Northern Trust Corporation — Q1 2017 10-Q
Business context and period: Northern Trust provides asset servicing, fund administration, asset management, fiduciary and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period |
|---|---|---|
| Revenue (GAAP) | $1.284 billion | $1.190 billion; up 8% |
| Net interest income (GAAP) | $353.5 million; up 15% | $307.8 million |
| Net interest margin | 1.32% GAAP; 1.35% FTE | 1.18% GAAP; 1.21% FTE |
| Net income | $276.1 million; up 13% | $245.4 million |
| Diluted EPS | $1.09 | $1.03 |
| Noninterest expense | $894.5 million; up 8% | $828.8 million |
| Provision for credit losses | Credit of $1.0 million | Expense of $2.0 million |
| Operating cash flow | $784.7 million provided | $295.5 million used |
| Investing / financing cash flow | $1.027 billion provided / $2.708 billion used | $662.5 million provided / $0.2 million used |
| Total assets | $121.5 billion | $123.9 billion at Dec. 31, 2016 |
| Deposits | $100.5 billion | $101.7 billion at Dec. 31, 2016 |
| Stockholders’ equity | $10.0 billion | $9.8 billion at Dec. 31, 2016 |
| Capital ratios, Corporation | CET1: 12.9% advanced / 12.2% standardized; total capital: 15.6% / 15.0% | At Dec. 31, 2016: CET1 12.4% / 11.8%; total 15.1% / 14.5% |
| Client assets | AUC/A $8.925 trillion; AUM $1.001 trillion | At March 31, 2016: AUC/A $7.926 trillion; AUM $900.0 billion |
Return on average common equity was 11.6%, unchanged year over year; return on average assets was 0.96%, up from 0.87%. Common dividends declared were $0.38 per share, versus $0.36. Period-end nonperforming assets were $186.8 million, up from $174.4 million a year earlier; the allowance for credit losses was $189.0 million, down from $232.6 million.
Material changes and management commentary
- Revenue growth was driven mainly by trust, investment and other servicing fees, up 8% to $808.2 million, and net interest income. Favorable equity markets, new business and lower money-market fee waivers supported servicing fees.
- Foreign-exchange trading income fell 21% to $48.1 million, attributed to lower currency volatility and client volumes.
- Net interest margin improved as short-term rates rose and premium amortization declined; average earning assets increased 4% to $109.0 billion.
- Expenses rose 8%. Compensation increased 12%, reflecting performance-based incentives, salary increases and staff growth; full-time-equivalent staff was up 6% year over year. Equipment and software expense rose 11%. Other operating expense fell 13%, partly because the sponsored PGA TOUR tournament shifted to Q3 2017.
- Wealth Management net income rose 18% to $126.9 million; C&IS net income rose 7% to $144.7 million.
- Management reported strong capital ratios above regulatory “well-capitalized” minimums. The Corporation repurchased $70.1 million of common stock during the quarter and declared $89.4 million in common dividends.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management stated that adoption of several accounting standards was not expected to have a significant effect on consolidated condition or results, though some impacts remained under assessment.
- On February 19, 2017, Northern Trust agreed to acquire UBS Asset Management’s fund-administration servicing businesses in Luxembourg and Switzerland for an initial cash price of approximately $175 million, subject to adjustment. Closing was expected in the second half of 2017, subject to approvals and customary conditions.
- Interest-rate sensitivity models estimated next-12-month net interest income increases of $25 million under a gradual 100-basis-point rise and $38 million under a 200-basis-point rise. Management cautioned that estimates depend on assumptions and do not reflect possible management actions.
- Credit quality warrants monitoring: nonperforming assets increased, driven principally by commercial loans, while the specific allowance rose. The allowance-to-nonperforming-loans coverage ratio was 0.9x, versus 1.2x a year earlier.
- Investment securities had $26.1 million of net unrealized losses at quarter-end. Management said it did not intend to sell loss-position securities and did not expect to be required to sell them before recovery or maturity; $0.1 million of OTTI charges were recorded.
- Legal proceedings: management did not expect pending matters to materially affect consolidated financial position or liquidity, but said individual-period operating results could be affected. Estimated reasonably possible losses were zero to approximately $35 million in aggregate, excluding matters for which a range could not be estimated. The French estate-tax case had resulted in acquittals, but the prosecutor appealed. The outcome of Visa interchange-fee litigation affecting conversion of retained Visa Class B shares remained uncertain.
- Other disclosed risks include market and foreign-exchange volatility, interest-rate changes, credit and liquidity risks, cybersecurity and operational risks, regulation, litigation, and the ability to control costs and retain or win clients.
Investor verification points
- Confirm the reported growth in recurring servicing fees and net interest income, and distinguish GAAP amounts from FTE non-GAAP presentation.
- Track expense growth—especially compensation and technology—and whether the Q1 increase in incentives and staffing persists.
- Review subsequent nonperforming-loan trends, allowance adequacy and the concentration of problem credits in commercial lending.
- Verify UBS transaction approvals, final purchase price, closing timing and integration costs.
- Monitor deposit and short-term borrowing movements, cash flows, capital ratios and the planned capital return; the filing notes a $74.8 million repurchase capacity under the 2016 Capital Plan through June 2017.
- Follow developments in the French appeal, Visa litigation and other contingencies, including exposures not included in the estimated loss range.