Northern Trust Corp (NTRSO) 2013 Q1 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation first-quarter 2013 earnings call. As a reminder, today's call is being recorded. At this time, I'd like to turn the call over to the Director of Investor Relations, Ms. Bev Fleming, for opening remarks and introductions. Please go ahead, ma'am.

Thank you, Alan, and good morning, everyone, and welcome to Northern Trust Corporation's first-quarter 2013 earnings conference call. Joining me on our call this morning are Mike O'Grady, Northern Trust's Chief Financial Officer; Rick Kukla, our Controller; and Allison Quaintance, from our Investor Relations team. For those of you who did not receive our first-quarter earnings press release or financial trends report via email this morning, they are both available on our website at northerntrust.com.

In addition and also on our website, you will find our quarterly earnings preview presentation which we will use to guide today's conference call. This April 16 call is being webcast live on northerntrust.com. The only authorized re-broadcast of this call is the replay that will be available through May 14. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our Safe Harbor statement.

What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2012 annual report and our periodic reports to the Securities and Exchange Commission for detailed information about factors that could affect actual results.

During today's question and answer session, we'd ask that you limit your initial query to one question and one related follow-up. This will allow us to move through the queue and allow as many people as possible the opportunity to ask questions as time permits.

Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thanks, Bev. Before I start, I wanted to say that our thoughts go out to all those impacted by the situation yesterday in Boston.

As usual, we've organized today's call into three sections. I will review our first-quarter results, update you on our Driving Performance initiatives, and comment on our capital. Bev and I would then be pleased to answer your questions.

Starting with some overview comments on slide two, this morning we reported first-quarter earnings per share of $0.67 and a return on equity of 8.8%. In the first quarter, we were successful in growing the business, adding both personal and institutional clients and improving our productivity. New business from personal clients was very strong, reflecting our positioning as a trusted advisor to our clients and the impact of improving confidence on client and prospect decision-making. With institutional clients, we are seeing a good pace of activity across global regions, products and client segments.

The macro environment was mixed with both positive and negative implications for our business. Equity markets in the US and Europe were higher, which supplemented our strong new business results. The S&P 500 was up 11% year over year and 10% sequentially, and the EAFE Index was up 13% year over year and 9% sequentially.

Our client asset levels increased as over 45% of our assets under custody and assets under management are equities. Assets under custody ended the quarter at $5 trillion, up 9%, and assets under management ended at $810 billion, up 13% over last year.

On a sequential basis, client asset levels were also up 5% and 7%, respectively.

Currency volatility increased in the first quarter for the first time in over a year, positively impacting our foreign exchange trading income. Interest rates, however, declined further. Low, short-term rates continue to pressure our net interest margin and also result in ongoing fee waivers in connection with our money market mutual funds. We continued to successfully execute on the Driving Performance initiatives announced in early 2012, which are focused on fundamentally improving our productivity and profitability while enhancing our capacity for investment in future growth regardless of the macro environment.

Overall, although we made further progress in the quarter, we are still not satisfied with our returns and continue to focus on executing our strategies in 2013. Let's move to page three and discuss the financial highlights of the first quarter.

Earnings per share of $0.67 increased 2% year over year and were down 3% sequentially. The current quarter included a $12.4 million writeoff of certain fee receivables resulting from the correction of an accrual methodology used in prior years. This prior period adjustment is recorded within other operating income.

We also recorded restructuring and integration charges of $1.8 million in the first quarter, primarily in occupancy expense, compared with $3.9 million a year ago and $8.2 million last quarter. Excluding these items, earnings per share would have been $0.71 in the first quarter, representing an increase of 6% year over year and flat sequentially.

On a year-over-year basis, revenues and expenses were both up 1%. Trust investment and other servicing fees, the largest component of revenues, increased a strong 10% due to new business and higher markets, but this growth was offset in the year-over-year comparison by lower net interest income and the impact of the receivables adjustment on other operating income. Expenses were up only modestly due to the impact of Driving Performance and good expense control across categories.

Year over year, our loan loss provision was unchanged at $5 million. As a result, net income was 2% higher than last year's first quarter. Compared to last quarter, revenues were up 1% and expenses were down 2%. Higher trust investment and other servicing fees and foreign exchange trading income offset lower net interest income and the impact of the receivables writeoff on other operating income. The lower level of expenses on a sequential basis primarily reflects a decline from the higher level of outside services and other expenses during a very active fourth quarter.

All-in, although pretax earnings increased 9%, net income was 2% lower due to a lower effective tax rate last quarter.

Our return on equity of 8.8% for the first quarter was below our long-term target range of 10% to 15%.

With that background and summary, let me get into more details behind our first-quarter results beginning on slide four.

First-quarter revenues on a fully taxable equivalent basis were $984 million, up 1% both year over year and sequentially. Trust, investment, and other servicing fees were $631 million in the quarter, up 10% year over year and 1% sequentially. As mentioned, new business and higher equity markets drove the increases. Foreign exchange trading income was $60 million in the first quarter, down 4% compared with last year, but up 46% compared with last quarter. A primary driver of foreign exchange trading income is currency volatility. As measured by an index of major currencies, volatility was lower by about 12% year over year and higher by approximately 21% sequentially.

Other operating income of $25 million for the quarter was down 36% year over year and 30% sequentially, primarily reflecting the receivables writeoff that I mentioned earlier. Absent this prior period adjustment, other operating income was down 4% year over year, primarily reflecting lower commercial lending fees and up 4% sequentially.

Net interest income was $234 million in the first quarter, down 12% year over year and 4% sequentially, primarily due to a lower net interest margin, which I'll discuss in more detail later, as well as lower levels of earning assets.

Moving to page five, let's look at the components of our fee revenues. For our institutional business, C&IS, fees totaled $349 million in the first quarter, up 10% year over year and 1% sequentially. Custody and fund administration fees, the largest component C&IS fees, were $224 million in the first quarter, up 7% year over year and flat sequentially. The year-over-year increase was primarily the result of higher equity markets, new business, and favorable results from our Driving Performance revenue initiatives. In the sequential quarter comparison, higher fourth-quarter international markets and new business were offset by lower sub-custodian recoveries and the currency translation impact of the stronger dollar.

Investment management fees for C&IS were $75 million in the first quarter, up 22% year over year and 2% sequentially. Both comparisons benefited from new business, primarily in our institutional index and mutual fund businesses and higher markets. The sequential quarter increase was partially offset by higher waived fees associated with institutional money market mutual funds. Waivers impacting C&IS fees equaled $9 million in the first quarter, $2 million lower year over year, but $3 million higher sequentially. The sequential quarter increase in fee waivers primarily reflects lower gross yields achieved in the underlying funds as repo and short-term rates were lower in the first quarter.

Securities lending fees were $22 million in the first quarter, up 4% year over year and 10% sequentially. The year-over-year increase reflects higher volume and spreads. The sequential quarter increase reflects higher volume. Securities lending collateral of $101 billion increased 5% versus last year and 15% sequentially.

C&IS assets under custody were $4.6 trillion at quarter end, up 9% year over year and 5% sequentially, while C&IS assets under management were $604 billion at quarter end, up 12% year over year and 8% sequentially.

Moving to our personal business, PFS trust investment and other servicing fees were $282 million in the first quarter, up 9% year over year and 1% on a sequential quarter basis. The year-over-year increase reflects strong new business, higher month lag equity markets, and lower fee waivers. The sequential quarter increase primarily reflects the impact of higher markets and new business, partially offset by higher fee waivers. Money market fund fee waivers in PFS were $13.4 million in the first quarter, down $1.4 million year over year but up $3.0 million from the fourth quarter, reflecting lower gross yields achieved in the underlying funds.

PFS assets under management were $206 billion at quarter end, up 15% year over year and 4% sequentially, in both cases reflecting higher equity markets and new business. PFS assets under custody were $455 billion at quarter end, up 12% year over year and 2% sequentially.

In the first quarter, PFS assets under custody were reduced by approximately $13 billion as we re-categorized certain assets that appear on clients' statements for their convenience but on which we have no advisory or custodial oversights.

Moving to page six, net interest income was $234 million in the first quarter, down 12% year over year and 4% sequentially. Earning assets averaged $82 billion in the quarter, down 5% year over year and 1% sequentially. The level of earning assets reflects our liability-driven balance sheet. Demand deposits averaged $17 billion in the quarter, down 13% year over year and $4 billion, or 21% sequentially, reflecting the expiration of the Transaction Account Guarantee or TAG program.

Interest-bearing funds averaged $64 billion in the quarter, down 2% year over year and up 6% sequentially, replacing most of the decline in demand deposits.

The net interest margin was 1.15% in the first quarter, down 9 basis points year over year and 2 basis points sequentially. The lower margin primarily reflects lower yields across earning assets categories as interest rates continue to decline. For example, the average for three-month LIBOR declined another 3 basis points in the quarter after declining 11 basis points in the fourth quarter and was 22 basis points lower than the first quarter of 2012.

By earning asset category, the yield on interest-bearing deposits with banks declined 3 basis points sequentially due to lower short-term rates with the biggest impact being the decline in overnight rates and the Australian dollar of 19 basis points. The yield on the securities portfolio also declined 3 basis points, primarily reflecting maturing securities being reinvested at lower rates. And the overall yield on the loan portfolio declined by 5 basis points as some of our loans are linked to LIBOR and new loans and leases are coming on our balance sheet at lower yields than those rolling off. These declines in earning asset yields were partially offset by a slightly lower cost of funds.

Now let's look at expenses on page seven. Expenses were $729 million in the first quarter, up 1% year over year and down 2% sequentially. As I mentioned earlier and as shown in the slide, we recorded restructuring and integration charges in each of the periods. Let's take a look at the trends and the expenses by category.

Compensation expense was essentially flat year over year and increased 1% sequentially, primarily due to higher share-based compensation. Recall that stock option expense is typically higher in the first quarter of each year due to the requirement to immediately expense options granted to retirement-eligible employees. Employee benefit expense decreased 7% year over year and 1% sequentially as the lower level of healthcare expense offset seasonally-higher FICA insurance expense.

Outside services expenses increased 1% year over year but decreased 8% sequentially due to lower consulting and sub-custodian expenses. Recall that outside services expense was elevated in the fourth quarter due to higher costs for contracted services related to increased new business activity and seasonally higher sub- custodian expenses, which are reflected in revenues as well.

Equipment and software expenses were higher by 1% year over year and sequentially, reflecting depreciation and amortization of technology investments.

Occupancy expense was up 3% year over year due to the restructuring charge, but was down 7% sequentially, primarily reflecting a lower level of charges associated with reductions in office space in the first quarter versus the fourth quarter.

Other operating expense increased 10% year over year due to a higher level of charges associated with account servicing activities. Other operating expense decreased 4% sequentially. Recall that the fourth quarter had $3 million in restructuring and integration expense in this line. Absent those charges, other operating expense was essentially unchanged sequentially at seasonally higher costs associated with the Northern Trust open were offset by lower staff-related expenses.

Expense control was particularly good in the first quarter. As we discussed in our fourth-quarter call, while our expense base fluctuates from quarter to quarter for various reasons, it generally tracks with the longer-term trend in our fee revenues. Given the continued success we've had in adding new clients, our objective is to grow our expenses at a lower rate than the growth rate of our fee revenues. We were successful in achieving this in 2012 and in the first quarter; however, we do expect expense fluctuations to continue for various reasons.

Let's move to page 10 to discuss Driving Performance a little more. In January of 2012, we indicated our goal to improve pretax operating income by $250 million by the end of 2013. In the first quarter, we produced over $55 million in pretax operating income improvement from Driving Performance initiatives. Positive impacts from revenue initiatives were similar to last quarter, primarily the result of successful pricing and cross-sell efforts in C&IS.

On expenses, in the first quarter, increased benefits were primarily the result of continued success in our process optimization efforts, especially in procurement and our office network optimization in our PFS segment. Going forward in 2013, we expect that process optimization and revenue efforts will drive increasing benefits from quarter to quarter. Based on the results achieved to date, we remain on track for our 2013 target for Driving Performance. We believe that we will continue to successfully implement the initiatives already identified to enhance our revenue and improve our productivity and that we will continue to identify incremental initiatives to drive future performance.

Capital, outlined on page nine, remained very strong with Tier 1 common and Tier 1 capital ratios of 12.8% and 13.3%, respectively. We estimate that our Tier 1 common ratio under the Basel III advance framework as we currently understand the regulations, including the impact of the proposed rules issued by the federal reserve, would be approximately 13%, exceeding all anticipated requirements.

As we announced in March, our 2013 capital plan received no objections from the federal reserve. In it, we requested authority to increase our quarterly common dividend to $0.31 per share. At its regular meeting later today, our Board of Directors will consider formal approval of the plan dividend increase, which is expected to be payable July 1.

In the first quarter, we repurchased 1.4 million shares at a cost of $74 million. In addition, our capital plan provides for the repurchase of up to $400 million of common stock between April 2013 and March 2014.

I'd like to provide a few thoughts to close. The first quarter demonstrated the continued execution of our strategy of providing exceptional service, expertise, and advice to our clients around the world.

We also achieved our objectives of growing the business and improving productivity. Progress was evident across our businesses. Wealth management, asset management, and asset servicing fees are all growing nicely, while banking battles through challenging operating conditions.

Driving Performance is ingrained. The productivity improvements from last year have carried into 2013, providing us with the capacity to fund our growth in trustees with lower growth and expenses. And we are deploying our capital effectively in our businesses and have received approval from our regulator to return more capital to our shareholders in the coming year.

All this will increase the return on our capital and move us closer towards achieving our long-term financial target.

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

Thank you again for participating in Northern Trust first-quarter earnings conference call. Alan, please open the line for questions.

(Operator Instructions). Howard Chen, Credit Suisse.

Mike, as you look across your C&IS and PFS client base, how would you broadly characterize the level of re-risking and re-engagement that you saw in these set of results and then subsequently since then?

Howard, I would say particularly focused on the personal side that we did begin to see activity of re-risking that we have been talking about in previous quarters and previous calls. I think it's a result of a number of things, but one is certainly that looking at cash and high-quality fixed income is really an insurance policy, but it's becoming a more and more expensive insurance policy. And that for investors to really achieve any type of real return, they understand that they have to take on greater risk.

So we did see, I would say, the beginnings of that. I think that is supported by, if you look at some of the asset flows that we had in the quarter and, for example, within PFS, the equity's category for us was up 13%. So up stronger. And if you looked at the flows behind that, you would see that equities, we had positive inflows, and on the money market side, we had outflows.

So I think that we're beginning to see it, although I would say it is still in a stage where it's somewhat fragile in our view. And while we've had a nice run, when you have days like yesterday, it certainly can have an impact on the psyche of the investor.

Great. Thanks. And my followup, now that the CAPR process is in the rearview mirror for this year, I was hoping you could just talk about how you arrived at the capital plan and the dividend boost and the $400 million buyback that your regulator had no objection to.

Sure. Well, as we've said before, we're very comfortable with our capital adequacy. And our objective, of course, is always to have sufficient capital and to have the appropriate and robust processes in place so that we can weather through whatever conditions may be in front of us.

So with that in mind, as you see from the results of the capital plan, our objective was to increase the amount of capital that we return to shareholders. So doing that both through increasing our dividend somewhat and then also significantly increasing the amount that we could do through share repurchase.

So I would say overall try to balance all those objectives to get to that position.

And I would also just say, Howard, with regard to capital, as I've said before, it's a situation that continues to evolve. The final rules for Basel III are expected to be coming out in the near future here. That's something that certainly we'll have to digest and you have other aspects of regulation that are still in flux. So we take all that into account as we look to continue to improve our processes around capital.

Okay. Thanks for taking the questions.

Gerard Cassidy, RBC.

Can you give us more color on the deposit outflow? You mentioned it was due to the expiration of the TAG program. Was that large corporations or countries? Who are the customers that took the deposits out?

Sure. So our demand deposits were down $4.4 billion on average for the period. And most of that was in our C&IS business, so about $3.5 billion of the total was from institutional clients. And it is -- it's a mix of clients, but it is definitely clients that had placed the deposits with us as a result of the TAG program.

And so with that expiring, they look to move those to other alternatives. What we saw in the institutional side there is that a decent portion of about $1.5 billion really just flowed into our money market funds. So they decided to switch from having deposits to putting it in, for example, one of our government funds.

And then the remainder for the institutional clients really split between either just purchasing government securities outright or in some cases just diversifying amongst other larger banks. So we still have what I would consider significant deposits from them, but they reduced the amount and placed deposits at other banks.

On the personal side, we saw about $1 billion decline in the demand deposits during the quarter. And I would say that's mostly just a shift into either interest-bearing deposits, and you saw that in the change in the average balances. And then also, as we've talked about, I think some of that also is reflected in the re-risking.

Great. The second question was -- your return on equity targets of 10% to 15%, in this low interest rate environment and obviously you're working very hard to manage your operating expenses which showed up again this quarter, and your ROE came in less than 10% in the quarter -- in the last two years, it's been less than 10% as well -- is it possible to get to 11% ROE if this rate environment remains this way through 2015 as the Fed has pointed out, that's what they plan?

Yes -- as we've said, the 10% to 15% is definitely a long-term financial target, and so it is intended to be across different macro operating -- macro environments. It is clearly difficult to do in this low interest rate environment as is being demonstrated through our results and I would say results overall.

What we're focused on is, as we talked about, trying to grow the parts of the business that we can. You've seen that in the stronger growth in our trustees, which is the largest component. So we look to grow that. We look to control the expenses. That improves profitability in and of itself to get there. Net interest income was a drag in this period, and I think we have also foreign exchange trading income, which has also been a drag in other time periods. So if both of those remain constant, do I think we could get there? We could, but it's going to be difficult. And it's going to take longer to get there without some improvement in the macro environment.

So again, I would just emphasize, it's a longer-term target. We still think it's the right target to have. And even in this environment, we're working towards it. It's just a significant challenge if the operating conditions, particularly low interest rates, continue to persist.

And then lastly, on the buyback with the $400 million being approved last year, you pretty much completed what you expected in terms of your approval from CCAR last year, you completed that buyback. Should we count on all $400 million being done over the next four quarters, or what event could happen where you choose not to execute on the buyback completely?

Sure. Well, with the capital plan, what we are looking to do is to provide an outlook for our regulators as to what our expectations would be and what we would like to be able to execute. But to your point, it doesn't necessarily mean that we need to execute on those or have to.

There are a number of things that could happen that would change that. Some of them very opportunistic. If there are other opportunities for us to deploy our capital, that certainly is something that we would take into account on whether we end up executing the full authority, I will say, and then also the operating conditions.

I mean when we put the plan in, it's with our best view on what those operating conditions are. All else equal, then yes, we'd look to move forward with executing on those. But the operating conditions, obviously, can change. And we also -- we do look at the relative alternatives that we have and how we can deploy the capital. And my point being, we do look at the value of the stock and when we think it's the best alternative to repurchase and the best time to do that relative to other things that are going on.

So our plan is to move forward with that. As you mentioned, just as we did last year, but certainly things can come up along the way that can change that.

I really appreciate you taking my questions.

Sure.

Jacob Troutman, KBW.

My first question just goes back to Howard's questioned on the PFS and the client re-risking. Overall it sounds like new client activity was very strong, but PFS revenues were only up about 1% linked quarter. I was wondering if you could maybe provide a little color on how much of those revenues are asset based versus how much are clients activity-based?

Sure. In the personal business, most of those fees are asset based. And we did have the drag of the money market fund fee waivers in the period, which caused the fees to be reduced relative to the prior period.

The other thing is within PFS, it depends not only on the asset mix -- so we have talked about how that is shifting around, but the actual products and the pricing on the various products. And within our multi-manager products, we also reduced the fees on a few of those products, which had some impact in the period-over-period comparison.

Okay. And then maybe just one quick follow-up along that vein. From the increased client activity there, do you expect to maybe see any increased demand for loans going forward?

Well, it is certainly something that we are offering to our clients and trying to be supportive of what their borrowing needs would be. So I would say it is in the forefront of the client service offering that we have. At the same time, it has to be driven by their demand. And that has really been the situation I would say both on the personal and certainly on the commercial or institutional front as well, which is demand has just not been significant enough or sufficient enough really to offset the natural rolloff of the portfolio. So it's not as though we're not -- first of all, very interested in lending to our clients, and it's not as though we're not originating new loans. It's just that the level of rolloff has been close to or in sometimes exceeding the new origination.

Cynthia Mayer, Bank of America Merrill Lynch.

Just another question on the PFS, I guess the AUM is up pretty strongly versus 4Q, and you guys mentioned new clients. Is it possible to parse out how much of the growth is due to new clients versus money from existing clients?

And just in terms of asset growth or account growth, how do the trends compare to last year, and is there a seasonal aspect to that, people switching advisors in 1Q? And where do you think you're taking share from if you are taking share?

Okay. Cynthia, you were very clever to embed multiple questions in there. So we will try to address them.

But, first of all, I would say as far as the seasonality aspect, I'm not sure that it's going to repeat every year, per se, but there's no doubt that the momentum that we saw in the fourth quarter of last year continued into the first quarter. So, as a result of I think the fiscal situation, anticipated changes in taxes, that just began a process with clients to look at their situation and potentially make changes. And we saw a strong end to the fourth quarter last year and then also we've seen that carry into this year. So that would be one.

Two is I would say that we continue to be successful as we move up market. So the size of the accounts or the relationships that we're adding on average have been larger as we move forward. We have a nice breadth of business, but I would say as far as particular momentum, we've seen it more on the upper end there.

And as far as just the balance between new business and equity markets, it's really been relatively balanced between the two. And so on that front, it would be great to have the market continue to support that, but where we're mostly focused is the area that we can have a greater influence on and that is adding new clients.

Great. Well, I don't know if I'm allowed to ask a second question.

Yes, sure.

I guess if rates and balance sheet levels didn't change from here, what would be the implications for net interest income in 2Q and the balance of the year? Thanks.

So, obviously, difficult to predict where rates are going to go. And so if you do take it the way you have asked the question of no change in rates, the way I look at it is by our earning asset categories. So on the loan front, we do continue to originate loans as loans roll off, and the trend has been that they are coming on at lower rates than what is rolling off. And you've seen that with a slowed decline in the yield on the loan portfolio, which is now still over 2.5%. So it's the highest-yielding portion of the portfolio, but all the same, we have seen decline there.

The securities portfolio, they are likewise as securities roll off, the reinvestment rates are lower. Now we've moved our duration out as we've gone over time and did so again in the quarter here. So it moved from basically an index duration of a year to about a year and a month. So just slightly moving it out because there's obviously trade-offs in doing that. That's enabled us to at least slow the decline in the yield on the securities portfolio.

And then deposits with banks, it's very much dependent on the shortest end of the curve, if you will, the overnight rates, and it depends on the currency. So as long as it is US dollar, the overnight rates have been relatively stable, and I think it is largely because the Fed has 25 basis points. But if you look over in Europe, we have seen a steady decline in overnight rates for the euro, but now they are at 3, 4 basis points. So we'd like to think less room to decline.

In sterling, the short-term rates are closer to 50 basis points, and the Bank of England has not been as aggressive in their easing. If they were to change that, that is what would cause an impact.

And then finally, as I mentioned in the comments, the Australian dollar, which yields a much higher rate, but has been declining over the past several quarters. So those are some headwinds to the yield.

We have been able to offset some of that with lower borrowing costs essentially and the rates that we pay on our deposits. But again there, there's just less room as we are closer to what appears to be the floor. And I guess I look at it and if you just go back over the four quarters here, we've seen the NIM decline a couple of basis points on average over those quarters. Not knowing where rates are going to go, we think that it will have continue to have pressure on our NIM.

Great. Thank you.

Alex Blostein, Goldman Sachs.

Just want to tackle the organic growth question for both, I guess, C&IS and PFS. When we look at some of the businesses you guys are growing more rapidly and whether it be outsourcing or middle office solutions, the stuff that doesn't really show up in assets under custody. In addition to that, obviously you have the market impact; you have the effects impact; you have the money market fee waiver impact. So when you guys try to X all that out and when you think about the core growth in the business, how should we think about that organic growth rate for you?

So, Alex, you are right. There are a number of factors that ultimately impact what the fee growth is there. Some of them less in our control than others. And so where we're focused is on that organic growth rate. And I think as you -- over time, as you sort out all these other factors, what we've achieved for that organic growth rate is mid single digits for both businesses.

Now we get there in different ways, historically. And what I mean by that is in the personal business, just the size of the accounts on a relative basis is just smaller to the overall base. There's less client concentration, if you will. And so it tends to be a less volatile organic growth rate as long as we are executing on our strategies.

Whereas on the institutional side, as you know, we can have some moderate clients, smaller size clients, but then we can also have some very significant clients that can tend to move the organic growth rate more in particular periods. So it is a little bit more volatile.

But over time, the average growth rate in that business has been very similar to what we've seen in the personal business.

So that is kind of how we think about it. And as you've mentioned, it's also particularly on the institutional side, a very diversified set of clients. So whether that is sovereign wealth funds, whether it is hedge funds, whether it is defined benefit plans in the US, or superannuation funds in Australia, it is diversified by client-type, geography, et cetera. And there are just different dynamics with each of those markets.

Got it. That's very helpful. And then my follow-up is on the expenses, and I guess maybe to clarify some of the questions that we've gotten over the course of this quarter from last quarter's call. But with that kind of mid-single-digit organic growth rate in mind, is it fair to think that your core expense growth -- again, over time -- should be somewhere below that given your comments earlier?

And I guess looking at more in the near-term first quarter tends to be seasonally high, so should we expect a similar quarterly pattern this year as we've seen in the past, so kind of lower second quarter, lower third quarter and then maybe high in the fourth quarter?

Yes. So to the first part of the questions, I would say the way you stated, Alex, is the way that we think about it. Which is the expenses and the growth in our expenses needs to be below our organic growth rate on revenues.

And so to the extent we can grow faster, then yes, our expense growth rate can be faster and vice versa, of course. But that is the relationship -- is focused on the organic growth versus the growth in the expenses. That does mean that over time total expenses are going to fluctuate and revenues are going to fluctuate because of external factors that may cause positive or negative operating leverage outside of that.

As far as your second question on the pattern, I think and have said the expenses fluctuate from period to period, and as much as there are certain expenses that we do experience -- so, for example, the Northern Trust opened in the first quarter, and are more predictable, there are other aspects that are not necessarily predictable by quarter. So I definitely would not hold to a set pattern where just because last year our expenses went down from first quarter to second quarter does not necessarily mean that they are going to go down this year from first quarter to second quarter.

Many other factors, which we've talked about as far as the growth in the business, the level of business activity -- any number of things that can cause fluctuation from period to period.

Got it. Okay. Thanks, guys.

Sure.

Luke Montgomery, Sanford Bernstein.

I'd like to ask you how seriously the firm is taking its competitors' cloud technology initiative and its claims that it is going to become the low-cost producer in the industry? And given that your clients share a common technology platform, would a similar transformation actually help Northern, or would it be superfluous, and then are you contemplating a competitive response there?

Sure. As much as some of our competitors may talk about their cloud computing strategy more than we do, does not mean that we are not utilizing and executing the cloud computing strategy ourselves. In fact, without being able to quote various numbers, it is something that we look at as to the number of applications that we have moved to the cloud, through our cloud. So it's a technology that we are very much using. It's just from a way that we characterize or position our technology strategy to the outside world, it's not centered around just the cloud computing. It's much broader than that.

You did mention our single operating platform, which is more about how we think about technology. And so I would say that as far as how we present ourselves to our clients and more importantly, reacting to strategic moves by our clients, there's no doubt that technology is one of the key competitive criteria. And needless to say, in both parts of our business meaning both personal and the institutional side of the business, it's critical that we continue to invest in technology and be at the front edge of that. We've demonstrated that both by the dollars that we've invested. We've demonstrated that by some of the acquisitions we've done where we've acquired what we believe to be leading-edge technology.

And with Driving Performance, one of the things we've talked a lot about both internally and externally is what we're doing there is really trying to create the capacity to continue to be able to continue to invest in technology. So recognizing the fact that it's an area that will require investment and as a result have a higher growth rate than maybe some of our other expense categories.

Thanks. That's really helpful. Following on Alex's question a bit, some of our channel checks are saying that the pipeline for large mandates has been drying up a little bit, particularly in middle office outsourcing. You have a very credible offering in that business. So I'm wondering if you'd agree with that view and if you might comment where we are in the replacement cycle for middle office and whether you are seeing continued growth in demand from new large customers who want that service?

Sure. I'm not going to be able to specifically give you a view on what the pipeline is, broadly speaking in the industry and just the opportunity that's out there. I will say that given the nature of those types of transactions, it can be more sporadic, right? So it's not just a constant stream at a certain level. And so I think it's -- you need to be cautious when you think about, is it a pipeline really building up or coming down?

We definitely are continuing to see opportunities of all sizes, so including very large opportunities in that business. But I will tell you it is sporadic in the sense that at times there can be multiple large opportunities that we're pursuing and are competing with others to win.

To your point, we think we have a compelling offering in that marketplace. We think there is a what I will call market dynamic that's out there that is very positive longer-term. So even if there are periods where it may slow down as to companies deciding to go that direction, we are still a believer that over time more asset managers will pursue that strategy.

Great. Thanks for taking my questions.

Sure.

Andrew Marquardt, Evercore Partners.

I wanted to ask about the balance sheet size again and going back to deposits and excess deposits, potentially. It was helpful, the TAG color. But can you go back and can you give us some reminders in terms of exit deposits from flight to safety? How much of that may be left? Should we continue to expect if, indeed, re-risking holds here more broadly that we can see that reversal continue?

Sure. So Andrew, you saw in the quarter that the size of our balance sheet or average earning assets was about the same as it was in the fourth quarter, but the mix did change as I talked about with demand deposits going down.

I think that what we have seen is a period of time where the quote-unquote excess deposits in the system did increase. And now we've seen for the most part that that has dispersed out more broadly as I talked about, both to funds, both to securities and two other asset categories and as much as our balance sheet is liability driven. So to the extent that our clients move back into a position that they want to place more deposits on the balance sheet, we'll be there, and you'll see the effect of that.

But I think at least in the current period here, we have seen a little bit of a stabilization of the balance sheet, closer to what I would consider normal levels as opposed to times before we've talked about really being in a higher level deposit situation.

Got it. And related, should we then expect from here that there actually could be growth in the overall balance sheet this year?

I wouldn't necessarily say that. I think, again, combination of on the one side, Andrew, where we are seeing this re-risking, some of that comes off of the balance sheet. And so we have on the personal side, for example, for a while anticipated that with some of our clients that have seen significant balances that they will essentially invest that either in funds or other investment products or businesses, et cetera.

So that trend could continue, which is not a negative thing, by the way. But that would be a decrease in the balance sheet.

At the same time, I would say as we grow our business overall, that tends to and has grown our balance sheet overall. So I look at the confluence of those two factors as having us in a range here really more than necessarily saying it's going to go up or it's necessarily going to go down.

Got it. That's helpful. And then just lastly, back to expenses. It looks like on slide eight of your slide deck, you are driving performance initiatives on a pretax basis. You are largely through your initial target in terms of an annual impact already this quarter -- 85%, 90% through, if you will. How much more room is there to go in terms of that target $250 million above and beyond when we get through this year? I assume you are targeting positive operating leverage this year and going forward.

So there definitely is more room just with the initiatives that we're executing on right now. As I've said before, some of these initiatives are more challenging. These are the end-to-end initiatives where we look at major processes within the institution and essentially reengineer them, which results in really better outcomes for the clients, for the partners, and also from a cost efficiency standpoint. So those are the areas that we're executing in. I would say that the gains come, but they come spread out over time.

So we definitely expect to see that Driving Performance benefit increase each quarter throughout the rest of the year. The level, it's difficult to put a pin in exactly what the level is going to be, but we do expect the trajectory to continue.

And then longer-term, we look to add additional initiatives, particularly in the area of this process optimization. We went after the areas that we thought had the most opportunity in the near term. Not just from an expense standpoint but from a process improvement standpoint. But there are additional processes which we've begun to execute on, but that we can also begin to execute on later in the year and into next year.

Got it. And the split on where we are today in terms of the run rate, in terms of expenses revenue, it had been 60-40 last year when you were 60%-plus and now you're closer to 85%, 90%. Is it still 60%-40%?

Yes, it's still pretty close to 60%-40%. It may drift a little bit to the expense side, just because some of these process optimization initiatives are definitely more expense oriented than revenue oriented.

Great. Thank you.

Sure.

Vivek Juneja, JPMorgan.

A couple of questions. Now that we have the CCAR results, your capital ratios keep growing. You have always been industry leading, and you just keep widening out the gap. So how much capital is too much at --?

Well, as you know, we do feel good about our capital position. But as I mentioned, the situation continues to evolve. And frankly, a lot of these things are out of our control. So as much as we feel very comfortable with our capital positions, the final rules as to what is required have not been determined.

And with regard to the CAPR and then the CCAR process, there's a process we have to go through with our regulators in order to return capital to our shareholders.

So needless to say, we feel very good about the level of capital we have for our business. We feel very good about the level of capital we have relative to our competitors. This year we will look to return more capital than we did in the previous year, and we will look to improve our processes around our capital plan and capital adequacies. So that regardless of how the rules may change and how ratios may get affected by changes in those rules, that we are well-positioned to continue to be able to do that.

But it's too difficult to be able to quantify exactly what that's going to be when you have so many uncertainties.

Is there any particular issue or item in what has not been clarified that you are particularly concerned about?

I would say that there is no particular ruling that we're concerned about, per se. There are always various either parts of the business or parts of the balance sheet that can be more favorably or less favorably impacted by what the requirements may be and various things that with the regulators you spend more time on. And so there's constantly things that are a part of our dialogue, but there is no one factor or rule, I should say, that at this point we're concerned about the outcome of a particular rule.

And one request, this will sync with any questions that was asked earlier. If you can start doing something that a lot of your peers do, which is break down inflows versus market impact when you give us details on things like assets under management, that would be very helpful.

Okay. We will take that into account.

John Moran, Macquarie Capital.

I just wanted to revisit the money market fund issue. I guess news out today that one of the big players here is resigned to floating NAB as an eventuality, and I think we've got some expected action coming later this year. So just wondering if we could get your updated thoughts on how you guys are positioned for what may be coming from a regulatory perspective there?

Sure. Well, overall we think we are well positioned in the sense that regardless of the direction of any type of money market reform, we should be in a position to be able to serve our clients' needs. So whether that is if they decide to continue in money market funds, we obviously offer them a number of alternatives. If those no longer become attractive, we can offer them other products, certainly balance sheet-oriented deposit products that can meet with their needs, and we're constantly trying to think of innovative new ways to meet those needs. So there may be types of funds that right now are not structured, but we can structure them in a way that will meet with needs if the others get chained. So that's the first part.

The second part, as far as these specific proposals that are out there, we think that all of them in one way or another either have flaws or would require further work in order to be something that would be workable overall. So as much as a floating rate NAV has some applicability in our view maybe to certain funds, so more of the prime funds, for example, there are various tax and accounting requirements that need to be worked through before a floating rate NAV would work for the prime funds.

We think some of the other proposals like holdbacks are more difficult, not from our perspective, but from our clients' perspective. As we talk to our clients on both the institutional and the personal side, that's not how they utilize the money market funds for the most part. They like to think that they have complete access to those funds. So we think that's a commercial issue overall for everybody.

And then certainly from a capital standpoint, as Vivek mentioned in the previous question, things that are changing or what are things that are out there, certainly money market reform is an area that we watch. We are a very large provider in that marketplace. And to the extent that capital is required specifically for funds or in some form, that is certainly way that our capital would have to be utilized.

So we think we're prepared for the various directions it could head, and we think that you are correct in that something is likely to come out here in the near term. And we will certainly be a part of that.

Got you. That's helpful, thanks.

And then just a nitty-gritty one here, on the fee waiver part of that business, I think in the past you guys have said we start to abate or get a little bit of relief with not a whole lot of movement on the short end, and then we would be done waiving fees at 75 to 100 basis points. Is that still the case?

Yes, basically it is. We're down now where repo rates I think they are 12, 13 basis points, depending on much securities you are repoing. But very low levels. That has caused the money market fund fee waivers to go up this past quarter.

But to the extent that the short end were to move up as you mentioned, 50, 75 basis points, without knowing all the other dynamics around that, that would have a very material effect on us trying to get out of the money market fee waivers.

Got you. Thanks very much.

Sure.

Brian Bedell, ISI Group.

Most of my questions have been asked. Just a couple of quick follow-ups.

The expense control, obviously, was very good in the first quarter, and Mike, I appreciate your comments as they can be volatile quarter to quarter. But it seems like we do have some higher seasonal expenses in the first quarter. Just curious to get your take on whether there were business conversion expenses in terms of the large main office asset servicing managed this first quarter and how that might influence your expense pattern during the year?

Sure. So we did, as you pointed out, Brian, in the fourth quarter talk a lot about having a very active quarter for onboarding. And that often happens at the end of the year where we're trying to get things completed for clients. And we did see some relief on some of those expenses in the fourth quarter.

So, I mentioned things like consulting expenses where we're hiring third parties to help us on board in order to get it done more quickly. Some of the legal expenses that we talked about in that time period as well because of setting up new trusts for clients and things like that. Those expenses were lower in the first quarter. And yet, they can increase as the business activity increases, but at this point, there's nothing in particular that we're expecting to change the trajectory of what they would normally be.

The larger onboardings -- we have a number of those. Bridgewater is one of them. The expenses from that will proceed when we begin to recognize the revenue. So it will have some impact, but it doesn't really fully flow in in that impact until more into 2014.

Not until 2014, you said?

Yes. There will really be a greater impact from those onboarding expenses.

Right. So the revenue expense calibration is certainly positive by the time we get to, say, the end of this year or into 2014 on that --?

I'm sorry, ask that part again.

The revenue expense calibration on the large mid-office deal such as Bridgewater become positive by the end of this year into 2014?

Yes, it is difficult to answer that specifically just as to what exactly you mean by calibration. But I mean what I would say is we always have onboardings that are happening, and we always have, as a result of that, expenses that come in advance of it. And it's the fact that we have a portfolio of these that allows us to, frankly, be able to take on new clients with expenses in advance. And there is a negative drag, maybe, on a per-client basis, but overall if you are referring to overall profitability of that, we definitely have that.

Great, great. That's helpful. And then just lastly, the $13 billion of the reclassification of PFS plus the assets, does that have any revenue impact, or is that just optical?

It has no revenue impact.

Great. Thanks very much.

Sure.

And that's all the time we have for questions and answers today. So at this point, I'd like to turn it back over to our speakers for any additional or closing remarks.

No, we are done here. So we just want to thank everybody for dialing in or on the web for today's call and look forward to talking a quarter from now.

Thanks. That does conclude today's call. We thank everyone again for their participation.