Northern Trust Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017, with quarterly data for the fourth quarter. Northern Trust is a financial holding company focused on asset servicing, fund administration, asset management, fiduciary services and banking, through Corporate & Institutional Services (C&IS), Wealth Management, and Treasury and Other.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue (GAAP) | $5.38 billion | $4.96 billion |
| Net income | $1.20 billion | $1.03 billion |
| Diluted earnings per common share | $4.92 | $4.32 |
| Return on average common equity | 12.6% | 11.9% |
| Net interest margin (FTE) | 1.33% | 1.18% |
| Net cash from operating activities | $1.72 billion | $1.51 billion |
| Total assets, year-end | $138.6 billion | $123.9 billion |
| Deposits, year-end | $112.4 billion | $101.7 billion |
| Stockholders’ equity, year-end | $10.2 billion | $9.8 billion |
- Revenue rose 8%; noninterest income increased 6% to $3.95 billion, and GAAP net interest income increased 16% to $1.43 billion. Fee income remained the largest revenue source.
- Trust, investment and other servicing fees rose 10% to $3.43 billion, supported by favorable markets, new business and the UBS fund-administration acquisition. Foreign-exchange trading income fell 11% to $209.9 million; other operating income declined 35% to $157.5 million, partly because 2016 included a Visa share-sale gain.
- Noninterest expense increased 9% to $3.77 billion. Growth reflected compensation, technology, outside services, acquisition costs and severance, including a one-time employee bonus related to tax reform.
- The provision for credit losses was a $28.0 million credit. Loans and leases declined 4% to $32.6 billion; net charge-offs fell to $10.2 million from $15.2 million, and nonperforming assets decreased to $155.3 million from $165.4 million.
- Year-end deposits were the principal funding source. Cash and due from banks were $4.5 billion; federal and other central-bank deposits were $40.5 billion; total securities were $46.8 billion. Management reported that liquid assets—including cash, central-bank deposits, short-term money-market assets and securities—represented 70% of total assets. The Corporation and Bank met U.S. liquidity coverage requirements; the filing does not state a specific LCR value here.
- Year-end borrowings included $1.50 billion of senior notes, $1.45 billion of long-term debt and $277.5 million of floating-rate capital debt, in addition to short-term borrowings. The Corporation issued $350 million of subordinated notes in May 2017.
- Operating cash flow was $1.72 billion; investing cash flow used $14.0 billion, mainly for central-bank deposits and securities purchases; financing cash flow provided $11.3 billion, largely from deposit growth and borrowings.
Fourth-quarter and segment highlights
- Fourth-quarter net income was $356.6 million, compared with $266.5 million in fourth-quarter 2016; diluted EPS was $1.51 versus $1.11. Net interest margin on an FTE basis was 1.39%, compared with 1.20%.
- C&IS net income increased 24% to $615.0 million for the year; Wealth Management net income increased 15% to $571.8 million. Treasury and Other net income was $12.2 million, down from $37.8 million.
- Assets under custody/administration increased 26% to $10.72 trillion, including $568.1 billion associated with the UBS acquisition. Assets under custody rose 20% to $8.08 trillion and assets under management rose 23% to $1.16 trillion.
Material changes, outlook and notable items
- The UBS Asset Management fund-administration businesses in Luxembourg and Switzerland were acquired on October 1, 2017. The recorded purchase price was $190.8 million, subject to adjustment; the acquisition added $78.3 million of goodwill and $126.0 million of other intangible assets.
- The Tax Cuts and Jobs Act produced a provisional net tax benefit of $53.1 million in 2017, including an estimated $150 million repatriation tax and a $210 million deferred-tax benefit. Management expected a 2018 effective tax rate of approximately 23%–24%; the tax accounting remained subject to refinement.
- Management announced its “Value for Spend” initiative, targeting $250 million in annualized expense run-rate savings by 2020; success is not assured. Management also expected 2018 pension expense to increase by approximately $19 million. The company contributed $50 million to its qualified pension plan in early 2018.
- The 2017 capital plan received no Federal Reserve objection. It permitted up to $454.6 million of common-stock repurchases after year-end through June 2018. The company repurchased 5.8 million shares during 2017 and increased its quarterly dividend to $0.42 per share.
- Capital ratios exceeded “well-capitalized” minimums. At year-end, Corporation CET1 ratios were 13.5% under the advanced approach and 12.6% under the standardized approach. The Bank’s ratios were also above applicable minimums.
- Regulators identified shortcomings in the Corporation’s 2015 resolution plan; the company submitted a revised plan in December 2017, with regulatory review pending. An adverse determination could lead to stricter capital, liquidity or growth requirements, or required divestitures.
- Key risks include dependence on asset values and activity for fee income, interest-rate and market movements, cyber and operational events, credit and counterparty exposures, competition, regulatory change, and Brexit-related disruption and costs.
- For pending legal and regulatory matters, management estimated reasonably possible losses of zero to approximately $30 million in aggregate for matters where a range could be estimated; other matters could not be reasonably estimated. A French court acquittal in a trust-administration case was appealed. Resolution of Visa interchange litigation and related restrictions on remaining Visa Class B shares remained uncertain.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- How much of the growth in servicing fees and client assets reflects recurring net flows and acquisition contribution versus market appreciation and foreign-exchange translation.
- Whether rising deposit and borrowing costs offset further rate-driven improvement in net interest income and margin.
- Progress toward the $250 million expense-savings target, alongside higher technology, compensation and acquisition-related costs.
- Final tax effects of the 2017 tax-law changes, including the provisional estimate and 2018 effective tax rate.
- Regulatory feedback on the December 2017 resolution plan and continued compliance with capital and liquidity standards.
- Developments in litigation and regulatory matters, including the French appeal, Visa-related exposures and the estimated range of possible losses.