Business Context and Reporting Period
Company: Northern Trust Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2006
Business Overview: Northern Trust is a financial services firm providing trust, investment, and other servicing fees, foreign exchange trading, and treasury management. The company operates primarily through Corporate & Institutional Services (C&IS) and Personal Financial Services (PFS) segments.
Key Financial Metrics
| Metric ($ in Millions) | Q2 2006 | Q2 2005 | 6-Month 2006 | 6-Month 2005 |
|---|---|---|---|---|
| Net Income | $167.9 | $150.0 | $330.9 | $289.1 |
| Diluted EPS | $0.76 | $0.68 | $1.49 | $1.31 |
| Total Revenues (FTE) | $792.3 | $687.4 | $1,540.0 | $1,310.0 |
| Net Interest Income (FTE) | $199.0 | $179.8 | $389.6 | $351.5 |
| Noninterest Income | $593.3 | $507.6 | $1,145.7 | $957.0 |
| Noninterest Expenses | $492.0 | $441.6 | $965.3 | $836.6 |
| Provision for Credit Losses | $3.0 | $0.0 | $7.0 | $0.0 |
| Total Assets | $53,325.9 | $46,255.6 | N/A | N/A |
| Stockholders' Equity | $3,808.4 | $3,446.3 | N/A | N/A |
| Return on Average Equity (ROE) | 18.05% | 17.84% | 18.13% | 17.46% |
Material Changes vs. Prior Period
- Revenue Growth: Net income increased 12% year-over-year in Q2 2006. Total revenues (FTE) rose 15% to $792.3 million, driven by record trust fees ($452.8M, +13%) and foreign exchange trading income ($84.4M, +64%).
- Expense Increases: Noninterest expenses rose 11% to $492.0 million. This was primarily due to higher performance-based compensation, increased staff levels, and a $4.8 million charge for exiting leased properties.
- Asset Expansion: Total assets grew to $53.3 billion, up from $46.3 billion in June 2005. Loans and leases increased 9% to $21.3 billion, and securities increased 16% to $10.5 billion.
- Accounting Changes: Adoption of SFAS No. 123(R) regarding share-based payment increased pre-tax compensation expense by $2.7 million in Q2 2006.
Guidance, Outlook, Risks, and Unusual Items
- Tax Reserve Adjustments: Net income was reduced by $15.0 million ($0.07 per share) due to reserve adjustments associated with the leveraged leasing portfolio. This included an $11 million increase in tax reserves for deductions challenged by the IRS and a $4.0 million net after-tax adjustment due to the Tax Increase Prevention and Reconciliation Act (TIPRA).
- Legal Proceedings: The company reached a $37.5 million settlement regarding the Enron-related class action lawsuit (Tittle v. Enron Corp.), fully covered by insurance. The company continues to defend other Enron-related preference payment lawsuits.
- Capital Position: Risk-based capital ratios remained strong, with Tier 1 Capital at 10.0% and Total Capital at 12.4%, well above regulatory minimums.
- Share Repurchases: The company repurchased 1.1 million shares in Q2 2006 at an average price of $57.54. Approximately 1.4 million shares remain authorized under the current buyback program.
- Outlook Risks: Management cites risks including the health of the U.S. and international economies, changes in securities markets, foreign currency fluctuations, and regulatory/tax law changes.
Investor Verification Checklist
- Leveraged Lease Tax Exposure: Verify the status of the IRS challenge regarding structured leasing transactions and the adequacy of the $11 million tax reserve increase.
- Enron Litigation: Monitor the progress of the remaining Enron-related preference payment lawsuits where the company is a defendant.
- Fee Revenue Sustainability: Assess the sustainability of the 13% increase in trust fees and 64% increase in FX trading income, which are sensitive to equity market performance and volatility.
- Expense Management: Review the impact of the $4.8 million lease exit charge and the ongoing increase in compensation costs due to SFAS 123(R) adoption.
- Asset Quality: Confirm that the provision for credit losses ($3.0M) remains adequate given the growth in the commercial loan portfolio.