Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: Northern Trust is a large accelerated filer providing corporate and institutional services (custody, fund administration, asset management) and personal financial services. The company operates globally with significant non-U.S. office deposits.
Key Financial Metrics
| Metric | Q2 2008 | Q2 2007 | 6 Months 2008 | 6 Months 2007 |
|---|---|---|---|---|
| Net Income | $215.6 million | $206.9 million | $600.8 million | $393.6 million |
| Diluted EPS | $0.96 | $0.92 | $2.67 | $1.76 |
| Total Revenues (FTE) | $1.09 billion | $0.88 billion | $2.24 billion | $1.71 billion |
| Net Interest Income | $236.1 million | $195.6 million | $489.6 million | $394.4 million |
| Noninterest Income | $845.3 million | $673.4 million | $1.73 billion | $1.28 billion |
| Noninterest Expenses | $643.3 million | $555.3 million | $1.18 billion | $1.08 billion |
| Provision for Credit Losses | $10.0 million | $4.0 million | $30.0 million | $4.0 million |
| Total Assets | $74.8 billion | $59.6 billion | N/A | N/A |
| Stockholders' Equity | $4.96 billion | $4.23 billion | N/A | N/A |
| Return on Average Equity (ROE) | 17.75% (Annualized) | 20.23% (Annualized) | 25.45% (Annualized) | 19.73% (Annualized) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues (FTE) increased 24% in Q2 2008 compared to Q2 2007. Noninterest income rose 26%, driven by a 56% increase in foreign exchange trading income (record $126.6 million) and a 21% increase in trust and servicing fees.
- Net Interest Income: Increased 21% year-over-year to $236.1 million. This growth was partially offset by a $29.4 million non-cash accounting charge related to structured leasing transactions.
- Expense Increases: Noninterest expenses rose 16% to $643.3 million, primarily due to higher compensation (22% increase) and employee benefits, reflecting staff growth and performance-based pay.
- Balance Sheet Expansion: Total assets grew 25% to $74.8 billion, funded largely by a 29% increase in non-U.S. office interest-bearing deposits and growth in loans and leases (up 19% to $28.7 billion).
- Unusual Items: The six-month period included a $153.5 million after-tax benefit from the Visa Inc. IPO (partial redemption of shares and offset of indemnification liabilities). Excluding this, operating earnings were $447.3 million.
Guidance, Outlook, Risks, and Contingencies
- Leasing Tax Contingency: The IRS challenged the company's tax position on structured leasing transactions. Management increased tax reserves to $380 million (from $208 million) due to revised estimates on the timing of deductibility. This resulted in a $29.4 million charge to interest income and a $57.9 million increase in tax provision in Q2 2008. Future impacts are expected to reduce net interest income by ~$6 million and increase tax provision by ~$9 million for the remainder of 2008.
- Visa Indemnification: A net liability of $73.9 million remains for Visa-related litigation indemnifications. Management anticipates remaining Visa shares will offset these liabilities.
- Capital Support Agreements: The company entered into agreements to support certain investment funds holding assets of Whistlejacket Capital LLC. The estimated fair value of this contingent liability was $9.9 million at June 30, 2008, with a maximum potential contribution of $229 million. No contributions have been made to date.
- Asset Quality: Nonperforming assets totaled $34.4 million (0.05% of total assets). The provision for credit losses increased to $10.0 million in Q2, reflecting loan growth and economic weakness. Specific reserves decreased due to loan payoffs, while inherent reserves increased.
- Acquisition: On June 24, 2008, Northern Trust agreed to acquire Lakepoint Investment Partners LLC, expected to close around October 1, 2008.
Investor Verification Checklist
- Leasing Tax Impact: Verify the sustainability of the $87.3 million total charge (interest income and tax) related to structured leases and the adequacy of the $380 million tax reserve.
- Visa Exposure: Confirm the status of the Visa litigation escrow account and the valuation of remaining Visa shares held by the company.
- Capital Support Agreements: Monitor the credit quality of Whistlejacket Capital LLC and the potential for capital contributions up to the $229 million limit.
- Asset Quality Trends: Review the increase in the provision for credit losses and the composition of nonperforming loans, particularly in the commercial and residential real estate sectors.
- Operating Earnings: Distinguish between reported earnings (inflated by the one-time Visa gain) and operating earnings to assess core business performance trends.