Northern Trust Corporation — Q2 2021 Form 10-Q
Business context and reporting period
Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons are primarily with the corresponding 2020 periods.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Change |
|---|---|---|---|
| Total revenue | $1.580 billion | $1.506 billion | +5% |
| Net interest income | $335.6 million | $372.1 million | -10% |
| Net income | $368.1 million | $313.3 million | +18% |
| Diluted earnings per share | $1.72 | $1.46 | +18% |
| Noninterest expense | $1.121 billion | $1.037 billion | +8% |
| Provision for credit losses | $(27.0) million | $66.0 million | $27.0 million reserve release |
| Net interest margin, GAAP | 0.95% | 1.20% | -25 basis points |
| Return on average common equity | 13.7% | 12.2% | +1.5 percentage points |
| Return on average assets | 0.96% | 0.91% | +0.05 percentage points |
For the six months ended June 30, revenue was $3.164 billion (+2%), net income was $743.2 million (+10%), diluted EPS was $3.42 (+13%), and net interest income was $675.7 million (-13%). The six-month net interest margin was 0.96% GAAP (0.99% fully taxable equivalent, a non-GAAP measure), compared with 1.33% GAAP (1.36% FTE) a year earlier.
Servicing fees rose 12% in Q2 to $1.075 billion, supported by favorable markets, new business and currency translation. Assets under custody/administration reached $15.727 trillion (+30% year over year), and assets under management were $1.539 trillion (+22%).
Balance sheet, liquidity and capital
- At June 30, total assets were $172.3 billion, deposits $146.2 billion and stockholders’ equity $11.8 billion. Since December 31, 2020, assets rose 1%, deposits 2% and equity 1%.
- Loans and leases were $37.4 billion, up 11% from year-end. Cash and due from banks were $4.8 billion; Federal Reserve and other central bank deposits were $54.2 billion.
- Reported debt and borrowing balances included $5.1 billion of other borrowings, $3.0 billion of senior notes, $1.2 billion of long-term debt, $277.8 million of floating-rate capital debt and $529.1 million of repurchase agreements.
- For the six months, operating cash flow was negative $1.168 billion, investing cash flow negative $2.232 billion and financing cash flow positive $3.895 billion; cash and due from banks increased $409.8 million. Operating cash outflow mainly reflected higher net collateral deposited with derivative counterparties.
- Corporation regulatory capital ratios at June 30 included standardized CET1 of 12.0%, Tier 1 capital of 13.1% and total capital of 14.5%. Management said capital remained strong and above applicable requirements.
Material changes and management commentary
- Q2 earnings growth reflected higher servicing fees and a reserve release, partly offset by lower net interest income and higher expenses. The reserve release reflected improved projected economic and industry conditions, partly offset by a limited number of commercial real estate credit deteriorations and portfolio growth.
- Low interest rates reduced asset yields and net interest margin; management expected low rates to continue weighing on net interest income. Higher average earning assets and client deposits partially offset the effect.
- Money market mutual fund fee waivers were $79.2 million in Q2 and $130.0 million for the first half, versus $0.3 million in each comparable 2020 period. The company expected waivers to continue in the low-rate environment, adversely affecting servicing fees.
- Noninterest expense included a $17.6 million pension settlement charge. Higher outside services, employee benefits, compensation, and equipment and software costs were partly offset by lower occupancy and other operating expense.
- During Q2, $6.86 billion of government-sponsored agency securities were transferred from available-for-sale to held-to-maturity for capital management. The transfer included $120.1 million of net unrealized gains retained in accumulated other comprehensive income and amortized over the securities’ remaining lives.
- The company restarted common share repurchases in Q1 under then-applicable regulatory limits. Federal Reserve pandemic-related capital distribution restrictions expired June 30, 2021. Q2 repurchases totaled approximately $30.2 million; the quarterly common dividend remained $0.70 per share.
- COVID-19 operations remained largely remote, with some locations planning hybrid or rotational returns during Q3. At June 30, PPP loans outstanding totaled $145.4 million; 889 applications had resulted in $153.1 million of principal and interest forgiveness.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management highlighted sensitivity to interest rates, financial-market values and client activity, which affect net interest income and asset-based fees. Other stated risks include COVID-19 impacts, credit estimates, cybersecurity and operational risk, counterparty and liquidity risk, regulation, foreign exchange, and the ability to retain and win business and deploy deposits profitably.
Management reported no material accruals for pending litigation or regulatory matters. For a limited set of matters with reasonably possible losses that could be estimated, the aggregate range was $0 to approximately $25 million; other matters’ possible losses could not be reasonably estimated. A French appellate retrial involving a subsidiary was required after a January 2021 reversal by France’s highest court; proceedings had not been scheduled. Separately, the timing and ultimate conversion terms of Northern Trust’s retained Visa Class B shares remain uncertain.
Other items include $131.2 million of loans held for sale following a decision to exit a non-strategic loan portfolio and implementation of enhanced funds-transfer-pricing methodology on January 1, 2021. Segment comparisons with 2020 were not restated for that methodology change.
Most important facts for investors to verify
- Whether servicing-fee growth and client-asset increases persist, and how much results depend on market appreciation versus net inflows.
- The trajectory of net interest margin, deposit pricing and money market fee waivers in a prolonged low-rate environment.
- The sustainability of earnings growth after accounting for the reserve release, pension settlement charge and rising operating expenses.
- Credit quality trends, particularly commercial real estate exposures, nonaccrual loans and allowance adequacy.
- Effects of the securities reclassification and AOCI movements on capital, reported earnings and future net interest income.
- Developments in litigation, including the French retrial and Visa-related uncertainty, and any changes to estimated losses or contingencies.