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| NTRS > SEC Filings for NTRS > Form 10-Q on 30-Oct-2009 | All Recent SEC Filings |
30-Oct-2009
Quarterly Report
THIRD QUARTER CONSOLIDATED RESULTS OF OPERATIONS
Overview
Net income totaled $187.9 million on a reported basis compared with a reported net loss of $148.3 million in the third quarter of last year. Reported net income per common share on a diluted basis for the third quarter was $.77 compared with a net loss per common share of $.66 reported in the third quarter of 2008. The prior year quarter's results were negatively impacted by client support related charges totaling $561.5 million ($353.2 million after tax or $1.59 per common share). Operating earnings were $176.7 million, or $.72 per common share, compared with an operating loss of $129.4 million, or $.58 per common share, in the third quarter of last year. Operating results exclude a current quarter $17.8 million pre-tax benefit from the reduction of an indemnification liability related to Visa, Inc. (Visa), consistent with the current quarter's increased funding by Visa of its litigation related escrow account, and a prior year $30.0 million pre-tax charge relating to Visa indemnifications.
The following table provides a reconciliation of operating earnings, a non-GAAP financial measure which excludes Visa related adjustments, to reported earnings prepared in accordance with U.S. generally accepted accounting principles (GAAP). Northern Trust is providing operating earnings in addition to its reported results prepared in accordance with GAAP in order to provide a clearer indication of the results and trends in Northern Trust's core businesses.
Third Quarter 2009 Third Quarter 2008
Per Per
Common Common
($ In Millions Except Per Share Data) Amount Share Amount Share
Reported Earnings (Loss) $ 187.9 $ .77 $ (148.3 ) $ (.66 )
Visa Indemnification Charges (net of tax
effect of $6.6 in the current period and
$11.1 in the prior period) (11.2 ) (.05 ) 18.9 .08
Operating Earnings (Loss) $ 176.7 $ .72 $ (129.4 ) $ (.58 )
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The performance in the current quarter produced an annualized return on average common equity (ROE) of 11.91% versus (11.62)% reported for the comparable quarter last year and an annualized return on average assets (ROA) of 1.05%, up from (.80)% last year.
Consolidated revenues stated on a fully taxable equivalent (FTE) basis totaled $927.6 million, down $10.9 million or 1% from last year's third quarter revenues of $938.5 million. Trust, investment and other servicing fees increased 10% from last year to $523.1 million. Foreign exchange trading income decreased $48.9 million or 34% to $92.9 million from $141.8 million in the prior year. Net interest income on an FTE basis totaled $248.2 million, a decrease of 7%. Noninterest expenses on an operating basis exclude the current quarter's $17.8 million pre-tax benefit from the reduction of the Visa related
indemnification accrual and the prior year quarter's $30.0 million pre-tax charge associated with Visa related indemnifications. Noninterest expenses on an operating basis, which excludes Visa related adjustments, totaled $617.0 million in the current quarter and $1.12 billion in the prior year quarter, a current quarter decrease of 45% or $507.0 million. The prior year quarter included client support related charges totaling $561.5 million. Absent the prior year client support related charges, operating noninterest expenses increased by $54.5 million or 10%.
Noninterest Income
Noninterest income of $679.4 million for the quarter accounted for 73% of total taxable equivalent revenue. Trust, investment and other servicing fees represented 56% of total taxable equivalent revenue. The increase in trust, investment and other servicing fees from the prior year quarter primarily reflects higher securities lending revenues, partially offset by the impact of lower market valuations on fees. Foreign exchange trading income results reflect lower currency volatility and client volumes compared to the exceptionally high levels experienced in 2008. Revenues from security commissions and trading income decreased due to lower revenue from core brokerage and transition management services.
The components of noninterest income are provided below.
Noninterest Income Three Months Ended September 30 (In Millions) 2009 2008 % Change Trust, Investment and Other Servicing Fees $ 523.1 $ 474.9 10 % Foreign Exchange Trading Income 92.9 141.8 (34 ) Treasury Management Fees 19.4 17.6 11 Security Commissions and Trading Income 12.9 19.2 (32 ) Other Operating Income 35.1 36.2 (4 ) Investment Security Gains (Losses), net (4.0 ) (16.9 ) 77 Total Noninterest Income $ 679.4 $ 672.8 1 % |
Assets under custody totaled $3.6 trillion at September 30, 2009. This represents an increase in assets under custody of 11% from June 30, 2009 and a 1% increase from September 30, 2008. Assets under management totaled $610.5 billion, a 9% increase from $558.9 billion at June 30, 2009 and a 6% decrease from $652.4 billion at September 30, 2008. The above changes in assets under custody and under management are in comparison to the twelve month decline in the S&P 500 index of 9%. The EAFE index (USD) remained relatively unchanged compared to the prior year quarter. As of the current quarter-end, managed assets were invested 42% in equities, 18% in fixed-income securities, and 40% in cash and other assets.
Noninterest Income (continued) Assets Under Custody September 30, June 30, December 31, September 30. (In Billions) 2009 2009 2008 2008 Corporate & Institutional $ 3,233.0 $ 2,908.3 $ 2,719.2 $ 3,217.0 Personal 321.9 300.2 288.3 314.2 Total Assets Under Custody $ 3,554.9 $ 3,208.5 $ 3,007.5 $ 3,531.2 |
Assets Under Management September 30, June 30, December 31, September 30, (In Billions) 2009 2009 2008 2008 Corporate & Institutional $ 469.0 $ 422.1 $ 426.4 $ 511.4 Personal 141.5 136.8 132.4 141.0 Total Assets Under Management $ 610.5 $ 558.9 $ 558.8 $ 652.4 |
Trust, investment and other servicing fees are generally based on the market value of assets managed, custodied, and administered, the volume of transactions, securities lending volume and spreads, and fees for other services rendered. Certain market value calculations are performed on a monthly or quarterly basis in arrears. Certain investment management fee arrangements also may provide for performance fees, which are based on client portfolio returns exceeding predetermined levels. Securities lending fees are also impacted by Northern Trust's share of unrealized investment gains and losses in one investment fund used in our securities lending activities, accounted for at fair value. In addition, Corporate & Institutional Services (C&IS) client relationships are generally priced to reflect earnings from activities such as foreign exchange trading and custody-related deposits that are not included in trust, investment and other servicing fees. Based on analysis of historical trends and current asset and product mix, management estimates that a 10% rise or fall in overall equity markets would cause a corresponding increase or decrease in trust, investment and other servicing fees of approximately 4% and total revenues of approximately 2%.
Trust, investment and other servicing fees from C&IS increased 27% from the year-ago quarter to $310.2 million, primarily reflecting higher securities lending revenues, partially offset by the impact of lower market valuations on fees. The largest component of C&IS fees is custody and fund administration fees, which decreased 9% to $150.4 million, driven primarily by lower market valuations as compared to the prior year quarter and the adverse impact of currency translation. Securities lending revenues totaled $82.0 million compared with a negative $4.6 million in the third quarter of last year. The current quarter increase was mainly due to a positive mark-to-market adjustment of approximately $57 million relating to previously unrealized asset valuation losses in a mark-to-market investment fund used in our securities lending activities. The prior year quarter included a negative mark-to-market adjustment of approximately $96 million. Excluding the impact of the mark-to-market adjustments, the current quarter decrease in securities lending fees of approximately $66 million reflects significantly reduced volumes and lower spreads on the investment of cash collateral. Fees from institutional asset management in the quarter totaled $61.0 million, down 11% from the prior year quarter.
C&IS assets under custody totaled $3.2 trillion at September 30, 2009, consistent with the prior year's quarter, and included $1.9 trillion of global custody assets, 11% higher than a year ago. C&IS assets under management totaled $469.0 billion, an 8% decrease from the prior year. C&IS assets under management for the quarter included $110.7 billion of securities lending related collateral, a 39% decrease from the prior year quarter. Excluding securities lending collateral, C&IS assets under management totaled $358.3 billion compared with $329.7 billion in the prior year quarter, a $28.6 billion, or 9% increase. The above changes in assets under custody and under management are in comparison to the twelve month decline in the S&P 500 index of 9%. The EAFE index (USD) remained relatively unchanged compared to the prior year quarter. As of the current quarter-end, C&IS managed assets were invested 44% in equities, 14% in fixed-income securities, and 42% in cash and other assets.
Trust, investment and other servicing fees from Personal Financial Services (PFS) in the quarter decreased 8% and totaled $212.9 million. The decrease in PFS fees resulted primarily from the impact of lower market valuations and the waiver of certain fees associated with money market funds due to the low level of short-term interest rates. PFS assets under custody totaled $321.9 billion at September 30, 2009, a 2% increase from $314.2 billion in the prior year quarter. PFS assets under management totaled $141.5 billion compared to $141.0 billion last year. The above changes in assets under custody and under management are in comparison to the twelve month decline in the S&P 500 index of 9%. As of the current quarter-end, PFS managed assets were invested 34% in equities, 32% in fixed-income securities, and 34% in cash and other assets.
The components of other operating income are provided below.
Other Operating Income Three Months Ended September 30 (In Millions) 2009 2008 % Change Loan Service Fees $ 15.2 $ 7.6 98 % Banking Service Fees 13.7 10.1 38 Non-Trading Foreign Exchange Gains (Losses), net (1.8 ) 1.6 (213 ) Credit Default Swaps Gains (Losses), net (1.2 ) 7.2 (117 ) Other Income 9.2 9.7 (5 ) Total Other Operating Income $ 35.1 $ 36.2 (4 )% |
Net investment security losses totaled $4.0 million for the current quarter compared to losses of $16.9 million in the prior year quarter. The current quarter loss includes a $5.3 million pre-tax charge to reflect the credit related other-than-temporary impairment of certain residential mortgage backed securities held within Northern Trust's balance sheet investment securities portfolio, compared to the credit related other-than-temporary impairment charge of $16.9 million pre-tax recorded in the prior year quarter.
Net interest income for the quarter totaled $238.3 million, 6% lower than the $253.4 million reported in the third quarter of 2008. Net interest income is defined as the total of interest income and amortized fees on earning assets, less interest expense on deposits and borrowed funds, adjusted for the impact of hedging activities. When net interest income is adjusted to an FTE basis, yields on taxable, nontaxable and partially taxable assets are comparable, although the adjustment to an FTE basis has no impact on net income. Net interest income for the quarter, stated on an FTE basis, totaled $248.2 million, down 7% from $265.7 million reported in the prior year third quarter.
Average earning assets of $64.1 billion were 2% lower than a year ago, driven by a decrease in average money market assets, partially offset by growth in securities and loans. Loans and leases averaged $28.2 billion, up 2% from the third quarter of last year. The securities portfolio averaged $17.6 billion, up 38% from last year, primarily reflecting an increase in the average balance of government sponsored agency securities and corporate debt. Money market assets averaged $18.3 billion for the quarter, a decrease of 26% from the prior year. The net interest margin was lower at 1.54%, compared with 1.62% in the prior year quarter. In the prior year, revised cash flow estimates associated with certain structured lease transactions resulted in a $9.5 million reduction in interest income. The prior year quarter's net interest margin, absent the leasing related adjustment, was 1.68%. The lower net interest margin in the current quarter primarily reflects the diminished value of non-interest bearing funds in the current low interest rate environment.
Average U.S. loans and leases outstanding during the quarter totaled $27.5 billion, 4% higher than the $26.3 billion in last year's third quarter. Residential real estate loans averaged $10.8 billion in the quarter, up 10% from the prior year's third quarter, and represented 38% of the average loan and lease portfolio. Commercial loans averaged $7.3 billion, up 3% from $7.1 billion last year, while personal loans averaged $4.7 billion, up 1% from last year's third quarter. Loans outside the U.S. decreased $664.2 million on average from the prior year quarter to $743.9 million.
Northern Trust utilizes a diverse mix of funding sources. Total interest-bearing deposits averaged $41.3 billion, down 16% from the third quarter of 2008. Higher levels of U.S. office deposits were more than offset by a $13.2 billion or 34% decline in non-U.S. office deposits from last year's third quarter. Average domestic retail deposit levels increased $4.7 billion due primarily to higher levels of money market deposit accounts and savings certificates. The decline in non-U.S. office deposits resulted primarily from a decrease in global custody related deposit balances. Other interest-related funds averaged $11.2 billion in the quarter compared with $7.8 billion in last year's third quarter. The balances within these classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. The increase in this funding category resulted primarily from higher levels of short term borrowings and senior notes. The increase in senior notes reflects the May 2009 issuance of $500 million of fixed-rate senior notes of the Corporation. Noninterest-related funds utilized to fund earning assets averaged $11.6 billion compared with $8.5 billion in last year's third quarter, resulting primarily from higher
levels of U.S. office noninterest-bearing deposits and stockholders' equity. The increase in shareholders' equity reflects the May 2009 issuance of 17,250,000 shares of common stock of the Corporation.
Provision for Credit Losses
The provision for credit losses was $60.0 million in the third quarter compared with $25.0 million in the prior year quarter. The current quarter provision reflects the continued weakness in the broader economic environment. The reserve for credit losses at September 30, 2009 was $333.0 million compared with $319.1 million at June 30, 2009 and $207.5 million at September 30, 2008. Net charge-offs totaled $46.1 million for the quarter and included $14.7 million resulting from the sale of two nonperforming loans. Net charge-offs in the prior year quarter totaled $.3 million. For a discussion of the provision and reserve for credit losses, refer to the "Asset Quality" section below.
Noninterest Expense
The components of noninterest expense are provided below.
Noninterest Expenses Three Months Ended September 30
(In Millions) 2009 2008 % Change
Compensation $ 283.6 $ 230.3 23 %
Employee Benefits 59.6 52.4 14
Outside Services 108.7 106.5 2
Equipment and Software Expense 65.6 60.7 8
Occupancy Expense 45.3 41.8 8
Visa Indemnification Charges (17.8 ) 30.0 (159 )
Other Operating Expenses 54.2 632.3 (91 )
Total Noninterest Expenses $ 599.2 $ 1,154.0 (48 )%
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The current quarter increase in compensation and employee benefit expenses primarily reflects the significant reductions in performance-based compensation and certain defined contribution benefit expense that were recorded in the prior year quarter to reflect the impact of the client support related charges on the 2008 full year performance. The increase also reflects higher staff levels. Staff on a full-time equivalent basis at September 30, 2009 totaled 12,400, up 2% from a year ago.
Expenses associated with outside services for the current quarter reflects higher expenses associated with technical services.
The remaining expense categories totaled $165.1 million in the current quarter, a decrease of $569.7 million or 78% compared to $734.8 million in the prior year's quarter which included $561.5 million of client support related charges. Absent the client support related charges, the remaining expense categories totaled $173.3 million in the prior year quarter, reflecting a current quarter decrease of 5%. The current quarter decrease, absent the client support related charges, primarily reflects reduced business promotion and lower charges related to account servicing activities, partially offset by higher software related and occupancy expenses.
Other Operating Expenses
The components of other operating expenses are provided below.
Other Operating Expenses Three Months Ended September 30
(In Millions) 2009 2008 % Change
Business Promotion $ 13.5 $ 19.2 (30 )%
Other Intangibles Amortization 4.1 4.3 (5 )
FDIC Insurance Premiums 8.0 .7 NM
Client Support Related Charges .5 561.5 NM
Other Expenses 28.1 46.6 (40 )
Total Other Operating Expenses $ 54.2 $ 632.3 (91 )%
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The increase in FDIC insurance premiums reflects higher domestic balances, assessment rates, and costs incurred to participate in the FDIC's Transaction Account Guarantee Program compared to the prior year quarter. The decrease in other expenses reflects lower charges related to account servicing activities and a net decrease in other miscellaneous items.
In September 2009, the FDIC proposed that insured depository institutions be required to prepay estimated assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012, inclusive of a proposed three basis point increase for the years 2011 and 2012. However, this proposal, which would not result in a change in the timing of insurance premium expense recognition, has not yet been approved.
Provision for Income Taxes
Income tax expense of $70.6 million was recorded in the current quarter and resulted in an effective tax rate of 27.3%. The current quarter includes $17.4 million of income tax benefits relating to the resolution of certain state and structured leasing tax positions taken in prior periods. The prior year quarter's income tax benefit was $104.5 million due to the pre-tax loss reported, representing an effective tax rate of 41.3%. The effective tax rate for the current quarter excluding the $17.4 million of income tax benefits was 34.0%. The effective tax rate for the prior year quarter excluding the impact of client support and leasing related charges was 32.0%.
The following tables reflect the earnings contribution and average assets of Northern Trust's business units for the three and nine month periods ended September 30, 2009 and 2008. Business unit financial information, presented on an internal management-reporting basis, is determined by accounting systems that are used to allocate revenue and expenses related to each segment, and which incorporate processes for allocating assets, liabilities, and equity, and the applicable interest income and expense.
Corporate and Personal Financial Total
Three Months Ended September 30 Institutional Services Services Treasury and Other Consolidated
($ In Millions) 2009 2008 2009 2008 2009 2008 2009 2008
Noninterest Income
Trust, Investment and Other Servicing Fees $ 310.2 $ 244.5 $ 212.9 $ 230.4 $ - $ - $ 523.1 $ 474.9
Other 123.0 181.0 33.7 32.3 (.4 ) (15.4 ) 156.3 197.9
Net Interest Income (FTE) * 88.2 116.2 133.0 138.4 27.0 11.1 248.2 265.7
Revenues (FTE) * 521.4 541.7 379.6 401.1 26.6 (4.3 ) 927.6 938.5
Provision for Credit Losses 24.5 3.5 34.9 21.5 .6 - 60.0 25.0
Visa Indemnification Charges - - - - (17.8 ) 30.0 (17.8 ) 30.0
Noninterest Expenses 323.7 763.3 261.7 355.0 31.6 5.7 617.0 1,124.0
Income before Income Taxes * 173.2 (225.1 ) 83.0 24.6 12.2 (40.0 ) 268.4 (240.5 )
Provision for Income Taxes * 55.6 (89.8 ) 31.4 9.4 (6.5 ) (11.8 ) 80.5 (92.2 )
Net Income $ 117.6 $ (135.3 ) $ 51.6 $ 15.2 $ 18.7 $ (28.2 ) $ 187.9 (148.3 )
Percentage of Consolidated Net Income (Loss) 63 % 91 % 27 % (10 )% 10 % 19 % 100 % 100 %
Average Assets $ 35,320.5 $ 49,041.5 $ 24,645.7 $ 23,472.6 $ 11,241.1 $ 803.3 $ 71,207.3 $ 73,317.4
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* Stated on a fully taxable equivalent basis (FTE). Total consolidated includes FTE adjustments of $9.9 million for 2009 and $12.3 million for 2008.
Corporate and Personal Financial Total
Nine Months Ended September 30 Institutional Services Services Treasury and Other Consolidated
($ In Millions) 2009 2008 2009 2008 2009 2008 2009 2008
Noninterest Income
Trust, Investment and Other Servicing Fees $ 908.1 $ 952.1 $ 627.1 $ 694.7 $ - $ - $ 1,535.2 $ 1,646.8
Gain on Visa Redemption - - - - - 167.9 - 167.9
Other 452.9 492.6 102.7 91.9 (9.9 ) (1.2 ) 545.7 583.3
Net Interest Income (FTE) * 343.5 349.1 395.5 377.7 57.0 53.8 796.0 780.6
Revenues (FTE) * 1,704.5 1,793.8 1,125.3 1,164.3 47.1 220.5 2,876.9 3,178.6
Provision for Credit Losses 44.1 5.7 130.3 49.3 .6 - 175.0 55.0
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