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Northern Trust Corporation’s (NTRS - Analyst Report) fourth-quarter 2012 earnings of 71 cents per share lagged the Zacks Consensus Estimate of 75 cents. However, this was favorable compared with the prior-year quarter earnings of 67 cents.

For 2012, Northern Trust’s earnings were $2.86 per share, marginally missing the Zacks Consensus Estimate of $2.88. Yet, this was up 7.5% year over year from $2.66 in 2011.

Considering certain non-recurring items, net income in the fourth quarter was $167.7 million or 69 cents per share compared with $130.2 million or 53 cents per share in the prior-year quarter. Also, for 2012, net income totaled $687.3 million or $2.81 per share versus $603.6 million or $2.47 per share in 2011.

Quarterly results on a year-over-year basis benefited from top line growth and decline in operating expenses. Further, improving credit quality and strong capital ratios were the tailwinds.

Performance in Detail

Total revenue was $969.7 million in the quarter, inching up 1% year over year, reflecting rise in non-interest income. However, it was below the Zacks Consensus Estimate of $986.0 million.

For 2012, total revenue reported was $3.90 million, up 3% from the prior year. Yet, it was below the Zacks Consensus Estimate of $3.94 million.

Net interest income (fully taxable equivalent) totaled $243.6 million in the reported quarter, down 13% year over year. The downside was spurred by a fall in net interest margin (NIM) and lower average earning assets.

NIM was 1.17%, down 11 basis points from 1.28% in the prior quarter. The decrease reflects lower yields on earning assets, partly offset by a higher percentage of funding from non-interest-bearing sources.

Non-interest income surged 8% from the year-ago quarter to $735.5 million, largely due to rise in trust, investment and other servicing fees. This was partially offset by decline in foreign exchange trading income.

Trust, investment and other servicing fees from the Corporate and Institutional Services segment improved 13% year over year to $344.3 million in the quarter. Further, Trust, investment and other servicing fees from the Personal Financial Services segment jumped 18% from the last year quarter to $278.3 million.

Non-interest expenses totaled $741.5 million in the quarter, dipping 3.9% year over year. The decline was primarily attributable to a lower compensation expense, employee benefit expense, lower equipment and software expenses along with reduced outside services expenses. These declines were partly offset by higher other operating expense.

Credit Quality

Northern Trust witnessed improvement in asset quality as nonperforming assets decreased to $275.1 million from $314.9 as of December 31, 2011. Additionally, net charge-offs declined 70.3% from $18.2 million in 2011 to $5.4 million.

Further, nonperforming loans and leases decreased 13.2% year over year to $254.8 million. Provision for credit losses was $25 million in 2012, down 55% from $55 million recorded in 2011.

Share Repurchase

During the quarter ended December 31, 2012, Northern Trust repurchased 1.3 million shares worth $62.9 million at an average price of $47.62 per share. In total, the company repurchased 3.5 million shares in 2012. Moreover, the company’s common stock repurchase authorization was replaced in March 2012, under which up to $77.1 million worth of common stock can be repurchased after December 31, 2012 through March 2013.

Assets Position

As of December 31, 2012, assets under management surged 14% year over year to $758.9 billion. Likewise, assets under custody rose 13% from the last year period to $4.8 trillion.

However, average earning assets declined 5% from the prior-year period to $82.9 billion. The fall primarily reflects drop in Federal Reserve deposits.

Capital Ratios Evaluation

Northern Trust’s risk-based capital ratios remained strong as of December 31, 2012, with tier 1 capital ratio of 12.8%, total risk-based capital ratio of 14.3%, and leverage ratio of 8.2%, 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 12.4%, up from 12.1% in the prior-year quarter.

Our Viewpoint

We expect enhanced asset management and servicing fees based on significant equity markets improvement and higher volumes. Further, continuously falling expenses depict better expenses management. 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.

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

Northern Trust currently retains a Zacks Rank #3 (Hold). Considering the fundamentals, we also maintain a long-term Neutral recommendation on the stock.

Among Northern Trust’s peers, Fifth Third Bancorp (FITB - Analyst Report) and BB&T Corporation (BBT - Analyst Report) are scheduled to release their fourth-quarter 2012 results on January 17.

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