Northern Trust Corp (NTRS) 2009 Q4 法說會逐字稿

Good day everyone annual come to the Northern Trust Corporation fourth quarter and full year 2009 earnings conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead.

Thank you, Kayla. And welcome to Northern Trust Corporation's fourth quarter 2009 earnings conference call. Joining me on our call this morning are Bill Morrison, Northern Trust's Chief Financial Officer, 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 by e-mail this morning, they are both available on our website at NorthernTrust.com. In addition, this January 20th call is being Webcast live on NorthernTrust.com. The only authorized rebroadcast of this call is the replay that will be available through January 27th. 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 2008 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 Bill Morrison.

Thank you, Bev. It's my pleasure to be speaking with you today on Northern Trust's fourth quarter 2009 earnings conference call. Earlier this morning, Northern Trust reported fourth quarter 2009 net income of $200 million, equal to $0.82 a share. These results were achieved in the context of an economic environment that continues to be challenging on several fronts. Although equity markets have improved, interest rates and spreads remain very low, which impacts several revenue sources, and market volatility is dramatically lower than it was a year ago, which impacts our foreign exchange trading income.

For the full year 2009, despite these difficult business conditions, we achieved record net income of $864 million. As I'll discuss in more detail later, we continue to win new clients in both our personal and our institutional businesses. Economic conditions notwithstanding, we think that our highly focused client centric business model underpinned by our strong financial condition positions Northern Trust very well for growth and success in the years ahead.

To assist you in understanding our performance this quarter, we've organized today's remarks into the following sections. First, I'll discuss market conditions that impacted our performance they the fourth quarter. Second, I'll review our financial performance, focusing on those items that most impacted our results. And third, I'll offer our perspectives on the near term environment, and the longer term strategic positioning of Northern Trust. And finally, Bev and I will be happy to answer your questions. The equity market environment continued to show signs of improvement in the fourth quarter. The S&P 500 was up over 23% in 2009, and improved 5.5% during the fourth quarter.

Some of our Trust Investment and other servicing fees are earned based on lagged market values. Let me review those impacts. Equity market performance calculated on a one quarter lag basis, which is the methodology used for calculating C&IS Custody and PFS Wealth Management fees, remained weak as the S&P 500 declined by 9.2% year-over-year on a one quarter lag basis. On a sequential quarter basis, however, the one quarter lag markets were up 15%. Using the one month lag methodology that applies to PFS fees excluding Wealth Management, the S&P 500 was up 5.3% versus the prior year and up 8.9% versus the third quarter. We're very encouraged by the improvement in the equity markets since March, but mindful that the quarter lag equity markets are still lower on a year-over-year basis.

The second market condition that's impacting our performance is the historically low interest rate environment. For example, in the United States, overnight interest rates averaged only 12 basis points for the fourth quarter. Three month rates averaged only 27 basis points. Short-term rates for the Euro and Sterling were also at low levels by historical standards. Our economists expect central banks to maintain their low interest rate policies for much of 2010, and this has impacted the industry and Northern Trust by compressing spreads in net interest income, and securities lending and pressuring some of the revenues that we earn on money market mutual funds.

With that environmental backdrop, let me review our fourth quarter results. Please note that in all discussions, I'll be referencing operating performance, which includes certain Visa-related items in prior periods. Revenues in the fourth quarter equaled $950 million, representing a significant decline of 17% or almost $200 million, compared to last year. On a sequential quarter basis, however, revenues increased 2% or $23 million.

Trust Investment and other servicing fees are the largest component of our revenues, representing about 54% of total revenues in 2009. Trust Investment and other servicing fees of $549 million increased 12% year-over-year and 5% on a sequential quarter basis. In our Institutional business, C&IS Trust Investment and other servicing fees equaled $329 million in the fourth quarter, an increase of 20% year-over-year, and 6% 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 $156 million in the fourth quarter, up 4% on both a year-over-year and sequential quarter basis. The year-over-year increase primarily reflects new business success in global custody, while the sequential quarter increase reflects the improving market environment and new business wins in global custody and Fund Administration. C&IS Investment Management fees equaled $65 million in the fourth quarter, up 3% year-over-year, and 6% compared with last quarter. The year-over-year increase was driven by new business wins and quantitative strategies, Institutional mutual funds and cash. The sequential quarter increase was driven by the improving market environment over the last several quarters, as well as new business in quantitative management and mutual funds.

Securities lending fees equaled $90 million in the fourth quarter, which included approximately $70 million in positive marks associated with the one mark-to-market investment fund used by certain securities lending clients. This compares with $44 million in negative marks in the fourth quarter of 2008, and $57 million in positive marks last quarter. On a cumulative basis, dating back to the third quarter of 2007, the fourth quarter's positive impact of $70 million reduces to approximately $95 million the cumulative impact that negative marks have had on our securities lending fees. Excluding the impact of the mark-to-market fund across all periods, C&IS securities lending fees declined approximately 77% year-over-year, and 20% sequentially. On this adjusted basis, the year-over-year decline was primarily attributable to lower spreads, due to the reinvestment of maturing, higher yielding investments at lower interest rates. In addition, average collateral volumes declined 14% year-over-year. On a sequential quarter basis, the decline was entirely attributable to lower spreads, once again due to the maturity of higher yielding investments in this historically low interest rate environment.

The three components of our institutional fees that I've just discussed are all impacted by the value of assets that we custody, administer or manage for our institutional clients. Let me review with you our various institutional client asset levels. Institutional assets under custody equalled $3.3 trillion at quarter end, representing a double-digit increase of 22% versus last year, and were up 3% versus the last quarter. Global custody assets, which are an important subcomponent of total C&IS assets under custody equaled $1.9 trillion at year end, up a very strong 36% year-over-year, and 2% on a sequential quarter basis.

The increase in institutional assets under custody represents improving equity markets, both year-over-year and in the fourth quarter, as well as the new business results that I mentioned earlier. Managed assets for institutional clients equaled $482 billion at year end, up 13% compared with one year ago and almost 3% sequentially. Securities lending collateral equaled $114.5 billion at year end, up 4% year-over-year and 3.5% sequentially. However, as I mentioned earlier, securities lending collateral on an average daily basis was actually down 14% year-over-year, yet up 8% sequentially. Excluding securities lending collateral from C&I assets under management, managed assets for institutional clients were up 16% year-over-year, and up 3% sequentially. As you compare our performance with market indices, note that equities represented about 44% of total C&IS managed assets at year end, with a significant majority of those equity assets being managed in a quantitative strategy.

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 $220 million in the fourth quarter, representing an increase of approximately 3% on both a year-over-year and a sequential quarter basis. The year-over-year and sequential quarter comparisons were both positively impacted by the improving market environment, as well as new business. Offsetting these positive factors, however, was the impact of fee waivers on PFS money market mutual funds, due to the very low level of short-term interest rates. In the fourth quarter, fee waivers equaled $11 million in PFS, up from $8 million last quarter. Fees in PFS are derived from the assets that we manage in custody for personal clients.

PFS assets under management equaled $145 billion at year end, up almost 10% compared with a year ago, and up 3% from last quarter. Assets under custody in PFS equaled $331 billion at year end, up 15% year-over-year and up 3% from last quarter. Recent new business success and improving markets combined to fuel the higher level of personal client assets at year end. As you evaluate this performance, note that about 35% of PFS managed assets and 42% of PFS custody assets were equity securities at year end. Net interest income equaled $244 million in the fourth quarter, down 30% when compared to the fourth quarter of 2008. The net interest margin equaled 1.43% in the current quarter, 57 basis points lower than the elevated net interest margin of 2% last year.

Recall that our net interest margin in the fourth quarter of 2008 benefited from three Federal Reserve rate cuts during the quarter, and a significant widening of credit spreads. On a sequential quarter basis, net interest income declined 2%, and the net interest margin declined by 11 basis points. During the fourth quarter, interest rates remained as historic lows and spreads continued to tighten at the short end of the yield curve. For example, the spread between the overnight Fed effective rate and the three month LIBOR averaged only 15 basis points in the fourth quarter, compared with 26 basis points in the third quarter and 224 basis points in the fourth quarter of 2008. Low rates, tighter spreads, and the reduced value of non-interest related funds continue to pressure net interest income and the net interest margin.

Foreign exchange trading income equaled $87 million, down 63% compared with the highly volatile fourth quarter of 2008, and down 6% compared with last quarter. Currency volatility and client volumes continued to moderate in the fourth quarter, as financial markets stabilized. We recorded a modest $3.4 million of credit related other than temporary impairment during the fourth quarter in our balance sheet investment portfolio, compared with $44 million in the fourth quarter of 2008, and $5.3 million last quarter. This amount is reflected in the investment security transaction line of our income statement.

During the fourth quarter, we recorded a loan loss provision of $40 million, compared with a $60 million provision recorded in both last year's fourth quarter and in the third quarter. Net charge-offs equals $32 million, down from $46 million last quarter. Our reserve for credit losses equaled $341 million at year end, up 36% or $90 million compared with last year, and up 2% or $8 million sequentially. Non-performing loans declined $14 million sequentially, to $278 million, reflecting a lower level of non-accrued commercial and industrial loans. Non-performing assets, however, increased $7 million sequentially as other real estate owned increased from $9 million at September 30th, to almost $30 million at year end. A significant portion of the net increase in other real estate owned was concentrated in two residential properties, one in Florida and one in California.

Credit quality within our balance sheet investment portfolio also continues to profile very well, when compared with industry peers. Net unrealized losses in our $17 billion available for sale securities portfolio equaled approximately $60 million pretax at year end, down 25% from $81 million on September 30th. Let me now shift my comments to a review of the key expense categories that impacted our fourth quarter performance. Operating expenses equaled $621 million in the fourth quarter, representing an increase of 6% year-over-year and 1% sequentially. On an adjusted basis, taking into account unusual or one-time items in both years, operating expenses were down 2% year-over-year and down 1% sequentially, reflective of ongoing expense management initiatives at Northern Trust.

Compensation expense equaled $270 million, down 13% year-over-year. Recall that our results in the fourth quarter of last year included a $17 million severance accrual and compensation expense related to initiatives to reduce staff expenses. Absent that item in last year's results, compensation expense would have declined 8% year-over-year. The year-over-year decrease in compensation expense primarily reflects the reversal of prior period accruals related to performance based compensation as well as lower salary expense.

Staffing levels equaled approximately 12,400 full-time equivalent positions at year end, an increase of 2% year-over-year, and essentially unchanged sequentially. New staff positions on a year-over-year basis were concentrated in the Asia-Pacific region. On a sequential quarter basis, compensation expense decreased 5%, primarily reflecting lower equity based compensation expense. Outside services expense equaled $118 million, an increase of 10% compared with last year, and 9% sequentially. The year-over-year increase primarily reflects higher investment manager sub advisory fees which are influenced by higher market values, and by higher technical services. The sequential increase primarily reflects higher technical services, consulting fees, and investment manager sub advisory expenses.

Equipment and software expense equaled $73 million in the fourth quarter, up 5% year-over-year, and 11% sequentially. The year-over-year increase reflects ongoing investment in technology. The sequential increase represents a 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 expenses equaled $63 million in the fourth quarter, compared with only $4 million last year, and $54 million in the third quarter.

Recall that our results in the fourth quarter of 2008 included two positive expense items, totaling $45.5 million, one related to the reduction of accruals in connection with our program to purchase certain auction rate securities from clients, and the other a currency translation benefit. Absent those two items last year, other operating expense would have equaled $49 million in the fourth quarter 2008. The adjusted year-over-year increase was primarily attributable to the November 2009 support payments and expiration of the capital support agreements established originally in 2008. At expiration, we funded approximately $138 million under the terms of the two remaining capital support agreements, which was approximately $12 million higher than the expense accrued through September 30, 2009. Thus, our fourth quarter results included $12 million in CSA expense, compared with a $9.7 million expense reduction in the fourth quarter of 2008.

Other operating expense on a year-over-year basis also reflects a $4.3 million increase in FDIC premiums. The sequential quarter increase in other operating expense reflects the impact of the funding and expiration of the capital support agreements. Our effective tax rate in the fourth quarter was 28%, and for the full year 2009 was 31%. The lower tax rate in the fourth quarter was primarily attributable to a greater proportion of earnings being generated in jurisdictions with lower tax rates than the United States, as well as the favorable resolution of certain state tax matters.

Let me wrap up today's call by offering our thoughts on the near term environment within which Northern Trust operates, and the longer term positioning of our Company. Equity markets continue to trend positively in the fourth quarter, and ended the year at levels higher than a year ago. Fixed income markets were strong throughout 2009, which was most significantly favorable to our securities lending results. Interest rates however remain at historic lows and appear poised to stay there for much of 2010. This adversely impacts net interest income, securities lending, and money market mutual fund fees. We were very pleased to report a reduction in non-performing loans, which was achieved despite the fragile economic environment. Our relationship orientation and conservative underwriting practices continued to position our loan quality stats very well, relative to industry peers

. In sum, our focus at Northern Trust remains on our clients and on our long-standing business strategies and philosophies. We continue to focus on very attractive businesses, where our competitive positioning is outstanding, and prospects for long-term growth are strong. We support our clients with a broad array of asset servicing, Investment Management, fiduciary and banking solutions, and have been viewed by many as a provider of choice throughout this turbulent environment. Our financial positioning remains top tier as best exemplified by strong capital ratios and a healthy balance sheet.

All in all, we feel very positively about the long-term positioning of Northern Trust. Let me thank you for joining Northern Trust for this fourth quarter 2009 conference call. We'd be happy to answer your questions. Kayla, would you call for questions,

Thank you, Mr. Morrison. Today's question-and-answer session will be conducted electronically. (Operator Instructions).

We'll go first to Robert Lee with KBW.

Thanks, good afternoon.

Hi, Rob.

I have a question on Wealth Management. If I look at I guess it's assets, I can understand why the PFS fees have been kind of flat I'd say last year, despite the rebound in the market. Obviously you've had the fee waivers that I guess roll through there that provide some offset. I guess if I look at the related assets under management, it seems like that I guess has been pretty flat there, despite the improvements in the market. Is that mainly because you've had money fund assets roll off, maybe talk a little bit about what may be happening there. Then as a follow-up to that, if I look within Wealth Management in particular, seems like revenues there have kind of really flattened out. Is that -- can you maybe talk about that a bit?

Well, I think, Rob, your observations are on point. Remember that in our Wealth Management group we've historically had a very high per sensitive of AUM in short duration assets. In fact at the end of the fourth quarter, 44% of our AUM in wealth was in cash. So very much underweighted in equities, 22% during the fourth quarter, as compared to a much higher level in the rest of the PFS business. So relative to the lower growth rates in Investment Management fee income, I would just point to the low allocation to equities and higher risk investments and also to the fact that in some of the investment vehicles in which we manage clients' cash in Wealth Management, we again are not generating enough return to both pay the clients expected return and our fees, so we're rebating some fees in there. I would say that also during the quarter, Wealth Management did lose about $2 billion in AUM out of the cash portion of their client AUM.

Okay. Just within the PFS, more broadly, the kind of -- is all the flat revenue kind of attributable to really kind of the cash management component and the fee waivers or -- I guess I would have expected a little bit of kind of incremental growth particularly given the strong growth I guess in new client relationships you had in 2008 and 2009.

There was a little bit of growth. Of course, we would have liked to have had a little bit more. We would have liked a bit more. The issue really is, you look at the business broadly, clients are not becoming more risk tolerant, frankly, at the pace that we had anticipated. In fact, the overall commitment to equities within the PFS investment solution book today is about 35%, and you may recall from our prior conversations in the first quarter of 2009, it got down as low as 28% and last quarter it was 34%. So clients really haven't moved out there in the risk tolerance curve again as quickly as we had anticipated. Higher levels of cash and of course those are subject to the fee rebates. So we've been watching that risk tolerance curve and hoping it would change a little quicker but to this point it has not.

Okay. Maybe just one quick follow-up. Looking at the loan side of the balance sheet, obviously you've come down a little bit, I guess have a little bit of runoff. Can you talk little bit about the demand side of the equation, my sense is you guys would like to find some loans you could put out and proper spreads and whatnot. But are you seeing just kind of most of your corporate clients just really just not even there being anything on the demand side or seeing any change in that, like a little bit of a pick-up in activity?

Well, number one, you're absolutely right. We would love to find some good loans to make and are looking hard in all parts of the business to find them. The environment in terms of demand is different depending on what part of the US or what part of the world you're in and you of course know that. I would say that within our commercial and industrial loan sector, we've seen frankly a higher level of payoffs than we would have anticipated from clients going to the debt markets and refinancing what they've got out there. At the same time you might remember that we financed out for a lot of our not for profit clients their auction rate securities and they also have gone back and refinanced those in the fixed income markets and so we've in effect swapped direct outstanding to letter of credit positioning. So also in PFS, a number of the markets that we're in and which we have large positions in are still pretty weak, Florida, Arizona, Southern California as an example, loan demand is slow.

One thing that I'll point out that you'll see when we issue our annual report at the end of February, we did have one subcomponent of loans that did show a sequential quarter increase. The personal loans were up almost 5% on a sequential quarter basis. So in that particular category, we actually are seeing some demand for the type of loans that fit with Northern Trust lending strategy to our clients but that growth was more than offset by all of the factors that Bill just described with respect to the commercial and industrial portfolio.

Great. Thank you very much.

We'll go next to Brian Bedell with ISI Group.

Hi, good morning, folks.

Hi, Brian.

Can you just repeat the equity and fixed income breakouts for the C&IS and PFS groups. I think I missed part of them.

Assets under management, Brian?

Yes.

For PFS, equity assets were 35%. Fixed income was 32%. And short-term was 33%. That's PFS, AUM.

Okay.

For C&IS AUM, the numbers were 44% equity, 14% fixed income, and 42% short duration.

Got it. Okay. Great. Thanks. And then just to I guess tack onto Rob's question a little bit on the asset numbers. Obviously you're winning new business and new clients at a pretty decent clip but there's a natural sort of loss of assets that come through as certainly your PFS clients spend money on things and take cash out. How should we think about that sort of going forward? Looks like right now the new business trends aren't strong enough to really move the total asset number up right now. Should we think of this as more of a seasonal impact or are you sort of running at organic growth rates right now that you would like to see be a lot better?

Well, actually to the lost business question first, or the runoff of the PFS business, I would just tell you that our loss business was the lowest it's been since I've been with the Company in 2009. So loss business experience has been quite good. I would also tell you that PFS net new business in 2009 was quite strong. In fact, other than the flight to quality induced remarkably high new business we had in 2008, 2009 was the best year we've had since 2000. So the trends are encouraging, I think, both from a new business point of view and from a loss business point of view. The issue that surprises me a little bit, I mentioned it a few minutes ago, is the concentration of existing and new client assets in PFS and very risk averse assets.

Right.

There's a give-up there, obviously.

Right, right. So you're sort of underachieving. I think you said in the last quarter, and tell me if this has changed at all, but you are seeing some reallocation to equities encouraging clients to move into equities?

It's quite small. It's 1% quarter-to-quarter. 34 to 35 using the numbers that Bev just gave.

Everyone's still pretty conservative.

Yes.

Could you talk just quickly about fee waivers, whether you think you're at a normalized rate at $11 million in the quarter or is there some more pressure in the first quarter coming?

We think we're getting close. As the short duration assets in these funds reinvest at lower rates. We think we're most of the way through that but there may be a little bit left in 2010.

Okay. And then the normalized tax rate that we should be thinking about, given we've had two quarters of sort of abnormally low tax rates here?

Hard to project, based on the fact that we don't know what our revenue flows are going to be from non-US sources. Obviously, the higher that revenue flow, the lower our taxes but there are some nonrecurring state tax credits in there and we would encourage you to use the full year 2009 tax rate as you think about future years.

Right.

Just for lack of better guidance on that subject.

And that was 31%?

More or less, yes.

Okay. And then just lastly, I guess on credit shall obviously this could be lumpy from quarter-to-quarter but certainly signs very encouraging in the fourth quarter. As you look into 2010, you look across your client base, do you think we're through the worst part or do you expect potential continued lumpiness there?

Well, first let me say we're encouraged with non-performing loans being down 5% and even with the non-performing asset number being up a little bit because we moved a couple of assets into ORE, that's encouraging too because it facilitates a quicker disposition of those assets and quicker resolution. I don't think we're ready to say that we've reached the peak on this and that we're headed down the other side. I'd like to think so, but we've still got some commercial real estate issues to deal with, with 11% of our portfolio in commercial real estate and while that's underwritten better than our peers have underwritten, I still think there's some risk there. So I'd like to think we peaked but I'm not sure. We're not collectively sure.

Right. Okay. And the reserve is -- should we be thinking about the reserve as your expectation for the next 12 months of charge-offs, roughly?

We don't have an expectation for the next 12 months. We look at it quarter-to-quarter. We looked at the relative shrinkage in the aggregate portfolio. We looked at the relatively lower number of charge-offs and looked at our inherent reserve allocation in our process and thought that was the right number for the fourth quarter and that's, again, we've got to I'm afraid take it quarter by quarter.

Great. Thank you very much.

We'll go next to Ken Usdin with Banc of America/Merrill Lynch.

A couple questions, please. First of all, Bill, to your point about the rate environment continuing to hurt net interest margin, looks like there was a -- continued to stay very conservative with your investments especially the big growth you had in the money market assets. Just wondering, are there any opportunities to just reinvest in the securities book or is it just going to be that you're just going to kind of take what the low rate environment gives you until rates actually turn the other way, just in terms of assessing when we can hope for that kind of stabilization of the down side pressures of the margin?

Although the temptation is there, we're going to stick to our conservative positioning in our securities portfolio and as you all know, that portfolio has an average duration of about a year, and substantially all floating rate. We might do some very, very marginal things around the margin, but are we going to change our strategy? No.

Right. So does that just mean, presuming that, then just directionally with the reinvestments rolling off, the bias is there's more pressure downwards than there is upside until rates turn.

I think if you looked at the components of our investment portfolio or how it's made up, there might be a little more to go, yes.

Okay. On PFS, just coming back to Rob's question earlier, within the last couple years the business has moved more towards an asset allocation model versus individual portfolio managers, and I'm just wondering how much of that has an impact on the recovery of PFS fees? Meaning is it as much about how much equity is recovered because now a days you're more in kind of an asset allocation, you might be getting paid sort of a percentage per. Differentiate those two buckets for us in terms of helping us understand how much leverage we can see overtime from that allocation change as far as the PFS fees are concerned?

Actually, I would view the full migration of PFS clients into a centrally run asset allocation driven investment model, as a positive to us in a number of ways and I think you may be thinking about it the other way. The reason I would view it as a positive is we would have more consistent movement from less risky to more risky, and vice versa, investment solutions because it would be centrally driven and secondly, the fee in those centralized solutions is managed centrally. So I don't think that it goes necessarily that the more clients migrate into that type of asset allocation approach and I would tell you that less than half of our clients are there, that our revenue was negatively impacted. I would view it the other way around.

Got it. That's interesting. Last quick thing, just on capital management allocation, just updates on your just desire to change dividend policy and your outlook for potential acquisitions as you just look around the world?

Yes. Just talk about acquisitions first. As all of you know, there's a lot out there and there's a lot for a Company that has the supposed excess capital we have to be out there looking at and we actually have been looking. We've been looking at opportunities in the Institutional side of the bank that would enhance our capabilities and add some clients to us as well. Both domestically and internationally. But we haven't done anything. On the personal side of the business, we are looking for acquisition opportunities which would allow us to acquire principally client relationships and principally in areas where we have relatively low market penetration and great opportunity, meaning the Northeast and the Mid-Atlantic and California and the West Coast, broadly. So we have an active initiative going on there and I would suspect we'll do something or a series of things there, none of which will be huge in terms of our historical background.

Can you just touch on the dividend policy?

Dividend, yes. As you all know, we were one of two of the top 20 banks not to cut our dividend the last time around. We've got a two plus percent dividend yield and we're paying out something in the range of 32 to 35% in our dividend and I think in the present environment, we'll stick with what we're doing. You know, we, like most other banks right now, are just beginning the second phase of the Basel 2 initiative and we've got to get a little further into that before we can get agreement with our principal regulators on what the appropriate level of capital is and I think not just for us, but for most like us, that's going to be a constraining factor until we get clarity.

Great. Thanks.

Not much change anticipated. Thanks.

Understood. Thanks a lot, Bill.

Next question is from Mike Mayo with CLSA.

Hi, Mike.

Good morning.

First, for the international custody activities and international revenues generally, can you highlight what that did linked quarter?

36% year-over-year, and 2% sequentially.

That's revenues? No, that's --

That's the increase in global custody assets, Mike.

Okay. And as far as winning new business, I guess so you have 20% annualized growth this quarter and C&IS and PFS, if you just take those two line items, I guess you're winning business and I guess the other processing banks are winning business so who are you winning it from?

Well, one of the things that I would point out, Mike, that's been a very consistent story for us over a long period of time is that about a little bit more than half of our new business in the Institutional side comes from existing clients. So we've done a terrific job over the years and that's been a pretty consistent 50 to 60% figure for as long as I've been in this role. So we do garner a lot of new business opportunities and we close on those new business opportunities with our existing clients which is very meaningful.

For a while there, a lot of the clients the way I understood it were kind of frozen, they didn't want to make many changes on the C&IS side. Has that changed at all? Have you seen kind of a defrosting in terms of willingness of clients to do more things with you or maybe to change providers?

Mike, it's Bill. I talked to Steve Fradkin last night a little bit about his pipeline in C&IS and he has a very strong pipeline across all of our different service segments in C&IS, both internationally and domestically. So I think the answer to your question is yes.

And to go back if I could and try to answer your question on the PFS side of the house, and who are we winning business from, it's changed pretty dramatically in the last year because we were winning from a group of banks that were per perceived to be troubled then and you all know who they are, and that no longer is the case so we're back to a very, very broad spectrum of competitors from whom we're winning business. But clients in the personal side also seem to be becoming a little more willing to consider new providers. We had a nice uptick in new business towards the end of the fourth quarter on the personal side.

All right. Thank you.

We'll go next to John Stilmar with SunTrust.

Good morning. Thank you for allowing me to ask my questions.

Hi, John.

Hi. Starting with C&IS, in the custody fee, if we just look at the custody fee as a percentage of the balance, I realize that's not a perfect way of looking at it, it had gotten as high as just over 2.2 basis points and now it's -- it started to trend down over the previous quarter. Is that because the fact that the service fees that are associated with the custody business are now a smaller proportion when you compare them to the asset base?

No. I'm looking at similar statistics and I guess I'm not seeing a meaningful change there. I will say that in my notes here I do see that we did have some prior period adjustments that impacted the fourth quarter a bit, so in terms of the level of detail you're getting into there, that might have been part of what you're seeing. But no, I don't see a meaningful change there.

Perfect. And then with regards to the balance sheet as we think forward, how should we be thinking about the securities portfolio and specifically the money market assets, which seem to have a bit of the growth and then if we look at the liability side it was an increase in short-term borrowing, non-interest deposits and deposits. How much of that is seasonal versus secular and how should we be thinking about this as a telling indicator for the balance sheet sort of near to intermediate term, given your certain risk preference?

Look, John, we've always said that our balance sheet is there for our clients and most of what's on the liability side of our balance sheet is client deposits. You will see that during the full year, our PFS, our personal clients which are on the balance sheet I think as savings deposits were up almost 50%. So we continue to see a lot of client flow, surprisingly to me, I might say, from the personal side of the bank. The Institutional side of the bank from a deposit flow point of view has been down for much of the year but on average during the fourth quarter, compared to the third, was actually up. So we're starting to see I hope a little bit more deposit business in our call book on the Institutional side as well. And that's principally responsible for the growth in money market assets and in our securities portfolio. There is a little bit of incremental borrowing on the balance sheet as well as you go through the last couple of quarters, and that is short-term borrowings and the proceeds for those borrowings overnight are being deposited with the Fed.

Okay. Perfect. And then put a finer point on the PFS segment. Are there any particular markets, look at the fees themselves with Illinois and Florida, if I just kind of compare the fees relative to where they were in call it precrisis period, we haven't quite gotten back to where we have reached on a revenue basis but fees in the other segment continue to outpace where we were sort of precredit cycle issue. And the question I have is what focus are you having or emphasis on growth in that segment and how should we be thinking about the other segment, considering that that seems to be the real engine of growth? Can you tell me a little of the trends that might be driving that fee dynamic underneath the surface?

John, I'd like to restate your question so I make sure we understand what you're talking about. When you're referring to other, what we disclose are Illinois fees, Florida fees and wealth management and you're referring to the remainder?

That's correct.

Okay. So the other would be all of the other states.

Correct.

You've only listed two states here and we're in 18 so it would be the 16 other states.

Yes.

And that would include the Northeastern United States, John, which would include our offices from Boston down to Delaware, which are relatively new and which are growing at a very, very fast rate. In fact, our AUM growth in that sector, while not material aggregately, is growing extremely quickly. So that gets back to my comment earlier about seeking client acquisition opportunities in the Northeast, in the Mid-Atlantic to try to add scale to that very, very successful part of our business over the last five years and take advantage of the opportunities there. And the same for the West Coast and California.

Okay. Thank you for your time.

Sure.

Next to Betsy Graseck with Morgan Stanley.

I'm good, guys. Thank you.

Thanks, Betsy .

Kayla, I think do we have any other questions in the queue.

We'll go next to Tom McCrohan.

Hi, everyone. Just have a quick administrative follow-up question. Which would be used as a share count for 2010?

We haven't provided any forward look on the share count. I would use what you can see for the fourth quarter.

Okay. Thanks.

We'll go next to Nancy Bush with NAB Research LLC.

Hi, guys. How are you?

Hey, Nancy.

Two questions here. And I apologize if you've already addressed this but after my fourth call my eyes are glazing over a little here.

We understand.

Segments, could you just discuss which segment of PFS excluding Wealth Management, where most of the business is coming from right now? Is it the lower end? Sort of in terms of the type of relationship, the type of new relationship that's coming to you, could you discuss that, please?

Well, Nancy, it's Bill. We're trying to and have been for the last three or four years move up market in PFS and as you know, we've got three principal segments but I would say that leaving the Wealth Management or the family office business out for a second, we are targeting families and businesses that can produce relationships that have AUM of more than $10 million. And we've organized that way. We put teams in our locations all around the country that are specifically focused on, say, the $10 million to $200 million AUM opportunity and they're doing extremely well. I can't give you the metrics around that, but that organization or that reorganization or client segmentation that we put into place three years ago is having the desired outcome. So significantly more new business in that larger space, larger than we previously were in, and a good chunk of that in that Northeast region but also in Illinois and also in California and also in Florida and every place we do business. So if you saw the stats, they would show a gradual migration in terms of new business into the larger client relationships versus history.

Okay. Also, if I could just get straight in my head the mark-to-market issue, and I think you said you were down now to a $95 million negative impact from the marks. Is that correct?

That is correct.

So that means we can only get $95 million more, right?

That's right.

Okay. I know this is very -- it's very much of a moving target but is it your expectation that after we get out of 2010, that that issue will effectively be behind us? Nancy, this is Bev. One of the things that I would point out and if anybody wants to get all of these statistics from me, please call afterwards, but the weighted average maturity of that fund is north of two years. So I don't think that we would want to sit here today and predict that in 2010 we will completely extricate ourselves from the remaining $95 million. It's a pretty significant weighted average maturity for the holdings in that fund.

Okay. Great.

Nancy, I would add that the size of that fund has gradually decreased as we've allowed clients to exit on a staged withdrawal basis and so I think at quarter end it was below $4 billion, so it's nowhere near as material as it once was to Northern Trust.

Bill, just looking at the whole crisis environment that we started into in 2007, at this point is really the biggest impact that's still on you, just this risk aversion that you're seeing in the client base, this reluctance to go back into equities, or is -- are we getting to something that looks like the new normal I guess is the basis of my question.

We took on a ton of business both in the bank and our investment business in PFS and in C&IS. You're right in that a ton of that new business, particularly in PFS, came in in cash and stays in cash. But that's not the problem. The problem is rates. I mean, if we had a somewhat normalized rate environment, that begs the question what normalized means, but certainly higher than we have today, we could make a pretty good chunk of money on that cash. Even if a client left it in investment solutions that didn't have risk in it.

But it's the combination of clients coming into cash and staying into cash and rates being so low that we're having difficulty covering our fees that's the problem. But I must -- I said this earlier, but I was not surprised by the amount of flow that Northern Trust got in 2008 from individuals and companies looking for safe haven. I have been surprised by the pace of the continuing flow. But again, it's largely in these very safe asset buckets that are yielding in today's environment a very, very low return to the client and to Northern Trust. That's the take-away.

Okay. Thank you.

We'll take our last question from Howard Chen with Credit Suisse.

Hi, everyone.

Hi, Howard.

Thanks for taking the question. Bill, a point of clarification from way back earlier in the call. The $2 billion loss that you noted within Wealth Management, I know small in the grand scheme of things but just curious, did that stay in house and if not thoughts on where it went and why.

Howard, let me -- I'll make a comment and then let Bill react to it. Remember that the cash that the -- the assets that we manage within our Wealth Management group, a large portion of it is cash and as those families and family offices, as they take on more risk, it would be a very normal occurrence for cash to come down and for them to invest those assets, whether it be in hedge funds, private equity, equity strategies, et cetera and as you know we only manage about I think it's between 15 and 20% of the Wealth Management family assets that we custody. So in terms of -- as our clients choose to take on more risk in their family offices, it would not be unusual for some of what had previously been cash to be invested elsewhere.

Yes. I think that's true Howard, but I also think that from time to time we either lose a piece of business, a relationship or a client finds a higher yielding short duration alternative that he or she likes and when they move, they move in big chunks. Not unusual for us to see a client pull five or $600 million out of cash, maintain a relationship with our Wealth Management team, but move that cash to another provider, either short-term or intermediate term so I think it's a combination of both.

Thanks.

Your question's around do we have significant loss business issues in Wealth Management, the answer to that is emphatically no.

That's helpful perspective. I just -- I heard you mention a number and I just wanted to just follow up on that.

Right.

And then second question, just any -- I know it's very early, but thoughts on the administration's proposed USBank's tax proposal, fee proposal and what if any longer intermediate term changes are perceived to the business?

Without getting into how we feel about it, I would just say that it's awfully early. We're going to wait and see if it becomes law and what shapes it becomes law or what form it becomes law. I would leave you with a thought that we have a very, very flexible balance sheet and we can act perhaps more quickly than some other banks in terms of changing the way we do business if we need to. The big impact for us is in our call book, in our foreign deposits, as it is for the rest of the -- for the trust banks and that's the big issue. The rest of it for us is really not that big an issue.

We've modeled what the tax might be. If it was at 15 basis points and calculated on our September 30 balance sheet and we come up with the same number that a lot of you all do and that's plus or minus $70 million. So we -- I think all of us in this segment feel the same about it. It puts us at a competitive disadvantage in our international banking business to non-US banks and obviously anything that puts you as companies as a competitive disadvantage we're going to be not very happy about and that's where I would say we are.

Makes sense. Thanks for taking the questions.

Okay. Thank you for being with us today. We look forward to talking with you again at the end of our first quarter. That session is scheduled for Tuesday, April 20th. Look forward to seeing many of you before then. Thanks so much.

This concludes today's conference. Thank you for your participation.