Good day, everyone, and welcome to the Northern Trust Corporation's First Quarter 2008 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, Ms. Bev Fleming for opening remarks and introductions. Please go ahead, Ms. Fleming

Thank you, Abe. Welcome to Northern Trust Corporation's first quarter 2008 earnings conference call. Whether you are participating in today's conference call live or via replay, we appreciate the time you are taking to listen to Northern Trust's first quarter 2008 financial results. Joining me on our call this morning are Steve Fradkin, Northern Trust's Chief Financial Officer; Aileen Blake, Controller; and Preeti Sullivan from our Investor Relations team. For those of you who did not receive our first quarter earnings press release or financial trends report by e-mail this morning, they are both available on our website at northerntrust.com. In addition, this April 15th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through April 22nd. 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 or 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 2007 financial annual report and our periodic reports to the SEC for detailed information about factors that could affect the actual results. Again, thank you for your time today. Let me now turn the call over to Steve Fradkin.

Well, thank you, Bev, and good morning, everyone. Let me extend my welcome to all of you listening to Northern Trust Corporation's first quarter 2008 earnings conference call. Earlier this morning Northern Trust announced first quarter reported net income of $385 million and reported earnings per share of $1.71. Our first quarter reported results include two items related to our membership in Visa U.S.A. The first item is a $168 million pre-tax gain related to Visa's March initial public offering. This gain which is accounted for on the other operating income line of our income statement represents the mandatory redemption under Visa's certificate of incorporation of a portion approximately 4 million shares of our ownership in Visa. On an after-tax basis, the gain equaled approximately $105 million. Our remaining Visa ownership of 6.2 million class B share is at the present time equivalent to approximately 4.4 million class A shares. We anticipate further dilution of the class B shares as matters progress related to Visa's indemnified litigation. The second item related to our Visa ownership is a $76 million pre-tax reduction in expense. This expense reduction reflected in the other operating expense line of our income statement equaled approximately $48 million on an after-tax basis. In connection with the IPO, Visa set aside $3 billion of the IPO proceeds in a litigation escrow account. Our proportionate share of the escrow account equals $76 million and is reflected in this quarter's income statement as a reduction in expense. Recall that in our results last quarter, we took a $150 million charge associated with our ownership in Visa. This charge represented our estimated portion of potential losses arising from certain litigation in which Visa is involved and for which we and other Visa members have provided indemnification. This quarter's $76 million pre-tax…

Thank you, Mr. Fradkin. [Operator Instructions] And we'll go first to Mark Fitzgibbon at Sandler O'Neill. Please go ahead.

Hi, good morning. Thanks for taking my question, Steve.

Hi, Mark.

The balance sheet grew by about $10 billion from the linked quarter and which I believe you pointed out was driven by foreign office time deposits. I wondered if you could talk to us about how you are pricing these deposits and I know it’s part of a whole relationship. What sort of hurdle rates of return you're looking for and give us a sense for maybe how large a component of liabilities you’d be willing to let the foreign office time deposits to become?

Well, I think Mark; I don't know that I can answer all your questions directly, but I think a couple of key things are important to remember. One that really is an outgrowth of the growth at our global custody business. So it is closely linked and obviously at any given point our clients had more or less cash. But that's an important component of the driver. Two, those are market competitive rates in the sense that the market is dynamic, it moves around. But these are large sophisticated institutional investors and if we can’t be competitive, we will not be able to attract those deposits. So, I would say the spreads on those will move around in-tandem with market conditions, but we do have to price those competitively; they are not viewed as compensating balances, might be in some other businesses. And we haven't put any limits on the growth. As I say it's an important part of what we do for our clients and we monitor it carefully. But we don't have any limits on it at the present time.

I guess what I am wondering though, Steve, is, the more you do of this kind of businesses over time that going to drag down returns because this is arguably a more price-sensitive line of businesses some of the other products and services that you sell.

Well, we have seen the mix in our net interest margin evolve over time as the proportion of loans on a relative basis they shrunk. So, that had… taking out were the fed goes up and down that has been a factor that we’ve had to contend with. But we still think this is an important part of our business mix and something we want to continue to attract.

Okay, and the last question I had is in PFS. It looks like there was a little bit more softness from the Illinois business in the quarter than what we’ve seen in the past. Were there any specific issues or changes that cause that drop in the Illinois business?

No, I don't think there was anything specific. And again you have to be very careful of the market conditions. We feel very good about the franchise overall and in Illinois, and I can't think of anything specific that would have showed up in Illinois this quarter.

Thank you.

You're welcome.

And we will go next to Mike Mayo of Deutsche Bank. Please go ahead.

Hi, Steve.

Hi, Mike.

Can you give more color on the securities lending revenues, should we expect this lower level to persist and just so I am hearing you correctly, I thought you said it would have been up 174% instead of a decline of 30%. So, I think that means you would have had $100 million or so more in revenue or $0.25 per share this quarter had you had the higher levels. So, please correct my math or my understanding?

Well, Mike, first to make sure you have the correct number. The number that Steve stated was $93 million in additional securities lending revenues that we would have had had this particular collateral been invested in our most commonly used pool. So it was $93 million and the math that we did was that securities lending would have increased by 174%. And the other thing I would point out is that as you saw, this will also obviously had an effect on our total revenue growth. Revenue growth for the quarter on an operating basis was up 19%, had we had that additional $93 million, it would have been up 30%.

So, how should we think about that? Is that a one-time effect or should we assume a lower run-rate of securities lending revenues going forward?

Well, I think, Mike, there are a lot of ifs and buts around this and as you know we don't provide earnings guidance. I think that the key takeaway is that this is happening as a consequence of mark-to-market. The mark-to-market phenomena that we are experiencing, in theory and that's all I can give you on the assumption that there is no degradation in these securities those marks will reverse at maturity and we should... we and our clients will benefit from that in the future. But I don't think in the current climate, I or anyone else wants to make any projections about specifically when that will be or the magnitude of the effect.

And, Mike, just to the refresh everybody's memory on the call, this is the third quarter that we have had this phenomenon occur. In the third quarter when... the first time we explained it to you; the impact was a $36 million impact. In the fourth quarter, it was a $46 million impact and here in the first quarter, particularly with the difficulties experienced in the credit markets in the month of March, it was $93 million. So from that perspective, we certainly couldn't call it a one-time occurrence as you said. But we have been very clear I think that as Steve mentioned that we don't believe that the particular securities in this fund that currently holds negative marks, we don't believe that they will become permanently impaired, and we do believe that this will turn around as those… as either the credit market conditions improve or as those securities mature at par.

The other piece to remember, Mike, is it's a broad number of securities. This isn't anchored to one or two individual securities. So, but again, we can't give you the guidance; we can explain what the phenomenon is and the magnitude of that phenomenon, but the timing of the recoupment, we’ll just have to let the markets do their thing.

And the $8.7 million other operating expenses fair value of the capital support agreement, can you just give a little more color on that?

Sure. We use a standard option pricing methodology. Think about the capital support agreement as a commitment that has to be valued each quarter and we are using a option pricing methodology to calculate the value of that agreement which we put at $8.7 million in the quarter. We will again have to look at that until the expiration of those contracts but that was the phenomenon we experienced in the first quarter. Let me remind you however that there were no contributions made to any of the funds. So, no Whistlejacket securities were sold, were sold at a loss resulted in… resulting in a degradation of the NAV of the funds. This is merely the valuation of the CSA and its value, if you will.

And do you think of your risk management of being extra sensitive to the capital markets, you already benefit or get hurt depending on the direction of the stock market to the extent that the credit markets go in that same direction. Aren't you just that much more sensitive to? How do you think about that in terms of a risk management?

Well, I think from a risk management standpoint, Mike, we think and worry about everything. We worry about disaster recoveries, we worry about credit cycles, we worry about interest rates, we worry about operating errors. It runs the gamut. So, certainly in a job like mine, we're very concerned about every facet of our business, I think the thing that we were trying to state at the beginning of this call, and I suspect you'll hear from others is the market environment has been particularly challenging, and I don't think I'm telling you anything you don't know, it's been very wild, very gyrating the equity markets, the fixed income markets, interest rates, and so forth. So, that is one dimension of our business that we have to think about from a risk management discipline perspective. But, there are certainly others that we'll have to contend with.

Thank you.

You're welcome.

And we'll go next to Nancy Bush. I believe it’s NAB Research.

Good morning, Steve.

Hi, Nancy.

This is an incredibly broad and hypothetical question, but I think it’s becoming increasingly important as we look at the trust and processing companies and see how they are benefiting this quarter from the rapid declines in interest rates. Sooner or later, this will turn around although none of us know is when, can you just give me your sort of general thoughts about what will happen when rates start to go up, particularly if they go up as quickly as they have gone down.

Well, I... again I don't want to provide guidance. But, I think we have tried to be very clear, Nancy that we absolutely did benefit on the net interest income line from this phenomenon. I think the important thing that I would drive you to and we've seen rates up and down over the last 20 years, you saw the phenomenon in the post September 11th era. And what we have found is that rates on the way down provide us with a very short-term benefit as they did this quarter. But, rates remaining very low for sustained periods of time provide us with more headwind. I think the key takeaway I would point to you to; however, Nancy, this quarter is the balance. While it's true that we did benefit on the net interest income line than the FX line, we also had to struggle through a number of things related to trust, investment, and other servicing fees and the mark-to-market and securities lending and so forth. So, it's not always going to stay at the same level, but I think we've got good balance to the business model that helps us manage through that cycle when we see net… softer net interest income.

Also, if I could just ask in PFS, I mean what are you seeing on the lower end of business? We've talked often about that, and sort of the entry-level PFS client, are you seeing any change in trends there?

While, I think PFS is a very good story. If you think about where our fee growth in PFS has gone in recent years, back in 2003, our year-over-year fee growth in PFS was down 1.5%. In 2004, it was up 8%; in 2005, it was 9% year-over-year growth; 2006, 10%; 2007 15%. So... and remember that 85% of PFS plus or minus relates to that broad-based franchise. So, we feel very good about contraction that we've got, the positioning that we're in, and as I alluded to in my prepared remarks, I think the first quarter was really telling, I can't break out the data for you, but I can give you gobs of anecdotal stories about the flight to quality in the safe haven status that we had during some of the challenges in the first quarter. So, we like the momentum there. Obviously, the downdraft in the markets hurts us a little bit on the fee line and on the asset accumulation line. But, I think it's an outstanding story for PFS generally and for the… as you characterize at the lower level of our PFS franchise, in particular.

Thank you.

You're welcome.

And we'll go next to James Mitchell at Buckingham Research.

Hey, good morning.

Hi, Jim.

Hey, I just want to, just to clarify on the losses, mark-to-market losses in securities lending. Is it the right way to think about it, you had about $175 million in cumulative losses over the last three quarters, and again is that all… if you're able to hold on to the assets till they recover or mature, is that $175 million should accrete back into earnings over time, obviously don't know when, is that the right way to think about it?

You are correct.

Okay. And is there any pressure from the invest, I guess the only way that doesn't work is if you're forced to sell these assets at these levels because investors pull out. How should we think about the risk of the investors in that fund or whether it's controlled by you or your ten clients that are in it? How do we think about the commitment to, I guess seeing it through to the end?

Well, that's right. If you… it’s not withstanding the quality of the investments, if you will. If the investors pulled out of the fund, we would be forced to sell, and therefore we would not recoup those unrealized losses. A couple of thoughts, one, remember that this is a small group of sophisticated investors. You’re only talked about ten clients here so, and they don't use this fund exclusively. So, I can't provide any assurance about what they're going to do. They have independent views and judgments to make. But, I think they definitely understand the nature of the issue here, the accounting that has taken place thus far, and the benefit that they at least theoretically will allure to the extent that they stay in the fund. But, we'll have to see what they decide over time.

All right. And the maturity, it's about 18 months, it sounds like, right? And is that much of it is sort of back-loaded and we kind of have to wait and see over time or is it sort of more spread out, you start to some mature in a shorter term?

Well, the weighted average maturity as you said is about 1.63 years, but the maturities are spread out starting here in 2008 and preceding down the road for several years. So, you need to focus on 1.63 as being a weighted average.

Okay, right, right. Okay, and one last question, if I may, on the securities lending business, ex the sort of mark-to-market issues, volumes were flat as you mentioned, I guess down 1% sequentially. But, clearly the revenues on a “normalized basis” were probably up 15% to 20%. Now that's obviously from continued benefits on the spread side. Now, is that primarily from the fed cut and if we see less fed cuts maybe the spreads start to narrow again or is that… or there is something more complicated going on?

We did benefit from the fed cut, and there is significant demand for treasury securities right now. So, yes there is an environmental effect that benefited the non-step, the non mark-to-market fund phenomenon.

But, I mean, I'm just trying to get a sense of securities lending spreads move that quickly, if there is less cuts this quarter, it can step down the spread, it can step down to quickly or is it slower kind of a move?

No, it's a pretty short-term phenomenon.

All right.

So, we absolutely did benefit, and if you didn't see that kind of move in future quarters, you would not see a dramatical change.

Okay, great. Thank you very much.

You're welcome.

And we will go to Tom McCrohan. I believe it’s Janney Montgomery Scott. Please go ahead.

Hi, Steve. Hi, Bev.

Hi, Tom.

There is a quick follow-up on that sec lending question. Just to clarify, there's unexpected rate cuts that really benefit you guys, is that right?

That is correct.

Okay. So, fed just… if an anticipated fed cut, do you still get the benefit that just not as much?

Yes, it's the unexpected that is more dramatic, if you will.

Got it. The $20 million credit [ph] business this quarter and maybe you said this in your prepared remarks, I missed it. How much of the $20 million provision was allocated to the capital support agreement, if any?

No, it's separate, none of it.

None of it?

None.

So the provision of $20 million, about 40% of it relates to loan growth, we saw a terrific demand for credit; total loans were up 24% year-over-year. About 30% of it was a result of the, just the overarching weakening in the environment or our judgment of that. And then, the balance related to some downgrades.

Okay. And I might be comparing apples and oranges, but back in February when you disclosed in another conference call regarding the SIV exposure through ten of your internally managed funds. Was any of that related to the sec lending or was that completely separate?

No, that --

The $4.5 billion of securities, SIV securities that are currently held in ten-year funds or any… has any of that had exposure related to the security lending collateral or that's completely separate?

I don't know if I can give you that by fund, what I can say is the… our overall exposure to SIVs is modest. And I think you should… I think, Tom, you should think about unless those securities lending related and more just as an asset in a short duration fund.

Okay. Fair enough. And the capital support agreements, it's not really supporting the collateral pool for securities lending right, it's supporting...

It's supporting any funds that has exposure to Whistlejacket.

All right. I hear you. And separate topic on the wealth management side, that trend, the revenue trend has just been great [inaudible] last five quarters. I was wondering you can just talk a little bit about what's driving the strength in wealth management and relatively has there had been in the past any migrations from clients that were not classified as wealth management, which is kind of a PFS client, and what the magnitude of that, maybe it’s not material where you have [inaudible] within your Illinois PFS segment then over time they get so large that, you kind of reclassify them as wealth management.

Well, a couple of things, one just to level [inaudible] on wealth management for us is those large families typically a couple of hundred million dollars and above in assets under custody. As you know and as we have stated before, we serve today a little over 20% of the Forbes 400 most affluent families, and Tom, you're right, the growth there has been steady and consistent and attractive. But, none of that growth is attributable to any, if you will, internal reclassification, so that's...

All right.

That's a real growth, if you will.

And keep in mind, Tom, that we wouldn't arbitrarily do an internal reclassification of a client from one segment to wealth management, it's really the client's decision as to whether or not the service delivery and the technology they're getting, they want the wealth management product. So, it's not something that we would do arbitrarily when they reach $75 million or $100 million. The other thing I would point out is that our number of family relationships at the end of the quarter reached 400, which was up pretty nicely from where it had been in the previous quarter. So, we have had nice new business in the wealth management as well

Great, congratulations. And in a month from now, Bev and Steve, when you host your Annual Investor Day, can you give us any preview on the agenda, and what topics you might be discussing?

We thank you for bringing that up. We were going to say that at the close, but we're going to be holding our Investor Day here in Chicago on March 28th. The invitations were just mailed at the end of last week. We'll start with lunch, so for those of you that want to travel in the morning, you can do that, we'll start from lunch, proceed through the afternoon and then have a reception at the end of the day. Each of our business units will be making a presentation on their growth strategies, Steve, of course will be giving an update on our financial topics of interest, and of course our CEO, Rick Waddell will be giving his perspectives as well. So, May 28th beginning at 12 noon through a reception that early evening.

So we can expect that kind of similar to prior Investor Day format.

Yes, sir.

Great. Thank you.

And we do have another question in the queue. This is Robert Lee from KBW.

Thanks, good morning.

Hi, Rob.

How are you doing? I know you have got to get to your Board meeting, but quick question on the loan growth, is it possible to get some color on what’s been driving that strong growth? Has it been just growth in the asset servicing business and maybe overdraft or how much of that maybe being driven by... I know you hired a lot of... a fair number of [inaudible] and what not, how much of that is being driven by kind of opportunities you're seeing in more traditional loan?

Rob, this is Bev. I think the strongest growth area that you will see, we'll put the table in our 10-Q as we always do is in commercial lending. And I think what we're seeing there is increased demand from clients for bank credits as other sources of liquidity have been drying up for them. We have seen as we look at the commercial loan growth, it is almost equally split between our large corporate client base, our middle market client base and our healthcare not-for-profit client base. So it's the same type of lending that we do for clients, high quality, which is, we’ve had higher demand because bank credit has been a little bit more in demand as liquidity sources elsewhere have dried up.

To put it another way, Rob, it has not been as the consequences of here in Chicago where there has been a lot of LaSalle bankers going to other firms, it has not been a consequence of that, it is just demand.

Great. Thank you.

You're welcome.

And Mr. Fradkin, we have no other questions in the queue. So I would like to turn the call back to you for any closing comments.

Well, let me again thank everyone for joining us for the first quarter conference call. We look forward to seeing you at our Investor Day on May 28th in Chicago and to updating you on our second quarter financial results on July 16th. Thank you very much.

Thank you. That does conclude the call. We do appreciate your participation. At this time you may disconnect.