Northern Trust Corporation — Q3 2020 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2020; nine-month results are also reported. Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. Results reflect the COVID-19 pandemic, sharply lower interest rates and related economic uncertainty. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total revenue | $1,485.1 million | $1,537.9 million | Down 3% |
| Net interest income | $328.6 million | $417.7 million | Down 21% |
| Provision for credit losses | $0.5 million expense | $7.0 million credit | — |
| Noninterest expense | $1,094.7 million | $1,036.3 million | Up 6% |
| Net income | $294.5 million | $384.6 million | Down 23% |
| Diluted EPS | $1.32 | $1.69 | Down 22% |
| Net interest margin (GAAP) | 1.01% | 1.58% | Down 57 bps |
| Return on average common equity | 10.5% | 14.9% | Down 4.4 percentage points |
- Nine months: Revenue was $4.58 billion, up 1%; net income was $968.4 million, down 14%; diluted EPS was $4.34, down 12%. Net interest income fell 12% to $1.11 billion, while provision for credit losses was $127.5 million versus a $13.5 million credit provision in 2019.
- Fee income and client assets: Q3 trust, investment and other servicing fees rose 3% to $1.00 billion. At September 30, assets under custody/administration were $13.08 trillion, up 13% year over year; assets under management were $1.31 trillion, up 9%.
- Balance sheet and funding: Total assets were $152.1 billion, up 11% from December 31, 2019. Deposits were $122.6 billion, up 12%; loans and leases were $32.8 billion, up 4%; stockholders’ equity was $11.6 billion, up 4%. Cash-flow statements show $420.5 million operating cash flow for the first nine months, compared with $955.6 million in 2019; investing used $13.1 billion and financing provided $13.0 billion, largely reflecting central-bank deposits, securities activity and deposit growth.
- Debt and capital: Period-end senior notes were $3.7 billion, long-term debt $1.2 billion and short-term borrowings $8.2 billion. Corporation CET1 was 13.4% under the standardized approach and 13.9% under the advanced approach. The company reported capital ratios above applicable well-capitalized requirements.
Material changes versus the prior comparable period
- Q3 earnings weakened as lower rates compressed net interest margin and net interest income; average earning assets increased 23%, but did not offset the rate impact.
- Q3 noninterest income rose 3%, led by servicing fees. Fee growth benefited from new business and markets, partly offset by money-market mutual fund fee waivers.
- Q3 noninterest expense increased 6%, including a $43.4 million charge tied to a corporate action processing error. Equipment and software expense, employee benefits and other operating costs also increased.
- Q3 credit provision was modest, but year-to-date credit provisioning rose substantially under the new expected-credit-loss framework and in response to portfolio downgrades and COVID-related economic forecasts.
- Deposits grew significantly, with elevated balances placed mainly at central banks and in securities. Net unrealized gains in the securities portfolio reached $884.3 million, versus $118.9 million at year-end 2019.
Outlook, commentary, risks and unusual items
- Management said low market interest rates were expected to continue weighing on net interest income. The filing provides no numerical earnings or revenue guidance.
- COVID-19 remained a material source of uncertainty, with potential effects on fee revenue, net interest income, credit losses, securities values, liquidity, capital, client demand and workforce operations. The majority of staff was expected to continue working remotely for some time.
- The allowance for credit losses was $267.9 million at September 30, 2020, including $215.4 million for loans and leases and $44.9 million for undrawn commitments and standby letters of credit. Nonaccrual loans and leases were $98.0 million; total nonaccrual assets were $98.9 million.
- Northern Trust adopted CECL on January 1, 2020, recording a $13.7 million increase in the allowance and a $10.1 million after-tax reduction to retained earnings. Prior periods were not restated.
- The Federal Reserve’s restrictions on share repurchases and limits on dividends were extended through Q4 2020. The open-market repurchase program had been suspended since March 16; Q3 common dividend remained $0.70 per share.
- Management estimated aggregate reasonably possible losses for certain legal matters at zero to approximately $15 million; other matters’ potential losses could not be reasonably estimated. Management did not expect pending matters, after reserves and insurance, to materially affect consolidated financial position or liquidity, though period results could be affected.
- Other notable items: $215.3 million of PPP loans were outstanding; $20 million was pledged over five years under a new philanthropic strategy; and management disclosed COVID-related loan modifications under applicable TDR relief.
Most important facts for investors to verify
- Whether net interest margin stabilizes and how continued low rates affect earnings and the deployment of large deposit balances.
- Whether CECL reserves adequately reflect COVID-related credit deterioration, especially in commercial and institutional, commercial real estate and private client portfolios.
- The nature, financial impact and any subsequent developments related to the $43.4 million corporate action processing error.
- Trends in servicing fees, AUC/A and AUM, including the effects of markets, client flows, currency movements and money-market fee waivers.
- Any changes to capital distribution limits, dividend capacity or resumption of share repurchases after Federal Reserve restrictions.
- Updates on COVID-19 loan deferrals, PPP forgiveness applications and legal or regulatory contingencies.