Northern Trust Corporation Reports Fourth Quarter Net Income of $167.7 Million, Earnings Per Common

Northern Trust Corporation Reports Fourth Quarter Net Income of $167.7 Million, Earnings Per Common Share of $0.69.

Full Year Net Income of $687.3 Million, Earnings Per Common Share of $2.81.

CHICAGO--(BUSINESS WIRE)-- Northern Trust Corporation today reported fourth quarter net income per common share of $0.69, up from $0.53 in the fourth quarter of 2011 and down from $0.73 in the third quarter of 2012. Net income was $167.7 million in the current quarter, up 29% from $130.2 million in the prior year fourth quarter, and down 6% from $178.8 million in the prior quarter. Return on equity was 8.8% in the current quarter, compared to 7.2% in the prior year quarter and 9.6% in the prior quarter.


Reported net income per common share for the full year was $2.81, compared to the prior year's $2.47 per common share. Net income for 2012 totaled $687.3 million compared to the prior year's $603.6 million. Return on equity for the full year 2012 was 9.3%, compared with 8.6% for 2011.

Frederick H. Waddell, Chairman and Chief Executive Officer, commented, "Fourth quarter and full year performance continued to reflect solid core trust fee growth amidst a challenging operating environment. We achieved strong new business success while also completing the integration of two important acquisitions.

Throughout the year, we focused on the needs of our clients and on improving the profitability and returns of our business. Our return on equity of 9.3% in 2012 improved from 8.6% in 2011 and our capital actions, including an increase in the quarterly dividend to $0.30 per share and the repurchase of 3.5 million common shares, returned $449.8 million in capital to our shareholders."

FOURTH QUARTER 2012 PERFORMANCE VS. FOURTH QUARTER 2011

Net income per common share in the fourth quarter of 2012 was $0.69 compared to $0.53 per common share in the fourth quarter of 2011. Net income for the current quarter was $167.7 million, up $37.5 million, or 29%, from $130.2 million in the prior year quarter. The current quarter includes restructuring and integration related charges of $8.2 million ($5.2 million after tax, or $0.02 per common share). The prior year quarter included restructuring, acquisition and integration related charges of $61.0 million ($39.8 million after tax, or $0.17 per common share). Net income in the fourth quarter of 2011 benefitted from a reduction of a liability related to potential losses from indemnified litigation involving Visa, Inc. (Visa). The associated prior year quarter pre-tax expense reduction totaled $13.0 million ($8.0 million after tax, or $0.03 per common share).

Consolidated revenue of $969.7 million in the current quarter was up $14.1 million, or 1%, from $955.6 million in the prior year quarter. Noninterest income, which represented 76% of revenue, increased $51.7 million, or 8%, to $735.5 million from the prior year quarter's $683.8 million, primarily reflecting higher trust, investment and other servicing fees, partially offset by lower foreign exchange trading income. Net interest income for the quarter on a fully taxable equivalent (FTE) basis decreased $37.6 million, or 13%, to $243.6 million compared to $281.2 million in the prior year quarter, primarily due to lower average earning assets and a continued decline in the net interest margin.

Trust, investment and other servicing fees were $622.6 million in the current quarter, up $81.1 million, or 15%, from $541.5 million in the prior year quarter. The increase primarily reflects strong new business, the favorable impact of equity markets on fees, and lower waived fees on money market mutual funds.

Assets under custody and assets under management are the primary drivers of our trust, investment and other servicing fees. The following table provides Northern Trust's assets under custody and assets under management by business segment.

  December 31,   September 30,   December 31,   % Change   % Change
($ In Billions)   2012   2012   2011   Q4-12/Q3-12   Q4-12/Q4-11
Assets Under Custody
Corporate & Institutional $ 4,358.6 $ 4,331.9 $ 3,877.6 1 % 12 %
Personal     446.3     429.5     385.2   4     16  
Total Assets Under Custody   $ 4,804.9   $ 4,761.4   $ 4,262.8   1 %   13 %
 
December 31, September 30, December 31, % Change % Change
($ In Billions)   2012   2012   2011   Q4-12/Q3-12   Q4-12/Q4-11
Assets Under Management
Corporate & Institutional $ 561.2 $ 565.6 $ 489.2 (1) % 15 %
Personal     197.7     184.1     173.7   7     14  
Total Assets Under Management   $ 758.9   $ 749.7   $ 662.9   1 %   14 %
 

Trust, investment and other servicing fees in Corporate & Institutional Services (C&IS) increased $38.6 million, or 13%, to $344.3 million in the current quarter from the prior year quarter's $305.7 million.

             
  Q4   Q4  

Change Q4 2012

($ In Millions)   2012   2011  

from Q4 2011

C&IS Trust, Investment and Other Servicing Fees  
Custody and Fund Administration $ 224.7 $ 205.6 $ 19.1 9 %
Investment Management 74.2 60.9 13.3 22
Securities Lending 20.3 19.3 1.0 5
Other     25.1     19.9     5.2   26  
Total   $ 344.3   $ 305.7   $ 38.6   13 %
 

Custody and fund administration fees, the largest component of C&IS fees, increased 9%, primarily reflecting new business and the favorable impact of equity markets on fees. C&IS investment management fees increased 22%, reflecting lower waived fees in money market mutual funds, new business and the favorable impact of markets. Money market mutual fund fee waivers in C&IS, attributable to persistent low short-term interest rates, totaled $5.7 million in the current quarter, compared to waived fees of $12.3 million in the prior year quarter. Securities lending revenue increased 5%, primarily reflecting higher spreads in the current quarter.

Trust, investment and other servicing fees in Personal Financial Services (PFS) totaled $278.3 million in the current quarter, increasing $42.5 million, or 18%, from $235.8 million in the prior year quarter. The increase in the current quarter primarily reflects the favorable impact of markets on fees, strong new business, revised fee structures, and lower waived fees in money market mutual funds. Money market mutual fund fee waivers in PFS totaled $9.6 million in the current quarter compared with $21.3 million in the prior year quarter.

Foreign exchange trading income totaled $40.8 million, down $30.9 million, or 43%, compared with $71.7 million in the prior year quarter. The current quarter decrease is attributable to reduced currency market volatility.

Other operating income totaled $35.7 million in the current quarter, down 6% from $37.7 million in the prior year quarter.

Net interest income for the quarter on an FTE basis totaled $243.6 million, down $37.6 million, or 13%, compared to $281.2 million in the prior year quarter. The decrease reflects lower average earning assets and a continued decline in the net interest margin to 1.17% from 1.28% in the prior year quarter. Average earning assets for the quarter were $82.9 billion, down $4.3 billion, or 5%, from $87.2 billion in the prior year quarter, primarily reflecting decreased Federal Reserve deposits. The current quarter decline in the net interest margin primarily reflects lower yields on earning assets, partially offset by a higher percentage of funding from noninterest-bearing sources. Net interest income in the prior year quarter included $7.0 million of income attributable to a settlement with the Internal Revenue Service (IRS) regarding the tax treatment for certain leveraged leasing transactions. Absent this leasing related adjustment, the prior year net interest margin would have been 1.25%.

The provision for credit losses was $5.0 million in the current quarter and $12.5 million in the prior year quarter. Net charge-offs totaled $5.4 million for the current quarter resulting from $16.1 million of charge-offs and $10.7 million of recoveries, compared to $18.2 million of net charge-offs in the prior year quarter resulting from $28.8 million of charge-offs and $10.6 million of recoveries. Nonperforming loans and leases decreased $38.9 million, or 13%, from the prior year quarter. Residential real estate loans and commercial real estate loans accounted for 69% and 22%, respectively, of total nonperforming loans at December 31, 2012.

The table below provides information regarding nonperforming assets, the allowance for credit losses, and associated ratios.

             
  December 31,   September 30,   December 31,
($ In Millions)   2012   2012   2011
 
Nonperforming Assets
Nonperforming Loans and Leases $ 254.8 $ 269.0 $ 293.7
Other Real Estate Owned     20.3     20.6     21.2
Total Nonperforming Assets     275.1     289.6     314.9
 
Allowance for Credit Losses
Allowance for Credit Losses Assigned to:
Loans and Leases 297.9 298.6 294.8
Unfunded Loan Commitments and Standby Letters of Credit     29.7     29.4     34.1
Total Allowance for Credit Losses   $ 327.6   $ 328.0   $ 328.9
 
Ratios

Nonperforming Loans and Leases to Total Loans and Leases

0.86% 0.91% 1.01%

Allowance for Credit Losses Assigned to Loans and Leases to Total Loans and Leases

1.01% 1.01% 1.01%

Coverage of Loan and Lease Allowance to Nonperforming Loans and Leases

1.2x 1.1x 1.0x
 

Noninterest expense totaled $741.5 million in the current quarter compared to $771.7 million in the prior year quarter. The current quarter includes restructuring and integration related charges of $8.2 million ($5.2 million after tax, or $0.02 per common share). The prior year quarter included restructuring, acquisition and integration related charges of $61.0 million ($39.8 million after tax, or $0.17 per common share). Excluding the current quarter and prior year quarter charges, and the prior year quarter's Visa benefit of $13.0 million, noninterest expense increased $9.6 million, or 1%.

Compensation expense, the largest component of noninterest expense, equaled $316.3 million, down $25.6 million, or 7%, compared to $341.9 million in the prior year quarter. The prior year quarter included $28.6 million of severance related accruals recorded in connection with initiatives to reduce staff expense levels, while the current quarter includes $1.3 million of net reductions in severance related accruals. Excluding the severance related items, compensation expense in the current quarter increased by $4.3 million, or 1%. Staff on a full-time equivalent basis at December 31, 2012 totaled approximately 14,200, up 1% from a year ago.

Employee benefit expense equaled $63.9 million, down $5.6 million, or 8%, compared to $69.5 million in the prior year quarter. The prior year quarter included $4.0 million of severance related accruals.

Expense associated with outside services totaled $140.7 million, down $13.5 million, or 9%, from $154.2 million in the prior year quarter. The current and prior year quarter include $2.6 million and $10.2 million of restructuring and integration charges, respectively. Excluding the current and prior year quarter restructuring and integration charges, outside services expense decreased $5.9 million, or 4%, primarily reflecting lower manager of manager advisory fees and decreased expense associated with legal and technical services.

Equipment and software expense totaled $90.5 million, a decrease of 5% from $95.3 million in the prior year quarter. The prior year quarter included $10.9 million of restructuring charges related to software write-offs. The current quarter includes higher levels of software amortization and related software support costs from the continued investment in technology related assets.

Occupancy expense equaled $46.2 million, a decrease of 7% from $49.6 million in the prior year quarter. The current and prior year quarter include $3.0 million and $6.3 million, respectively, of restructuring charges related to reductions in office space.

Other operating expense equaled $83.9 million, up $9.7 million, or 13%, from $74.2 million in the prior year quarter. The current quarter includes restructuring and integration related charges of $3.3 million, higher staff related and business promotion expense, and increases within various other miscellaneous categories of other operating expense.

Income tax expense was $55.5 million in the current quarter, representing an effective tax rate of 24.9%, and $41.2 million in the prior year quarter, representing an effective tax rate of 24.1%. These compare to full-year effective tax rates of 30.7% and 31.7% for 2012 and 2011, respectively. The current quarter includes an $11.7 million tax benefit attributable to a refund from the IRS in connection with the resolution of certain leveraged lease related matters. The prior year quarter included adjustments to the Corporation's intercompany service allocation methodology, the favorable resolution of certain federal and state tax matters, and reductions in state tax reserves.

FOURTH QUARTER 2012 PERFORMANCE VS. THIRD QUARTER 2012

Net income per common share was $0.69 in the current quarter, compared with $0.73 in the third quarter of 2012. Net income for the current quarter totaled $167.7 million, down $11.1 million, or 6% from $178.8 million in the prior quarter.

Consolidated revenue of $969.7 million for the current quarter was down slightly from $972.5 million in the prior quarter. Noninterest income increased $8.6 million, or 1%, to $735.5 million from the prior quarter's $726.9 million, primarily reflecting higher trust, investment and other servicing fees, partially offset by lower other operating income and foreign exchange trading income. Net interest income for the current quarter on an FTE basis decreased $13.3 million, or 5%, to $243.6 million from $256.9 million in the prior quarter, primarily due to lower average earning assets and a continued decline in the net interest margin.

Trust, investment and other servicing fees totaled $622.6 million in the current quarter, up $20.7 million, or 3%, from $601.9 million in the prior quarter. C&IS trust, investment and other servicing fees totaled $344.3 million in the current quarter, up from $334.4 million in the prior quarter.

             
  Q4   Q3  

Change Q4 2012

($ In Millions)   2012   2012  

from Q3 2012

C&IS Trust, Investment and Other Servicing Fees  
Custody and Fund Administration $ 224.7 $ 214.4 $ 10.3 5 %
Investment Management 74.2 73.2 1.0 1
Securities Lending 20.3 23.8 (3.5) (15)
Other     25.1     23.0     2.1   9  
Total   $ 344.3   $ 334.4   $ 9.9   3 %
 

C&IS custody and fund administration fees increased 5%, primarily reflecting the favorable impact of equity markets on fees and new business. Investment management fees increased 1%, primarily reflecting new business. Money market fee waivers, attributable to the low short-term interest rates, totaled $5.7 million in C&IS in the current quarter compared to $6.5 million in the prior quarter. Securities lending revenue decreased 15%, primarily reflecting lower spreads and lower volumes in the current quarter.

PFS trust, investment and other servicing fees were $278.3 million, up $10.8 million, or 4%, from $267.5 million in the prior quarter, primarily reflecting the favorable impact of equity markets on fees and new business. Money market mutual fund fee waivers in PFS totaled $9.6 million in the current quarter compared to $10.3 million in the prior quarter.

Foreign exchange trading income decreased 7% to $40.8 million compared to $44.0 million in the prior quarter. The current quarter decrease is attributable to reduced currency market volatility.

Other operating income in the current quarter totaled $35.7 million, down $10.9 million, or 24%, from $46.6 million in the prior quarter. The prior quarter included a $5.3 million gain on foreign exchange contracts related to hedges of certain investments in foreign currency denominated subsidiaries. The current quarter includes lower income on employee benefit related assets held in trust by the Corporation and lower leasing related income.

Net interest income on an FTE basis in the current quarter totaled $243.6 million, down $13.3 million, or 5%, compared to $256.9 million in the prior quarter. The decrease reflects lower average earning assets and a continued decline in the net interest margin. Average earning assets totaled $82.9 billion in the current quarter, down $1.6 billion, or 2%, compared to $84.5 billion in the prior quarter. The net interest margin decreased to 1.17% in the current quarter from 1.21% in the prior quarter. The prior quarter net interest income included a $5.1 million adjustment related to the amortization of premiums on certain investment securities. Absent this adjustment, the net interest margin would have been 1.19%. The current quarter net interest margin reflects lower yields on earning assets.

The provision for credit losses totaled $5.0 million and $10.0 million in the current quarter and prior quarter, respectively. Net charge-offs totaled $5.4 million for the current quarter resulting from $16.1 million of charge-offs and $10.7 million of recoveries, compared to $11.9 million of net charge-offs in the prior quarter resulting from $16.3 million of charge-offs and $4.4 million of recoveries. Nonperforming loans and leases decreased $14.2 million, or 5%, as compared to the prior quarter. Residential real estate and commercial real estate loans accounted for 69% and 22%, respectively, of total nonperforming loans at December 31, 2012.

Noninterest expense totaled $741.5 million in the current quarter, an increase of $45.1 million, or 6%, from $696.4 million in the prior quarter. The current quarter and prior quarter, respectively, include restructuring and integration related charges of $8.2 million and restructuring, acquisition and integration related charges of $2.9 million.

Compensation expense totaled $316.3 million for the current quarter, relatively unchanged from $315.7 million in the prior quarter, while employee benefit expense totaled $63.9 million for the current quarter, up 4% from $61.3 million in the prior quarter.

Expense for outside services totaled $140.7 million, an increase of $14.1 million, or 11%, compared to $126.6 million in the prior quarter. The current quarter increase primarily reflects higher expense for technical, sub-custodian, consulting, and legal services.

Equipment and software expense totaled $90.5 million in the current quarter, up 5% from $86.0 million in the prior quarter.

Other operating expense totaled $83.9 million, an increase of $20.9 million, or 33%, from the prior quarter's $63.0 million. The current quarter increase primarily reflects increased business promotion expense, higher charges related to account servicing activities, higher staff related expense, and the restructuring and integration related charges of $3.3 million.

Total income tax expense was $55.5 million for the current quarter, representing an effective tax rate of 24.9%. Income tax expense was $87.3 million in the prior quarter, representing an effective tax rate of 32.8%. The current quarter includes the $11.7 million tax benefit attributable to a refund from the IRS in connection with the resolution of certain leveraged lease related matters.

FULL YEAR 2012 PERFORMANCE VS. FULL YEAR 2011

Reported net income per common share for the full year was $2.81, compared to the prior full year's $2.47 per common share. Net income for 2012 totaled $687.3 million compared to the prior year's $603.6 million. The current and prior year include restructuring, acquisition and integration related charges of $18.6 million ($12.0 million after tax, or $0.05 per common share) and $91.6 million ($59.8 million after tax, or $0.25 per common share), respectively. Net income in 2011 benefited from reductions totaling $23.1 million ($14.4 million after tax, or $0.06 per common share) of a liability related to potential losses from indemnified litigation involving Visa.

The performance in 2012 produced an annualized return on equity of 9.3% compared to 8.6% in 2011. The annualized return on average assets was 0.7% in both 2012 and in 2011.

Consolidated revenue totaled $3.90 billion in 2012, an increase of $126.2 million, or 3%, from $3.77 billion in the prior year. Noninterest income increased $145.0 million, or 5%, to $2.91 billion from 2011's $2.76 billion, primarily reflecting higher trust, investment and other servicing fees, partially offset by lower foreign exchange trading income. Trust, investment and other servicing fees in 2012 reflect the full year impact of acquisitions completed in June and July of 2011.

Net interest income on an FTE basis in 2012 totaled $1.03 billion, a decrease of $18.2 million, or 2%, compared to $1.05 billion in 2012, primarily due to a decline in the net interest margin.

Noninterest expense totaled $2.88 billion in 2012, up $47.6 million, or 2%, from $2.83 billion in the prior year. Excluding the current and prior year restructuring, acquisition and integration related charges of $18.6 million and $91.6 million, respectively, and the prior year Visa benefits, noninterest expense increased $97.5 million, or 4%, primarily reflecting higher equipment and software expense and the full period impact of operating costs attributable to the acquisitions completed in 2011.

STOCKHOLDERS' EQUITY

Total stockholders' equity averaged $7.6 billion, up 5% from the prior year quarter's average of $7.2 billion. The increase primarily reflects earnings, partially offset by dividend declarations and the repurchase of common stock pursuant to the Corporation's share buyback program. During the quarter ended December 31, 2012, the Corporation repurchased 1,319,927 shares at a cost of $62.9 million ($47.62 average price per share). Under our capital plan, which was reviewed without objection by the Federal Reserve in March of 2012, the Corporation may repurchase up to $77.1 million of common stock after December 31, 2012 through March of 2013. The Corporation is authorized to purchase up to 6.8 million additional shares after December 31, 2012 under its current common stock repurchase authorization.

As reflected in the table below, the risk-based capital ratios of Northern Trust and its principal subsidiary bank, The Northern Trust Company, remained strong at December 31, 2012, with all ratios exceeding the regulatory requirements for classification as a "well capitalized" institution established by U.S. banking regulators of 6%, 10%, and 5%, respectively.

             
    December 31, 2012   September 30, 2012   December 31, 2011
  Tier 1   Total   Leverage   Tier 1   Total   Leverage   Tier 1   Total   Leverage
    Capital   Capital   Ratio   Capital   Capital   Ratio   Capital   Capital   Ratio
Northern Trust Corporation 12.8% 14.3% 8.2% 12.8% 14.3% 8.1% 12.5% 14.2% 7.3%
The Northern Trust Company   11.9%   13.7%   7.6%   11.8%   13.8%   7.5%   11.7%   13.8%   6.8%
 

The following table provides the Corporation's ratios of tier 1 capital and tier 1 common equity to risk-weighted assets, as well as a reconciliation of tier 1 capital calculated in accordance with applicable regulatory requirements and GAAP to tier 1 common equity.

             
  December 31,   September 30,   December 31,
($ In Millions)   2012   2012   2011
 
Ratios

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