Northern Trust Corporation: FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing. Several consolidated financial statements and management’s discussion are incorporated by reference and are not reproduced in the supplied filing text.
Business context
Northern Trust is a financial holding company focused on asset servicing, fund administration, investment management, fiduciary services and banking. Its principal client businesses are Corporate and Institutional Services and Personal Financial Services, supported by Northern Trust Global Investments and Operations and Technology. At year-end, the company reported 78 U.S. offices in 18 states and 16 international locations.
- Corporate and Institutional Services: $3.7 trillion in assets under custody and $489.2 billion in assets under management.
- Personal Financial Services: $370.2 billion in assets under custody and $154.4 billion in assets under management.
- These custody and management figures are client assets, not company balance-sheet assets.
Financial position and performance
Parent-company consolidated position: Total assets were $83.8 billion and stockholders’ equity was $6.8 billion at December 31, 2010. The filing excerpt does not provide clear consolidated revenue, net income, cash flow, margins or a complete consolidated debt and liquidity profile; those statements are incorporated by reference.
Bank subsidiary figures (unaudited, not the Corporation’s consolidated results):
| Metric | 2010 | 2009 |
|---|---|---|
| Total assets | $70.4 billion | $68.8 billion |
| Stockholders’ equity | $5.354 billion | $4.776 billion |
| Deposits | $54.974 billion | $48.570 billion |
| Loans and leases, net of unearned income | $15.511 billion | $15.333 billion |
| Net interest income | $582.7 million | $675.7 million |
| Noninterest income | $2.205 billion | $2.306 billion |
| Provision for credit losses | $47.0 million | $116.5 million |
| Income before taxes | $775.4 million | $984.5 million |
| Net income | $529.8 million | $694.8 million |
| Long-term debt | $1.836 billion | $1.789 billion |
Bank subsidiary net income declined about 24% year over year. Noninterest income decreased about 4%, net interest income about 14%, and noninterest expenses rose from $1.881 billion to $1.965 billion. The provision for credit losses fell by $69.5 million. These bank-only figures should not be treated as Corporation-wide results. The filing excerpt does not provide a clear net interest margin or cash-flow amount.
Credit, capital and liquidity indicators
- Consolidated loans and leases were $28.132 billion at year-end, compared with $27.806 billion in 2009. The consolidated reserve for credit losses was $357.3 million, including $319.6 million assigned to loans and leases and $37.7 million for unfunded commitments and standby letters of credit.
- 2010 net charge-offs were $143.2 million, versus $125.8 million in 2009; provision for credit losses was $160.0 million, versus $215.0 million. The reserve assigned to loans and leases equaled 1.14% of year-end loans and leases, compared with 1.11% in 2009.
- Corporation regulatory capital ratios at year-end were 13.6% Tier 1, 15.6% total capital and 8.8% leverage. The Corporation and its U.S. bank subsidiaries exceeded the stated “well capitalized” thresholds.
- Average consolidated deposits were $55.6 billion in 2010, up from $53.2 billion in 2009. Year-end purchased funds were $4.994 billion, versus $9.766 billion. The excerpt does not give a complete Corporation-wide liquidity analysis.
Material changes, outlook and risks
- Bank subsidiary earnings were lower than in 2009, with weaker net interest income and fee income and higher operating expenses; lower credit-loss provisioning partially offset these pressures.
- Management emphasized recurring fee-based business. Results remain exposed to asset valuations, market activity, foreign-exchange volatility and low interest rates; the company reported waiving certain money-market fund fees in 2009 and 2010 due to low short-term rates.
- The Dodd-Frank Act and Basel III were expected to bring new capital, liquidity, leverage, resolution-planning and compliance requirements. Their ultimate effects were uncertain and could increase costs or constrain activities. The company stated it believed its capital strength, balance sheet and business model positioned it well for Basel III.
- Key disclosed risks include credit deterioration, counterparty exposure, securities valuation and liquidity, securities-lending activity, operational and technology failures, fiduciary and investment performance, regulation, litigation, funding access and reputational harm. The company also noted the potential for higher deposit-insurance assessments, although it expected the then-final assessment rule to result in slightly lower assessments for its depository subsidiaries.
- Three lawsuits were described: an ERISA class action related to the employee plan’s company-stock investment option, a securities class action alleging inadequate credit-loss provisions and disclosures concerning securities lending, and a shareholder derivative action. Potential losses were unspecified and management said it could not assess the likelihood of a material adverse outcome or reasonably estimate losses at that stage.
- No specific earnings or financial guidance is provided in the supplied text. The full outlook and management commentary are incorporated by reference to the 2010 Annual Report to Stockholders.
Important facts for investors to verify
- Review the incorporated consolidated income statement, balance sheet and cash-flow statement, plus MD&A, for Corporation-wide revenue, earnings, cash flow, margins, funding and liquidity.
- Check the drivers of lower bank net interest income and fee income, and whether those trends continued after 2010.
- Assess credit quality by loan category, especially commercial real estate, nonperforming assets, reserve adequacy and subsequent charge-offs.
- Review securities-lending exposures, investment-security valuations and other-than-temporary impairment judgments.
- Track the development and financial impact of the Dodd-Frank and Basel III requirements, as well as the progress and potential costs of the disclosed litigation.