Northern Trust Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; fourth-quarter figures are unaudited. Unless otherwise noted, financial amounts are U.S. dollars.
Business context
Northern Trust provides wealth management, asset servicing, asset management and banking services through Corporate & Institutional Services (C&IS) and Wealth Management. Asset Management supports both segments. At year-end, assets under custody/administration were $14.53 trillion and assets under management were $1.41 trillion; these are client assets, not consolidated balance-sheet assets. Consolidated assets were $170.0 billion.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue, GAAP | $6.10 billion | $6.07 billion |
| Noninterest income | $4.66 billion | $4.40 billion |
| Net interest income, GAAP | $1.44 billion | $1.68 billion |
| Net interest margin, FTE | 1.19% | 1.60% |
| Provision for credit losses | $125.0 million | $(14.5) million credit |
| Noninterest expense | $4.35 billion | $4.14 billion |
| Net income | $1.21 billion | $1.49 billion |
| Diluted EPS | $5.46 | $6.63 |
| Return on average common equity | 11.2% | 14.9% |
| Year-end deposits | $143.9 billion | $109.1 billion |
| Year-end stockholders’ equity | $11.7 billion | $11.1 billion |
| Year-end senior notes / long-term debt | $3.12 billion / $1.19 billion | $2.57 billion / $1.15 billion |
| Operating cash flow | $1.90 billion | $2.59 billion |
Net interest income on a fully taxable equivalent (FTE) basis was $1.48 billion, down 14%. The filing reports a 25.7% effective tax rate, versus 23.2% in 2019. Consolidated cash and due from banks was $4.39 billion at year-end. The company reported that cash, central-bank deposits, short-term money-market assets and investment securities together represented 73% of total assets; the Bank and Corporation met applicable liquidity coverage ratio requirements.
Capital ratios remained above applicable well-capitalized thresholds. Corporation common equity Tier 1 was 12.8% under the standardized approach and 13.4% under the advanced approach; total capital was 15.6% and 15.9%, respectively. The 8.6% supplementary leverage ratio reflected temporary regulatory treatment of certain central-bank deposits and Treasury securities.
Fourth quarter 2020 revenue was $1.52 billion, net income $240.9 million and diluted EPS $1.12, compared with $1.55 billion, $371.1 million and $1.70, respectively, in fourth quarter 2019.
Material changes versus 2019
- Net income fell 19% and diluted EPS declined, despite revenue increasing modestly. Lower interest rates reduced FTE net interest margin to 1.19% from 1.60%.
- Noninterest income rose 6%, led by 4% growth in trust, investment and other servicing fees, 16% growth in foreign-exchange trading income and 29% growth in securities commissions and trading income.
- Client assets under custody/administration increased 21% to $14.53 trillion, reflecting net inflows, favorable markets and currency translation. Assets under management increased 14% to $1.41 trillion.
- Credit-loss provision increased to $125.0 million, driven by COVID-related economic forecasts and portfolio downgrades. The allowance for credit losses was $259.9 million at year-end, versus $124.4 million at year-end 2019; adoption of the expected-loss accounting standard affected comparability.
- Deposits rose 32% to $143.9 billion, and total assets increased 24% to $170.0 billion, largely reflecting elevated client deposit balances and related placements in central-bank deposits and securities.
- C&IS net income declined 27% to $520.7 million, primarily from lower net interest income and higher expenses. Wealth Management net income declined 8% to $729.2 million, primarily due to higher credit provisions and expenses.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management said low market interest rates were expected to continue affecting net interest income. Money-market mutual-fund fee waivers, totaling $29.3 million in 2020, were expected to continue while yields remained insufficient to cover stated fees.
- COVID-19 created continuing uncertainty around markets, fee revenue, credit losses, deposits, liquidity, workforce operations and cybersecurity. The company also identified interest-rate, market, foreign-exchange, counterparty, operational, fiduciary, regulatory, cyber and geopolitical risks, as well as uncertainty associated with Brexit and the transition away from LIBOR.
- 2020 expense included a $43.4 million charge for a corporate-action processing error, $55.0 million in severance-related charges and $11.9 million for an early lease exit. The processing error is a notable operational-control event.
- The Federal Reserve restricted capital distributions during 2020 and extended limits into first quarter 2021. Northern Trust suspended open-market repurchases in March 2020 and restarted the program in first quarter 2021 subject to those limits. The quarterly common dividend remained $0.70 per share during 2020.
- Potential litigation and regulatory matters were not assessed by management as likely to materially affect consolidated financial position or liquidity. For certain matters, the estimated aggregate range of reasonably possible loss was zero to approximately $20 million; other matters could not be reasonably estimated. A French appellate retrial concerning a subsidiary’s trustee role was pending following a January 2021 reversal.
- The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting. The allowance for credit losses on commercial loans and leases evaluated collectively was identified as a critical audit matter.
Most important facts for investors to verify
- Whether deposit growth and elevated liquidity can be deployed profitably without further deterioration in net interest margin.
- Credit quality trends, especially commercial and institutional and commercial real estate exposures, nonaccrual assets, and the assumptions underlying the $259.9 million allowance.
- The persistence and financial impact of money-market fee waivers and other pressures on fee income.
- Follow-up disclosures on the $43.4 million processing error, including any additional costs, client impacts or control remediation.
- Capital-distribution restrictions, subsequent repurchases and dividend capacity, including the Bank’s ability to upstream dividends to the Corporation.
- Developments in the French litigation, Visa-related exposures, LIBOR transition and other contingencies; the filing does not provide a clear estimate for all potential losses.