Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: Northern Trust provides corporate and institutional services (custody, fund administration, asset management) and personal financial services (wealth management, trust services). The company operates as a large accelerated filer.
Key Financial Metrics
| Metric ($ in Millions) | Q2 2007 | Q2 2006 | 6M 2007 | 6M 2006 |
|---|---|---|---|---|
| Net Income | $206.9 | $167.9 | $393.6 | $330.9 |
| Diluted EPS | $0.92 | $0.76 | $1.76 | $1.49 |
| Total Revenues (FTE) | $882.4 | $792.3 | $1,706.2 | $1,535.3 |
| Net Interest Income (FTE) | $208.6 | $199.0 | $418.9 | $389.6 |
| Noninterest Income | $673.8 | $593.3 | $1,287.3 | $1,145.7 |
| Noninterest Expenses | $555.3 | $492.0 | $1,081.2 | $965.3 |
| Provision for Credit Losses | $4.0 | $3.0 | $4.0 | $7.0 |
| Total Assets | $59,609.7 | $53,325.9 | N/A | N/A |
| Stockholders' Equity | $4,227.2 | $3,808.4 | N/A | N/A |
| Return on Average Equity (Annualized) | 20.23% | 18.05% | 19.73% | 18.13% |
Material Changes vs. Prior Period
- Profitability: Net income increased 23% year-over-year in Q2 2007, driven by higher revenues and a lower effective tax rate (33.2% vs. 40.3% in Q2 2006). The prior year's tax rate was elevated by $15 million in additional reserves for leveraged leasing transactions.
- Revenue Growth: Total revenues (FTE) rose 11% in Q2. Noninterest income grew 14%, primarily due to an 18% increase in trust, investment, and servicing fees, fueled by higher equity markets and new business.
- Expense Management: Noninterest expenses increased 13% to $555.3 million. This was driven by higher compensation (12% increase) and outside services (22% increase) due to volume growth and staff expansion.
- Balance Sheet: Total assets grew to $59.6 billion, up from $53.3 billion a year ago. Loans and leases increased 13% to $24.0 billion, while securities rose 20% to $12.6 billion.
- Net Interest Margin: The net interest margin (FTE) declined to 1.58% from 1.73% in the prior year, impacted by the adoption of FASB Staff Position No. 13-2 (FSP 13-2) and narrowing interest rate spreads.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The adoption of FSP 13-2 regarding leveraged leases reduced Q2 net interest income (FTE) by approximately $7.0 million. The full-year impact is expected to reduce net interest income by approximately $14 million.
- Assets Under Management/Custody: Assets under custody reached $4.0 trillion (up 26% YoY), and assets under management totaled $766.5 billion (up 20% YoY). Management estimates a 10% move in equity markets would impact total revenues by approximately 2%.
- Capital and Liquidity: Risk-based capital ratios remain strong, exceeding regulatory requirements. The company repurchased 798,150 shares in Q2 at an average price of $64.28. Approximately 11.1 million shares remain authorized for repurchase.
- Legal and Tax Contingencies:
- IRS Investigation: The IRS Criminal Investigation Division referred a matter regarding structured leasing transactions to the U.S. Attorney's Office for grand jury investigation. The company is not a target but is cooperating. Management believes reserves are adequate.
- Enron Litigation: A settlement agreement regarding Enron bankruptcy claims was approved by the bankruptcy court in July 2007, expected to dismiss the case against settling defendants.
- Asset Quality: Nonperforming assets totaled $32.4 million (0.05% of total assets). The reserve for credit losses was $150.5 million, or 0.58% of total loans and leases.
Investor Verification Checklist
- FSP 13-2 Impact: Verify the ongoing impact of the leveraged lease accounting change on future net interest income and tax provisions.
- IRS Structured Lease Investigation: Monitor developments in the grand jury investigation regarding structured leasing transactions and potential changes to tax reserves.
- Fee Revenue Sensitivity: Assess the correlation between equity market performance and the company's primary revenue driver (trust and servicing fees).
- Expense Trajectory: Review the sustainability of the 13% increase in noninterest expenses, particularly in compensation and outside services, relative to revenue growth.
- Capital Ratios: Confirm that subsidiary banks maintain "well-capitalized" status as reported.