(Source: PRNewswire)CHICAGO, July 22 /PRNewswire-FirstCall/ -- Northern Trust Corporation (Nasdaq: NTRS) today reported second quarter net income per common share of $.95, compared with reported net income per common share of $.96 in the second quarter of 2008. Net income was $314.2 million compared with net income of $215.6 million reported in the second quarter of last year. Net income applicable to common stock, which includes the impact of dividends and discount accretion relating to preferred shares, totaled $226.1 million.

Frederick H. Waddell, President and Chief Executive Officer, commented, "We are pleased with our performance in the quarter. Client assets under custody and management, which represent an important component of our business, increased 13% and 7%, respectively, during the quarter. Improved market conditions favorably impacted securities lending revenues and reduced our obligations under capital support agreements with certain Northern Trust investment vehicles. While encouraged by our results, economic conditions remain difficult. In this challenging environment, we continue to maintain a heightened focus on serving the needs of our clients.

In the second quarter, we successfully completed a public offering of common stock, raising $834.5 million, and issued $500 million of senior notes. We were also pleased to complete the redemption of the $1.576 billion in preferred shares while maintaining an exceptionally strong capital position, including a tier 1 capital ratio of 12.6% and a tier 1 common equity ratio of 12.1%, as of June 30, 2009."

SECOND QUARTER PERFORMANCE HIGHLIGHTS

Net income per common share was $.95 for the second quarter compared to $.96 per share reported in the second quarter of 2008. The current quarter's earnings per share were reduced by $.37 in connection with Northern Trust's participation in the U.S. Department of the Treasury's Capital Purchase Program. The reduction was comprised of $68.6 million, or $.29 per share, attributable to the acceleration of the remaining difference between the carrying value of the preferred shares and their liquidation preference recognized upon the repayment in full of the $1.576 billion preferred share investment made by the U.S. Department of the Treasury under the Capital Purchase Program, and $19.5 million, or $.08 per share, attributable to dividends on the preferred shares that were recorded in the current quarter through the redemption date. The prior year quarter's results included non-cash accounting charges of $87.3 million, or $.39 per common share, associated with lease transactions.

Northern Trust's second quarter consolidated revenues totaled $1.05 billion, down 4% from last year's second quarter. Trust, investment and other servicing fees decreased 7% from last year to $601.4 million and represented 58% of second quarter revenues. Foreign exchange trading income was strong for the quarter and totaled $134.3 million, an increase of 6% from last year's second quarter. Net interest income totaled $260.1 million, an increase of 5%. Total fee-related income decreased 7% to $785.0 million and represented 75% of revenues.

Trust, investment and other servicing fees from Corporate & Institutional Services (C&IS) decreased 4% from the year-ago quarter to $390.9 million, reflecting significantly lower market valuations, partially offset by securities lending results and new business. The largest component of C&IS fees is custody and fund administration fees, which decreased 19% to $140.5 million, driven primarily by declines in the equity markets. Securities lending fees totaled $172.5 million compared with $149.9 million in the second quarter last year. The current quarter included a positive mark-to-market adjustment of approximately $129 million relating to prior period unrealized asset valuation losses recorded in one mark-to-market investment fund used in our securities lending activities. This compares to a positive mark-to-market adjustment of previous unrealized asset valuation losses of approximately $25 million in the prior year quarter. Excluding the impact of the mark-to-market adjustments, the current quarter decrease in securities lending fees reflects significantly reduced volumes. Fees from asset management in the quarter totaled $61.1 million, down 15%, reflecting lower market valuations. Trust, investment and other servicing fees from Personal Financial Services (PFS) in the quarter decreased 11% and totaled $210.5 million compared with $235.9 million a year ago. The decrease in PFS fees resulted from significantly lower market valuations, offset in part by strong new business.

Northern Trust's total assets under custody were $3.2 trillion and total managed assets were $558.9 billion. C&IS assets under custody totaled $2.9 trillion, down 20% from a year ago, and included $1.6 trillion of global custody assets, 19% lower than a year ago. C&IS assets under management totaled $422.1 billion, a 31% decrease from the prior year. C&IS assets under management for the quarter included $101.0 billion of securities lending related collateral, a 58% decrease from the prior year quarter. Excluding securities lending collateral, C&IS assets under management totaled $321.1 billion compared with $370.5 billion in the prior year quarter, a $49.4 billion, or 13% decrease. PFS assets under custody totaled $300.2 billion, an 8% decrease from $325.9 billion in the prior year quarter. PFS assets under management totaled $136.8 billion, a 4% decrease from $142.8 billion last year. The above decreases in assets under custody and under management are in comparison to the twelve month decline in the S&P 500 index of 28% and in the EAFE index (USD) of 34%.

Foreign exchange trading income equaled $134.3 million, up 6% or $7.7 million from the performance in last year's second quarter, reflecting higher currency volatility. Revenues from security commissions and trading income totaled $16.8 million, down from $20.4 million in the prior year, reflecting decreased revenue from core brokerage and transition management services.

Other operating income equaled $28.2 million compared with $34.8 million in the same period last year. The decrease reflects the current quarter impact of adverse mark-to-market adjustments recorded on certain credit default swap contracts with outside counterparties used to mitigate credit risk associated with specific commercial credits and decreased custody-related deposit revenue, partially offset by an increase in commercial loan-related commitment fees.

Net investment security losses totaled $17.5 million for the current quarter and included an $18.0 million pre-tax charge to reflect the credit related other-than-temporary impairment of certain residential mortgage backed securities held within Northern Trust's balance sheet investment securities portfolio. The charge consisted of $4.3 million relating to three securities previously determined to be other-than-temporarily impaired and $13.7 relating to five securities determined to be other-than-temporarily impaired in the current quarter. There were no investment security gains or losses in the prior year quarter.

Net interest income for the quarter, stated on a fully taxable equivalent basis, totaled $260.1 million, up 5% from $248.8 million reported in the prior year second quarter. The prior year quarter included a $29.4 million reduction from a leasing related adjustment. Average earning assets of $65.6 billion were 4% higher than a year ago, driven by growth in securities and loans. The net interest margin was 1.59%, consistent with the prior year quarter. The prior year quarter net interest margin absent the leasing related adjustment would have been 1.78%. The current quarter decrease, after adjustment, in the net interest margin reflects the diminished value of noninterest-related funding sources resulting from the significant interest rate cuts over the past year.

The reserve for credit losses at June 30, 2009 of $319.1 million increased $15.8 million from the March 31, 2009 balance. The provision for credit losses was $60.0 million in the current quarter and net charge-offs totaled $44.7 million. The current quarter provision reflects the continued weakness in the broader economic environment. A $10.0 million provision was recorded in the prior year second quarter and net charge-offs totaled $4.7 million. Nonperforming loans totaled $227.9 million at June 30, 2009, compared with $167.8 million at March 31, 2009 and $30.1 million at June 30, 2008. The reserve for credit losses of $319.1 million included $21.8 million allocated to loan commitments and other off- balance sheet exposures compared with $10.6 million in the prior year. The remaining $297.3 million reserve assigned to loans and leases at June 30, 2009 represented a reserve to loan and lease ratio of 1.02%, compared with .94% at March 31, 2009 and .60% a year ago. Nonperforming loans of $227.9 million at quarter-end represented .79% of total loans and leases and were covered 1.3 times by the assigned reserve.

Noninterest expenses totaled $502.7 million, a decrease of 22% or $140.6 million from the year-ago quarter's $643.3 million of noninterest expenses.

Compensation and employee benefit expenses totaled $349.8 million, down $18.9 million or 5% compared with the prior year second quarter. The decrease reflects reductions in performance- based compensation expense, partially offset by higher staff levels and annual salary increases. Staff on a full-time equivalent basis at June 30, 2009 totaled 12,400, up 5% from a year ago.

Expenses associated with outside services totaled $102.1 million, down $4.1 million or 4% from $106.2 million last year. The current quarter decrease reflects decreases in global subcustody and investment manager sub-advisory services and in consulting services, partially offset by increased expenses for technical and legal services.

The remaining expense categories totaled $50.8 million, compared to $168.4 million in the prior year second quarter. The current quarter reflects a $130.1 million expense reduction associated with a valuation adjustment of the liability established in connection with the previously disclosed capital support agreements with certain Northern Trust investment vehicles (Funds). This compares with a valuation related expense increase of $1.2 million recorded in the second quarter of last year. During the current quarter, as a part of the restructuring and final settlement related to an investment vehicle held by eight of the nine Funds covered by capital support agreements, Northern Trust made cash payments totaling $66.7 million which further reduced the liability associated with capital support agreements. As a result of the completion of this investment vehicle's restructuring and the related support payments, seven of the nine capital support agreements were terminated during the quarter, reducing the aggregate maximum remaining exposure from $550.0 million to $200.2 million. The remaining two capital support agreements expire on November 6, 2009. Excluding the capital support agreement valuation adjustments, the increase in the current quarter totaled $13.7 million and primarily reflects a $29.0 million increase in Federal Deposit Insurance Corporation (FDIC) insurance premiums, including a June 30, 2009 special assessment of $20.2 million. The current quarter also reflects higher software related expenses. These increases were partially offset by lower charges associated with account servicing activities and reduced business promotion expenses.

Income tax expense of $158.3 million was recorded in the current quarter and resulted in an effective tax rate of 33.5%. The prior year quarter provision for income taxes was $212.5 million, representing an effective tax rate of 49.6%, and included $57.9 million associated with leasing related adjustments. The effective tax rate for the prior year quarter, excluding the impact of the leasing adjustments, was 33.8%.

SECOND QUARTER PERFORMANCE VS. FIRST QUARTER

Net income per common share of $.95 for the second quarter increased from $.61 per share reported in the first quarter of 2009. The current quarter's earnings per share reflects a $.37 per share reduction attributable to preferred share dividends and discount accretion in connection with Northern Trust's participation in the U.S. Department of the Treasury's Capital Purchase Program. This compares with $23.0 million of preferred stock dividends accrued in the first quarter, which reduced first quarter earnings per share by $.10. Net income increased to $314.2 million from $161.8 million reported in the first quarter.

Consolidated revenues increased 16% or $140.9 million to $1.05 billion. Trust, investment and other servicing fees increased $190.7 million or 46% in the quarter, with C&IS fees increasing $183.9 million or 89% and PFS fees increasing $6.8 million or 3%. C&IS fees increased primarily due to higher securities lending fees and new business. Securities lending fees totaled $172.5 million in the current quarter compared with a negative $7.9 million in the first quarter. The current quarter included a positive mark-to-market adjustment of approximately $129 million relating to prior period unrealized asset valuation losses recorded in one mark-to-market investment fund used in our securities lending activities. This compares to a negative mark-to-market adjustment of previous unrealized asset valuation losses of approximately $52 million in the prior quarter. The increase in PFS fees primarily reflects new business and improved markets. Net interest income decreased $27.6 million or 10% in the second quarter, primarily reflecting a decrease in the net interest margin and lower levels of average earning assets. Foreign exchange trading income increased $3.2 million or 2%.

Other operating income was $28.2 million for the second quarter, compared with $37.1 million in the prior quarter. The decrease reflects the current quarter impact of adverse mark-to-market adjustments recorded on certain credit default swap contracts with outside counterparties used to mitigate credit risk associated with specific commercial credits, partially offset by an increase in commercial loan-related commitment fees. The prior quarter included gains resulting from the sale of leased equipment.

Net investment security losses totaled $17.5 million for the current quarter and included the $18.0 million pre-tax charge to reflect the credit related other-than-temporary impairment of certain residential mortgage backed securities held within Northern Trust's balance sheet investment securities portfolio. The prior quarter included investment security gains of $.4 million.

The provision for credit losses totaled $60.0 million in the current quarter, compared with $55.0 million in the first quarter of 2009.

Noninterest expense totaled $502.7 million in the second quarter, a decrease of $90.8 million or 15% from the first quarter.