Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
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 reported strong growth in assets under custody and management, driven by higher equity markets and new business.
Key Financial Metrics
| Metric ($ in Millions) | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Net Income | $208.3 | $163.7 | $601.9 | $494.6 |
| Diluted EPS | $0.93 | $0.74 | $2.69 | $2.23 |
| Total Revenues (FTE) | $892.5 | $749.6 | $2,598.7 | $2,284.9 |
| Net Interest Income (FTE) | $228.4 | $198.5 | $647.3 | $588.1 |
| Noninterest Income | $664.1 | $551.1 | $1,951.4 | $1,696.8 |
| Noninterest Expenses | $566.6 | $477.0 | $1,647.8 | $1,442.3 |
| Provision for Credit Losses | $6.0 | $6.0 | $10.0 | $13.0 |
| Total Assets | $63,098.9 | $55,200.9 | N/A | N/A |
| Stockholders' Equity | $4,359.4 | $3,936.0 | N/A | N/A |
| Return on Average Equity (Annualized) | 19.51% | 16.96% | 19.66% | 17.73% |
Material Changes vs. Prior Period
- Revenue Growth: Net income increased 27% year-over-year in Q3 2007. Total revenues (FTE) rose 19% in the quarter and 14% for the nine-month period.
- Noninterest Income: Increased 21% in Q3, driven by a 16% rise in trust and servicing fees (due to higher equity markets and new business) and a 74% surge in foreign exchange trading income to a record $91.9 million.
- Net Interest Income: Rose 15% in Q3 to a record $228.4 million (FTE), supported by higher average earning assets. However, the net interest margin declined slightly to 1.69% from 1.73% due to growth in lower-yielding custody-related deposits.
- Expense Growth: Noninterest expenses increased 19% in Q3, primarily due to higher compensation (performance-based and salary increases), increased staff levels (up 11% year-over-year), and higher outside service costs.
- Balance Sheet: Total assets grew to $63.1 billion, funded largely by a 26% increase in non-U.S. office time deposits. Loans and leases increased 17% year-over-year to $24.9 billion.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: Adoption of FASB Staff Position No. 13-2 (FSP 13-2) regarding leveraged leases reduced stockholders' equity by $73.4 million at the beginning of 2007 and is expected to reduce 2007 net interest income by approximately $13 million.
- Tax Position: The effective tax rate for Q3 was 30.8%, lower than the prior year's 34.7%, due to the decision to indefinitely reinvest earnings of certain non-U.S. subsidiaries and new state tax legislation. The company faces an ongoing IRS investigation regarding structured leasing transactions (1997-2000), though management believes reserves are adequate.
- Asset Quality: Nonperforming assets decreased to $29.3 million (0.09% of loans). The provision for credit losses remained stable at $6.0 million for the quarter.
- Capital: Risk-based capital ratios remained strong, with the Corporation and its subsidiary banks classified as "well capitalized." Tier 1 capital ratio was 9.8%.
- Share Repurchases: The company repurchased 1.24 million shares in Q3 at an average price of $62.18. Approximately 9.8 million shares remain authorized under the current buyback program.
Investor Verification Checklist
- Fee Revenue Sensitivity: Verify the correlation between equity market performance and trust/servicing fees, as management estimates a 10% market swing impacts fees by approximately 4%.
- IRS Investigation Status: Monitor developments regarding the IRS grand jury investigation into structured leasing transactions and potential adjustments to tax liabilities.
- Expense Trajectory: Assess whether the 19% increase in noninterest expenses is sustainable or driven by one-time factors, given the 11% increase in staff levels.
- Net Interest Margin Pressure: Evaluate the impact of continued growth in global custody deposits (invested in short-term assets) on the net interest margin.
- Asset-Backed Securities: Review the composition of the $1.8 billion asset-backed securities portfolio, which is predominantly floating rate and triple-A rated.