Northern Trust Corp (NTRSO) 2014 Q4 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation fourth quarter 2014 earnings conference call. Today's call is being recorded. At this time I'd like to turn the call over to the Director of Investor Relations, Bev Fleming. For opening remarks and introductions, please go ahead, ma'am.

Thank you, Rich. Good morning, everyone and welcome to Northern Trust Corporation's fourth quarter 2014 earnings conference call. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer and Allison Quaintance from our Investor Relations team.

For those of you who did not receive our fourth quarter earnings press release and financial trends report via e-mail this morning, they are both available on our website at NorthernTrust.com. In addition and also on our website you will find our quarterly earnings review presentation, which we will use to guide today's conference call.

This January 21, 2015 call is being webcast live on NorthernTrust.com. The only authorized rebroadcast of this call is the replay that will be available through February 18, 2015. 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 expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict.

I urge you to read our 2013 Annual Report and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results. During today's question and answer session, please 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 Biff Bowman.

Good morning, everyone. Let me join Bev in welcoming you to the Northern Trust earnings conference call. As is our customary practice, today I will review our results for the quarter, after which Bev and I would be happy to answer your questions.

Starting on page 2, this morning we reported fourth quarter net income of $244 million and earnings per share of $0.98. Our provision for income taxes in the quarter included a $9.5 million benefit related to our decision to reinvest the earnings of a foreign subsidiary indefinitely outside the US.

This decision under APB Opinion Number 23 reflects the continued growth and success of our business outside the United States and is consistent with other similar assertions made in the past. Excluding the income tax benefit, earnings per share were $0.94 in the fourth quarter and our return on equity was 11%.

Environmental factors which impact our businesses and our clients were mixed in the fourth quarter. A theme which has been ongoing for some time. US Equity Markets were higher at the end of the fourth quarter both year-over-year and sequentially with the S&P 500 up 11% and 4% respectively.

International equities as measured by the MSCI EAFE Index, however, were down approximately 7% year-over-year and 4% sequentially, with the decline in both comparisons primarily reflecting a stronger US dollar. In Bond Markets, the Barclays US aggregate index was up 3% year-over-year but down 1% sequentially.

Client assets under custody ended the quarter at $6 trillion, up 7% over last year and Assets Under Management ended at $934 billion up 6%. On a sequential basis, client custody and managed assets both increased 1%. I'll provide further details on asset trends later in this call.

Currency Markets had multiple impacts this quarter. Currency volatility as measured by the G7 index was 4% higher than the fourth quarter of last year. Sequentially, the G7 index was 37% higher, increasing in each month since hitting an all-time low in the month of July. Currency volatility influences our foreign exchange trading income as does the level of client activity.

Currency rates, which influence the translation of non-US currencies to the US dollar, impact client assets and our revenues and expenses. The dollar was stronger both year-over-year and sequentially. Dollar strength tempered custody asset growth and related fee growth, but benefited expense growth.

Short-term interest rates rose slightly compared with the third quarter yet remained at very low levels, continuing to pressure our net interest margin and resulting in fee waivers on our money-market Mutual Funds. Three-month LIBOR and the Fed Funds effective rate both increased 1 basis point sequentially to 24 and 10 basis points respectively. And the overnight repo rate increased 6 basis points to 14 basis points.

With those comments providing context on the environment, let's move to page 3 and discuss the financial highlights of the fourth quarter. Year-over-year, revenue increased 8% with non-interest income up 9% and net interest income up 5%. Expenses, adjusted for a litigation settlement charge taken in the fourth quarter of last year increased 1%, primarily reflecting higher compensation and equipment and software.

We recorded a loan loss provision in the quarter of $3 million primarily reflecting loan growth as credit quality continued to improve. Reported net income was 44% higher year-over-year.

Excluding this quarters income tax benefit and last years legal settlement charge, net income was 29% higher. Compared to last quarter revenue increased 5% with non-interest income up 4% and net interest income up 6%.

Expenses increased 1% due primarily to higher compensation, equipment and software, occupancy and other operating expenses, offset partially by lower employee benefit expense. Reported net income increased 19%, sequentially. Excluding this quarters income tax benefit, net income was 15% higher.

Let's look at the results on page 4 in greater detail starting with revenue. Fourth quarter revenue on a fully taxable equivalent basis was approximately $1.1 billion up 8% year-over-year and 5% sequentially. Trust Investment and other servicing fees, the largest component of revenue, were $728 million in the quarter, up 8% year-over-year and 1% sequentially.

Fees in our Corporate and Institutional Services business increased 10% year-over-year and 2% sequentially. While fees in our Wealth Management business grew 5% year-over-year and were unchanged sequentially.

Higher Equity Markets and new business were both drivers of growth with higher money-market Mutual Fund fee waivers partially offsetting in the year-over-year comparison.

In addition, currency translation, as I mentioned earlier, detracted from overall fee growth by approximately 1 percentage point in both comparisons. Fee waivers were approximately $33 million in the fourth quarter, $2 million higher versus last year and $1 million lower sequentially. The higher waivers year-over-year were primarily due to the gross yield of the funds declining by approximately 1 basis point on average.

In the sequential comparison, the slight reduction in waivers was primarily due to higher gross yields. I'll go into further detail on Trust and Investment fees shortly.

Foreign exchange trading income was $61 million in the fourth quarter, up 19% year-over-year and 31% sequentially. Currency volatility was higher in the fourth quarter, steadily trending up from an all-time low in July.

Client trading volumes were modestly higher both year-over-year and sequentially. Other non-interest income was $77 million in the fourth quarter up 9% from last year and up 19% sequentially.

Within other non-interest income Securities Commission and Trading income was a record $21 million up over 40% both year-over-year and sequentially. Core brokerage, particularly in Equities and Transition Management were both higher in the quarter. But the primary driver was higher income associated with interest rate protection products in support of our personal clients.

This business is directly tied to Wealth Management client loan demand, which was strong in the quarter as well as our clients preference to lock in a fixed rate solution in this low rate environment. The number and size of interest rate swap transactions grew significantly in the fourth quarter driving the increase in Securities Commission and Trading income.

Other operating income of $41 million in the quarter increased 8% year-over-year and 21% sequentially. The increase primarily reflects higher income associated with a third party servicing agreement, which was modified in December.

About half of the sequential increase of $7 million reflects the third quarter impact of the modified agreement. Net interest income, which I will also discuss in more detail later, was $271 million in the fourth quarter, up 5% year-over-year and 6% sequentially.

With that backdrop, let's look at the components of our fee revenues on page 5. For our Corporate and Institutional Services business, fees totaled $409 million in the fourth quarter up 10% year-over-year and 2% sequentially.

Custody and Fund administration fees, the largest component of CNIS fees were $282 million in the fourth quarter up 12% year-over-year and up 2% sequentially. Assets Under Custody for CNIS clients were $5.5 trillion at year-end up 7% year-over-year and 1% sequentially.

Growth in fees and assets primarily reflects new business and market conditions including higher Equity and Bond Markets offset partially by the impact of a stronger US dollar. Investment Management fees in CNIS of $78 million in the fourth quarter were up 4% year-over-year and 3% sequentially. Assets Under Management for CNIS clients were $710 billion up 7% year-over-year and up 1% sequentially.

The year-over-year increase in CNIS Assets Under Management was due to higher equity and fixed income markets, new business and higher securities lending collateral. In the sequential quarter comparison, higher US equity and fixed income markets and new business were partially offset by lower securities lending collateral and the impact of the stronger dollar on international equities.

CNIS Investment Management fee growth was reduced in the year-over-year comparison by higher waivers on institutional Money-Market Mutual Funds. Waivers impacting CNIS fees equaled $17 million in the fourth quarter, $2 million higher year-over-year, primarily reflecting the lower gross yields achieved in the underlying funds that I previously mentioned. Waivers impacting CNIS fees were essentially flat sequentially.

Securities lending fees were $22 million in the fourth quarter unchanged versus last year and down 2% sequentially. Year-over-year results reflect higher collateral levels essentially offset by lower spreads in most asset classes.

The sequential quarter decline reflects lower collateral levels with the largest decrease seen in US Treasuries offset by higher spreads. Securities lending collateral was $116 billion at year-end up 14% year-over-year and down 4% sequentially. On an average daily basis, the sequential quarter decline was 1% as the change in period end collateral was more pronounced due to client and borrower decisions around year-end positioning.

Other fees in CNIS were $28 million in the forth quarter up 23% year-over-year and 4% sequentially. The year-over-year increase primarily reflects investment risk in analytic services while the sequential quarter increase primarily reflects higher revenue for the benefit payment services.

Moving to our Wealth Management business, Trust Investment and other servicing fees were $319 million in the fourth quarter up 5% year-over-year reflecting higher equity markets and new business. Wealth Management fees were unchanged sequentially. Assets Under Management for Wealth Management clients were $225 billion at quarter end up 1% year-over-year and 2% sequentially.

Recall that earlier in 2014, we transferred $7.6 billion in Assets Under Management from Wealth Management to CNIS. Absent that transfer, Wealth Management Assets Under Management would have increased about 5% year-over-year. Money-Market Mutual Fund waivers in Wealth Management totaled $16 million in the current quarter, flat compared with last year and down just less than $1 million compared to last quarter.

Moving to page 6. Net interest income was $271 million in the fourth quarter up 5% year-over-year and up 6% compared to the third quarter. The increase in net interest income was driven by a larger balance sheet as client deposits averaged $87 billion in the quarter up 9% year-over-year and 2% sequentially.

Partially offsetting the impact of a larger balance sheet in the year-over-year comparison was a lower net interest margin, which at 1.08% in the fourth quarter was down 4 basis points year-over-year. In the sequential comparison, the larger balance sheet and a 3 basis point increase in the net interest margin drove higher net interest income.

The yield on the securities portfolio increased 14 basis points sequentially. About 7 basis points of the increase in yield was due to lower premium amortization in our mortgage backed securities portfolio versus the prior quarter. Another 3 basis points of the higher yield was due to the call in the quarter of certain auction rate securities resulting in accelerated discount amortization.

Other factors which drove the higher yield on the securities portfolio were maturities of lower yielding floating rate agency securities, the purchase of longer duration US Treasuries and the purchase of higher yielding securities de nominated in the Australian dollar. Loan balances averaged $31 billion in the fourth quarter up 9% or $2.5 billion year-over-year and up 4% or $1.1 billion sequentially.

We saw solid loan growth this quarter across commercial and institutional, private client and commercial real estate partially offset by a lower level of residential real estate loans. The yield on the loan portfolio, however, decreased 11 basis points sequentially as average loan yields have dropped in commercial real estate, private client and residential real estate and growth in lower yielding categories has shifted the mix of the loan portfolio.

Turning to page 7, expenses were $781 million in the fourth quarter, down 2% year-over-year and up 1% sequentially. When adjusted for last years legal settlement charge, expenses were up 1% year-over-year. Compensation expense increased 6% year-over-year primarily reflecting higher incentive compensation, staff growth, and annual merit increases partially offset by the favorable impact of movements in currency rates.

Staff levels increased approximately 4% year-over-year with about 70% of 2014 staff growth emanating from our global operating centers in Bangalore, Manila and Limerick. On a sequential basis compensation expense increased 2% lead by higher incentive compensation and staff growth was 1%.

Employee benefit expense declined 6% year-over-year primarily driven by lower pension and employee medical expense partially offset by higher payroll tax expense. On a sequential quarter basis, employee benefit expense decreased 11%, primarily due to lower medical expense. Recall that employee medical expense, which can be uneven from quarter to quarter, was elevated in the third quarter.

In 2014, pension expense was approximately $5 million lower each quarter versus 2013. In 2015, we expect pension plan expense to be approximately $4 million to $5 million higher each quarter versus 2014 in line with the 75 basis point decline in the discount rate, a 50 basis point decline in the plan rate of return assumption, and changes in the mortality table. Thus, we expect 2015 pension expense to approximate 2013 levels.

Outside services expenses were down 6% year-over-year and up 1% sequentially. The year-over-year decline reflects a lower level of expense in a number of categories including legal, technical services, consulting, and sub-custodian. Equipment and software expense was up 5% year-over-year and 3% sequentially reflecting higher software amortization as we continue to invest to support clients, improve efficiency, and meet regulatory and compliance requirements.

Other operating expense decreased 28% year-over-year. Excluding the prior year legal settlement charge, other operating expense decreased 11% year-over-year primarily driven by lower business promotion and staff related expenses. In the sequential comparison, other operating expense increased 3% primarily in business promotion, which is typically higher in the fourth quarter than the seasonally slower third quarter and also typically seasonally higher in the first quarter due to the Northern Trust Open.

Turning to the full year, our results in 2014 are summarized on page 8. Net income was $812 million and earnings per share were $3.32, both up 11% compared with 2013. We achieved a return on equity for the year of 10%, better than 9.5% in 2013 and at the low end of our target range of 10% to 15%.

Full year revenue and expense trends are outlined on page 9. Trust Investment and other servicing fees grew 9% in 2014. New business across segments of geographies and higher Equity Markets contributed to these results.

Foreign exchange trading income was down 14% primarily reflecting lower currency volatility across the first three quarters of the year. Net interest income increased 7% primarily driven by 12% growth in earning assets as low short-term interest rates continued to pressure our net interest margin. The net result was a 6% growth in overall revenue in 2014. Expenses were 5% higher in 2014 than 2013, reflecting vestments in people and technology to support the growth of the business and risk management and compliance requirements.

Turning to page 10, a key focus has been on sustainably enhancing profitability and returns. This slide reflects the progress we have made in recent years to improve our expenses to fees, pretax margin and ultimately our return on equity.

The ratio of expenses to trust and investment fees is a particularly important measure of our progress as it addresses what we can most directly control. Reducing this measure from 131% in 2011 to 111% in 2014 has been a key contribute to the improvement in our return on equity from 8.6% to 10% across the same time period.

Sustainable improvements to our operating model are critical to our financial performance. Our focus on profitable growth and productivity gains will allow the Company to invest in future growth opportunities that will produce targeted returns over time.

Turning to page 11, our capital ratios remain solid with common equity Tier 1 ratios of 12.4% and 12.5%, respectively, calculated on a transition basis for both advanced and standardized. On a fully phased in basis our common equity Tier 1 capital ratio under the advanced approach would be approximately 11.9% and under the standardized approach would be approximately 10.6%.

All of these ratios are well above the fully phased in requirement of 7%, which includes the capital conservation buffer. The supplementary leverage ratio at both the Corporation and Bank is above 5%, which exceeds the 3% requirement applicable to Northern Trust.

As Northern Trust progresses through fully phased in Basel III implementation, there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules. We repurchased 2.5 million shares of Common Stock at a cost of $165 million in the fourth quarter bringing to $481 million our total share repurchase activity in 2014.

Our 2014 capital plan provides for the repurchases up to an additional $108 million of Common Stock through March of 2015. In October our Board of Directors declared the quarterly dividend on the preferred stock issued in August.

As I mentioned during our third quarter call, the initial preferred dividend payment reflected in our fourth quarter financials covers five months or $9.5 million. The quarterly preferred dividend going forward will equal $5.85 million. With respect to the liquidity coverage ratio, Northern Trust is above the 80% minimum required effective as of January 1, 2015 and is also above the 100% minimum requirement that will become effective on January 1, 2017.

In closing, in 2014, we made progress on many fronts. Let me review just a few examples. From a geographic perspective, we enhanced our client servicing presence by opening offices in South Korea and Malaysia. From a product and positioning perspective, we successfully established new depository businesses in the Netherlands, United Kingdom, and Guernsey concluding implementation under the AIFMD regulation.

In Wealth Management, we were named best private bank in the United States for the sixth consecutive year by the Financial Times Group. And were particularly gratified at the innovation, a client centered strategy, and the quality of our staff were highlighted as key factors driving the award.

From a strategic and financial perspective, we sharpened our focus on profitable growth with a number of leadership changes that became effective on September 1, 2014. Announced action is expected to produce annual ongoing savings of approximately $25 million once fully implemented. And expanded our global operating footprint with a new processing center in Manila, and the announcement of a new center in Arizona.

We achieved growth of 9% in Trust and Investment fees and improved further the ratio of expenses to fees. Our return on equity was 10% in 2014. Within our target range of 10% to 15% and we remain focused on continuing to improve profitability and returns over time.

Thank you again for participating in Northern Trusts fourth quarter earnings conference call today. Bev and I would be happy to answer your questions. Rich, please open the line.

(Operator Instructions)

We'll take our first question from Betsy Graseck of Morgan Stanley.

Hi, good morning.

Betsy.

So, operating leverage looked really great, and I was just wondering if you could speak to how you're thinking about driving operating leverage, if we have a scenario where rates continue to come down at the long end of the curve? Do you have anything that you could do to pull forward some of the actions that you were outlining?

Thanks, Betsy. We continue to execute on our expense initiatives that we had talked about in previous calls; we continue to focus in on the revenue side. Obviously, if you think of operating leverage growing that top line, that revenue provides the first part of that. And we believe that our focus around growing our trust fees, and executing on our business strategies, can allow us to continue to grow that, even in a rate environment, as you describe, with a flattening curve. So, I'll talk about the fee part of the revenue in that.

If you look at our balance sheet, and how it's currently put together today, which I would talk about if I can go a little longer than this is -- if you looked at our construction of our balance sheet, it is relatively short in duration, and is positioned to take advantage if the short end of that curve moves up, and the long end stays flat. And that is a scenario that we do model and look at and consider. So, I would say we're positioned well on that.

Betsy, did you have a follow-up question?

Sorry about that. So, the follow-up question is just on the volatility that's in the marketplace. Not so much on the equity market, which is where -- I know your skew is more towards the equity market than the bond market, but you do have some business, obviously, in the bond market side. Could you just give us a sense of how the flash crashes that we're seeing in different parts of the market over the last few months -- in October, we had the Treasury, and more recently the Swiss franc activity. How do you prepare for that? How does that impact you?

Are you being asked to take on any balance sheet from your clients if other market participants are not willing to provide sufficient liquidity? And is there anything that you can talk to about how you're thinking of trying to enhance liquidity for clients?

Thanks, Betsy. That's a broad question, so I'll pick one example, if I could. I'll talk about the announcement that the Swiss National Bank came out with. It's one example of these flash crashes that you describe.

If you think about it from our perspective, other than the obvious move in the Swiss franc, and the volatility surrounding that move, we really saw no negative impact. And we don't expect one going forward.

Much of our Business, like our foreign exchange business model, is centered around our clients for whom we custody their global assets all around the world. So, it's sort of business as usual, if you will, in support of that. And so these movements, if you will, have not created any undue stress, other than there's volatility in the market on our client base.

As you also know, we have a conservative risk appetite. You can look at our VaR; you can look at other public disclosures. Another example is, for instance, on FX, we don't really warehouse large currency positions, so these types of volatilities -- I'm just picking on foreign exchange as one -- really haven't lent themselves to the volatility to our business performance as perhaps other institutions.

Right, and your clients aren't necessarily asking you to take on additional roles beyond the custodian role that you've got right now?

They are not.

Okay, thanks.

We'll take our next question from Adam Beatty of Bank of America.

Thank you, good morning. I'll ask my question and my follow-up together, as they both concern asset and wealth management. Some of the mutual fund data that we can see indicated decent flows through the quarter, but somewhat weaker for Northern Trust than other firms in December.

Just wondering if you saw similar trends on the wealth management side in separate accounts? And also, what you're seeing on the corporate and institutional side?

And as my follow-up, it was interesting that some of your wealth clients are -- were using interest rate swaps to try and lock in lower rates for longer -- was wondering if that was also affecting their behavior as investors, whether they were going toward shorter-maturity, fixed-income funds or what have you? Thanks very much.

Okay, thank you, Adam. First, let me talk a little bit, if I could, about the AUM and AUC growth, which I think you talked about -- or the AUM growth, specifically.

On the wealth side, first of all, the performance, when you look at markets being up, that was a US phenomena. And if you look at the MSCI EAFE index, that actually declined 4% or so. And our wealth clients are typically invested globally, so it would have had an impact, if you will, both a positive and a net, which helped drive what I would call some of the lower sequential growth that you've seen in our wealth management business.

I would also highlight that we did see some movement into cash in our wealth management space; we saw some meaningful. That may address part of your question, Adam, about -- did we see any different behaviors with the volatility in the market. We did see some movement into cash in our movement, so we didn't get some of the equity pick-up that you may have thought about in those businesses.

In terms of the swap portion of your question -- if you think about our loan volume growth that you saw sequentially, the 4%, that has largely come to our wealth management clients, who have asked for that. And in this interest rate environment, they have asked for ways to convert the floating into fixed. So we think that some of that revenue was just part of a client solution in not only providing the financing for these individuals, but also being able to provide the interest rate protection as a part of that solution.

So I think you're -- ultimately, your question was: Is it behavior change? I think they are certainly looking and coming up with their own conclusions about the rate environments, and making decisions based on that.

Thanks. So, just to clarify, as fund investors, are they sort of shying away from longer-dated government funds or high yield funds, and going toward shorter maturity type funds, or have you seen that?

So, our mutual fund flow -- we saw increases in our mutual fund flows, some in the cash. I would say that probably the trend I would highlight would be that we have seen, in our wealth space -- I think this is a macro trend -- is a movement from active to more passive type products in that.

That's great detail. Thank you; much appreciated.

We'll take our next question from Marty Mosby of Vining Sparks.

Hi, Marty.

Hey, thanks for taking my questions. I wanted to ask a little bit about the ability to close out the last round of the efficiency target you have on getting the operating expenses equal with your custody and core revenues. You've gone down to about only 7% gap between those, but do you see -- kind of what's the time frame being able to get that to 100%?

So, I would start with saying I don't know we've publicly said that the 100% is a goal because, while we're trying to continue to drive it down, I don't know that 100% will be the place we want to stop, but let me give you some color.

First, if I look at our wealth management business -- they actually are at 100% in the wealth management franchise. Our corporate and institutional services business, where we have very high growth, as you saw in the earnings, is slightly higher than that, but is reducing that significantly as we utilize locations like Manila and Limerick and Bangalore to help lower the cost, if you will, and the cost ratio there.

We continue to progress on that, and continue to execute on all of the expense initiatives and cost initiatives items that we've talked about in the past, like our location strategy, our technology strategy on minimizing storage, or our asset service or asset pricing where we've consolidated asset pricing vendors. All of those continue, and we think can continue to move us forward.

Follow-up question was: On the loan growth, you've all been around the $28-billion to $29-billion-range for a while, and now, through this year, you've really seen kind of a momentum pick-up. What are some of the sources or catalysts for that acceleration in loan growth?

Thanks, yes. Let me start by sharing some of the data you'll see when we publish our annual report. We've had great success in our private client loans. I think they're up $510 million, or 7%.

Commercial real estate has grown about $225 million, and commercial and institutional is also increased; really, so, across the board. The one area where I would say we haven't seen that growth is in residential real estate, which is a conscious, strategic decision for the Bank.

Our clients demand and need for assistance in those spaces picked up significantly in the second half of the year. And particularly -- as you saw with the 4% sequential growth, particularly in Q4. So, those are kind of the pockets of where we've seen that loan growth expand.

And any change in your philosophy, or just customer demand pool?

There's not really a change in our philosophy. I think we continue to want to serve the clients as their credit needs ask. I would say we've grown things that we would call [IMAS] secured, not to use a -- it's investment account secured -- and we've gone more up-market in our credit strategy. That's why you see some pullback in the residential real estate, and more in things such as premium finance, aircraft lending, and et cetera.

Thanks.

We'll take our next question from Luke Montgomery of Bernstein Research.

Great, good morning, thank you; well, afternoon, at this point. I believe you and the other trust banks recently agreed to share information with your custody clients about what they're paying for benchmark licensing and data that you use in performance measurement for them. So, I wondered if you might anticipate any need to unbundle those costs from performance reporting fees, or if you think there would be any pricing pressure as those costs become more transparent? Maybe it's just a question about whether you mark those up at all, I'm not sure.

Luke, that's something that we're really not familiar with, to that level of detail. I'd be happy to take that offline with you and help you out. We can talk directly on that at a later date.

Okay, so, a little overly detailed. Maybe stepping back, big picture, obviously this was a very encouraging result this quarter: fees were up in the face of negative FX impacts; FX fees are finally trending more like peers; you got a little NII growth; expenses seem well contained; and the operating margin is above the elusive 30% aspiration you've discussed elsewhere. Core expenses to core trust fees are approaching 110%.

So, I think, at the same time, the quarter looks a little bit like an outlier, so I just wanted to get your sense of whether you think this is a sort of run rate that's more or less sustainable, and a step up related to core business initiatives? Or do you think there is an element of random lumpiness there, really caused by the equity market in Q3, among other things?

First, we believe that our business model and strategy are absolutely sustainable, and geared around our Business with great growth demographics, whether we're serving the wealth of individuals or institutions. Secondly, we believe that the ability to execute on those strategies, particularly around winning new clients, winning new mandates, increasing our productivity that you discussed, are within our control, and those are absolutely sustainable.

Items such as markets and currency volatility, and interest rates, they will continue to fluctuate, and they provide some of the variability in there. But we still believe, with continued execution, that there is sustainability in our momentum.

Great, thank you very much.

We'll take our next question from Alex Blostein of Goldman Sachs.

Hi, Alex.

Hey, how are you guys? Wanted to dig into the NII dynamic in the quarter; and, Biff, you highlighted a couple of moving pieces, just wanted to make sure I've got all the numbers right. So, there was obviously a little bit of help in the NIM this quarter from lower premium amortization and a couple other things, but all-in sounds like it was maybe like a 10-basis-point help sequentially on the securities portfolio; maybe like a 1-, a 2-basis-point help on the NIM overall.

Is it a fair assessment? So, like, all else equal, NIM probably stays in the range over the next couple quarters until rates move, hopefully in a positive direction towards the end of the year?

Thanks, Alex. We would look -- if you have the stated NIM of 1.08%, we think there was probably 1 basis point of premium amortization, and 1 basis point -- we had an early call of some auction rate preferreds. So, that 2-basis-point type help that you talked about is absolutely in the range, from a NIM.

There were other actions, as you see across any of the earning assets, that moved them. Most of those were conscious actions that we take in the regular management of our portfolio.

Got it. And on the funding side of things -- again, numbers are getting quite small -- but if you look at -- I guess your funding costs did come down a little bit over the course of the quarter -- I think 1 or 2 basis points. What was primarily behind that? Is there more room to go, because it doesn't seem like we've seen kind of a corresponding headwind on bank deposits that you guys have on the asset side of the balance sheet?

You know, Alex, I can give you a few data points there across a couple of the funding categories. The saving certificates another time; that might be one you're talking about was down about 2 basis points.

We saw lower CD rates across basically all tenors but the ultra-short category. You saw the cost of non-US office interest bearing go down about 3 basis points. Recall that we had a change in deposit pricing on [euro] deposits, so that was obviously a factor there. As well as some less favorable FX swap arbitrage activities.

And then, long-term debt was down as well. We had a September maturity of a FHLB advance, and had the full quarter impact of that. So, again, as Biff said, kind of a lot of things just in the normal course, if you will, that led to both the asset side and the funding side moving in the direction as he described.

Got it, that's helpful, thank you. And then, a quick follow-up, just on the core business: C&IS, like we've seen the last couple years, continues to do quite well. It still sounds to me like a big driver there is the administration business, but we don't obviously see the assets that correspond to that. Any sense you guys can break out how much of the growth this quarter was due to some of the new fund administration initiatives versus the more core custody business?

Alex, we don't have that breakdown for you this quarter, but in 2015 we are looking at expanding our disclosures to include assets under administration, which has obviously become a much more relevant asset figure for Northern Trust. And we should have all of our disclosure parameters and controls in place to allow for that disclosure in 2015. And at that time, coincident with that at the disclosure, it would be our intention to take custody and fund administration fees for C&IS, and break that down into two different lines.

Got it. Well, that would be super helpful. Thanks, guys.

We'll take our next question from Ashley Serrao of Credit Suisse.

Good morning. On capital, Biff, I was curious what drove the decline in standardized/advanced ratios this quarter? And then, also, what's your latest thinking around preferred issuance and the cushion you like to keep about your minimum requirements?

Thanks, Ashley. The slight decline in the corporate capital levels really resulted from a flat equity balance and a very modest increase in risk weighted assets. As you saw, we essentially returned all of net income through capital actions in the quarter, between the buyback and the dividend. So, we obviously kept the capital level flat, and we had a modest increase in the risk weighted assets, as you've seen some -- the balance sheet get slightly larger.

So, the combination of those drove that ratio slightly lower -- about from 12.5% to 12.4% or so, depending on how you've looked at it. We still think that's very well capitalized, as you might say.

The second part of your question was really around the capital structure and how we think about preferred. As you know, we did some in August, and we continue to evaluate the regulatory environment, and to look at our ability to both return our Common and, if possible, replace that with Tier 1. And that's a strategy that we will continue to review on a regular basis.

Okay. I guess my follow-up is just on the core business, within C&IS, are you able to size the business won, but not installed, as it stands right now?

Internally we have that ability, and we know, and I will comment on this: Our pipeline is very strong, and our incoming business that will be implemented is also very strong. And we're busy working on bringing that in, as we speak.

Thanks for taking my questions.

We'll take our next question from Ken Usdin of Jefferies.

Thanks; afternoon, Biff.

Hi, Ken.

Biff, a little follow-on, on the net interest income front: Can you just remind us that if -- well, I guess actually could you just tell us what that number was of what the premium amortization was this quarter versus the [13] you had last? And then also then remind us how your mechanism tends to work with regards to either coincident or lagging? So, if rates stay where they are, will that then revert back the other way, just from a mechanism perspective? Thanks.

So, let me answer the second part of your question first. We are on a lagging basis; so, as rates have come down, you and we will look at that and the impact on premium amortization, absolutely.

The first part of your question was on the -- ?

Just trying to actually size those two numbers that you gave in basis-point terms as a percent of -- you gave it in the yield terms. It would just be simpler if you were able to just tell us what premium amortization was this quarter, and what the benefit was from those pre-pays of the auction rates.

Okay, thanks.

Yes, it was -- $7 million was the amortization in the period; I'm rounding.

Okay, and then a smaller amount for the auction rate pay down?

That's correct.

Okay. And then bigger-picture follow-up on net interest income: The balance sheet mix has changed, loans are now starting to grow again, they had become a smaller proportion of the balance sheet.

When you think about the potential for rates to rise, whenever they do, any updated views as far as where you think your normalized NIM can go, given the changes that we have seen in both the liability structure, the equity mix, and the asset side components of the balance sheet? Thanks.

Yes, so -- well, we certainly think our NIM can expand in that environment, and we think we're positioned well for that increase in rates when they do arise. I don't think we'll provide exactly where we think the NIM can go, but we think we're positioned well. As you see in our duration, we're relatively short, with sort of a 1.1 duration in the existing portfolio. And we think, like I said, we're positioned well for the NIM to rise when rates do come.

Okay, thanks, Biff.

We'll take our next question from Brennan Hawken of UBS.

How you doing, Biff?

Good, how are you?

Good. So, real quick, on the drop-in in outside services and other expenses, was some of that a decline in the sort of elevated CCAR expense that you've got? And should we expect some of that to transition into comp, as I think you guys had laid out in the past -- just curious about whether that's at play at all there?

Thank you. Let me answer that question from a couple different perspectives, particularly as it relates to regulatory expense and what you saw come through the outside services. I'll start with saying the decline in outside services, fairly broad based; it included legal expense, it included the consulting expense that you talked about, it talked about consulting services. I'll focus in on the part that you talked about, about the regulatory environment, and let me talk about that from a few different perspectives.

As we said in the past, our expenses associated with outside consultants -- it did ramp up in 2013, really due to our first-time efforts around CCAR resolution planning. We expected the level of consulting expense related to these initiatives to decline in 2014, and that did indeed happen.

We do continue, however, to add personnel where appropriate. And as we shift to what I would call business-as-usual environment, we're staffing those efforts more internally than using outside expertise.

So, the second part of it is, is our portfolio of regulatory initiatives -- quite frankly, it changes year to year, as you're aware. We track those; we track the expenditures for those specific programs. And we really track those programs, if you will, to indicate where we need internal personnel and outside consulting. And we've seen the mix shift from use of outside consulting to the hiring of personnel internal to Northern, where we need that expertise on an ongoing basis.

So, I'll end it by saying: While we don't really see a moderation in the level of expense, we do see a slowing in the growth rate of that. And the mix between internal hire and external is shifting as well.

Okay. And then, following up on the point that you made on the swap volumes that you saw this quarter, should we view those as sort of one-time and opportunistic? And if so, is there a way you can help us maybe size that to think about how we should be looking at the revenues on a core basis?

So, they are opportunistic, and they are certainly in -- any environment would move up and down. And the sequential increase had -- about half of that sequential increase was a result of what I would call episodic interest rate swap opportunities. Those can come and go in quarters, depending on loans, but about half of the sequential increase in that line item was interest rate swaps.

Terrific, thanks, Biff.

We'll take our next question from Brian Bedell of Deutsche Bank.

Great, thanks very much. Biff, if you could just talk a little bit more on the balance sheet -- just trying to get a sense of some direction coming into 2015. I think you mentioned investing a little bit longer out on the yield curve in the government securities portfolio. I wanted to see if that was a significant magnitude? And then also on the loan yield mix and pricing, if you continue to see that -- the recent trends continue into 2015 on the loan pricing?

Okay, thanks. Let me start with part 1, on the duration. As we said, we were 1.1 in the month of December. We did add about 0.1 of duration buying treasuries -- about $1 billion worth of treasuries. So, I would say a modest increase in the duration of the portfolio, and still on the shorter end. So, that helped add, if you will, some of the increase that you saw there.

If you'd look at the loan, the yields on loans were down 11 basis points quarter over quarter. There's a couple components that I'll walk through there, if I could. The first is really the shift, if you will. The first was: We're in lower yielding loans, and I described some of those, so those is part 1.

Part 2 is: Some of that mix shift has impacted the overall spread, and we did have a very modest amount of lease residual write-down in the quarter, not meaningfully. But the combination of those sort of was the 11 point basis-point move.

And do you see those trends continuing -- aside from the lease residual write-down, do you see those trends continuing into the first quarter? And I guess what's your feeling on duration on the securities portfolio that you'd typically like to stay within?

Well, on the ceiling on duration, the answer is: We meet monthly as an [out-co] committee, and look at the market environments and make decisions as needed. So, we move appropriately on that front.

In terms of the loan yield, somewhat a factor -- the market, right -- what is pricing doing in the market? And if the competition and others continues to drive down the pricing on the loans there that we have there, we could continue to see pressure on that line. So, that's a market-driven answer.

Okay. And then just a clarification on the expenses: I think you said FX currency translation impacted revenue by 1%. I don't know if I missed what the impact was to expenses?

Yes, generally, the revenue and expense impact for us is almost a wash in any given -- it was -- on a year-over-year comparison, we had $7 million worth of trust fee impact and $6 million worth of impact in our comp and ben. But a reasonable expectation is around those two being a wash, in terms of currency impacts.

Great, okay, thanks so much.

We'll take our next question from Glenn Schorr of Evercore ISI.

Hi, thanks. Just a quick question on annual issuance levels: You mentioned strong capital ratios, and you returned most of the cash [to] net income in the quarter, but fully diluted share count's only down 1.3%, I think, year on year. So, just curious: What's the annual issuance about -- just more of a modeling question for go-forward.

Glenn, it's Bev. I'm thinking about whether or not I've got that in the materials in front of me. I think I'm going to have to get back to you on that.

No biggie. The other question I have is just: In asset management in general, we tend to talk around it through the other businesses, but maybe we can get a quick reminder on maybe the core growth initiatives within asset management as a business. You seem to be well positioned from a product standpoint, given the environment, and using your own proprietary distribution. But just curious if you could talk about it at the asset management business level?

Sure, Glenn. I'll highlight a couple of initiatives in the group that are -- we've talked about our ETF growth, and we continue to add funds. I believe we have 17 funds in our ETF family, and over $8.5 billion of AUM; so, that continues to be a focus.

I would also highlight engineered equity products and capability. This is -- if you think about our tax-advantaged equity and other programs, which is, as the trend from active to passive comes, we view engineered equity as a form of active equity, but has some of the characteristics of passive funds in their return profile. And so, those are two areas.

The third I would highlight is our alternatives investment business. And particularly -- that's of particular interest really across both of our business units, but the demand, as you might suspect, from our wealth management clients is high.

Okay, and usually not a big ask on my part, but while you're contemplating some of those other disclosures for 2015, a matrix screen on asset management as a business might be an interesting one because you've got a lot of the essential pieces of what's growing in the marketplace. It's just hard to see sometimes, but I appreciate that.

And, Glenn, I did find that figure. So, we talked about in the call that we had 2.5 million shares repurchased in the quarter. The issuance for -- under employee comp was about 112,000.

For the full year?

For the fourth quarter.

Oh, okay. Yes, I'll follow up if you don't have it on the full year later.

Oh, okay, no problem.

Thank you.

Thanks.

We'll take our next question from Mike Mayo of CLSA.

Hi, I'm staring at slide 4, and just looking at the fourth-quarter annualized revenue growth of 19%, and wondering how much of those revenues are sustainable? I heard that you said you have sustainability of the model of clients and momentum. But what's interesting is that your assets under custody and assets under management grew only half as fast in the fourth quarter as it did for the year, but the revenue growth grew twice as fast. So, maybe just to summarize what you said on this call, you talked about some episodic events, but as I look at slide 4 and the four categories, anything there you want to caution us about not extrapolating too much?

Yes, well, first of all, in your first part of your question was around the AUC and other growth. There's foreign exchange impacts on those, so they somewhat tempered AUC growth and others. So, the sequential growth was a little bit -- it muted the impact of the AUC growth by some of the foreign exchange impacts.

In terms of -- is there anything in that, that we want to sort of be leary of, I would say that there's the core business, the trust fee growth continues to be solid, and trend around that 8% to 9% range that you've seen. By almost any measure, we think that's there.

There will clearly be volatility in FX, and your models will produce that. And we think, in the net interest income model, while at risk to the way rates move, we think we've given you some pretty good indications to the stability of that. We can highly control the expense side of the equation in terms of the overall profitability, and we continue to work on that, but I don't think there's any revenue trends that we would call out.

Bev, I don't know if you have --?

Mike, I guess the only thing that I would point out, and Biff did mention this earlier, and you can't quite see it on slide 4, but within the other category is securities, commissions and trading income. And we did point out that that was a record in the quarter -- quite a significant record at $21 million. And that the interest rate swap revenue in the quarter was particularly high.

So, what I would say is the stars aligned with respect to that particular revenue stream. And whether or not that will repeat as we go forward, and the interest rate environment shifts and client demand shifts, remains to be seen.

Yes, and, Mike, I'd highlight one other -- in the other income, we have a relationship that we talked about that it had some third-quarter impact. We had retroactive negotiation with a service provider, if you will, and we had some benefit in that -- a portion of that outperformance, but not meaningful in terms of that. But there is -- a little bit of the outperformance in other was third quarter, and not fourth-quarter run rate, but relatively modest.

Just one follow-up: In terms of the competitive environment as it relates to the trust fees, has anything changed? Has it gotten better? Has it gotten worse? Could you talk maybe by geography?

It continues to be a competitive landscape, as you know. I think there's discipline amongst our competitors, in that they have their own models. And when an opportunity makes sense financially, they compete hard; and when it doesn't, we've seen them or ourselves have the discipline to not continue on, both from a pricing and from a risk perspective, at least that's true for us.

In certain regions of the world, we've seen our success and our competitive wins have been really broad based. I think we've had particularly great success in Australia, but the wins are pretty broad based for us across the Business.

All right, thank you.

We'll take our next question from Gerard Cassidy of RBC.

Hi, Gerard.

Thank you for taking my call; hi, Biff. The question I have has to do with your securities lending business. Can you frame out for us the ideal environment where the security loan balances could grow even faster than you've seen in the recent past?

Ideally, in foreign exchange revenue, it seems like high volume of activity and volatility favorably impacts that business. Are there any metrics that you guys look to that could favorably impact the securities lending business, aside from spreads widening out?

Demand is a big part of that. I mean, the market, the hedge fund needs for the securities or the instruments. I mean, demand is the primary driver of the success in that business. As you know, that varies in -- particularly in the fourth quarter, we see people make decisions about their willingness to have that outstanding late in the year.

But demand is the driver; so, if we see either stocks -- let's talk equities. If we see equities with high intrinsic values, and there's a demand for those, it's a driver of that business -- a substantial driver of that business.

Do you get a sense behind the demand -- obviously, higher demand would be great, but would a sustained bear market be the ideal condition to drive that demand even higher? Do you guys get a sense of what that would be from your past experience?

I'm not sure; I mean, I think it could, but it would be speculation on my part. I think it absolutely could, but I'd be speculating, and I don't -- I'd be speculating, I'll leave it at that.

Okay. And the follow-up question is: You guys have had good success in growing the balance sheet, obviously, over the last two years. And one of the areas of growth has been the deposits at the central banks; the Federal Reserve deposits are up quite strongly in the fourth quarter versus first quarter of 2013, as you show in your trends slides.

The question is: How much of that is sticky, meaning that should rates move higher and your customers decide to take their excess deposits out, assuming most of them are sitting there, where do you see those line items going, in view of the liquidity coverage ratio that you have to maintain versus what your customers may take out and put elsewhere?

So, I'll start with our liquidity coverage ratio, and as you see from our balance sheet, our liquidity coverage ratio is fully compliant with 2017 guidelines and is north of 100%, as we talked. And to your point, we have a very liquid balance sheet, as you've seen.

We do detailed analysis to understand the stickiness, or what is operational in that deposit base and what is perhaps sitting there as an excess, and I'll just use that phrase. It's as an excess. I think that much of the growth in the balance sheet and much of the growth that you've seen in central bank deposits, et cetera, is reflective of the growth we've had in our Business. They are largely items there that would be in support of business transactions and the core custody business.

We have had an increase in demand deposit. If you look at that, that's a meaningful increase on the balance sheet. I believe two-thirds of that increase is in 10 clients. And that money is largely around hedge funds, endowments, and other types of large clients with large balances. The nature of them staying or going is probably somewhat more up for discussion. But our core balance growth, I think, is still reflective of the business growth you see.

Thank you.

We'll take our next question from Jim Mitchell of Buckingham Research.

Hey, good afternoon. I just wanted to follow up on foreign exchange in the fourth quarter -- you guys were up 31% sequentially. Is that purely a function of just the higher volatility, or was there anything unusual, whether this quarter, fourth quarter or third quarter where you were a little bit weaker than your peers? Anything unusual you saw in the fourth quarter, or is it just reflective of the environment?

It's largely reflective of the environment, with the volatility we track with that, we had very modest volume increase with our clients, but largely it was around the volatility. As we said last quarter though, we continue to build out our capabilities and products around our foreign exchange business. And we hope to see the fruition of that as we move through the year.

On the electronics side?

On the electronics side, and providing algorithmic solutions to our clients, et cetera.

Got you. So, when we think about the volatility this quarter, appreciate the comments around -- it's the volatility around the Swiss National Bank, for instance, wasn't a negative. But I would think -- is it fair to assume that, all else being equal, the higher volatility so far this month is a positive? Or would we think there's something else that could be negative? It doesn't seem that way, but volatility should be good, right?

Volatility is good for us, as I described earlier with -- we don't warehouse positions and others. It's really trading volume for our clients, and that volatility is positive.

Right. And on the -- sticking with the volatility theme, have you seen deposits remain elevated or increase? A lot of times at the end of the quarter you get a build-up and then it drops off, but obviously with Swiss National Bank and QE in Europe, do you see deposit levels even growing further so far this quarter?

We've seen some modest growth in the balance sheet, but I wouldn't say outsized from traditional growth that we just see related to our core businesses.

Okay, fair enough, thanks a lot.

We'll take our next question from Geoffrey Elliott of Autonomous Research.

Hi, Geoff.

Hi. When you talked about the 10.6% fully phased Basel III Common Equity Tier 1, you mentioned that you'd be watching for what regulators have to say there. And I just wondered: Are there any areas in particular that you're focusing on that you think could move that ratio up or down?

I don't know that -- we just continue -- as you know, in December, Governor Tarullo talked about additional GSIB buffers, which didn't impact us, but we still stand ready to see if those types of changes come along. So, it's not so much a change in the calculation of that element of the ratio, but it's where our levels are relative to where new ratio limits are required.

So, we stand ready to make adjustments if we need to be compliant with any new ratios that come about. And then we obviously will wait for anything on the net stable funding ratio. We got better guidance -- the US version of that -- the Basel came out in October, but the US sort of finalitied that and others.

Great. And then maybe just to follow-up, there's been some discussion around the group of banks which go through the CCAR process being altered -- the $50-billion asset threshold being raised. Do you kind of think, as an advanced approaches bank, you're going to be in that exercise [effort], or do you think this as a $100-billion asset bank or thereabouts, there's some chance that at some stage you come out of the process or it gets watered down?

So, I don't -- the answer I would say is: We're different than some of those other $100-billion balance sheet banks in the sense that we're $6 trillion of assets under custody, and we're $1 trillion -- almost $1 trillion of assets under management.

So, we've become, and we're far more significantly global. That probably puts us in a position that the regulators will have to make a determination if we look more like a US-based $100-billion regional bank or a global institution. And we'll have to see how that plays out.

Great, thank you.

We'll take our last question from Vivek Juneja of JPMorgan.

Hi. Question on the swaps business that drove some higher revenues: Is that a business you're trying to expand more actively in the wealth management area?

It is a business that we think is complementary to our focus on solutions for our clients. And it -- in this kind of interest rate environment, particularly as the credit demand picks up and we have an interest rate environment where people have an opinion on whether it's at lows or going up, it's a product and a capability that I think fills out the solution set we can bring to them very effectively. So, we will continue to discuss it with our clients, as needed.

And are you limiting it to just interest rate swaps or anything beyond that?

So, generally that's been the most common solution, but we listen to our clients, and if they have other needs, we certainly have those dialogues internally.

And a completely unrelated question: There have been some rate cuts overseas. Any commentary on implications of those?

Sure. I'll pick the Swiss franc, if I could. For instance, we have about $200 million worth of Swiss franc deposits. We have been charging negative 35 basis points on that. With the move to negative 75 basis points, our team will closely monitor the situation, and adjust our pricing to be appropriate for the competition. But likely moving down much closer to that rate, if not slightly past it. And the same would be true in the Danish krone or any of the other markets where they've dropped the central bank rates, if you will.

Okay. And is Australia a meaningful one for you folks, in terms of deposits or assets?

It is, and in fact, it is a high growth area for us, and some of the improvement in our NIM has been our ability to invest in Australian securities. It's a pretty modest impact to the NIM, but it is an example of where, because we have the cash and the deposits in that market, we've been able to utilize some sub-sovereign wealth investments in the Australia marketplace.

Great, thank you.

And at this time, there are no further questions in the queue.

Thank you, Rich, and thank you, everyone, for joining us. We will speak with you again in this format in April on the day of our Annual Meeting. Thank you very much.