Good day, everyone and welcome to the Northern Trust Corporation Fourth Quarter 2017 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. Mark Bette for opening remarks and introductions. Please go ahead.

Thank you, Hanna. Good morning, everyone, and welcome to the Northern Trust Corporation's fourth quarter 2017 earnings conference call. Joining me on our call this morning are Biff Bowman, our Chief Financial officer; Aileen Blake, our Controller; and Kelly Moen Lernihan from our Investor Relations team. For those of you who did not receive our fourth quarter earnings press release and financial trends report via email this morning, they are both available on our website at northerntrust.com. Also, on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This January 24th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through February 21st. 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 2016 Annual Report on Form 10-K 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 enable 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 Mark in welcoming you to our fourth quarter 2017 earnings conference call. Starting on page two of our quarterly earnings review presentation. This morning, we reported fourth quarter net income of $356.6 million, earnings per share were $1.51, and our return on common equity was 15.1%. As noted on the second page of our earnings release, this quarter's results included a net $53.1 million tax benefit associated with the Tax Cuts and Jobs Act, a $12.9 million expense related to special onetime employee cash bonuses paid in connection with the Tax Cuts and Jobs Act, and $17.6 million charge associated with severance related and restructuring charges. This is also the first quarter which includes the impact from our acquisition of UBS Asset Management’s, fund administration unit in Luxemburg and Switzerland. The quarter included $21.1 million in fee revenue and $24.2 million in expense, which was inclusive of integration and transaction expense. In regards to our effective tax rate following tax reform, we currently expect our ongoing effective tax rate to be approximately 23% to 24%. Of course, it should be noted that a number of factors can and do impact our effective tax rate from quarter-to-quarter. Before going through our results in detail, I would note that macro factors impacting our business and clients during the quarter were generally positive. Both domestic and global equity markets were favorable. Short-term interest rates continued to increase during the quarter, driven by rate hikes from both the Federal Reserve and the Bank of England, during the quarter. Currency rates influence the translation of non-U.S. currencies to the U.S. dollar and therefore impact client assets and certain revenues and expenses. The British pound and euro ended the quarter up 9% and 14%, respectively versus the prior year as…

Thank you. [Operator Instructions] And we'll go first to Mike Carrier of Bank of America Merrill Lynch.

Hi. Thanks guys. Hey, Biff. Maybe first question, just you mentioned the tax guidance. But, when we think about maybe uses whether it's from an expense standpoint or capital priorities, has anything changed given that you're operating at that lower rate? And on the flip side, you guys have been investing quite a bit over the past years and you’re focused on the value for spend, but I just want to frame that dynamic with the lower tax benefit and how much you expect to drop to the bottom line?

Thanks. I appreciate it, Mike. Tax reform is expected to be meaningfully beneficial to our firm and its shareholders and that it will favorably impact our financial performance. It does allow us to grow, as you said, and it does allow us to reinvest in our business and our people and our communities in which we operate. What it doesn’t do, what the tax change doesn’t do is it doesn’t alter our strategic focus on profitable growth, our value for spend initiative, and quite frankly, driving more leverage into our business. That is our focus; that is the strategy of the firm. If we accomplish that, if we continue to drive more leverage into our business and we increase the profitability as a result of that and we apply the lower tax rate you just cited, that should lead to much improved returns for our shareholders. But, all other constituent groups may benefit from that as well. But, certainly, as I outlined, it will drive more profitable growth for the firm.

And then, just follow-up on net interest income. You mentioned the benefit in the quarter in the lower premium amortization. Just when we think about going forward, given the organic growth of the Company, what you think you can kind of grow from the deposit coming in? And then, also, where you think about managing the capital ratios, how should we be thinking about that going into 2018-2019, like both those dynamics? Obviously, the rate environment is where it is and deposit betas seem like those have been trending in line with expectations. But just, how to be thinking about more the balance sheet growth with the capital ratios?

Sure. There is a couple of questions in there. One, if I look at the balance sheet and I look at the net interest income and the NIM as we exited the year, it is a reasonable basis to establish next year’s thought process for all of you. But, I want to put a few caveats or a few explanations around that and both a balance of positive influencing factors and some that could be drags. You cited one and it’s positive or a negative, it depends on how betas unfold during the course of the year. To your point, if we look at our betas over a 12-month period from sort of fourth quarter of 2016 to fourth quarter of 2017. On the institutional side, they’re obviously a bit higher but in line with what competitors have talked about, generally. On the wealth side, they have been low over that period, but we did see with the most recent hike, some increase in the beta on the retail side, really for the first time. So, how the betas unfold next year is important. We have seen some increase, but we have also seen some discipline in the rates of those increases. So, we’ll have to observe how those unfold and make sure that our -- we’re aligned with the competitive landscape. As you also said the, right now, our betas, if you look across wealth and institutional combined, they’re generally -- our beta for the last year is under 50%. So, there is still the ability for NIM expansion in the franchise, if that holds true and the betas rise at a regular type range. Obviously, the balance sheet size and the balance sheet mix are also key components of that factor that you just talked about. We have…

We'll go next to Glenn Schorr with Evercore ISI.

Hi. Thanks very much. I wonder if we could talk about the acquired UBS business for a sec. I'm just curious what you can tell us about the mix of business and profitability thereof. I noticed on the revenue side, it looks like 1.5 basis points versus 2 basis points for Northern and overall, but I don't know if that's really a good apples-to-apples comparison. And then, of the $24 million in expenses this quarter, what would you consider ongoing versus integration-related, so we can just get a glimpse of profitability? Thank you.

Yes, sure. Let me take the mix question first and I'll let Mark talk to you about the ongoing expenses. But, if you think about that mix, the 1.5 basis points that you talked about, this is a pure fund administration type business and does not have a custody piece to it. So, comparing that to a more blended C&IS portfolio probably can produce different dynamics. There is obviously different product components in those items. And so, I would be hesitant to tell you that that's a perfect assessment. I think, you've got to do a little bit more of a blend across. And even that 1.5 basis points may not be indicative of other fund administration business in different geographies, because they have different dynamics in different regions. So, the way I think of that is the mix matters here and the business profile matters. And this is a pure fund administration capability here with no custody aligned to it. And Mark, if you want to add?

Yes. On the expenses, the $24 million, about $7.5 million of that was integration. We would say though, as you look at the $21 million in fees and $24 million in expense as far as we enter 2018, there will be integration activities that are going on throughout 2018. So, both of those are probably fairly good run rates, as you think about building off of the fourth quarter.

Okay, I appreciate that. One quickie on wealth management. There has been some changes to the broker protocol on the broker dealer side of wealth management. It usually wouldn't have much of an impact on Northern. But, I guess my question is, what are you doing to help drive organic growth in wealth management, both in your current client base and then in terms of attracting and growing new relationship managers?

So, my first part of that is, you’re right. We don’t really have a brokerage-led model. So, some of the nuance that you discussed there is less applicable to us. We do have the capability but it’s not the core, it's more of a fiduciary-led type model that we have in our wealth management front. In terms of growing that franchise, I think there has been significant investment in time in our goals driven investing, comprehensive approach to the wealth profile of our clients. And we’ve seen tremendous growth and take up in that business or that capability and approach, if I could say that. And as you could see in the growth rates in our wealth management business with double-digit fee growth and double-digit fee growth for the year in that business, while maintaining 40% margins, we’ve been very pleased with what we’ve seen in that. And then, in terms of attracting talent, it is a competitive landscape but we do believe that the Northern Trust brand is an important differentiator in attracting that talent, as is the fiduciary kind of based model, I think in some cases versus a more transactional based model. So, it’s competitive out there but we think the brand and the performance shows we're still very focused on that business, and it had a strong performance this year.

We will go next to Betsy Graseck with Morgan Stanley.

Couple of questions, one is on the acquisition. Was there any balance sheet impact from that?

No. There is none.

And then, you did have end-of-period, noninterest bearing deposits grow up nicely. I think on average base, it was down but EOP was up. Is that something you think can persist as we go through the next couple of quarters here?

I would say unlikely. Our balance sheet end-of-period quite frankly can have very onetime or transactional oriented balances in that. I think it’s probably better for you to look at the average balance sheet over the period. We did still see that noninterest bearing deposits essentially were flat sequentially, I think they were down $300 million. And as we tried to outline on the last call, if we look at that balance, about 21 billion, about three quarters of it we think is -- we've got pretty good line of sight and it’s traditionally been fairly stable. It’s that last order or about $5 billion that we keep regular tests on to see how interest rate sensitivity it is. It didn’t move. So, we do think that it has a sticky component to it in a rate-sensitive environment but it’s that quarter that we keep regular tabs on. This quarter, it remained fairly stable.

Got it, okay. And then, you talked little bit about increasing the leverage in the business model over time and the funding side of that. Could you speak a little bit to how you're thinking about stack rank, any opportunities on the deployment side?

On the capital deployment side?

Correct.

Yes. So, we do look at a balance of dividend and stock buyback. We're in interesting period of time for that evaluation. If you look historically, our dividend payout ratio has been around the mid-30s with the reminder of our payout coming in the form traditionally in stock buybacks. We’re in the process of evaluating the current environment we’re in. We’re looking at what we think is the maximum ability to -- excuse me, the maximum performance for our shareholders in that mix. And we’re early start into the process of CCAR working with our Board and others. But, we do think about the dividend payout levels versus stock buyback in this environment very closely. And more to come on that as we go through our process and we get feedback from our Board and our regulator.

Okay. I get that. It’s -- and just kicking off CCAR period here. But when we think back, some this has been seen for a while, we think back to before the 2008, 2009 period, your dividend payout was 40% north of that. So, I’m just wondering if that’s at all in the mix on expectations over the next year or two. I know, you can’t comment on that. But that’s background to the question.

Thank you. Understood. Yes.

Yes. And then, just lastly on the FX revenues, really strong quarter, especially relative to peers. I know you mentioned that you took share. Could you just give us a senses to drivers for that, especially given the volatility is relatively low?

Yes. Thank you. Our strong performance in FX trading was driven by higher volumes, which can be unique to a client base or a client portfolio versus other competitors in any period. But, it was also -- it included a higher level of swap activity. We have regular balance sheet management activities where we look at opportunities to place excess cash on a hedge basis. And in this quarter, as a part of that normal balance sheet management, we did see a greater level of benefit than we typically do from sort of this FX swap hedging that we do in our treasury balance sheet. That in any typical quarter can produce low to $4 million or so of FX of our total FX. This quarter, it was probably $4 million to $6 million higher than that normal run rate that I talked about because of those swap opportunities that we saw, that may continue into the quarter. There is a bit of an offset to that. So, that helped drive a little bit more than half of the sequential increase you saw in FX with sort of the normal balance sheet treasury activities. There is a bit of an offset of that, because we take cash out, in this case out of dollars and swap them into sterling and euro. And so, you would have had some reduction in net interest income as we were putting those in lower yielding central bank. But, the offset was the swap FX income in this, which ended up being a positive trade for the bank.

We’ll go next to Brian Bedell with Deutsche Bank.

Maybe to circle back on the deposit beta. I think you mentioned in the wealth management division, Biff, since the December hike, you did see an uptick. Can you quantify that as we move into the first quarter? I mean, obviously, your fourth quarter deposit betas were pretty low. But as we look at the trajectory coming into 1Q, can you give us a sort of a sense of maybe how much of those rates, deposit rates have gone up, I guess for January or the trajectory into 1Q?

Yes. On our wealth management side, the betas remain low. But we establish a review and we look at a certain subset of our competitors in the wealth space. We target to stay within a certain range of that competitive landscape for our depositors, maybe sometimes at a premium or a discount to that, but we got a set of competitors that we view. So that beta will depend to some degree on how the competitive landscape unfolds in that space. As you rightly said, throughout 2017 that beta remained low. We did see, again, in December, we did see some increase in the beta. But still -- if you looked at it on a yearly basis, at a really pretty low level in the wealth side. I don't know, I can't forecast how that will unfold during 2018 and kind of how that competitive landscape moves. But we've done very disciplined with that approach.

And these would be wealth management peers, other private banks plus the warehouses as well?

Yes. So, broad based basket of competitors. Yes, absolutely.

And then, just back to the spending both the value and spend program. As you think about tax reform, as we sort of go through the year on tax reform and I guess, what would be your view on -- obviously, I heard you -- continue to focus on profitable growth. But, as you think about the timing of that and the willingness to spend on some initiatives that might have some upfront expenses for some very strong long-term benefits. How do you think about that as we move to 2018 and what we should be thinking about for the expense to trust fee ratio, which did come down nicely this quarter, down to the 107 or 106 ex the bonus? Maybe some color on that.

Yes. As you said, we are focused on driving that expense to fee ratio further down. But not completely -- if there are opportunities out there to actually improve that ratio, but require expense but can improve the expense to fee ratio by driving the fee line harder or faster, we obviously evaluate those on a regular basis. And I'm not really sure that the tax reform is going to impact how we think about that. Those are decisions that we think about in our business at its core. We do and we talked to you with our value for spend, we are striving and working hard to improve the expense to fee ratio during the course of the year. That doesn't mean that our normal business model does produce enough internal income, if you will, to reinvest in our business. And it doesn't always require additional returns from taxes or whatever to do that. It's a business model that produces enough to invest internally. So, that's how we think about it. I think if we were sitting around the table, we would say that the tax reform is beneficial in the sense that we’re going to pay 7, 8 points, based on the range I gave you, less than our current effective tax rate, and that’s a benefit at all levels. But we still need to drive more leverage into the business, strategically and from an execution standpoint and we’re committed to it.

And longer term, do you see the competitive environment changing because of tax reform outside of you in terms of pricing and other companies’ willingness to spend.

That’s a good point. The one -- we’re in the early innings of tax reform. I think we have to assess what others do with the financial benefits. And if pricing changes in our industry or investment changes in our industry, we will absorb that. That’s why the view of probably early into this that in -- the returns from the tax benefit will probably flow -- will increase profitability. But boy, the competitive landscape, we have to see how it unfolds. We’re three weeks into tax reform right now and have to see how the discipline and approach is taken by other institutions.

We will go next to Ken Usdin with Jefferies.

Biff, if I could be more little more technical on the expense question. So, if you had 6.5% kind of core expense growth this year, what would you say the organic fee growth was this year?

So, we had 10% fee growth and I think the range was probably about half was organic. So, the way we think about it is, if we're 5% organic, our organic expenses were probably like you said close to 6.5%, we’re not generating positive organic fee leverage. And that’s why value for spend and still continued focus on expense discipline.

And that’s really my question, then. So, accepting that as yesteryear and now moving forward, if you expect organic fee growth to still be in that four to five range as you expected before, is that where we should expect the range of core expense growth to be and would that be inclusive of any incremental restructuring charges you take?

So, I think that we've said last time that we’re trying to drive positive fee, organic fee leverage. So that’s where we're trying to get. So, what you just describe is what we publically said we want to try to drive organic fee leverage. And we remain focused on that. The second part again…

Is that inclusive of charges?

Is that inclusive of charges? As it relates to charges, I would say it is not inclusive of charges in our 2018 thinking. And while we don’t give guidance, right now there will be the need for some charges. We think they are largely in line with the magnitude of the charges you saw in 2017. They might fluctuate a little bit from that. So, on a year on year basis that won’t create much of the growth that you just described. But, we're in a process here where that could change, if we see the right opportunities, but that’s where we’re right now.

Okay. So, I'm still just trying to get to the can you commit to that fee operating leverage, regardless? But then also can you help us understand next year’s growth rate also will have the full year of UBS and can you help us understand what that would be plus the Omnium purchase? So, the rest of the tech would -- how much of that would add incrementally, if separate from the organic growth?

Well, this is Mark, Ken. On the Omnium tech acquisition, at this point, I wouldn’t necessarily view as layering on additional expense, and we’ll share more on that as we work through that. On the -- when we do look at our organic growth rate, we do on an internal basis, we do acquisition kind of out of that picture. So, as we look at let’s say the first quarter of 2018 versus the first quarter of 2017, we would be looking to kind of strip back the expense growth and the organic fee growth excluding the acquisition. Obviously, eventually, it becomes part of your business, once it’s fully integrated. But, when you have those periods when there’s a year-over-year issue, we do adjust for those.

Right. And UBS already came on slightly positive on that front. So, hopefully on a full year basis, we would get that as an increment?

Yes. I mean, about 3 -- on a pre-tax, including integration about 3 million drag on pre-tax.

Okay. I mean, on a non -- on a go forward basis, right. Because if you said 8 million was the non-organic part of that and you’re bringing on 21 against 16ish, and that would be kind of organic positive leverage onto its own, just presuming that carries forward?

Yes.

We’ll go next to Alex Blostein with Goldman Sachs.

So, sorry to go back to this, but I guess just a follow-up to Ken’s point and the discussion there. I guess, 2017 was a pretty noisy year for you guys in terms of expenses, numerous charges, you kind of outlined some of the severance related activity, but there is also some others. You kind of -- and then there is UBS. So, if you strip all that out, it feels like the core expense base, I’m excluding UBS here, is a little under $3.7 billion. Is that the right way to think about it, as we’re kind of contemplating, kind of layering on more normal kind of 4% to 5% organic expense growth or I guess what would you consider to be the baseline for expenses? Again, keeping UBS aside because you gave a lot of useful color on that one.

Yes. And this is Mark, Alex. I would say that if you took the charges out and you adjusted for the fourth quarter acquisition, that 3.7 is about the right number. I mean, I would also say that -- and again, we don’t give specific guidance, but the value for spend program, the intention is that to get to that point where we have that neutral to positive organic fee operating leverage by 2020. So, as far as -- if you look at 2018 on its own, there is work obviously we have to do. And the goal is, by the time we get to 2020, we’ll have that expense growth in line with the organic. And there might quarters before then where we are able to achieve it. But by 2020, we want to be able to consistently deliver that.

And then, the strategic question for you guys just around the Omnium tech transaction. So, it’s a bit of a wash on the expense side, sounds like. But any incremental opportunities that gives you on the revenue side? I mean I know that's been a pretty successful partnership for you guys in the past. That’s kind of how you got into the hedge fund administration business and that's been a big driver of servicing growth for you. But, as I think about it you’re now doing that in-house. Any revenue implications that are sort of tangible you can point over the next 12 to 18 months?

Yes. I think when we announced the agreement, as you've pointed out, we basically -- with Citadel, we're bringing the technology in-house and the flexibility that gives us and the talent quite frankly that it brings with it is powerful for us to think about how we go out and compete. And if you think about that in some competitive environments not having that in-house could be a detriment in a competitive environment, if they say who owns the technology and who supports the technology in certain competitive environments. Having that being able to be in-house, I think will allow them in that competitive environment to not face that hurdle in certain parts of the discussion. And then, we also think we get the benefit of bringing that in and fitting that into our IT infrastructure and understanding the benefits and a bigger and broader set of IT infrastructures that it can sit within. And again, we get some very talented individuals who we think can benefit, not just the Omnium platforms but some of ours as they look at some of the Northern Trust platforms as well. So, we're quite positive on the transaction. And again, it's unfolding as we speak here in the first three or four months of the year.

Yes. And I would also add that over time, we do expect this transaction to be cost beneficial to us. And like Biff said, be able to create greater efficiencies in the future. But, we will share what we can with you as we work through the process of closing.

We'll go next to Brennan Hawken with UBS.

So, quick follow-up on capital. In past, you guys -- I totally appreciate that you're going through the process and it certainly seems like very -- front and center in your minds is shareholder returns and returning capital to shareholders. I just wanted to clarify something. In the past, you've talked about how staying close to competitors and keeping capital ratios close to competitors is a key consideration competitively, which is fair. We've heard that in the press more and more attention to relief for on the leverage ratio upfront. So, if we end up seeing that relief for peers and if it is only focused on SIFIs not directly on you, won't that also benefit you all and provide some relief on a measure that has in the past constrained you to some degree?

Yes. So, if you look this quarter, while our capital ratios are still strong as is our leverage ratio, our binding constraint would be the leverage ratio not supplementary but the leverage ratio. So, the relief that's been proposed or the reaction to price share quarrels, reports are earlier this week or late last week are positive directionally for us. And if those come to being, they do give us even greater flexibility in our capital thinking and returns than we already have, which is like I said in a position great opportunity, given the strength of where we are and our capital ratios. I'm not sure how fast those will come. They were thoughtfully put in. And I'm not sure how fast we will be able to change those, but if they do, we would benefit. I think some of our peers have supplementary leverage ratio concerns that’s less impactful for us, but the leverage ratio is absolutely impactful for us and would again give us even greater capital flexibility in our thinking. And you’re right to say, it is front and center in our thinking right now.

Great, thanks for that. And then, following up on your NIM outlook comments, Biff. Respectfully, just a little push back here, like, why so caveat it, right? They deserve pretty low in your deposit base, as you walk through still. And even if they go up, they are still going to be at a level that’s manageable. And when you look at the asset side, you guys are more levered to the front end of the curve, you guys have now -- I think a great move to get rid of the premium amortization noise. So, we don’t have that to worry about. So, why not a more confident outlook in the rate leverage for you guys as you move into 2018, particularly given the market is now looking for three hikes. And by the way, all that’s before even considering the Bank of England, where we could see higher rates there too which matter to you guys.

So, Brennan, without giving guidance, we think our NIM can expand. Okay? We think it will expand. Just we're cautious in the sense of if betas move to 1 with the next hike in a competitive landscape, an unlikely scenario, I might add. If we come on here and told you that the NIM would be meaningfully expand, that may not be the case. If we see the NIMs expand at what we project and what we think and what we’ve observed -- excuse me, the betas expand, what we have seen here, our NIM will expand and it will. If you’ve seen the trajectory of our net interest income and our NI, it’s moved I think quite nicely, relative to the industry, given the disciplines we deploy on that beta. And I think it’s been beneficial to the firm. So, I think we will but we have a degree of caution there.

That’s totally fair, and I completely agree, like especially now that you guys have the balance sheet stable, I would think it’d be a pretty nice positive for you. But thanks for clarifying that, appreciate it.

We will go next to Jim Mitchell of Buckingham Research.

On wealth management, some of your discount guys have pointed to significant activity pick up among retail investors, obviously not necessarily you're same. The high net worth space is not as a different customer base. But, if you’ve seen sort of the animal spirits getting better with your wealth management high net worth customers, you’ve seen flows improve. Just trying to get sense of how to think about organic growth, what you’re seeing in flows and activity levels among your wealth management client base?

So, the answer to that is yes, we did see a strong year-end flows. And I think our clientele which tends to be at the higher end of the network spectrum is reacting to a very successful or high returning equity markets. They are looking at lower, perhaps personal income taxes, depends on what state you're in probably. They are looking at -- to your phrase, maybe a little bit more in the animal spirits, which allows them to invest in their own company businesses, allows them to perhaps take those businesses public or to sell those business. And so, we have seen that flow and new business pick up. There was a meaningful improvement in our organic growth rates from ‘16 to ‘17 in our wealth management franchise. And I think you see that in the fee growth line and you see that in the overall performance of our wealth management business. Again, with tax perform starting this year and the market that’s starting, healthily we think those animal spirits are still intact and long may they last.

And are cash balances at low points still reasonably usually high? I mean, what’s sort of the dry powder?

Yes. So, they’re not at low points, they’re actually still high. So, I think you’ve got people that are looking at where those opportunity sets are. And our cash balances inside of our firm increased across our asset management portfolios nicely year-over-year, both institutionally and on the personal site. But, we are seeing -- I think when I looked -- if you looked at our traditional wealth portfolio, we were at the highest level of equity as a component of that portfolio since 2009 when we kind of bottomed out. So, people existing equity investment in their portfolio were back to the high at the low-50% range across the average portfolio.

Maybe just one question on clarification. Your tax rate guidance of 24 to 25, I’m assuming that’s FTE?

23 to 24.

I’m so sorry. Is that FTE or GAAP?

That’s on GAAP.

GAAP.

That’s GAAP? Okay. All right. Thanks for that.

Yes.

We’ll go next to Mike Mayo with Wells Fargo Securities.

Look, I’m going to give a little windup to my question. So, on the positive side, look, Northern had the best top-line growth among peer in 2017. You guys played the long game, you did very well through the crisis. So, I don’t want to take anything away from you guys. But, did I hear it correctly that you’re not committing to positive fee operating leverage until 2020. In other words, I think you said, you did not get it on a core basis in 2017 and you’re not planning on that for either this year or next year because it’ll take time for the $250 million of savings to come through?

No. That isn’t what we said. So, we’re going to work hard to do what we can on that front over the next 12 months to get to that level. Obviously, the organic fee part of that equation requires a lot execution. But, I can tell you that we’re committed to getting to that before 2020, all things being equal.

And Mike, when I was comment earlier, I was focused on the organic leverage. So, we’ve been running at about 6.5, even if you adjust for things on expenses, our organic fees or let’s say 4.5 to 5. And the value for spend initiative has the intention of closing that GAAP.

Okay. I’m glad I asked the question. And as it relates to the pre-tax margin, it’s another way to ask this question a little bit differently. Again, notwithstanding the strong top-line last year, the pre-tax margin was flat and still down a little bit from a couple of years ago. Your peers tend to highlight that in the first few slides and you guys have it in the appendix. Do you have a target for the pretax margin for the firm? Do you expect that to increase? And just more generally, it goes to the question, how much are you willing to sacrifice the pretax margin to have better performance in the future.

Mike, we focus on the expense to fees more than we do to pretax margin piece of that. But, pretax margin is I can tell you internally something that we look at. And as you know we've historically and I think our competitors all are able to drive something in that low30s. And we think it's important to be in that range as well. Now, we've got a wealth business that does better than that. And so, we're trying to get I think that blended rate and improve that pretax margin along with all other expense initiatives we talked about. We just don't call that out as something that we set an established target for. But, I think our pretax margin actually improved during the course of the year. And I can tell you that we continue to focus on, not just giving up margin to get the profitability you described.

And if I could squeeze one more in. I guess, what I'm getting to, it just seems like you're increasing some investment spending to somewhere. And it might be logical, some of your peers are increasing their tax spending. Are you increasing spending in certain areas, again with an eye for that payback and you're a lot more conscious to this profitable growth and getting more leverage through the franchise. But, if you're increasing investment spending, what areas are you focused on?

Yes. So, we obviously -- you can see it in the equipment software line, if you look at the depreciation growth rate. We absolutely are making investments in our business. And we hope many of those generate the returns that you would expect to drive that expense to fees down further. The areas in many cases, I took the wealth side, there is investment in Goals Driven investment, capability and product that drives both revenue and operating efficiencies. But, a lot of that investment is in our core operating platform to support our C&IS business, so that we can produce and perform at as what you described the better margins and the better returns. And that's a technology intensive business, and we need to continue to invest. Our business generates I think enough to make that investment. But that's where we've seen that. And then there has been investment also in things like robotics and others that are largely in place for driving operating efficiencies. So, it's combination of all those.

We'll go next to Gerard Cassidy with RBC Capital Markets.

I got a question for you. You guys have done a very good job of driving that return on equity higher, not return on tangible common equity. And I think you have right now the goal to keep that number -- the range is 10% to 15%. And I go back and I think back to your old days before all the banks had to air all that capital and you had a long term target for ROE of 16% to 18%. And I understand, we’re probably not going to get there. But with the tax rates now coming down, and your profitability and your peers' profitability going higher as a result of that. Should we see this range increase or how are you guys looking at pushing that higher as your profitability goes higher?

Thanks, Gerard for the question. If we think back to when we established the range originally, the 10 to 15, the industry had kind of gone through -- I guess you described it as a secular change. We had all been asked to put more capital on the balance sheet and we all had to look at how we could return across the cycle, and that’s when we established the 10% to15% range. What I would suggest is at this point, if the tax reform is indeed the secular change, we think it is, that we have to think about that and what that is to our targeted range and how the reform itself will impact us and move this up. So, this type of secular change will prompt that type of evaluation inside the firm.

And then, second sticking with taxes, obviously, we all know about the SALT part of the new federal tax code. In your state, your home state, Illinois is one of the higher tax states. At what point -- I know it’s only a couple of weeks into the new tax bill, so we don’t have the answers yet. But, will you guys take a look at what that might mean in terms of the cost to your operations of -- for your employees and other factors in the state of Illinois because of the higher cost of doing business there versus other states and possibly shifting to lower cost areas, should that make sense?

I'm going to tell you that I think that it’s early in the stages and I probably don’t have a much more detailed answer for you on that right now. We obviously conduct and do business around the globe. We have a global franchise, we have operating centers and offices around the globe. And we’ll have to take a look and see how this unfolds and what the impacts to our people et cetera. We’d certainly let that unfold over the next period of time while we absorb this.

We will go next to Vivek Juneja with JPMorgan.

Just a quick clarification. Firstly, On MBS premium amortization, you said have a onetime charge which gets you to 20 to 25, so the charge -- the increase is 10 to 13, so the rest would imply what 10 million to 12 million. And since you said you’re going to make it pretty similar quarter-over-quarter, so is that to say that you’re expecting that 10 million to 12 million to continue on a quarterly basis through the rest of the year?

Yes.

Even though the long end has gone up so much?

Yes. As we sit here today, that’s our expectation. Yes.

Secondly, consulting service costs did decline, are you done with pulling pack on all the increase it had in consulting fees and projects for the living will or is there still more to come out of that?

We submitted our 165, at the end of the year. We believe in that that we’ve addressed regulator’s concerns but we will get that feedback from them in short order. So, the expenses we needed to do that work. Right now, we were able to have some of the consulting spend associated with that pull back and in other areas too. I wouldn’t say just related to that but in other consulting spend as we discussed, the spend pulled back. And then, we have to observe our feedback and we’ll go from there. But, yes, as of today. We also have to submit our CIDI plan by July 1st. But, we’re well underway on that front.

And lastly, going back to, I think Gerard’s question earlier, which was the ROE goals. I mean, from what I can see, the guidance that you’re giving on taxes, ongoing taxes should add a good 1.5 points to your ROE levels. So, at the very least, shouldn’t we expect that 10 to 15 to go up by that 1.5 percentage points?

So, we will evaluate that as we said on the call in terms of -- this is the type of secular change that promotes that. I think, the math you’ve done is something we can all do and that’s a reasonable mathematical equation, but we’ve got a balance that across the series of other strategic factors, and that’s where we are.

Meaning you might use some of this for something else? Any color on what you might be thinking?

Yes. That’s not what we were trying to say there. We’re just saying, we’ve got process, we’ve got reviews and other things that we’ve got to look at and we’re going to let that process unfold.

We’ll go next to Brian Kleinhanzl with KBW.

Just a quick question. Can you maybe just outline the strategy behind using the wholesale funding that kind of help fund the balance sheet growth? I mean, are you seeing suitable yields? On the earning asset side to make -- improve the margin still with that strategy?

Yes. Sure. So, as you saw, we did do some discretionary leveraging and used some wholesale funding. With our strong capital positions, we felt that we could put the balance sheet to work with discretionary leveraging and/or other kind of wholesale funding sources, as you described. But the nature of those is obviously very short. We’re generally putting those at central banks. Because, as we look at the flexibility we would like in the deployment of that capital, we’re not looking to lock those up into longer term assets. So, whether those are loans or something else as you described. Right now, we like that short-term flexibility around using that wholesale funding for, call it discretionary leveraging and the likes. It was additive to the quarter. And then, also to give you some idea, roughly for every 1 billion of discretionary leveraging, it’s about a 1 basis-point of a drag on the NIM. But we still felt that driving the NII was important.

And Brian to give you some color as far as volumes go. There was about 8 billion of leveraging during the current quarter compared to about 5.5 to 6 last quarter and 3 a year ago. So, at this point, when you think about the basis point impact on NIM, that gives you some color on that.

And could you just give what the duration of the securities book is now? Have you had to extend duration at all?

We’ve not. The total securities -- still remains 1.2, 1.1 years.

It appears there are no further questions in queue at this time. That concludes today's conference call. Thank you for participating.