Northern Trust Corp.’s (NTRS) fourth quarter earnings of 64 cents per share were below the Zacks Consensus Estimate of 72 cents. Last year, the company reported a gain of 61 cents per share. Earnings benefited mainly from a decrease in loan loss provisions.

Net interest income totaled $240.1 million, down 17% year over year. Net interest margin (NIM) was 1.44%, down from 1.68% in the prior-year quarter. The decline in NIM and the resulting impact on net interest income is a result of the significant drop in interest rates, which has dramatically reduced the interest rate spread on short-term assets and the value of non-interest related funds.

Non-interest income increased 8% year-over-year to $667.5 million due to an increase in trust, investment and other servicing fees, partially offset by lower foreign exchange trading income, decreased security commissions & trading income and investment security losses.

Non-interest expenses totaled $619.7 million, up 4% year-over-year mainly due to an increase in compensation expense.

Provision for credit losses was $40.0 million in the quarter versus $55.0 million in the year-earlier period. As expected, Northern Trust continued to experience asset quality pressure witnessed by an increase in non-performing assets, which totaled $365.2 million versus $172.1 million in the prior-year period. Net charge-offs ballooned to $30.6 million from $2.7 million in the prior-year quarter.

Trust, investment and other servicing fees from the Corporate & Institutional Services segment increased 44% year-over-year to $297.3 million, led by an increase in custody and fund administration fees and investment management fees, securities lending fees and other revenues, all of which reflects improved market dynamics.

Trust, investment and other servicing fees from the Personal Financial Services (PFS) segment increased 7% year-over-year to $217.8 million. The increase in PFS fees primarily reflects higher markets and new business, partially offset by fee waiver due to the low interest rates.

After falling for four straight quarters, Northern Trust’s assets under management (AUM) have shown an increase since the second quarter of 2009, the same trend was seen during the quarter with AUM experiencing an increase of 3% sequentially and 24% year-over-year to $647.2 million. A modest increase in overall equity values led to the growth. Assets under custody increased 2% sequentially and 31% annually to $3.7 billion.

Average earning assets of $67.4 billion were 3.0% lower on a year-over-year basis, driven by a decrease in average money market assets, partially offset by an increase in the U.S. government sponsored agency securities.

Northern Trust’s risk-based capital ratios remained strong at the end of the quarter, with Tier 1 capital ratio of 13.4%, total risk-based capital ratio of 15.5%, and leverage ratio of 8.9%, each exceeding the regulatory requirements of 6%, 10%, and 5%, respectively, for classification as a well-capitalized institution. The ratio of Tier 1 common equity to risk-weighted assets, a non-GAAP financial measure, was 12.8%, up from 9.6% in the prior year period.

Low interest rates, which appear poised to stay for much of 2010, continue to restrain earnings, impacting net interest income, securities lending and money market mutual-fund fees. However, we expect increased asset management and servicing fees amid improved equity markets and higher volumes.

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