Northern Trust Corporation — Q1 2011 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2011; interim financial statements are unaudited. Northern Trust provides asset servicing, investment management, banking and wealth-management services through Corporate and Institutional Services (C&IS), Personal Financial Services (PFS), and Treasury and Other.
Financial results and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $897.9 million | $897.9 million; flat |
| Net interest income (GAAP) | $234.4 million | $230.4 million; up 2% |
| Net interest margin (FTE) | 1.32% | 1.44% |
| Net income | $151.0 million | $157.2 million; down 4% |
| Diluted EPS | $0.61 | $0.64 |
| Provision for credit losses | $15.0 million | $40.0 million |
| Noninterest expense | $652.9 million | $619.7 million; up 5% |
| Operating cash flow | $72.9 million | $34.8 million |
Assets were $92.7 billion at March 31, 2011, versus $83.8 billion at year-end 2010. Deposits totaled $71.1 billion, up from $64.2 billion. Cash and due from banks was $3.6 billion; interest-bearing bank deposits and Federal Reserve/other interest-bearing balances totaled $32.0 billion. Loans and leases were $27.9 billion, with a $313.5 million allowance assigned to loans and leases. Total stockholders’ equity was $6.9 billion.
Balance-sheet borrowings included $4.4 billion of federal funds purchased, $2.1 billion of other borrowings, $1.9 billion of senior notes, $2.5 billion of long-term debt and $276.9 million of floating-rate capital debt. Other borrowings increased from $347.7 million at year-end. Regulatory capital remained strong: Corporation tier 1 capital ratio 13.5%, total capital ratio 15.4%, and leverage ratio 8.5%.
Cash flow reflected $8.0 billion used in investing activities, largely including increased Federal Reserve balances and net securities purchases, offset by $8.7 billion provided by financing activities. Deposit growth contributed $6.9 billion of financing cash flow. Common dividends were $68.6 million; the company repurchased 701,146 shares for $36.4 million.
Material changes versus comparable periods
- Trust, investment and other servicing fees were essentially flat at $514.9 million. C&IS fees fell 9%, primarily as securities-lending revenue declined 69% to $17.0 million; the prior-year quarter included recovery of about $38 million of prior valuation losses. PFS fees increased 12% to $243.6 million, supported by new business and improved markets.
- Foreign-exchange trading income rose 6% to $84.8 million. Net interest income increased modestly, but FTE net interest margin contracted 12 basis points as asset growth favored lower-yielding investments and funding shifted toward interest-bearing deposits.
- Net income declined despite lower credit-loss provisions. Compensation, outside services, and equipment/software costs increased; total expenses rose $33.2 million.
- Nonperforming loans and leases were $325.1 million, down from $333.0 million at year-end; nonperforming assets, including $56.3 million of other real estate owned, were $381.4 million versus $378.5 million. The allowance for credit losses was $350.8 million, compared with $357.3 million at year-end.
- Assets under custody rose 17% year over year to $4.36 trillion; assets under management rose 2% to $662.2 billion.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management cited continued low short-term rates, weak loan demand and prolonged economic weakness, particularly affecting residential and commercial real estate credit.
- A $10.1 million Visa-related indemnification benefit reduced noninterest expense; after tax, it increased reported earnings by $6.4 million, or about $0.02 per share. Excluding it, management reported non-GAAP operating earnings of $144.6 million, or $0.59 per share.
- The company recorded $5.1 million of other-than-temporary impairment losses on residential mortgage-backed securities. Unrealized securities losses totaled $97.6 million, including $45.8 million on residential mortgage-backed securities; the filing identifies subprime and Alt-A exposure within this portfolio.
- The company agreed to acquire Bank of Ireland Securities Services; acquisition-related costs contributed to higher outside-services expense. The filing does not state a purchase price or expected financial contribution.
- Structured-lease tax disputes with the IRS remained under discussion. The related uncertain tax position balance was $66.7 million; management said it had reserves and did not expect future changes to materially affect financial position or liquidity, though results in a particular period could be affected.
- Management disclosed securities-lending litigation and an SEC investigation, as well as securities and derivative-related risks. For a limited set of matters, the estimated upper end of reasonably possible losses was approximately $22.5 million; other matters could not be reasonably estimated. No material litigation or regulatory accruals were recorded.
- Securities loans subject to indemnification were $84.4 billion, secured by borrower collateral; management reported no liability for these indemnifications. Visa litigation outcomes remain uncertain, though management expects the value of remaining Visa shares to exceed remaining related indemnification liabilities.
- Management said interest-rate risk and foreign-exchange trading portfolio value-at-risk had not changed significantly since December 31, 2010. Forward-looking outcomes remain subject to market, credit, liquidity, regulatory, litigation, operational and other risks.
Important facts for investors to verify
- Whether fee growth and assets under custody/management can offset securities-lending weakness, low-rate fee waivers and pressure on net interest margin.
- Trends in residential and commercial real estate credit quality, nonperforming assets, charge-offs, recoveries and allowance adequacy.
- The valuation and liquidity of mortgage-backed and auction-rate securities, and any further impairment charges.
- Funding and liquidity implications of deposit growth, increased other borrowings, and securities/derivative collateral requirements.
- Developments in the Bank of Ireland Securities Services acquisition, IRS lease-tax discussions, securities-lending matters and Visa-related contingencies.
- Capital ratios, share repurchases and dividend policy; the filing states that 6,478,135 shares remained authorized for repurchase after quarter-end.