NTRS

Northern Trust Corporation (NTRS)

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Northern Trust Corporation (NTRS)

Q2 2010 Earnings Call Transcript

July 21, 2010 12:00 pm ET

Executives

Bev Fleming – SVP and Director of IR

Bill Morrison – EVP and CFO

Analysts

Brian Foran – Goldman Sachs

Betsy Graseck – Morgan Stanley

Howard Chen – Credit Suisse

Nancy Bush – NAB Research

Robert Lee – KBW

Mike Mayo – CLSA

Ken Usdin – Bank of America-Merrill Lynch

Brian Bedell – ISI Group

Tom McCrohan – Janney

James Mitchell – Buckingham Research

Presentation

Operator

Good day, everyone, and welcome to the Northern Trust Corporation’s second quarter 2010 earnings conference call. Today’s conference is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead.

Bev Fleming

Thank you, Cynthia. Welcome to Northern Trust Corporation’s second quarter 2010 earnings conference call. Joining me on our call this morning are Bill Morrison, Northern Trust’s Chief Financial Officer; Aileen Blake, our Controller; and Allison Clayton [ph], 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 Web site at northerntrust.com.

In addition, this July 21 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through July 28. Northern Trust disclaims any continuing accuracy of the information provided on 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 2009 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 your time today. Let me turn the call over to Bill Morrison.

Bill Morrison

Thank you, Bev and good morning, everybody. It’s my pleasure to speak with you today on Northern Trust’s second quarter earnings conference call. Earlier this morning Northern Trust reported second quarter net income of $200 million. Reported earnings equaled $0.82 per share. Our second quarter results include an expense credit of $0.04 per share related to the 2008 IPO of Visa which impacted all of Visa member banks.

In our press release issued earlier today, we provided operating results which are exclusive of this Visa-related item. We believe operating results provide a clearer indication of the results and trends in our core businesses, therefore, our commentary for the remainder of today’s conference call, will focus on operating results, which are exclusive only of the Visa-related item.

To that end, Northern Trust today announced second quarter operating net income of $192 million. Operating earnings equaled $0.78 per share.

To help you evaluate our performance this quarter, I will begin with a brief overview of market conditions that influenced our results, specifically equity markets and interest rates. Equity markets, as you know, deteriorated during the second quarter, with the S&P 500 and EAFE indices both falling approximately 12%.

Let me review the impact of these equity market trends on fees earned by Northern Trust. Equity market performance calculated on a one-quarter lag basis is the methodology used for calculating C&IS custody and PFS wealth management fees. The S&P 500 increased 46% year-over-year on a one-quarter lag basis.

On a sequential quarter basis, the one-quarter lag markets increased 5%. Using the one-month lag methodology that applies to PFS fees, excluding wealth management, the S&P 500 was up 33% versus the prior year and up 4.6% versus the first quarter.

Short-term interest rates remained at extremely low levels throughout the second quarter. For example, in the United States, overnight interest rates averaged only 19 basis points in the second quarter, a modest improvement from 14 basis points in the first quarter.

Three-month rates averaged 44 basis points, a welcome increase of 18 basis points sequentially, but still 40 basis points below one year ago. Short-term interest rates for the euro and sterling were also at low levels by historical standards.

Our Chief Economist, Paul Kasriel, recently pushed out his forecast for Fed tightening from early 2011 to mid 2011, and noted that the first tightening might not take place until early 2012. As many of you know, low interest rates have impacted our recent performance most noticeably by pressuring both our net interest margin and the fees that we earn on money market mutual funds. I’ll discuss both of those impacts in more detail later on the call.

With that environmental backdrop, let me review of our second quarter results. Revenues in the second quarter equaled $974 million, down 7% compared to last year’s second quarter, but up 7% sequentially.

Trust, investment and other servicing fees are the largest component of our revenues, representing 56% of total revenues in the second quarter. Trust, investment, and other servicing fees of $544 million decreased 10% or $75 million year-over-year.

Virtually, the entire decline reflects the year-over-year change in positive marks associated with the one mark-to-market fund used by certain securities lending clients.

Positive marks impacted our fees in the second quarter of last year by $129 million, compared to $37 million in this year’s second quarter or $92 million year-over-year difference. Adjusting for these positive marks in both years, trust fees increased 7% year-over-year. On a sequential quarter basis, trust fees increased 6%.

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