Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Northern Trust is a large accelerated filer providing asset servicing, wealth management, and asset management services. The reporting period covers the second quarter of 2009, a time characterized by significant financial market volatility and economic weakness.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Income (Total) | $314.2 million | $215.6 million | $476.0 million | $600.8 million |
| Net Income (Common Stock) | $226.1 million | $215.6 million | $364.9 million | $600.8 million |
| Diluted EPS (Common) | $0.95 | $0.96 | $1.57 | $2.66 |
| Total Revenues (FTE) | $1.05 billion | $1.10 billion | $1.95 billion | $2.24 billion |
| Net Interest Income (FTE) | $260.1 million | $248.8 million | $547.8 million | $514.9 million |
| Noninterest Income | $785.0 million | $845.3 million | $1.40 billion | $1.73 billion |
| Noninterest Expenses | $502.7 million | $643.3 million | $1.10 billion | $1.25 billion |
| Provision for Credit Losses | $60.0 million | $10.0 million | $115.0 million | $30.0 million |
| Total Assets | $75.0 billion | $74.8 billion | $75.0 billion | $74.8 billion |
| Stockholders' Equity | $6.1 billion | $5.0 billion | $6.1 billion | $5.0 billion |
| Return on Average Assets (ROA) | 1.71% | 1.22% | 1.27% | 1.73% |
| Return on Average Equity (ROE) | 15.48% | 17.75% | 13.34% | 25.45% |
Material Changes vs. Prior Period
- Profitability: Net income increased 46% year-over-year in Q2 2009 ($314.2M vs $215.6M), driven primarily by a significant reduction in noninterest expenses and a lower effective tax rate. However, diluted EPS remained flat ($0.95 vs $0.96) due to the dilutive impact of preferred stock dividends and discount accretion related to the TARP Capital Purchase Program.
- Revenue: Total revenues (FTE) declined 4% in Q2 2009. Trust, investment, and servicing fees dropped 7% to $601.4 million, reflecting lower market valuations of assets under custody and management. This was partially offset by a 6% increase in foreign exchange trading income ($134.3M) due to higher currency volatility.
- Expenses: Noninterest expenses decreased 22% to $502.7 million. This reduction was largely due to a $130.1 million valuation gain (expense reduction) related to Capital Support Agreements (CSAs) and lower performance-based compensation. Excluding the CSA adjustment, expenses increased due to higher FDIC insurance premiums (including a $20.2M special assessment).
- Asset Quality: The provision for credit losses surged to $60.0 million in Q2 2009 from $10.0 million in Q2 2008, reflecting economic weakness. Nonperforming loans increased to $227.9 million (0.79% of total loans) from $30.1 million a year ago. Net charge-offs were $44.7 million.
- Capital Structure: On June 17, 2009, the company repaid in full the $1.576 billion preferred stock investment from the U.S. Treasury under the TARP Capital Purchase Program. The company also issued 17.25 million shares of common stock in May 2009.
Guidance, Outlook, and Risks
- Capital Support Agreements (CSAs): Seven of nine CSAs were terminated in Q2 2009 following restructuring and cash payments of $66.7 million. Two CSAs remain active with a maximum remaining exposure of $200.2 million, expiring November 6, 2009. The fair value of the contingent liability was $125.6 million at June 30, 2009.
- Securities Portfolio: The company recorded an $18.0 million pre-tax charge for other-than-temporary impairment (OTTI) on residential mortgage-backed securities. Total gross unrealized losses on securities were $249.1 million, with 83% related to asset-backed securities.
- Visa Indemnification: A net Visa-related indemnification liability of $73.9 million remains. The company expects to record a $17.8 million reduction to this liability in Q3 2009 following additional deposits into the Visa litigation escrow account.
- Tax Matters: The IRS is challenging the company's tax position on structured leasing transactions. While the company believes its reserves are adequate, resolution could impact future operating results. The effective tax rate for Q2 2009 was 33.5%, compared to 49.6% in Q2 2008 (which included $57.9M in leasing adjustments).
- Regulatory Environment: The company faces enhanced regulatory scrutiny and potential additional FDIC special assessments in the third or fourth quarter of 2009.
Investor Verification Checklist
- TARP Repayment Impact: Verify the specific accounting treatment of the $68.6 million charge related to the acceleration of preferred stock discount accretion upon TARP repayment.
- Capital Support Agreement Exposure: Confirm the status of the two remaining CSAs and the potential for additional cash contributions up to the $200.2 million limit.
- Asset Quality Trends: Monitor the trajectory of nonperforming loans and the adequacy of the $319.1 million reserve for credit losses given the economic environment.
- Securities Impairment: Review the composition of the $249.1 million in unrealized losses, specifically the 15% of asset-backed securities rated below double-A.
- FDIC Assessments: Assess the potential impact of future FDIC special assessments on liquidity and operating expenses.
- Visa Litigation: Track the resolution of Visa-related litigation and the final valuation of the remaining Visa shares held by the company.