expenses also increased. Q1 2013 included a $12.4 million pre-tax fee-receivable write-off and $1.8 million in restructuring and integration charges (together $8.9 million after tax, or $0.04 per share), making the prior-year comparison less favorable. The current quarter included $3.9 million of other-than-temporary impairment charges on certain CRA-eligible securities.
Management commentary, risks and contingencies
- Management attributed servicing-fee growth to market appreciation and new business. Low short-term rates continued to drive money-market fund fee waivers: $14.9 million in C&IS and $17.6 million in Wealth Management.
- Expense growth reflected compensation, consulting and other outside services, and software costs. Management cited costs associated with evolving regulatory and compliance requirements. No specific earnings or revenue guidance was provided.
- Credit quality remained a concern in residential real estate. Nonperforming assets were $269.7 million; residential real estate represented 70% of nonperforming loans and leases. The allowance for credit losses was $309.4 million, including $279.2 million assigned to loans and leases.
- The securities portfolio was reported as 87% U.S. Treasury, government-sponsored agency and triple-A-rated securities. Net unrealized securities gains were $14.4 million; management said it did not intend, and was not likely to be required, to sell securities in unrealized-loss positions before recovery.
- Gross exposure to Irish obligors was approximately $887 million, less than 1% of consolidated assets; the filing reported no exposure to the other specified stressed eurozone countries or their sovereign debt.
- Legal proceedings included securities-lending-related claims. A proposed settlement of two cases remained subject to documentation and court approval; other cases remained pending. In April 2014, the SEC issued a subpoena seeking documents concerning securities-lending activities. Management estimated the upper end of reasonably possible losses for certain matters at approximately $130 million in aggregate; other matters could not be reasonably estimated. No material litigation or regulatory accruals were recorded.
- Standby letters of credit totaled $4.4 billion. Securities loaned subject to client indemnification totaled $95.4 billion, generally supported by collateral; no liability was recorded for these indemnifications. The company had $30.3 billion in pledged securities and loans.
- Interest-rate risk and foreign-exchange trading VaR were reported as not significantly changed since December 31, 2013. The filing identifies market, credit, liquidity, operational, regulatory, litigation and other risks; actual results may differ from forward-looking statements.
Most important facts for investors to verify
- Whether servicing-fee growth and client-asset levels persist, and how market movements affect fee revenue.
- Whether net interest margin stabilizes, given the 3-basis-point consolidated FTE margin decline and further pressure in Wealth Management.
- Trends in residential real-estate delinquencies, nonperforming assets, charge-offs and allowance adequacy.
- The resolution and potential financial impact of securities-lending litigation and the SEC inquiry, including the proposed settlement’s final approval.
- Future expense growth, regulatory and compliance costs, and the extent to which operating leverage improves.
- Capital and liquidity developments, including the impact of Basel III implementation, deposit mix, pledged assets and continued share repurchases.