Northern Trust Corp (NTRS) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation first-quarter 2011 earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to the Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead.

Thank you, Audra, and welcome to Northern Trust Corporation's first-quarter 2011 earnings conference call. Joining me on our call this morning are Bill Morrison, Northern Trust's Chief Financial Officer; Aileen Blake, our Controller; and Allison Quaintance from our Investor Relations team.

For those of you who did not receive our first-quarter earnings press release or our Financial Trends Report by email this morning, they are both available on our website at northerntrust.com. In addition, this April 19th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through April 29. 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 and 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 2010 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 joining us today. Let me turn the call over to Bill Morrison.

Thanks, Bev, and good morning, everyone. It's my pleasure to speak with you today about Northern Trust's first-quarter earnings. Earlier this morning, Northern Trust announced first-quarter net income of $151 million and reported earnings per share of $0.61. Our first-quarter results include an expense credit of approximately $0.02 per share related to the 2008 IPO of Visa, which impacted all Visa member banks.

In our press release issued today, we present operating results, which exclude this Visa-related item. We believe operating results provide the clearest indication of results and trends in our core businesses. Our commentary for the remainder of today's conference call will focus on operating results, which, again, exclude only the Visa-related item.

First-quarter operating net income was $145 million and operating earnings per share was $0.59. Before I review the key drivers of our first-quarter performance, let me briefly discuss current market conditions and how they impact our results.

As has been the case for several quarters, extremely low short-term interest rates, coupled with narrow spreads at the short end of the yield curve, continue to have a negative impact on our net interest income, some investment management fees, and securities lending revenues. Overnight interest rates in the United States averaged only 16 basis points in the first quarter, down from already low 19 basis points in the fourth quarter. Three-month LIBOR averaged 31 basis points, an increase of only 2 basis points sequentially.

Short-term interest rates for the euro and sterling were also at low levels by historical standards, although short-term interest rates in the euro rose in the first quarter in anticipation of the European Central Bank increasing interest rates, which it announced on April 7. Equity markets, as you know, improved for the third consecutive quarter, with the S&P 500 advancing 5.4% in the first quarter. The international EAFE index, however, was up just 0.3% in the quarter.

Equity markets rose in the fourth quarter of 2010 as well, which is relevant to fees that we earn on C&IS custody and PFS wealth management, our businesses which primarily use a quarter-lag methodology in calculating some fees. Finally, using the one-month lag methodology which is relevant to fees that we earned in PFS, excluding wealth management, equity markets improved 10.5% in the first quarter. So, all in all, a modestly favorable equity market environment for the first quarter of 2011.

With that background, let me get into the detail behind our first-quarter results.

Revenues on a fully taxable equivalent basis were $908 million in the first quarter, essentially flat both year-over-year and sequentially. Trust investment and other servicing fees are the largest component of our revenue mix, representing 57% of total revenues in the first quarter. Trust investment and other servicing fees of $515 million were flat year-over-year and up 2% sequentially.

In our institutional business, C&IS trust investment and other servicing fees totaled $271 million in the first quarter, down 9% year-over-year, and up 1% on a sequential quarter basis. C&IS fees include three primary categories -- custody and fund administration; institutional asset management; and securities lending. Let me discuss each of those briefly.

C&IS custody and fund administration fees were $169 million in the first quarter, up 6% year-over-year, and up 2% sequentially. The increase in both periods reflects new business success and global custody, fund administration, investment operations outsourcing, and domestic custody, as well as higher market values. Our C&IS new business results in the first quarter reflect the uneven nature, which we have discussed many times over the years. While last quarter was the best quarter in our history, this quarter's results were softer. That said, our global competitive positioning and pipeline of opportunities continue to be excellent.

For example, Northern Trust was Named Global custodian of the Year in March at the 10th Annual Global Pension Awards in London; also was announced in the first quarter we now provide asset servicing solutions to 34% of the top 200 pension schemes in United Kingdom. We also recently announced with Queensland Investment Corporation, one of Australia's leading fund managers, has entered into an investment operations outsourcing agreement with Northern Trust. This is a very significant new client for our Global Fund Servicing team and for our Asia-Pacific region.

C&IS investment management fees were $67 million in the first quarter, up 5% year-over-year, and were flat sequentially. Waived fees associated with institutional money market mutual funds equaled $4.6 million in the first quarter, up from $3.6 million in the fourth quarter. The higher level of waived fees reflects lower yields on the funds due to lower interest rates at the short end of the yield curve. Absent fee waivers, C&IS investment management fees were up 6% year-over-year, and 1% sequentially, reflecting higher market values as well as new business in our manager of manager, index management, and short duration businesses.

Securities lending fees equaled $17 million in the first quarter, down from $56 million in last year's first quarter, and equal to $17 million reported last quarter. We'd ask you to recall that our securities lending fees in the prior year's first quarter included $38 million in positive marks, associated with the one mark-to-market investment fund used by certain securities lending clients. All remaining securities in that fund were sold in the third quarter of 2010. There were no mark-to-market impacts in the first quarter. Adjusting for the prior year impact of those marks, our securities lending fees decreased 3% year-over-year, primarily reflecting a 10% decline in average volumes.

Our institutional fees are impacted by the value of assets that we custody, administer, and manage on behalf of our institutional clients. Institutional assets under custody were a record $4 trillion at quarter-end, representing an increase of 18% or almost $600 billion year-over-year, and 7%, or $260 billion sequentially. Growth in assets under custody primarily reflect strong new business success, higher equity market values, and the strengthening of the euro and sterling relative to the US dollar.

Global custody assets, a subcomponent of assets under custody, were also a record at $2.5 trillion, up 26% or $512 billion year-over-year, and 9% or $206 billion on a sequential quarter basis. Managed assets for institutional clients were $494 billion at quarter-end, down $4 billion or 1% compared with one year ago, but up $5 billion or 1% sequentially.

Recall that during the fourth quarter, a large global investor reduced assets under management with Northern Trust by approximately $21 billion in passive strategies, primarily equities. That reduction was the primary driver of the year-over-year decline in institutional managed assets. Securities lending collateral equaled $110 billion at quarter-end, down 10% or $12 billion year-over-year, but up 10% or $10 billion sequentially.

Now let's move to our Personal Financial Services business. Trust investment and other servicing fees and PFS were $244 million in the first quarter, an increase of 12% year-over-year and 3% on a sequential quarter basis. Growth was driven by improved market values and by new business. The very low level of short-term interest rates once again resulted in the waiver of some fees on money market mutual funds. These fee waivers reduced PFS fees by $12 million in the first quarter compared with $10 million in the fourth quarter, and $16 million in last year's first quarter.

PFS new business in the first quarter was the best quarterly results since we've been tracking this metric. All regions posted sequential growth in net new business, led by our Northeast region and the Wealth Management Group. We attribute these strong results to our consistent and focused client-oriented business strategy; to the strength of our brand; and to renewed merger and acquisition activity, which has led to money and motion in the marketplace. We have also seen new business success due to competitor disruption, notably in the mid-Atlantic and Midwest regions.

Fees in PFS are derived from the assets that we manage in custody for personal clients. PFS assets under management were a record $168 billion at quarter-end, up 13% or $19 billion compared with a year ago, and up 9%, or $14 billion versus last quarter. Assets under custody were also a record at $385 billion at quarter-end, up 13% or $44 billion year-over-year, and 4%, or $14 billion sequentially. Approximately 37% of PFS-managed assets were invested in equity securities at quarter-end compared to 36% last quarter.

Net interest income was $245 million in the first quarter and the net interest margin was 1.32%. Net interest income increased 2% year-over-year. This increase was driven primarily by a 12% increase in average earning assets, partially offset by a 12 basis point decline in our net interest margin.

Growth in earning assets was concentrated in lower yielding assets such as Federal Reserve deposits, interest-bearing deposits with banks, and securities. Loan demand remains soft, increasing only $297 million on average year-over-year. The 12% decline in our net interest margin was driven by the mix shift on the balance sheet toward lower yielding asset securities, as well as by ongoing compression of the yield in our securities portfolio.

As we've said in the past, maturing investments are being reinvested at lower rates. For example, the yield on government-sponsored agency securities was 0.78% in the first quarter, down 32 basis points from 1.10% in the year-earlier quarter. Sequentially, net interest income increased 5%. The sequential drivers are similar to what I just mentioned in my year-over-year commentary; average earning asset growth of 6% sequentially was concentrated in lower yielding assets, as average loans increased only $180 million, and the yield on agency securities declined by 5 basis points sequentially.

I'd like to make one additional point on net interest income in the first quarter. As I'll discuss later in this call, loan recoveries were higher in this quarter than in recent quarters. In fact, we reported our highest quarterly level of loan recoveries ever. Some of the amount recovered, as per our accounting standards, was applied to interest income. Absent the impact of these loan recoveries and related interest income, our net interest margin would have been very slightly lower when compared with the fourth quarter.

Foreign exchange trading income was $85 million, up 6% compared with the first quarter of 2010 and down 14% compared with last quarter. The year-over-year increase was due to higher volumes and volatility. The sequential decline primarily reflects lower volatility.

Other operating income of $36 million decreased 8% year-over-year and 15% sequentially. The year-over-year decline reflects lower non-trading foreign exchange gains and a loan sale that was recorded in the first quarter of last year. The sequential quarter decrease also reflects lower non-trading foreign exchange gains, as well as a $3 million gain on the sale of a building last quarter.

In the first quarter, we recorded $5 million in credit-related, other-than-temporary impairment on five residential mortgage bank investment securities held within our balance sheet securities portfolio, reflecting additional deterioration on previously identified impaired securities. Notwithstanding the impairment charge this quarter, the quality of our balance sheet securities portfolio remains strong, with 85% of the portfolio rated Triple-A as of March 31.

Our loan provision was $15 million in the first quarter, down from $40 million recorded in both the first and the fourth quarters of 2010. Net charge-offs were $22 million, down $9 million year-over-year, and down $22 million sequentially.

Net charge-offs deserve a little bit closer look this quarter. Gross charge-offs were $35 million, down $10 million when compared with the fourth quarter, with about two-thirds related to real estate exposures. Recoveries, however, totaled almost $14 million, our highest quarterly recoveries ever, primarily reflecting cash received on two previously charged-off loans. Absent those two recoveries, our loan loss provision in the first quarter would have been about $10 million higher than the $15 million recorded in the quarter.

Nonperforming loans decreased $8 million sequentially to $325 million at quarter-end, with all nonperforming categories except residential real estate declining on a sequential quarter basis. Nonperforming residential real estate loans equaled $158 million at quarter-end, up $5 million sequentially, and represented 49% of total nonperforming loans.

Other real estate owned increased $11 million on a net basis sequentially and was carried at $56 million at quarter-end. Nonperforming assets increased $3 million to $381 million, representing 1.36% of total loans, a ratio that continues to position Northern Trust favorably among our banking industry peers.

Let me shift my comments now to a review of the first-quarter expense. In all comparisons, I'll be referring to operating expenses which include the Visa item that I mentioned at the onset of today's call.

Total operating expenses were $663 million in the first quarter, representing an increase of 7% year-over-year. Expenses were essentially flat sequentially. Compensation expense was $294 million, up 7% or $19 million year-over-year, and 4%, or $12 million sequentially. The primary drivers of the year-over-year increase were higher accruals for cash-based incentives and higher salaries associated with annual merit increases. The primary drivers of the sequential quarter increase were higher stock option expense and salaries.

Stock option expense was $15 million in the first quarter, compared to $5 million in the fourth quarter. Stock option expense is typically higher in the first quarter of each year, due to the requirement to immediately expense options granted to retirement-eligible employees.

Employee benefit expense was $55 million in the first quarter, down 13% or $8 million year-over-year, and down 2% or $1 million sequentially. In the first quarter, we recorded a $9.7 million reversal of an employee benefit accrual for which the 2010 goal had not been met. Absent that reversal, employee benefit expense would have been $65 million, resulting in an adjusted year-over-year increase of 2% or $1 million, and a sequential quarter increase of 16% or $9 million. The adjusted sequential quarter increase primarily reflects higher FICA insurance expense, which is a normal seasonal pattern, as well as higher pension and healthcare expense.

Outside services expense was $124 million in the first quarter, up 17% or $18 million compared with last year, and down 4% or $5.5 million sequentially. The year-over-year increase reflects higher consulting, investment manager sub-advisory, and technical expenses, as well as acquisition-related costs associated with our recently announced agreement to acquire Bank of Ireland's Security Services. The sequential quarter decline represents lower expense associated with legal and technical services.

Equipment and software expense was $73 million in the first quarter, up 10% or $7 million year-over-year, and down 6% or $5 million sequentially. The year-over-year increase reflects higher software amortization expense associated with ongoing capital investments in technology. The sequential decrease represents the typical annual pattern, where expense associated with depreciation and amortization of equipment and capitalized software is typically lower in the first half of the year.

Other operating expenses were $74 million in the first quarter, an increase of 11% or $7 million year-over-year, reflecting increased business promotion and advertising, higher charges for account servicing activities, and higher staff-related costs such as hiring, relocation and training, offset by a $3 million decrease in FDIC insurance premiums.

On a sequential quarter basis, other operating expenses decreased 3% or $2 million. The sequential decrease primarily reflects lower staff-related expenses and lower charges associated with account servicing activities, offset partially by higher business promotion expense.

Our effective tax rate in the first quarter was 34.3% compared with 26.7% in the fourth quarter of 2010, and 32.4% for the full-year 2010. Our first-quarter tax rate includes a higher state tax provision associated with the Illinois corporate income tax increase effective in January of 2011. Our below-normal tax rate in the fourth quarter reflected the favorable resolution of certain state tax matters and our election to indefinitely reinvest the earnings of an additional non-US subsidiary.

Let me make a few closing remarks before we open the line for questions. First, we are continuing to invest in our businesses to ensure that we're extremely well-positioned to serve our clients in the US and around the world. For example, in 2010, we invested approximately $510 million in technology, covering a broad range of initiatives that will benefit our clients and prospects for years to come.

In PFS, we acquired Waterline Partners in late 2010, the top-ranked investment advisory firm based in Los Angeles. We're progressing toward a summer opening of a new PFS office in Washington, D.C., and we're making strategic hires throughout PFS, bringing on seasoned senior professionals to bolster our presence in key existing markets.

In C&IS, we announced in February our agreement to acquire the fund administration, investment operations outsourcing, and custody business of the Bank of Ireland Group, an acquisition which we expect will close later in the second quarter. Supporting organic growth through investment in infrastructure and people, combined with strategic acquisitions, is reflective of our commitment to having the talented staff, the world-class capabilities, and enviable client base necessary to drive growth in the future.

Second, we remain committed to the financial strength of our Company -- the hallmark of Northern Trust and a key differentiator through the difficult times of the past few years. Our capital levels are very strong, with Basel I Tier 1 capital and Tier 1 common equity ratios of 13.5% and 13%, respectively, at quarter-end. Under the Basel III framework, as we currently understand the regulations, we estimate that our current capital levels would exceed all regulatory requirements. Our historical commitment to financial strength allowed Northern Trust to maintain its dividend throughout the financial crisis, something that only one other large bank in the United States was able to do.

We reinstituted our share repurchase program in the first quarter, buying back approximately 700,000 shares at a cost of about $36 million, as we return to our historical practice of repurchasing shares issued under equity compensation programs, including shares issued over the past two years. Our strong financial condition also positions us well to take advantage of attractive strategic acquisitions, such as the one I mentioned earlier. We feel very good about the positioning of Northern Trust, despite the economic and interest rate environment, and we're focused on positioning the businesses to serve our clients and prospects well now and into the future.

Before I conclude, I want to point out that our annual shareholders meeting begins at 10.30 Central Time this morning. As is customary for our first-quarter earnings call, we'll need to end today's call to allow sufficient time for all of us to get to the annual meeting. Please accept our apologies in advance in the event that we have to close off the Q&A period earlier than is our normal practice.

Thank you again for your time today. Bev and I would be happy to answer your questions now. Audra, if you would please open the line for questions.

(Operator Instructions). John Stilmar, SunTrust.

Just a quick question on just touching on compensation for a second. The $294 million that you had this quarter, was there a one-time benefit or detriment in there? I wasn't quite sure. I was wondering if you could just clarify for me.

In compensation expense, the only issue is really stock option expense. And John, as I mentioned in my comments, we expense stock option grants, which, of course, are done in the first quarter, in their entirety for retirement-eligible people. And we do have several retirement-eligible people in our management group.

And that's a common first-quarter occurrence, John. I'll give you the numbers. Stock option expense in the first quarter was $50 million and last quarter, the fourth quarter was [$5 million -- $10 million] delta.

Okay. Perfect. Thank you. And then with regards to the pace of new investment on the custodial side, can you talk to me a little bit about whether the standard question of winning new business? On one of the other calls this morning, we were given the -- given some color around the pace of [whether] new business wins were at the expense of others in the industry. I was wondering if you could share with us if there is an update on that, and just kind of general comments around pipeline and what we should be thinking of, at least in -- and how to put that in the context of where we've been relative to the fourth quarter.

Well, I think that relevant to the issue of where our new business wins are coming from, on the institutional side, they're pretty much across the board -- from multiple providers, from multiple regions, and across all of the service areas that we're in, John.

And on the personal side of the business, same thing. I mean our new business is very broadly across all of our geographic regions in the United States and in Western Europe, and within all of our service segments -- all of our client segments. So it's very, very broad, and from a broad, broad source of prior providers in both the institutional business and in the personal business.

Okay. Perfect. And then final question -- just with regards to the increase in recoveries, is that more having to do with lumpiness of some of the previous collection efforts? Or is that you actually achieving a better severity on some of the actual loans that you took the charge-off for this quarter? Thank you.

I think it's more of the lumpiness that we've talked about in the past. I sense that we have a slightly improved marketplace in a lot of the places that we do business, particularly in PFS. And we're starting to see some very slight trends of improvement there. But as we've said in the past, we have a relatively low level of nonperformers and we have, generally, in some cases, some rather large loans.

So we would caution you all to think in terms of the fact that one or two loans moving one way or the other could impact the statistics pretty significantly. But things do seem to be improving at a little bit quicker pace around the United States.

Thank you.

Howard Chen, Credit Suisse.

Bill, you've been highlighting the record levels of new business momentum within C&IS in the second half of the year, specifically the fourth quarter, along with the rallying asset prices. I guess I would have thought we'd seen a bit more strength in fees here. Did I just miss something? Is this timing-related? Or is there another factor in your mind that's impacting results?

I would tell you to some extent it's timing-related. It's also, in part, related by our hedging practices. In the first quarter, we have a situation where our hedged rates are effectively lower than market rates. To what extent others have that problem, I can't comment, but I would tell you it's a combination of both of those issues.

Got it. Thanks. And then you noted just a desire to protect and insulate the net interest margin without taking undue risk. I think last quarter, you mentioned an 18-month duration in the securities portfolio. Where did that go and where do you think about taking that?

Well, we did almost nothing in the first quarter. We just finished out the program that we began in the fourth quarter and have done nothing since. The securities portfolio is roughly flat quarter-to-quarter in terms of yield.

Bev, would you add something there?

Yes. Howard, the one thing that I would add is, if you look at our Financial Trend Report that we issued this morning, you can actually see some of the actions that we took. If you look at the US government line on the average balance sheet, you'll see that -- you see the US government securities equaled, on average, $974 million in the first quarter versus only $67 million last year.

And then if you look at the Interest Rate Trend page, which is page 8 in our Trend Report, you'll actually see -- you can see the rate that we're earning on those securities. And that line item really depicts a lot of the yield enhancement strategies that we talked about that we instituted in the fourth quarter.

Also, Howard, the duration of the securities portfolio now is about two years. Average pricing duration is about nine months.

Great. Perfect. Thanks, Bill and Bev.

Brian Bedell, ISI Group.

If you could just elaborate a little bit more on the hedged rates that you -- Bill, that you just talked about a couple of questions ago?

Sure.

Brian, the way I would describe this to you is that we hedge our non-US dollar fees to reduce the volatility that can arise when currency rates fluctuate during and across periods. So there's hedging on fees, but, of course, we're not hedging the asset levels.

So any analytics that you're doing where you're comparing our fees to our assets, need to take into consideration that we're hedging our fees, but the assets are reacting to spot rates. So the relationship between those quarterly hedge rates and the period-end spot rates can have an influence on the realization that we get on the assets. As a matter of fact, if you look over the last nine quarters, you see that the quarters where we had the highest realization on our assets were actually the quarters where there was the widest variance between the hedge rate and the spot rates.

Right. That was going to be my next question, on the pricing. So, I guess, as we move forward, how should we think about that? Are you -- do you plan to continue these hedges as you have in the past? Or should we be modeling this a little closer to the actual foreign exchange influence?

Our hedge strategy remains in place, so we would expect that to continue. And it just depends on what the difference is between the hedge rates and the spot rates in any given quarter, and how it compares with the prior quarter or the prior year.

Right. Okay. And then just on the net interest margin, I think, Bill, you said it would have been slightly lower without that -- the one-time and the [low] -- are you talking about, like, 1 or 2 basis points, or --?

Yes, right. Exactly.

Okay. And then given the strategy of investing in US government securities pretty significantly in the fourth quarter, do you expect to continue that policy? So we should see the potential for [them] to improve from here?

No, not necessarily. I mean, we looked at our investment portfolio every month and consider options, and how we want to invest maturing securities. As we speak, our policy is unchanged -- meaning we would reinvest upcoming maturities and common types and common durations.

Right. Right, okay. And then just to clarify on the employee comp again -- so, once again, there was the $10 million of additional stock options expense versus the prior quarter. And then you said there was a $9 million reversal on the employee benefits side? Is that right?

Yes, that's correct.

So going into the second quarter, we should normalize for both of those -- [of course to a lot of] people?

Yes. Correct.

Okay. Great, thank you.

Tom McCrohan, Janney Capital Markets.

What's the breakeven US dollar rate? So what level does the US dollar need to be to break even on the hedge for the rest of 2011?

I don't know.

Higher from current levels?

We don't have any disclosures on that, Tom.

Okay. And then was the weaker US dollar -- just a curious question -- is the weak dollar during the quarter a factor at all in the sequential improvement in net interest margin?

In the net interest margin?

Yes.

Oh. It's not.

It's not -- okay. And on the expense side, just kind of curious what you're thinking about on expense growth. Is there a point where you're going to -- are you thinking internally about taking a little more aggressive actions on the expense side to offset potentially persistently low interest rates? Or are you going to continue to invest and be comfortable with the dynamic of potentially stubbornly low growth and top line and rising expenses? Thanks.

As we said in the call comments, we're continuing to invest in our business. And investing in our business involves a considerable investment in technology. At the present time, we have a higher number than last year planned in that category. It involves a continuing commitment to high quality people. And we've discussed our investing through the cycle program with you before.

At the present time, I would tell you that remains in place. However, we talk about the changing environment every month, every quarter. And if we feel that the realization of the benefits of these types of programs will be farther out than we had originally thought, or that market circumstances change, or that the world changes in some unanticipated way, we would consider changing our policy. But today, our policy is to continue to invest in the business because we can and certain others can't.

Betsy Graseck, Morgan Stanley.

A couple of questions. One is on fee waivers. I think you mentioned the run rate right now is $16.7 million, is that right?

That's correct.

So that's up from the prior --?

Yes, it is. It's up from the prior quarter, and actually, I think, down from a year-ago's quarter. But the issue here is this stuff is very short duration these days, as you know. And during the fourth quarter, we had a pretty significant decline in very short-term yields, particularly toward the end of the quarter.

Okay. So this was rate-oriented, not the amount of the funds that you're applying this to?

No, it's actually -- it's completely rate resulting because the balances in our money market fund complex are roughly the same quarter-to-quarter and the distribution is roughly unchanged as well. So [yearly] lower yields and our inability to realize even the percentage of our fees that we were realizing in the prior quarter.

Okay. And then on PFS, you were indicating how business is up in part from the Northeast region. You started to build out your Northeast region about three years ago, is that right?

Actually, we started in 2003 with the opening of our office in New York, and then had built out subsequent to then. So it's been almost eight years now.

Okay. So as we're thinking about the opening of the D.C. office, I'm wondering if you can give us a sense as to how you're expecting that office to contribute to the overall performance? I know it's one office out of many, but I guess the basic point of my question is, do you think you're going to be in a period of ramping to breakeven to profitability faster than what you experienced in the New England area? Or is it kind of on the same track?

Well, I think we'll do better than we did with our first couple of entrants. When we first came to New York in 2003 and later to Boston, I believe in 2005, we were quite underknown and under-recognized. Today, our presence in the market, while not dominating by any sense, is more important, and we have a very strong reputation for high-quality client service in the Northeast and the Mid-Atlantic that we might not have had at the beginning of last decade.

So I think reputationally, we're better positioned. Having said that, these new offices take a while to become profitable. So, while I wouldn't expect the incremental expense run rate to be too significant, it does, absent an acquisition, take several years to become profitable.

The other thing that I would add, Betsy, for the benefit of you and the others on the call, is that in our 2010 Annual Report, we began disclosing our [PFFC's] on a regional basis, because that's how we're running the business. So you can actually see the Northeast region's fees not only in our Annual Report, but continuing into this first quarter in our Trend Report. So just to give you a perspective on the relative size of the various regions, the Northeast included.

Okay. Super, thanks.

Robert Lee, KBW.

First question is on the tax rate. Is there any one-time items there? Because I guess my impression had been that with the change in the Illinois state tax, there was some changes to some deferred tax items that may have caused some one-time adjustments.

Yes, there are. We think that the impact of the Illinois state corporate tax rate will affect us in two ways. One -- and this is reflected in the first quarter -- there's a $3.4 million adjustment to deferred tax liability. And then for each of the four quarters of this year, we're looking for a $1 million incremental tax liability. So, end quarter, $4.4 million; $3.4 million which would not be recurring. And then going forward, another $1 million a quarter.

All right. Great. That's helpful. I wanted to ask you a question on capital management, just kind of a strategic question.

As you pointed out, your capital management strategy had served you well the last couple of years in the crisis. But as you come out now with essentially all your competitors around the world, particularly in the US, being forced to retain higher levels of capital, in some ways you could argue that the competitive advantage to that diminishes over time. So how do you think about if -- how do you think about capital management going forward?

I mean, if, for example -- I mean, just to throw numbers out, if the regulators dictate that you have to have at least -- all your competitors have to have 7% or 8% Tier 1 common under Basel III, do you feel that competitively you want to run 9% or 10%? Or I mean, do you always kind of want to be one or two steps ahead of everyone else, even if everyone else's capital ratios are coming up?

I think the answer to that is yes. Because historically, we maintained the Company at a well above well-capitalized level. And I think we want to do that into the future. For, among other reasons, the fact that while our capital is very high on a percentage basis, on an absolute dollar basis, it isn't that high relative to some of the peer banks that we compete with. So I think it's important to both keep the ratio high and the dollar amount, particularly of common equity, reasonably high.

Let me make a comment, though, about where we are on the issue of capital management. It may not be clear to all of you.

While we are not one of that 19 so-called SCAP banks, we are the next bank. We are the 20th on the list. And we're actually in a unique peer group, I believe. We're in a peer group of one, being a Basel II bank and not being a SCAP bank.

So, while we have not filed -- or followed exactly the timelines that the Fed has set for the SCAP banks in terms of filing capital plans and certain other things, we are doing the same things. And we did file, after our Board meeting in February, a two-year capital plan which had covered all of our planned capital actions with the Fed in late February. And we're waiting to hear the Fed's comments on that plan now.

So my point is that capital management and capital actions are not simply something that we are controlling at the present time. We've had pretty good cooperation from our principal regulator; but at some point, we do need to have agreement between the Company and our principal regulator about what an appropriate level of capital is going forward. And I'm sure we will, but at this point, we don't.

Okay. Thanks. And maybe one or two quick follow-ups, I guess also related to the balance sheet.

I mean, for a while now, your non-US businesses have been growing much quicker. And certainly, you see your non-US deposit base and it continues to be the driver of growth. Have you started to think about at all changing on how you manage the asset side of the balance sheet to reflect that? Whether it's actually more non-US-based assets? Or I mean -- any need to change or rethink balance sheet management as the mix of your deposit sources changes?

Well, I don't think so. Keep in mind that our practice in this area is to reinvest in common currency. So, for instance, if we get Australian dollars, we buy something on the asset side in Australian dollars. So we don't take currency risk on client deposits -- one. Two, relative to the client expectations in this business, we need to keep that money quite liquid.

Three, the growth in our balance sheet -- and you have the balance sheet in our press release and in our Trend Report -- has been pretty significant here in the last quarter and particularly at the quarter-end period. And it's well north of $9 billion. And almost all of that growth is from our non-US deposit base. So, the business is growing at a quick rate, probably at an accelerated rate versus prior periods. And we, of course, will continue to accept our clients' deposits when they want to place their money with us.

But to the question of being a little bit different in our approach on reinvesting those deposits on the asset side, we'll consider alternatives, but I don't think they'll be much different than where we are today.

Okay. And thanks for indulging me. One last quick question, this is on money fund fee waivers. I know you had disclosure about what they were in the quarter, but as, I guess, as a forward-looking comment or asking you for one but -- assuming repo rates, which started off the quarter under some pressure here, assuming that they remain under pressure for the quarter, is it reasonable to expect that, in the short-term at least, we're going to see some -- could see some increased pressure on fee waivers in the coming quarter? Particularly given how short duration money fund portfolios have to be nowadays?

Yes, in a word. I think if things stayed exactly the way they were at quarter-end, hypothetically speaking, throughout the second quarter, our fee waivers would be higher than they were in the first quarter.

Great. Okay. Thanks for taking my questions.

Ken Usdin, Jefferies.

Bill, I apologize if I missed this in your prepared remarks, but the last few quarters you've been giving us some color on how net new business was, just anecdotally. I was wondering if you can just tell us across the businesses how that looked in 1Q?

Sure. I'm happy to say that on the personal side, first quarter was the best quarter we've ever had, when presented on a net new business basis. So, good news there. And last year, as you remember from prior comments, was historically high as well.

In the institutional side of our business, you may recall that the fourth quarter was the best quarter we'd ever had. And again, on the same basis, net new business. And we were a little bit softer in the first quarter in C&IS.

Okay. And my second question, just to kind of follow-up on the business progression, just looking at the servicing detail, you had good positive marks on the equity side in all of the businesses, but investment management was down slightly. I'm sure some of that's the performance fees.

And also in looking at the new color on the PFS side, the Midwest was slightly down and Wealth Management was slightly down. So, I was just -- obviously, the year-over-year growth is very strong, but just from a progression perspective, can you just kind of walk us through whatever it -- whether it's day count or money fund fees, or just negative business mix, what are the drivers there?

Ken, this is Bev. First of all, we don't have performance fees like some of our peers do, so that would not be part of our equation as you do your analytics.

And then the other point that you make is a good one. Now that we have a regional breakdown in PFS, one of the things that you correctly saw was that our sequential quarter growth in the Midwest region did not look as strong as it was across the other regions. And you actually have to deconstruct that a little bit.

Actually, our Illinois fees and the rest of our Midwest states did have strong growth very similar to what you're seeing from the other regions. But we also, because the Midwest is our heritage region, we include Other in there. And in the first quarter, we did change an allocation methodology for some of our fund level asset management fees. They had previously been assigned to Other and now we've moved them out into the regions. So that does affect -- it affects the Midwest region, but primarily because it had previously had this Other category related to fund level asset management fees.

So, as Bill said earlier, new business was strong across all of our regions and we feel very good about all the regions. And I wouldn't focus too much on that one metric, the sequential quarter growth for Midwest.

Okay, great. Thanks very much.

And that is all the time we have for questions today. Mr. Morrison, I'll turn the conference back over to you for any closing remarks.

Thank you. Thanks, everyone. We look forward to updating you on Northern Trust's second-quarter performance on July 20. Thanks. Have a good day.

And that does conclude today's conference. Again, thank you for your participation.