Northern Trust Corporation — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Financial statements are unaudited. Amounts are in U.S. dollars; financial amounts are in millions unless noted.
Business context and financial results
Northern Trust provides asset servicing, investment management and banking services through Corporate and Institutional Services (C&IS), Personal Financial Services (PFS), and Treasury and Other.
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue, fully taxable equivalent (FTE) | $907.6 | $904.2 | Up slightly |
| Net income | $157.2 | $161.8 | Down 3% |
| Diluted earnings per common share | $0.64 | $0.61 | Up 5% |
| Net interest income | $230.4 | $277.1 | Down 17% |
| Net interest margin, FTE | 1.44% | 1.68% | Down 24 basis points |
| Provision for credit losses | $40.0 | $55.0 | Down 27% |
| Noninterest expenses | $619.7 | $593.5 | Up 4% |
Trust, investment and other servicing fees rose 25% to $515.1, supported by higher market values, new business and securities-lending-related factors. Foreign-exchange trading income declined 39% to $79.7, reflecting lower currency volatility. Management cited low rates and compressed short-term spreads as key pressures on net interest income. The prior-year diluted EPS included a $0.10 reduction related to the U.S. Treasury Capital Purchase Program; the preferred stock had been repurchased in 2009.
Balance sheet, cash flow, liquidity and capital
- Total assets were $76.3 billion at March 31, down from $82.1 billion at year-end 2009 and $78.5 billion a year earlier. Loans and leases were $28.0 billion; total deposits were $57.4 billion.
- Cash and due from banks were $2.65 billion. Money market assets were $23.0 billion. The quarter-end balance sheet also included $16.6 billion of available-for-sale securities and $1.2 billion of held-to-maturity securities.
- Stockholders’ equity was $6.45 billion. Regulatory capital remained above stated minimums: Corporation Tier 1 capital ratio 13.4%, total capital ratio 15.5%, and leverage ratio 8.9%. Tier 1 common equity ratio was 12.8%, versus 9.6% a year earlier.
- Quarterly cash flow was $34.8 million from operating activities, $5.51 billion provided by investing activities, and $5.37 billion used in financing activities. Cash and due from banks increased $159.9 million. Investing and financing flows included substantial movements in interest-bearing assets and short-term funding.
- At quarter-end, borrowings included $3.74 billion of federal funds purchased, $1.40 billion of senior notes, $2.73 billion of long-term debt, and $1.04 billion of other borrowings. Total liabilities were $69.9 billion.
Material changes, risks and unusual items
- Credit quality weakened: nonperforming loans increased to $319.5 million from $278.5 million at year-end and $167.8 million a year earlier; nonperforming assets were $365.2 million. Net charge-offs were $30.6 million, compared with $2.7 million in Q1 2009. The total credit-loss reserve was $350.0 million.
- Residential real estate and commercial real estate were notable sources of nonperforming loans. The filing reports $103.9 million of unrealized losses on residential mortgage-backed securities; $102.5 million of those losses had persisted for at least 12 months. Auction-rate securities measured using Level 3 inputs totaled $411.7 million.
- C&IS securities lending fees included recovery of about $38 million of prior valuation losses, compared with about $52 million of losses in the prior-year quarter. Excluding valuation adjustments, management cited lower cash-collateral investment spreads as a drag. Money market fund fee waivers totaled $20.2 million.
- The company reported no credit-related impairment losses on debt securities in Q1 2010. Securities lending indemnifications covered $88.2 billion of client securities; management said collateralization mitigated exposure and recorded no liability for these indemnifications.
- Contingencies include Visa-related indemnification liability of $56.1 million, standby letters of credit outstanding of $4.8 billion, securities-lending litigation, and an ERISA putative class action for which management said loss could not be reasonably estimated. The IRS continues to challenge tax treatment of certain structured leases; Northern Trust reported $67.9 million in leveraged-lease-related uncertain tax positions and said it had reserves and IRS deposits.
- Management stated interest-rate risk and foreign-exchange trading value-at-risk had not changed significantly since year-end. The filing provides no specific earnings or revenue guidance. It identifies economic conditions, markets and asset values, credit losses, regulation, litigation, liquidity, operational risks and expense control as factors that could affect future results.
Important facts for investors to verify
- Whether fee growth and higher assets under custody and management can offset net interest margin pressure and weaker foreign-exchange revenue.
- Whether rising nonperforming loans, charge-offs and real-estate-related credit exposure require further reserve increases.
- The valuation, liquidity and impairment sensitivity of mortgage-backed and Level 3 auction-rate securities.
- The sustainability of reported earnings, including the effect of securities-lending valuation recoveries, stock-based compensation comparisons and fee waivers.
- Developments in tax disputes, securities-lending and ERISA litigation, Visa indemnifications, and evolving regulatory capital and liquidity requirements.