Northern Trust Corp (NTRSO) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Northern Trust Corporation fourth-quarter and year-end 2005 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, Beverly Fleming, for opening remarks and introductions. Please go ahead, Beverly.

Thank you, Sheila. Good morning, and thank you everyone for joining us to review Northern Trust fourth quarter 2005 financial results.

Joining me this morning are Steve Fradkin, our Chief Financial Officer, Aileen Blane, Controller, and Mark Bette from our Investor Relations team. For those of you who might not have received our earnings press release or financial trend report by email this morning, they are both available on our website at northerntrust .com.

In addition, this January 18th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through January 25. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now, for our Safe Harbor Statement. What we say during today's conference call may include forward-looking statements which are Northern Trust's current estimates or expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2004 annual report and our periodic reports to the SEC for detailed information about factors that could affect actual results.

Similar to last quarter and to assist you in your analysis of our quarterly performance, let me quickly review the line items on our fourth-quarter income statement that were impacted by the Financial Services Group acquisition or FSG. After I've given you those figures, I will hand the call over to Steve Fradkin, Northern Trust's Chief Financial Officer.

On the revenue side of the income statement, the FSG acquisition added 42.7 million in revenues during the fourth quarter of 2005. Note that this figure excludes the funding impact of the acquisition which equals 6.3 million during the fourth quarter. If you include the acquisition funding costs as an interest expense, and therefore a reduction to revenues, fourth-quarter revenues associated with the FSG equalled a net $36.4 million.

This FSG revenue contribution can be broken down by income statement line item as follows -- 28.6 million in custody and fund administration fees in our corporate and institutional services business unit, 4.8 million in foreign exchange trading profits, 2 million in personal financial services trust investment and other servicing fees, 5.6 million in net interest income, offset by 6.3 million in acquisition funding costs, as I mentioned earlier, and 1.7 million in other income.

On the expense side of the income statement, the acquisition added 34.4 million in expenses during the fourth quarter. Total expenses associated with the acquisition included approximately 5.3 million in integration expenses. FSG integration expenses totaled approximately $20 million for full year 2005.

Total fourth quarter FSG expenses break down by line item as follows -- 13.9 million in compensation expense, 3.4 million in employee benefit expense, 4.9 million in occupancy expense, 600,000 in equipment expense, and 11.6 million in other operating expense.

In addition, we recorded a $900,000 loan loss provision for FSG as we began to transition their loan portfolio to our loan loss reserve methodology. Just to be clear, this provision relates only to the FSG entity.

As you read in our press release issued earlier today, and as Steve will discuss later in call, the fourth quarter loan loss provision on a consolidated basis was zero. On an after-tax basis, the FSG acquisition was neutral to overall corporate earnings in the fourth quarter and neutral to overall corporate earnings for full-year 2005. With those details behind us, let me now hand the call over to Steve Fradkin.

Thank you, Bev. And good morning, everyone. Let me extend my welcome to all of you listening to Northern Trust's fourth-quarter 2005 earnings conference call.

Earlier this morning, Northern Trust reported fourth-quarter 2005 earnings per share of $0.67, up 12% compared to the $0.60 we reported in the fourth quarter of 2004. Net income for the quarter equalled $148 million, up 11% year-over-year. Earnings per share and net income were both essentially flat on a sequential quarter basis. On a full-year basis, Northern Trust earned $2.64 per share, an increase of 16%, as compared to the $2.27 earned in 2004.

Net income in 2005 equalled a record $584 million, also up 16% when compared with the prior year. We've organized today's call to address three basic areas. First, I will outline a few items that you should be mindful of as you analyze our fourth quarter results. Second, I will review our financial performance in some level of detail. And finally, I will offer a few perspectives on our strategy and the momentum we are seeing in our businesses. As always, Bev and I will then be pleased to answer your questions.

As you analyze our fourth quarter results, you will want to keep in mind three particular items that impacted reported results.

First, as Bev outlined for you, our acquisition of the Financial Services Group of Baring Asset Management or FSG contributed $42.7 million in total revenues, excluding $6.3 million in acquisition-related funding cost, and $34.4 million in expenses, which includes the previously mentioned $5.3 million in integration expenses. Consistent with the revised expectations we provided last quarter, FSG was essentially neutral to corporate earnings in both the fourth quarter and for the full year 2005.

Second, our results in the fourth quarter included a $3.1 million nonrecurring gain associated with the sale of a multi-tenant building in Sarasota, Florida, that houses our Sarasota County headquarters and branch office. This transaction is part of our ongoing real estate portfolio optimization process and has no impact on our business model in Florida. We remain fully committed to the Sarasota market and will continue to be a tenant in the building under a long-term lease agreement.

Third, as outlined in our third quarter Form 10-Q filing, Northern Trust repatriated approximately $51 million in dividends from foreign subsidiaries in the fourth quarter under provisions of the American Jobs Creation Act of 2004. The related tax benefit reduced our provision for income taxes in the fourth quarter by $3.5 million, and resulted in an effective tax rate of 32.6% for the quarter. Our effective tax rate would have been 34.2% without the tax benefit from the dividend repatriation.

With that backdrop, let me review the quarter's financial performance beginning with our key revenue drivers. Total revenues equalled a record $692 million in the fourth quarter, up 15% or $89 million compared to last year. Excluding the impact of the FSG acquisition, revenue growth was 9%.

Trust investment and other servicing fees were the biggest contributor to the quarterly growth in revenues, up $65 million or 19%, compared to the fourth quarter of last year. Even excluding FSG, trust investment and other servicing fees increased at a double digit rate, up 10%.

Strong year-over-year fee growth was followed closely by excellent growth in net interest income, up $23 million or 14%. Corporate and institutional services fees of $221 million increased 28% or $48 million year-over-year. Excluding FSG, year-over-year C&IS fee growth equalled 11%. C&IS fees were essentially flat on a sequential quarter basis.

Custody and fund administration fees in C&IS increased 59% year-over-year to $110 million. Included in reported C&IS custody fees were $28.6 million in FSG fees. Excluding FSG fees, custody and fund administration fees increased a strong 18% year-over-year.

The key driver of our year-over-year custody fee growth was continued strong new business internationally. Global custody assets at year end equalled $1.2 trillion, an increase of 28%, or $274 billion versus one year ago, and 5% or $57 billion sequentially.

The equity market environment also contributed to the year-over-year growth in C&IS custody fees. Recall that C&IS custody fees are built primarily on a one quarter lag basis. At September 30, the S&P 500 was up 10% versus the prior year, and the EFA index was up 23%.

On a sequential quarter basis, custody fees in C&IS increased 2%, or $2 million. New business in our international activities and higher quarter lag equity markets were partially offset by lower FSG custody and fund administration fees. The decrease in FSG fees was primarily attributable to the loss of one client account. This loss was anticipated and we did not pay for the assets or revenues as part of our acquisition purchase price.

Securities lending fees equalled $33 million, up 7% versus one year ago, and down 7%, as compared to the third quarter. The year-over-year increase was primarily driven by growth in the volume of securities on loan. Securities lending collateral volumes equalled $217 billion at year end, up 16% or $29 billion versus one year ago.

Volume growth this quarter was driven by increased demand in the marketplace for U.S. Treasuries and strength in the IPO and M&A markets. The sequential decline in securities lending fees resulted from reduced spreads in the fourth quarter, offset by a 2% increase in securities lending collateral. Investment management fees in C&IS of $62 million were up 5% or $3 million versus one year ago, and flat sequentially.

The year-over-year growth in C&IS investment management fees was driven by our manager of managers subsidiary, Northern Trust Global Advisors, which benefited from both new business success and an improved equity market environment.

Assets under custody in C&IS equalled $2.7 trillion at year end, up 15%, or $355 billion from a year ago, and up 2.7%, or $72 billion versus last quarter.

Growth in C&IS custody assets this quarter was driven by favorable equity markets and new assets transitioned during the quarter, offset slightly by the adverse impact of foreign currency translations.

C&IS managed assets exceeded $0.5 trillion at year end. At $501 billion, C&IS managed assets were up 8.5% or $39 billion from last year, and 1% or $7 billion sequentially. 75% of the year-over-year increase in C&IS managed assets was the result of outstanding growth in our securities lending business, with the remainder emanating from our international and global asset management activities.

Our Personal Financial Services business unit reported fourth-quarter fees of $183 million, an increase of 10%, or $17 million compared to the year-ago quarter. PFS fees included $2 million in FSG fees in the fourth quarter. PFS fee growth excluding FSG was 9% year-over-year.

Growth was broad-based with all states and the Wealth Management Group experiencing improved new business results. The equity market environment also contributed favorably to the year-over-year comparison.

Recall that all PFS states are on a consistent monthly fee methodology. Using this monthly methodology, the S&P 500 was up 8% compared to last year. On a sequential quarter basis, PFS fees were up 3.4%, or $6 million. The primary driver of the sequential growth was new business, as the month end -- the month lag markets represented by the 1.1% rise in the S&P 500 provided only modest contribution to the quarter's results.

Total assets under custody in PFS at December 31st, equalled $226 billion, up 8% or $16 billion from a year ago, and up 3% or $6 billion sequentially. Managed assets in PFS equalled $117 billion, up 6% from a year ago and 3% sequentially.

Our Wealth Management Group, which serves families with assets of $75 million or more, reported fourth-quarter fees of $23 million, up 19% versus one year ago, and up 7% sequentially.

The year-over-year results represent both excellent new business in Wealth Management and a favorable equity market environment with the S&P 500 up 10% on a year-over-year one quarter lag basis.

The sequential increase was also attributable to strong new business booked in the fourth quarter. One indication of our continued success in Wealth Management is the very strong growth we have seen in assets. Assets under custody in Wealth Management equalled $114 billion, up 13% or $13 billion from one year ago, and up 4.5% or $5 billion sequentially.

Managed assets in Wealth Management totaled $22.4 billion at December 31, up 13% year-over-year, and 9% as compared to September 30. Foreign exchange trading profits equalled $44 million during the fourth quarter, up 3% versus last year and down 5% sequentially. The primary driver of the year-over-year increase was the FSG acquisition, which added $4.8 million in foreign exchange trading profits during the fourth quarter. In addition, higher client volumes were offset by a decline in volatility of the major currencies on a year-over-year basis.

The weaker sequential performance reflects relatively flat volatility across the major currencies and slightly lower volatility in the end. Treasury management fees equalled $16 million during the fourth quarter, down 21% compared to last year, and down 9% compared to the third quarter. More than half of the decline was offset by improved net interest income as clients elected to pay a higher proportion for their treasury management services via compensating balances.

Other operating income in the fourth quarter equalled $29 million, up 14% or $4 million year-over-year, and up 5% sequentially. Other operating income included $1.7 million in FSG revenues, and $4.5 million in nonrecurring gains related to the sale of certain assets, including the previously mentioned $3.1 million gain on the sale of a building in Sarasota, Florida.

Recall that other operating income in the fourth quarter of 2004 included a gain of $5 million on the sale of two nonperforming loans, and that the third quarter of 2005 included a gain of $4.7 million on the sale of a warehouse here in Chicago.

Net interest income equalled a record $187 million, up 14% or $23 million, from a year ago, and up 2% or $4 million sequentially. Our net interest margin equalled 1.80% in the fourth quarter, up 14 basis points from last year, and down 1 basis point sequentially.

Three primary factors fueled the year-over-year increase in net interest income. First, higher retail deposit spreads were the biggest contributor to the year-over-year growth in net interest income. Similar to recent quarters, deposit spreads have widened to more normalized levels with the rising rate environment from the depressed levels seen when rates were very low versus historic norms. Second, we experienced 9% growth in the loan portfolio year-over-year, primarily as a result of PFS activities and the FSG acquisition. Third, growth in foreign office time deposits has led to a mixed shift on the funding side of the balance sheet.

Foreign office time deposits, a direct outgrowth of our international success, averaged $18 billion in the quarter, up 23% year-over-year. Foreign office time deposits represented 51% of total interest-related funding in the fourth quarter, up from 43% one year ago, and 31% at the end of 2000.

These three factors -- improved retail deposit spread resulting from rising interest rates, loan growth, and a reduction in our relative level of more expensive wholesale funding, were the primary contributors to the $23 million increase in net-interest income as compared to last year.

The $4 million sequential increase in net-interest income was largely attributable to the maturity of some higher cost long-term borrowings and an increase in mortgage volumes.

Total loans outstanding at year end equalled $20 billion, up 11% from the year-end 2004. Residential mortgages increased 3% versus last year, to $8.3 billion. Residential mortgages represented 43% of our total average loan portfolio in the fourth quarter. Commercial loans increased 11% from a year ago to $3.5 billion at year-end. Commercial loan growth was fueled by new business in our middle market group and M&A activity in the marketplace.

International loans increased almost threefold from the prior year, and equalled $1.6 billion at year end, primarily due to the FSG acquisition and overall growth in our international business.

Credit quality at Northern Trust continues to be excellent. Nonperforming loans totaled only $31 million at year end, compared with $33 million one year ago and $34 million last quarter. We recorded no loan loss provision for the quarter compared with a $2.5 million provision in the third quarter, and a $10 million negative provision last year, resulting from the loan sales I mentioned earlier. During the fourth quarter, we recorded a de minimis $100,000 in net charge-offs.

Now, let me shift my comments to a review of expenses. Expenses during the fourth quarter of 2005 equalled $457 million, up 14% from a year ago -- from the year-ago quarter, and up 3% sequentially. As Bev mentioned earlier, expenses in the fourth quarter of 2005 included $34.4 million related to FSG. Expenses excluding FSG were up 6% year-over-year.

Compensation expense equalled $200 million, up 19% or $33 million year-over-year, and up 1% or $2 million sequentially. Compensation expense included $13.9 million attributable to FSG. Compensation expense excluding FSG was up 11% year-over-year.

The year-over-year increase in compensation expense excluding the FSG impact reflected higher incentive compensation due to improved corporate performance, the April 2005 annual salary merit increases, and additional staff to accommodate our continued growth and expansion.

Staffing levels equalled approximately 9,000 full-time equivalent positions at year end, up 12% from last year. The increase from last year reflects the addition of approximately 800 staff related to the FSG acquisition. The remaining hires relate primarily to the outstanding growth in our International and Wealth Management businesses and the continued buildout of staffing in our newer PFS offices.

Employee benefit expenses equalled $47 million in the fourth quarter, up 1% versus last year, and down 1% sequentially. Employee benefit expenses associated with FSG during the quarter equalled $3.4 million. Excluding FSG, employee benefit expenses were down 6% year-over-year.

Recall that last year's fourth quarter employee benefit expenses included a true-up accrual due to that year's strong corporate performance. Occupancy expenses in the fourth quarter equalled $37 million, up 28% or $8 million year-over-year, and up 12% or $4 million sequentially. Occupancy expense associated with the FSG acquisition equalled $4.9 million in the fourth quarter, and included $1 million to exit our lease for former FSG space in London.

Excluding FSG, occupancy expense was up 11%, or $3 million year-over-year, and 10% or $3 million sequentially. In both cases, the majority of the increase was due to prior period real estate tax adjustments or refunds. Other operating expenses of $149 million were up 12% or $16 million year-over-year, and 6% or $8 million sequentially.

The biggest contributor to the year-over-year growth was FSG, which added $11.6 million in other operating expenses during the fourth quarter, including $3.8 million in intangibles amortization. Excluding FSG, other operating expenses were up 3% year-over-year and 4% sequentially.

Other contributors to the year-over-year increase in other operating expenses included higher technical and consulting services associated with various product and systems development initiatives.

In addition, we saw an increase in expense directly linked to our revenue growth as exemplified by higher business promotion, advertising and global sub-custody fees. These increases were partially offset by the excellent performance of our worldwide operations and technology team resulting in low levels of account servicing losses. We repurchased 926,000 shares of Northern Trust common stock in the fourth quarter at a cost of $49 million.

Diluted shares averaged 221.6 million, down 100,000 from last quarter. We can purchase an additional 3.2 million shares under our buyback authorization.

In keeping with our practice, we increased average common equity by 10%, versus one year ago, to a record $3.6 billion at year end. This represents the 71st consecutive quarter that we have increased common equity.

Let me wrap up by commenting on both the FSG integration and the continued strength of our positioning in the markets that we serve.

With respect to FSG, we finalized the purchase price including all post-closing adjustments during the fourth quarter. As expected, the purchase price adjustment was not material. The final adjusted purchase price equalled 261.5 million British pound sterling, less than 1% higher than the original purchase price.

We continue to make good progress integrating the new fund administration and related capabilities into our operations. Client migrations to our platform, staff moves, and other real estate consolidations are all well under way and proceeding as expected.

On the client front, our expanded product breadth is achieving the goal we had set -- to make available a broader suite of services to our fund manager clients and to strengthen our position as a leader in the growing global fund manager marketplace.

In C&IS we ended 2005 with strong fourth-quarter new business results including several high profile wins. Our global business continues to lead the way, as global custody assets now account for 46% of C&IS assets under custody, up from just 9% in 1990.

We have achieved a 31% compound annual growth rate in our global custody assets over the past 15 years across a variety of market environments.

During the fourth quarter, Northern Trust was selected as custodian and fund administrator for the new pension pooling vehicle launched by Unilever, one of the world's most successful consumer goods company. The fund will be seeded with approximately EUR2 billion. Unilever is believed to be the first fully tax transparent cross border pension pooling vehicle launched for a multinational corporation in the form of a Luxembourg Domiciled Fund. Demand and interest for pension pooling is very strong, signalling the success of our product innovation efforts.

In PFS we also experienced solid new business results in the fourth quarter. Our national sponsorships of the King Tutankhamun and Andy Warhol exhibits are being leveraged across PFS regions. We are the national sponsor of the Andy Warhol Super Nova Exhibit and during the fourth quarter hosted the reception at the Walker Center of Art in Minneapolis to celebrate the exhibit's opening and our new office there. Over 400 clients and prospects were in attendance, solidifying our position as a prominent entrant to the Minneapolis/St. Paul private client landscape.

We will leverage our sponsorship further when the Warhol exhibit moves to the Museum of Contemporary Art in Chicago this March. The King Tut Exhibit wrapped up, so to speak, a very successful debut at the Los Angeles County Museum of Art and moved to the Museum of Art in Fort Lauderdale in mid-December. We hosted a preview party in Florida for 500 clients and prospects on December 16, transforming the museum's pavilion into an Egyptian oasis.

Finally, in December, Northern Trust was very pleased to receive the Americas Award for outstanding private bank from Private Banking International Magazine. The award recognizes achievements of institutions that specialize in wealth management.

Northern Trust was recognized for our trusted advisor model in which relationship management teams work together to provide comprehensive financial solutions to clients. Our investment arm, Northern Trust Global Investments, offers a broad product lineup to our core private and institutional clients. During the fourth quarter, we saw particular client demand for our securities lending, manager of manager, transition management, and mutual fund products. In the manager of manager's area, we were very pleased to announce a new relationship with Nordea, one of the leading financial services firms in the Nordic region, to provide manager research, selection, and monitoring expertise to their new manager of manager funds.

Northern Trust Global Advisors will act as subadvisor for the funds which will be sold by Nordea's life and pensions distribution channel. In the mutual fund group our assets under management exceeded $50 billion for the first time, reaching $54 billion at year end, up from $46 billion last year. The $8 billion increase was attributable to net inflows, primarily into our short duration and quantitative products.

In sum, we are pleased with our results in both the fourth quarter and for the full year 2005. For the year, we achieved record revenues, net income and earnings per share. Both C&IS and PFS trust fees were at record levels, as were net interest income and foreign exchange trading profits. Asset accumulation was strong as assets under custody, global custody assets and managed assets all reached record levels at year end. We achieved positive operating leverage for the year, an important goal at Northern Trust, and we ended 2005 with outstanding financial strength as exemplified by our strong balance sheet and capital positioning and excellent asset quality.

And now, Bev and I would be happy to answer your questions. Sheila, please open the call for questions.

Yes, sir. Thank you. [OPERATOR INSTRUCTIONS] And we will take our first question from Mike Mayo, Prudential Equity Group. Please go ahead.

Good afternoon. Or I guess it is still good morning for you.

Hi, Mike.

Hi. Could you give some more detail on the expenses? It seemed like expenses increased a bit more than revenues on a link quarter basis, and more generally, you had a flat earnings growth, link quarter, I think consensus was expecting a little bit more. So what didn't go quite as well as maybe you had expected, or maybe it did?

Mike, I don't think there is anything -- we have noise related to the FSG acquisition, and the expenses that we have there, but there is nothing that stands out in my mind as particularly problematic.

We had some revenue growth as I alluded to. We had expenses associated with that. We had a number of initiatives underway that perhaps moved up technical and consulting expense a little higher, but there is nothing that I would point to specifically that was of particular concern to us.

And did any area kind of fall short of what you had anticipated? Like FX or something else that might have hurt results more than you might have expected three months ago?

Well, I think it is always difficult to predict things like FX securities lending, there is always going to be a little bit of volatility, and you can look at the volatility in the marketplace, but it also depends on what your clients choose to do.

So I wouldn't single any of those out as materially better or worse. I just think we always have a little bit of movement. As I reflect back on securities lending, we're comparing off a very strong year-ago level of performance that was vastly better for a whole host of reasons at that time. So no, that's the normal volatility that we experience, and it is really driven by what our clients opt to do.

And then lastly, PFS showed some really great growth, especially in Illinois, but seemingly across most of your states. What is kind of the momentum there? And what is your outlook in 2006?

I think that is a good observation. PFS feels like it is building. As we have talked about, the Wealth Management Group continues to be very strong with Wealth Management fees up 19% versus a year ago and the pipeline there strong. And the product innovation there is strong. Some of the things we're doing with our virtual family office platform has been very good.

In that middle section, the Wealth advisory, which we think of as generally the 25 to $75 million, we've really seen great traction there, we've tripled the number of clients in that space, it is now a multibillion dollar business for us. And again, our pipelines there are strong and the win ratio is very good.

And then more broadly, in the private client service, the 84 offices in 18 states, again, I like what we're seeing. We're seeing improved fee growth. We're seeing the expansion of our physical presence. We're seeing improved client satisfaction indicators. And frankly, a better rollout of continuously improved product. Whether you want to look at just our investment performance, a broader product offering, with hedge funds and private equity, some of the things we're doing in financial consulting, interest rate, risk management, single stock concentration, and the like.

So I think your observation is right. We feel better about the broader PFS franchise and we will continue our work on that front.

Thank you.

You're welcome.

And we will take our next question from Tom McCrohan, Janney Montgomery Scott. Please go ahead.

Hi -- excuse me. Good morning. A couple of your competitors this morning talked about the outlook for this year, and two of which talked about feeling comfortable generating at a minimum 100 basis points of operating leverage for this year no matter what the market environment is this year.

Do you also believe Northern Trust, given your business mix, I know the rolls are somewhat different, can successfully grow revenues this year at a minimum of 100 basis points faster than expenses?

Tom, as you know, we don't provide any guidance. We do have a long-term stated objective of trying to achieve positive operating leverage, and I think we've done very well against that. When you look at 14 of the last 17 years we have done that. And that certainly would be a goal for 2006. But I wouldn't be able to go any further in terms of 100 basis points or anything of that nature.

It is consistent with the over-arching strategy and themes of this Company and what we have delivered on an annual basis the vast majority of the years over the last couple of decades.

Fair enough. And regarding the FSG acquisition, you talk a little bit about the status of the conversion of the clients. Can you remind us what potential revenue synergies exist once that fund administration business is completely converted? Synergies with both your -- if at all, with your domestic C&IS client base and if at all with your domestic private client business?

Well, Tom, we have not provided any numeric guidance as to revenue synergies, so I will have to be thematic here. But what I would is say is we have seen a growing -- substantially growing base of fund manager clients, something we call the Global Fund Services Segment.

And as you may recall, prior to the FSG acquisition, we really did not in Europe have fund administration and hedge fund administration capabilities, and an important driver of this was that capability expansion. Thus far, we are seeing good demand on that front.

Demand for alternative products is strong, so what the numbers will be, we will just have to see what we do, but I think from a capability standpoint and the demands that we're seeing and probably that you hear about vis-a-vis hedge funds, private equity and the like, we hope it will be an important contributor in 2006.

Maybe said another way, do you, in your -- before you bought FSG, as part of your existing C&IS Institutional business, you have a base of fund management clients, including hedge funds that you now are able to cross-sell this capability to, or is this more a new -- completely new client segment for Northern Trust?

No, it is an existing client segment for us, but I think the way I would answer that, Tom, is that the historic fund manager client base of Northern Trust was, if you will, tilted away from hedge fund, principally because we didn't have significant hedge fund administration capabilities.

So this opens up two doors, if you will. One, being a hedge fund administrator to, if you will, stand-alone hedge funds; and two, of equal importance from our perspective is that our nonhedge fund clients were showing clear direction to offer hedge fund offerings. So this enables us to both cross-sell to them as they enhance their product lineups to offer hedge funds and as well to serve, of course, the stand-alone hedge fund community.

Okay. And have you given a timetable when you believe the integration will be fully completed?

We expect it to be substantially completed in 2006. There will be some things that drift into 2007. But the vast majority of what we will be doing should be completed in 2006.

Excellent. And I just have one last question on net interest income slide.

Can you help us conceptually think about how the European Bank is now raising interest rates will impact that growing base of foreign time deposits on your balance sheet?

I don't know that I can correlate to central bank activity in any given part of the world. I think the correlation, at least intuitively to me and historically, is tighter to just our overall growth in global custody assets.

Now, of course, there are periods when our clients opt to have more cash, and you might argue that in a higher rate environment, they are more inclined to have a higher proportion of their assets in cash. But I don't think I can draw any strong correlation.

Okay. Thank you very much.

You're welcome.

And we will take our next question from Brian Bedell with Merrill Lynch. Please go ahead.

Thank you. Good morning, guys. Just going back to an earlier question on the growth in PFS. If you can break it out between three different areas and you probably can't provide exact numbers but maybe just more directionally. Third quarter to fourth quarter, what portion of that would be what you would describe as sort of seasonal type of revenues from things that you are doing within the tax planning, or whatever, in the PFS segment or financial planning? What portion would be from some of the new offices that you have opened over the last year to year and a half? And then maybe just characterize how sort of same store growth is doing? Are you seeing a bit of an inflection of your clients willing to invest more in your equity products and your products?

Brian, I don't have exact numbers, so I am going to have to give you directional [technical difficulty]. I think on a seasonal perspective there is nothing that I can think of that would have given us a pop, if you will. I would essentially zero out that one.

In terms of new offices, the way we cut the data, at least for this purpose, it's difficult to pull that together. My intuition would be that as we have talked about in a variety of forums, we have seen very good traction in the northeast, New York, Connecticut. We've seen very good traction in Delaware, although it is off a small base. Boston is still building. I would say the pipeline there is relatively smaller but extremely high quality. And Minneapolis is still early days. So I don't know how much I can -- I really don't have a number, but they do seem to be contributing, I will put it that way.

And then in terms of your question on, if you will, overall same store sales growth, if you want to term it that. I think my broad comment would be that it continues to feel better. If you reflect back a year ago, at least as we go around the system, as we look at the revenue growth, as we look at the pipelines, and as we look at the attitude of our sales and relationship people, it seems stronger. So again, I can't give you a number, but definitely feels healthier.

And you would -- I think you said this a little bit before but you would characterize the Wealth Management Group as leading that growth over the lower end of your [Inaudible].

I think it is still fair to say that the higher end of the market is more buoyant than -- I'm hesitant to say lower end, but the super-rich seem to be less impacted by any of the machinations of oil and all of the rest of it.

One thing I would add to that, Brian, though, is to keep in mind that many of the opportunities that come us to in the Wealth Management space do begin in some of our states. So the states can be very significant contributors to the success that Wealth Management has seen.

Right, you see some overlap between those different segments.

They tend to be great sources of getting in touch with those families and ultimately bringing them into the Northern Trust fold.

Bev actually makes a good point. It's -- sometimes when we talk about this, and you think in terms of segment, you think of Wealth Management as, if you will, a separate entity, but it is very closely linked to our offices in Florida and Texas and California. And many of the opportunities that we ultimately are successful on are forged by that network of offices and relationships that they've built and then bringing in, if you will, the Wealth Management capabilities to support those needs.

Right. So it's improved -- the net strategy overall is now really beginning to show an improvement in the overall franchise, because you're tying it together a little bit better it sounds like.

Yes, and I think Bev's point is a good one. It would be misleading in some respects to think about Wealth Management entirely separately. It is a set of capabilities, and we talk about it that way, but it is very, very much integrated to the rest of the broader PFS franchise.

Right. Okay. And then just flipping over to C&IS, foreign exchange and securities lending always difficult to predict given the volume of volatility but maybe you could characterize how you think cross-sell progress to your increasing client base in Europe is going?

Yes. You're right. It is difficult to predict. There are a lot of factors that drive year-over-year sequential results in any given period. But I would say the cross-sell continues to be quite high.

And if you look at those two categories on a sort of 10-year basis and try and take out a lot of the noise, there is definitely a correlation with the overall growth in our global custody assets. There can be individual events in the markets that spike or trough one of those in a given period.

But I would say the cross-sell continues to be good, and we continue to target those clients that commit or certainly seem substantially biased in favor of doing the mix of business with us as opposed to stand-alone custody.

Right. We shouldn't see any major change in that relationship, at least over the long term.

I would not expect to see one.

Right. Okay. And then on your foreign time deposits, they've been flat the last couple quarters, they had a big increase, I think a couple of quarters ago. Yes, that is the first to second quarter, a huge increase. Anything going on there that we should read or is it just sort of seasonality fluctuation?

I think it is just noise. Again, we have a large base of clients, and they can drop a billion, $2 billion on us at the blink of an eye, and it really has more to do with their underlying investment decisions and the hiring and firing of managers and so forth, more so than anything else. So you will see a little noise in that.

Right. And then again, we should correlate that with your growth in global custody assets over the long term as well.

That's correct.

Right. Okay. And then on the -- oh, the -- basically your private, or your PFS deposits, they've gone up at a very consistent rate over the last several quarters. Do you see that being able to be maintained?

I don't think -- I wouldn't anticipate any material change on that front. It has been pretty steady over the years. So no, there is nothing that comes to mind that would suggest a material change.

Right. Okay. And then just on the integration expense, are you still -- I think you had another 12 million in integration expense in 2006.

Is that -- that's about right with your -- you haven't changed your guidance on that, right? Or your year outlook on integration expense for FSG?

Brian, what we haven't done is we haven't provided any updated guidance on that so at this point there is no 2006 guidance on the table for integration expenses in totality.

The most recent guidance that we provided you last quarter was that we expected 2005 to be in the 20 to $22 million range and as you heard earlier, we ended up at 20.

Right. But then looking at what your total integration expense was, when you disclosed that at your May conference, which I think was higher than that, did that imply that you'd have more of it spill over into 2006? And we should continue to model that in, correct?

Well, I guess my point is is that we haven't provided you with any updated guidance on FSG for 2006 other than the EPS guidance that we provided last quarter.

Right. Okay. And then just last, maybe, can you just break out the equity, fixed income and the cash of the different segments?

You wanted that for a total as well as for PFS and C&IS?

Yes. Or actually just PFS and C&IS.

In our Personal Financial Services business, and Brian's question for the rest of you is to give a -- basically the asset allocation for assets under management.

In the Personal Financial services business it was 50% equities, 34% fixed income, and 16% short duration. And in our Institutional Asset Management business, it was 36% equities, 12% fixed income and 52% short duration.

Okay. Great. Thanks very much.

You're welcome, Brian.

We will take our next question from Mark Fitzgibbon, Sandler O'Neill. Please go ahead.

Steve, my question has been asked and answered. Thank you.

And we will go next to Nancy Bush, NAB Research. Please go ahead.

Hi Steve. How are you?

Hi, Nancy. I'm well. How are you?

I'm fine. Thank you. Just for clarity sake, could you just go back and summarize the special items that are present in other operating income and other operating expense in the fourth quarter, just so we've all got them clearly?

Sure, in other operating income, we had the sale of the Sarasota building in Florida. Again, just to be clear, that's a real estate driven decision, having nothing to do with our long-term commitment to Sarasota. And, in fact, we have a long-term commitment to that building.

And a few other nit and gnat games which add up to $4.5 million. And recall that the year-over-year comparison on other operating income had a $5 million gain on the sale of our asbestos loans. And then sequentially, again, we've got the 4.5 million, but in the third quarter, we also, as part of our real estate disposition strategy, had a $4.7 million gain on the sale of the warehouse here in Chicago.

And then, Nancy, the only other item that would be noteworthy would be the repatriation of the dividends, the 3.5 million, which would be an after-tax benefit to reduction to the income tax expense.

But that was in the income tax line, right? That wasn't on the other income?

Correct.

That's absolutely right.

Other expenses had how much in integration expense in there or was that distributed throughout the lines?

The 5.3 million in integration expense for FSG you're referring to?

Right.

You can break that down roughly a third each. The first third being compensation and benefits, the second third being the occupancy line item, and the third being other operating. It is roughly a third each.

So there was some in other operating.

Right.

It is integration expense.

Yes.

Was there anything else in there in the fourth quarter? I'm just trying to sort of net out the positives and the negatives.

No, there was nothing --

It was sort of a big sequential increase, what, about $8 million or so, which is a fairly large sequential increase in that for you.

The only other point I would make, Nancy, but this isn't going to answer your sequential question, is more the year-over-year, is for those of you that were listening to our call last year, to recall that there was a true-up, if you will, accrual in the employee benefits line, in the fourth quarter of last year. So as you're doing the year-over-year comparison on employee benefits you would want to be mindful of what happened last year.

Once again, that wasn't in the other expense line?

No it is not. It is in employee benefits.

I'm just trying to get the others.

You're just trying to get the other, okay.

Right. If there is anything special that led to that sort of $8 million rather large increase from third quarter to fourth quarter. Other than you had about a third of the integration expense which would be roughly 1.5, $2 million, if there was anything else in there?.

No, it is all spread across an array of lines, Nancy. There is nothing else that I can think of that jumps out.

Okay. Secondly, you said you're still building in Boston and I know there was quite a long surge for a place to hang the hat there. Is Boston fully in the expense run rate at this point? Or is there going to be more added over the course of '06?

The base of Boston is in the run rate. We will have a few more hires. Just for the benefit of all, we had our Grand Opening in Boston on October 24 with several hundred people, clients, prospects, centers of influence.

We did move someone out to run the office, Lee Willie, who is a long-term veteran of Northern Trust and PFS based here in Chicago, has relocated to Boston. We recently hired a portfolio manager and a couple of other key positions. So we're -- we've done the heavy lifting in Boston. But we will continue to build. But more built around the growth in our revenue profile in Boston.

Okay. So -- but for occupancy expense, and that sort of thing, that's already mostly in the run rate?

That's correct.

Okay. Great. Thank you.

You're welcome.

And we will take our next question from Ken Usdin, Banc of America Securities. Please go ahead.

Hi, thanks. Good afternoon.

Just one quick question on FSG, the revenue side. Sequentially, that business was down a little bit, third to fourth, and I just wonder if you can kind of just walk through, A, if through any specific drivers, either kind of customer outflows or contracts going away? And also just the context of just how that part of the business specifically is positioned for the future.

Ken, yes, there was one client departure that was the driver of that sequential decline in FSG. That departure was known to us. It was expected by us. It was revenues that we did not pay for in the purchase price. So that was -- that accounted for the downdraft sequentially.

And would you say that that impact of clients leaving, is that pretty much washed out now? Or is there still some element of that potentially for next year?

I think it is largely done. I would be hesitant to say definitively, but I think -- a lot of this was stuff that had already been baked in the cake, that either FSG knew about or we knew about quite quickly after the close. So I think the vast majority of it is done.

Okay. And the last just quick question on the -- did you say what the net income from FSG was this quarter, specifically, because I know the last couple of quarters you had a disconnect between the pre-tax and the after tax?

The only -- all we said, Ken, was that it was neutral. We gave you the income statement. We gave you the loan loss provision, so you can get to a pre-tax, and then we said it was basically neutral after tax.

All right. Thanks a lot.

Sure.

You're welcome.

We will take our next question from Betsy Graseck, Morgan Stanley. Please go ahead.

Thanks, hi, good afternoon. Just a follow-up on the FSG question. I do -- if I recall correctly, you are anticipating to get some expense saves as you continue to integrate FSG. Is that a fair statement?

That is correct.

And have those expense saves started to hit your numbers yet?

The answer is yes, but you can't see them, because we've got a number of things going on. On the one hand, we've had some head count changes. We've switched real estate. We've migrated from platforms. But on the other hand, we have also ramped up on the client service side, and we're carrying the cost of some extra real estate, as we migrate.

So we are generating the cost saves that we had expected, but in this transitional period, it will be harder to see until we get through the extra expenses, if you will, of integration.

And are you pretty much done with integration at this stage?

No, we have a little more to do primarily in 2006. As I say, our plan carries a little bit into 2007. The bulk of it will be done this year.

So is it fair to expect that we should start to see the impact of the expense saves during '06?

Yes. Well, I would think that you would see -- I would expect to see moderation in the integration expenses as we go through the year and so you will start to get a better look at it.

Okay. And do I recall correctly that you had about 15 or 16 million in integration saves?

$20 million for full-year 2005.

Okay. And you don't have any changes for that?

No, that is the actual 2005 integration.

Oh, I'm sorry. I'm talking about the saves that you had indicated I think back in the Investor Day.

And again, we haven't provided any update to the information that we provided at Investor Day.

Okay.

It would probably also be a good point to point out that as we continue to integrate FSG, it will become harder and harder for us to be able to separate it out, which is clearly one of our goals. So our plan, at this point in time, is that we will provide you with separate information through the fourth -- the first quarter of this year, at which point in time the year-over-year comparisons will be comparable.

Right.

It is important for us to point that out to you because integration is one of our key goals here. This will not be kept as a separate entity, if you will.

Right. But given the merger phase, that you do anticipate over time, all other things -- you would expect a -- equal, you would expect a slightly slower growth rate to your expense line, as --

As relates to FSG, that's correct.

Thanks.

You're welcome.

And at this time we have no further questions. I would like to turn the conversation back over to the speakers for any additional or closing remarks.

Sheila, thank you very much. We appreciate the time and interest in Northern Trust and we look forward to updating you again in April with our first quarter 2006 results. Thank you.

And that does conclude today's presentation. We thank you for your participation. And you may disconnect at this time.