Northern Trust Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results. Northern Trust provides wealth management, asset servicing, asset management and banking solutions through Corporate & Institutional Services (C&IS) and Wealth Management.
Financial performance
- Third quarter: GAAP revenue was $1.538 billion, up 4% year over year. Net income was $384.6 million, up 3%; diluted EPS was $1.69, up 7%. Income before taxes was $508.6 million. Effective tax rate was 24.4%, versus 22.1%.
- Nine months: Revenue was $4.525 billion, up 2%. Net income was $1.121 billion, down 2%; diluted EPS was $4.92, up 2%. Income before taxes was $1.468 billion. Effective tax rate was 23.6%, versus 22.1%.
- Revenue mix and interest: Q3 noninterest income rose 5% to $1.120 billion, led by trust, investment and servicing fees (+4%) and other operating income. Foreign-exchange trading income declined 17%. GAAP net interest income increased 2% to $417.7 million; GAAP net interest margin was 1.58%, versus 1.44% a year earlier (FTE margin 1.61%, versus 1.47%). Higher margin more than offset lower average earning assets.
- Expenses and credit: Q3 noninterest expense rose 3% to $1.036 billion, mainly from compensation, outside services, and equipment and software. The provision for credit losses was a $7.0 million credit. Nonperforming assets were $116.3 million, down from $124.9 million a year earlier; residential real estate represented 86% of nonperforming loans and leases.
- Returns and client assets: Q3 annualized return on average common equity was 14.9% (15.1% prior year); return on average assets was 1.31% (1.22%). At quarter-end, assets under custody/administration were $11.565 trillion, up 7% year over year, and assets under management were $1.202 trillion, up 3%.
Balance sheet, cash flow and capital
- At September 30, total assets were $124.4 billion, down 6% from December 31, 2018; deposits were $97.3 billion, down 7%; loans and leases were $30.8 billion, down 5%; and stockholders’ equity was $10.8 billion, up 3%.
- Cash and due from banks totaled $5.0 billion, with Federal Reserve and other central bank deposits of $22.5 billion. Total liabilities were $113.5 billion. Debt and borrowing balances included $7.8 billion of other borrowings, $2.6 billion of senior notes and $1.2 billion of long-term debt. The filing does not provide a single aggregate debt figure in the cited summary data.
- For the first nine months, operating cash flow was $955.6 million, compared with $1.308 billion in 2018; investing cash flow was positive $8.998 billion, versus $5.348 billion; financing cash flow was negative $9.499 billion, versus negative $5.896 billion. Deposit and federal funds outflows were major financing uses. Investing inflows included lower central-bank deposits; the period also included $1.0 billion of bank-owned life insurance premium purchases.
- Regulatory capital remained above well-capitalized thresholds. Corporation CET1 was 12.9% under the standardized approach and 13.7% under the advanced approach; total capital was 16.0% and 16.8%, respectively.
- Common dividends declared were $0.70 per share for Q3 and $1.90 year to date. The company repurchased $835.8 million of common stock in the first nine months.
Changes, outlook and risks
- For the first nine months, servicing fees increased 1% and net interest income increased 4%, while foreign-exchange trading income fell 19%. Expense growth of 3% and higher taxes contributed to the 2% decline in net income.
- Segment results are less directly comparable because Northern Trust changed its funds-transfer-pricing methodology and allocation of revenue, expense and average assets effective January 1, 2019. Prior periods were not recast. Q3 C&IS net income declined 17% to $185.0 million; Wealth Management net income was nearly flat at $205.6 million.
- No specific earnings or revenue guidance is provided in the filing. Management identified market levels and volatility, foreign-exchange activity and rates, client flows, deposit deployment and margins, technology and cybersecurity, regulatory/compliance matters, credit quality, and litigation as risks to results.
- Northern Trust expected to adopt the new expected-credit-loss standard (ASU 2016-13) on January 1, 2020, and said adoption was not expected to have a significant impact if then-current and forecast conditions remained unchanged. The estimate remained dependent on economic conditions and portfolio composition.
- Legal and regulatory matters: management estimated reasonably possible losses of zero to approximately $25 million in aggregate for a limited set of matters, while noting other matters could not be reasonably estimated. On September 30, 2019, the CFTC resolved a swap-reporting and supervision matter with a $1.0 million civil penalty. Visa Class B conversion and related litigation outcomes remain uncertain.
- Unusual or relevant items include Q3 other operating income growth partly related to a bank-owned life insurance program launched in Q2 2019, lower Visa-related swap expenses, and a prior-year community-development investment impairment. The $1.0 billion insurance premium purchase affected investing cash flow.
Key facts investors should verify
- Whether servicing-fee growth, client net inflows and market-sensitive AUC/A and AUM can continue to support revenue if markets weaken.
- Whether margin gains persist as earning assets and deposits decline, and how interest-rate changes affect net interest income.
- Whether expense growth—particularly compensation, technology and outside services—remains controlled relative to revenue growth.
- Credit trends in residential real estate, including the concentration of nonperforming loans and the allowance coverage ratio.
- The effects of the 2019 segment-allocation changes on year-over-year comparisons, and the eventual impact of CECL adoption.
- Developments in the CFTC matter, other legal contingencies and Visa litigation; also confirm capital returns remain consistent with regulatory approval and capital needs.