Northern Trust Corporation (NTRS) Q4 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Northern Trust Corporation Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] At this time, I would like to turn the call over to the Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead, ma'am.

Thank you, Jessica, and welcome to Northern Trust Corporation's Fourth Quarter 2010 Earnings Conference Call. Joining me on our call this morning are Bill Morrison, Northern Trust's Chief Financial Officer; Aileen Blake, our Controller; and Allison Quaintance from our Investor Relations team. For those of you who did not receive our fourth quarter earnings press release or financial trends report via email this morning, they are both available on our website at northerntrust.com. In addition, this January 19 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through January 28. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now, for our Safe Harbor statement. What we say during today’s conference call may include forward-looking statements, 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 2009 Annual Report and our periodic reports to the Securities and Exchange Commission for detailed information about factors that could affect actual results. Thank you, again, for joining us today. Let me turn the call over to Bill Morrison.

Thank you, Bev, and good morning, everyone. It's my pleasure to speak with you today about Northern Trust's fourth quarter earnings. Earlier this morning, Northern Trust announced fourth quarter net income of $157 million and reported earnings per share of $0.64. Our fourth quarter results include an expense credit of approximately $0.05 per share related to the 2008 IPO of Visa, which impacted all Visa-member banks. In our press release issued earlier today, we presented operating results which exclude this Visa-related item. We believe operating results provide the clearest indication of results and trends in our core businesses. Therefore, our commentary for the remainder of today's conference call will focus on operating results, which exclude only the Visa-related item. To that end, fourth quarter operating net income was $144 million and operating earnings per share equaled $0.59. For the full year 2010, operating net income was $649 million and operating earnings per share equaled $2.65. As I'll discuss in more detail later, our fourth quarter and full year performance reflect the strong competitive positioning of Northern Trust in the markets where we compete. We continue to win new clients in both our Personal and our Institutional businesses, and believe that our client-centric business strategy and strong financial condition position Northern Trust well for growth. That said, extremely low interest rates continue to pressure several important and profitable revenue streams. Most notably, net interest income and trust investment and other servicing fees, and I'll touch on each of these later in the call. Before I review our fourth quarter performance, let me discuss the current market conditions that impact our results. Equity markets, as you know, improved for the second consecutive quarter with the S&P 500 and EAFE indices rising 10.2% and 5.2%, respectively, in the fourth quarter. You will recall that equity markets also improved in the third quarter, which is relevant to fees that we earned in C&IS custody and PFS wealth management, our businesses which use a quarter lag methodology in calculating some of their fees. Likewise, equity markets improved 10.1% in the fourth quarter, using the one-month lag methodology, which is relevant to fees that we earned in PFS, excluding wealth management. The very low level of short-term interest rates, coupled with narrow short-term spreads, continue to have a negative impact on net interest income, some investment management fees and securities lending revenues. As you know, interest rates remained at extremely low levels through the fourth quarter. In the United States, overnight interest rates averaged only 19 basis points in the fourth quarter. Three month LIBOR averaged 29 basis points, a decrease of a significant 10 basis points sequentially. Short-term interest rates for the euro and sterling were also at low levels by historical standards, although short-term interest rates in the euro increased in the fourth quarter. With that background, let me review our fourth quarter results. Revenue in the fourth quarter equaled $906 million, down 5% compared to last year's fourth quarter and up 1% sequentially. Trust investment and other servicing fees are the largest component of our revenues, representing 56% of total revenues in the fourth quarter. Trust investment and other servicing fees of $505 million decreased 8% year-over-year and 3% sequentially. In our Institutional business, C&IS trust investment and other servicing fees totaled $269 million in the fourth quarter, down 18% year-over-year and 8% on a sequential quarter basis. C&IS fees include three primary categories: custody and fund administration, institutional asset management and securities lending. Before I move into a review of our C&IS fee trends, please recall that our third quarter C&IS custody and fund administration fees were increased and investment management fees were decreased by $4.3 million each as a result of a fee reclassification. You will want to be mindful of this third quarter reclassification as you evaluate our sequential quarter performance for these two categories. C&IS custody and fund administration fees were $166 million in the fourth quarter, up 6% year-over-year and 4% sequentially. Excluding the third quarter reclassification that I mentioned earlier, C&IS custody and fund administration fees would have been up 7% sequentially. The year-over-year increase reflects broad new business success in global custody, fund administration, investment operations, outsourcing and domestic custody, as well as improved market values. The sequential quarter increase primarily reflects the improvement in markets, as well as new business in global custody, investment operations, outsourcing and fund administration. We were very pleased with our C&IS new business results in both the fourth quarter and for the full year, both of which represented records. Fourth quarter net new business in C&IS increased over 50% on a sequential quarter basis and more than doubled when compared with the fourth quarter of 2009. Cross-selling to existing clients, a long-standing and important contributor to C&IS fee growth, was particularly strong in 2010, representing about 60% of our new business for the year. C&IS investment management fees were $67 million in the fourth quarter, up 4% year-over-year and 11% sequentially. Excluding the third quarter reclassification that I mentioned earlier, C&IS investment management fees would have been up 4% sequentially. Waived fees associated with institutional money market mutual funds equaled $3.6 million in the fourth quarter, up from $1.2 million one year ago and $2.5 million last quarter. Absent fee waivers and the fee reclassification, C&IS investment management fees were up 8% year-over-year and 5% sequentially. The year-over-year growth reflects new business in our index management and manager of managers business and improved market conditions. The sequential increase primarily reflects higher equity markets and new business. Securities lending fees equaled $17 million in the fourth quarter, down from $90 million in last year's fourth quarter and $56 million in the third quarter. Recall that our securities lending fees in the prior year and in the prior quarter included $70 million and $39 million, respectively, and positive marks associated with the one mark-to-market investment fund used by certain securities lending clients. As we mentioned last quarter, all remaining securities in that fund were sold in the third quarter. There were no mark-to-market impacts in the fourth quarter. Adjusting for the prior period impacts of these marks, our securities lending fees of $17 million in the fourth quarter were down 16% year-over-year and 3% sequentially. The year-over-year decline was due to lower spreads and volumes. The sequential quarter decline primarily reflects lower volumes. Our institutional fees are impacted by the value of the assets that we custody, administer and manage on behalf of our institutional clients. Let's look at our various C&IS client asset levels. Institutional assets under custody were $3.7 trillion at year end, representing an increase of 12% year-over-year and 4% sequentially. Growth in assets under custody reflects higher global equity market values and new business success. Global custody assets, a sub component of assets under custody, were $2.3 trillion, up 17% year-over-year and 5% on a sequential quarter basis. Managed assets for institutional clients were $489 billion at year end, up $7 billion, or 1%, compared with one year ago, but down $19 billion, or 4%, sequentially. During the fourth quarter, a large global investor reduced assets under management with Northern Trust by approximately $21 billion in passive strategies, primarily equities. We continue to manage a sizable passive fixed-income mandate for this highly valued client. This reduction, combined with a $13 billion decline in year-end securities lending collateral, accounted for the bulk of the sequential quarter decline in C&IS assets under management, which was offset partially by higher equity markets. Now let's move to our Personal Financial Services business. Trust investment and other servicing fees in PFS were $236 million in the fourth quarter, an increase of 7% year-over-year and 5% on a sequential quarter basis. Growth was driven by improved market values and by new business. The very low level of short-term interest rates once again resulted in the waiver of some fees on money market mutual funds. These fee waivers reduced PFS fees by $10.3 million in the fourth quarter compared with PFS fee waivers of $11.4 million in the fourth quarter of 2009 and $10.4 million last quarter. PFS net new business in 2010 increased approximately 12% from the level achieved in 2009. We attribute this growth to our brand and financial strength, which have stood out in the financial services industry in recent times. In addition, renewed merger and acquisition activity, competitor disruption, notably in the mid-Atlantic and the Midwest, and improving consumer confidence combined to favorably influence market opportunities for PFS. Fees in PFS are derived from the assets we manage in custody for personal clients. PFS assets under management were $154 billion at year end, up 6% compared with a year ago and 4% versus last quarter. Assets under custody in PFS were $370 billion at year end, up 12% year-over-year and 6% sequentially. Approximately 36% of PFS-managed assets and 45% of PFS-custody assets were invested in equity securities at year end, both higher than last quarter due primarily to improved equity market levels. Net interest income equaled $232 million in the fourth quarter, down 5% when compared to the fourth quarter of 2009 and down 4% sequentially. Our net interest margin was 1.30% in the current quarter, 13 basis points lower year-over-year and 14 basis points lower sequentially. Interest rates remain near historic lows, resulting in continued compression of the yield on our securities portfolio as maturing investments have been reinvested at lower rates. In addition, spreads were tighter, both year-over-year and sequentially at the short end of the yield curve. For example, the spread between the overnight Fed effective rate and three month LIBOR averaged only 10 basis points in the fourth quarter, half of the 20 basis point-spread in the third quarter. Average earning assets of $71 billion increased 5% year-over-year and 6% sequentially, but growth was concentrated in lower yielding securities and money market assets as loan demand continues to remain soft. Foreign exchange trading income was $98 million, up 12% compared with the fourth quarter of 2009 and up 11% compared with last quarter, primarily reflecting higher currency volatility. Other operating income of $42 million increased 16% or $5.8 million year-over-year, and 52% or $14.5 million sequentially. The year-over-year increase primarily reflects a gain on the sale of the building, higher non-trading foreign exchange gains and higher commercial loan-related fees. The sequential increase reflects the same items as well as $6.3 million in pre-tax losses recorded in the third quarter, which resulted from the discontinuance of certain cash flow hedges. In the fourth quarter, we recorded $7 million in credit-related other-than-temporary impairment on residential mortgage-backed investment securities held within our balance sheet securities portfolio, including one newly identified impaired security and additional deterioration on four previously identified impaired securities. Notwithstanding the impairment of these five securities this quarter, the quality of our balance sheet securities portfolio remains strong with 85% of the portfolio rated AAA as of December 31. Our loan-loss provision was $40 million in the fourth quarter, equal to our provision recorded in the last year's fourth quarter and $10 million higher than our $30 million provision last quarter. Net charge-offs were $44 million, up $12 million year-over-year and $14 million sequentially. Nonperforming loans increased $6 million sequentially to $333 million at year end, with the net increase concentrated primarily in residential real estate and commercial real estate portfolios. Other Real Estate Owned declined $5 million on a net basis sequentially and equaled $45 million at year end. Non-performing assets increased $1 million to $379 million and equaled 1.34% of total loans, a ratio that continues to position Northern Trust favorably relative to our banking industry peers. Let me shift my comments to a review of fourth quarter expenses. In all comparisons to the prior year and prior quarter, I'll be referring to operating expense, which excludes the Visa item that I mentioned at the onset of today's call. Total operating expenses were $662 million in the fourth quarter, representing an increase of 7% year-over-year and 6% sequentially. A compensation expense was $282 million, up 4% or $12 million year-over-year, and 3% or $8.5 million sequentially. The primary driver of higher compensation expense was higher accruals for cash-based incentives. Employee benefit expense was $56 million, up 1% year-over-year and down 7% sequentially. We employed approximately 12,800 full-time equivalent staff at year end, an increase of 3% year-over-year and 1% sequentially. New staff positions were concentrated in the Asia-Pacific region. Outside services expense was $129.5 million in the fourth quarter, an increase of 10% or $11.5 million compared to last year, and 17%, or $19 million, sequentially. The year-over-year and sequential increases primarily reflect higher expenses associated with investment managers sub-advisory fees and higher technical and consulting services. Equipment and software expense was $78 million in the fourth quarter, up 7%, or $5.5 million, both year-over-year and sequentially. The year-over-year increase reflects higher software amortization expense associated with ongoing capital investments in technology. The sequential increase represents the historical annual pattern, where expense associated with depreciation and amortization of equipment and capitalized software is typically higher in the second half of the year. Occupancy expense was $41 million, down 6% or $3 million year-over-year, and down 5% or $2 million sequentially. The decrease in occupancy expense primarily reflects accrual adjustments for real estate taxes. Other operating expenses were $76 million in the fourth quarter, an increase of 22% or $14 million year-over-year. The fourth quarter of 2009 included $12 million of expense related to the final support payments and expiration of the Capital Support Agreements. Excluding that item from last year's comparison, other operating expenses increased $26 million year-over-year, reflecting higher charges for account servicing activities, increased business promotion and advertising and higher staff-related costs such as hiring, relocation and training. On a sequential quarter basis, other operating expenses increased 21% or $13 million. The sequential increase primarily reflects higher business promotion and staff-related expense, partially offset by lower charges associated with account servicing activities. Our effective tax rate in the fourth quarter was 26.7% compared with 34.5% in the third quarter. Two items influenced our below normal tax rate for the fourth quarter. First, during the quarter, we resolved certain state tax matters on a favorable basis. Second, we elected to indefinitely reinvest the earnings of an additional non-U.S. subsidiary. Our effective tax rate for the full year 2010 was 32.4%. Let me make a few closing remarks before we open the line for questions. Our results in the fourth quarter and throughout 2010 continued to reflect environmental conditions that are detrimental to our business model. The Fed funds rate in the United States has been near zero for two full years. Our net interest margin was 1.41% in 2010, more than 30 basis points below its pre-crisis historical average. We estimate that extremely low interest rates negatively impacted 2010 revenues, both net interest income and trust fees, by more than $300 million when compared with historical norms that equates to over $0.80 per share in earnings. Likewise, while the quality of our loan portfolio continues to profile well relative to the banking industry broadly, our credit costs have been persistently higher than historical averages. Nevertheless, I am encouraged by signs of a broadening economic recovery and the eventual impact that will have on GDP growth, on the unemployment rate, on consumer confidence, and ultimately, on short-term interest rates. Despite the environment, we are investing in our businesses to ensure that we continue to be well positioned to serve our clients in the U.S. and around the world. For example, in PFS, we recently announced the acquisition of Waterline Partners, a top-ranked investment advisory firm based in Los Angeles. Waterline is an excellent fit with our client-focused strategy and will bolster our presence on the West Coast to the United States. This acquisition is right in line with the M&A approach that we've outlined for PFS, and that involves adding talent, capabilities and clients, particularly in the important East and West Coast markets. Ongoing investment in our integrated global operating and technology platform has allowed us to meet the evolving and complex needs of our institutional clients. In 2010, we announced numerous product and capability enhancements for the benefit of our clients, including, for example, enhanced derivative processing, risk reporting, private equity tracking and Australian fund accounting. Our client-focused brand strength and service offering all contributed to the strong new business successes that we achieved in 2010 in both personal and institutional markets. Our capital levels remain strong with Basel I Tier 1 capital and Tier 1 common equity ratios equal to 13.6% and 13.1%, respectively, at year end. Under the Basel III framework, as we currently understand the regulations, we estimate that our current capital levels would exceed all regulatory requirements if implemented at December 31, 2010. Notwithstanding the environment, we continue to serve our clients with distinction, and we remain confident in our strategic, competitive and financial positioning. Thank you for your time today. Bev and I would now be happy to answer your questions.

[Operator Instructions] We'll go first to Robert Lee with KBW. Robert Lee - Keefe, Bruyette, & Woods, Inc.: A couple of questions. First, I guess I'll just get it out of the way. I mean, with taxes, I guess the recent tax hike in Illinois, I mean, how should we be thinking of that impacting you guys going forward?

Well, if it doesn't get vetoed, and I don't think we think it will, the impact on us consolidated in 2011 should be about $13.5 million. And keep in mind, though, that we have a much higher impact in the first year of adoption of those higher rates than we would in subsequent years as we adjust our deferred tax accounts. Going forward, after the first year, all other things being equal, we think that will probably cost us about $4 million a year. Robert Lee - Keefe, Bruyette, & Woods, Inc.: And maybe talk a little bit about your outside services and the expenses. I mean, I know you went through some of the things that impacted higher, I guess, sub-advisory fees and consultant fees. How much of that, if any of it, should we be thinking about as kind of potentially non-recurring in the sense -- or is that kind of a good run rate? And I guess, within that, since it is a goal to grow kind of your manager of managers business, which I assume is what's driving some of the sub-advisory fees, is that a large proportion of that line item that -- maybe how large would that be?

Well, that was about $4 million in the fourth quarter. Sub-advisory fees and sub-custodian expense grow based on market values. So let's hope we have another couple of quarters of positive market appreciation, then, yes, we'll have higher sub-advisory and sub-custodian expense in this line going forward. But we're going to continue to run an open architecture type of investment management platform, so we will continue to have expense liability to sub-advisers and, of course, to sub-custodians. But market levels would drive most of that expense, Rob. Robert Lee - Keefe, Bruyette, & Woods, Inc.: And to the extent that part of that increase or that number is maybe outside consultants you're using or what not to kind of bring on new business, I mean, is there any -- what I'm trying to get, is there anything in there that we can kind of, that we're looking forward, that we should think about as being kind of -- it's operating, but it's not necessarily going to keep recurring in the coming year?

We would hope our consulting expenses would be lower going forward. But honestly, a good portion of that is a function of today's regulatory world and a need to validate through third parties, an awful lot of our own conclusions. So I think it's a little bit early to forecast, and we wouldn't do it anyway, but a little too early to forecast consulting expenses around Dodd-Frank and the new regulation that we're dealing with, not just in the United States, but around the world. That number was $5 million in the fourth quarter, by the way. Robert Lee - Keefe, Bruyette, & Woods, Inc.: I think you talked a little bit about the drop in the C&IS-managed assets. I think, if I remember correctly -- if my notes are correct, you had one large passive mandate that left. Do you have any sense of -- and this also relates to maybe your pipeline, particularly in asset management. Generally, you've had good flows into passive strategies. I mean, are you seeing any kind of shift, like clients maybe starting to think more about active strategies and any change kind of in the passive pipeline? And, I don't know, do you have any sense of this client kind of go somewhere else to save a basis point or they were just reallocating to active alternatives, some other strategy?

Well, our understanding around this particular instance was that the client went to a passive, actually, two passive providers to duplicate what they moved from us. Moving to your question more broadly, no, we don't see shifts away from passive mandates to active mandates in either side of the business. And of course, it's mostly an Institutional business issue. Perhaps, like you, I read about that, but I haven't seen it in our asset allocation.

We'll go next to Tom McCrohar with Janney.

Can you talk a little bit about the growth in assets under custody, relative to assets under management? So it looks like you've been growing custody assets at a faster rate. And given the cross-sell opportunities for asset under management, I'm just wondering if there's something going on there where there's an opportunity for improvement to improve kind of cross-sell rates on the management side.

Well, remember, you need to adjust the assets under management category sequentially for the loss of the institutional mandate we just talked about. Also, in the quarter, Tom, there was a run down in our securities lending collateral, and that was about $13 billion. And some of that is seasonal and some of that is market-related as, I guess, there's been some short covering or there was some short covering toward the end of the quarter. But if you adjust for that additive $34 billion in AUM, I believe you'll see a much closer number of AUM growth versus what you would expect, given how the market changed in the third and fourth quarter, and also, given the new business numbers that we teed up during the conference comments. Having said all of that, yes, our custody business is growing more quickly than our AUM. And frankly, that's been the case, particularly on a global custody basis, for quite some time. Is there an opportunity to grow our AUM a little more quickly? Yes. And I would tell you that, particularly, in our manager of managers business and in our passive businesses, institutionally, we've had some great success. We've had some nice wins that aren't in the reported new business. And those wins should be reflected in later periods.

And as a follow-up on the interest rate environment side, you had framed it out before. I was wondering if you can remind us if the Fed increases rates by 25 basis points, what could we expect as far as recoupment of currently waived money market fees as well as net interest income?

Well, actually, Tom, the previous discussions we've had were that if interest rates were to rise from where they currently are by about 50 to 60 basis points, then the money market fee waivers that we're currently experiencing in both PFS and C&IS would be eliminated. We've never referred to a recoupment because there will be no opportunity to earn back what we've already waived.

And that would be $60 million, round numbers, based on the full year 2010 waivers.

We'll go next to Glenn Schorr with Nomura.

Quick question on just what's going on, on deposit trends. I see, nice that the non-U.S. deposits keep growing. The interesting thing was that is the one place where you saw the average yield being paid consistently rising over the last four quarters, where everywhere else in the world, it's falling? And I'm just curious if that was a competitive dynamic, or how to think about that?

Glenn, it's actually not a competitive dynamic. It's actually something that's a little bit confusing that probably is a bit unique to us, and let me try and walk you through that. The first thing that I would say is that you wouldn't want to look at the cost of the non-U.S. time deposits, obviously, on the liability side in isolation. You need to look at it in concert with a rise of 16 basis points in the yield on loans and leases. So I'd ask you to look at those two together, again, not in isolation. And the reason why is that we've got some arrangements with certain clients where we post cash collateral for the client's benefit in their local currency to allow our clients to manage their counter-party risk with Northern Trust, specifically related to foreign exchange trading. When that collateral is posted, the interest earned is accounted for by accounting guidelines as interest income on loans and leases. And likewise, on the liability side of the balance sheet, to the extent that we need to fund that collateral with a light currency, the interest paid is accounted for as an interest expense on a non-U.S. office time deposit. Then, to make it even more complicated, from a balance sheet perspective, we actually net those principal balances against other assets and liabilities. So in a nutshell, what we have here is we're earning interest income on loans and leases. We're paying an interest expense on non-U.S. office time deposits, but the principal balances have been netted away. So the result is that the yield on the loans and leases and the cost of the non-U.S. office time deposits really appear higher than they would otherwise be, were it not for this collateral arrangement with our clients. I think the bottom line, though, and I'll let Bill comment on this, is that the net impact of the complicated scenario that I just described was really not the driver of the change in our net interest margin this quarter because the two basically offset each other. And I think Bill would probably want to comment on what was the driver of the NIM compression.

Right. As we said in the press release, our margin declined 14 basis points to 1.30% in the fourth quarter. And as Bev just said, it wasn't from the deposit expense. It was basically from a reduction of about 10 basis points in our loan yield on domestic loans quarter to quarter, and also about an 11 basis point reduction in our investment securities portfolio yield. And let me just talk briefly about each of those two. I think all of you will remember that we talked about in the third quarter the fact that the very low rates, particularly three and five year treasuries at that time, were giving rise to increased levels of modification requests for our residential loans. Rather than have those loans refinanced and go off the balance sheet, we did modify the rate on a material number of residential mortgage loans, most of which are three- and five-year adjustable rate mortgages. And so the impact of those modifications caused part of that 10 basis point decline in domestic loans. And then secondly, as we said during our comments earlier, the reduction, particularly in 90-day LIBOR, about 10 basis points during the quarter, reduced the yield on loans that are tied to both 30- and 90-day LIBOR in our personal and in our commercial book of business. So that's part of it. The other part is you'll recall that our investment security portfolio has quite a short duration, less than 18 months. And so we are reinvesting a significant amount of money in that portfolio each month as existing investments mature. And we've been staying in common quality and common duration, so we've been reinvesting at ever lower levels. So the combination of those two effects is what drove the reduction in net interest margin, fourth quarter to third, and for that matter, year-over-year.

Got it, that was very comprehensive. Have you disclosed the size of the three- to five-year adjustable book to average marker? Any other quality stats?

We have not. But I'll tell you that the three- and five-year adjustable category of our residential mortgages is the majority of our residential mortgage book, which is a little over $10 billion at the end of the quarter, total.

Got it. And just the follow-up on the one client leaving. I was going ask a question where did the money go, but I think you helped us with that. I've seen lots of anecdotal evidence of rekindling of some pricing wars on the passive equity management side. Do you feel those pressures? And how do you feel like your product pricing is positioned as that kind of heats up?

Well, one, we don't think this was a pricing-related issue. And two, the success that we've had in terms of new business in this category of our investment management would suggest that our pricing is competitive. So no, we don't see that kind of trend today.

Our next question comes from Mike Mayo with CLSA. Michael Mayo - Credit Agricole Securities (USA) Inc.: I just want to get a better sense on what is normal. And Bill, you mentioned low rates are costing you over $300 million, or $0.80, per year. Was that right?

That's correct.

Revenue.

Revenues, right. But $0.80 net, yes. Michael Mayo - Credit Agricole Securities (USA) Inc.: $0.80 in terms of EPS?

Yes. Michael Mayo - Credit Agricole Securities (USA) Inc.: And would that, I'm just going back to my notes from your conference last year, and would that be the money market fees, securities lending and spread revenues?

Yes. Michael Mayo - Credit Agricole Securities (USA) Inc.: And has that number changed from what you presented the middle of last year? Do you feel better or worse about any of those normal adjustments?

It hasn't really changed, Mike. In fact, I think $0.80 is exactly the number that we gave at our investor conference in May. Michael Mayo - Credit Agricole Securities (USA) Inc.: All right, so you're still waiting for the day when rates go higher and you can recoup that?

But if you think about it, really, nothing's changed. We had a slight uptick in LIBOR and then came back down. So short rates, across the board, say up to a year anyway, are right where they were when we made those comments in May. Michael Mayo - Credit Agricole Securities (USA) Inc.: A couple other items you mentioned back in May, loan loss provisions are a little bit higher this quarter?

That's right Michael Mayo - Credit Agricole Securities (USA) Inc.: When do you think that goes back to normal? What are you seeing there?

That's tough to say. I've said to you and others on this call before that we got into this cycle later than others because, on average, our clients probably had a little more liquidity and more staying power, particularly on the personal side of the business. And we will probably get out of it a little later than some of the others. And if you look at the trends of the top 20 banks compared to us in these categories, we have not exhibited the same trends that others have to date. However, I would tell you that in our large credit or large corporate groups, taken to include our middle market groups, credit quality has improved measurably. We continue, though, to have challenges in commercial real estate and residential real estate lending, particularly in some of the more troubled southern states; Florida, Arizona, Nevada. And the solutions to those situations will come in time. It's a bit lumpy, but I don't think I'm willing to forecast how soon that improvement is coming. I think the United States is stabilizing at an uneven rate, although I think everybody's getting a little bit better. And I feel a little bit better about it personally, but very difficult to forecast [indiscernible]. Michael Mayo - Credit Agricole Securities (USA) Inc.: And then the last question related to what's normal, I know it's been asked a couple times, I don't have a firm dollar number here, but your expenses in the fourth quarter, on a core basis, if you add back the Visa, I mean, it's the worst in a few years as far as a quarterly rate and...

That's right. It is, yes. Michael Mayo - Credit Agricole Securities (USA) Inc.: And fourth quarter, you guys always have a lot more expenses. That's not new. It's just, I think the magnitude of this increase is quite a bit more than what people, or at least what we thought. Can you put any dollar numbers around, like, what's likely not recurring?

Not category by category. I'll tell you this, though, our expenses were up $40 million sequentially. And I agree, that's a higher number than we've seen in some time. There's a lot of seasonality around this. There's year-end accrual true ups. We did some stuff on comp in there that we usually do this time of year. We've got much higher expenses, and we don't know how long this will last. And I talked about this in the opening comments around Dodd-Frank and the increased regulatory environment that we're living in. We've got higher expenses to sub-providers around higher asset values. And as we've said before, we continue to make investments in our business; to whit, we spend a significant amount of money, as you know, each year, in IT capital and less amount in premises capital. And we continue to do that at increasing rates. And, of course, that carries forward in depreciation and amortization. But that investment seems to be validated based on the -- particularly, the institutional new business that I reported a little bit earlier in my comments. So we're going to have some level of carry-forward going forward, as we continue to invest in the business as appropriate. Michael Mayo - Credit Agricole Securities (USA) Inc.: My last question on what's normal. As far as your client behavior in PFS, for a while there, more of your clients went toward equities, maybe made more money. What are you seeing in that regard?

No change, surprisingly, because we're recommending higher commitment to riskier assets. But PFS consolidated was at 36% equities at the end of the quarter, Mike. And that's lower than I would have expected. Wealth management client is the same thing. Michael Mayo - Credit Agricole Securities (USA) Inc.: I mean, on the lower end, more the mass affluent level, you're seeing a pick up of risk appetite. So are the very wealthy, the people you cater to, they're on the same risk appetite?

I think that our very wealthy clients, framed as our wealth management clients, have moved some money in prior periods into alternative investments and equities. But our individual non-wealth management clients have been very slow to do that, I must say, surprisingly, to me.

We'll go next to Ken Houston [ph] with Jefferies & Company.

Just one more question on the margin. I think I definitely have an understanding of the potential upside when we eventually do get rates. I'm just wondering, number one, what are you guys using as a house as far as your expectation of when rates do rise? And number two, presuming that rates do stay where they are, for at least or even through this year, is there still NIM pressure that still has to come out as the investment's portfolio still rolls over, even though you have short duration?

Let me comment on the loans first. The three- and five-year and even one-year treasury moves down that drove that modifications surge that I talked about earlier seems to be well behind us because all of those indices have moved up quite a lot. So we're not seeing the same level of request for renegotiation in our residential mortgage book. And of course, the other driver, reduction in domestic loan yields, was the reduction in LIBOR. Personally, I can't see LIBOR getting much lower. So we don't see much more pressure on the domestic loan side. In the securities portfolio, that will continue in a limited way. And I say in a limited way because we have made some very nominal, very high quality focused extensions of duration in that portfolio to try to limit the downside.

Yes, that's where my question leads to, which is what point do you start to either lap the reinvestments to the downside, given your maturity schedule? And how far out are you comfortable extending to try to pick up a little extra yield?

Yes, you don't lap these issues until late in 2011. And we look at this every week, every month, as you can imagine. We have made some moves to extend duration to protect the ongoing depreciation of yield in the account. And we'll just keep watching it.

And then my second question, Bill, is last quarter, you talked about record net new business across PFS and C&IS. And I was just wondering if you could kind of give us a framework of how net new business was this quarter?

Well, C&IS business was a record, and a record by a big, big margin. The specifics around the new business are encouraging. It's not concentrated in one part of the Institutional business. We have excellent growth in the fund administration business. We have excellent growth in the investment outsourcing business, which is part of fund administration. We have excellent growth in the traditional pension business, and we have good growth, although you don't see it in the quarter numbers, in the investment management business. Also I would tell you that, that growth is distributed across all three key markets: North America, Europe, Middle East and Africa and Asia. So it's very broadly and equally distributed, and frankly, quite encouraging. On the personal side of the business, the new business for the full year was the second best this decade. We had a better performance in PFS in 2008, largely because of the flight to quality initiative that we all remember. But new business in PFS has been quite strong as well. And again, across all of the segments, principally the wealth advisory segment, the private client service segment and the institutional segment of PFS, and wealth management, also, which had been weak throughout the year, had a little stronger fourth quarter and a couple of very nice wins here right at the end of the year. So both businesses, new business, is encouraging.

Bill, sec lending, you said you had the volume declines in the fourth quarter? Could you describe what that was attributed to?

Well, number one, there seems to be a seasonality that is historical around the end of the year, as clients clean up their balance sheet. Also, there seemed to be a bit of short covering at the end of the year. So I'd say most of it was equity market dynamics and client actions, neither of which we think are unusual.

And then the spreads underneath that were also -- how did the spreads act? Tighter just based on LIBOR Fed fund tightening?

Yes, exactly. The spreads versus third quarter were narrower.

I think we mentioned that in the transcript, so you might want to take comments from the transcript.

We'll go next to Brian Bedell with ISI Group.

Just a couple quick ones on the balance sheet. The securities portfolio, 18 months duration, what are you comfortable, or I guess, what are the limits of what you could take that up to if you so desired?

Not a lot further. We've got some ALCO, or internal limitations, on that portfolio. We wouldn't go much beyond two years.

So you could reinvest up in three-plus-year paper? You can go up to five-year-paper I think.

Yes, we can go up to five-year in the highest quality issues. And in a couple of limited instances, we have done that.

So if we get steepening in the mid-part of the curve, there is some flexibility to reinvest at this higher yield and potentially pick up some yields in the portfolio?

There is. And as I said before, we have done that in a very modest way.

And then on the adjustable rate mortgages, what is the lag for resetting to LIBOR so when 90-day LIBOR picks up, just add reset over the next quarter essentially?

Almost all of our adjustable-rate mortgages are tied to treasury indices. So it's the one-, three- and five-year treasury that we really want to benchmark to. And those loans adjust annually, based on the anniversary date of the loan. So whatever the three-year treasury is on the date the loan hits its anniversary is the re-pricing date and rate.

So there's some lag impact if the rates have moved up nicely, but obviously there'll be a lag in how that accretes into the yield?

Exactly. I was focused on the fact that we shouldn't see as much decline in the margin from modifications, and not so much on the pick up that we would have the next time they re-price. But we certainly will have that if rates stay where they are today.

And then the new business, you mentioned the record for C&IS? Did I hear this correctly, it was 50% higher in the fourth quarter than the third quarter?

Yes.

And what was the PFS -- what was the same ratio for the PFS business?

Well, PFS, we said, was up 12% on a full year-over-year basis. The third to fourth quarter in PFS was up just a modest amount.

And you said you won some wealth management business just at year end, so I guess the question would be should we expect a reasonable amount of new business revenue momentum tied, revenue tied to that new business won late in the quarter coming into 2011?

There should be some carry over, particularly because the quarter was so strong into the first and second quarters of next year, yes.

And then in the sub-advisory, or the outside services segment, you mentioned $4 million was for sub-advisory arrangements? Is that correct?

Yes.

That was the increase.

Yes, that was the increase, of course. And so on the revenue offset -- basically, what you're doing there is you're getting mandates to manage -- for your sub-advisors to manage essentially on behalf of your clients or to your clients. So you're getting some of that product fee as your clients are investing in those outside-managed products, correct?

Oh, absolutely.

Oh, yes, definitely.

So is there an effort underway to sort of increase the revenue take that you get over the next, say, over the next year or so, in terms of the consulting services that you're providing for your PFS clients in that regard?

Well, you mean to increase the fees that we collect from our clients?

Yes. Basically for the allocation services that you're providing to your clients.

Actually, our PFS business unit is looking at restructuring their whole approach to fees. And the mindset is driven by the question of whether we can do it in a better way and a more transparent way than we have historically. I don't believe they've come up with their final recommendations yet, so we can't comment on those. But those are typically thought to be fees around asset allocation and portfolio construction as opposed to fees within individual products. So we'll see where that goes, too early to really comment on.

And then just finally, the tax rate outlook, you gave the guidance on the Illinois taxes. But obviously, you had a lower tax rate this quarter. What should, and I guess a broad range, what should we be using as an ongoing tax rate?

Well, if you look at the last couple of years, I'd say some place between 32% and 33%.

And that's excluding Illinois? I mean, excluding the rate?

Including the impact of Illinois.

We have time for one final question. We'll go to John Stilmar with SunTrust Robinson Humphrey.

Quick question, and this may be a misinterpretation of a term, but when you were talking about modification request on the mortgages in your loan portfolio, the three- to five-years, are those modifications in terms of reworking or restructuring the loans? Or are those just the re-pricings that occur when the contractual period of the arm resets?

Those are purely interest rate reductions driven by market conditions. So to get it down to a granular level, the client comes in and says, "I can refinance my three-year arm that has a 5% current rate at 3.5% with another organization. Will you match that and reset, or shall I move it?" And in most cases, we want to keep that business. Not all, but most. And so we try to renegotiate the rate at a slightly higher cost than they would be able to get by redoing the mortgage entirely, generally. And so we convert, if we have a three-year arm, we re-price and reset. But we keep it -- we try to keep it in a three-year arm product. We don't typically take a three-year arm and convert it to a 30-year fixed.

And other than the refinancing trend that seems to have crept up this past quarter, can you talk about the velocity of lending that seems to occur in some of the markets where you traditionally have -- I noticed that you had some slight month or quarter-over-quarter loan growth and just how underneath the surface of those numbers, loan growth, we should be expecting? And how's the capital starting to form in the markets where you lend?

The quarter-over-quarter growth was about $300 million, so it's really pretty small. I would say that we have loan growth, at least in the personal side of the business, in most of our markets. And the pace is beginning to increase a bit in terms of demand. And I would expect that to continue. On the Institutional side of the business, larger clients, we have quite a lot of increase in commitments but a very small, in fact, no increase in fact of the clients actually in outstandings because those clients continue to access the public debt markets. And until that option becomes less affordable than it is today, I don't really see any significant growth in the large corporate business.

This does conclude the question-and-answer session. I would like to turn the call back to our speakers for any additional or closing remarks.

Just thanks to everybody. We look forward to talking to you again to talk about our first quarter performance on April 19. Until then, bye-bye.

This does conclude today's conference. We thank you for your participation.