Business Context and Reporting Period
Company: Northern Trust Corporation (Northern Trust)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Northern Trust is a financial holding company and a leading provider of investment management, asset and fund administration, fiduciary, and banking solutions. It operates through two principal business units: Corporate and Institutional Services (C&IS) and Personal Financial Services (PFS), supported by Northern Trust Global Investments (NTGI) and Operations and Technology (O&T). As of December 31, 2008, the Corporation had consolidated total assets of $82.1 billion and stockholders' equity of $6.4 billion. The principal subsidiary, The Northern Trust Company (the Bank), held $70.4 billion in assets.
Key Financial Metrics
Balance Sheet (Consolidated):
- Total Assets: $82.1 billion
- Stockholders' Equity: $6.4 billion
- Total Loans and Leases: $30.76 billion (up from $25.34 billion in 2007)
- Total Deposits: $55.30 billion (average for 2008)
Income Statement (The Northern Trust Company - Unaudited):
- Total Noninterest Income: $2,655.8 million
- Total Interest Income: $1,943.3 million
- Net Interest Income: $755.3 million
- Provision for Credit Losses: $65.9 million
- Total Noninterest Expenses: $2,015.3 million
- Net Income: $808.3 million
Capital Adequacy (December 31, 2008):
| Entity | Tier 1 Capital Ratio | Total Capital Ratio | Leverage Ratio |
|---|---|---|---|
| Northern Trust Corporation | 13.08% | 15.36% | 8.50% |
| The Northern Trust Company | 10.87% | 14.06% | 6.44% |
| Minimum Required | 4.0% | 8.0% | 3.0% |
| "Well Capitalized" Minimum | 6.0% | 10.0% | 5.0% |
Credit Quality: The Reserve for Credit Losses increased to $251.1 million at year-end 2008 from $160.2 million in 2007. Net charge-offs were $23.2 million in 2008 compared to $8.8 million in 2007.
Material Changes vs. Prior Period
- Asset Growth: Consolidated assets grew significantly, driven by a $5.4 billion increase in loans and leases and a substantial increase in securities available for sale (from $7.74 billion in 2007 to $14.41 billion in 2008).
- Provision for Credit Losses: The provision for credit losses for the Bank increased to $65.9 million in 2008 from $13.3 million in 2007, reflecting deteriorating economic conditions and higher charge-offs.
- Net Interest Income: Net interest income for the Bank increased to $755.3 million from $578.9 million in 2007, primarily due to a $158.5 million increase from higher average balances, partially offset by a $62.5 million decrease due to lower rates.
- Noninterest Income: Increased to $2,655.8 million from $2,106.3 million, driven by higher foreign exchange trading income ($616.2 million vs. $351.3 million) and a one-time gain on Visa share redemption of $167.9 million.
- Net Income: The Bank's net income rose to $808.3 million from $533.0 million in 2007.
Guidance, Outlook, Risks, and Unusual Items
TARP Participation: On November 14, 2008, Northern Trust participated in the U.S. Treasury's Capital Purchase Program (CPP) under TARP. The Corporation sold $1.576 billion of Fixed Rate Cumulative Perpetual Preferred Stock and a warrant to purchase common stock to the U.S. Treasury. This transaction subjects the Corporation to restrictions on dividends (capped at $0.28 per share without regulatory approval), share repurchases, and executive compensation.
Government Support Programs: Certain funds advised by a subsidiary participated in the Temporary Guarantee Program for Money Market Mutual Funds.
Key Risks:
- Economic Conditions: The severe global economic downturn negatively affects asset valuations, fee income, and credit quality.
- Interest Rate Risk: Falling or low interest rates reduce net interest margins.
- Securities Portfolio: Declines in the value of securities held in the investment portfolio could result in other-than-temporary impairment charges.
- Regulatory Changes: Evolving regulations under TARP and the American Recovery and Reinvestment Act of 2009 (ARRA) impose restrictions on compensation and expenditures.
- Liquidity: While the Corporation maintains strong capital ratios, access to capital markets remains critical. Restrictions under TARP may limit the ability to raise additional equity capital.
Unusual Items: The 2008 results included a $167.9 million gain on Visa share redemption and a $76.1 million credit for Visa indemnification charges (reversal of prior charges).
Investor Verification Checklist
- Verify the impact of the $1.576 billion TARP capital injection on future dividend policies and executive compensation restrictions.
- Review the composition of the $14.4 billion securities available for sale portfolio for potential other-than-temporary impairment charges in future periods.
- Monitor the trend in the provision for credit losses and net charge-offs as economic conditions evolve.
- Assess the sustainability of the increase in foreign exchange trading income ($616.2 million) given market volatility.
- Confirm the status of the pending class action lawsuit regarding the Thrift-Incentive Plan filed in January 2009.
- Review the implementation timeline and capital impact of the Basel II advanced approaches framework.