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Northern Trust Misses Slightly on Earnings

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Northern Trust Corporation’s (NTRS - Free Report) first-quarter 2013 earnings of 71 cents per share lagged the Zacks Consensus Estimate by a cent. However, this was favorable compared with the prior-year quarter’s earnings of 67 cents.

Considering certain non-recurring items, net income in the first quarter was $164.0 million or 67 cents per share compared with $161.2 million or 66 cents per share in the prior-year quarter.

Results on a year-over-year basis benefited from top-line growth, partially offset by a rise in operating expenses. Further, improving credit quality and strong capital ratios were the tailwinds.

Performance in Detail

Total revenue was $976.4 million in the quarter, inching up 1% year over year, reflecting a rise in non-interest income. However, it was below the Zacks Consensus Estimate of $999.0 million.

Net interest income (fully taxable equivalent) totaled $233.7 million in the reported quarter, down 12% year over year. The downside was spurred by a fall in net interest margin (NIM) and lower average earning assets.

NIM was 1.15%, down 9 basis points (bps) from 1.24% in the prior quarter. The decrease reflects lower yields on earning assets and lower level of demand deposits, partly offset by a decline in cost of non-interest-bearing liabilities.

Non-interest income grew 6% from the year-ago quarter to $750.3 million, largely due to a rise in trust, investment and other servicing fees. This was partially offset by a decline in foreign exchange trading income.

Trust, investment and other servicing fees from the Corporate and Institutional Services segment augmented 10% year over year to $348.7 million in the quarter. Further, Trust, investment and other servicing fees from the Personal Financial Services segment improved 9% from the last year quarter to $282.0 million.

Non-interest expenses totaled $728.9 million in the quarter, increasing marginally 1% year over year. The rise was primarily attributable to a higher other operating expense and occupancy expense. These were partially offset by lower compensation expense and employee benefit expenses.

Credit Quality

Northern Trust witnessed an improvement in overall asset quality as nonperforming assets fell 8% from the year-ago quarter to $262.2 million as of Mar 31, 2013. Further, nonperforming loans and leases were 0.87% of total loans and leases, down 3 bps year over year.

Provision for credit losses was $5 million in the reported quarter, at par with the prior-year quarter level. However, net charge-offs jumped 50% from $5.8 million in the last year quarter to $8.7 million.

Assets Position

As of Mar 31, 2013, assets under management surged 13% year over year to $810.2 billion. Likewise, assets under custody rose 9% from the last year period to $5.0 trillion.

However, average earning assets declined 5% from the prior-year period to $82.2 billion. The fall primarily reflects a drop in Federal Reserve deposits.

Capital Deployment Actions

In its latest capital plan, Northern Trust received the Federal Reserve’s approval for $400 million worth of share repurchases through the first quarter of 2014. Also, the company got the approval to hike its quarterly dividend by about 3.3% to 31 cents per share from the second quarter of 2013.

During the quarter ended Mar 31, 2013, Northern Trust repurchased 1.4 million shares worth $74.5 million at an average price of $53.08 per share.

Capital Ratios

Northern Trust’s risk-based capital ratios remained strong as of Mar 31, 2013, with tier 1 capital ratio of 13.3%, total risk-based capital ratio of 14.7%, 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 12.8%, up from 11.9% in the prior-year quarter.

Our Viewpoint

We expect enhanced asset management and servicing fees based on a 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. The company’s fundamentals remain highly promising with a diverse business model and a strong balance sheet.

Northern Trust currently retains a Zacks Rank #3 (Hold).

Among major regional banks, Fifth Third Bancorp (FITB - Free Report) and BB&T Corporation (BBT - Free Report) are scheduled to report on Apr 18, while State Street Corporation (STT - Free Report) will report on Apr 19.

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