Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: Northern Trust is a large accelerated filer providing corporate and institutional services, personal financial services, and treasury operations. The company operates as a bank holding company with significant assets under custody and management.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | 6M 2010 | 6M 2009 |
|---|---|---|---|---|
| Net Income (Millions) | $199.6 | $314.2 | $356.8 | $476.0 |
| Diluted EPS | $0.82 | $0.95 | $1.46 | $1.57 |
| Total Assets (Millions) | $80,048.9 | $75,045.2 | - | - |
| Stockholders' Equity (Millions) | $6,619.6 | $6,128.7 | - | - |
| Net Interest Income (FTE) (Millions) | $242.4 | $260.1 | $482.5 | $547.8 |
| Noninterest Income (Millions) | $731.4 | $785.0 | $1,398.9 | $1,401.5 |
| Noninterest Expenses (Millions) | $614.4 | $502.7 | $1,234.1 | $1,096.2 |
| Provision for Credit Losses (Millions) | $50.0 | $60.0 | $90.0 | $115.0 |
| Return on Average Assets (Annualized) | 1.1% | 1.7% | 1.0% | - |
| Return on Average Common Equity (Annualized) | 12.2% | 15.5% | 11.1% | - |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 36% year-over-year in Q2 2010 ($199.6M vs. $314.2M). The prior year period included a $130.1 million pre-tax benefit from Capital Support Agreements (CSAs) and was impacted by the Capital Purchase Program.
- Revenue Pressure: Total revenues (FTE) declined 7% to $973.8 million. Trust, investment, and servicing fees dropped 10% to $543.5 million, driven by lower securities lending revenue and fee waivers in money market funds due to low interest rates.
- Expense Increase: Noninterest expenses rose 22% to $614.4 million. This increase is partially offset by a $12.7 million pre-tax benefit from a reduction in Visa indemnification liability. Excluding the Visa benefit and prior year CSA benefits, core expenses increased modestly.
- Asset Quality: Nonperforming loans increased to $345.5 million (1.22% of total loans) from $227.9 million in Q2 2009, reflecting economic weakness. The reserve for credit losses increased to $361.6 million.
- Balance Sheet: Total assets grew to $80.0 billion, driven by higher securities balances and money market assets, while loans and leases decreased slightly.
Guidance, Outlook, and Risks
- Outlook: Management notes that the prolonged weakness in the broader economic environment continues to impact credit quality and fee income. The low interest rate environment has compressed net interest margins and necessitated fee waivers in money market funds.
- Capital Position: Risk-based capital ratios remain strong, with Tier 1 Capital at 13.7% and Total Capital at 15.9%, well above regulatory requirements. The company is classified as "well capitalized."
- Key Risks:
- Regulatory Changes: Potential impacts from the Dodd-Frank Act and Basel II on capital requirements, leverage limits, and compliance costs.
- Market Volatility: Exposure to fluctuations in foreign exchange rates and equity markets, which directly impact fee income and asset valuations.
- Credit Risk: Continued stress in residential and commercial real estate markets affecting loan performance.
- Legal/Contingent Liabilities: Ongoing Visa litigation indemnification obligations and pending securities lending lawsuits.
- Unusual Items: The Q2 2010 results include a $12.7 million benefit from the Visa indemnification liability reduction. The Q2 2009 results included a $130.1 million benefit from CSAs and a $20.2 million FDIC special assessment.
Investor Verification Checklist
- Fee Income Sustainability: Verify the extent of fee waivers in money market funds and the trajectory of securities lending spreads as interest rates evolve.
- Credit Reserve Adequacy: Assess the $361.6 million reserve for credit losses against the rising trend in nonperforming loans ($345.5M) and Other Real Estate Owned ($44.3M).
- Visa Liability Resolution: Monitor the status of Visa litigation and the potential for further indemnification adjustments or recoveries.
- Regulatory Capital Impact: Evaluate how evolving regulations (Dodd-Frank, Basel II) may alter future capital composition and cost.
- Operating Earnings: Review the reconciliation of reported earnings to "Operating Earnings" ($191.6M for Q2 2010) to understand core business performance excluding one-time items.