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Northern Trust Corporation’s (NTRS - Analyst Report) first-quarter 2012 earnings of 67 cents per share surpassed the Zacks Consensus Estimate by a penny. The results were in line with the prior quarter’s earnings.

Overall, results were marked by higher non-interest income, strong new business and improved equity markets. Moreover, decline in non-interest expenses and improved credit quality were the positives for the quarter. The fall in net interest income acted as a headwind for the company.

Including the pre-tax restructuring and integration related charges of $3.9 million ($2.6 million after tax, or 1 cent per share), the net income was reported at $161.2 million or 66 cents per share in the quarter.

Performance in Detail

Total revenue reported was $965.4 million in the quarter, slightly up by 1% sequentially, reflecting improved equity markets. However, revenue was below the Zacks Consensus Estimate of $977.0 million.

Net interest income (fully taxable equivalent) totaled $266.3 million in the quarter, down 5% sequentially. The decline was driven by a fall in average earnings assets and a decrease in net interest margin (NIM). NIM was 1.24%, down from 1.28% in the prior quarter.

However, non-interest income climbed 4% sequentially to $709.0 million, primarily due to a rise in trust, investment and other servicing fees. These increases were partially offset by lower foreign exchange trading income.

Trust, investment and other servicing fees from the Corporate and Institutional Services segment hiked 4% sequentially to $317.0 million in the quarter, mainly due to new business, improved transaction volumes and high equity markets.

Trust, investment and other servicing fees from the Personal Financial Services segment surged 10% sequentially to $258.2 million. The improvement in PFS fees primarily reflects higher markets and lower waived fees in money market mutual funds.

Non-interest expenses totaled $723.6 million in the quarter, dipping 6% sequentially. The decline in expenses were primarily attributable to a decrease in equipment and software expenses, employee benefits expenses, compensation expenses, occupancy and outside services expenses.

Credit Quality

Overall, credit quality marked an improvement in the first quarter of 2012. Provision for credit losses was $5 million in the quarter, down from $12.5 million in the prior quarter. Moreover, Northern Trust witnessed an improvement in asset quality as nonperforming assets declined to $284.5 million from $314.9 in the last quarter.

Further, net charge-offs plummeted to $5.8 million from $18.2 million in the fourth-quarter 2011.  Nonperforming loans and leases edged down 11% sequentially to $262.1 million from $293.7 million. Reported provision levels reflected continuing weakness in residential real estate loans in certain markets, though commercial and institutional as well as commercial real estate loans improved.

Share Repurchase

In the first quarter of 2012, Northern Trust repurchased 0.3 million shares worth $14.5 million at an average price of $43.98 per share.  Moreover, the company’s common stock repurchase authorization was replaced in March 2012, under which up to 10 million shares are authorized for buyback after March 31, 2012.

Assets Position

Assets under management witnessed an increase of 8% both sequentially and year over year (y/y) to $716.5 billion. Assets under custody grew 8% sequentially and 5% y/y to $4,595.2 billion. Average earnings assets of $86.1 billion inched down 1% sequentially but jumped 14% y/y.

Capital Ratios Evaluation

Northern Trust’s risk-based capital ratios remained strong as of March 31, 2012, with Tier 1 capital ratio of 12.4%, total risk-based capital ratio of 14.0%, and leverage ratio of 7.6%, 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 11.9%, down from 12.1% in the prior quarter.

Our Viewpoint

Overall, results were marked by higher non-interest income and a strong new business. Improved credit quality and an increase in assets under management acted as positives for the company. Moreover, a fall in non-interest expenses reflects better expense management.

Further, we expect increased asset management and servicing fees based on equity markets improvement and higher volumes. However, the Dodd-Frank Act will bring in numerous regulatory changes over the next several years, which might act as deterrents to the company’s fundamentals.

In Conclusion

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 haul. Northern Trust’s fundamentals remain highly promising with a diverse business model and a strong balance sheet.

Also, from the risk perspective, as Northern Trust cleared the most difficult stress test, it is for sure that Northern Trust would be able to withstand another financial crisis as it has cleared the most difficult stress test.

Moreover, one can consider a company like Northern Trust as value investment due to its steady dividend-yielding nature. The company announced about 7% increase in its quarterly dividend to 30 cents per share. Prior to this, the company had increased its quarterly dividend by 12% to 28 cents per share in December 2007.

Northern Trust currently retains a Zacks #3 rank, which translates into a short-term “Hold” rating. Considering the fundamentals, we also maintain long-term ‘Neutral’ recommendation on the stock.

Among Northern Trust’s peers, Huntington Bancshares Inc. (HBAN - Analyst Report) will be releasing its first-quarter 2012 earnings on April 18, while TCF Financial Corporation (TCB - Analyst Report) will come up with it on April 19.

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