Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Context: The filing covers the third quarter of 2008, a period marked by unprecedented disruptions in global financial markets. Northern Trust reported a net loss for the quarter, primarily driven by significant client support-related charges and indemnification liabilities, despite growth in core revenue streams like foreign exchange trading and net interest income.
Key Financial Metrics
| Metric | Q3 2008 | Q3 2007 | 9M 2008 | 9M 2007 |
|---|---|---|---|---|
| Net Income (Loss) | $(148.3) million | $208.3 million | $452.5 million | $601.9 million |
| Diluted EPS | $(0.67) | $0.93 | $2.01 | $2.69 |
| Total Revenue (FTE) | $938.5 million | $892.5 million | $3.01 billion (excl. Visa) | $2.60 billion |
| Net Interest Income | $253.4 million | $213.2 million | $743.0 million | $607.6 million |
| Noninterest Income | $672.8 million | $660.5 million | $2,398.0 million | $1,943.3 million |
| Noninterest Expenses | $1,154.0 million | $566.6 million | $2,332.6 million | $1,647.8 million |
| Provision for Credit Losses | $25.0 million | $6.0 million | $55.0 million | $10.0 million |
| Total Assets | $79.2 billion | $63.1 billion | N/A | |
| Total Deposits | $62.4 billion | $47.7 billion | N/A | |
| Stockholders' Equity | $4.84 billion | $4.36 billion | N/A |
Material Changes vs. Prior Period
- Net Loss vs. Profit: The company reported a net loss of $148.3 million in Q3 2008, a reversal from the $208.3 million net income in Q3 2007. This was driven by $561.5 million in pre-tax client support charges and a $30 million Visa indemnification charge.
- Expense Surge: Noninterest expenses more than doubled to $1.15 billion from $566.6 million year-over-year. Excluding the $591.5 million in specific charges (client support and Visa), adjusted expenses were flat or slightly down.
- Revenue Growth: Total revenues on a fully taxable equivalent (FTE) basis increased 5% to $938.5 million. Foreign exchange trading income surged 54% to a record $141.8 million due to high currency volatility. Trust fees declined 7% due to lower market valuations.
- Balance Sheet Expansion: Total assets grew 25% to $79.2 billion, funded primarily by a 40% increase in non-U.S. office interest-bearing deposits. Loans and leases increased 20% to $29.9 billion.
- Asset Quality: Nonperforming assets rose to $61.5 million from $29.3 million a year ago. The provision for credit losses increased to $25.0 million from $6.0 million, reflecting loan growth and economic weakness.
Guidance, Outlook, and Risks
- Client Support Actions: Management incurred significant charges to support clients:
- $313.9 million for Capital Support Agreements with investment funds.
- $167.6 million for securities lending clients facing collateral deficiencies.
- $80.0 million for a program to purchase illiquid auction rate securities held by clients.
- Visa Indemnification: A $30 million charge was recorded to increase the Visa indemnification liability following a settlement announcement. The total net liability stands at $103.9 million.
- TARP Participation: On October 24, 2008, the company received preliminary approval to participate in the U.S. Treasury's TARP Capital Purchase Program, issuing approximately $1.5 billion in senior preferred shares.
- Market Risks: The filing highlights risks related to the global financial crisis, including liquidity constraints, volatility in asset values, and the potential for further credit losses. Management notes that forward-looking statements are subject to significant uncertainty regarding the health of the U.S. and international economies.
- Capital Position: Despite the loss, risk-based capital ratios remained strong and well above regulatory minimums. The Tier 1 capital ratio was 9.2% and Total Capital ratio was 11.4%.
Investor Verification Checklist
- Client Support Charges: Verify the ongoing nature and potential magnitude of the $561.5 million in client support charges, specifically regarding the Capital Support Agreements and auction rate securities program.
- Visa Liability: Monitor the resolution of Visa litigation and the adequacy of the $103.9 million indemnification reserve versus the value of remaining Visa shares.
- Asset Quality Trends: Track the increase in nonperforming loans (up to $58.8 million) and the adequacy of the reserve for credit losses ($207.5 million) in the context of the broader economic downturn.
- TARP Impact: Assess the dilutive effect and dividend obligations associated with the $1.5 billion TARP preferred stock issuance.
- Fee Revenue Sensitivity: Evaluate the impact of continued declines in equity markets on Trust, Investment, and Servicing fees, which represent the largest revenue component.