Northern Trust Management Discusses Q2 2012 Results - Earnings Call Transcript

Northern Trust (NTRS)

Q2 2012 Earnings Call

July 18, 2012 12:00 pm ET

Executives

Beverly J. Fleming - Senior Vice President and Director of Investor Relations

Michael G. O'grady - Chief Financial Officer and Executive Vice President

Analysts

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Brian Bedell - ISI Group Inc., Research Division

Gregory W. Ketron - UBS Investment Bank, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Andrew Marquardt - Evercore Partners Inc., Research Division

Presentation

Operator

Good day, everyone, and welcome to the Northern Trust Corporation Second Quarter 2012 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead.

Beverly J. Fleming

Thank you, Lisa. Welcome to Northern Trust Corporation Second Quarter 2012 Earnings Conference Call. Joining me on our call this morning are Mike O'grady, Northern Trust Chief Financial Officer; Rick Kukla, our Controller; and Allison Quaintance from our Investor Relations team.

For those of you who did not receive our second quarter earnings press release or financial trends report by email this morning, they are both available on our website at northerntrust.com. In addition, and also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 18 call is being webcast live on northerntrust.com. We only authorize rebroadcast of this call as the replay that will be available through August 15. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our Safe Harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2011 annual report and our periodic reports to the Securities and Exchange Commission for detailed information about factors that could affect actual results.

Thank you again for joining us today, and let me turn the call over to Mike O'grady.

Michael G. O'grady

Good morning, everyone. Let me join Bev in welcoming you to the Northern Trust second quarter 2012 earnings conference call. Our second quarter results of earnings per share of $0.73 and a return on equity of 9.9% reflect continued progress on many fronts. Growth in trust, investment and other servicing fees was strong, driven by new business from both personal and institutional clients.

Execution on our driving performance initiatives remains a critical priority, and we made further progress in the second quarter on both the revenue and expense side, and profitability improved with our pretax margin increasing to 27.7%. This performance was against the ongoing backdrop of a mixed operating environment.

Equity markets were weak in the second quarter, following positive performance in each of the 2 preceding quarters. The S&P 500 was down 3%, and the IFA was down 7%. This weakness had a negative impact on the market value of client assets, as did the strengthening of the dollar. Assets under custody ended the second quarter at $4.6 trillion, down 1% sequentially but up 3% year-over-year, and assets under management ended at $704 billion, down 2% sequentially but up 3% year-over-year.

Fees, overall, benefited from the prior quarter's positive market performance, given that some fees are calculated on the basis of month or quarter lag asset values. Foreign exchange volatility in volumes continue to be low, impacting our foreign exchange trading income. Interest rates remain low, placing continued pressure on our net interest margin and resulting in ongoing fee waivers on our money market funds, albeit lower in the second quarter than the first quarter.

The U.S. economy's slow recovery has led to continued improvement in the credit quality of our loan portfolio. Nonperforming assets declined for the fourth quarter in a row, and our loan loss provision was $5 million, unchanged from last quarter and down from $10 million one year ago. And we saw some modest loan growth both sequentially and compared to last year.

Let's move to Page 2 and discuss the financial results for the second quarter. Net income of $180 million and earnings per share of $0.73 both increased approximately 11% sequentially and 18% year-over-year. Our return on equity of 9.9% was better than last quarter and one year ago and just below our long-term target range of 10% to 15%, signifying good progress on our productivity and profitability efforts. The sequential quarter improvement was primarily the result of revenue growing 2% and expenses declining 1%.

Trust, investment and other servicing fees, the largest component of our revenues, grew 5% but were offset partially by reduced foreign exchange trading income and net interest income. The decline in expenses was primarily due to lower compensation benefits and other expenses. Higher trust, investment and other servicing fees and net interest income drove the year-over-year comparison, which was again impacted by the reduced level of foreign exchange trading income.

The year-over-year comparisons for both revenues and expenses were also impacted by the inclusion of the Bank of Ireland Securities Services and Omnium acquisitions, which closed in June and July of 2011, respectively. Before getting into more detail, I'd like to highlight 3 items, which impacted the comparisons between periods.

First, we recorded $3.6 million in restructuring acquisition and integration charges during the second quarter. This compares to $3.9 million last quarter and $22.6 million one year ago.

Second, our results for the quarter included software write-downs at $10.5 million. Our first quarter results also had an unrelated software write-downs of $4.6 million. There was no such item in the year earlier period.

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