01—Abstract
Summary
Summary of the 10-K filed February 27, 2009. Cited figures are marked; the original filing is the authoritative source.
Northern Trust Corporation's 10-K for fiscal 2008 describes it as a financial holding company providing investment management, asset and fund administration, fiduciary, and banking solutions, with 85 offices in 18 U.S. states and 15 international locations.
At December 31, 2008, consolidated total assets were $82.1 billiona and stockholders' equity was $6.4 billion. Reported net income was $794.8 million in 2008, versus $726.9 million in 2007, but operating earnings excluding Visa-related items fell to $641.3 million from $821.1 million, and operating diluted EPS declined to $2.79 from $3.66. The 2008 results absorbed significant client support charges: $314.1 million under capital support agreements with cash investment funds, $167.6 million for securities lending clients, and a $54.6 million auction rate securities program charge.
Total revenue on an FTE basis was $4.33 billionb, up 21%, led by record foreign exchange trading income of $616.2 million and net interest income that rose to $1.08 billion. Client assets under custody fell 27% to $3.01 trillion and assets under management fell 26% to $558.8 billion, reflecting market declines of roughly 38% in the S&P 500 during 2008. Credit quality metrics rose, with the provision for credit losses at $115.0 million versus $18.0 million, and nonperforming assets at $100.2 million.
The company received $1.576 billionc from the U.S. Treasury's Capital Purchase Program in November 2008 through Series B preferred stock and a warrant, which shapes future dividend and buyback constraints, including Treasury approval for common dividends above $0.28 per quarter. The filing also discloses an ongoing IRS challenge to structured leasing transactions, which led to a $61.3 million tax provision increase in 2008, and an ERISA class action filed in January 2009.
02—Key points
Key Highlights
- Reported 2008 net income of $794.8 million (diluted EPS $3.47), up from $726.9 million in 2007, but operating earnings excluding Visa items declined 22% to $641.3 million.
- Client support related charges totaled over $536 million in 2008, including $314.1 million for capital support agreements with cash investment funds and $167.6 million for securities lending clients.
- Record foreign exchange trading income of $616.2 million, up 75%, and net interest income (FTE) of $1.13 billion, up 24%, offset partially by lower fee-based revenue.
- Assets under custody declined 27% to $3.01 trillion and assets under management fell 26% to $558.8 billion amid 2008 equity market declines.
- Received $1.576 billion from the U.S. Treasury's Capital Purchase Program in November 2008, with preferred dividends and common dividend restrictions attached; Tier 1 capital ratio reached 13.1%.
- Provision for credit losses rose to $115.0 million from $18.0 million, though nonperforming assets were $100.2 million, or 0.33% of loans and OREO.
- Ongoing IRS challenge to structured leasing transactions resulted in a $61.3 million tax provision increase in 2008, and an ERISA class action was filed in January 2009 regarding company stock in the Thrift-Incentive Plan.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 27, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $4.28B— | — |
| Interest Expense | $1.40B$1.94B | −27.8% |
| Net Income | $794.80M$726.90M | +9.3% |
| EPS (Basic) | $3.51$3.28 | +7.0% |
| EPS (Diluted) | $3.47$3.23 | +7.4% |
| Shares Outstanding (Basic) | 221446.38B219.68M | +100803682.3% |
| Shares Outstanding (Diluted) | 224053.43B223.08M | +100436628.3% |
05—Questions
Frequently Asked Questions
How did Northern Trust perform in 2008 excluding Visa-related items?
Operating earnings, which exclude Visa-related adjustments, were $641.3 million, down 22% from $821.1 million in 2007. Operating diluted EPS was $2.79, down from $3.66, and operating return on average common equity was 12.89%, below the company's 16-18% target.
What drove the large noninterest expense increase in 2008?
Total noninterest expenses were $2.89 billion, up 19%. The increase was driven largely by client support related charges, including $314.1 million under capital support agreements, $167.6 million for securities lending clients, and a $54.6 million charge for an auction rate securities purchase program, plus higher compensation from staff growth to support international expansion.
What are the terms of the U.S. Treasury Capital Purchase Program participation?
On November 14, 2008, the company issued 1,576,000 shares of Series B Preferred Stock with a $1,000 liquidation preference and a warrant for 3,824,624 common shares at $61.81 per share, for $1.576 billion. Dividends accrue at 5% for five years and 9% thereafter. Until November 2011, common dividends above $0.28 per quarter and most share repurchases require regulatory approval.
What are the main regulatory and legal risks disclosed?
The company disclosed an IRS challenge to structured leasing transactions from 1997-2000 returns, which it believes are valid but may not prevail, and it recorded additional tax provisions in 2008. An amended ERISA class action filed January 16, 2009 alleges fiduciary breaches related to company stock in the Thrift-Incentive Plan, and the company said it cannot assess the probability of material loss at this early stage.
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