Northern Trust Corp (NTRS) 2008 Q4 法說會逐字稿

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

Thank you, Darren, and welcome to Northern Trust Corporation's fourth quarter 2008 earnings conference call. Joining me on our call this morning are Steve Fradkin, Northern Trust's Chief Financial Officer; Aileen Blake, our 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 21st call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through January 28. 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 2007 financial 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 Steve Fradkin.

Good morning, everyone. Let me join Bev in welcoming all of you to Northern Trust's fourth quarter 2008 earnings conference call. Earlier this morning, Northern Trust reported fourth quarter 2008 net income of $342 million, equal to $1.47 per share. For the full year 2008, reported net income equaled $795 million or $3.47 per share.

Included in our fourth quarter and full year 2008 results are impacts associated with our status as a member bank in Visa USA, Visa's initial public offering, and Visa shareholder impacts associated with various indemnified litigation. As outlined in our earnings press release issued earlier this morning, Northern Trust has provided operating earnings to you which are exclusive of the Visa-related items. We believe operating earnings provide a clearer indication of the results and trends in our core businesses.

Therefore, my commentary for the remainder of today's conference call will focus on operating results exclusive of the Visa-related matters. For the fourth quarter of 2008, Northern Trust achieved record operating earnings of $1.39 per share representing a very strong increase of 43% compared with the $0.97 per share reported in the fourth quarter of 2007.

Operating net income also equaled a quarterly record of $323 million, an increase of 47% from 2007. For the full year 2008, operating earnings per share equaled $2.79 per share, representing a decrease of 24% from $3.66 earned in 2007. Operating net income in 2008 equaled $641 million, down 22% from $821 million earned in 2007.

Full year 2008 operating earnings per share and net income moderated versus 2007 as a result of the client support charges taken in the third quarter of 2008. When juxtaposed against the extremely difficult industry and economic conditions that unfolded throughout 2008, and heightened in intensity beginning in September, we are very pleased to have delivered record fourth quarter 2008 operating earnings and over $640 million in full year 2008 operating earnings.

As I said to you in our earnings conference call last quarter, Northern Trust's track record of managing through stock market gyrations, shifting interest rates, a weakening credit environment, currency volatility, and other factors has been extremely strong on average over time. Our record results in the fourth quarter and our positive earnings for the full year are another testament to our fundamental strategies and strong positioning.

To assist you in understanding our performance this quarter we have organized today's remarks into the following sections. First, I will review with you certain fourth quarter market conditions that impacted our performance. Second, I will outline several items that you should consider as you analyze our fourth quarter financial results.

Third, I will review our financial performance focusing on those items that most impacted our results. Fourth, I will offer a few perspectives on Northern Trust's full year results along with an environmental outlook as we proceed through 2009. And then finally, Bev and I will be pleased to answer your questions.

Let me begin by providing you with a brief overview of the key market conditions that impacted our results in the fourth quarter. First, the equity market environment was very weak in the fourth quarter. The S&P 500, Dow Jones Industrial average, EAFE and many other indices around the world declined for the fifth straight quarter.

The S&P 500, which is a good indicative data point for some parts of our business, fell 22.5% in the fourth quarter and was down 38.5% compared with one year ago. Equity markets, as measured by the S&P 500, were also down 9% on a sequential quarter lag basis which negatively impacts our institutional and wealth management custody fees.

Similarly, using the month lag methodology that applies to our PFS fees, excluding wealth management, the S&P 500 was down 33.5% versus the prior year and 20.9% versus the third quarter. All told, the equity market environment exerted very significant headwinds across our businesses.

Second, the credit markets continued to show considerable stress despite numerous actions taken by the U.S. Treasury Department and the Federal Reserve Bank. Fixed income markets, including short-term markets, have experienced significant illiquidity, spread widening and related volatility. This unprecedented environment in fixed income markets has also weighed on the industry and Northern Trust for over one year.

These market factors, equity and fixed income, combined to impact both the value of client assets that we report and assets under management and assets under custody, and, as well, the fees that we earn for services provided to clients. However, as we have demonstrated in the past, through various cycles, both up and down, we continue to add new clients and do more for existing clients which serves as a partial offset to market related headwinds.

Now let me highlight several items you should consider as you evaluate our performance in the fourth quarter. Let me start with three items on the revenue side of our income statement. First, other operating income in the fourth quarter included a $33.3 million increase in non-trading foreign exchange gains.

The primary driver of the elevated amount of non-trading foreign exchange gains in the fourth quarter related to the rapid strengthening of the U.S. dollar in the quarter relative to the British pound sterling which impacted certain sterling-denominated liabilities. We view the increase of $33.3 million as a one-time occurrence.

Second, also in other operating income, we recorded a gain of $20.6 million on certain credit default swap contracts that we use to mitigate credit risks associated with specific commercial loans. We have made use of credit default swaps on a limited basis as a regular part of our risk management discipline. The value of the swaps is mark-to-market each quarter.

The gain this quarter reflected in other operating income was larger than normal and so I simply wanted to draw it to your attention. Third, we recorded a $44.4 million pre-tax charge relating to an other than temporary impairment of four asset-backed securities in our balance sheet investment portfolio. These four securities have a par value of $63 million and represent residential mortgage-backed securities.

The $44.4 million charge reflects the difference between amortized costs and current market value. In compliance with Generally Accepted Accounting Principles, specifically FAS 115, we recognized the entire difference between the amortized costs and estimated fair value as of the date the securities were deemed to be other than temporarily impaired. These three revenue items net to $9.5 million, or a benefit to our fourth quarter results of approximately $0.03 per share.

On the expense side of the income statement, let me bring five items to your attention. I will start with four items that had a positive impact on expenses in the quarter. First, as I mentioned earlier, the fourth quarter included a $30 million benefit from the reversal of a Visa indemnification accrual that was established last quarter in the same amount. The settlement by Visa involving their litigation with Discover Financial Services led to the third quarter charge which was reversed in the fourth quarter when the escrow account was funded by Visa.

The $30 million fourth quarter benefit has been excluded from operating results as I mentioned at the beginning of today's call. Second, he we reduced by $25.4 million the $80 million accrual established last quarter for a program to purchase certain illiquid auction-rate securities from Northern Trust clients. This benefit appears in the other operating expense line item and resulted primarily from a security-by-security valuation based on each security's unique liquidity, credit, and cash flow characteristics.

Third, other operating expense included an additional benefit of $20.1 million associated with the close-out of various items associated with Lehman Brothers bankruptcy matters. This amount primarily reflex a currency gain related to the strengthening of the U.S. dollar versus the British pound sterling during the quarter.

And, fourth, other operating expense included a $9.7 million credit associated with the fair value of our liability to the capital support agreements that we entered into initially in February of 2008 to support certain of our cash funds. The credit to expense this quarter represents a mark-to-market of the fair value of our liability under the capital support agreements in accordance with the Financial Accounting Standard board number 133.

We have made no capital contributions to the funds to date under those agreements. There was also one unusual item that adversely impacted expenses in the fourth quarter. As previously announced by Northern Trust on December 15, we incurred a pre-tax charge of $19 million associated with the elimination of approximately 450 positions and other costs. The charge recorded in the fourth quarter includes a $17 million severance accrual in compensation expense and $2 million in software write-offs.

The net impact on expenses of these five items was a benefit to earnings of $66.2 million, or $0.19 per share. The net effect of all unusual revenue and expense items that I just discussed resulted in a benefit to pre-tax reported earnings in the quarter of approximately $76 million, or $0.21 per share after tax.

With that background, let me review our fourth quarter results beginning with revenues. Revenues in the fourth quarter equaled $1.15 billion, up 18% or $177 million, compared to last year. Revenues increased 23% or $211 million on a sequential quarter basis. Trust investment and other servicing fees decreased 11% year-over-year, or $59 million to $488 million.

In our institutional business, C&IS trust investment and other servicing fees equaled $274 million in the fourth quarter, a decrease of 13%, or $41 million year-over-year, and an increase of 12% or $29 million on a sequential quarter basis. C&IS fees include three primary revenue areas, custody and fund administration, institutional asset management and securities lending.

Let me discuss the performance of each in the fourth quarter. C&IS custody and fund administration fees equaled $150 million in the fourth quarter, down 10.5%, or $18 million year-over-year. The unfavorable market environment was the primary driver of this decline as quarter lagged markets were down 23.7% using the S&P 500 and 30.9% using the EAFE index and local currency on a year-over-year basis.

We were able to partially offset the negative impact of market value declines with new business successes in both global and domestic custody and in fund administration. On a sequential quarter basis, C&IS custody and fund administration fees decreased 9%, or $14 million, again, driven by the challenging quarter lag equity market.

Investment management fees in C&IS equaled $62.5 million in the fourth quarter, a decrease of 17% or $12 million year-over-year. On a sequential quarter basis, investment management fees declined 8%, or $6 million. In both the year-over-year and sequential quarter comparisons the weak market environment served as a considerable headwind for investment management fees.

New business, however, again helped to offset those headwinds, particularly in our institutional mutual fund business. C&IS securities lending fees equaled $44 million in the fourth quarter as compared with $55 million in last year's fourth quarter and a negative $5 million in the third quarter of this year.

Once again, and similar to the results we reported to you in four of the last five quarters, our securities lending fees reflect the ongoing dislocation in the fixed income markets. For us, this again took the form of negative pricing marks in one mark-to-market securities lending collateral fund. The impact of the negative marks on our fourth quarter securities lending fees equaled $44 million, which compares with a negative impact from the marks of $50 million one year ago and a negative mark of $96 million last quarter.

Let me offer a few reminders about the mark-to-market fund as we have done in the past. First, this mark-to-market fund has followed its investment guidelines consistently and appropriately. No atypical portfolio investment management decisions have been made in the fund. Second, the fund does not use leverage. Third, the fund is managed with a conservative interest rate sensitivity of 43 days and a credit-based weighted average maturity of 1.66 years as of year end.

And finally, 52% of the securities held in the fund are rated either AAA or AA, and approximately 74% of the fund's portfolio is invested in corporate notes with the remainder invested in asset-backed securities and cash. Excluding the impact of the mark-to-market fund in all periods, our securities lending fees would have equaled $88 million in the fourth quarter of 2008 representing a decrease of 16% year-over-year and a decrease of 3.5% compared with the third quarter.

The three institutional fee revenue items that I just discussed are all impact by the value of assets that we custody, administer and manage for our C&IS clients.

Let me take a moment to review our various client asset levels with you. Institutional assets under custody equaled $2.7 trillion at year end, down 28.5%, or $1.1 trillion from a year ago, and down 15.5%, or $498 billion versus last quarter. Global custody assets, which are a component of total C&IS assets under custody, equaled $1.4 trillion at year end, down 32% year-over-year and 17% on a sequential quarter basis.

The year-over-year and sequential quarter declines reflect the quarter's lower market values as the S&P 500 fell 38.5% year-over-year and 22.5% in the fourth quarter, and the EAFE index declined 42.1% year-over-year and 18.9% in the fourth quarter. In addition, the lower level of institutional assets under custody was also negatively and significantly impacted by the stronger U.S. dollar.

As an example, on a year-over-year and sequential quarter basis, the British pound sterling depreciated by approximately 27% and 20% respectively versus the U.S. dollar. The significant strengthening of the U.S. dollar had a material downward impact on the U.S. dollar equivalent market value of assets that we custody and manage for clients.

Managed assets for institutional clients equaled $443 billion at year end, down 27%, or $166 billion compared with one year ago, and down 13% or $68 billion sequentially. Excluding securities lending collateral from C&IS assets under management, which I'll discuss in a moment, managed assets for institutional clients were down only 2% year-over-year and actually increased by 1% sequentially.

Securities lending collateral equaled $110 billion at year end, down 59% or $159 billion versus a year ago, and down 39%, or $71.5 billion compared with September 30. The lower level of securities lending collateral reflected in our institutional assets under management reflects three factors. First, lower market values due to weak equity and fixed income markets drove approximately one half of the year-over-year decrease and one-third of the sequential quarter decrease.

Second, a reduction in borrower demand drove approximately one-fourth of the year-over-year decrease and one-half of the sequential quarter decrease. The remainder was explained by client imposed restrictions or suspensions during this turbulent market environment.

Let me now switch to our personal business which we refer to as personal financial services, or PFS. Trust investment and other servicing fees in PFS equaled $214 million in the fourth quarter, representing a decrease of 8% or $18 million year-over-year. On a sequential quarter basis, PFS fees decreased 7% or $16 million. New business in PFS was yet, again, very strong in the quarter, representing our best quarterly result since the fourth quarter of the year 2000.

The positive impact of strong new business was not enough, however, to offset the weak month lag equity markets that I referred to earlier. For the full year, we recorded our best new business in PFS since the peak of the bubble in the year 2000. In addition, PFS new business in 2008 was about 50% higher than what we were awarded by clients in 2007.

Our strong positioning relative to many weakened competitors, combined with our heritage and client focus, serve to fuel the outstanding new business achieved in 2008. Fees in PFS are derived from the assets that we manage or custody for personal clients. PFS assets under management equaled $132 billion at year end, down 11% or $16 billion from a year ago, and down 6% or $9 billion from last quarter.

Assets under custody in PFS equaled $288 billion on December 31, down 13% or $44 billion year-over-year, and down 8% or $26 billion from September 30. This performance compares once again with the backdrop of a very difficult market environment which saw a 38.5% decline in the S&P 500 year-over-year and a 22.5% decline in the fourth quarter.

Net interest income equaled $348 million in the fourth quarter, up a very strong 38% or $96 million when compared to the fourth quarter of 2007. On a sequential quarter basis, net interest income increased 31% or $83 million. Recall that the third quarter net interest income included a $9.5 million reduction related to a lease portfolio adjustment. Excluding that adjustment from last quarter's result, net interest income in the fourth quarter would have increased 27%, or $73 million.

Our strong net interest income in the fourth quarter reflects both a higher level of earning assets and an increase in our net interest margin. Average earning assets equaled a record $69 billion in the fourth quarter, an increase of 23% or $13 billion year-over-year, and 6% or $4 billion sequentially. Earning asset growth was evident in both the loan and securities portfolios.

Our net interest margin in the fourth quarter equaled 2%, as compared to a leasing adjusted 1.68% last quarter and 1.79% one year ago. Wider spreads, in part due to rate cuts by the Federal Reserve combined with favorable mix changes in both earning assets and funding liabilities, fueled the sizable increase in our net interest margin.

Foreign exchange trading income equaled a record $235 million, up 111% or $123 million compared with the fourth quarter of 2007. On a sequential quarter basis, foreign exchange trading income increased 65%, or $93 million. The key driver of our quarterly results in foreign exchange was volatility, which continued to be very high in the fourth quarter.

Other operating income equaled $84 million in the fourth quarter, over three times higher than the $25 million reported last year and more than twice the $36 million reported last quarter. Fourth quarter other operating income included two items that I mentioned in my introductory remarks; an elevated level of non-trading foreign exchange gains, $33 million, and a $20.6 million gain on certain credit default swap contracts.

Excluding those items from both third and fourth quarter results, other operating income would have equaled approximately $30 million, representing an increase of 22% year-over-year and 4% sequentially. The primary driver of this growth in core other operating income was higher commercial loan related fees.

During the fourth quarter, we recorded a loan loss provision of $60 million compared with an $8 million provision last year and a $25 million provision in the third quarter. The fourth quarter's loan loss provision reflects broad-based loan growth, increased weakness in the overall economy, and a number of specific credits that deteriorated in the fourth quarter. Loans at year end equaled almost $31 billion, an increase of 21% year-over-year and 3% sequentially.

Credit quality deteriorated during the fourth quarter in light of the challenging economic environment, but continued to remain at levels far stronger than the banking industry at large. Within our loan portfolio, nonperforming assets equaled $100 million at year end, representing only 33 basis points of total loans. Nonperforming assets increased $39 million in the quarter with about two-thirds of the increase being accounted for by only two loans.

Within our $14 billion available for sale balance sheet investment portfolio, credit risk also continues to profile well when compared with banking industry peers. Our unrealized losses on available for sale securities equaled approximately $390 million pre-tax on December 31, compared with $200 million pre-tax on September 30.

Now let me shift my comments to a review of the key expenses -- expense categories, rather, that impacted our fourth quarter performance. Expenses exclusive of Visa-related items in both the fourth quarter of 2007 and the fourth quarter of 2008 equaled $632 million, representing a decrease of 8% or $47 million year-over-year. Compensation expense equaled $311 million, and increased 10% or $28 million from the year-ago period.

The year-over-year increase in compensation expense reflects higher staff levels, the previously discussed severance accrual, and our normal April merit increases offset by a lower level of year-over-year incentive funding. Staffing levels equaled approximately 12,200 full-time equivalent positions at year end, up 12% year-over-year.

Our office in Bangalore, India now employs over 1,200 staff members, 75% higher than the staff level we had in India one year ago, and 6% higher than September 30. On a sequential quarter basis, compensation expense increased 35% or $80 million, primarily reflecting higher incentive compensation and the severance accrual.

Recall that our third quarter results included reductions in incentive compensation due to that quarter's client support related charges. Employee benefit expenses equaled $51 million in the fourth quarter, down 18%, or $11.5 million versus last year and down 3% or $1 million sequentially.

The year-over-year decrease primarily reflects lower pension and defined contribution plan expense. The sequential quarter decrease was driven primarily by lower FICA and insurance expense.

Outside services expense equaled $107 million, a decrease of 2%, or $2 million, compared with last year. The year-over-year decrease resulted from lower consulting and investment management subadvisory expense offset by higher technical services and legal expense. Outside services expense was essentially flat sequentially.

Equipment and software expense equaled $69 million, up 17% or $10 million year-over-year and 14% or $9 million sequentially. The year-over-year increase reflects higher levels of technology investment and the $2 million software write-off that I mentioned earlier. The sequential increase represents software write-off and the typical annual pattern where expense associated with depreciation and amortization of equipment and capitalized software is typically higher in the second half of the year.

Other operating expense exclusive of Visa equaled $4 million in the fourth quarter which includes the following three items that I mentioned earlier. First, a $25.4 million benefit from the reversal of a portion of the charge incurred last quarter related to our auction-rate securities purchase program. Second, a $20.1 million benefit for the close-out of various items associated with Lehman Brothers bankruptcy matters, primarily related to the strengthening of the U.S. dollar versus British pound sterling.

And third, a $9.7 million benefit associated with the fair value of our liability related to the capital support agreements that we entered into in early 2008. Excluding these three items from fourth quarter other operating expense and excluding the client support related charges taken in the third quarter, other operating expense would have equaled $59 million in the fourth quarter representing a decrease of 28% year-over-year and 17% sequentially.

The year-over-year and sequential quarter decreases were broad-based across a number of expense categories reflective of various expense management initiatives undertaken in this difficult market and economic environment. In the fourth quarter, our income tax provision equaled $180 million and resulted in an effective tax rate of 34.5%.

In wrapping up, let me close with some reflections on the 2008 full-year results for Northern Trust. From our vantage point, 2008 was a remarkable year. So much was achieved, yet much of our achievement was masked by the broader economic degradation that touched virtually all segments of the global economy.

The broader macro challenges are too many to recite in totality here and are well-known to this audience. This noted, let me just remind you of a few of 2008's many obstacles. Recession, global stock market collapses, extraordinary weakness in the housing sector, wholesale collapses of Wall Street firms, a severely challenged automotive sector, soaring and collapsing energy prices, commodity price gyrations, money market and equivalent fund challenges, and, of course, the December arrest of Bernard Madoff for allegedly running the biggest ponzi scheme in history.

2008 was year in which there was indeed no respite for the weary. Northern Trust entered 2008 from a position of strength and closed the year on an equally strong footing, notwithstanding the dislocations that occurred throughout the year. From the standpoint of performance, our full-year operating results were strong. This is especially so when considered in the context of the environment and relative to our banking industry peer group.

2008 full-year operating revenues increased 16% year-over-year driven by particularly strong growth in foreign exchange trading income and net interest income. While we earned full year operating net income of $641 million, our year-over-year operating net income and earnings per share declined by 22% and 24% respectively as our third quarter decision to support our clients weighed on our results.

As we reflect on our other achievements in 2008, we think a few are particularly noteworthy. First, we closed the year with more clients than we had in the third quarter and more than we had a year ago. Put another way, our franchise continued to grow very nicely notwithstanding the toll that the markets took on our fees. We have more clients today and more work to be done and that, in our view, will auger well for the Northern Trust franchise in the future.

Second, and relatedly, in PFS we experienced the best new business results in 2008 that we have seen since the year 2000, which was the peak of the bubble. This performance, amidst severely declining markets, clearly represents in our view the flight to quality phenomenon that has served Northern Trust so well as a beacon of service, expertise and integrity for our clients.

Third, on the C&IS front we continue to successfully build upon our global franchise winning some of the largest and most prestigious investors around the world. In the fourth quarter, for example, we were selected by the Swiss National Bank as custodian, fund accountant and valuation agent for a vehicle established to purchase approximately $60 billion of illiquid assets. This vehicle is similar in concept to the U.S. Troubled Asset Relief Program, or TARP.

We also recently announced mandates from the New Zealand Debt Management Office, the Laborer's Pension Fund of Central and Eastern Canada, and Nova Scotia's Halifax Regional Municipality Master Trust.

And finally, amidst all the environmental carnage and the challenges that many financial institutions incurred in 2008, our credit quality and capital ratios continued to be very strong, which is a testament to our longstanding, conservative financial policies and risk management efforts. For example, at December 31, our Tier 1 capital ratio equaled 13.1%, our total capital ratio equaled 15.4% and our leverage ratio equaled 8.5%.

In sum, we are proud of our accomplishments in 2008, particularly relative to the environmental backdrop. As we look forward into 2009, we remain optimistic about our business model and client franchise, though guarded about the broader economic environment over the near term. Stock markets are currently well below the year-ago 2008 levels.

Interest rates are at historically low levels. Credit quality in this difficult environment is unlikely to improve over the near term and market volatility, which benefited our foreign exchange business, is uncertain. Bearing all these perspectives in mind, we plan to stick to the formulas that have driven Northern Trust's success for almost 120 years.

We will continue to focus on our positioning in attractive businesses. We will drive to exceed the expectations of our clients and we will work to accomplish this while adhering to our time-tested and conservative financial and risk management practices.

In closing, our strong operating results in the fourth quarter signified the vitality of the strategic business model of Northern Trust. We are very pleased with the financial results that we are reporting to you today including excellent top line revenue growth and attractive double-digit operating earnings per share and net income growth achieved despite a challenging macroeconomic environment.

Now Bev and I would be pleased to answer your questions. Darren, 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 Mike Mayo at Deutsche Bank.

Good afternoon, or good morning, for you still. Two questions, one on C&IS, and one on PFS. C&IS, non-U.S. seemed to be a drag, whereas in the past, it seemed to really help out a lot. I know assets under custody outside the U.S. down 17%, (inaudible) time deposits down, it's no secret that non-U.S. is kind of trailing the U.S. in the decline.

Has that changed how you think about investments outside the U.S., or how you think about resource allocation or even acquisitions?

Not at all, Mike. Remember, the phenomenon that you are seeing there, in addition to the degradation in market values, assets under custody and so forth, you're also seeing a significant degradation as we translate back to U.S. dollars.

So our C&IS business outside the United States continues to grow very nicely. Our deposits have grown nicely, though sequentially we're a little softer, but in the non-U.S. office time deposits, but it hasn't changed a bit. I think that's more the noise of the environment than the underlying business fundamentals.

Let me switch to PFS. On the positive side, you are having enormous dislocation in some wealth management businesses. You have the Morgan Stanley/Smith Barney combination, you have the Merrill Lynch takeover. I know you have been advertising more, like with your golf tournament.

How much do you plan to move down market, how much are you looking to ramp up your market share efforts even more? I mean, you said you had new business in 2008 that was the best in 2000, but it seems like the biggest dislocations are happening now.

We have seen a steady, marked improvement in PFS for many years, as we came out of the bubble, and clearly 2008 was a banner year, and I think we definitely benefited from the dislocations and challenges that many experienced. But I think we're also benefiting because our product set, our credibility, our stability, our investment performance, on a relative basis, was strong.

So we're going to continue to try and capitalize on the position that we've got, and in terms of advertising, I don't see any significant change. As you know, last year we started our sponsorship of the Northern Trust Open. We'll continue in doing that.

And we're excited about the position that we've got and the differentiated profile that we think seems to be working in the personal market.

Do you think it's right sized for the environment or are you going to keep it at the current level to get market share?

I think it's right sized for the environment. Again, it's not all a question of just advertising. It's a question of the effectiveness of our teams in getting out and talking to people and thus far we've -- the pipelines have been quite busy, so we're comfortable with where we are on the advertising relative to PFS front.

And then last question, how much of the margin expansion do you think you might have to give back the next couple quarters, or the FX gains or spread revenues generally? Do you want to give us any cautionary language about the first quarter? Seems like some of those might not be sustainable.

Well, as you know, Mike, we give no guidance. Clearly, you had on the net interest income you saw us and others benefit from dramatic rate cuts, and rates at very low levels will present a different environment. FX volatility, who knows. We certainly wouldn't have guessed -- I think last year, as we finished 2007, we were saying, boy, that was a heck of a year on FX, so we ought to, from a planning perspective, be judicious in thinking about '08, and that kind of shows you how effective our planning was.

Clearly, there are a lot of moving parts but I think what I would draw your attention to, Mike, is the balance in the business model. You saw that come to play this year. You look at what markets did to our trust fees, but having multiple streams going in different directions, the net interest income, foreign exchange and so forth, really, I think, proved to be a very strong advantage to us this year, and we hope that will be the case going forward.

Thank you.

You are welcome.

And we'll take our next question from Nancy Bush, NAB Research, LLC.

Hi, guys, how are you?

Hi, Nancy.

One of these weary speaking to you. Just a quick question. You mentioned Bernie Madoff as one of the extraordinary circumstances, I guess, of last year. Have you been able to -- can you sort of -- have you seen an increase in PFS requests or inquiries since then? Is there anything you can sort of tie to that as being a pick-up in new business?

I can't -- Nancy, I can't tie directly to Madoff, but I would offer a couple of thoughts. One, just to be clear, we do have hedge fund programs and Bernie Madoff was not included in any of our funds. We have known of Madoff for many years, and many have trumpeted, or had trumpeted his success, but as I think all of you have read, there were numerous red flags from a due diligence standpoint that never allowed us to even consider him, frankly.

Clearly, the Madoff challenge, I think, again, plays well to our business model. We are far more transparent, we are far more -- we are highly regulated, we have a bigger balance sheet, and so I think it is another contributing factor or example of a flight to quality, though I can't prove that in any statistical sense, based on what we saw. But, again, I think it -- it's a terrible, terrible situation, but I think it, again, plays probably to our strength, if I had to net out to whether it's a positive or not.

Okay, the second one would be, Steve, I've got to believe there are a whole lot of small asset management shops out there that, having been battered for the past year, are ready to join up with a larger institution. Do you guys see your pace of acquisitions picking up in the next year or so? Are you getting more people knocking on the door? Are you seeing opportunities with these small asset management places, and any regions particularly?

Well, as you know, in 2008, we did make one acquisition on the PFS front in Cleveland to bolster our position there, and if you think about what was happening in Ohio in financial services, we think that was probably well timed and a good acquisition for us.

I'd say the pipeline of opportunities out there is stronger than we typically see, and, obviously, pricing has degraded a lot, but I think we stand by our view, which is that we have been a 120-year-old organic growth Company that has not been distracted by significant sized acquisitions. You can never eliminate any possibilities, but it's status quo at Northern Trust, though the shopping list is longer, and there are certainly some interesting things to look at. But I don't think we're going change our stripes on that front.

Okay, thank you.

You are welcome.

And we'll take our next question from Glenn Schorr, UBS.

Thanks very much. Hey, Steve.

Hi, Glen.

Just if you can, it's less of a relevant conversation for you all, but I want to go through the numbers anyway. Can you talk about maybe period end goodwill and intangibles and any deferred tax liability that would get included in a TCE calculation?

Mike, I don't have that handy. We're in such a very different, I think, position than some of the others (inaudible) -- take that offline.

Yes, no problem.

Glenn, in both cases, if you wanted to do an estimate, you certainly could use the figures we disclosed at the end of the third quarter, which for goodwill was $400 some million, and for intangibles was $84 million, I think. I don't know what the deferred tax items were off the top of my head. But I don't think any of them would have changed materially from the end of the third quarter. Of course, all of this will be disclosed in our Annual Report when we file it.

No worries. Did you mention the actual -- I apologize if I missed it -- the actual business wins during the quarter?

In C&IS we just mentioned a couple. The Swiss National Bank --

But not the aggregate size?

No, we did not.

Okay, and then how about, could we trouble you for the size of the mark-to-market investment fund in (inaudible) lending and the size where it was at the end of last quarter?

Yes, bear with me, the mark-to-market -- sorry, the mark-to-market in the fourth quarter was $44 million.

But I think --

But not the marked, I want total size. Yes, thanks, Bev.

The fund associated with securities lending was about $8 billion at the end of the year.

That's about the same size, right?

Exactly. It was a little bit higher than that, about $9 billion at the end of September.

And the -- that going down is that some clients pulling down or leaving?

That has not been a significant factor thus far. We really have not seen that.

And then maybe a question for [sec] lending in general, maybe not even outside the mark-to-market fund. I'm assuming your [sec] lending NAV is like everybody else's, below he the buck, because how it could not be, just given the nature of the business and what's happened in the credit markets. How can we think about that? Is there a systemic issue? Are clients okay with assets in kind, or how big of a deal is this brewing right now on the client side?

Well, let me give you a couple of thoughts. At the end of December, the aggregate net asset value of our unregistered cash pools was about $60 billion. So these are the unregistered constant dollar funds, and that $60 billion represents about 55% of our total securities lending collateral.

So this is the commingled?

That's correct.

Exactly right. And the NAVs for us ranged from 0.975 to $1. So -- and, this, Glenn, was an issue we started talking about last quarter, and obviously we took some pain to deal with it. So, I think last quarter when we talked about this, we tried to say this is about much more than one individual security, the broad degradation was causing problems here. So we're comfortable with our NAVs where they are, but there are issues there.

Glenn, I think it's important to stress a point that Steve just made, though. Recall in that third quarter, we did declare, we formally declared a collateral decision fee on five of those funds. And the reason for doing that was to bring the NAVs back up to $1. So there was a formal action that we did take last quarter that I think is important to remind people of.

Yes, I remember that. Given your capital base, you could even consider it a competitive advantage to be able to step up for the clients, so to speak. II just don't know, industry-wide, if everybody's pools are below, how much stress that puts on the lender.

Well, we did step up and support our clients last quarter. And that was part of the client support charges that we took in the third quarter.

That was $167 million figure last quarter.

Right, right. I'm with you. Then last one. Once again, and I apologize for -- I'm keeping in perspective, but NPAs are up a reasonable amount on a percentage basis, so if you look at the trend line that's going up, but at the same time the trend line on the reserve coverage is going down for the last five quarters. It's still 2.4 times, but the two arrows are moving in different directions.

Where, about, is your comfort zone on that coverage, and if NPAs keep rising up, I guess it's natural to assume that the reserve will continue to build?

Right. I think, our -- remember our starting point is always difficult, our credit quality metrics have been so strong that it's -- anything that happens to us is perhaps --

I hear you.

Blown up a little bit. But I think if you think about, we continue to -- our loan portfolio continues to grow and grow significantly. Loan growth in the fourth quarter, end of period, was up 21% year-over-year and 3% quarter-over-quarter. So, we're comfortable with our credit metrics, though clearly, we're concerned about the environment and the headlines that we're seeing. But when we look at our portfolio today we still feel comfortable with where we are.

And one thing I would point out is that we are now -- have had seven consecutive quarters where we have provided for more than we have charged off. So we have clearly felt the need to be building over the course of many quarters, not just this last quarter.

Okay. Thank you both.

You are welcome.

We'll take our next question from James Mitchell, Buckingham Research.

Good afternoon, guys.

Hi, Jim.

Maybe just a quick going back to the deposit base, you guys kind of held steady sequentially, but you had a nice mix shift into non-interest bearing deposits from interest bearing. Can you maybe speak to what drove that trend and how we should think about the deposit base going forward?

You seem to get a little bit less hot money, so to speak. Do you think the deposit levels are sustainable, and how do you think about the mix?

Sure. Well, just let me put a little perspective around it. Savings deposits were up 22% year-over-year, or about $2 billion. So they were $11.7 billion, and sequentially they increased about 14% or $1.4 billion. On the non-U.S. time deposits, those, recall, are the deposits really tied to our global custody business, year-over-year end of period they were up 14% or $4 billion to reach $35 billion. And sequentially non-U.S. time deposits decreased by $5.8 billion, or 14%.

I think, as you look at the non-U.S. office time deposits, half our sequential quarter decline relates to the stronger dollar. So again, it's a translation. The balance really relates to just normal custody close. We have clients moving in and out, and kind of where we land is where we are.

Right. But you think a lot of that is -- for the most part is pretty sticky? Plus or minus.

I think, it's hard to say, but, yes, we've had -- this has been client driven. I would say we're clearly seeing flight to safety and quality in both our personal and institutional business, and in this environment, with all that's going on, I think it will move around a bit, but we've clearly been the beneficiary, on average, over time.

Right, okay, and then maybe jumping to the securities lending portfolio, the mark-to-market portfolio, I've had difficulty trying to determine the drivers of that.

If you look at 74% of the -- is in corporate notes and a good chunk of that is highly rated corporate notes, if you look in the fourth quarter, most highly rated corporate notes were, pricing was flat to improving, so the decline in the assets obviously -- or seemingly seems to be coming from the other 26%, I guess, the asset-backed side. Is that a fair statement? Is there any more detail you can give to us at least to give us a little more visibility on how to predict the mark-to-market moves?

I think that's a fair statement, though I don't think could I give you any more, and I definitely don't think I could predict the mark-to-market moves, though I wish we could.

No, I understand that. I just meant helping us track it, not for you to predict it, but by giving us better asset detail. But you think my conclusions are at least relatively close to the mark?

I think the only thing you can do is look at us historically quarter-to-quarter to see what those marks have been and compare those marks to spread widening or tightening it with higher quality fixed income, and that's probably the best indicator you are going to get.

Right. And it just -- there's been very little correlation there, just so you know. It seems more tied to non-GSE related ABS seems to be the biggest driver.

Jim, I'm going from memory, but I actually thought that did you a pretty good job of estimating this quarter, didn't you?

I did, but I have to admit it was a bit more finger in the air than I'd like to admit.

I'm surprised you're admitting that.

But I appreciate that. All right, well, thanks. Could you at least comment is there a duration difference between the corporate and the ABS, so we can kind of get a sense of when the probably the more impaired or lower priced assets mature?

We have that.

Well, no, actually, I do, I'm sorry. Yes, the corporate notes have a weighted average maturity of 1.3 years, and the asset backs are over three.

Okay, that's helpful. Thanks a lot, guys.

And we'll take our next question from Tom McCrohan, Janney Montgomery.

Hi, Steve. Hi, Bev. I just wanted to circle back on credit quality. If you didn't have the two loans this quarter that migrated to NPA status, would your quarterly provision have been materially lower?

I don't know that I want to comment on that, I just don't have that data in front of me. But I think, Tom, what I would say is as is our normal case, from our vantage point, the quality of the loan portfolio is high. It has deteriorated clearly consistent with the environment.

We've seen a significant increase in our 7 and 8 rated loans, so we are not immune, or our clients, I should say, are not immune to the stresses of the environment. So we are seeing that. But again, we start from a very, I think it would be fair to say, pristine base.

I'm just trying to get a read on the quarterly provision level for next year and I can't really tell from your comments if I'm underestimating what the provision is going to be for next year. Is $60 million, in your mind, a sufficient run rate going forward, or do you think this was somewhat of an elevated quarter because of the NPAs?

Tom, I'm so sorry, but as you know we don't provide any type of forward-looking guidance so we're not in a position to be able to give you an answer to that question.

Okay. Just a clarification on the dividend associated with the preferred equity that was $12 million this quarter. Is that the amount that we should be modeling for going forward, or is there anything unusual included in the $12 million this quarter, first quarter of that equity issuance?

Tom, I don't have the data in front of me, but I think it's pro rata in accordance with when we actually got the TARP money. So it's less than the full quarter.

Absolutely. We received the money on November 15th, something like that.

[Mid-November-ish.]

So that would definitely be a pro rata number, Tom.

And that is -- that number should just be equal to -- what's the interest on that? 25%, the coupon on it?

We'll have to take you off-line to confirm the numbers, Tom.

All right. Fair enough. Thanks very much.

You are welcome.

We'll take our next question from Ken Usdin, Banc of America.

Thanks. Hey, Steve and Bev. Just one follow-up on the provision question. Obviously, grew loans again very strong this quarter by $2.5 billion. So just wondering, as you do think about reserve builds and going forward, can you help us think about how this quarter's provision was broken out between loan growth versus internal credit migration?

I don't know if I have that, Ken. I don't have the specific answer for you, Ken. Again, we have seen significant growth and significant opportunity. Clearly, there is degradation in overall quality, but I don't think I want to go beyond that.

Okay. And this might be a 10-K question, but any color on whether the 7 and 8 movements reflect kind of the same direction of NPAs?

Yes, they do, Ken. We can go ahead and give that to you. Bear with me while I find it.

Yes, 7 and 8s equaled $401 million at year end, which was up from $260 million at September 30, and up from $63 million a year ago.

Got it. Great. Second question is, I apologize if I missed this earlier, but there were no incremental CSA charges this quarter. The only thing we saw was the reversal of the $10 million of the fair value, right?

That's correct.

So can you just remind of us what potentially is left as a potentially incurred income statement item in the future?

Well, that's the $550 million is the maximum number. So that's --

And our cumulative to date with the roughly $10 million credit this quarter, the cumulative would be $314 million.

Okay, so the difference is the difference between $550 million and $314 million.

Theoretically, yes.

Theoretically, understood, okay, that's all I'm asking is the if, if, if number. And then my last question is, are there any issues, or are you having any issues within your money market mutual funds as far as fee waivers or profitability issues just given where rates are at all?

Well, it's certainly something that, given the low rates, we'll want to keep a close eye on, but it was not a material effect in the fourth quarter.

Okay. Great. Thanks, again.

You are welcome.

We'll take our next question from David Schneider, Axium International.

Hi. Thank you for taking my call. Just a quick question. You commented that the one [sec] lending portfolio was about $9 billion at the end of the third quarter, and then about $8 billion. Could you kind of give us some -- is that all just due to some asset value deterioration, or were there some client flows involved in that, some people coming out of the program, some people going in, how that's moving around?

I don't think there was any material client flow either way to the best of my knowledge. So that's asset related.

Okay, thank you.

You are welcome.

And we'll take our next question from Murali Gopal, KBW.

Good morning, again. Thanks for taking my call. Just a couple of quick questions. In terms of the restructuring initiative that you announced, $50 million to $60 million annualized cost saves that you expect, is any of those saves already in Q4 and if not, what's the expectation in terms of when that's likely to be fully phased in?

None of those saves are in Q4. We announced the charge in the fourth quarter, but the initiatives we're undertaking will be proceeding over the course of 2009.

Okay. In terms of the two new additions to the nonperforming loans, could you give us an idea what type of loans these were?

Murali, one of them is a residential mortgage in the southeast, and the other is commercial real estate transaction here in Illinois.

Great. And lastly, if I may, can you give me an idea, in terms of, when I look at the asset side your balance sheet, how long before you expect the assets to re-price and catch up in terms of the Fed rate cuts and what's the lag that we have in terms of the repricing between your liabilities and your assets?

That's a really hard question for us to answer. The one, certainly the loan portfolio I wouldn't know where to begin with giving that you metric, but the securities portfolio, if this helps you at all, is about two months in terms of interest rate changes.

Okay. Great. Thanks very much.

It appears 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.

Okay, thank you, Darren. Let me again thank everyone for joining us for this fourth quarter 2008 earnings conference call, and we will look forward to updating you on our first quarter results on April 21. Have a great day.

This concludes today's conference. We thank you for your participation. You may now disconnect. Have a wonderful day.