Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Northern Trust is a large accelerated filer providing corporate and institutional services, personal financial services, and treasury operations. The reporting period reflects the impact of the global financial crisis, characterized by declining asset valuations, increased credit provisions, and a low interest rate environment.
Key Financial Metrics
| Metric ($ in Millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Income | $161.8 | $385.2 |
| Net Income Per Share (Diluted) | $0.61 | $1.71 |
| Total Revenues (FTE) | $904.2 | $1,146.0 |
| Net Interest Income | $277.1 | $253.5 |
| Noninterest Income | $616.5 | $879.9 |
| Noninterest Expenses | $593.5 | $535.3 |
| Provision for Credit Losses | $55.0 | $20.0 |
| Total Assets | $78,464.6 | $77,480.3 |
| Total Deposits | $53,344.6 | $58,392.5 |
| Stockholders' Equity | $6,524.7 | $4,758.4 |
| Return on Average Equity (Annualized) | 10.88% | 33.63% |
Material Changes vs. Prior Period
- Net Income Decline: Net income decreased 58% year-over-year. The prior year included a $167.9 million non-operating gain from the Visa share redemption. On an operating basis (excluding Visa items), earnings were $161.8 million in Q1 2009 versus $231.7 million in Q1 2008.
- Revenue Pressure: Total revenues (FTE) fell 8% due to a 22% drop in trust, investment, and servicing fees, driven by lower market valuations and negative securities lending fees. This was partially offset by a 16% increase in foreign exchange trading income and an 8% increase in net interest income.
- Asset Quality Deterioration: The provision for credit losses nearly tripled to $55.0 million. Nonperforming loans increased to $167.8 million (0.55% of total loans) from $27.7 million a year ago. The reserve for credit losses rose to $303.3 million.
- Balance Sheet Growth: Total assets increased to $78.5 billion, funded by growth in U.S. deposits, short-term borrowings, and proceeds from the U.S. Treasury's Capital Purchase Program (CPP). Stockholders' equity increased 37% due to the CPP preferred stock issuance and retained earnings.
- Assets Under Management/Custody: Assets under custody declined 29% year-over-year to $2.8 trillion, and assets under management fell 33% to $522.3 billion, reflecting broader market declines.
Guidance, Outlook, and Risks
- Capital Position: Risk-based capital ratios remain strong, with Tier 1 capital at 13.0% and Total Capital at 15.2%, well above regulatory requirements. The company is in dialogue with the Federal Reserve regarding the redemption of CPP preferred stock.
- Securities Portfolio: The company holds $341.5 million in gross unrealized losses on securities, 84% of which relate to asset-backed securities. Management does not currently consider these other-than-temporarily impaired, citing intent and ability to hold until recovery, though future impairments are possible.
- Contingent Liabilities:
- Visa Indemnification: A net liability of $73.9 million remains related to Visa litigation indemnification.
- Capital Support Agreements: A contingent liability of $322.4 million (fair value) exists for investment funds, with a maximum exposure of $550 million.
- Tax Disputes: The IRS is challenging tax positions on structured leasing transactions; the company believes its reserves are adequate but acknowledges potential future cash flow impacts.
- Outlook: Management anticipates continued weakness in the broader economic environment impacting credit quality and asset valuations. No specific forward-looking financial guidance was provided beyond general risk factors.
Investor Verification Checklist
- Operating Earnings Quality: Verify the sustainability of earnings excluding the one-time Visa gain from the prior year.
- Asset-Backed Securities (ABS): Review the composition of the $341.5 million unrealized loss portfolio, specifically the 19% of ABS rated below double-A, to assess impairment risk.
- Credit Reserve Adequacy: Monitor the trend in nonperforming loans (up 508% YoY) and the sufficiency of the $303.3 million credit reserve.
- Capital Support Agreements: Assess the potential drawdown risk of the $550 million maximum exposure under Capital Support Agreements with investment funds.
- Visa Litigation Resolution: Track the status of Visa-related indemnification liabilities and the potential impact of future settlements on the $73.9 million reserve.
- CPP Redemption: Monitor regulatory progress on redeeming the Treasury's preferred stock to improve return on equity.