Northern Trust Corporation — Q1 2021 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2021, compared with Q1 2020 unless stated otherwise. Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management.
Financial performance
- Revenue: $1.583 billion, essentially flat year over year. Noninterest income rose 5% to $1.243 billion, while GAAP net interest income fell 17% to $340.1 million.
- Profit: Net income increased 4% to $375.1 million; diluted EPS was $1.70, up from $1.55. Income before tax was $495.9 million and the effective tax rate was 24.4%, versus 21.8%.
- Fees and client assets: Trust, investment and other servicing fees increased 6% to $1.064 billion. At quarter-end, assets under custody/administration were $14.8 trillion, up 36% year over year; assets under management were $1.449 trillion, up 29%.
- Margins and returns: Net interest margin was 1.00% on a fully taxable equivalent basis, compared with 1.51% a year earlier (GAAP margin: 0.98% versus 1.48%). Return on average common equity was 13.7%; return on average assets was 0.99%.
- Credit costs: The company recorded a $30 million release of credit reserves, versus a $61 million provision in Q1 2020, reflecting improved economic forecasts and portfolio credit quality. Allowance for credit losses totaled $230.8 million, down from $259.9 million at year-end 2020.
- Expenses: Noninterest expense rose 5% to $1.118 billion, led by higher compensation, equipment and software, and other operating expense.
- Cash flow: Operating activities provided $68.3 million, investing activities provided $5.134 billion and financing activities used $4.906 billion. Cash and due from banks increased $194.9 million to $4.584 billion.
- Balance sheet and funding: Total assets were $163.9 billion, down 4% from December 31, 2020; deposits were $137.5 billion, down 4%; stockholders’ equity was $11.46 billion, down 2%. Period-end other borrowings were $5.43 billion; senior notes were $2.99 billion and long-term debt was $1.44 billion, including floating-rate capital debt.
- Capital: Corporation CET1 ratios were 12.0% under the standardized approach and 12.8% under the advanced approach. Management said capital ratios remained above applicable well-capitalized requirements.
Changes and drivers
- Servicing-fee growth reflected favorable markets, new business and currency translation, partly offset by money-market fund fee waivers. Northern Trust waived $50.2 million of such fees in Q1 2021; management expected waivers to continue while yields remained insufficient to cover stated fees.
- Lower interest rates and a shift in balance-sheet mix drove the decline in net interest income and margin, partly offset by higher average earning assets. Average earning assets rose 27% year over year, supported by deposit inflows.
- Equity-market gains and net inflows contributed to higher client assets. AUC/A rose 2% from year-end, and AUM rose 3%.
- Net unrealized gains in the investment securities portfolio declined to $333.6 million from $872.6 million at year-end, primarily reflecting increased unrealized losses attributed to changes in rates and credit spreads. Accumulated other comprehensive income fell to $65.9 million from $428.0 million.
- Wealth Management net income rose 16% year over year to $220.6 million, while C&IS net income fell 11% to $158.2 million. Segment comparisons are affected by a revised funds-transfer-pricing methodology implemented January 1, 2021; earlier periods were not restated.
Outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management noted that low market interest rates were expected to continue affecting net interest income. Forward-looking statements identify COVID-19 and economic conditions, market and interest-rate changes, client asset values, credit estimates, cybersecurity and operational risks, regulation, competition and litigation among key uncertainties.
- COVID-19-related loan relief continued. At March 31, 25 residential mortgage modifications totaling $9.5 million remained in active deferral; 595 modifications totaling $1.03 billion had completed deferral.
- The Federal Reserve’s temporary capital-distribution restrictions could end after June 30, 2021, subject to stress-test results. The company restarted repurchases during Q1 and repurchased 1.03 million shares under its public plan for $99.9 million; total share purchases including shares withheld for compensation were 1.40 million shares costing $135.6 million. The quarterly common dividend remained $0.70 per share.
- Potential litigation and regulatory losses were estimated at zero to approximately $25 million in aggregate for matters where a range could be estimated; other matters could not be reasonably estimated. Northern Trust Fiduciary Services (Guernsey) faced a French appellate retrial after France’s highest court reversed an earlier acquittal; proceedings had not been scheduled.
- Northern Trust continued to bear uncertainty related to Visa Class B shares and related swaps. It held approximately 4.1 million shares at zero cost basis; the timing and conversion rate remain uncertain.
- The filing reported $176.4 billion of client securities lent with indemnification. Management considered credit-loss exposure not significant given borrower controls and full collateralization, but the amount represents a contingent exposure.
Investor verification priorities
- Track net interest margin, deposit mix and the earnings effect of persistently low rates and continued money-market fee waivers.
- Assess whether servicing-fee growth and client asset inflows persist, and distinguish market appreciation from net flows.
- Review allowance assumptions and credit trends, including nonaccrual assets, TDRs, completed deferrals and the effect of economic forecasts; nonaccrual assets were $125.3 million at quarter-end.
- Monitor unrealized securities losses, AOCI, interest-rate sensitivity and the extent to which securities may need to be sold before recovery.
- Confirm capital-distribution limits after the Federal Reserve’s stress-test decisions, and compare repurchases and dividends with capital needs.
- Follow the French retrial, Visa litigation/conversion exposure and other contingencies; the filing says loss estimates for some matters cannot be determined.