Northern Trust Corporation’s (NTRS) second quarter earnings of 82 cents per share outpaced the Zacks Consensus Estimate of 74 cents per share, despite the low interest rate environment and lingering economic recovery. In last year’s second quarter, the company reported a gain of 95 cents per share. Net income reported was $199.6 million compared with net income of $157.2 million in the prior quarter.

Operating earnings, excluding $12.7 million pre-tax benefit ($8.0 million after tax, or 4 cents per common share) were $191.6 million, or 78 cents per common share.

Behind the Headlines

Net interest income totaled $242.4 million, down 7% year over year. Net Interest margin (NIM) was 1.47%, down from 1.59% in the prior-year quarter. The decline in NIM and the resulting impact on net interest income is a result of the significant drop in interest rates.

Non-interest income decreased 7% year over year to $731.4 million due to a decrease in trust, investment and other servicing fees that primarily reflect low securities lending revenue.

Non-interest expenses totaled $614.4 million, up 22% year over year, mainly due to an increase in equipment and software expenses and outside services expenses.

Provision for credit losses was $50.0 million in the quarter versus $60.0 million in the year-earlier period. As expected, Northern Trust continued to experience asset quality pressure witnessed by an increase in nonperforming assets, which totaled $389.8 million versus $233.8 million in the prior-year period. Net charge-offs shrunk to $38.3 million from $44.7 million in the prior-year quarter.

Trust, investment and other servicing fees from the Corporate and Institutional Services segment decreased 19% year over year to $316.0 million, led by a decrease in securities lending revenue, partially offset by higher custody, fund administration and investment management fees.

Trust, investment and other servicing fees from the Personal Financial Services segment increased 8% year over year to $227.5 million. The increase in PFS fees primarily reflects higher markets and new business, partially offset by fee waiver for low interest rates.

Assets Position

After falling for four straight quarters, Northern Trust’s assets under management (AUM) have shown an increase since the second quarter of 2009. The reverse trend was seen during the reported quarter, with AUM experiencing a decrease of 7% sequentially, but increase of 8% year over year to $603.0 million. Assets under custody decreased 4% sequentially, but increased 11% year over year to $3.6 billion.

Average earning assets of $66.1 billion were 1.0% higher on a year-over-year basis, driven by an increase in average money market assets and average investment securities.

Capital Ratios Evaluation

Northern Trust’s risk-based capital ratios remained strong at the end of the quarter, with Tier 1 capital ratio of 13.7%, total risk-based capital ratio of 15.9%, and leverage ratio of 9.2%, each exceeding the regulatory requirements of 6%, 10% and 5%, respectively. This classifies Northern Trust as a well-capitalized institution. The ratio of Tier 1 common equity to risk-weighted assets, a non-GAAP financial measure, was 13.2%, up from 12.1% in the prior-year period.

In Northern Trust’s peer group, JPMorgan Chase & Co. (JPM), The Bank of New York Mellon Corp’s (BK) and State Street Corporation (STT) reported impressive results with positive net income and revenue growth.

However, we expect increased asset management and servicing fees based on anticipated improvement in equity markets and higher volumes. Additionally, with the growth in network of clients, the company is poised to benefit from the changing demographic trends. Moreover, adequate financial strength positions it for suitable acquisitions.
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