NTRS

Northern Trust Corporation (NTRS)

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Northern Trust Corporation (NTRS)

Q2 2009 Earnings Call

July 22, 2009 12:00 pm ET

Executives

Bev Fleming – Director of Investor Relations

Steven L. Fradkin – Chief Financial Officer & Executive Vice President

Aileen B. Blake – Executive Vice President & Controller

Preeti Sullivan – Investor Relations Team

Analysts

Brian Foran – Goldman Sachs

Michael Mayo – Calyon Securities (USA), Inc.

Glen Shore – UBS

Nancy Bush – NAB Research

Thomas McCrohan – Janney Montgomery Scott, LLC

Robert Lee – Keefe, Bruyette & Woods

Ken Usdin – Bank of America

Betsy Graseck – Morgan Stanley

Howard Chen – Credit Suisse

John Stilmar – SunTrust Robinson Humphrey

Marty Mosby – FTN Equity Capital Markets

Presentation

Operator

Welcome to the Northern Trust Corporation second quarter earnings conference call. Today’s call is being recorded. At this time I would like to turn the conference over to the Director of Investor Relations Bev Fleming.

Bev Fleming

Welcome to Northern Trust Corporation’s second quarter 2009 earnings conference call. Joining me on our call this morning are Steve Fradkin, Northern Trust’s Chief Financial Officer; Aileen Blake, Controller and Preeti Sullivan from our Investor Relations Team. For those of you who did not receive our second quarter earnings press release or financial trends report via email this morning, they are both available on our website at www.NorthernTrust.com. In addition, this July 22nd call is being webcast live on www.NorthernTrust.com. The only authorized rebroadcast of this call is the replay that will be available through July 29th. 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 or 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 2008 annual report and our periodic reports to the Securities & Exchange Commission for detailed information about factors that could affect actual results.

Thank you again for your time today. Let me turn the call over to Steve Fradkin.

Steven L. Fradkin

Let me join Bev in welcoming all of you to Northern Trust’s second quarter 2009 earnings conference call. Earlier this morning Northern Trust reported second quarter 2009 net income of $314 million, an increase of 46% versus a year ago period. Net income applicable to common stock which includes the impact of both dividends and discount accretion related to the redemption of preferred shares in the quarter equaled $226 million or $0.95 per common share. This compares with net income of $216 million or $0.96 per share earned in last year’s second quarter.

To assist you in understanding our performance this quarter, we have organized today’s remarks in to the following sections: first, I will highlight several items that you should be mindful of as you evaluate our performance; second, I will profile certain second quarter market conditions that impacted our performance; third, I will review our financial performance focusing on those items that most impacted our results; fourth, I will offer a few perspectives on the operating environment and on the strategic and financial positioning of Northern Trust; and finally, Bev and I will be pleased to answer your questions.

Let me begin by highlighting six items that you should be mindful of as you evaluate our performance this quarter. First, during the second quarter Northern Trust successfully completed an issuance of new common stock which increased our capital base by approximately $835 million. Shares outstanding increased from 223.7 million on March 31st to 241.4 million on June 30th, an increase of 17.7 million shares. In addition, we successfully issued $500 million in senior notes.

Second, the combination of the common stock offering and debt issuance along with additional resources positioned Northern Trust to be one of the first large banks to redeem the preferred shares sold to the US Treasury as part of the TARP capital purchase program. We successfully repurchased 1.576 billion of preferred shares on June 17th. As previously announced, our second quarter financial results were reduced by $0.37 per share associated with the preferred stock. This reduction was comprised of $68.6 million or $0.29 per share of accelerated discount accretion associated with the redemption and $19.5 million or $0.08 per share in preferred dividends recorded through the June 17th redemption date.

Third, our trust investment and other servicing fees in the corporate and institutional services business unit benefited from improved fix income market conditions in the second quarter. Specifically, our securities lending fees equaled $172.5 million in the second quarter which included approximately $129 million in positive marks associated with one mark-to-market investment fund used by certain securities lending clients. This compares with $25 million in positive marks in the second quarter of 2008 and $52 million in negative marks in the first quarter of this year.

On a cumulative basis, dating back to the third quarter of 2007, the second quarter’s positive impact of $129 million reduces to approximately $222 million the cumulative impact that negative marks have had on our securities lending fees. Fourth, on April 1st Northern Trust adopted financial accounting standards for its staff position number 115-2 and 124-2 which were designed to create greater clarity and consistency in the industry for impairment losses on securities.

Adoption of this guidance impacted our results in three ways, first, we recorded $18 million or $0.05 per share in other than temporary impairment through the income statement related to credit losses on certain residential mortgage backed securities. $4 million of that amount related to further credit impairment of three securities that were previously determined to be impaired in 2008. $14 million related to five additional securities on which we have taken credit loss impairment in the second quarter. Second, the non-credit portion of impairment previously recognized in 2008 and equal to $15 million pre-tax was reclassified from retained earnings to accumulated other comprehensive income. This reclassification had no impact on capital as it was a reallocation from one capital category, retained earnings, to another accumulated other comprehensive income. Third, we recorded $40 million of non-credit related losses in the second quarter to other comprehensive income.

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