NTRS

Northern Trust Corporation (NTRS)

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Northern Trust (NTRS)

Q2 2011 Earnings Call

July 20, 2011 12:00 pm ET

Executives

Beverly Fleming - Senior Vice President and Director of Investor Relations

William Morrison - Chief Financial Officer and Executive Vice President

Analysts

Brian Bedell - ISI Group Inc.

Alexander Blostein - Goldman Sachs Group Inc.

Kenneth Usdin - Jefferies & Company, Inc.

John Stilmar - SunTrust Robinson Humphrey, Inc.

Howard Chen - Crédit Suisse AG

Glenn Schorr - Nomura Securities Co. Ltd.

Nancy Bush - NAB Research

Michael Mayo - Credit Agricole Securities (USA) Inc.

Presentation

Operator

Good day, everyone, and welcome to the Northern Trust Corporation Second Quarter 2011 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to the Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead, ma'am.

Beverly Fleming

Thank you, Kevin. Welcome to Northern Trust Corporation's Second Quarter 2011 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 Quaintance from our Investor Relations team.

For those of you who did not receive our second quarter earnings press release or financial trends report via e-mail this morning, they are both available on our website at northerntrust.com. In addition, this July 20 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through August 17. 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 2010 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. Let me turn the call over to Bill Morrison.

William Morrison

Thank you, Bev, and good morning, everybody. It's my pleasure to speak with you today about Northern Trust's second quarter earnings. Earlier this morning, Northern Trust announced second quarter net income of $152 million and earnings per share of $0.62. Our results this quarter included $22.6 million or $0.08 per share in expenses associated with restructuring, acquisition and integration activities. Specifically these expenses relate to integration activities in connection with our June 1 acquisition of the fund administration business of the Bank of Ireland, as well as related restructuring activities in our Global Fund Services business in Ireland and in the United Kingdom, and the expenses related to the pending acquisition of Omnium, the hedge fund administration business of Citadel, which we expect will close in the third quarter.

Adjusting for the restructuring acquisition and integration expenses incurred in the second quarter, earnings would have been approximately $0.70 per share. This compares with operating earnings per share of $0.78 in the year earlier quarter and $0.59 in the first quarter of 2011. Recall that our results last year and last quarter each included an expense credit related to the 2008 IPO of Visa, which impacted all Visa member banks. We presented operating results in those prior periods, which excluded Visa-related items. Our results this quarter were not impacted by any Visa-related items.

As is customary in our earnings conference call, I want to briefly discuss how the macroeconomic environment, specifically interest rates and equity markets, impacted our results. Low short-term interest rates, coupled with narrow spreads at the short end of the yield curve, continue to negatively impact net interest income, some investment management fees and securities lending revenues. Overnight interest rates in the United States averaged only 9 basis points in the second quarter, down from an already low 16 basis points in the first quarter. Three-month LIBOR averaged 26 basis points, a decrease of 5 basis points sequentially. Short-term interest rates for the euro and sterling were also at low levels by historical standards, although short-term interest rates in the euro rose in the second quarter following the decision by the European Central Bank to increase its key interest rate by 25 basis points on both April 13 and July 13.

Equity markets were essentially unchanged as of June 30 when compared to March 31. However, equity markets, as measured by the S&P 500 index, rose 5.4% in the first quarter, which is relevant to fees that we earn in C&IS custody and PFS wealth management, our businesses which primarily use a quarter-lag methodology in calculating some fees. Using the one-month lag methodology, which is relevant to fees that we earn in PFS, excluding wealth management, equity markets improved 4.2% in the second quarter. So all in all, the impact of the equity markets on our second quarter results was mixed, with current markets having little impact and lag markets providing some support to asset values and to related fees.

With that background, let me get into the detail behind our second quarter numbers. Revenues on a fully taxable equivalent basis were $955 million in the second quarter, down 2% year-over-year and up 5% on a sequential quarter basis. Trust, investment and other servicing fees were the largest component of our revenue mix and represented 58% of total fully taxable equivalent revenues in the second quarter. Trust, investment and other servicing fees of $558 million were up 3% year-over-year and up 8% sequentially.

In our Institutional business, C&IS trust, investment and other servicing fees totaled $309 million in the second quarter, down 2% year-over-year and up 14% on a sequential quarter basis. C&IS fees include 3 primary categories: custody and fund administration, institutional asset management and securities lending. And let me spend a moment on each of those briefly.

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