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Northern Trust Corporation’s (NTRS - Analyst Report) second-quarter 2013 earnings of 78 cents per share lagged the Zacks Consensus Estimate by a nickel. However, this compared favorably with the year-ago earnings of 73 cents.
Results benefited from top-line growth and a strong capital position on a year-over-year basis, partially offset by a rise in operating expenses. However, deteriorating credit quality was the headwind.
Net income was $191.1 million compared with $179.6 million in the prior-year quarter.
Recently, Northern Trust declared its intention to move its Miami office from 700 Brickell to 600 Brickell, at Brickell World Plaza. The relocation is expected to be complete by the end of this year. Northern Trust and the other co-owners sold the office property for $64.1 million. The bank expects a pre-tax gain of approximately $30 million in the third quarter of 2013 from the sale.
Performance in Detail
Total revenue came in at $1.02 billion in the quarter, up 3% year over year, reflecting a rise in non-interest income. However, it was below the Zacks Consensus Estimate of $1.03 billion.
Non-interest income grew 9% from the year-ago quarter to $734.4 million, largely due to a rise in trust, investment and other servicing fees along with elevated foreign exchange trading income.
Trust, investment and other servicing fees from the Corporate and Institutional Services segment augmented 8% year over year to $364.2 million in the quarter. Further, Trust, investment and other servicing fees from the Personal Financial Services segment improved 10% from the last-year quarter to $293.1 million.
On the downside, Northern Trust reported net interest income (fully taxable equivalent) of $228 million in the reported quarter, down 14% year over year. The downside was spurred by a fall in net interest margin (NIM).
NIM was 1.10%, down 18 basis points from 1.28% in the prior quarter. The decrease reflects lower yields on earning assets, partly mitigated by reduced cost of interest-related funds due to lower short-term interest rates.
Non-interest expenses totaled $729.7 million in the quarter, increasing marginally by 2% year over year. The rise was primarily attributable to higher other operating expenses, elevated compensation and occupancy expenses. These were partially offset by lower employee benefit along with reduced equipment and software expenses.
Northern Trust witnessed deterioration in its overall asset quality as nonperforming assets surged 7.2% sequentially and 6.1% year over year to $281.2 million as of Jun 30, 2013. Further, nonperforming loans and leases were 0.93% of total loans and leases, up 6 basis points sequentially and 12 basis points year over year.
Net charge-offs more than doubled to $8.1 million from $3.2 million in the prior-year quarter but reduced from $8.7 million in the prior quarter. Provision for credit losses was $5 million in the reported quarter, at par with the prior-year quarter and prior-quarter level.
As of Jun 30, 2013, Northern Trust’s assets under management surged 14% year over year to $803 billion. Likewise, assets under custody rose 8.7% from the last-year period to $5.0 trillion. However, average earning assets remained almost in line with the prior-year period and stood at $83.1 billion.
Northern Trust’s risk-based capital ratios remained strong as of Jun 30, 2013, with tier 1 capital ratio of 13.1%, total capital ratio of 14.4%, and leverage ratio of 8.4%, 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 12.6%, up from 12.4% in the prior-year quarter.
During the quarter ended Jun 30, 2013, Northern Trust repurchased 281,326 shares worth $15.3 million at an average price of $54.28 per share.
We expect enhanced asset management and servicing fees for Northern Trust based on a significant equity markets improvement and higher volumes. However, thrust of banking regulations might act as deterrents to the company’s fundamentals. Further, increased expenses depict undisciplined expense management.
An investor with an appetite to absorb risks related to the market volatility should not be disappointed with an investment in Northern Trust over the long run. The company’s fundamentals remain highly promising with a diverse business model and a strong balance sheet. Northern Trust currently carries a Zacks Rank #2 (Buy).
Among major regional banks, Fifth Third Bancorp (FITB - Analyst Report) and BB&T Corporation (BBT - Analyst Report) are scheduled to report on Jul 18, while State Street Corporation (STT - Analyst Report) will report on Jul 19.