Northern Trust Corp (NTRS) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation fourth quarter 2007 earnings conference call. Today's call is being recorded.

And 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.

Thank you. Welcome to Northern Trust Corporation's fourth quarter 2007 earnings conference call. Whether you are participating in today's conference call live or via replay, we appreciate the time you are taking to listen to Northern Trust's fourth quarter 2007 financial results. 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 fourth 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 January 16, call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through January 23. 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 2006 financial annual report and our periodic reports to the SEC for detailed information about factors that could affect actual results. Again, thank you for your time today. Let me now turn the call over to Steve Fradkin.

Well, thank you, Bev, and good morning, everyone. Let me extend my welcome to all of you listening to Northern Trust Corporation's fourth quarter 2007 earnings conference call. Early this morning, Northern Trust announced fourth quarter reported net income of $125 million, and reported earnings per share of $0.55. Consistent with Form 8-K filings we made on November 13, 2007 and on January 11, 2008, these results included a $150 million fourth quarter non-operating charge associated with our membership in Visa USA. This charge represents our estimated portion of potential losses arising from certain litigation in which Visa is involved and for which we have and all other Visa members have provided indemnification.

As previously disclosed in our Form 8-K filing on November 13, $50 million of the charge represents our estimates of our proportionate share of a settlement involving litigation between Visa and American Express. The remaining $100 million charge represents the estimate of our proportionate share of additional indemnified litigation that has yet to be resolved. Guidance provided by the Securities and Exchange Commission clarified that member banks such as Northern Trust must recognize the estimated fair value of the additional indemnified litigation. We continue to expect that our proportional share of the proceeds of Visa's planned initial public offering will more than offset any liabilities related to Visa litigation. Excluding the Visa charge, Northern Trust recorded operating earnings per share equal to $0.97 in the fourth quarter, representing a very strong increase of 26% compared to the $0.77 that we reported in the fourth quarter of 2006.

Operating net income equaled a quarterly record of $219 million, representing an increase of 28% year-over-year. This was our 12th consecutive quarter of double-digit year-over-year growth in operating earnings per share, and our 11th consecutive quarter of double-digit year-over-year growth in operating net income. On a full year reported basis, Northern Trust earned $3.24 per share in 2007, compared to $3 earned in 2006. Net income in 2007 equaled $727 million, compared with the $665 million earned in the prior year. Excluding the Visa charge, full year operating earnings per share equaled $3.66 in 2007, representing an increase of 22% compared with 2006. Operating net income equaled $821 million for the full year, up a very strong 23% compared with 2006.

Our operating performance in 2007 met all four of our long-term across cycle strategic financial targets. For the year, we achieved strong revenue growth of 17%. Positive operating leverage, 22% growth in operating earnings per share, and an operating return on equity of 19.7%. At year end 2007, Northern Trust had record client assets under custody of $4.1 trillion, representing an increase of $590 billion or 17% compared with year-end 2006. On a sequential quarter basis, assets under custody increased $18 billion or 0.4% compared with September 30. Also at year end, client assets under management equaled $757 billion, representing a $60 billion or 9% increase compared with year-end 2006. On a sequential quarter basis, assets under management declined $4 billion or 0.5% compared with September 30.

We have organized the remainder of our earnings conference call today into two sections. First, I will review our financial performance, focusing on those areas that most impacted the fourth quarter's results. And second, I'll offer a few perspectives on a number of achievements we made in 2007 relative to several core themes we set out early in the year. These achievements are particularly noteworthy, given the difficult macroeconomic environment that played out in the second half of 2007. As always, Bev and I will then be pleased to answer your questions.

So now let me review the fourth quarter's key performance drivers. I'll start with revenues focusing on the major items that impacted our top line performance in the fourth quarter. Total fourth quarter revenues equaled $973 million, up an exceptionally strong 25% or $197 million, compared to last year's fourth quarter. In the 18 years or 72 quarters since 1990, we have had had six quarters where the year-over-year quarterly revenue growth rate exceeded 20%. Three of those six high growth quarters occurred in the year 2000 when the equity markets reached their bull markets peaks. Of the six quarters where revenue growth exceeded 20%, the best performing quarter was the just-completed fourth quarter of 2007, when we grew revenues by 25%.

Revenue growth as measured sequentially was equally notable. Fourth quarter revenues grew 9% or $80 million on a sequential quarter basis. Here too we have had six quarters since 1990 where sequential quarter revenue growth exceeded 8%, placing the fourth quarter of 2007's revenue growth of 9% in the top tier of sequential quarter revenue growth performance since 1990. We are very pleased with our top line performance in the fourth quarter of 2007, which is even more striking when juxtaposed against the backdrop of a highly tumultuous macroeconomic environment.

Let me review for you the key drivers of our very strong revenue growth in the quarter. The line item contributing the most to revenue growth in the fourth quarter was trust investment and other servicing fees, which is also the largest component of our revenue mix, accounting for 56% of total revenues in the quarter. We continue to be extremely pleased with our excellent growth in this revenue category, across both our personal and institutional businesses. Growth in this core revenue category is reflective of our ability to serve our clients exceptionally well, retaining their business and aggregating additional assets from them, while also having clients new to Northern Trust select us as their provider of choice.

Trust investment and other servicing fees increased 19% year-over-year or $89 million, to $547 million. This $89 million growth figure represents an impressive 45% of our total year-over-year revenue growth in the quarter. On a sequential quarter basis, trust fees increased 8% or $38 million, a very strong indication of the strength of our core fee generating businesses. Within this line item PFS Trust Investment and other servicing fees equaled a record $233 million in the fourth quarter, increasing 14% or $29 million versus last year's fourth quarter. This is our fifth consecutive quarter of double-digit year-over-year growth in PFS trust fees. We last achieved five consecutive quarters of year-over-year growth in PFS trust fees beginning in the fourth quarter of 1999.

On a sequential quarter basis, PFS trust fees were equally strong, increasing 3% or $6 million. Our fee growth in PFS emanates from two primary drivers. The first is our ability to retain and grow the business that our existing clients have entrusted to our care, while at the same time winning new clients to Northern Trust. The second factor behind our PFS growth is the equity market environment, which can either support our fee growth in rising markets or provide a measure of headwind in declining markets. With respect to the fourth quarter, net new business in PFS was consistent with the strong levels that we had achieved in the first three quarters of 2007. Full year 2007 net new business was at its best level since the year 2001, which speaks to the consistency of our net new business results in PFS throughout all four quarters of 2007.

The equity market environment relative to our quarterly PFS fees also provided support for the quarter's 14% year-over-year growth in fees, with the S&P 500 up 11% using our monthly fee methodology with a one month lag. Equity market support was also evident on a sequential quarter basis, as the S&P 500 was up 3% compared to the third quarter, using the same month lag methodology. Keep in mind too that PFS manages broadly diversified portfolios for clients. We are not exclusively an equity manager. As is the case with some of the publicly traded asset management firms. We are managing balanced, diversified portfolios for our private clients, structured to meet their goals and objectives. The asset allocation of PFS managed assets as of year end was 46% equities, 24% fixed income, and 30% cash and other asset classes, indicating that any equity market support does not apply 100% to our fee equation.

Fees in PFS are derived from the assets that we manage or custody for persona; clients. We were very pleased with our ability to aggregate private client assets at attractive rates of growth in the fourth quarter. PFS assets under management equaled a record $148 billion at year end, up 10% or $14 billion from a year ago and up 1% or $1.4 billion sequentially. Assets under custody in PFS also equaled a record, reaching $332 billion at quarter end. PFS assets under custody increased 18% or $50 billion from a year ago and were up 1% or $3 billion sequentially.

The ultra wealthy client segment within PFS which we call the wealth management group, continues to be an outstanding contributor to our growth. Wealth management serves the complex needs of some of the world's wealthiest families. We currently work with approximately 20% of the Forbes 400 richest Americans. The average size of our custody relationships with the almost 390 families served by Northern Trust's wealth management group equaled $500 million at year end, signifying the very high end of the affluent market served by this group. This incidentally compares with an average of just $226 million just five years ago, and therefore represents a $274 million increase on average across the families we serve, which equates to a 121% increase.

We continued to achieve excellent growth in wealth management client assets in the fourth quarter. Custody assets in wealth management equaled $195 billion at year end, up 22% or $35 billion from one year ago, and up 2% or $3 billion sequentially. We also manage a portion of the assets that our wealth management clients have placed in custody at Northern Trust. Managed assets in wealth management totaled $30 billion at year end up 9% or $2 billion year-over-year and up 2% or $1 billion sequentially. In summary on the PFS front for the full year 2007, performance was excellent as PFS Trust Investment and other servicing fees increased a strong 15%, representing our best annual growth rate since the year 2000.

Switching to our institutional business, C&IS Trust Investment and other servicing fees equaled $315 million in the fourth quarter, an increase of 24% or $60 million year-over-year. C&IS fees increased 12% or $33 million, compared with the third quarter. C&IS fees include three primary revenue areas. Custody and fund administration, institutional asset management and securities lending. And let me discuss the performance of each in the fourth quarter.

C&IS custody and fund administration fees equaled $168 million in the fourth quarter, up 29% or $37 million year-over-year. This strong double-digit custody fee growth was driven by excellent new business, particularly in global custody, by market growth and by higher transaction volumes during the quarter. Sequential growth in C&IS custody fees was also strong, up 5% or $9 million compared with the third quarter. Sequential growth was driven primarily by strong new business.

As with our fees in PFS, the market environment influences our C&IS fee growth. Recall that C&IS custody fees are billed primarily on a one quarter lag basis. Thus our 29% year-over-year growth in C&IS custody fees was supported by equity market growth, as evidenced by a 14.3% quarter lag growth in the S&P 500 and 11.6% growth in the EAFE Index.

Market support of our 5% sequential growth in C&IS custody fees was mixed, however, with the S&P 500 up only 1.6% and the third -- in the third quarter and the EAFE Index actually down 3% on a quarter lag basis. Again, you should also remember that while markets do impact our results, the relationship between equity market movement and Northern Trust fees is not a one to one relationship.

An important contributor to C&IS custody fees is our ability to successfully aggregate client assets. Institutional assets under custody equaled a record $3.8 trillion at year end, up 17% or $540 billion from a year ago and up 0.4% or $15 billion versus last quarter. International activities continued to be a primary driver of institutional assets and fee growth in the fourth quarter. Global custody assets equaled $2.1 trillion at year end, an increase of 23% or $397 billion from a year ago. The fourth quarter represents the 19th consecutive quarter that we have reported double-digit year-over-year growth in global custody assets.

On a sequential quarter basis, global custody assets were up 4% or $73 billion. Investment management fees in C&IS equaled $75 million in the fourth quarter, an increase of 12% or $8 million year-over-year. Growth was driven by both new business and positive markets. New business results were strong in short duration assignments, including institutional mutual funds and cash suite products and in quantitative management. Note again, that in our institutional asset management business we manage a wide range of asset classes for our clients. The asset allocation of C&IS managed assets as of year end was 35% equities, 9% fixed income, and 56% short duration and other. Institutional investment fees increased 3% or $2 million on a sequential quarter basis.

Managed assets for institutional clients equaled $609 billion at year end, up 8% or $46 billion compared with one year ago, yet down 1% or $6 billion sequentially. The sequential decline in C&IS assets under management was attributable to a $14 billion decline in securities lending collateral which was partially offset by higher equity and fixed income institutional assets under management. C&IS securities lending fees equaled $55 million in the fourth quarter, representing an increase of 32% or $13 million compared with last year's fourth quarter and an increase of 67% or $22 million compared with the third quarter.

Securities lending collateral equaled $270 billion at year end up 9% or $22 billion versus one year ago and as I mentioned earlier, down 5% or $14 billion compared with September 30. The sequential decline primarily reflects a continuation of the deleveraging phenomenon that occurred in the third quarter, which was another out growth of heightened risk aversion in the challenging fixed income environment.

As we did last quarter, let me pause for a minute and provide some perspective around our securities lending results in the fourth quarter. Similar to our experience in the third quarter of 2007, our securities lending results in the fourth quarter were adversely impacted by the continued disruption in the credit environment, particularly during the month of November. It's important to note, however, that there were positive offsets in our securities lending business during the fourth quarter including strong demand for treasury securities, and the federal reserve's 100 basis point reduction in the federal funds rate since September. This noted, the unusually high levels of credit market disruption did negatively impact the returns achieved in the one mark-to-market cash collateral investment fund used for securities lending as of December 31 -- used for securities lending, excuse me.

As of December 31, approximately 5% of our $270 billion in securities lending cash collateral was invested at our client selection and direction in this total return short duration fixed income fund. As I mentioned last quarter, this is our only meaningful fund that is structured as a mark-to-market fund and understanding this designation is essential to understanding the impact during the third and fourth quarters. The consequences of being a mark-to-market fund during the fourth quarter of 2007 were severe, even more severe than what was experienced in the third quarter.

Pricing pressure on fixed income securities continued. Asset value changes in this case asset value markdowns flowed directly through to the total return of this fund, thus impacting the earnings of a small number of our securities lending clients and Northern Trust's securities lending fees as well. While the environment was a challenging one for this fund in particular, and therefore for our overall securities lending revenues, I want to remind you of a few key points.

First, this mark-to-market fund has followed its investment guidelines consistently and appropriately. No atypical portfolio management decisions in the fund prior to, during, or after quarter end occurred. Its performance results reflect the full impact of the challenging market environment. Second, the fund does not use leverage. Third, the fund did not post a negative total return for the fourth quarter. Put another way, the fund earned a positive annualized return for the fourth quarter of 0.6% to be precise. Keep in mind, however, that securities lending revenue is earned based on the spread between what is earned on the collateral pool and what is paid in terms of the rebate rate. With this fund having earned 0.6% annualized in the fourth quarter and fed funds averaging approximately 4.5%, you can see how the negative net spread on this specific fund would yield negative securities lending earnings across the quarter. For 2007 overall, the fund earned 3.37% while fed funds averaged 5.02%.

Fourth, the fund has a very high quality profile. 65% of the securities held in it are rated either AAA or AA. Fifth, the fund is conservatively managed with an interest rate sensitivity of 54 days, and a credit based weighted average maturity of 1.69 years as of December 31. Sixth, the fourth quarter total return of the fund reflected negative mark-to-markets on a broad mix of holdings. There does notice exist at this time any permanent impairment of any holdings. All of the asset markdowns recorded in the fund during the fourth quarter are unrealized. We expect, given what we know now, that all of the fund's holdings will mature at par as expected. Because we expect all the funds holdings to mature at par, no actions have been taken to sell all or a portion of any holdings that have mark-to-market losses.

I should also note that there has not been a need to sell assets that have mark-to-market losses in connection with the management of the fund, such as to rebalance for diversification purposes or to meet client redemptions. Any future positive marks-to-market will be reflected in the yield on the fund and in the resultant securities lending revenues reported by Northern Trust. Lastly, the fund is used as a securities lending cash collateral option by only a small number, approximately 10, of our more sophisticated clients. None of these clients uses this mark-to-market fund exclusively for their collateral investments. All have other less aggressive funds to round out their total collateral investments.

Let me now comment on our other revenue line items, starting with net interest income, which accounted for 25% of revenues in the fourth quarter. Net interest income equaled a record $247 million, an increase of 19% or $40 million compared with last year. On a sequential quarter basis, net interest income equaled a strong 8% or $18 million. The two primary drivers of the year-over-year and sequential quarter increase in net interest income were balance sheet growth and a higher net interest margin. Average earning assets equaled $56 billion in the fourth quarter, an increase of 14% or $7 billion year-over-year, and 5% or $2.5 billion sequentially.

Our balance sheet growth remains liability driven, which in turn drives this strong growth in earning assets. Non-U.S. office time deposits remain the fastest growing liability on our balance sheet, averaging $31 billion in the fourth quarter, up 30% or $7 billion versus last year, and up 14% or $4 billion sequentially. This strong growth in non-U.S. office time deposits is directly related to our international success in the institutional custody business which I discussed earlier. Our net interest margin in the fourth quarter, 1.74%, up 7 basis points from the prior year and up 5 basis points sequentially. Both the year-over-year and sequential increases in the net interest margin were driven by wider spreads between overnight rates and one to three month rates, combined with the three Fed rate cuts in September, October, and December.

Foreign exchange trading income of $111 million was outstanding and equaled a record, up 105% or $57 million, compared with the fourth quarter of 2006. On a sequential quarter basis, foreign exchange trading income increased 21%, or $19 million. The key drivers of our quarterly results in foreign exchange were volume and volatility. Both remained very high in the fourth quarter, with client volumes up significantly both year-over-year and sequentially. Currency volatility was also quite high, due in part to continued disruption in the credit markets. Other operating income equaled $30.5 million in the fourth quarter, an increase of 22% or $6 million, compared with the prior year, and an increase of 34% or $8 million sequentially. Both the year-over-year and sequential comparisons saw higher levels of overdraft income related primarily to institutional custody operations and a higher net impact of currency revaluations related to our non-trading activities.

Credit quality remained exceptionally strong at year-end, with non-performing assets equal to only $29 million, down $8 million or 21% from a year ago, and unchanged from September 30. Non-performing assets equaled only 12 basis points of total loans at year-end. During the fourth quarter, we recorded a loan loss provision of $8 million, compared with a provision of $2 million in the fourth quarter of last year and $6 million in the third quarter of 2007. The majority of our loan loss provision in the fourth quarter reflects growth in our commercial loan portfolio.

Now, let me shift my comments to a review of the key expense categories that impacted our fourth quarter performance. Expenses during the fourth quarter of 2007 equaled $782 million, which includes the $150 million Visa related litigation charge that I discussed earlier. Excluding that charge, expenses equaled $632 million, representing an increase of 23% or $118 million, from the year-ago quarter. On a sequential quarter basis, excluding the Visa charge, expenses were up 12% or $66 million.

Compensation expense equaled $283 million and increased 27% or $59 million from the year-ago period. Approximately half of the year-over-year increase in compensation expense reflects higher incentive compensation due to improved Corporate performance. The remaining primary contributor was an increase in staff to accommodate growth and expansion. Staff levels equaled approximately 11,000 full-time equivalent positions at quarter end, up 12% year-over-year. Our office in Bangalore, India, now numbers approximately 725 staff members, up over 440 FTE from year end 2006.

On a sequential quarter basis, compensation expense increased 9% or $23 million, primarily reflecting year-end true-ups of incentive compensation and increased staff levels. Employee benefit expenses equaled $62 million in the fourth quarter, up 16% or $9 million versus last year and up 9% or $5 million sequentially. The year-over-year increase was driven primarily by three key items. A fourth quarter 2007 true-up of expatriate expenses, a higher Company matching contribution to our 401K plan based on improved performance, and a rise in FICA insurance. The sequential increase primarily reflects the expatriate and 401K match items in addition to higher pension costs in London and Guernsey.

Outside services equaled $109 million, an increase of 23% or $20 million compared with last year and 10% or $10 million sequentially. The year-over-year increase primarily reflects higher consultant and technical expenses, as well as an increase in several expense areas that are driven by increase in client volumes, such as global subcustodian fees, and investment management subadvisory fees. The sequential increase was driven primarily by higher consultant and technical expenses.

Equipment and software related expense equaled $59 million in the fourth quarter, up 4% or $2 million year-over-year, and up 10% or $6 million sequentially. The year-over-year increase is primarily attributable to the higher software amortization resulting from continued investment in technology. The sequential increase represents typical annual pattern where the expense associated with the depreciation and amortization of equipment and capitalized software is typically higher in the second half of each year, compared to the first half.

Other operating expense equaled $232 million in the fourth quarter, which includes the previously mentioned $150 million charge related to Visa. Excluding that charge, other operating expense equaled $82 million, an increase of 50% or $27 million compared with last year. On a sequential basis, other operating expense increased 41%, or $24 million.

Two primary factors drove the year-over-year and sequential quarter increases in this expense category. First, in the fourth quarter we experienced higher than normal charges associated with the securities processing activities. Two in particular totaled $11 million. In one case, we recognized a loss of approximately $7 million, related to the execution of a client trade. In the second case, we recognized the loss of approximately $4 million, related to a misunderstanding associated with a client instruction.

In the fourth quarter, we also had higher business promotion and advertising expenses in the other operating expense line item. Our provision for income taxes in if fourth quarter equaled $33 million, resulting in an effective tax rate equal to 23.4%. This compares to a tax rate of 29.5% in the fourth quarter of last year.

The lower tax rate on a year-over-year basis primarily reflects three items. First, we recorded a lower level of taxable earnings due to the Visa charge. Second, we are now earning a higher proportion of our earnings from operations in countries with more favorable tax rates. And finally, catch-up adjustments were made to certain state income tax reserves. Northern Trust repurchased 1.2 million shares of common stock in the fourth quarter at a cost of $88 million. Diluted shares averaged 225.6 million. We can purchase an additional 8.7 million shares under a buyback authorization approved by our Board of Directors in October of 2006. In keeping with our practice, we increased average common equity by 11%, versus one year ago, to a record 4.4 billion at year end, representing our 79th consecutive quarter of increasing common equity or almost 20 years running.

Let me close with a few thoughts on what we achieved in 2007, relative to several core themes that we established at the beginning of the year. In our personal financial services business unit, we began 2007 with an objective to continue strengthening the service, capability, and value proposition that we bring to our private clients. Doing this successfully, we thought would enable us to consistently achieve double-digit rates of growth in trust fees. That goal was accomplished in both 2006 and 2007.

PFS Trust Investment and other servicing fees increased 15% in 2007, following our 10% growth in 2006. Growth rates in excess of 10% were achieved consistently across each of the four quarters in 2007. This achievement represents a renewal of consistent, double-digit year-over-year growth rate -- year-over-year growth, last seen in PFS trust fees in the year 2000. This performance was broad-based, across geographies and client segments, including private client, wealth advisory, and wealth management.

In our corporate and institutional services business unit, one of our primary objectives in 2007 was to continue to build and grow our business serving global fund managers. To that end and as evidence of our positive progress in this important strategic segment, our global fund services segment reported an increase of over 70% in revenue transitioned in 2007 versus 2006. We expanded our fund manager client base in 2007 and achieved a significant milestone with the successful migration of Insight Investment Management's back and middle office operations to Northern Trust platform, including over 600 client portfolios, representing approximately $190 billion in Insight assets under management.

Across the board in 2007, with fund managers, pension funds, public funds, local authorities, insurance companies, foundations, endowments, and sovereign wealth funds, the most frequently cited regions for appointing Northern Trust included service, technology, and reputation. For Northern Trust global investments, one of our primary 2007 objectives was to achieve renewed growth in our institutional Asset Management business. Here too, we were happy to report 13% year-over-year growth in institutional asset management fees in 2007, as compared to 2006. Double-digit growth was evident consistently throughout 2007, as each individual quarter recorded growth at least equal to 11%.

Growth was primarily driven by money market, quantitative, and manager of manager products. Money market growth was the strongest in our institutional mutual fund products, which increased 19% year-over-year and equaled $38 billion in short duration mutual fund assets as of year end.

In our worldwide operations and technology business unit, a key objective in 2007 was to focus on the development of our global operating model. We have a truly global footprint with clients in over 40 countries around the world and a subcustodian network that allows us to settle trades for clients in over 90 markets. This worldwide footprint necessitates a global operating model. With our major operation centers distributed across three regions of the world, covering all time zones, we have the physical presence and operational resilience to effectively and efficiently serve our global client base.

To put some perspective around this, several years ago we put plans in motion to significantly increase our presence in the Asia Pacific region. The implementation of these plans accelerated in 2007. Our office in Bangalore, India employed 725 Northern Trust partners at year end, up from less than 300 at year end 2006. From this office, we are well-positioned to closely serve our growing base of clients in the Asia Pacific region, while also adding to our ability to provide around-the-clock, cost efficient support to our global client base. In India there are some 26 discrete operational functions that run as extension of global teams based out of Chicago, London, Dublin, Limerick, Luxembourg, and Singapore. Functional activity supported in Bangalore are broad-ranging from trade processing, income collections, and reconciliations to valuations, reporting, and fund accounting.

At a Corporate level, a primary objective in 2007 was to build the Northern Trust brand. As many of you know, we launched new television and print advertising in 2007. Our communication strategies emphasize our brand now more than ever before. And the Northern Trust Open which will be held at the Riviera Country Club in Los Angeles will be a breakout event for us in terms of building name recognition and reaching our target audience. We estimate that 450 million households in 150 countries will be exposed to our message and to the strength of the Northern Trust brand during this premier golf tournament in February. 2008 even more so than 2007 will be a year in which our brand aware information is extended on both the national and global basis.

In closing, our operating results in the fourth quarter signify the strength of the strategic business model of Northern Trust. We are very pleased with the financial results that we are reporting to you today, including strong top line revenue growth and attractive double-digit operating earnings per share and net income growth achieved amidst a challenging macroeconomic environment. And now, Bev and I would be happy to answer your questions. Please open the call for questions.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) We'll take our first question from Mark Fitzgibbon with Sandler O'Neill.

Good morning. Thank you for taking my question.

Hi, Mark.

Steve, I wondered, if you look at assets under management and assets under custody, they're relatively flattish from the linked quarter. I'm curious, could you share with us what was the impact on each of these from market action and what was attributable to the fund close?

Well, Mark, I think when you look at it overall, I think, one, I would say that we are very pleased with the asset aggregation that we had in both categories. I think what you're probably focusing on is the assets under management linked quarter. But remember that the primary driver of that decline linked quarter was a $14 billion decline in our securities lending collateral, which was driven by the deleveraging phenomenon that we've been talking about. If you exclude that, our assets under management actually increased 2% sequentially, which is better than the S&P, which was down 3.8% and the EAFE, which was down 3.2%. So we feel very good about the asset accumulation and I think that explains the assets under management sequentially.

Okay. And then the second question I had, Steve, you've obviously heard and read about a lot of the problems other institutions are having down in Florida. I know that your business is very different, but I wondered if you could share with us maybe some of the trends that you're seeing in your loan book down there and is that perhaps why you added so aggressively to the loan loss provision or the loan loss reserve for the quarter?

Well, let me just start with the loan loss -- the provision which was an $8 million provision, that was not linked in any specific way to anything in Florida. That was driven by growth if the commercial loan portfolio. No linkage there. I would say when we look at Florida more generally, our fees in Florida were $53 million in the fourth quarter. They were up 8% year-over-year and a point sequentially. Our new business in Florida in the fourth quarter was very strong and more than double what we did in the fourth quarter the year before. So the Florida business continues for us to be excellent and growing.

That said, I think there is a build-up of competition in Florida and Florida has its own, as you suggested, unique set of issues with respect to a troubled housing market, condo inventory and so forth. But there is a ballot in Florida that's coming up on the 29, that will help Floridians address or might help them address the real estate tax issues and a number of other things. So when we look at Florida, both for the quarter and for the year, we feel good about it. It continues to be an important part of our franchise. We like the positioning. The asset accumulation there was good. The new business was very good. And very strong. So I think we are different than the aggregate sort of macro issues that you're hearing about in Florida.

Thank you.

You're welcome.

We'll take our next question from Nancy Bush with NAB Research.

Good afternoon, guys.

Hi, Nancy.

I know, Steve, you pointed out that you are broadly diversified in both PFS and C&IS and the action in the equity markets does not have sort of a one for one direct impact there. But if you could just summarize for us your exposure to the equity markets. I think you said it was 46% in the allocated portfolios in PFS. Is there a similar number that I could use to look at C&IS?

Let me make one point and then Bev's going to give you that number. I think, I want to be clear, we are broadly diversified, not immune. I wouldn't want anyone, and, Nancy, you know this well, I wouldn't want anyone to draw the conclusion that what's going on in the markets and so forth doesn't touch us. We just wanted to make the point that it's not a one for one on the upside and it's not a one for one on the down side.

Nancy, in terms of those statistics, in PFS, as you said, the equity market portion of AUM was 46%. In C&IS, the equity portion of assets under management was 35%.

And on the issue of the short duration fixed income fund that has been, I guess a pain for a couple of quarters now, how large is that fund and is sort of the -- are the participants in that fund continuing to hang in there or what's happening?

Yes, I think -- I don't know if I have the size of that with me but I'll--.

Well, I can -- the particular fund represents about 5% of our total securities lending collateral pool which equaled $270 billion, so 5% of that total $270 billion securities lending collateral pool.

Right.

Let me make a couple of points here and this is very consistent with what we described last quarter, but it bears mentioning. If you look at our securities lending results up 32% year over year but as we said, we had to endure the negative marks, if we weren't -- if this were not a fund in which we had to have a mark-to-market, the comparable securities lending fee would have been up a little over 140%. So that gives you a flavor for what happens between -- in this environment, at least, a mark-to-market and not marking to market. And remember that the mark-to-market occurs because these are pooled funds. If these were run as separate accounts, you do not need to mark it to market.

Nancy, if I could give you a number relative to what Steve just mentioned, in the third quarter we told you in this call that had that mark-to-market fund been a custom fund or one that was not required to be mark-to-market, our third quarter securities lending revenues would have been $36 million higher, that was third quarter. The comparable number and the way that Steve did that calculation to show you an adjusted growth rate, the comparable number for the fourth quarter was $46 million. So that's what gets you from the actual year-over-year fourth quarter growth of 32% to this adjusted number that Steve provided of 142%.

Okay. Great. And clients are continuing to hang in with the fund or what sort of -- I mean, 5% of $270 billion is $13.5 billion. What was the similar number in the third quarter at the end of the third quarter?

For the size of the fund?

Yes.

I think it was slightly higher than that.

Okay. Great. Thank you.

Our next question comes from Mike Mayo with Deutsche Bank.

Good afternoon.

Hi, Mike.

Can you just clarify the one-timers a little bit more. You said there were $11 million of one-time client related expenses. I guess that's kind of offset by the low tax rate. A couple questions. How much of a lower tax rate is permanent since you're more outside the U.S. now than you were before?

Well, we've got -- maybe a little color. We had historically been at an effective tax rate around 35%. We talked a year or so ago about our expectations that that would probably -- a lot of puts and takes, but move down a point or so. Obviously this quarter we have a lot of noise with Visa and some other adjustments. As we look forward, Mike, we really -- we expect that to be in a more normalized environment, around 33%. And that more normalized look emanates from the continued growth of our global business and the effect that that has from APB-23 and also some state tax law changes in Illinois. So that's, obviously it will move around, but that's the level that we currently think is reasonable to think about without any noise in the quarter.

And then even after the $11 million of client related expenses, which I think look one time, other expenses were still up another $12 million. Is that due to the adds and promotions that you talked about?

Well, I think no. I think our expenses were up across the board, whether you want to look at compensation, outside services, operating expenses and so forth. It was broad-based. Clearly, advertising, marketing expenses were up significantly year-over-year. But I'd say we have a scenario where we're growing revenues by 25% year-over-year, we've got a global franchise. We've got a host initiative -- of initiatives in process and as we've talked about in other past calls and past years, we very much try as best we can to calibrate our revenue growth and expense growth and sometimes we do that a little better than others. But the short answer to your question is no, it is not exclusively related to marketing and advertising.

And then the $46 million mark-to-market hit that you took this quarter above the $36 million in the third quarter, while it's not one-time, should we expect that to repeat? Because I guess if you didn't have that this quarter, EPS would have been higher, by $0.10 or more.

What I'd say is that it is very volatile in the markets and I certainly can't predict what will happen but I think our continued belief, Mike, is that on the assumption that we're right and that these securities, there's no default on these securities, we would expect the things that have been marked down in 2007 to inure to our benefit in 2008 and beyond and the the exact timing of that will be a function of what happens in the markets and how things are valued. But yes, these are unrealized marks.

And then getting to the other comment, are you -- in the past I think I heard you say, your revenues for every 10% stock market decline, your revenues could be hurt by, say, 1% and you talked about the composition of equities in your business. Is that relationship still true?

Well, Mike, the relationship is actually a 10% movement in the markets, translates into a 4% movement in our trust investment and other servicing fees.

Right.

And since those represent about half of revenues you get to about a 2% impact on total revenues, not the 1% figure you just cited. So 10, 4, 2 is the relationship broadly, broad markets defined up or down.

And as you look out at 2008 you have a lot of new business. On the other hand you could have a little bit of a drag with the lower stock market. How do you think about that?

Well, I think, it's really more a question how you think about that. We have to operate and run a business and serve clients day in and day out and we continue to like the business model, the markets we're in, the value proposition that we're gaining and new business results both in PFS and C&IS have been very strong. So we're going to try and do that, whether the markets help us or hurt us. So that's how we look at it and obviously we would like the markets to be on the positive side but that's not always going to be the case. It doesn't really change how we think about trying to keep clients and earn new ones. Obviously on the margin, on the expense side, if we have a dimmer environment, we have to rope in our discretionary spending but that's not a new phenomenon for us.

Then lastly, as it relates to the revenue growth that you had this year, what is the competitive environment like? You had two of your competitors kind of merging. Everybody says pricing's no better. Are you seeing any benefits?

No. I think the competitive environment is as stiff as ever. We had two competitors merge. But they're big and they're strong and they're effective. So as we have said in the past, in environments like this, and it will move around, whether there is disruption because of M&A transactions or financial stress that competitors have, we generally like that environment. Our new business results, again, were very strong across both businesses and there was disruption across both. But I wouldn't attribute it specifically to the mergers, Mike, that you're talking about. So the markets that we're in are big and we like the opportunity to continue to capitalize on it and obviously some of the stress that the non-trust bank competitors are having that organizations we compete with on the private wealth side, hopefully that will inure to our benefit. But we'll have to see. I think on the pricing side it continues to be institutionally a very competitive market. There are no layups there.

Thank you.

You're welcome.

Our next question comes from Gerard Cassidy with RBC Capital Markets.

Good afternoon, Steve. Good afternoon, Bev.

Hi, Gerard.

I don't know if you guys have mentioned this, but have you guys announced your ownership in the Visa, or what it will be when the company goes -- assuming it goes public this year?

No, Gerard, I don't think we have done that.

Gerard, you're talking about the value that we will attain when the Visa IPO occurs?

No, no, no. No one's really going that far. But we are receiving from other companies that will own 3% or 5% of the company once it goes public and then people are making estimates about what that would be worth.

Gerard, we have not announced that so I'm not sure I want to do that here. But you can probably work some directional math because when you look at what everyone else -- and everyone is announcing charges with relation to Visa and there's a certain proportionality, so that can probably get you close. I think I would want to talk to our General Counsel before I give the numbers specifically.

That's fair. The other question is, obviously new business wins is an important part of your business as well as some of your peers, as well as the selling of additional products to existing customers, both on the personal side as well as the Corporate and institutional side. Are you guys finding it easier or harder for that matter, selling existing customers on the corporate side more products? Is that an easier sale today than maybe three, four, five years ago?

I can only give you intuition here but I think the cross-selling to institutional clients -- I don't think, I know that that is absolutely critical and an important part of our growth. I don't think it's any harder today. And arguably, this is -- I don't have data in front of me, I don't want to say it's easy but maybe it's easier because there's a lot of complexity out there and a lot more granularity of choice and I think there is a dimension that says you like to make those choices with people you know, people you've worked with for years and so forth. Certainly if I were to back into the answer, I'd say when we look at our new business results in C&IS, there is still a very consistently significant piece coming from expanding existing relationships with clients. So long way of saying, I don't think there's a change on that front that we can discern.

Is it more important in terms of when you guys look at your revenue growth in a particular quarter, are you generating more of the revenue growth from existing clients, taking on more products, or is it new clients coming on board?

It's typically 50/50. 60/40, 40/60, it moves around. But directionally -- and that number, Gerard, has been consistent for the 22 years I've been here.

Okay. And then finally, on the golf, are you -- are we going to see an uptick in marketing expenses in the first quarter or have you already started to incur some of those expenses in preparation for your sponsorship of the tournament.

No, I'd say -- obviously we had some expense in the fourth quarter as we get ready for this tournament in February. But I'd say the major uptick on that will be in the first quarter. Clearly, we're going to do what we can to moderate that as much as possible. But I think it would be fair to say that it's a significant event for us and we'll feel that in the first quarter.

Sure. Okay. Thank you.

You're welcome.

Our next question comes from Tom McCrohan with Janney Montgomery Scott.

Hi, Steve, hi, Bev, I just want to circle back quick to your sensitivity to equity market valuations and how your client's equity allocation decisions could potentially change depending on return expectations. What has been your experience in the past with clients shifting their equity allocation levels to both PFS and C&IS during difficult equity markets and what were their allocations, say, during past economic donwturns?

Tom, I think that's a very difficult question to answer. You have within -- we have such a wide spectrum of clients. You have the conservative clients and the aggressive clients. So one pulls back and is very concerned about capital preservation and the other thinks there's a tremendous buying opportunity. So I would be hesitant to, in the aggregate try and describe that phenomenon for you.

Have you seen at a minimum, can you comment on the last recessionary period, if you did see clients both in the high net worth side, institutional side, reduce their proportion of equity exposure?

I don't have the data that could validate that in front of me, Tom. I prefer not to comment on it.

Fair enough. Thanks.

You're welcome.

Our next question comes from Brian Bedell with Merrill Lynch.

Hi, folks. Good afternoon.

Hi, Brian.

Steve, if I can ask, this may be a little bit of a long question, but as we move into 2008, your thoughts about the momentum of organic growth in your main businesses. I guess what I'm getting at is the asset servicing business, both globally and in the U.S. and then also if you could comment on your PFS business. When I see momentum of that organic growth, it has generally been on an up trend over the last several quarters. Do you see that momentum or improvement continuing into 2008 or do you think that maybe moderates somewhat if we're in a normal market environment, let's say. And then in spending on that, you mentioned a number of things in terms of accelerating expansion in India and other expenses involved with the global operating model, but do you feel well-prepared from an infrastructure perspective to take on that new growth with limited additional expense? Or do you think there's a lot more expense in growth initiatives or infrastructure involved with that?

Well, let me try and address the first question to start with, which is the momentum question, I think one thing, I would say this on 2007 in the aggregate. Because if you had said to us at the beginning of 2007 that oil is going to move up 57% and credit spreads are going to widen dramatically and markets essentially for the year are going to be up, the S&P 3.5% and the EAFE up a little over 1% and the dollar is going to depreciate against 14 of the top 16 currencies and housing subprime, et cetera, I'm not sure you would have concluded that we would have had the momentum we were able to garner in 2007. My point being, it's very hard to predict.

If I speak to the question of new business, both in PFS and in C&IS, remember that our new business results for PFS in 2007, they were up about 13% year-over-year, which was the best year we've had since 2001. If I look at C&IS, our new business was up 11% for the year, which was the best we've seen since 2000. So as to the momentum of winning core clients in the franchise, we feel very good about it. Now, will the environment dampen enthusiasm? I don't know. But in terms of competing in the marketplace, we feel very good and the results are the best we've seen in some time.

As to the ability to have the infrastructure and support and capabilities to accommodate that growth, that is a never-ending quest. We feel very good about our capabilities, but we're not done. We will continue to build out India. We will continue to build out Limerick. We will continue to invest in some technological capabilities for clients and so forth. So no, it's -- we feel good that we can support the clients but as our business continues to grow, the demands of our clients continue to evolve and we will need to spend, obviously the question is trying to make sure that your rate of growth on revenue and expense are appropriate and as we have talked about before, we've had positive -- neutral or positive operating leverage 17 out of the last 20 years. We don't get it right every year but our record is pretty good. That's what we're going to try and do in 2008.

Do you think you have reasonable flexibility if the markets do turn down and volumes turn down and FX and securities lending as you're spending out on these initiatives to build out the technology, do you feel that you have some expense flexibility to ratchet that down and still hit your goal of positive operating leverage in '08?

Well, we do absolutely have some expense flexibility. The question is how big is the degradation in the markets and how does that impact our fee line, and also how much do we want to do that. I mean there, clearly we want to have positive operating leverage and that's in our plan for 2008 and we will try to achieve that. But you also have to look at what you do and remember that you're in this business for the long-term. So there are times if the markets are sharply down where our goals are on average over time across cycles and we'll have to evaluate that as we go. So yes, we do have flexibility. We would use that if markets or the environment puts us in that position. But it's not the only thing we're striving to achieve.

Okay. Then just a couple housekeeping questions. On the compensation line, the increase in the quarter, was there any factor in that from the Visa settlement in terms of incentive compensation?

No.

Okay. Great. And on the securities lending, I understand you're trying to manage that I guess a little bit more for liquidity going forward. In other words, you wouldn't be purchasing I guess riskier instruments on a go-forward basis and so how you're managing the fund now obviously is sort of using the existing securities that you had already purchased and so they should accrete back into securities lending fees. How should we think about that timing of that accruing back in, assuming they pay at par?

As I said, it's very difficult to project that. But between now and into 2009, and it's hard to project the timing because the markets are extremely volatile.

Okay. Is that a safe assumption that you are managing it now more for liquidity or are you continuing to purchase instruments that have credit risk?

Well, everything has some credit risk, but I'd say we're -- we have a high degree of liquidity in that fund but I certainly can't say there's no, there is credit risk and there always will be.

Just lastly, do you guys -- this might come out in the annual report, but would you be able to update us on your share of revenue and earnings from outside the U.S. for 2007.

You'll have to wait until the financial annual report.

Thanks very much.

Our next question comes from Robert Lee with KBW.

Thanks, good afternoon.

Hi, Rob.

How you doing?

Great.

Just quick question, on net interest income, if I remember correct, I think you have it in the press release that through 2007, there was about 11 million or $13 million of adjustments related to how you had to account for I guess leases. Does that reverse or go away in 2008?

Well, what you're referring to is the impact of FSP-13.2 which relates to the accounting for change and projected timing of cash flows related to leases. That's a variable number because it depends on your projection of the resolution of some leasing issues. Our full year impact was $13 million, so a degradation of $13 million, and the fourth quarter was about $3.5 million. So that can move around I guess is the answer.

I'm just curious, the -- you've had such strong growth particularly in the fourth quarter, your foreign office time deposits. When you look ahead to the environment and client behaviors, is there anything to make you think that the growth trajectory of that could slow either because of client preference or was there sort of a year-end liquidity surge and you've seen that sort of -- expect that that would sort of back off? How should we think of that in '08?

Well, if you have a good way of think about it, let me know. I think we have generally seen growth in foreign office time deposits directionally move with the growth in global custody assets. Obviously, the liquidity that our clients have and leave with us is going to move around. It's a very hard number to predict. Directionally up, if you think we're going to be a bigger and more successful asset servicer, we should on average, over time, continue to grow the non-U.S. office time deposits but hard to land on the head of the pin.

And I'm just interested in your thoughts behind this. I notice that over the course of the year I guess it was, the investment and obviously short duration but investments in agency securities have declined even though you've grown the balance sheet and clearly your money market assets on the balance sheet have grown. What was the -- was it just the environment, just unattractive spreads, just a desire to tighten up the balance sheet even more to make you shrink that?

Rob, this is Bev. When you think about our earning assets, what I would suggest you do is we view our balance sheet investments in the securities portfolio, which are primarily agency securities and in money market assets as relatively interchangeable in both our short term, both our highly rated. So I would say that when you think about the two of those, you need to look at both categories together. All right?

Okay.

When we think about -- when we think about it from a spread perspective, the spread that we earn on our U.S. dollar deposits that are invested in U.S. currency, agencies, obviously or money market assets would be comparable to the spread that we earn on euro or sterling deposits that are invested in time deposits in their respective currency. Look at the two together and think of it as we do in terms of comparable spreads that are earned based on how they're invested. Is that helpful?

Yes, it is. Thank you. That's it. Thanks.

The next question comes from James Mitchell with Buckingham Research.

Hi, guys.

Hi, Jim.

Got a quick question back on securities lending. Obviously if you look at just adding back the $46 million, you were up 46% I think sequentially on a normalized basis yet balances at least at period end were down. What's driving the sequential revenue growth? Is it just securities lending spreads as the short term interest rates come down that your spreads are widening pretty meaningfully? And then if that's true, how do we think about that if the Fed continues to cut rates, does that continue to prop up those spreads and how that works through the system over '08 I guess.

Well, the benefit of Fed rate cuts in part always depends on whether they're anticipated or unanticipated. Unanticipated rate cuts are good. Anticipated rate cuts kind of get priced in, if you will. So it depends, the answer is it kind of depends what happens there. But the big phenomenon here, Jim, is this mark-to-market phenomenon. It kind of depends how that plays out and the pacing of it really depends what happens and do these things start to correct and at what speed.

Right. Fair enough. But how do we think about the sequential improvement, if we sort of ignore the mark-to-market, you guys had a pretty big jump in the fourth quarter without really volumes growing. What was the driver there? Was it spreads widening?

It was absolutely spreads widening, consistent with what you're hearing from others.

It should be, since you kind of -- you're investing in one to three month basically money market rates versus short term rates, as long as short term rates continue to come down there's going to be a benefit, I would assume, vis-a-vis the money market rates which are slower to catch up I would say; right?

That's the analysis that you've got to do.

Fair enough. Is that the similar way to think about your net interest income in terms of your margin, which came up a little bit this quarter, should we continue to see some benefits there?

Yes, it is the same. I think generally speaking, when rates come down, we get a relatively short term benefit that inures to us.

Okay. Great. Just want to confirm that. Thanks.

The next question comes from David Long with William Blair.

Thanks, my questions have been answered.

Thank you, Dave.

The next comes from Ken Usdin with Banc of America.

Hi, just two quick ones. First of all, just on the net interest margin as well, Steve, given -- just given that last comment about short -- lower short rates helping, are there any offsets? Or can you just walk through the positives and negative drivers I guess of the margin as you look out?

Well, the positives and negatives of the margin?

You've detailed in the past what things are either benefiting or hurting the margins. I want to make sure that -- is it more leaning to the positive of -- that the short rates coming down are more of the positive and anything else that you might experience as far as spreads or anything?

Well, when you have short rates coming down, if that's the way you want to look at it. We also have the continued growth of the lower margin asset phenomenon. So you kind of have to triangulate amongst where you think rates going on the one hand. But also this continued growth in the non-U.S. office time deposits, which is good but they are generally lower margin assets than traditional loans. And that phenomenon too is continuing for us.

And that was my second question, which is can you just walk us through the loan growth, where you're seeing it? Is it geographically diverse, is it product specific? What are you seeing there?

We have had very good growth on the commercial front. We've had good growth on the personal front. It's actually pretty broad-based, Ken, I would say. So the loan portfolio for us has been extremely clean. As you know, our philosophy has been to be a relationship lender to those clients that fit our credit standards and our success on the loan portfolios is quite broad. But I guess the driver would be the commercial, the personal, and some of the activity we have internationally.

And last question is just your '07 results like others were really helped by the extremely strong volatility in volumes that we all saw in foreign exchange. Just wondering what your broad market view is of the volatility conditions and relative to your thoughts on the broader market environment, do you expect that to stay around? Do you expect that to change or decrease over time?

Well, I'm no foreign exchange expert, Ken, so take this comment with a grain of salt. Look, conditions in 2007 from a foreign exchange perspective, both the volatility and in our case the volume, were very strong. I mean, you had phenomenal results and you can look at the trend and see the history and so it would be -- I can't predict what the future will be but from a planning perspective you certainly wouldn't, or we certainly wouldn't want to envision or assume I should say that same kind of volatility. It's just been very, very strong. So where it's going to land, I don't know. But those were very, very strong results and I think that's worth keeping in mind as we move into 2008.

Okay. Thanks a lot. You're welcome.

Our final question is a follow-up from Brian Bedell with Merrill Lynch.

Sorry, just one quick follow-up. On the foreign office time deposits the rate paid on those went down by about 23 basis points linked quarter. Can you just describe the factors that influenced that? Was that the Bank of England cut in December or are you able to effectively link some of that pricing to Fed rate cuts?

Our non-U.S. office time deposits are not exclusively in non-U.S. dollar. There are some dollar deposits in there. So that would be partially I think where you're coming from, Brian.

Okay. So continued Fed rate cutting campaign should be one factor in potentially driving that rate down in the future?

Yes.

Great. Thank you so much.

Thank you, Brian.

There are no further questions at this time. Mr. Fradkin, I would like to turn the conference back over to you for any additional or closing remarks.

Well, thank you all for joining us for our review and we'll look forward to updating you at the end of the first quarter.

This does conclude today's conference. We appreciate your participation. You may now disconnect.