Northern Trust Corp (NTRS) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation first-quarter 2012 earnings conference call. Today's call is being recorded. At this time I would like to turn the call over to the Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead.

Thank you, Jennifer, and welcome to Northern Trust Corporation's first-quarter 2012 earnings conference call. Joining me on our call this morning are Mike O'Grady, 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 financial trends report by e-mail this morning, they are both available on our website at NorthernTrust.com. In addition and also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call.

This April 17 call is being webcast live on NorthernTrust.com. The only authorized rebroadcast of this call is the replay that will be available through May 18. 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 2011 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 Mike O'Grady.

Good morning, everyone. Let me join Bev in welcoming you to Northern Trust's first-quarter 2012 earnings conference call. During today's call, I'll review our first-quarter financial performance and provide an update on the Driving Performance initiative we introduced last quarter.

Before we get into the details I would like to make a few overview comments on the quarter. Our first-quarter results of earnings per share of $0.66 and a return on equity of 9% reflect progress across a number of fronts against a backdrop of a mixed operating environment. New business was strong, including success with both Personal and Institutional clients.

For example, our Institutional business announced custody wins with UnitedHealth Group and BJC HealthCare as well as another ETF from Source. And just last week we announced the excellent momentum we are seeing in the hedge fund administration space, which I will discuss in more detail later in the call.

In our Personal business we continue to see strong growth across all regions. Equity markets improved for the second quarter in a row. This had a positive impact on the market value of client assets and on our fees, where they are calculated on the basis of current period, month lagged, or quarter lagged asset values.

Assets under custody ended the first quarter at a record $4.6 trillion, up 6% year-over-year and 8% sequentially. Assets under management ended at $716 billion, up 8% year-over-year and sequentially.

Volatility trended lower in the first quarter, resulting in a reduced level of foreign exchange trading income. The low level of interest rates continued to pressure net interest income and has also resulted in fee waivers on our money market funds remaining at high levels, albeit lower in the first quarter than the prior quarter.

The US economy's slow recovery continues, which can be seen in the improving credit quality of our loan portfolio. With nonperforming assets declining for the third quarter in a row, our loan loss provision decreased to $5 million.

Execution on our Driving Performance initiative is off to a strong start for the year on both the revenue and expense fronts. This corporate-wide effort, which began at the end of 2011, focuses on improving our productivity, profitability, and returns in order to deliver greater value to our clients and shareholders.

Let's move to page 2 and discuss the financial highlights of the first quarter. Net income of $161 million and earnings per share of $0.66 both increased approximately 7% year-over-year and 24% sequentially. Our return on equity of 9% was better than last quarter and one year ago, but still below our historical returns and our future aspirations.

The year-over-year comparisons for both revenues and expenses were impacted by the inclusion of the Bank of Ireland Security Services and Omnium acquisitions which closed in June and July of 2011, respectively. The year-over-year comparison was also favorably impacted by higher trust investment and other servicing fees, higher net interest income, and a lower loan loss provision.

These favorable factors were partially offset in revenues by reduced foreign exchange trading income and in expenses by higher compensation, employee benefit, and equipment and software expenses. The sequential quarter comparison was favorably impacted by higher trust investment and other servicing fees, a lower loan loss provision, and lower expenses in general, offset partially by reduced net interest income and foreign exchange trading income.

I would like to highlight two additional items which impact the comparison between periods. First, we recorded $3.9 million in restructuring and integration charges during the first quarter. Recall that in the fourth quarter of 2011 we recorded $61 million in, restructuring, acquisition, and integration charges. There is a schedule of components of these charges in the appendix.

Second, there were no Visa-related adjustments in the first quarter. However, our results in the first and fourth quarters of last year included expense credits related to Visa of $10 million and $13 million, respectively.

With that background and summary, let me get into more details behind the first-quarter results beginning with trust, investment, and other servicing fees on page 3. Trust, investment, and other servicing fees were $575 million in the quarter, up 12% year-over-year and 6% sequentially.

Trust, investment, and other servicing fees in C&IS, our Institutional business, totaled $317 million in the first quarter, up 17% year-over-year and 4% sequentially. As I mentioned, equity markets were higher in the first quarter, with the S&P up 12% sequentially and the EAFE up 9%.

As you recall, some of our custody and investment management fees are calculated based on a one-quarter lagged methodology. Given that markets were also up in the fourth quarter, with the S&P 500 up 11% and the EAFE up 4%, sequential performance also benefited from quarter-lagged markets.

C&IS custody and fund administration fees were $210 million in the first quarter, up 24% year-over-year and 2% sequentially. Both increases were primarily the result of higher fund administration fees, including the acquisitions, as well as new business.

C&IS investment management fees were $62 million in the first quarter, down 8% year-over-year and up 1% sequentially. In the year-over-year comparison, new business was insufficient to offset higher money market fund fee waivers. The sequential quarter increase of 1% reflects a mixed picture -- improving market values, new business, and lower fee waivers partially offset by several factors including product mix and timing.

Waived fees associated with Institutional money market mutual funds and impacting C&IS were $10.6 million in the first quarter, up from $4.6 million in last year's first quarter but down from $12.3 million in the fourth quarter. The sequential-quarter decline in Institutional fee waivers reflects higher yields in the underlying money market mutual funds.

Securities lending fees were $21.5 million in the first quarter, up 26% compared with last year and 11% sequentially, driven by higher spreads. Borrower demand remained soft, however, as securities lending collateral of $97 billion decrease 12% year-over-year and increased only 2% sequentially.

C&IS assets under custody were $4.2 trillion at quarter-end, up 5% year-over-year and 8% sequentially, while C&IS assets under management were $537 billion at quarter-end, up 9% year-over-year and 10% sequentially. Asset growth was primarily driven by higher market values and new business.

We continue to be pleased with the pace of new business in C&IS. We had success in the first quarter expanding relationships with existing clients and also bringing in relationships new to Northern Trust. That said, our net new business results were lower than the year earlier quarter in the fourth quarter, as one significant client was acquired and its assets were consolidated with another custodian.

One area where momentum is noteworthy is the hedge fund administration space. In the last seven months, Northern Trust Hedge Fund Services has secured 22 client wins across the globe including six new clients in the Asia-Pacific region. We now have more than $180 billion in hedge fund assets under administration, including clients of Omnium, which we acquired last year. The innovative, technology-driven hedge fund administration capabilities that we have brought to the marketplace via Northern Trust Hedge Fund Services clearly provide an attractive proposition for clients and are but one area where we see very good momentum.

Moving to our Personal business, PFS, trust administration and other servicing fees were $258 million in the first quarter, up 6% year-over-year and 9% on a sequential-quarter basis, reflecting new business, higher market values, and the impact of the change in our fee structure, which was effective January 1. Money market fee waivers in PFS were $14.8 million in the first quarter, which is $2.5 million higher than the prior quarter but $6.5 million lower than the fourth quarter.

The sequential-quarter decline in PFS fee waivers reflects two factors. First, we reduced fees on our retail mutual fund products effective January 1, coinciding with the implementation of our new PFS fee methodology. Second, yields on the funds improved in the quarter.

With respect to market impacts, our PFS regions use a one-month lag methodology; and on that basis, equity markets were up were up 8% on a sequential basis in the first quarter. Wealth management fees are calculated based on a one-quarter lag methodology. While the S&P 500 was up 11% in the fourth quarter, wealth management fees were essentially flat as the impact of markets and new business was more than offset by the internal transfer of certain client accounts out of wealth management and into PFS regions and C&IS.

PFS assets under management were $179 billion at quarter-end, up 6% year-over-year and 3% sequentially, reflecting new business and higher markets. During the first quarter, as I just mentioned, we transitioned a large foundation client from PFS's wealth management group to the foundations and endowments group in C&IS. This client account encompassed both custody and managed assets.

New business in PFS remains quite strong across all regions and the wealth management group.

Total revenues are summarized on page 4. Total trust, investment, and other servicing fees, which I just highlighted, were $575 million for the quarter, up 12% year-over-year and 6% sequentially. Foreign exchange trading income was $62 million in the first quarter, down 27% year-over-year and 14% compared with last quarter.

The year-over-year decline reflects downward trending volatility and lower client volumes. The sequential decline reflects lower volatility, offset partially by slightly higher volumes.

All the other fee revenue categories were up 7% year-over-year and 6% sequentially. In the first quarter we recorded $3 million in credit-related, other-than-temporary impairment with our balance sheet securities portfolio compared with $5 million in the first quarter of last year; and we recorded no such impairment in the fourth quarter.

Net interest income was $266 million in the first quarter, up 9% year-over-year and down 5% sequentially. Our net interest margin was 1.24%, down 8 basis points year-over-year and 4 basis points sequentially. Recall that net interest income in the fourth quarter included a $7 million increase associated with the settlement with the IRS regarding the tax treatment of certain structured leasing transactions. Absent that benefit last quarter, net interest income would have declined 3% sequentially and the net interest margin would have declined just 1 basis point.

The sequential-quarter decline in net interest income was primarily the result of a reduction in average demand deposits of about $1 billion and one less day in the quarter. So in total, revenues on a fully taxable equivalent basis were $975 million, up 7% year-over-year and 1% sequentially.

Now, let's look at first-quarter expenses on page 5. Total expenses were $724 million in the first quarter, up 11% year-over-year, primarily reflecting the impact of the two acquisitions completed last summer, higher equipment and software expense, and the prior year's Visa benefits, which I mentioned earlier.

Our effective tax rate in the first quarter was 31.9%, compared with 24.1% last quarter. The low tax rate last quarter primarily reflects the favorable resolution of a number of outstanding items with both the IRS and state tax authorities as well as benefits from adjustments to our inter-company service allocation methodology.

To assist in your analysis of expense management, page 6 depicts sequential-quarter expenses, adjusted for restructuring and integration charges in both quarters as well as Visa in the fourth quarter. We adjusted the first quarter for the $3.9 million in charges associated with restructuring and integration activities. We have adjusted the fourth quarter for the $61 million in charges and as well as the expense credit related to Visa of $13 million.

On this adjusted basis, expenses were lower sequentially by approximately 1%. The 2% sequential increase in adjusted compensation expense is primarily attributable to higher share-based compensation. Recall that 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.

Staff levels on a full-time equivalent basis, however, were down 1%, compared with year-end. The 4% adjusted sequential-quarter increase in employee benefit expense primarily reflects higher FICA insurance expense, which is a normal seasonal pattern, and as well as higher healthcare expense.

Adjusted for charges, outside services expense declined 13% sequentially, reflecting reductions in sub-custodian, legal, technical services, and consulting expenses. The increase in equipment and software expense primarily reflects a $4.6 million write-off of software that is no longer supported by a vendor. Other operating expenses were flat on an adjusted basis despite the impact of costs associated with the February Northern Trust Open.

While our early progress and managing expenses is positive, we have more work to do and remain focused on the goals outlined last quarter in our Driving Performance initiative.

Let's move to page 7 for an update on Driving Performance and our actions and successes to date. On our last earnings call we indicated our goal to improve pretax income by $250 million by the end of 2013. We're on track to meet this goal and to reaching at least half the $250 million by the end of 2012. In the first quarter, we achieved approximately $25 million in pretax income improvement, roughly half each in revenues and expenses, which equates to approximately $100 million on an annualized basis.

On the revenue side, we have already implemented a number of initiatives designed to align our offering and pricing with that of our clients. On January 1 we successfully instituted a new pricing structure in PFS that provides greater transparency to our clients. This initiative was launched at the beginning of the year and is delivering enhanced revenues in 2012.

Outside of PFS, our other businesses are taking a coordinated set of actions to deepen relationships with clients, ultimately increasing our share of wallet. We are pursuing these initiatives in a very customized way, generally on a client-by-client basis, with selected revenue successes in the first quarter.

On the expense side, process optimization will over the long term be the most significant contributor to our profit improvement plan. However, process optimization efforts are complex, involve a high degree of change management, and the planning and instrumentation has to be coordinated over multiple quarters in order to ensure that customer service levels are not negatively impacted. While we do intend to realize meaningful financial benefits in 2012 from these initiatives, the majority of this value will be delivered in 2013.

One process area where we have already begun to deliver savings in 2012 is the optimization of our office footprint in PFS. In this instance, we are aligning our brick-and-mortar infrastructure to support our Personal clients more efficiently.

Technology initiatives are underway and delivering value in 2012 in line with the long-term expectation. As we have noted in the past, we have an efficient technology platform due to our integrated operating model and history of organic growth.

Actions driving improvement in 2012 include managing internal demand for IT services and hardware, and migrating our IT resourcing mix to lower-cost sources without compromising service or risk. We will continue to pursue these efforts in 2013 and also begin to realize benefits from realizing overlapping IT applications.

Corporatewide initiatives are delivering significant value in 2012, as many of these initiatives can be implemented quickly and the financial impact realized immediately. The simplification of our organization's structure is a major driver within this bucket.

As of the first-quarter 2012, our organization simplification plan is on schedule. We have made meaningful progress in eliminating positions associated with the 2011 restructuring charges, and additional positions have been eliminated via attrition. Aligning our retirement benefits with market is another significant component here.

Finally, given the importance of continuing to execute on these initiatives, we have made an important organizational move to help ensure that Driving Performance and ongoing productivity improvement efforts are successful. We have created a small group to manage the overall Driving Performance program and build the capabilities we need to sustainably increase our productivity and efficiency.

This group called Enterprise Productivity, will focus on these efforts and facilitate strategic corporatewide investments in technology and capability development. As announced on March 19 our Controller, Aileen Blake, will assume leadership of this group on May 1, and we have staffed it with some of our finest talent. We are confident that Enterprise Productivity will not only help us to deliver on the full $250 million target by the end of 2013 but will also drive meaningful, ongoing productivity improvements beyond that.

Let me wrap up with a few comments on the strength of our balance sheet, which has differentiated Northern through the challenging economic cycle. On page 8 we outline the three components of earning assets, all of which have been consistently managed with a conservative orientation.

Our lending strategy represents $29 billion in earning assets and is focused on our clients, with the majority of loans to PFS clients. Conservative underwriting practices across a diversified portfolio have resulted in loan quality better than industry averages.

In the first quarter, nonperforming loans decreased $32 million sequentially to $262 million at quarter-end. Improvements were evident across-the-board, including in residential and commercial real estate and commercial and institutional. Nonperforming assets were 0.98% of total loans and other real estate owned, down from 1.08% in the fourth quarter.

Net charge-offs were $6 million, down from $18 million last quarter. Our loan loss provision was $5 million in the first quarter, down from $15 million recorded in the first quarter of 2011 and $2.5 million recorded last quarter. As a result, the allowance for credit losses assigned to loans and leases was $295 million at quarter-end, representing 1% of total loans and leases and 1.1 times our nonperforming loans.

Our securities portfolio, which was about $32 billion at quarter-end continues, to be managed in a high-quality fashion with 85% of the portfolio invested in US Treasury, Agency, and AAA securities. The portfolio at quarter-end had a maturity duration of a little over two years and repricing duration of about 11 months, slightly higher than the prior quarter.

Interest-bearing deposits with banks, at $19 billion our third largest earning asset category, continued to be managed conservatively as well. Duration remains short at less than two months on average.

Eurozone exposures within this portfolio have been monitored and managed closely. At the end of the first quarter, we had approximately $3 billion in exposure to banks in the Eurozone, primarily those located in the Netherlands and the Nordic region. We continued to place deposits with a select group of stronger banks at short tenors.

Capital, outlined on page 9, remained very strong with Tier 1 Capital and Tier 1 Common ratios at 12.4% and 11.9%, respectively. As we estimate that our -- and we estimate that our Tier 1 Common ratio under the Basel III framework as we clearly understand the regulations would equal 12%, exceeding all anticipated requirements.

In mid-March, we announced a number of capital actions, including a 7% increase in our quarterly dividend to $0.30 per share and a new common stock repurchase authorization of up to an aggregate 10 million shares. We also announced that the Federal Reserve did not object to our capital plan, including the dividend increase and the repurchase of up to $240 million of common stock through March 2013.

Capital strength is a hallmark of Northern Trust and a key point of differentiation. We were one of only two large US banks that did not cut its dividend during the financial crisis. The capital plan that we submitted to the Federal Reserve demonstrates our capital strength, focused business model, and conservative risk profile.

Let me summarize by reiterating a few key points made during the call. Our first-quarter financial performance demonstrates progress on executing our strategies. Northern Trust's core businesses -- asset servicing, asset management, wealth management, and banking -- are performing very well on a global basis. We are delivering client-focused, value-added solutions and growing relationships accordingly.

Driving Performance is already having an impact by improving profitability and returns while maintaining our differentiated client service experience. Our strategy, our brand, and our financial strength continue to position us very well to serve our clients, grow the business, and deliver value to our shareholders.

And one final comment, we recently announced that Vice Chairman Sherry Barrat has decided to retire at the end of June. Sherry has been with Northern Trust for 22 years, and her passion for our clients has been instrumental in positioning Northern Trust as the premier wealth management firm in the US. Sherry has had a deep impact on Northern Trust and she will be missed.

Before I conclude, as is customary for our first-quarter earnings call we will need to end today's call to allow sufficient time for all of us to get to our Annual Meeting, which is this morning. Please accept our apologies in the event that we have to close off the question-and-answer period earlier than our normal practice.

Thank you again for participating in Northern Trust's first-quarter earnings conference call. Jennifer, you can open up the line for questions.

(Operator Instructions) Howard Chen, Credit Suisse.

Hi, good morning, Mike. Good morning, Bev. Mike, using some of the figures you mentioned, it sounds like first quarter had approximately $12 million to $13 million of revenue enhancements related to the program. Is that -- one, am I doing the math right? Two, is that entirely related to the new PFS pricing schedule adjustment?

You are doing the math correctly in that it was approximately half of the $25 million I mentioned; and the majority of that has to do with the PFS initiative. But there are some other items in there also, Howard, just related to C&IS, where that process is going to take longer and they are in the earlier days of that. But we did see some benefits in the first quarter.

Great. I know it's very, very early, but just curious to what extent on both sides of the house are you seeing any, like, client pushback? Or are you needing to make the difficult decisions to maybe sever or reduce relationships as you try to look to optimize returns and client profitability?

Yes, let me comment on both the Personal and the Institutional side. On the Personal side, I would say the evidence that this has gone well is that so far our lost business in the quarter is at levels that is very consistent with previous quarters, which is a low level, certainly relative to the new business that we have.

That is not because -- that is because it was managed very carefully, and it did involve the relationship managers reaching out to all of our clients and explaining what we are doing on the fee front, and the fact that the change in structure of the fee is intended to give them greater transparency around the services that they are receiving, the products that they are using. So I would say it has gone very well on that front.

And with any situation we do, even on the Personal side, take it client by client when there are concerns or issues.

On the Institutional front, I would actually say that beyond just going well in the early days, that it really has enriched the dialog with a number of our clients. Because it is something where it has caused both us and the clients to sit down and talk about the status of the relationship and, frankly, how their needs have changed over a number of years where we have been servicing them, and different things that we can do for them.

So again, early days on that; but there is a tremendous amount of preparation that has gone into these individual meetings that are happening so that they are very comprehensive when they happen.

Great, thanks. That's very helpful color, Mike. Just last one for me. Now that the 2012 capital plan is complete and there was no objection by the Fed, can you just provide us a sense of how you arrived at that plan and how you are thinking about -- how you thought about the balance between buyback, dividend, and just maybe retention to either continue to grow the business or do strategic acquisitions? Thanks.

Sure. So, on the capital plan, as we all know, this is an evolving process with the banks and with the Federal Reserve. Certainly our objective was to put together a capital plan that we felt that was providing capital return to our shareholders and was a capital plan also that would be not objected to by the Fed. And given that there is a lack of history there and knowing the nature of the process here, where it is either object or not object, it was very important to us that that plan is approved.

As far as the balance, as I mentioned in my comments there, Howard, as you know Northern did not reduce its dividend through the last several years here. And as a result, our dividend payout ratio is one of the highest and is above the 30% guidance that is out there. So from that standpoint we did feel like it was appropriate on our end to raise that dividend, which we did, knowing that that further pushed our dividend payout ratio relative to others and relative to the guidance.

We also then wanted to further, I will call it align our capital structure with our needs and doing that with the share repurchase. It was an amount, again, that we felt on top of the dividend would not be objected to by the Fed and gives us some flexibility. And I would just say going forward it is something certainly that we always think about capital management, and as the circumstances change going forward we will continue to analyze that and have the dialog with the Fed.

Thanks so much, Mike.

Jeff Hopson, Stifel Nicolaus.

Okay. Thanks a lot. You mentioned in terms of the new business, particularly on the alt side, good momentum. Any sense on the driver there, in terms of I guess geography?

And then are you taking share from, say, local competitors? Anything to understand what is driving that for you guys relative to, say, the market at large.

Yes, so I think, Jeff, you are referring to the comments I made with regard to our Northern Trust Hedge Fund Services. I would say the success there is -- it is a couple things.

One is with the Omnium acquisition, the platform that we acquired there, the technology, in our view really is differentiated and is certainly the strategic rationale behind that transaction. That has really been proved out in the marketplace and with these wins.

So we think that we are providing a solution that is competitive, certainly, and frankly something better than what they may be using. Which leads to the second factor, which is in a number of these cases the hedge fund manager is currently doing this on their own, and so it is really an outsource opportunity as well. So they look at this as an opportunity to get not only the best technology but also to move certain activities outside the firm and to focus on their investing activities.

Okay. Then just overall, in terms of new business activity, particularly I guess in Europe and other places, obviously there is a need to do more outsourcing because of the pressures. But any sense of the pipeline? And what are clients investigating, and do they seem action oriented? Any change in the new business pipeline, I guess?

Yes, what I would say as far as the new business pipeline, that the tone is good. There are a number of different opportunities that we are working on, and it's always difficult to truly quantify what the pipeline is. But the activity level, again, I would say very positive.

And I would say, Jeff, that the mix is very diversified geographically. So it is both opportunities here in the United States but then also in Europe as well as in Asia.

Then I would also say as far as the size of the opportunity, it really is a broad spectrum of large and small and medium-size opportunities in there. So at this point we feel good about the pipeline opportunity.

Okay, great. Thank you.

Ken Usdin, Jefferies & Company.

Hey, Mike and Bev. How are you doing? Good morning. Just a question, a follow-up on the productivity plan. Mike, I know you said that you are on track to get the half of the $250 million this year.

But I was just wondering if you can clarify again like your belief on -- do you see potential upside to the $250 million in terms of how -- where is your confidence level in terms of either getting to that $250 million?

And also I just want to make sure I didn't -- I heard right what you're saying. Like is there potential upside to that already in terms of how well things have gone in your first couple of months implementing?

Yes, at this point we are still focused on hitting our goals and hitting our targets. I would say, Ken, that importantly that some of the initiatives that we have kicked off here, you do see an immediate impact to them. So with the fee simplification, for example, that is a January 1 item; we essentially had the full quarter benefit from that.

Likewise, with some of the changes on the organization, even if we didn't have a full quarter, we did have the better part of a quarter given the reductions that we had in headcount. So some of those right out of the gates we'll get a benefit, so I wouldn't necessarily expect the same pace of improvement going forward.

Having said that, it is a major focus that we execute on this. And at this point feel very confident about achieving both our longer-term objective of the $250 million as well as our near-term objective of over half of that in the first year.

Okay, great. Then just my second question just relates to -- just want to ask you about the foreign exchanges. I know you made it very clear that there is the volatility challenge in FX and that continued to pressure FX revenues.

But can you just comment on if there is just anything changing underneath the surface in the business of FX? Whether it is either clients transacting differently, or moving away from using Northern or any other trust bank provider for transactions, or was it really just led by what is happening in the market environment?

Yes, I would say it clearly is primarily driven by what is happening in the market. As I mentioned in the comments there, our client volumes were actually up a little bit in the quarter. Having said that, that is our traditional business with our core custody clients and so that is going to be impacted by the volatility levels.

I would also say that like any market there are always changes that are occurring. It is something that we are taking a hard look at strategically to just determine -- are we approaching the business in the right way given the way that it is evolving? So as much as there is no fundamental underlying secular change in the business, in our view, we do view it as a service we provide to a current set of clients and look at ways that we can grow that.

Okay. This last clarifying thing, in the other services within C&IS, I am sorry if I missed this in your prepared comments. It was up a good chunk; it was up $3 million kind of to a little bit of a breakout level. I'm just wondering if you have any color on what was strong within other services.

Ken, this is Bev. That was primarily a seasonal factor related to the benefit payments business.

Okay, so it's seasonally strong in 1Q?

In this year, it was, yes.

Okay, great. Thanks, guys.

John Stilmar, SunTrust.

Good morning, Bev. Good morning, Mike. Real quickly, just with regards to the balance sheet, as I look at -- one, can you help identify the re-risking that has occurred, and the evolution of deposit flows on your balance sheet?

And from your perspective, given your client mix, what inning we are in, and where customers' deposits are sitting, and how you are thinking about your balance sheet positioning?

Sure. So as you are alluding to, John, we have seen over a more extended period, say the last two years, that clients -- both again Institutional and Personal -- have moved more assets on to our balance sheet in the form of deposits. I think that that is largely the result of just the broader environment.

So in a position of low risk, if you will, and looking for maximum principal preservation. So that is the underlying dynamic that we saw before this quarter for seven quarters in a row.

I think what you are seeing now is that with an improving equity market environment and, at least until in the last several weeks here, investors feeling better about developments in Europe, that they are more comfortable in moving off the balance sheet and essentially putting some of that to work.

Now, having said that, you saw it had a modest impact on our balance sheet where average assets were down 1% quarter over quarter. And going forward here, it is not perfectly clear to me that we are necessarily going to go into a period where the balance sheet continues to go down for quarters. It could go both ways, just as the risk environment changes.

But I think you are seeing that dynamic. I would be surprised if we saw a return to the growth levels in the balance sheet that we had in the previous two years, though.

Okay, great. Thank you. Then just for a point of clarification, the $12 million to $13 million from revenue opportunities that you saw in the quarter, those are actually in the reported results even with the one-quarter lag effect on some of your different segments, correct?

Correct.

Okay, great. Thank you, guys.

Brian Bedell, ISI Group.

Hi; good morning, folks. Just drilling down in PFS a little bit, a couple questions within there. So, obviously on the pricing side, to what degree are clients adopting some of the -- I guess the way to ask it would be adopting some of the different procedures that -- or I should say the different types of services that you are charging more for?

I guess if I have it correct you are charging more for the advice component that you are giving, versus the actual asset management component. Is that a correct way of thinking about it?

I would think about it differently. I wouldn't say that we are charging more for that component. What we are doing, really, is moving from a bundled fee, if you will, so a single fee for the client, to an unbundled fee. One where there is an account management fee that is separate from product fees.

So that all clients have the account management fee; but depending on the level of activity and the types of activities that the client has, they will have different levels of product fees. So that is the biggest difference.

It isn't necessarily an increase in the fees on any of those components. In fact as I mentioned, on some of the product fees we actually brought those fees down as a part of this initiative.

Right, right, so you are charging basically more for the advice component of your overall services, which I think is better aligning it with the overall service that you are delivering. So I guess my question was -- are clients feeling that is more valuable? And do you think there will be a better adoption rate of that going forward?

So in other words, will we see greater contribution from that price increase in future periods, do you think?

Yes, the way I would think about it, again, is that we didn't have a separate advisory or advice fee. So now the account management fee is segregated.

I wouldn't say that that has changed the view of the advisory part of this. I would say if there is any change in view it is that they have greater transparency and a greater recognition of the pricing of various types of products.

So an actively managed fund, an alternative product versus passive, versus cash, versus fixed income, and that transparency I think can have an effect on how they think about their account.

All right, great. Okay. Then just on the asset mix, are you seeing more clients shift to equities? We did obviously see an increase in the first quarter versus the fourth quarter. Was that to some degree due to clients shifting into equities, or is it mostly market-based?

Yes, when you do the analysis it is mostly market-based. The equity allocation is slightly higher above the change in markets. So we saw some movement, but I would say it was not a significant shift in asset mix, absent markets.

Okay. Is it your sense that clients will begin re-risking into equities over the course of the year? Or is that really a market-dependent? I guess, are you advising clients to shift more into equities?

Yes, again, we are continuing within NTGI to provide the asset allocation mix that is consistent with where we have been, but does include a large equity component.

Okay. Then just very lastly on the impact of the transitioning from that wealth management client into C&IS, is that material at all? Is that really not evident in results?

Well, you would see it in both the fees for wealth management as well as the AUM for PFS overall. So it would have an impact on -- it is one of the reasons why our wealth management fees didn't show the growth that you might have expected, and also why (technical difficulty) with the AUM. So yes, clearly if it was moving from PFS to C&IS, it was a very meaningful account.

Great, okay. Then just very last question on the balance sheet investment strategy. It looks like some of the yields in the government side and the GSE, the Agency paper is bottoming out. Are you investing at yields now that are higher than those first-quarter levels?

Yes, so basically what we saw in the first quarter is that we were able to reinvest at a yield that was roughly equivalent within a couple basis points of the yield of the securities that were rolling off. So overall it happened to be, as you saw, that the yield on the investment portfolio is the same quarter-over-quarter; and the activity underlying that -- roll-offs versus add-ons -- was also at the same.

So don't know where rates are going to go; but at the same time, certainly there was stabilization in the quarter.

Yes, great. Okay. Thanks so much.

Cynthia Mayer, Bank of America Merrill Lynch.

Hi, thanks a lot. Good morning. Just maybe a follow-up to Brian's question on the PFS AUM. It looks like it only went up 3%, and other AUM and AUC went up like mostly 6% to 10%.

So is all of that difference due to that one client moving over to Institutional, or are there other factors as well that we should think about? Aside from that, did you have inflows to PFS?

We definitely had new business in PFS this quarter. Of course the timing would be spread out across the quarter; but a significant portion of the AUM movement was affected by that large account that moved out of PFS and moved into C&IS.

Just recognizing in general that equities are only a portion of the total AUM numbers, and so the equities piece of it did go up, I would say corresponding with the market, absent what Bev just mentioned there. The other portions of assets under management there obviously did not see the same type of appreciation quarter-over-quarter.

So I would say what we saw there was consistent with changes in the market for the different asset classes, positive inflows, plus the adjustment Bev mentioned.

Great, thanks a lot. That clears it up. Then I guess one more question on the fee schedule if you can stand it, which is does -- is the new fee schedule any more or less sensitive to the equity market? It doesn't sound like it would be. But for instance, if the equity market rises 10% now, would it have any more impact on PFS fees than it used to have?

Not necessarily, I guess. Having said that, Cynthia, I do think that the fee levels, meaning in dollars, can behave differently now that we have unbundled that fee. So as our clients move to different products, those products can have different fee levels on that, whereas we wouldn't have seen that same level of sensitivity to asset mix when we had a single bundled fee.

Got it, okay. Lastly, if you don't mind, just maybe your outlook on money market fee waivers, given where rates are now and where you see them for this quarter.

Yes. So you saw in the quarter that they were actually down relative to the fourth quarter, and that was a result at least on the retail mutual fund side, money market mutual fund side, where we did bring down the pricing overall. So that was one component that resulted in the decline.

But in addition to that, we saw both on the retail side as well as the Institutional side, with just the slight lift in rates on the very short end of the curve, that the yields on the actual mutual funds went up and therefore reduced the fee waivers. To the extent that we continue right at the rate levels we have right now, I would say we would stay consistent with what the fee levels are -- fee waiver levels. But obviously to the extent that even on the short end they go up by a basis point or 2, we do see that benefit in reduced fee waivers.

Great. Thanks a lot.

David Long, Raymond James.

Good morning, Mike. Good morning, Bev. In the PFS business, with the branch rationalization that is going on, are there any specific closures or sales that you can point to in the quarter?

No, we took a few actions at the end of last year where we are basically recognizing the benefit of that this year. Again, I think what is important there is that what we did is in certain areas, such as north of Chicago here, in the northern suburbs, we had two branches for example in a particular neighborhood; and what we were able to do is consolidate into one branch, which we could then invest more in both from the standpoint of the physical presence but also in the expertise that we would put into that presence.

So, so far that has gone well. So we have done the same thing in certain other parts of the country.

So we did some of that at the end of last year. We will also continue to look at opportunities this year to do the same thing in other markets.

Okay. Then with the Driving Performance and the change in the PFS fee structure, were there any changes to the internal guidance that you can talk about? Or the internal guidelines that you used to distinguish? You used to have groups were it would be $1 million to $10 million are in this group, and $10 million and higher in that group. Has anything changed with those guidelines?

Not as a result of the change in fee structure. I would say that we continually look at how we serve clients and the different level of service need. As you mentioned, the segmentation that we have had, to make sure that we do have the right segmentation so that we can be providing the right services with the right level of efficiency for the needs of that particular client base.

So not related to the fees, but in general continually look at that, and frankly look to move clients to the segment where they can get the best and most appropriate service, which is -- you heard in some of my commentary there, we did move some clients from one part of PFS to another in order to get that.

Right, okay. Then lastly on the global initiative that you have talked about and made some changes in the management there, can you talk about any progress there? Then also where and how you are targeting the prospects outside of the US?

Are you saying changes with regard to the Enterprise Productivity that I mentioned or something different?

This is related to the Global Family and Private Investment Offices group.

Okay.

I will take that, Dave. You know, one thing to answer -- this is a follow-on to your previous question with respect to Private Client, wealth advisory and wealth management, the segmentation in how we serve those clients has not meaningfully changed. But in the second quarter you will see a change in our regional description.

So when we issue our earnings next quarter, for example, we have consolidated our Northeast and our Southeast into the East region; we have renamed the Midwest Central; and we have the West region. So we will next quarter have three regional breakdowns for PFS.

And we have renamed effective April 1 what used to be the wealth management group into more of a family/office group. So that has more to do with naming and structure than it does the service model.

Okay. Thanks, Bev. I appreciate that color.

Alex Blostein, Goldman Sachs.

Hey, guys. Good morning. Quick follow-up on the capital. So it feels like you guys went through the process, and I understand that. Obviously the first point that you guys wanted to make sure happens is that the regulators have no opposition to whatever it is you propose.

But if you look at some of the other banks that are as strong as you guys are, even some that are a little bit weaker, total payouts were higher; some of them were near 100%. You guys are still closer to like the 60%, 65%.

Do you see yourself over time returning more capital now that it is seems the regulators are, I guess, a little bit more open to higher payouts for the industry?

Yes, I think the most important thing on capital, Alex, is that that changes over time depending on what our capital needs are. So to the extent that we're able to continue to grow the business and have opportunities -- and I don't just mean balance sheet growth, but areas where we can deploy capital because we believe we can get attractive risk-adjusted returns, we would look to deploy capital there first.

Second, to the extent that we see opportunities to acquire other businesses that would be strategic for us, as we did in 2011, and achieve attractive returns as well, we look to deploy capital that way. And then as far as the dividend, as I mentioned, right now we are at a level -- not only is it above the level for other banks, but it is about our long-term level. Our expectation certainly is to grow into a dividend payout ratio that is consistent with where we have been historically.

Then that leaves you with -- where is our capital position relative to where we think we need to be and where the regulators think we need to be? And that is where with the share repurchases the approval that we have -- or the non-objection, if you will -- gives us the flexibility then to get the capital structure into the right place after you have gone through that waterfall that I just talked about.

Certainly having more flexibility on that front is better for us from a management standpoint. So we wouldn't sit here today and necessarily tell you, yes, we are looking to change our payout ratio per se; because if we have better uses for it then we would rather deploy in that way and get better returns on it. But to the extent that we are in a position that we feel as though we do have excess capital, we'd like to have the flexibility to have the Board make that decision and be able to return that capital through dividends and share repurchase.

Got you. Understood. Then, Bev, just a couple questions on expenses, on the one-offs; and I apologize if you guys already mentioned it. But could you quantify the seasonal pickup in comp due to options, and also what is the one-off this quarter also for the Northern Open? .

We have not quantified what the total cost of the Northern Trust Open is, but I can tell you that for the stock option expense in the quarter the amount that was associated with the immediate expensing to retirement-eligible employees was $5.3 million.

Got you. So that $5.3 million arguably goes away in the second quarter?

Correct, we would get back to a normal quarterly run rate. The first quarter is typically higher because of the fact that we immediately expense options that are issued to retirement-eligible employees.

Okay, great. And Mike, just -- sorry; one last one for me and this is a follow-up to Cynthia's question, the money market fee waivers. It looks like, if I look at the Treasury fund at least, the real pickup in yield happened in late Feb, March and continued here into April. And this is again really, really short end of the curve.

So to an extent where there's dynamic rolls through your money market funds, shouldn't we think about that $25 million net fee waiver number this quarter getting better in the second quarter, holding everything else equal? Just as securities mature and you add the ones that are -- with a little bit of higher yield on them.

Yes, you are correct in that trend that we saw during the quarter there, which is it started off with yields on the funds being lower, so the fee waiver amount did go down to the latter part of the quarter. And so we are entering into the quarter at a better level than we started the first quarter.

If it maintains that level, Alex, then, yes, we would see that benefit. Not knowing again where rates will be the rest of the quarter.

Yes; fair enough. Thanks, guys.

Mike Mayo, CLSA.

Hi, first the easy question. You had $720 million of run-rate expenses. You are looking for a $250 million reduction over two years, half this year. So where should expenses exit this year? Would that be $690 million per quarter, or does it not all hit the bottom line?

Yes, it's -- the reason why we quantify the initiative the way that we have, Mike, is because the expense level that we have over time is not static and definitely relates to the business and the growth of our business. So we will capture the amounts that we talked about there, $250 million by the end of '13 and over half of that this year. But underlying that, our expenses level could change depending on how fast we grow the business.

I'd also want to remind you that the $250 million is a pretax number which includes the revenue side of the equation as well. It's not just expenses.

This quarter you had $5 million of option expenses, $4 million for a software writedown. So would that be $9 million of expenses that should not occur in the second quarter?

We would expect that those two items would not occur in the second quarter, yes.

Okay. Now the tougher question, which is not a new one. So, the good news is the markets -- stock markets were up 10%; your assets under custody were up 8%. The bad news is your custody fees were up only 2% and Institutional asset management revenues were up only 1%.

Seems like a huge disconnect. I know there is a lag and everything else; but still it just doesn't seem close. I hear what you're saying about going from bundled fees to unbundled fees, but --.

And you're not alone. Your competitors, the assets under custody markets, are up big; and the core custody fees aren't up much. So are you guys just beating each other up? Is it like one big Hunger Games among the processing banks?

Your analysis is correct and certainly something that we look at as well, Mike. What I would say is that first of all, there still is definitely a correlation between assets under custody, assets under management, and our fee levels. Having said that, on a quarter-by-quarter basis, it is not always going to be a one-for-one correlation, even after you adjust for things like the asset mix that underlies that.

What are the other factors that come into place? Part of it is the timing on those flows. So we are giving you a reported asset level as of the end of the quarter; for some of those fees, they may be calculated based on end of the quarter or the client may have come in earlier in the quarter. Okay? So it doesn't fully capture the fee activity in the quarter.

The other part is, as I mentioned, we did have one large client that was consolidated, meaning that it was acquired and their assets were consolidated with another custodian. It depends on the timing in which that client goes out in the quarter. So there are some timing issues that underlie that.

Then also, with clients the asset mix that they have or product mix also has a different fee mix to it. So on that front we can have large new client wins but they may be in our passive area, which is going to be a lower level than say something that is in our Personal business or even a smaller client within the Institutional business.

So, what I would say is that the longer-term trend is still intact. Having said that, from quarter to quarter it is not always going to be a direct correlation.

Should we expect higher custody fees in the second quarter, assuming markets hold the current level, given the lag effect?

The lag effect definitely, yes, will be a positive factor. Just given as you pointed out, a lot of these fees are on a quarter-lag basis. The other thing I would say is that fees in there are not all asset-based, so there are some that are activity-based as well.

And for certain portions just in the quarter we saw either a flat or slightly lower level of activity, of transaction activity. That also comes into play.

Then just the Institutional asset management area, it is down 8% year-over-year. It is hardly up this quarter. It seems like something else is going on there that is not good. I don't know what it is, though.

Yes, I would say similar what I will call dynamics to what I just described for the broader fee levels. But you are right, there is not the direct correlation to the AUM levels.

All right, thank you.

Andrew Marquardt, Evercore Partners.

Good morning, guys. Just wanted to circle back once again I guess on the Driving Performance discussion. Can you just give us a sense of how much flexibility is there, or how conservative were you in coming up with the number?

What I am getting at is, if indeed revenues are tougher than folks expect or you guys expect, is there more room to -- -- more levers to pull? And conversely, obviously maybe we wouldn't see as much drop to the bottom line as you implied earlier. Which begs the question -- do you think you can actually get positive operating leverage this year in this environment?

Yes, so as far as more levers, the area I would point to, Andrew, if you think about one of the slides there, that second category about process optimization, that is an initiative where we looked at all the major processes within the bank in order to determine if there are opportunities to improve the both -- I will call it the effectiveness and the efficiency. So we would want to do it if we felt that it has a better client outcome, we can do it more efficiently, and we can increase our profitability, if you will, on that as well.

And with that, the initiatives that we have that we are pursuing right now are in the equivalent of a first wave, if you will; and then we will move on to a second wave. So the additional levers are the exact reason why we set up this Enterprise Productivity group, because we expect to continue to pursue these.

We are going after what we consider the greatest opportunities first. But as we go forward, we will look to do more of those. And that is probably of those categories the area where there is the greatest opportunity.

Thank you. And on getting to positive operating leverage in this still tough environment, is that achievable? Is that achievable this year? Do you think it is achievable this year?

Well, we had positive operating level on a sequential basis; and I think -- and again everybody will do their adjustments in their own way. But I think even if you look year over year, if you take out the acquisitions -- because the acquisitions, while positive contributors to profitability this quarter, are still in the early stages or middle stages, I will call it of being integrated. So I think you take those factors out, you basically have slight positive leverage even on a year-over-year basis.

So there is no question that we are looking to continue to improve our margins going forward, and that entails getting positive operating leverage.

Got it. That's helpful. In terms of the margin, how should we think about the margin going forward if the re-risking comes back? How much of the deposit inflows that you have received in the last several quarters really is a flight to safety, flight to quality that may reverse at some point? How do you think about that in the context of a normalized margin and balance sheet?

Yes, I think that while we definitely saw the benefit of flight to quality, because we know that those deposits likewise can get redeployed on short notice as well, that causes us to reinvest those at the shorter end of our maturity spectrum. So even within the securities portfolio or other parts of our balance sheet outside of that, in overnight funds, just to make sure we have adequate liquidity.

And at those levels, yes, those are going to be lower margin. Right now the overnight rate closer to 25 basis points, which is obviously below the 1% that we get on our securities portfolio. So as those roll off, we will see the first funds, if you will, being rolled off at the lowest part of the margin.

What I can't comment to is not only the rest of the securities portfolio and just where rates are, but also just our loan portfolio, which is a third of our earning assets, and also the deposit book as well. So I can't tell you that it definitively would cause our net interest margin to go up. But the aspect that you are talking about is a positive contributor to it.

To the margin? And how much would you think about that excess deposits? Is it $10 billion, $15 billion?

No. One, I can't quantify what it is because a lot of this is -- this is decisions being made by Institutional and Personal clients, so hard to know how they think about it. But I wouldn't expect it to be the magnitude you mentioned there.

Okay, thanks. Then the last question just on -- to [tag] on credit, it seemed like you had unusually strong recoveries this quarter, which led to the provision being materially lower this quarter versus last. Is that a fair characterization, that that might not repeat going forward in terms of the recovery levels?

That's correct, so I would say that chargeoffs, gross chargeoffs were down; but you are correct that our net chargeoffs were down even more because of the recoveries. And, no, would not necessarily expect to have that level of recoveries in future periods.

Great, thank you.

That is all the time we have for questions today. At this time I would like to turn the call back over to Bev Fleming for any additional or closing remarks.

Thank you for joining us this morning, and we look forward to speaking to you on our second-quarter earnings conference call in the middle of July. Thank you very much. Have a good day.

Thank you. That does conclude today's teleconference. We do thank you all for your participation.