Northern Trust Corp (NTRSO) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation Fourth Quarter 2003 Earnings Conference Call. Today's call is being recorded. Conducting the teleconference today is Director of Investor Relations, Ms. Beverly Fleming. Please go ahead.

Thank you, Jamie. Good morning and thank you for joining us to review Northern Trust's fourth quarter financial results. Joining me this morning or Perry Pero, Vice Chairman, Steven Fradkin, Chief Financial Officer, Harry Short, Controller, and Mark Beatty my colleague in Investor Relations. If you do not receive our earnings release or financial trend reports I e-mailed this morning they are available on our website at www.northerntrust.com. I need to mention this January 21 call is being webcast live and can be found on our website. The only authorized rebroadcast of this call is the replay that will be available through January 28. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our Safe Harbor statement. What we say during today's conference call may include forward-looking statements, such as statements that relate to our earnings -- our financial goals, dividend policy, expansion and business development plans, projected profit improvements, business prospects and positioning with respect to market and pricing trends, strategic initiatives, reengineering and outsourcing activities, new business results and outlook, changes in securities market prices, credit quality including reserve levels, planned capital expenditure and technology spending, and the effective of any extraordinary events and various other matters including changes in accounting standards and interpretations on our business results. Actual results, of course, could differ materially from those indicated by these statements. I urge you to read our 2002 annual report and our periodic reports to the SEC for additional information about factors that could affect actual results. Now, let me hand the call over to Perry Pero.

Thank you, Beverly. And good morning. To all of you on this fourth quarter conference call. Let me extend my welcome to all of you.

Before highlighting our financial results today, I would like to make a few comments on the management changes we announced this morning. Earlier this month, I celebrated my 40th anniversary at Northern Trust. For the past 15 years, I've had the privilege of being the Chief Financial Officer for the corporation. Since the fourth quarter of 2002, Steven Fradkin has worked closely with me as Executive Vice President Finance in all aspects of the CFO job. We have planned this change for some time.

Steve has been working with Northern Trust for almost 19 years. And had a leadership role in many of the strategic initiatives we undertook in 2003. He joined Northern Trust in 1985, after graduating from Washington University in St. Louis, and prior to joining the finance team, he had a major role in the phenomenal growth we have achieved in our global custody business.

This morning, after I comment on the highlights of our performance, Steve will brief you on the major elements of our revenue and expense results. After those comments, I will return with some wrap-up comments, and then we will proceed to the question-and-answer session.

Earlier today, Northern Trust reported fourth quarter 2003 earnings per share of 58 cents, as compared to 43 cents reported in the fourth quarter of 2002, and 51 cents reported in the third quarter of 2003. We are very pleased to report this continued improvement in our earnings.

Highlights in today's earnings announcement including the following: First, we had meaningful positive operating leverage as revenue growth was greater than expense growth due to improved equity markets, acquisitions, new business success over the past year, and effective expense management.

Second, both our trust assets under administration, and managed assets are at record levels of $2.2 trillion and $479 billion respectively. Included in our managed assets at the end of 2003 were $75 billion in previously acquired passive assets.

Third, historically low levels of interest rates continue to challenge us as net interest income declined $15 million, compared to last year's fourth quarter. However, the strong increase in our fee revenues more than offset the decline in net interest income.

Finally, credit quality improved markedly from the already strong position you have been accustomed to expect from Northern Trust. An important factor in our earnings per share and net income results was the reduction in our credit loss reserve of $15.5 million. This resulted in a provision for credit loss credit of $15 million which had a positive impact of 4 cents per share on our earnings. The $15 million negative provision for credit loss compares to a provision of 7.5 million, one year ago, and $5 million last quarter. Our net charge-offs totalled only $500,000, or one basis point in the quarter.

During the fourth quarter, of 2003, our 7 and 8-rated loans, the highest risk-rated loans based on our internal rating scale declined 23% from $280 million at September 30th, to $215 million at year-end. Nonperforming loans declined 20% to $80 million from $100 million last quarter. The decline in both 7 and 8-rated loans and in our nonperforming loans stem directly from cash received during the fourth quarter to pay down existing loan balances on the highest risk-rated loans.

At Northern Trust, we follow a rigorous reserve methodology that requires an allocation of our credit loss reserve to each loan based on its credit rating. With the sharp decline in our highest risk loans, as a result of the cash received, we freed up $15 million of our reserve. Northern Trust remains a well-reserved financial institution with a sound and conservative credit philosophy.

Now, I would like to turn over to Steven Fradkin, our new Chief Financial Officer, to review our fourth quarter major revenue and expense items. Steve, welcome aboard.

Thank you, Perry.

Revenues in the fourth quarter were $544 million, up 7.5% as compared to the year ago quarter. 13% year-over-year growth in trust fees more than offset continued weakness in net interest income due to historically low levels of interest rates. On a sequential basis, revenues were up 1% versus the third quarter.

Our personal financial services business unit reported fourth quarter trust fees of $155.3 million, an increase of 6% or $9 million as compared to the year ago quarter. PFS trust fees were also up 2% or $3 million sequentially. Fees reported by our Illinois offices were up $4 million or 8% year-over-year, and up $1 million or 2% sequentially. Florida fees were up $2 million, or 5% from last year's fourth quarter, and up $1.5 million or 4% sequentially. You will recall from previous conference calls that Illinois fees are based on the prior quarter's ending asset values, while Florida's fees are based on asset values throughout the quarter.

Therefore, Illinois fees were impacted by September 30 market values, where the S&P was up 2.2% from June 30. Florida calculates fees throughout the quarter and the S&P increased 5.6% on a daily average basis during the fourth quarter. Trust fees in our remaining states increased $4 million versus last year.

For those of you who maintain financial models on Northern Trust fees, we will begin collecting fees on a monthly basis in Illinois, Texas, Arizona and several other newer states effective January 2004. These states now join California in using a monthly fee collection methodology. Fees will continue to be based on market valuations, which will now be calculated monthly based on the prior month's ending market values. This effort is designed to improve the consistency and efficiency of our PFS fee billing process. Florida will continue with its fee collection methodology that uses average daily valuations during the quarter.

Trust fees in our wealth management group, which serves families typically with assets of $75 million or more, equalled $17.6 million down $800,000 versus a year ago, and up $300,000 sequentially. The year-over-year decline primarily reflects a transfer of certain client accounts to the Illinois trust business.

Assets under administration in wealth management were $85 billion, up 30% from one year ago, and $8 billion or 10% from September 30. Managed assets in wealth management totalled $17 billion at year-end, up from $14.4 billion one year ago and up from $16.7 billion at September 30.

Our PFS new business results in the fourth quarter were a positive $7 million in net new annualized trust fees sold, as compared to $12 million in the fourth quarter of last year, and $6 million in the third quarter. Assets under administration in PFS at December 31 were a record $195 billion, up 24% from a year ago, and up 8% from September 30. Managed assets in PFS reached a record $104 billion, up 19% from a year ago, and 5% from $99 billion at September 30.

Corporate and institutional services trust fees of $155.3 million increased 20% or $25 million from last year's fourth quarter, and were up 2.5%, or $4 million on a sequential basis. The custody fee portion of total CNIS trust fees increased $10 million or 20%, as compared to last year, buoyed by continued strong performance in global custody. Global custody assets at year-end equalled $751 billion, an increase of 59% or 279 billion versus year-end 2002.

Growth was solid sequentially as well, [INAUDIBLE] custody fees up $4 million or 7%, versus the third quarter. Investment management fees in CNIS at $55 million also showed strong growth, up $11 million or 24% versus a year ago. Included in CNIS investment management fees during the fourth quarter were $5.5 million of fees resulting from our previous acquisition of the passive asset management business. Investment management fees were up 1% or $700,000 sequentially.

Securities lending fees equalled $23 million, up $2 million versus a year ago, yet down $2 million from the third quarter. The year-over-year increase in securities lending fees is attributable to the increase in collateral volumes that is resulted from our passive asset management acquisition. The sequential decline reflects the positive summer impact of the international dividend season, which typically runs into the early weeks of the third quarter. In addition, the low interest rate environment continues to pressure spreads earned on the investment of collateral.

Net new recurring business in CNIS for the fourth quarter equalled $25 million in annualized fees. These strong new business results reflect the momentum experienced in our institutional business in 2003. However, I need to remind you that it is the nature of the institutional business to have uneven flows from quarter to quarter.

Nevertheless, we are seeing positive new business dynamics from four principal factors. First, we continue to win new clients in the global marketplace. The State of New Mexico and Harris Corporation are fourth quarter examples of our new client success.

Second, our institutional investment business had a strong new business year in 2003. In particular, our passive asset management business has seen very robust organic growth emanating from our Number 3 positioning in the institutional index management business. For 2003, we added $40 billion in new passive assets above and beyond those added as a result of the acquisition.

Third, we continue to sell new solutions to existing clients. In 2003, fully 50% of our net new business came from cross-selling additional services to current clients.

And finally, we experienced less lost business in 2003. Our leverage ratio, which measures the amount of new business to the amount of lost business was 5.0 in the fourth quarter, and 4.3 for the full year, as compared to 2.0 for the full year 2002. We are very pleased with the new business results in CNIS and feel good momentum as we move into 2004.

Assets under administration in CNIS were up 46% from a year ago to a record $2 trillion, while managed assets of $374 billion were up $160 billion or 74%. On a sequential basis, CNIS managed assets increased $38 billion from $337 billion at September 30. Included in our CNIS managed assets at the end of 2003 were $72 billion in passive assets acquired.

Foreign exchange trading profits equalled a $27 million compared to 19 million dollar in last year's fourth quarter, and $29 million in the third quarter. The year-over-year increase reflects increased market volatility with the underlying theme of dollar weakness, and increased client flows.

Other operating income in the fourth quarter equalled $20 million as compared to $11 million in the same period last year. Recall that in the fourth quarter of 2002, we wrote off our $4.8 million equity investment in the global straight-through processing association industry utility. And wrote down $4.6 million in the residual value of an aircraft lease to United Airlines. Sequentially, other operating income was down $1 million.

Net interest income equalled $150 million down 9% or $15 million from a year ago, and up 1% or $2 million sequentially. The unprecedented low interest rate environment continued to place a significant drag on our net interest income as residential mortgages were refinanced or modified, and money market assets re-priced at very low rates. This has squeezed our net interest margin to 1.63%, down from 1.85% last year, and 1.67% in the third quarter.

Total loans averaged $17.5 billion essentially flat compared to a year ago. Residential mortgages were up 2% from last year, and averaged $7.9 billion, representing 45% of our total loan portfolio. Commercial loans averaged $3.5 billion, down 12% from a year ago, reflecting continued lackluster commercial loan demand. Personal loans were up 4% to 2 1/2 billion dollars.

As Perry mentioned earlier, our provision for loan losses was a negative $15 million in the fourth quarter, as compared to 7 1/2 million dollars last year. During the quarter, net charge-offs equalled $500,000, or one basis point on average loans. For the full year, net charge-offs were a low eight basis points. We are well-reserved with the reserve for credit losses equal to $157.2 million.

Nonperforming assets decreased to $80 million at December 31, down from $100 million at the end of the third quarter. This is the lowest level of nonperforming assets we have seen since the fourth quarter of 2000. Our asset quality continues to place us in a leadership position when compared to our industry peers.

Expenses during the fourth quarter of 2003 equalled $347 million, up 2% or $5 million, from the year ago quarter, and flat sequentially. Included in fourth quarter expenses were $3.4 million in expenses associated with acquisitions. Adjusting for that amount, expenses would have been essentially flat as compared to last year. Our expense performance benefited from initiatives announced in June 2003 to reduce our expense base by 70 to $75 million annually, over the next 12 months.

In September, we said that we expected to reach the high end of that range or an estimated $75 million in annualized savings by June of 2004. By the end of the third quarter we had successfully achieved approximately two-thirds of that annualized objective. We have now completed 85 to 90% of the total annual target of $75 million, and will complete the remaining amount by June of this year.

Now let me review each expense line item in detail.

A good example of efficient expense management at Northern Trust is that total compensation and benefit expense in the fourth quarter was $190 million, up only $600,000 sequentially. Head count continues to be aggressively managed and was down 38 people from September 30. Both occupancy and equipment expenses were managed effectively, as well, and combined were up only $1 million sequentially. Other operating expenses of $105.4 million were $8 million lower than last year's fourth quarter, and flat sequentially.

In the fourth quarter, we benefited from the reduction of a reserve we established in the second quarter of 2002, for a corporate action event. This matter accounts for approximately one half of the lower other operating expense in the quarter. Unlike prior years, our fourth quarter expenses did not increase sequentially, because of our various expense initiatives implemented in mid-2003. Items such as advertising and business promotion did not increase as in prior fourth quarters.

We repurchased 935,000 shares of Northern Trust common stock in the fourth quarter at a cost of $43 million. Diluted shares were down 331,000 from September 30, to 224.3 million. We can purchase an additional 10.2 million shares under our buyback authorization. Finally, in keeping with our practice, we increased common equity by 6% to a record $3 billion at the end of 2003.

Now, let me turn the call back to Perry for some closing comments.

Thank you, Steve.

It is certainly gratifying to end 2003 on a stronger note than we began the year. We believe the continued improvement in our profitability, since the middle of last year, reflects the ongoing effects of the strategic initiatives we put in place. Our revenues are again increasing and we continue to effectively manage our expenses.

A major challenge continues to be the low interest rate environment. Low rates are significantly impacting our net interest income and will continue to do so as the consensus outlook is that interest rates will continue at low levels this year. However, we have offset the decline in net interest income with increases in our fee revenues.

Our continued new business success in the marketplace bodes well for our continued growth. Our new business in CNIS was at a record pace in 2003. It is our expectation that the stronger stock market and economy will engender more investor confidence and increase our new business success in our PFS franchise.

In summary, we feel that Northern Trust's one of a kind personal and institutional financial services strategies, have strong potential for continued growth.

This morning, in addition to the announcement that Steven Fradkin was named Chief Financial Officer and a member of the management committee reporting to Bill Osborn, there were several other management changes announced. I would like to highlight them for you.

Stephen Timbers, Vice Chairman and President of Northern Trust Global Investments and a member of the management committee, will be retiring at the end of February. Steve joined Northern Trust in February of 1998, and previously had been President of Kemper Corporation and President of Zurich Kemper Investments. Terry Toth, who has been Executive Vice President and Global Head of Quantitative Management, Securities Lending, Transition Management and Commission Recapture, was named President of Northern Trust Global Investments, succeeding Stephen Timbers. Terry will join Northern Trust's management committee and report to Bill Osborn.

Also, Pete Rossiter, Executive Vice President and previously General Counsel, and current Head of Corporate Risk Management, has announced his intention to leave Northern Trust at the end of February. Peter will return to the practice of law at Shiff Hardin LLP, the law firm with which he was associated prior to joining Northern Trust in 1992. I will continue as Vice Chairman of Northern Trust and a member of the management committee. I will assume Peter's responsibilities, and continue as Chairman of the Asset and Liability Committee, and Head of Credit Risk Management.

We began these conference calls approximately a decade ago. And it has certainly been a privilege for me to conduct them since their inception.

Now Jamie, will you please open the call for questions or comments from our participants and either Steve or myself will respond to them.

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, press star 1 on your touch-tone telephone. Again, star 1 for any questions or comments that you may have. We'll pause for only a moment to assemble our question roster. We'll go first to Tom McCandless, Deutsche Banc.

Good morning.

Good morning, Tom.

A couple of questions, if I may. Could you please drill down a little bit into the nature of your new CNI business? You ended the year on a strong note, I'm looking for a little bit more color in terms of the type of business it is, is it pension, something else, is it domestic, or is it continuing international? Obviously, strongest year overall in five. That's the first question.

Tom, it's Steven Fradkin. Well, as you saw, the $25 million for the quarter was up 91% over the $13 million recorded last year. We are really seeing it across a variety of fronts, clearly Europe has been very strong for us, and you see that in the asset growth up to $751 billion in global custody assets. But I would say there's not one unique segment. We announced during the quarter the State of New Mexico, a public fund here in the United States, and Harris Corporation, a large corporation, we're seeing it amongst multinationals, amongst local authorities in the United Kingdom, and we're seeing it on the Continent. So it's fairly broadly based.

Okay. The second question has to do with -- two questions related to the income statement. If you touched on this, my apologies if I didn't capture all the details. But I'm curious as to the general trend and cash management fees, it's one of the areas that does not appear to be improving as much as others, I'm wondering if there's anything special going on there.

You're referring to treasury management fees.

That's correct.

Treasury management fees, those are the classical commercial banking revenue sources, lock box, disbursement, ACH, et cetera. If you look at our trends on that, you will see that that is essentially been flat and the competitive environment in that business has been significant for some time. And there's been a slight downtick in the fourth quarter, it was not only due to the competitive environments, but we had a lower level of transaction volume. It's your classical commercial banking cash management business.

Okay.

And your -- you had a follow-up?

Yeah, the third question is related to the expenses, the employee benefit number dropped sequentially in the fourth quarter, as it did last year, which I think there was maybe there were some reversals and I'm just wondering if there were any reversals in this year's fourth quarter.

What happens -- you do traditional true-ups, you have a lot less FICA in the fourth quarter, as many people go above and beyond the threshold for FICA, and you do your year-end true-ups. And that accounts for what you're observing, Tom.

And finally, a point of clarification on Steve's comment about some existing reserves in the other expense line. Could you please repeat that detail again? Were you comparing the year-over-year drop that half of the year-over-year drop is attributable to previously establishable reserves?

Let me amplify that for you. We -- what we had is we had a corporate action in the second quarter of 2002, that we had to reserve for. The issue had litigation associated with it, we've been working on it, and the resolution at this point in time was essentially for -- as Steve indicated, one half of that benefit that you see in terms of the expenses, was the result of our taking back the reserve that we established in 2002. Second quarter.

Okay. Thanks. Congratulations.

Thanks for waiting. You got a round-tripper there, we went completely around the bases.

Congratulations on a fine quarter and a fine year.

Thank you very much, Tom.

We'll go now to Nancy Bush, NAB Research.

Good afternoon.

Good afternoon, Nancy.

Congratulations, Perry, on your move upward.

Thank you.

Steve or Perry, the issue of options expense is sort of still looming out there for Northern Trust. And you've got one of the larger exposures, if your third quarter queue is any indication. As a percentage of your total earnings. So I guess USB implemented this, as you may well know, a few days ago, I'm just wondering when you're looking at implementing that, and what the impact will be?

Well, Nancy, so that everybody is aware of what you're referring to, you're referring to our 10-Q where we showed that in the third quarter if we had expensed options, it would have been 5 cents a share.

That's correct.

Impact to the earnings. We have taken the posture, as the majority of the companies have, that to continue with accounting principle 25 and FASB Number 123 until the final resolution is pronounced this year, and our expectation is that we would then commence expensing in 2005. The whole issue is under review, and as you know, it will not only be the expensing of the options issued, but also the remaining invested options. And we are looking at our overall option program at this time with our compensation committee to determine in what manner, if any, we will modify the profile of the options that we issue, and the stock unit grants that we issue. So the nickel a share that you see in the third quarter may not necessarily be the impact to our earnings when we begin to expense a year from now, in 2005. But you're right in your observation, we have not expensed, but we are waiting until there's final determination by FASB, then we will proceed accordingly, and we will review our overall option in stock unit award grants in the context of what FASB issues as the standard for expensing options.

Let me just clarify, Perry, what's shown in the third quarter Q is a nickel per share per quarter; is that correct?

That's the third quarter impact, you're exactly right.

Okay. If I may also ask, if you could just rough out where your assets under management, what percentage of them are equity versus fixed income assets at this point, so we can sort of see what the impact may be as rates begin to rise?

I'd be happy to do that. On managed assets, which is, you know, the one more revenue-sensitive, the totality of the managed assets, which aggregated 479 billion, as Steve indicated, the equity piece is 41%, fixed income is 20%, and the short or cash-related is 39%. The corporate and institutional piece has within it, equities 39%, fixed income 15, and the short-term piece is 46%.

Now that very higher short-term piece, that is the securities lending collateral that is part of the corporate and institutional services, and in the trend report, if you haven't gotten it already, you'll be getting, you'll see there was $132 billion of securities lending collateral. So that influences, it's not all cash, but that influences the fact that almost half of the managed assets in CNIS are short-term duration.

On the personal side, the $104 billion, Nancy, 50% is equities, half of it, 36% is fixed income, and about 14% is short duration. And that is on the managed side.

And the non-managed side, which of course, is not as sensitive as you can fully appreciate, our total assets under administration, equities are now 41%, fixed are 20, and the remainder, 39%, is essentially short-term with securities lending accounting for about 28% of it.

Okay.

And on the personal side, equities are 55%, fixed income 28, and the balance is short-term and other about 17%.

Okay, great.

I think that should help you, Nancy, give you sensitivity to it.

And Perry, if I may just ask one very general question: There seems to be in this quarter sort of a greater diversity between growth on the PFS side and the CNIS side that I've seen in this company in while, CNIS looking like it ended a year with a very strong quarter, and PFS not quite. Is it an issue of net asset value pricing? How do you see that? Is that a correct statement?

Well, it depends on what you're talking about. If you're talking about trust fees, I think they both did quite well. The PFS fees were 155 million, identical to what corporate and institutional were. The growth rate obviously was greater in both, of course CNIS is influenced by the revenues we're getting from the Deutsche acquisition, that buffers it, but they've had as Steve indicated very strong new business coming through. Now, are you referring to fees or new business?

Just sort of the new business trend, not seem as strong in PFS as they do at CNIS.

Your observation is correct. What we're reflecting there is the need to have a return of more confidence by the individual prospects that we're looking toward in the individual market. We find that particularly with those prospects and business opportunities that have asset opportunities for us in the range of $1 to $5 million. That part of the American populus was truly negatively impacted by its confidence of the three years of sustained declines in the equity markets. It's only in the second half of last year that you began to see a return to confidence. The markets didn't begin to turn until we got into the second quarter, and it's been a slow process of getting confidence back.

And as I said in my comments, it is our expectation that we now have had an extraordinary increase on a rather sustained basis, in the equity markets, and the general economy appears to be getting better. That should make investors more confident, more confident in making decisions about where they're going to be placing their assets. So we're looking forward to a lot more positive marketing environment than we've encountered. There's no question that last year was one of the more challenging years we faced in the PFS franchise, and it truly was because of the external factors of three years of historic bear market.

Thank you, Perry.

Thank you. Good to have you with us, Nancy.

Thank you.

I'll go next to Mike Mayo with Prudential.

Hi.

Hi, Mike, good morning.

Good morning. Seems like you'll have a pick-up in the first quarter from the monthly pricing. If you could just dimension what type of revenue pickup we might see in PFS fees, and maybe you can confirm my math. It seems like perhaps 100 million of the PFS fees are based on lag pricing. Between the pick-up and the market values job the push to monthly pricing, what kind of pick-up do we see if the first quarter, at least the pick-up that's already baked in?

Mike, as you know, we don't give specific forward looks on it, but your logic is exactly right. As you know, we've been on PFS, it was the asset values at the end of the preceding quarter which determine the revenues going forward, and as Steve tried to articulate, we're now bringing that more into the model that we've had in California and the other states. And it was really up until now it was like a 60/40 was the relationship that we have consistently said with 40% of the fees being more on a continuous realtime quarter, and 60% of the PFS fees were in a lagged quarter basis. So that's the dynamic. Then it's up to you to make a judgment relative to what this change that Steve indicated. Because as you know, our practice is not to give specific forward-looking guidance.

After the change to monthly billing, do we start thinking of that as more than 60 and less than 40? And if so, what would that new relationship be?

It might be in the range, approximately, give you some guidance, 75/20 or so with the 75 being the monthly. We don't have it all, we're entering into it now, we don't have a specific percentage to give you, just sort of a general Kentucky windage direction.

The reason for the change, was it just to benefit from the increase in the market or --

No, no. Not at all, because it's going to work both ways. This has nothing to do where markets go up and down, it's really to get the business on a more similar profile throughout the country.

It's really just part of our efforts announced, Mike, in June to improve, streamline, get some process efficiencies and get some of the variability out there. It will go both ways, but that's all that's behind it.

Will expenses also go up or is that going to be business as usual?

What was your question again?

Just with regard to expenses, should we expect any change with expense recognition or --

In what sense?

With this change we're talking about the monthly billing, are there any other changes being made on the expense side?

No, no, no. We have nothing -- the practices will remain the same.

Okay, great. Thank you.

Thanks for being with us, Mike and thank you for your coverage of Northern.

My pleasure.

We'll go next to Mark Fitzgibbons with Sandler O'Neill.

Well gentlemen, let me offer my congratulations as well on your promotions, I understand Steve we need to offer you congratulations on the birth of your new son.

Thank you. I've got it all going on, Mark.

I had two quick questions for you. First, I wonder if you can give us a sense of whether the pipeline of new custody business is starting to shrink now that low hanging fruit from the GSS State Street transaction is going by the wayside. And I have one follow-up.

I think the answer in a nutshell, Mark, is no. But it is difficult to generalize. Remember that as you look at our CNIS business, we have tremendous geographic diversity with clients in 38 countries. We have tremendous segment diversity. So as I referred to earlier, the pension funds, the insurance companies, the foundations, endowments, fund managers and so forth, and we have size diversity ranging from north of 50 billion down to the billion dollars level. As you can appreciate, there's a range of activity, but I would say that we have not seen any significant drop-off. And as you saw, we had a record year for new business in CNIS, and a very strong fourth quarter. I'm quick to suggest that that cannot portend a run rate, but it was a strong performance and there's nothing that I can think of off the top of my head that suggests a dramatic change from that.

Okay. And then the second question is: On the expenses, I guess link quarter operating expenses were flat. Are we sort of at bottom or do you think there's an opportunity to perhaps squeeze a little bit more on the expense side?

Well, we have been here for several years on a very sustained program to manage the expense base as aggressively as we can, in the context of the business, however, that is continuing to win in the marketplace. So we're going to continue the same practice that we've had. We have a very, very sharp focus on the head count, which is the biggest part of our expense dollars here at the Northern, and in the -- from the third to the fourth quarter, we went down about 36 people. And our focus will be to manage the head count, get more technology productivity improvements, but then recognizing with a business that, you know, is continuing to win in the marketplace, there would be an upward drift in the expenses, but we're ever mindful our productivity ratio and our goal is to get $1.60 in revenue for every dollars of expense.

But in basic answer to your question, we will continue very tight management of the expense base of the company. We were able to lower with a great degree of pain the cost structure of the business last year. And we certainly want to continue to maintain that lower cost structure base that we achieved in midyear of last year. With, you know, making some very difficult and painful decisions on the people side of the business.

Thank you.

We'll go next to Joel Gomberg with William Blair.

Hi Joel, thanks for joining us.

Thanks, Perry. Could you maybe give us your outlook on new office openings in PFS, I know you're now in New York City, Connecticut, where and when you plan going into Boston, and then is the priority more to fill out multiple offices in these areas, or should we expect other entrants into other cities in '04? And on the heels of that, do you expect to increase your marketing and advertising in '04 versus this past year?

Well, Joel, as we've talked about, we feel very positively about the footprint we've established, and we've been on a consistent campaign over the years to nationalize our footprint. If you look at where we are today, we've had New York up and running since July, we have opened up in Stamford, Connecticut, effective in January -- effective this month. We are partway into Boston. So I think the overall footprint is well in place, and the current strategy is less about office expansion and more about optimizing that footprint. That would not preclude other office openings in the future, but that is not the Number 1 priority at this point in time, given the coverage that we now have with our footprint.

On the marketing budget?

In terms of the marketing budget, we will continue to -- as Perry alluded to, we'll have to continue to watch that expense line until we see stronger momentum on the PFS side. But it's a question of how we use that budget. In our newer state, in New York and so forth, we will go up. But we'll be managing that in the context of our overall expense management program. So it will be shifting buckets, but I wouldn't expect to see a radical jump in marketing expenses.

Thanks.

We'll go now to Brock Vanderville with Lehman Brothers.

Thanks very much.

Hi.

I just wanted to ask a question a slightly different way: Are there any structural expense headwinds that we should look for that typically occur in the first quarter? You mentioned the FICA tax pick-up, but are there any items unique to your business that would really push up the expense base?

Nothing that -- extraordinary that -- you're absolutely right, FICA is -- what happens, you do have a step-up as you go from one year to the other, you basically have higher -- like all corporations, higher healthcare, your employee benefit, the whole range of employee benefits goes on. You have salary increases that you put in place, and obviously there's, in the employee benefits, we haven't finalized it all, you have the pension issues and all that. So what you encounter here at the Northern are the general expense issues that American corporations of our size face as you go from one year to the next year on the employee benefits side.

Okay.

But there's nothing else structural in terms of, you know, occupancy or what you're driving at that we are at all aware of.

Okay. And as a follow-up within CNIS, the investment management line, that included, I believe, 5.5 million of asset management business. Are there other issues there that accounts for its relative flatness sequentially?

No, there are no other issues there. You did understand Steve correctly. There was 5.5 million of Deutsche that came through there.

Okay. Great, congratulations, guys.

Brock, I woke up one morning a week ago and you were on Bloomberg, you know, on your call on the big merger that occurred here in Chicago, did you a terrific job, you came across terrific that morning. I stopped what I was doing and I listened to you.

Thank you very much.

We'll go now to Brian Bidell, Merrill Lynch.

Hi, good morning, guys, let me congratulate you on your new roles, very exciting. A couple questions, a lot of them have been answered, just to touch on CNIS fees, am I correct that in assuming the New Mexico plan funded in the fourth quarter -- I'll start with that.

Yes, that's correct.

And just to talk about the pipeline in UK and the Scandinavian countries, is there any difference in the outlook for that environment now versus a quarter ago?

No, I think Brian there's no substantive difference. As you can appreciate, there's volatility, and when people make decisions, but we still feel very optimistic about what we're seeing in the UK and Continental Europe, and in a variety of segments from insurance companies on through public funds and corporate pension funds. So no, no substantive change.

Any change in plans of looking at new markets within Europe or are you going to pretty much stay with the sort of footprint that you have now?

We have announced that we will be opening an office in Luxemburg. We hired a managing director for Luxemburg and have scouted out space so you'll see that come onstream, I think that's in the second quarter. But not positive. Other than that, we continue to look at our geographic footprint in Europe. As you know, we have clients in 38 countries, so we are used to operating with clients in countries where we don't have a physical presence. But as we continue to grow, we'll continue to evaluate where our physical presence makes sense. But nothing beyond Luxemburg to say at this point.

With Luxemburg office, you're really target central Europe, like France, Germany, so on and so forth?

Yeah, the Luxemburg office is really a play more on the global funds services business, servicing the needs of fund managers who have co-mingled funds, or servicing the needs of multinational pension funds who want to pool assets. So it's a fund manager, if you will.

Just a review on the PFS pricing, prior month or Illinois, Florida and daily average for Florida?

Correct.

And all other states will be a monthly prior?

Correct.

Okay. And then just to talk about fiduciary fees that are the seasonal lift that you get in the first half from the such things as estate planning, tax planning and things like that, should we expect to bump up this the first half of this year versus --

You understand the business, the biggest item that you see seasonally is the tax planning that we do, the tax returns that we prepare for all of our fiduciary clients, which is a significant activity that occurs in the first quarter. And that is traditionally year after year a first quarter phenomenon.

Okay. Great. And then a couple things, just the tax rate, do you have tax rate guidance for 2004?

No, we don't.

No, okay. And should we assume something around the same levels a '03?

Our pattern has been pretty consistent. You don't see huge variability at all in the percentage there. It's just basis point difference.

Right, okay. And just in -- oh, provisioning, clearly this reserve lease is a one-time item, it sounds like, does this mean you'll be lowering your provisions going forward?

I will be doing what?

Lowering the credit provisions.

No, it doesn't signal anything, it's based on our methodology, and the quality of the loan portfolio.

Right.

In periods where the loan portfolio has migrated to higher-risk ratings, you know historically in year 2000, in the third quarter, we had to increase our provision because we had a migration to higher risk ratings. So at this point in time, there's really no forward look there, and it's a very rigorous methodology that we apply, loan by loan.

Great. Lastly on the -- you talked about the branch openings that were planned. When is Boston supposed to come on line?

Latter half of this year.

Second half. And Bill had talked about in the past about openings in the middle Atlantic region. Any color on if that is something that would be thought about for the latter half of this year also or that more of a 2005.

We don't have anything here in January 21 to add any color to what Bill may have said prior, there's nothing specific I can give you.

Okay. Great, thanks a lot, guys.

Thanks for joining us.

Yes.

We'll go now to Tom McCrone, Keefe Bruyette & Woods.

Good afternoon.

Hi, good afternoon, Tom.

Two quick questions, follow-up on the reduction in reserves. How much of that sequentially reduction was due to the cash pay-downs for the high-risk loans versus a migration of 7-8 credits to a lower credit rating which might be more of a signal of a longer term trend?

This was all the cash-related, very tangible. Cash payments on loans rated 7 and 8.

So is it fair to say that the credit outlook kind of remains the same today as it did yesterday, you just happened to have some cash pay-downs?

Well, as you see, the -- there was not a general change in the direction of the credit ratings across the portfolio. It was essentially concentrated in the 7 and 8-rated loans. To have them come down, as I said, from 280 million to 215 million which is a very significant decline, and embedded with them were the nonperforming loans which came down 20 million, these are all on cash, it's not on us making a judgment. This company has gotten better in its performance and, therefore, we'll change the credit rating. It was all tangible events via the payment of cash, which reduced loan balances.

Great. Fair enough. And my follow-up was on the leverage ratio you spoke about earlier on the call, the ratio of new business won to new business last, can you refresh me, I couldn't write fast enough for numbers this year versus last, can you clarify what -- the number this year I think was five something, and if you excluded the disruption from the Deutsche State Street deal, what do you think the leverage ratio would have been this year?

I don't know that I can give you what it would have been. It was five in the fourth quarter, 4.3 for the year, and two last year. And we're talking about CNIS.

Just anecdotally, do you think the State Street disruption had a significant impact on that number this year or do you think this is more reflective of a trend going forward?

I really don't know.

I think what we had -- to put it in perspective, the lost business, as Steve indicated, last year we were inordinately impacted by -- particularly in the first quarter of last year, where a number of our custody clients were acquired by other entities, and the business moved from us to the acquiring entity's bank, and that brought about a -- the much lower leverage ratio. Because this business exited because the companies were acquired by another entity, and we did not have the business of the acquiring entity, and they consolidated it all with their existing custodian. So we have an issue where you might say that last year was abnormally low because of an abnormally high concentration of mergers, that business combinations that occurred in our client base, particularly in the first quarter of last year. And that affects your ratio year-over-year.

Great. Fair enough. And congratulations to both of you, Perry, and you Steve.

Thank you, Tom.

Thank you, thank you for joining us.

We'll go now to Ken Houston with UBS.

Thanks, good afternoon. Two very quick questions. First of all on just within the income lines, I was wondering if you could give a little more color on how two smaller actions, transition management and commission recapture acted in the quarter?

Well, we've -- transition management is -- was very good. Very good. And the whole transition management business in the year 2003 expanded significantly from the levels that we had in prior years. And it really came about from the fact that we had the expanded asset base that we got from the Deutsche transaction, and our numbers were -- we had approximately $25 billion of transition activity, a number of transactions were in the range of about an 400, if memory serves me right. And as I said, the business began to really take off in 2003. It's a substantial increase from levels we had in 2002. We brought on more of a team in 2002 which has done a terrific job in growing that business for us.

Commission recapture, same type of trend?

It's been good. You know, it's not -- nothing like transition, but it's something that we're doing more of now than we did several years ago.

And then the last question was on can you just talk a little bit request the Northern asset design product and how that's being now rolled out and accepted through the franchise? And any color on any impact that that's having on results in PFS?

Well, I think, Ken, it's a little early to say what the overall results are, but I think it has been a positive for us, and a -- an action that helps bring this PFS franchise around to the same kind of model, and enables us to provide pore consistency for clients. I think directionally we feel very good about what it means for our clients, and what it means for our process. But I think it's too early to discern any long-term trend around the end result of that effect.

Okay, thanks a lot. Good luck guys, in your new roles.

Thank you, Ken.

Next to a follow-up with Nancy Bush with NAB Research.

My question's been answered, thank you, it was on the branch openings.

And there are no further questions at this time. Mr. Pero, I would like to turn the conference back over to you for additional or closing comments.

Thank you, Jamie. This closes the January conference call, and Steve and the team will be with you in April to report on our first quarter results in 2004. And again, as we always say, we appreciate the interest that all of you have in the performance of Northern Trust Corporation. That closes the conference call, Jamie. Many thanks.

Once again, ladies and gentlemen, this concludes today's call. Thank you for your participation. You may disconnect.