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Northern Trust Corp (NASDAQ:NTRS)
Q3 2021 Earnings Call
Oct 20, 2021, 10:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, everyone. Welcome to the Northern Trust’s Third Quarter 2021 Earnings Call. [Operator Instructions]
At this time, I will turn the call over to Mr. Mark Bette. Please go ahead, sir.
Mark Bette — Senior Vice President, Director of Investor Relations
Thank you, Alan. Good morning, everyone, and welcome to Northern Trust Corporation’s third quarter 2021 earnings conference call. Joining me on our call this morning are Mike O’Grady, our Chairman and CEO; and Jason Tyler, our Chief Financial Officer. Our third quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today’s conference call. This October 20th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through November 17th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.
Now for our Safe Harbor statement. What we say during today’s conference call may include forward-looking statements, which are Northern Trust’s current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those expressed or implied by these statements, because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2020 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.
During today’s question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits.
Thank you again for joining us today. Let me turn the call over to Mike O’Grady.
Michael G. O’Grady — Chairman, President and Chief Executive Officer
Thank you, Mark. Let me join and welcoming you to our third quarter 2021 earnings call. During the third quarter, we continued to have success executing on our growth strategies across each of our businesses. In our Wealth Management business, we’ve driven strong growth across each of our regions and our Global Family Offices business. We continued to see improved levels of engagement in new business activities with both existing and new clients.
During the quarter, we’ve also invested and strengthened our depth of expertise. There is no question that labor markets are tight and competition for talent is fierce, but even amid this environment, we are very pleased with the additions to our team across the country.
Within Asset Management, we continue to see momentum in our quant active FlexShares’ ETF and ESG strategies. We launched six new climate-themed ETFs, which incorporate our new ESG Vector Score. Two of the launch funds were in Europe, marking our second launch of FlexShares offerings in Europe. We’ve also continued to have growth in our liquidity products and our money funds surpassed $300 billion in assets under management during the quarter for the first time. Additionally, our Asset Management business was recognized by Investment News as the 2021 Excellence in Diversity, Equity and Inclusion award winner for the third consecutive year.
Our Asset Servicing business continued to see growth that is well-diversified across regions, products and client segments. We remain focused on driving profitable growth, while investing and expanding our asset servicing solutions. The current environment has continued to pressure margins earned by investment managers and as they rethink their operating models and whether to move to outsourced solutions, our whole office approach has put us in a position to help them achieve their goals. We’re also positioned well to benefit from the trends of asset owners managing more assets in-house, as the flexibility of our model and ability to combine capabilities for these clients has been an area of strength.
Our growth strategies within each of our businesses resulted in 11% year-over-year growth for our trust fees and 10% growth in our revenue. Our expenses also increased year-over-year, albeit at a lower rate, as we continue to invest in technology and our staff, including higher levels of compensation as we build a diverse engaged workforce with skills for the future. Taken together, this resulted in both positive fee operating leverage as well as positive total operating leverage.
To close, I also wanted to express my sincere and immense appreciation for our employees around the world, whose commitment, expertise, and professionalism in serving our clients, communities and one another continues to be truly extraordinary.
Now, let me turn the call to Jason to review our financial results in greater detail for the quarter.
Jason J. Tyler — Executive Vice President and Chief Financial Officer
Thank you, Mike. Let me join Mark and Mike in welcoming you to our third quarter 2021 earnings call. Let’s dive into the financial results of the quarter, starting on page two. This morning, we reported third quarter net income of $395.7 million. Earnings per share were $1.80 and our return on average common equity was 13.7%, which matches our performance from the prior two quarters. You can see some historical market data on the bottom of page two. Recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels. And both the S&P 500 and EAFE Local had favorable sequential performance based on those calculations. As shown on this page, average 1-month and 3-month LIBOR rates were modestly lower during the quarter.
Let’s move to page three and review the financial highlights of the third quarter. Year-over-year revenue was up 10% and expenses increased 3%. Net income was up 34%. In the sequential comparison, revenue was up 4% and expenses were up 1%, while net income was up 7%. The provision for credit losses reflected a release of $13 million in reserves in the current quarter compared to a release of $27 million in the prior quarter.
Return on average common equity was 13.7% for the quarter, up from 10.5% a year ago and consistent with the prior quarter. Assets under custody and administration and assets under custody were both up 21% compared to the prior year and flat on a sequential basis. Assets under management were $1.5 trillion and were up 17% from a year ago and also flat on a sequential basis.
Let’s look at the results in greater detail, starting with revenue on page four. Trust, investment and other services fees, representing the largest component of our revenue, totaled $1.1 billion and were up 11% from last year and up 3% sequentially. Foreign exchange trading income was $66 million in the quarter, up 8% year-over-year and down 6% sequentially. The year-over-year growth was driven by higher volumes, while the sequential decline was due to lower volumes and lower volatility. The remaining components of non-interest income totaled $110 million in the quarter, up 21% from one year ago and up 11% sequentially. Within this, securities commissions and trading income was up 40% from the prior year and up 10% sequentially. Higher levels of interest rate swap activity benefited both the year-over-year and sequential results, while higher core brokerage revenue also benefited the performance versus last year.
Other operating income totaled $62 million and was up 17% from one year ago and up 15% sequentially. The increase compared to a year ago was driven by distributions from certain investments in community development projects, as well as higher banking and credit-related fees partially offset by lower miscellaneous income. The sequential increase was primarily driven by lower expenses related to Visa swap agreements and the higher income from investments in community development projects. Net interest income, which I’ll discuss in more detail later, was $357 million and was up 6% from one year ago and up 4% sequentially.
Let’s look at the components of our trust and investment fees on page five. For our Corporate & Institutional Services business, fees totaled $630 million and were up 8% year-over-year and up 3% sequentially. Custody and fund administration fees are $460 million and up 17% year-over-year and up 1% sequentially. Both the year-over-year and sequential increases were driven by favorable markets and new business. Unfavorable currency translation and lower transaction volumes also impacted the sequential comparison.
Assets under custody and administration for C&IS clients were $14.8 trillion at quarter end, up 21% year-over-year and flat sequentially. The year-over-year growth was primarily driven by favorable markets and new business. The sequential performance was driven by new business and favorable markets offset by unfavorable currency translation.
Investment management fees in C&IS of $114 million were down 17% year-over-year and up 13% sequentially. The year-over-year performance was driven by higher money market fund fee waivers, partially offset by favorable markets and new business. The sequential performance was driven by new business and favorable markets. Fee waivers in C&IS totaled $49.9 million in the third quarter, essentially unchanged from the prior quarter, but up compared to $0.9 million in the prior year.
Assets under management for C&IS clients were $1.2 trillion, up 17% year-over-year and down 1% sequentially. The growth from the prior year was driven by favorable markets and client flows. The sequential decline was driven by modest unfavorable impact from markets in currency, partially offset by positive net flows.
Securities lending fees were $20 million, up 2% year-over-year and up 3% sequentially. Average collateral levels were up 22% year-over-year and up 3% sequentially.
Moving to our Wealth Management business, trust, investment and other servicing fees were $481 million and were up 15% compared to the prior year and up 4% from the prior quarter. Fee waivers in Wealth Management totaled $26.7 million in the current quarter compared to $29.2 million in the prior quarter. And $4.4 million in the prior year.
Across the regions in Global Family Office, the year-over-year growth was driven by favorable markets and new business, partially offset by higher fee waivers. For the sequential performance, the growth within the regions was mainly due to favorable markets, as well as slightly lower fee waivers. Within Global Family Office, the sequential growth was primarily due to new business, favorable markets and lower fee waivers. Assets under management for Wealth Management clients were $373 billion at quarter end, up 17% year-over-year and essentially flat on a sequential basis. The year-over-year growth was driven by favorable markets and client flows, while the sequential performance primarily reflected client flows, mainly offset by unfavorable markets.
Moving to page six, net interest income was $357 million in the quarter and was up 6% from the prior year. Earning assets averaged $144 billion in the quarter, up 11% versus the prior year. Average deposits were $130 billion and were up 15% versus the prior year, while loan balances averaged $38 billion and were up 16% compared to the prior year.
The net interest margin was 0.98% in the quarter and was down 5 basis points from a year ago. The net interest margin decreased primarily due to lower average interest rates, partially offset by the benefits of balance sheet volume and mix. On a sequential quarter basis, net interest income grew…