Bad Loans Rise At Northern Trust; State Street Loses Client Funds

Banks that serve wealthy individuals and large institutions don't usually face troubles with bad loans, but Northern Trust Corp.'s (NTRS) first quarter was a glaring exception.

The Chicago bank-and-trust, whose stock fell less during the financial crisis than almost any other U.S. lender, said its levels of troubled loans and assets rose sharply during the first quarter, to $365.2 million. The disclosure was a reversal from last quarter, when the bank's number of souring loans appeared to be tapering. A year ago, Northern Trust had troubled loans, called nonperforming assets, of $172.1 million.

The 120-year-old bank nonetheless turned in profits of $157.2 million for the quarter as fees from trust and investment services--Northern Trust's core business--remained strong, as compared to year ago. Net income fell 3% over a year ago amid higher expenses and slower profits tied to enduringly low interest rates.

But investors were rattled by the state of the Northern Trust's loan books, which suggest higher losses could be coming in future quarters.

William Morrison, Northern Trust's chief financial officer, said during the company's conference call that "half of the increase" in nonperforming loans "is related to residential real estate." He said the bank's holdings of real estate collateral from failed loans grew sharply, "principally related to two commercial real estate properties."

Shares in Northern Trust were recently down 4.8% to $55.58. The stock of its competitor State Street Corp. (STT), which on Tuesday said its lost some business from clients, was recently down 3.6% to $45.53.

The rise in troubled loans at Northern Trust is a rare stumble on the bank's relatively smooth journey through the financial crisis. Northern has consistently turned in a quarterly profit over the last three years.

But the bank's portfolios of traditional loans could drag on Northern's performance during the rest of the year. The bank's levels of properties seized as collateral, known as other real estate owned properties, rose more than ten-fold over a year ago to $45.7 million. Northern set aside another $10 million to offset future losses, but didn't say in a statement which of its loan classes are likely to drive those losses. Morrison said on the conference call that the growth of OREO holdings were "principally related to two commercial real estate properties."

State Street Also Posts Lackluster Earnings

Northern Trust's Boston-based competitor, State Street Corp., marked another trust bank to post lackluster earnings on Tuesday.

State Street earned $495 million in quarterly profits, up 11% over a year ago. Its revenues of $2.3 billion were up 14.7% over a year ago.

But the company said some clients had moved assets out of State Street's management.

State Street also turned in trading revenues of $242 million, down 10% over last quarter even though big Wall Street banks, like Bank of America Corp. (BAC) and J.P. Morgan Chase & Co. (JPM), have recently reported frothy first-quarter revenues from trading stocks and bonds.

-By Marshall Eckblad and Jodi Xu, Dow Jones Newswires; 212-416-2156; marshall.eckblad@dowjones.com

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