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Northern Trust (NASDAQ:NTRS)

Q4 2011 Earnings Call

January 18, 2012 12:00 pm ET

Executives

Michael G. O'grady - Chief Financial Officer and Executive Vice President

Beverly J. Fleming - Senior Vice President and Director of Investor Relations

Analysts

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Brian Bedell - ISI Group Inc., Research Division

Michael Mayo - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Howard Chen - Crédit Suisse AG, Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Betsy Graseck - Morgan Stanley, Research Division

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Operator

Good day, everyone, and welcome to the Northern Trust Corporation Fourth Quarter 2011 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the call over to Director of Investor Relations, Bev Fleming, for opening remarks and introductions. Please go ahead, ma'am.

Beverly J. Fleming

Thank you, Ryan, and welcome to Northern Trust Corporation's Fourth Quarter 2011 Earnings Conference Call. Joining me on our call this morning are Michael O'grady, Northern Trust's Chief Financial Officer; Eileen Blake, our Controller; and Allison Quaintance, from our investor relations team.

For those of you who do not receive our fourth quarter earnings press release or financial trends report via e-mail this morning, they are both available on our website at northerntrust.com. In addition and also on our website, you will find our quarterly earnings review presentation which we will use to guide today's conference call. This January 18th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through February 17th. 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 2010 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 Mike O'grady.

Michael G. O'grady

Thank you, Bev. Let me join Bev and welcome you to today's call. First, I'll review our fourth quarter financial performance as we customarily do. And second, as we indicated in our last earnings call, I'll review the initiative we call driving performance which is our corporate-wide effort embarked on earlier in 2011 that focuses on improving our productivity, profitability and returns in order to deliver greater value to our clients and shareholders.

Before we get into details, I'd like to make a few overview comments on the quarter. The operating environment Northern Trust has faced in the last several quarters continued in the fourth quarter. While these conditions presented mostly challenges for our business, we saw certain benefits in our financial results in the fourth quarter reflected this dynamic. While the U.S. economy exhibited signs of a continued slow recovery, there was growing uncertainty in Europe. As a result, many of our clients remained cautious, which was reflected in continued increases in demand deposits on our balance sheet.

With interest rates still at historically low levels, we realized only a modest benefit from higher deposits as yields on high-quality investments decline. In addition, fee waivers on our money market funds increased as a result of low rates.

Another benefit of the improving U.S. economy can be seen in the credit quality of our loan portfolio. With trouble loans declining, our provision also declined. Equity markets were up in the fourth quarter but down on a quarterly and monthly lag basis. This had a negative impact on our trust fees as most of our fees are calculated on a lag basis. And foreign exchange volatility and volumes trended lower in the fourth quarter resulting in lower foreign exchange trading income.

Importantly, the uncertain backdrop does present the opportunity for Northern Trust to fulfill our role as a trusted advisor and service provider to our clients. We continue to be very successful in adding new clients, both personal and institutional, which enabled us to organically grow our business and partially offset the impact of these headwinds on our revenues. To provide the high level of service Northern Trust clients both new and existing are accustomed to, we continue to invest in our business both people and technology, which caused our ongoing expense levels to grow.

To achieve our goals delivering value to both our clients and shareholders, we have been actively identifying ways in which we can increase our productivity while maintaining the differentiated client service experience. With successful execution of driving performance, we expect to improve profitability and return. We'll talk more about that in the second section, but now, let's move to Page 4 and discuss the financial highlights of the fourth quarter.

Earlier this morning, Northern Trust announced fourth quarter reported net income of $130 million, a decrease of 17% versus last year and 24% versus last quarter. Earnings per share were $0.53. Fourth quarter results included $13 million in adjustments related to Visa, so consistent with our treatment of Visa items, operating earnings, which exclude the adjustment, were $0.50 per share. There were 2 additional items that we do not adjust for in operating earnings but impacted the fourth quarter. First, we recorded $61 million in restructuring, acquisition and integration expenses during the fourth quarter or $0.17 per share. The charges primarily relate to the driving performance initiative. There's a schedule of the components of the charges in the appendix.

Second, net interest income in the quarter included a $7-million increase associated with the settlement with the IRS regarding the tax treatment for certain structured leasing transactions. This settlement, along with related income tax impact, amounted to a benefit of $0.02 per share on the quarter. For the full year 2011, reported earnings were $2.47 per share. Operating earnings, which exclude only Visa, were $2.41 per share and restructuring, acquisition and integration charges were $92 million or $0.25 per share.

If you turn to Slide 5, Slide 5 summarizes our results for the quarter. Operating net income, which excludes Visa, was $122 million, and down 15% year-over-year and 28% sequentially. Excluding the after-tax impact of the additional 2 items I mentioned, the restructuring charge and the lease settlement, operating net income would've been up 9% year-over-year and down 9% sequentially. On that basis, both the year-over-year and sequential comparisons were favorably impacted by higher net interest income, a lower loan-loss provision and a lower effective tax rate. And while the fourth quarter was the first quarter to include the full impact of the Bank of Ireland security services and Omnium acquisitions, increasing both revenues and expenses, they were essentially just below breakeven on an operating basis.

Compared to the prior year, these favorable factors were partially offset by reduced foreign exchange trading income and higher compensation expenses. Compared to the previous quarter, these factors were more than offset by lower trust fees and foreign exchange trading income and higher equipment and software expenses. Our return on equity on a reported basis with 7.2% reflecting the quarter's charges and the difficult environment. Our return on equity adjusted for Visa and for the 2 items I mentioned earlier, it was 8.7%, essentially in line with recent experience, but below our historical returns and our future aspirations.

With that background, let me get into the detail behind the fourth quarter results, beginning with C&IS trust investment and other servicing fees on Page 6. Trust investment and other servicing fees in C&IS, our institutional business, totaled $306 million in the fourth quarter, up 14% year-over-year and down 2% on a sequential basis. Net new business in C&IS was strong for the quarter and for the year and came in just below a record we set in 2010. We were successful with clients new to Northern Trust in all regions around the world but also continued to garner new business from existing clients. We're particularly pleased with the pace of new wins and the robust pipeline in the hedge fund administration space. As I mentioned, the equity markets were mixed in the fourth quarter, with the S&P 500 up 11% sequentially, yet EFA was up only 3%. As you'll recall, some of our custody and investment management fees are calculated based on a 1-quarter lag methodology. Given that markets were down in the third quarter, with the S&P down 14% and the EFA down 20%, sequential performance was negatively impacted by the quarterly lag month.

C&IS custody and fund administration fees were $206 million in the fourth quarter, up 24% year-over-year and flat sequentially. The year-over-year increase primarily reflects the recent acquisitions, which together added $35 million in custody and fund administration fees this quarter and new business. Flat performance sequentially, primarily reflects the weak quarter lag markets offsetting that new business.

C&IS assets under custody were $3.9 trillion at year end. Compared to the prior year, AUC growth of 4% primarily reflects the impact of new business, partially offset by lower securities lending collateral, flat year-over-year performance to the S&P 500 and lower international markets. Compared to the prior quarter, AUC growth of 2% primarily reflects new business and higher equity markets offset by the stronger U.S. dollars, lower securities lending collateral and a decision by a global client to consolidate its custody assets elsewhere.

C&IS investment management fees were $61 million in the fourth quarter, down 10% year-over-year and 6% sequentially. In both comparisons, new business was insufficient to offset higher money market funds, fee waivers and market impacts. Waived fees associated with institutional money market mutual funds were $12 million in the fourth quarter, up from $10 million in the third quarter and $3 million in last year's fourth quarter.

C&IS assets under management were $489 billion at year end. Compared to the prior year, flat AUM primarily reflects the new business offset by flat U.S. market and lower international market. Compared with last quarter, AUM growth of 2% primarily reflects new business and the blended impact of higher U.S. and international markets, partially offset by lower securities lending collateral.

Securities lending fees equaled $19 million in the fourth quarter, up from $17 million in last year's fourth quarter, yet down from $21 million last quarter. Borrower demand remains soft as securities lending collateral of $95 billion was down 5% in the quarter, more than offsetting the impact of higher spread.

Fees in our Personal Financial Services business are outlined on Page 7. Trust, investment and other servicing fees in PFS were $236 million in the fourth quarter, flat year-over-year and down 4% on a sequential quarter basis. New business was strong in the quarter, and for the full year, PFS had an all-time record for new recurring fees. Existing and prospective clients continue to place their trust in expertise solutions, brand and financial stability of Northern Trust. Strong new business was unable to offset the impact of equity markets and higher money market fund fee waivers. These waivers reduced PFS fees by $21 million in the fourth quarter compared to $10 million in the quarter earlier, and $19 million in the third quarter. With respect to market impact, our PFS regions use a 1-month lag methodology and on that basis, equity markets were down 5% on a sequential quarter basis in the fourth quarter.

Wealth management fees are calculated based on a 1-quarter lag methodology. While the S&P 500 was down 14% in the third quarter, Wealth Management Group fees are modest 1% due primarily to strong new business.

PFS assets under management were $174 billion at year end, up 13% year-over-year and 6% sequentially. The year-over-year increase primarily reflects new business and more than offsetting the impact of flat markets. The sequential increase reflects new business and higher markets.

Total revenues are summarized on Page 8. Total trust, investment and other servicing fees, which I just highlighted for C&IS and PFS, were $542 million for the quarter, up 7% year-over-year and down 2% sequentially reflecting the impact of lag market effects and fee waivers. Foreign exchange trading income was $72 million in the fourth quarter, down 27% year-over-year and 18% compared with last quarter, reflecting lower client volumes and downward trending volatility. Other operating income of $38 million decreased 11% year-over-year and sequentially, reflecting the impact of currency translation gains in the prior period.

Net interest income was $281 million in the fourth quarter, up 21% year-over-year and 5% sequentially; and net interest margin was 1.28%. As I mentioned earlier, net interest income in the quarter included a $7 million increase associated with the settlement with the IRS regarding the tax treatment for certain structure leasing transactions. Absent that benefit, the net interest margin would've been 1.25%, unchanged from the third quarter. The increase in net interest income was primarily the result of growth in average earning assets. Balance sheet growth has been fueled by strong client deposits, more specifically, demand deposits more than doubled year-over-year and averaged over $20 billion in the fourth quarter. These deposits have been primarily invested in our investment securities portfolio.

While the net interest margin was down year-over-year, it was stable in the third and fourth quarters when adjusted for the leasing item in the current quarter. In total, revenues on a fully taxable equivalent basis were $965 million, up 6% year-over-year and down 2% sequentially.

Now, let's look at fourth quarter expenses on Page 9, which are shown on operating basis, which excludes only Visa, but includes all restructuring, acquisition and integration-related charges. Total expenses were $785 million in the fourth quarter, up 19% year-over-year and 12% sequentially. Fourth quarter expenses included $61 million in charges associated with integration and restructuring activity compared with $4 million in the third quarter. Fourth quarter expenses also included for the first-time, the full run rate impact of acquisitions, which added $43 million in the current quarter and $31 million last quarter. Expenses adjusted for restructuring charges and all acquisition expenses were up 3% year-over-year and 2% sequentially. Compensation expense, our largest category, was up 6% year-over-year and 1% sequentially.

The adjusted 2% sequential increase in total expenses was primarily driven by higher equipment and software expense as we continue to invest in technology to support our clients, higher business promotion and higher charges associated with account servicing activities.

Our effective tax rate in the fourth quarter was 24.1%, well below 32.6% last quarter. The lower tax rate primarily reflect the favorable resolution of a number of outstanding matters with both the IRS and state tax authorities, including the leverage leasing matter, as well as benefits from adjustments to corporations intercompany service allocation methodology. Our average effective tax rate cost the past 5 years was approximately 33%, which is more representative of a normalized rate.

Moving to Page 10, credit quality was better in the fourth quarter as non-performing loans decreased 14% sequentially to $294 million at year end. Improvements were evidenced in commercial and institutional, commercial real estate and residential real estate, each declining sequentially by about $4 million. Other Real Estate Owned also decreased by $9 million on the net basis sequentially and was carried at $21 million at year end. The net result was non-performing assets were 1.08% of total loans and Other Real Estate Owned, down from 1.18% in the third quarter. Net charge-offs were $18 million which compares with $44 million last year and $29 million last quarter. Our loan-loss provision was $12.5 million in the fourth quarter, down from $40 million recorded in the fourth quarter of 2010 and $17.5 million recorded last quarter. As a result, the allowance for credit losses assigned to loans and leases was $295 million at quarter end, representing 1% of total loans and leases and one time on non-performing loans.

Let me wrap up this section on Page 11 by briefly covering 3 topics of interest relative to our balance sheet. First, our securities portfolio, which was about $31 billion at year end continue to be managed in a high-quality fashion, with 86% of the portfolio invested in U.S. Treasury, agency in AAA securities. During 2011, we extended the duration portfolio slightly. The portfolio at year end had a maturity duration of a little over 2 years and repricing duration of about 10 months, both slightly higher than the prior quarter. Second, with respect to the Eurozone, we've essentially no exposure to Greece, Italy, Ireland, Portugal and Spain within our balance sheet securities portfolio, deposits with banks and due from. We continue to invest and place deposits with a select group of stronger banks at sure tenures. Third, our capital levels remain very strong, with Tier 1 capital and Tier 1 common ratios of 12.5% and 12.1%, respectively. And we estimate that our Tier 1 common ratio under the Basel III framework, as we currently understand the regulations, would equal 12.3%, exceeding all regulatory requirements.

We continue to invest in our business, deploying capital to support our clients' needs and through strategic acquisitions including the 2 completed in 2011. We maintained our dividend throughout the financial crisis, paying $273 million in dividends in 2011 for a dividend payout ratio of 45%. We bought back approximately 1.6 million shares in 2012 at the cost of $79 million, virtually all in the first half of the year.

Dividend and share repurchases combined, our total payout ratio was 58% for 2011. Capital strength is and will continue to be a hallmark of Northern Trust and a key point of differentiation. As did the other banks in the regulatory capital planning process, we submitted our capital plan earlier this month to our primary regulator and expect to hear back in mid-March.

Let's move to the second section of today's call. While our client-focused business and financial condition are strong, the macroeconomic conditions continue to restrain revenues and return. As I mentioned earlier, we reported $2.47 per share in 2011 and reported a return on equity of 8.6%. Our earnings returns are below historical averages, and we expect the environment to be challenging for the foreseeable future.

Northern Trust is a different company today than 5 years ago or 10 years ago. As a company, we have more clients, we have greater global reach, we provide new products and services and we operate in a more complicated environment. It is a necessity that we step back and look at how we operate our business.

I want to also emphasize what this isn't. The underlying businesses and strategies in Northern Trust are sound and compelling. We are not changing the core strategies and principles of Northern Trust, nor is this a once every few years across-the-board series of actions. Rather, driving performance is about continuously examining every aspect of how we execute our business in order to accelerate productivity in the near term and improve the long-term. It's about driving performance to deliver greater value to our clients and shareholders.

On Page 13, we outlined the goals, drivers and estimated impact of this corporate-wide effort. An overarching and critical goal is to maintain a laser-like focus on our clients. This is the heritage of Northern Trust dating back to our founding as a competitive differentiator that matters in the marketplace. We will not take any actions that will compromise the client experience, and we'll strive to enhance it.

Our goal is to optimize operating processes in order to improve productivity. And by doing so, improve the profitability and returns of our business, regardless of how favorable or unfavorable the macro environment may be. Northern Trust has a high performance oriented culture, and we intend for this effort to contribute to that. Our actions fall into 4 broad categories: Revenue enhancements, process optimization, technology efficiency and corporate-wide initiatives, which I'll discuss in more detail in the next page. We estimate this effort will improve pretax income by $250 million by the end of 2013.

Page 14 outlines the category to key drivers and example initiatives within each. As I just mentioned, driving performance includes both revenue and expense initiatives. By 2013, we expect the mix of impact to be approximately 1/3 revenue, 2/3 expense. Let's talk about some of the specific initiatives we're pursuing.

First, we're pursuing revenue enhancement initiatives to accelerate our revenue growth. Fundamentally, the revenue initiatives are meant to fully align our offering with what our clients value most. Over the past several years, the needs of our clients on both the personal and institutional sides have evolved as has the mix of products and services that we provide them. In light of these changes, we have taken a fresh look at what our clients really care about in our offerings to realize value here more fully. Furthermore, we are taking steps to simplify our pricing structures in a client-friendly way that provides transparency for the valuable services we offer such as advisory and fiduciary services. We are taking a coordinated set of actions to deepen relationships with our clients, ultimately increasing our share of wallet. Relationships with our personal and institutional clients are the cornerstone of our business. As such, we are pursuing these initiatives in a very customized way and generally on a client-by-client basis.

Driving performance expense initiatives are broadly based on implementing sustainable actions that, holding all else equal, take cost permanently out of our operating model. With process optimization, one of the most significant elements is streamlining our major business processes. Just a couple of examples, taking a look at how we strike our hands on a daily basis and how we open a client account and maintain the documentation associated with them. Activities such as these drive significant costs, so implementing steps to make these processes more efficient while still retaining or even improving our high levels of client service. Some of the tools that we are using to reduce costs include centralizing and consolidating activities, shifting additional activity to the middle and back-office, and eliminating redundant or low value-added activities.

Beyond our major processes, we will continue to optimize our operational footprint as we have for several years, assessing how to best serve our global client base. Another major piece is procurement. By enhancing our procurement organization and embedding new processes, we can realize meaningful savings on a category by category basis from office supplies to travel. On the technology side, we have worked with industry experts to rigorously benchmark our technology spend. The good news is we believe that we have a very efficient technology structure due to our integrated operating model and a history of organic growth. The leading benchmark confirm this for us. That said, IT efficiencies do play a role in driving performance. We've identified opportunities to migrate our IT resourcing mix to lower cost sources without compromising service or risk. Again, while our applications portfolio is relatively clean, we will rationalize the number of IT applications with overlapping functionalities. Last, within technology, we expect that managing internal end-user demand to things such as PCs, storage, telecom, market data, et cetera, will drive savings as well.

Finally, we're pursuing a set of corporate-wide initiatives. Notable elements here include simplifying our organizational structure and aligning our retirement benefit plans with market levels. So you can see that we have a wide range of initiatives underway aimed at improving productivity, and ultimately our profitability and returns.

Moving to Page 15, driving performance is not just a 2012 project. We began this effort in mid-2011 with a business-led bottoms up evaluation of efficiency opportunities. As a matter of fact, many initiatives have already begun and been implemented. For example, we consolidated our banking charters in October of 2011, and consolidated several offices in Illinois, Florida and Texas in late 2011. We also began reorganizing parts of Global Fund Services in the fall. This bottoms-up approach was followed by a top-down analysis that looked across business units in global operations and resulted in many of the initiatives discussed on the previous page. Implementation is well under way across the wide variety of categories outlined earlier.

On Page 16, we summarized the charges already taken in support of this effort and reiterate the expected financial impact in the years to come. The financial effect of these initiatives on margins and returns will depend on a number of factors, including the timing of realizing the benefits and how effectively we continue to grow our business overall. However, in order to isolate and measure the benefit of the impacts of these initiatives, we calculated the impact of successfully achieving $250 million on our current baseline. We estimate, using 2011 results, that our successful execution of these initiatives will improve our pretax margin by 5 to 6 percentage points and our return on equity by about 2 percentage points. We expect to realize over half of these benefits in 2012.

Finally, as you know, Northern Trust has historically disclosed long-term strategic financial targets, which included revenue growth, operating leverage, earnings per share and return on equity. We last updated these long-term targets in 2006.

While our financial performance has often surpassed these targets, there have been time periods, including the current period we have been experiencing since 2007 when our financial performance has not met these goals. As we discussed earlier, our efforts have been and will be increasingly focused on improving the profitability and returns of our business. To that end, the primary financial measure we are utilizing for our business is return on equity. While there's no single metric that's sufficient to evaluate performance, we believe ROE is the most comprehensive measure that captures both how profitably we operate the business, as well as how efficiently we manage our shareholders' capital. Over time, Northern Trust has achieved attractive ROE levels considering the operating environment within average reported ROE for the last 10 years of 14.6%. And even over the last 5 years, which includes the financial crisis, our average reported ROE was 13%.

Importantly, Northern Trust also has a strong track record of organically growing its business and revenues over time. We will continue to do so with the objective of organic revenue growth in excess of our peers. With the strong discipline around productivity and efficiency being emphasized through driving performance, we expect to produce positive operating leverage and higher margins. The lack of clarity in the outlook for the global economy, interest rates and equity markets, along with an evolving regulatory framework, make it difficult to project target returns in the near term. However, we're confident the corporation will continue to produce attractive returns to its shareholders over time.

We expect the current macroeconomic conditions will persist into this year and likely beyond, further pressuring returns. With this backdrop, our long-term ROE target is 10% to 15%. With the successful execution driving performance, we expect to achieve the lower end of this range, and with an improved operating environment, we expect to move up higher in the range.

Let me summarize by reiterating a few key points made during today's call. Northern Trust remains focused on our clients and on helping guide them through this challenging market environment. We continue to win new, meaningful business from both personal and institutional clients who value the service and expertise that we offer. Our strategy, our brand and our financial strength have been steady and resilient during this prolonged difficult environment. Driving performance will increase our productivity, while maintaining our differentiated client service experience. It's about delivering greater value to our clients and to our shareholders.

Thank you for participating in Northern Trust Fourth Quarter Earnings Conference Call today. And with that, Ryan, please open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley, Research Division

Two questions. One, on the Slide 14 when you go through the drivers of the improvement of the $250 million that you're looking for, in the revenue enhancements, could you just give us a sense as to how you size them? Is that something that you've done tough one already and the pre-work here or is it an expectation that with increased focus and attention through just increasing the number of people focused on a particular client? Do you think you can get the revenues up?

Michael G. O'grady

Yes. I want to talk about that a little bit more. And I think it's important that, that part of the set of initiatives there is across the business, so both on the personal and the institutional side. And it is something that very much we spent the time sizing up but I think more importantly, have already begun to implement. On the personal side, really, what this is primarily is implementing a fee methodology and schedule, if you will, that's objective and simple and transparent to clients. And as a result of that, we think it better aligns the fees with the value proposition that we deliver, and as a result, the fees can and will change for a number of clients. Some will go higher, some will stay the same, some will go lower but overall the way we sized it out, we do see that overall, our fees will go up. That's something also that was implemented at the beginning of the year, so we expect to realize the benefits throughout 2012. On the C&IS front, that's a different business, if you will, with regards to how you think about the value proposition and the fees that we receive from our clients, and I think it's important on that front to separate between new business, business that we're winning now versus business that's been in place for a long time. On the new front, there I think that the business takes into account the current environment we're in and the services that we're providing. And so that business, the value proposition, if you will, is well aligned. It's on the existing business where on a client by client basis, we spent a lot of time looking at all the clients, both those that the activity with them and the services we provided continue. But more importantly, with those where it's changed over time. Where previously, when we entered into the relationship with them, the activities that they anticipated and we anticipated have now changed in some respect. So they previously would have potentially anticipated doing more securities lending, but now at this point, are not doing that. It's really a situation then when we address that with them in a way to realign that value proposition in a way that works for both parties. So that could involve just doing new services with them. We can manage some of their assets as a way to improve the overall relationship for both parties. So that process is something that's been designed, but then as far as the implementation, it's been happening for some time period and will continue going forward but in a very measured way.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And PFS is fully in the run rate at this stage?

Michael G. O'grady

Correct, the new fee schedule, if you will, implement that this year.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And then just a follow-up on Page 16, when you go through the estimated pretax impact of $250 million, which is about half realized in 2012. How do we think about that in relation to future charges that you outlined, future charges that have incurred. Can you give us any sense of how much of the total charges of the program have you already incurred versus what you expect going forward?

Michael G. O'grady

Yes, sure. So the charges relate to any of the activities that we anticipate as part of these initiatives going forward in the next 12 to 18 months. And just from an accounting standpoint that we can recognize the costs that will be associated with those. The reason why we have down here future charges is that there will be additional activities as we go forward in this. As I mentioned, it's not just a 2012 project. That will also result in charges. So, for example, with an office to the extent that we close an office, we don't take the charge for that until we've actually vacated the presence -- premises. So it has to do with the accounting for that. We'd like to think that the charges that we've taken here in the fourth quarter represent the majority of what it's going to be. But at this point, we're not estimating or projecting what future charges will be.

Operator

And we'll take our next question from Howard Chen with Credit Suisse.

Howard Chen - Crédit Suisse AG, Research Division

I know you've been at this for a while, but I guess what started out sounding like an expense containment initiative now appears a lot more substantial. I was just hoping if you look back at the last year and a half, just could you give us a sense of why maybe that changed and what exactly you all learned incrementally as you went through the process?

Michael G. O'grady

Yes, Howard, I think your characterization is correct, which is this is not just a cost containment exercise. And in fact, that is the part where we pulled back to look at the business, how was the environment changed and what do we need to do in order to be competitive and to serve our clients, not just in the next year, but going forward. And so many of the incremental initiatives you see here fall into the category there, with regard to process optimization, and that's where we're looking at the major processes within the institution to determine if there are better ways to do that. So an example would be if you think about client administration, which would involve account openings and the account maintenance process there, that's a process that doesn't just happen within any particular part of the institution, but rather happened across the enterprise. And so what we're looking at is how can we make that process better for clients, and also more efficient for us? Right now, while the process certainly works well, we think it can be much better. Right now, it's largely a paper-based process. And it's something that involves a number of people involved in that. We think that to the extent that we can streamline the process, apply some technology to it as well, so automate parts of it, that we can make that, as I said, better for the client as they open an account, but then also reduce our cost.

Howard Chen - Crédit Suisse AG, Research Division

Great. And then just a follow-up to all of this, in places where you are changing pricing schedules, are you assuming anything in terms of client attrition? And similarly, are you holding back any project spending that you otherwise would've liked to do?

Michael G. O'grady

No, on both fronts -- when we made our estimates here, Howard, we definitely have tried to take into account that there could be potential attrition from this. We don't expect that there will be much, and I say that in a sense that we're going about it in a very careful way, and we do think that it's being done in a way that aligns with the value that we deliver to the clients, but we have taken that into account. And on your second point, there will be some investments in technology as a part of this, as we look to improve the processes and automate certain activities that we have. But the capital investment here is really very modest, and it's also something that fits into the broader context of our capital spending.

Howard Chen - Crédit Suisse AG, Research Division

Perfect. And then finally for me, Mike, you touched on capital return. I thought Rick made some fairly constructive commentary during the fourth quarter on his desire for capital return for the firm. What are your current hopes for an overall payout ratio? And is there any level of concern about kind of the 45% dividend payout for 2011 as the -- this CapEx which you have not won, there seems to be more scrutiny on the 30% figure.

Michael G. O'grady

Sure. As I mentioned and as you know, we submitted our capital plan. And so we'll just have to sit tight and wait until our regulator, primary regulator gets back to us with their view on our capital plan. But what I can say Howard is that I -- if you look at the history of Northern Trust, we've always taken a balanced approach to both dividends and share repurchase. And we'll continue to attempt to take that approach going forward. We really think about a capital primarily from the standpoint of having the appropriate level of capital in the institution as opposed to a particular payout ratio. Now that is another lens which can be applied to it. But at this point, I think that you can expect that we'll be consistent with what we've done in the past, and we'll just need to wait and see how the regulators though that the plan that we've put forward.

Operator

And we'll take our next question from John Stilmar with SunTrust.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Really quickly, diving still into the idea of revenue opportunities, you talked about potentially providing or taking market share and providing new products and services that your customers wanted, was wondering if you could touch on what some of those products might be in both the institutional and personal side and then maybe are these completely new products and resources that reflect the time period or is this taking wallet share or market share from somebody else and how does that dynamic basically work? I was wondering if you could walk through your thoughts on both of those.

Michael G. O'grady

Sure. John, I was primarily referring to on the institutional side, where we are dealing with very large global institutions, and they are active in a number of areas. In a number of areas frankly that they're products or services that we can provide, which we may or may not be providing them at this point in time. It would be a rarity that we're ever providing a single or even just a couple of services to a client. It's usually a much broader relationship. But it's also a situation where we likely don't have all of the business that we can have as they work with multiple institutions. So increasing the wallet share really is working with clients to see if we can't provide more services. It does mean picking up market share from others to do that. But it also, it doesn't mean that this point that we need to go out and get a new capability. We have the capabilities and the products to serve. It's just a matter of getting greater market share with them.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

And then touching on another topic with regards to money market fee waivers. You obviously, amongst the trust banks that felt the sting of the low-interest rate environment on your revenues pretty significantly, and as the SEC is reviewing money market funds, are we kind of at the point now where this sting is already out of it and there really isn't that much risk to revenue? Should you get an adverse or kind of rule from the SEC? Or how do you look at the proposal of the SEC relative to kind of the revenue opportunities and what you would expect institutional clients to do based on that?

Michael G. O'grady

Sure. John, I'm going to break that up into 2 separate questions. First is with regard to the level of money market fee waivers. Right now, rates are very low. Is it possible they could be lower? I guess that's possible. So that could have an impact. The other thing is that they are affected by the size of that business for us. So if our assets under management grow, then that can also increase the amount of fee waivers. Having said that, to the extent that our fee waivers grow our overall fees for those funds are growing. So it doesn't necessarily mean that we won't have greater revenue. It just means that the fee waivers themselves could be greater. But at this point, given the amount that we're waiving, yes, we'd like to think that we're well past the majority of the amount that we would waive. Now the second question with regard to just money market funds in general, you mentioned the SEC, there are obviously other regulators that are broadly involved in this. And it is something that because of the importance of that business to us, we're actively a part of the dialogue. So we're in dialogue with our clients as to how they think about the fund because remember, many of these clients can potentially either be in our money market funds or could be depositors of the bank. So we're in dialogue with our clients. We're certainly active in discussion with the regulators as to how they're thinking about money market mutual funds. And then also, we're a part of the various industry groups as well, whether a number of proposals out there with regard to whether it's variable right now or other ideas. And I would say at this point, there is not a clear direction in our view that this is headed. But it's something that will continue to be on the front edge of.

Operator

And we'll take our next question from Mike Mayo with CLSA.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

Just a few real specific questions, can you remind us what the targets were in 2006?

Michael G. O'grady

Sure. Bev, do you want to...

Beverly J. Fleming

Sure, Mike. We were looking at revenue growth of 8% to 10%, earnings per share growth of 10% to 12%, positive operating leverage and an ROE of 16% to 18%. Those were the targets that we rolled out in 2006.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And so now, it's solely the ROE target of 10% to 15%?

Michael G. O'grady

Yes, Mike. That's right in the sense of that is the target that we're going to put out there publicly. Having said that, as you can imagine, we run the business looking at a number of metrics. And as I mentioned in my comments there, that's not to say, for example, that revenue growth is not extremely important to us. It's just the fact that if you think about what impacts revenue growth there, the headwinds that we've encountered here with interest rates and markets and foreign exchange volatility that at a top line, those can have a fair amount of variability. Having said that, we view that it's our job here to manage the business in a way that ultimately generates returns for our shareholders in all types of macro environment. So that's why we felt it was best to focus everyone in on one primary metric.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And do you have a view on what your cost of capital is?

Michael G. O'grady

Well, I think that everybody can calculate their own cost to capital. We definitely do that for ourselves internally. It's not something that we disclose. But I do think that in the same way Bev has said that our targets have come down, certainly, with lower rates, et cetera, we do view that the cost of capital has come down as well.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And I guess where I'm leading to is, is your ROE target high enough going back. The early part of last decade, 16%, 17%, 20% at times, and now we're down to 10% to 15%?

Michael G. O'grady

Yes. I mean, we certainly strive to generate into the high end of our range there, Mike. But at the same time, given the current environment, we think that it's appropriate to look at the business as it is now, take initiatives like driving performance in order to improve their performance. But be realistic, given the environment, and frankly the uncertainty both macro also but regulatory really, with regard to capital when we set that target.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And if I can just segue to the cost savings, so you're looking to eliminate 6% of the 2011 expenses of $2.8 billion, if I look at that correctly.

Michael G. O'grady

Yes.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And are you leading the project since you're relatively new to Northern? If I'm not mistaken, it's helpful to have a fresh look at situations such as this. So if you can just kind of describe your background and the perspective that you're bringing to this project.

Michael G. O'grady

So you are correct, I'm relatively new. And so I'd like to think that I have a perspective that's valuable overall. But I am just one of the perspectives. This is something that's critical to the whole senior management team. So everybody from Rick and Bill on down is really responsible for this. We do have a pretty disciplined process around it. So we have a project management team that has been a part of not only developing these initiatives, but also ensuring the implementation. But it is a top priority of the institution overall.

Michael Mayo - Credit Agricole Securities (USA) Inc., Research Division

And actually, how much is PFS versus C&IS?

Michael G. O'grady

Yes. We're not really breaking it out and part of that, Mike, is because one of the key things here is that this runs across the institution. Much of this is looking at, as I mentioned, whether it's client administration or whether it's things that we can do in our lending area to improve the efficiency of our documentation, things like that, that happened in all of our businesses or multiple businesses. So it's really not broken out by individual business units.

Operator

And we'll take our next question from Brian Bedell with ISI Group.

Brian Bedell - ISI Group Inc., Research Division

Just hearing on the revenue enhancement side of it a little bit more. In terms of these 3 components, the value proposition, unbundling and the extend in wallet share, can you describe a little bit the timing of the -- of your expectation of revenue improvement from each of the aspects? And then did I hear you correctly that you said the PFS new schedule run rate is or new PFS schedule is already in the fourth quarter run rate or the first quarter of '12?

Michael G. O'grady

No. The fee schedule itself was implemented as of January 1 of this year. So it's not in the fourth quarter. So the items you mentioned there, I mean, I would say that the idea of fully aligning the value proposition is true for both PFS as well as C&IS and NTGI. And so, that initiative, or that characterization, if you will, is really what we're doing overall. The specific fee methodology change is PFS. So as you heard there, by implementing that at the beginning of the year, that's something that we'd like to think that we'll see very near-term positive impact from that. On the C&IS front and the idea of gaining greater share of wallet, as I mentioned earlier, Brian, that is client by client and has been happening for some time period. I think that as a result of everything we're doing here, we'll accelerate that. But that's something that will continue through 2012 and into 2013 as well.

Brian Bedell - ISI Group Inc., Research Division

Okay. And what portion of that 30% to 35% would you describe as the everything but expanding the wallet share? Is it majority, minority?

Michael G. O'grady

Yes, I wouldn't characterize it as a portion of that amount. I mean, I think as far as we're going to go, Brian, as far as breaking it down the buckets that we have on that page.

Brian Bedell - ISI Group Inc., Research Division

Okay. And then just as we think of the longer-term operating leverage potential. Obviously, as you move through this and make the organization more lean, when we do eventually get to a better environment be it from higher market levels or a better rate backdrop, what's the sense of, I guess, sort of expansion and projects spend? You said before you're not really holding back projects spend right now, so should we assume that you'll see pretty substantial, potentially pretty substantial operating leverage, a couple of years out in 2014 and 2015? Or do you sense that there are a lot of sort of pent-up demand for projects that you sort of put on the back burner during these projects?

Michael G. O'grady

Yes. I'd answer this, Brian, in 2 ways. First of all, as far as, I'll call it the operating leverage, what we're doing here is to look to improve margins in the current environment. And we obviously have suffered as a result of some of the conditions and the fact that there is operating leverage in the business, but it cuts both ways. And so to the extent that, that operating environment improves and we are successful implementing the initiatives here, yes we do expect to see the benefit of that in our operating leverage as you mentioned, kind of 2014 and '15 as well. As far as projects, there's nothing that we're -- what I would call constraining as a part of this. It's much more about making sure that as we spend our capital dollars, that we're prioritizing the right projects. And if you're taking one of my comments earlier with regard to that, that was just to say that there is not a significant capital investment that's required, that's incremental as a result of the driving performance initiative.

Brian Bedell - ISI Group Inc., Research Division

Got it. Okay, that's very helpful. And maybe just switching to the balance sheet. Just looking at some of the trends from third to fourth quarter on the rate side, the interest-bearing deposit yield went up pretty significantly on the asset side, 113 to 129. Can you describe what drove that? And then secondarily on the U.S. government securities, looks like you added quite a bit of additional exposure there. What are you investing in incrementally in terms of maturities on that side?

Michael G. O'grady

Sure. First, to respond to the first part, as far as the interest bearing deposits with banks and the increase there, a higher proportion of the dollar amount there or the balance that's invested in Australian dollars, which have a higher yield. So that was really the biggest driver of that increase. As far as the securities portfolio, yes, you're correct. We did increase the amount in U.S. treasuries and was mentioned in my comments earlier extended our maturity somewhat. So that is treasuries that we've put out for 2 years. And really, I, Brian, try not to look at any particular investment as indicative of what our investment strategy is because the portfolio really is managed overall. So it's not for some reason we think a particular security, the particular part of the curve is a sweet spot, but rather just trying to make sure that overall, we have the right level of liquidity, and we have the right level of credit quality which we've had.

Brian Bedell - ISI Group Inc., Research Division

Great. Okay, that's helpful. And just lastly on the tax rate going forward, should we continue to assume something in the 33 to 34 range or are we moving lower? I know this quarter was an aberration, but just wanted now look to 2012.

Michael G. O'grady

Yes. For now, I would stick with that historical average that we've had which is in the neighborhood of 33%.

Operator

And we'll take our next question from Gerard Cassidy with RBC.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

On your comments on the fee waivers, do you think -- I don't know if I heard you correctly. Did you just say that you think you're 50% through going through the accounts that have fee waivers or did I misunderstand that?

Michael G. O'grady

No, George. You didn't in the sense of if nothing else changed, so I say that in a sense of rate, market rates or the asset levels that we have. We are more than 50% through the fee level. So I was just saying, so we're waiving more than 50%.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Okay. If -- obviously, as you grow your business and maybe more customers then we'll get these fee waivers because of the rate environment, what rates are most impactful on waiving these fees? What are you finding to be the rate that we've got to see go up so this phenomenon for you and your competitors goes away?

Michael G. O'grady

Yes. It's really just overall short-term rates and very high quality securities. So you can't pick one single metric and say, for example, an x rate or index goes up. But it had because in the same way I just mention how we think about our investment portfolio, with NTGI likewise have a look at their short duration portfolios, it's a number of factors that they take into account that have the right credit quality, the right liquidity and also get the appropriate rate that they can. But certainly, I think as you see the combination of shorter term rates go up, that's going to be your best indication that we should see relief on this front.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

And is it unfair to say or maybe fair that if everything remain constant for a moment and you went through the remaining 50% of the accounts, would the fee waivers will essentially double or is that too bearish or too pessimistic?

Michael G. O'grady

Yes. That's not how I would necessarily think about it. Again, if nothing else change right now as far as the rate environment and the asset levels that we have, Gerard, then our fee waivers would not change the next quarter. Now, obviously, those things do change, but at this point, if they were the same you would have the same level, and you wouldn't expect to continue eat through all the way to the total amount of your fees.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Okay. And then finally, coming back to your return on equity target. I know, Mike, you were with the firm back when they had their Investor Day on May 26, 2010, and when you look at those slides, you guys gave us that return on equity number which of course was similar to what you mentioned on the '06 numbers. On the revenue growth and EPS growth and the positive operating leverage which you referenced back to the '06, do you guys plan to give us those targets as well at some point in the future or are you just going to stick with the ROE number?

Michael G. O'grady

Yes, we're just going to stick with the ROE for the reasons that I said, Gerard. Again, while we do think that there are number of other financial metrics that are useful and we certainly use a number of them internally, we think that it's best to have this primary metric that we can guide, both you and frankly the company internally towards what we're trying to drive the business towards.

Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Lastly, on the Basel requirements on capital, assuming you guys are, let's say, 100 basis points simply buffer on top of the 7%, what's that comfort level? Because Northern has always been very conservative in the way they view capital, what the comfort level for your Tier 1 common ratio under Basel III if the requirement for you folks is 8%?

Michael G. O'grady

As you mentioned, we won't know if there's any buffer at all or what that buffer would be. As far as that comfort level, the main thing I would say is it's very important for us to be very well-capitalized and to compare favorably with others. And so there are many factors that would go into it. It would depend on the environment that we're in. It would depend on the levels of other institutions. So many factors are going to where we think the appropriate place to be needless to say, we're very comfortable with our current level, but that's something that I continually get monitored, both by ourselves as management and the capital committee that is responsible for that, but also with our Board of Directors and our discussion with the regulators.

Operator

And we'll take our next question from Alex Blostein with Goldman Sachs.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

I want to go back to your guys comments on cost savings. Just kind of go through that maybe in a little bit more detail. So if we were maybe to break up the 1/3 comes from revenue, 2/3 comes from cost cuts, how much of that, if anything, is already in the run rate, but -- because as you pointed out, Mike, you guys closed a couple of branches already. So I don't know if some of those cost savings are already coming through or all of that is really incremental to the current run rate?

Michael G. O'grady

Yes. I would say there is a very small portion that is in the run rate at this point, Alex. You mentioned some of the things that happened, but most of those happened kind of fall towards the end of the year. So of the total there, it's a small amount. It begins in this quarter, if you will, that you'll see more of it.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

And the progression of how you think this is going to come through, you highlighted 50% realizing 2012, and again, is that mostly on the cost side or revenue side or total?

Michael G. O'grady

It's balanced between the 2.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Got it. Okay. And then it looks like your net interest margin was pretty stable over the last 2 quarters for you guys. Is it fair to think about freights don't really change from here? Maybe you guys have been trying to be a little bit more the balance sheet management to kind of keep NIM a little bit more steady and again holding everything else equal, that sort of the run rate we should think about for the foreseeable future?

Michael G. O'grady

I think you characterized it correctly, Alex, which is we are trying to maintain the NIM where we are at this point in this environment. At the same time, there can be various factors that change that move that around a little bit. So as much as that's the objective, I don't think that we or anybody else can really project out exactly where it will end up.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Understood. And then, my last question on foreign exchange trading. One other terms bank is coming in today that they have seen some migration from clients in the construction business to either electronic or I guess direct trading. Have you guys seen anything similar in your business or do you think the decline this quarter is really just purely volumes and volatility? And then maybe, broader if you can help us understand the breakdown in your FX results standing instructions versus direct?

Michael G. O'grady

Yes. So I would say that the reduction that you saw in our foreign exchange trading income definitely relates primarily to the broader trends with regard to volatility and just volumes overall. Now having said that, like any market, Alex, it's a dynamic market. And so there are constantly things that are changing, as you mentioned, where technology is being introduced, which changes the nature of the way the business works and the transactions get executed. And that is something that we certainly are a part of. And that's why we do invest in our businesses like that one to make sure that our technology is such that we can capture the business to the extent that it migrates that direction. There are also other dynamics just as to how clients think about executing their FX and who they do that with. And again, we are constantly assessing the way that we approach our clients, both the existing ones but also potentially other clients to be able to provide that service to them. And so, it's of a complex part of the market that we, like the others I think, are very focused on making sure that it continues to be a good business for us.

Operator

And we'll take our next question from Jeff Hopson from Stifel, Nicolaus.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

There's a slight difference between the affect on margin and the $250 million, I think, some wondering if that reflects the ongoing additional cost of software, et cetera. And then the second question regarding the current quarter. Looking at average core assets under custody and the fee levels, did client behavior changes affect any of those balances? So as money moved out of, say, registered products over to deposits, with that influence on either revenues and/or assets under custody, was there some negative mix shift, in terms of servicing fees?

Michael G. O'grady

On the second one, I would say that that's not something that we would be able to attribute to one or the other. I would say though that the broader point that you're making is valid, which is clients are definitely looking at the alternatives of either placing their short-term investments, meaning cash investments in a money market fund or on the balance sheet of an institution like Northern Trust. And when they do that, they have to think about not only the economic returns that they would have, but also the safety of that short-term investment as to whether it's a deposit at an institution like Northern or whether it's a part of a mutual fund that's invested in a certain set of high-quality investments. So we do see that, and we do see migration between the funds and our balance sheet. And I think that will continue as we go forward. As far as being able to determine the impact of profitably of one versus the other, that's not something that we see as having a material impact on us, given that we do both for our clients.

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

Okay. But would you charge a lower custody fee on money market versus something else, I guess, is my question.

Michael G. O'grady

No, we don't change our fees based on -- if I understand your question, no, we have not adjusted our fees in any way related to that.

Beverly J. Fleming

Jeff, could you repeat your first question?

J. Jeffrey Hopson - Stifel, Nicolaus & Co., Inc., Research Division

So if you look at the margin effect on the current revenues, you say 5% to 6%, and if I take the $250 million divide it by the current revenues, I'm coming up with a larger number, more like 7%. So is my math just wrong?

Beverly J. Fleming

Well, the $250 million is a split of both revenue and expense. So you would need to take that into consideration in your calculation.

Operator

And we'll take our next question from Ken Usdin with Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

A couple of quick questions on the expense side. First of all, just with regards to getting the 50% in 2012, is that also an end of year run rate of context similar to how you're talking about 250 by the end of '13 run rate it?

Michael G. O'grady

It is, Ken, but certainly both in both years. We're looking to do this as quickly as we can so that we have year end -- maximum year end benefits both in 2012 and 2013.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

So -- okay. So you're saying that the...

Michael G. O'grady

Just methodology though to answer your question.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Okay, I get it. So to the methodology, yes, but on the realization you hope to do it quicker than just to that point as far as recognition across the year. That's a fair way to say it?

Michael G. O'grady

That's right. So there's -- neither of those are intended to be back end weighted if you will. We're supposed to do it as soon as possible to capture the maximum benefit in the year.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Okay, good clarification. Second one, the fourth quarter expenses were elevated relative certainly to the revenue output, having sequential growth and it core expenses x the charges and the decline in top line revenues quarter-to-quarter. So I'm just wondering, I know you called out the specials related to the program, but was there anything just in this quarter that you'd also say in a core basis was either above trend or elevated that would look better as we get into the beginning of next year?

Michael G. O'grady

Yes, I think where you did see elevated levels is I think I call that 1 point in the dialogue there is on equipment and software, we did see a higher level in the quarter-over-quarter comparison. That's a result of the investment we've made over time, but also in the quarter there where we had higher equipment rental and maintenance costs. But overall, I would say that the run rate that we saw there is exactly why we're focused on driving performances to really improve across the board on the line item and, it's not necessarily focused on any particular line item.

Beverly J. Fleming

And, Ken, one other thing that I would say about another line item, the other operating expense line item. That one you can see in the press release was elevated due to some business promotion activities as well as account servicing charges. But I think more importantly, I'd remind you that in the first quarter, we typically see higher business promotion expense related to the Northern Trust open as well as to our -- that's the approach that we take to immediate expensing of some stock options.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Right, yes. Okay, and then a big picture question is on the plan. So you're helping us size the $250 million in context of what you would do to pretax margins and ROE. But I just wanted to make sure, is there any incremental message there relative to the growth of the rest of the business? Because previously, I think the [indiscernible] you've been talking about slowing the rate of growth and improving margins at the same time. So I just want to understand the flavor for what's going to be happening behind the scenes of the plan, meaning you're still expecting net expenses to grow over the next couple of years or is this a different context given how you're sizing it for us in terms of just that -- is it more of a net add as opposed to a kind of reduction relative to a growth rate expectation?

Michael G. O'grady

I don't think we're changing the way that we've discussed it with you. But just to clarify, we still see significant growth opportunities. So as we mentioned earlier in the call, this year was a very strong year for net new business to the firm. And we see significant opportunities ahead of us as well. And so we don't believe that it's in the shareholders interest for us to try to slow the growth of the business overall. What we do think is in the shareholders interest is to improve our productivity in a way that it increases the profitability of that growth. And so we think as a result, it's best to provide you and us with a way to capture these initiatives and be able to determine what the impact of those initiatives will be, separate from the underlying growth of the business.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Okay. And speaking -- then my last question speaking to the growth of the business, once again, you guys had exceptional deposit growth, both in kind of core deposits and non-interest-bearing, and I'm just wondering if you can tell us a little bit about how much of that is still the flight to quality versus how much of it is just kind of core customer growth in terms of your ability that those become either core deposits or perhaps some still flight risk to them as the world normalizes?

Michael G. O'grady

So the growth in deposits is still with what I would call core clients. So it is a matter of them leaving more cash in the form of demand deposits on our balance sheet. Having said that, I think that it's very difficult to predict how that will change as the environment changes. So as much as those are deposits with core clients, I don't necessarily think that it should be interpreted that those clients wouldn't change their mind as the environment changes and take those off the balance sheet as deposits going forward. So it's not in any way flyby deposits that are coming from entities that we don't do other things with. But at the same time, I could see them go down in a different environment.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

And as a result, does that still keep you with excess growth still being somewhat conservative with how you reinvest it as we're seeing with the treasury investments and such?

Michael G. O'grady

No question that we have to maintain appropriate liquidity as a result of that and yes to be shorter, as far as the duration there puts pressure on the net interest margin.

Operator

And we'll take our final question from Glenn Schorr with Nomura.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

I'm not sure if I missed it in the prepared remarks, but do have -- can you tell us what your won but not yet converted new businesses as you exited 2011?

Beverly J. Fleming

Glenn, that's not a disclosure that we've provided in the past, so we don't have anything to give you today on that.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

All right, I'll try a different way, Bev. The new business that you're bringing on, given your pricing comments and obviously, there's lots of different parts of new business, but in general, is the new business coming on at a higher average fee relative to when we do the math in our model on the current book?

Beverly J. Fleming

Well, one of the things that you'd want to be aware of is that we are being very successful with assets under administration. So you would see in the custody and fund administration fee line, fees that could be associated with assets that are not within assets under custody. So from that perspective, the math that I'm familiar with that you're doing has looked better actually in the last couple of quarters because of that phenomenon.

Glenn Schorr - Nomura Securities Co. Ltd., Research Division

Understood. I appreciate that. And then last one is all the questions around the ROE target now versus then I think is interesting. Curious if you could break down. If you look at the top end of the range and that 300 basis point differential, is that the pure -- the best -- the purest way to look at, at what the increase capital requirements for the industry are and the rest as a function of business trends? Or am I reading too much into that?

Michael G. O'grady

Yes, I think it's still probably a combination of both at this point. So yes, the industry is carrying more capital as a result of the broader economic but also regulatory environments. But it's also to say that at this point, given the visibility of the environment here and how long we can continue to see interest rates that are at these levels, and the nature of some of the other changes in the business with regard to securities lending, potentially with foreign exchange, that the combination of those 2. And I think just the last thing, just more broadly speaking, the returns that all financial institutions will look to be able to generate going forward. I think if you factor those 3 things in, that's how you get to the range that we're in.

Beverly J. Fleming

Ryan, I believe that was the last call. So we thank you for participating, and we will speak with you in April.

Operator

That does conclude today's conference. Thank you for your participation.

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