Jan 16, 2008
Executives
Beverly J. Fleming, Senior Vice President and Director, Investor Relations Steve Fradkin - Chief Financial Officer Aileen Blake - Controller
Analysts
Mark Fitzgibbon - Sandler O’Neill Nancy Bush - NAB Research Mike Mayo - Deutsche Bank Gerard Cassidy - RBC Capital Markets Thomas Mccrohan - Janney Montgomery Scott Brian Bedell - Merrill Lynch Robert Lee - Keefe, Bruyette & Woods James Mitchell - Buckingham Research David Long - William Blair Ken Usdin - Banc of America
Operator
Good day, everyone and welcome to the Northern Trust Corporation fourth quarter 2007 earnings conference call. Today’s call is being recorded.
At this time, I would like to turn the call over to the Director of Investor Relations Bev Fleming, for opening remarks and introductions. Please go ahead, Bev.
Beverly J. Fleming
Welcome to Northern Trust Corporation’s fourth quarter 2007 earnings conference call. Whether you are participating in today’s conference call live or via replay we appreciate the time you’re taking to listen to Northern Trust’s fourth quarter 2007 financial results.
Joining me on our call this morning are Steve Fradkin, Northern Trust’s Chief Financial Officer; Aileen Blake, Controller and Percy Sullivan from our Investor Relations team. For those of you who did not receive our fourth quarter earnings press release or financial trends report via email this morning, they are both available on our website at NorthernTrust.com.
In addition, this January 16th call is being webcast live on NorthernTrust.com. The only authorized rebroadcast of this call is the replay that will be available through January 23rd.
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 2006 financial annual report and our periodic reports to the SEC for detailed information on factors that could affect actual results. Again, thank you for your time today.
Let me now turn the call over to Steve Fradkin.
Steven L. Fradkin
Thank you, Bev and good morning, everyone. Let me extend my welcome to all of you listening to Northern Trust Corporation’s fourth quarter 2007 earnings conference call.
Early this morning, Northern Trust announced fourth quarter reported net income of $125 million and reported earnings per share of $0.55. Consistent with Form 8-K filings we made on November 13, 2007 and on January 11, 2008, these results included a $150 million fourth quarter non-operating charge associated with our membership in Visa USA.
This charge represents our estimated portion of potential losses arising from certain litigation in which Visa is involved and for which we and all other Visa members have provided indemnification. As previously disclosed in our Form 8-K filing on November 13, $50 million of the charge represents our estimate of our proportionate share of a settlement involving litigation between Visa and American Express.
The remaining $100 million charge represents the estimate of our proportionate share of additional indemnified litigation that has yet to be resolved. Guidance provided by the Securities & Exchange Commission clarified that member banks such as Northern Trust must recognize the estimated fair value of the additional indemnified litigation.
We continue to expect that our proportional share of the proceeds of Visa’s planned initial public offering will more than offset any liabilities related to Visa litigation. Excluding the Visa charge, Northern Trust recorded operating earnings per share equal to $0.97 in the fourth quarter, representing a very strong increase of 26% compared to the $0.77 that we reported in the fourth quarter of 2006.
Operating net income equaled a quarterly record of $219 million, representing an increase of 28% year over year. This was our 12th consecutive quarter of double-digit year-over-year growth in operating earnings per share, and our 11th consecutive quarter of double-digit year-over-year growth in operating net income.
On a full year reported basis, Northern Trust earned $3.24 per share in 2007 compared to $3 earned in 2006. Net income in 2007 equaled $727 million compared with $665 million earned in the prior year.
Excluding the Visa charge, full year operating earnings per share equaled $3.66 in 2007, representing an increase of 22% compared with 2006. Operating net income equaled $821 million for the full year, up a very strong 23% compared with 2006.
Our operating performance in 2007 met all four of our long-term across-cycle strategic financial targets. For the year, we achieved strong revenue growth of 17%; positive operating leverage; 22% growth in operating earnings per share; and an operating return on equity of 19.7%.
At year end 2007, Northern Trust had record client assets under custody of $4.1 trillion representing an increase of $590 billion or 17% compared with year end 2006. On a sequential quarter basis, assets under custody increased $18 billion or 0.4% compared with September 30.
Also at year-end, client assets under management equaled $757 billion, representing a $60 billion or 9% increase compared with year end 2006. On a sequential quarter basis, assets under management declined $4 billion, or 0.5% compared with September 30.
We’ve organized the remainder of our earnings conference call today into two sections. First I will review our financial performance focusing on those areas that most impacted the fourth quarter’s results.
Second, I’ll offer a few perspectives on a number of achievements we made in 2007 relative to several core themes we set out early in the year. These achievements are particularly noteworthy given the difficult macroeconomic environment that played out in the second half of 2007.
As always, Bev and I will then be pleased to answer your questions. Now let me review the fourth quarter’s key performance drivers.
I’ll start with revenues, focusing on the major items that impacted our top line performance in the fourth quarter. Total fourth quarter revenues equaled $973 million, up an exceptionally strong 25% or $197 million compared to last year’s fourth quarter.
In the 18 years or 72 quarters since 1990 we have had six quarters where the year-over-year quarterly revenue growth rate exceeded 20%. Three of those six high growth quarters occurred in the year 2000 when the equity markets reached their bull market peaks.
Of the six quarters where revenue growth exceeded 20%, the best performing quarter was the just completed fourth quarter of 2007 when we grew revenues by 25%. Revenue growth as measured sequentially was equally notable.
Fourth quarter revenues grew 9% or $80 million on a sequential quarter basis. Here too we have had six quarters since 1990 where sequential quarter revenue growth exceeded 8%, placing the fourth quarter of 2007 revenue growth of 9% in the top tier of sequential quarter revenue growth performance since 1990.
We are very pleased with our top line performance in the fourth quarter of 2007 which is even more striking when juxtaposed against the backdrop of a highly tumultuous macroeconomic environment. Let me review for you the key drivers of our very strong revenue growth in the quarter.
The line item contributing the most to revenue growth in the fourth quarter was trust investments and other servicing fees, which is also the largest component of our revenue mix, accounting for 56% of total revenues in the quarter. We continue to be extremely pleased with our excellent growth in this revenue category across both our personal and institutional businesses.
Growth in this core revenue category is reflective of our ability to serve our clients exceptionally well, retaining their business and aggregating additional assets from them while also having clients new to Northern Trust select us as their provider of choice. Trust investments and other servicing fees increased 19% year over year, or $89 million to $547 million.
This $89 million growth figure represents an impressive 45% of our total year-over-year revenue growth in the quarter. On a sequential quarter basis, trust fees increased 8% or $38 million, a very strong indication of the strength of our core fee generating businesses.
Within this line item, PFS trust investment and other servicing fees equaled a record $233 million in the fourth quarter, increasing 14% or $29 million versus last year’s fourth quarter. This is our fifth consecutive quarter of double-digit, year-over-year growth in PFS trust fees.
We last achieved five consecutive quarters of year-over-year growth in PFS trust fees beginning in the fourth quarter of 1999. On a sequential quarter basis, the PFS trust fees were equally strong, increasing 3% or $6 million.
Our fee growth in PFS emanates from two primary drivers. The first is our ability to retain and grow the business that our existing clients have entrusted to our care while at the same time winning new clients to Northern Trust.
The second factor behind our PFS growth is the equity market environment, which can either support our fee growth in rising markets or provide a measure of headwinds in declining markets. With respect to the fourth quarter, net new business in PFS was consistent with the strong levels that we achieved in the first three quarters of 2007.
Full year 2007 net new business was at its best level since the year 2001, which speaks to the consistency of our net new business results in PFS throughout all four quarters of 2007. The equity market environment relative to quarterly PFS also provided support for the quarters 14% year-over-year growth in fees, with the S&P 500 up 11% using our monthly fee methodology with a one-month lag.
Equity market support was also evidenced on a sequential quarter basis as the S&P 500 was up 3% compared to the third quarter using the same month lag methodology. Keep in mind too that PFS manages broadly diversified portfolios for clients.
We are not exclusively an equity manager, as is the case with some of the publicly traded asset management firms. We are managing balanced, diversified portfolios for our private clients, structured to meet their goals and objectives.
The asset allocation of PFS managed assets as of year end was 46% equities, 24% fixed income, and 30% cash and other asset classes, indicating that any equity market support does not apply 100% to our fee equation. Fees in PFS are derived from the assets of we manage or custody for personal clients.
We were very pleased with our ability to aggregate private client assets at attractive rates of growth in the fourth quarter. PFS assets under management equaled a record $148 billion at year end, up 10% or $14 billion from a year ago and up 1% or $1.4 billion sequentially.
Assets under custody in PFS also equaled a record, reaching $332 billion at quarter end. PFS assets under custody increased 18% or $50 billion from a year ago, and were up 1% or $3 billion sequentially.
The ultra-wealthy client segment within PFS which we call the Wealth Management Group, continued to be an outstanding contributor to our growth. Wealth Management serves the complex needs of some of the world’s wealthiest families.
We currently work with approximately 20% of the Forbes 400 richest Americans. The average size of our custody relationships with the almost 390 families served by Northern Trust Wealth Management Group equaled $500 million at year end, signifying the very high end of the affluent market served by this group.
This incidentally compares with an average of just $226 million just five years ago and therefore represents a $274 million increase, on average, across the families we serve which equates to a 121% increase. We continue to achieve excellent growth in Wealth Management client assets in the fourth quarter.
Custody assets in Wealth Management equaled to $195 billion at year end, up 22% or $35 billion from one year ago and up 2% or $3 billion sequentially. We also manage a portion of the assets that our Wealth Management clients have placed in custody at Northern Trust.
Managed assets in Wealth Management totaled $30 billion at year end, up 9% or $2 billion year over year and up 2% or $1 billion sequentially. In summary, on the PFS front, for the full year 2007 performance was excellent as PFS Trust Investment and other servicing fees increased a strong 15%, representing our best annual growth rate since the year 2000.
Switching to our institutional business, C&IS Trust Investment and other servicing fees equaled $315 million in the fourth quarter, an increase of 24% or $60 million year over year. C&IS fees increased 12% or $33 million compared with the third quarter.
C&IS fees include three primary revenue areas: custody and fund administration, institutional asset management and securities lending. Let me discuss the performance of each in the fourth quarter.
C&IS custody and fund administration fees equaled $168 million in the fourth quarter, up 29% or $37 million year-over-year. This strong double-digit custody fee growth was driven by excellent new business, particularly in global custody; by market growth and by higher transaction volumes during the quarter.
Sequential growth in C&IS custody fees was also strong, up 5% for $9 million compared with the third quarter. Sequential growth was driven primarily by strong new business.
As with our fees in PFS, the market environment influences our C&IS fee growth. Recall that C&IS custody fees are built primarily on a one quarter lag basis, thus our 29% year-over-year growth in C&IS custody fees was supported by equity market growth as evidenced by a 14.3% quarter lag growth in the S&P 500, and 11.6% growth in the EFA index.
Market support of our 5% sequential growth in C&IS custody fees was mixed, however, with the S&P 500 up only 1.6% in the third quarter and the EFA index actually down 3% on a quarter lag basis. Again, you should also remember that while markets do impact our results, the relationship between equity market movement and Northern Trust fees is not a one-to-one relationship.
An important contributor to C&IS custody fees is our ability to successfully aggregate client assets. Institutional assets under custody equaled a record $3.8 trillion at year end, up 17% or $540 billion from a year ago, and up 0.4% or $15 billion versus last quarter.
International activities continued to be a primary driver of institutional asset and fee growth in the fourth quarter. Global custody assets equaled $2.1 trillion at year end, an increase of 23% or $397 billion from a year ago.
The fourth quarter represents the 19th consecutive quarter that we have reported double-digit, year-over-year growth in global custody assets. On a sequential quarter basis, global custody assets were up 4% or $73 billion.
Investment management fees in C&IS equaled $75 million in the fourth quarter, an increase of 12% or $8 million year over year. Growth was driven by both new business and positive markets.
New business results were strong in short duration assignments including institutional mutual funds and cash suite products, and in quantitative management. Note again that in our Institutional Asset Management business we manage a wide range of asset classes for our clients.
The asset allocation of C&IS managed assets as of year end was 35% equities, 9% fixed income, and 56% short duration and other. Institutional investment fees increased 3% or $2 million on a sequential quarter basis.
Managed assets for institutional clients equaled $609 billion at year end, up 8% or $46 billion compared with one year ago, yet down 1% or $6 billion sequentially. The sequential decline in C&IS assets under management was attributable to a $14 billion decline in securities lending collateral which was partially offset by higher equity and fixed income institutional assets under management.
C&IS securities lending fees equaled $55 million in the fourth quarter representing an increase of 32% or $13 million compared with last year’s fourth quarter and an increase of 67% or $22 million compared with the third quarter. Securities lending collateral equaled $270 billion at year end, up 9% or $22 billion versus one year ago and as I mentioned earlier, down 5% or $14 billion compared with September 30.
The sequential decline primarily reflects the continuation of the deleveraging phenomenon that occurred in the third quarter which was another outgrowth of heightened risk aversion in the challenging fixed income environment. As we did last quarter, let me pause for a minute and provide some perspective around our securities lending results in the fourth quarter.
Similar to our experience in the third quarter of 2007, our securities lending results in the fourth quarter were adversely impacted by the continued disruption in the credit environment, particularly during the month of November. It’s important to note however that there were positive offsets in our securities lending business during the fourth quarter, including strong demand for Treasury securities and the Federal Reserve’s 100 basis point reduction in the Federal funds rate since September.
This noted, the unusually high levels of credit market disruption did negatively impact the returns achieved in the one mark-to-market cash collateral investment fund used for securities lending. As of December 31, approximately 5% of our $270 billion in securities lending cash collateral was invested at our client’s selection and direction in this total return, short duration, fixed income fund.
As I mentioned last quarter, this is our only meaningful fund that is structured as a mark-to-market fund and understanding this designation is essential to understanding the impact during the third and fourth quarters. The consequences of being a mark-to-market fund during the fourth quarter of 2007 were severe; even more severe than what was experienced in the third quarter.
Pricing pressure on fixed income securities continued. Asset value changes, in this case asset value markdowns, flowed directly through to the total return of this fund, thus impacting the earnings of a small number of our securities lending clients and Northern Trust securities lending fees as well.
While the environment was a challenging one for this fund in particular, and therefore for our overall securities lending revenues, I want to remind you of a few key points. First, this mark-to-market fund has followed its investment guidelines consistently and appropriately.
No atypical portfolio management decisions in the fund prior to, during or after quarter end occurred. Its performance results reflect the full impact of the challenging market environment.
Second, the fund does not use leverage. Third, the fund did not post a negative total return for the fourth quarter.
Put another way, the fund earned a positive annualized return for the fourth quarter of 0.6%, to be precise. Keep in mind however that securities lending revenue is earned based on the spread between what is earned on the collateral pool and what is paid in terms of the rebate rate.
With this fund having earned 0.6% annualized in the fourth quarter and Fed funds averaging approximately 4.5%, you can see how the negative net spread on this specific fund would yield negative securities lending earnings across the quarter. For 2007 overall, the fund earned 3.37% while Fed funds averaged 5.02%.
Fourth, the fund has a very high quality profile; 65% of the securities held in it are rated either AAA or AA. Fifth, the fund is conservatively managed with an interest rate sensitivity of 54 days and a credit-based weighted average maturity of 1.69 years as of December 31.
Sixth, the fourth quarter total return of the fund reflected negative mark-to-markets on a broad mix of holdings. There does not exist, at this time, any permanent impairment of any holdings.
All of the asset markdowns recorded in the fund during the fourth quarter are unrealized. We expect, given what we know now, that all of the fund’s holdings will mature at par as expected.
Because we expect all the fund’s holdings to mature at par, no actions have been taken to sell all or a portion of any holdings that have mark-to-market losses. I should also note that there has not been a need to sell assets that have mark-to-market losses in connection with the management of the fund, such as to rebalance for diversification purposes or to meet client reductions.
Any future positive marks to market will be reflected in the yield on the fund and in the resultant securities lending revenues reported by Northern Trust. Lastly, the fund is used as a securities lending cash collateral option by only a small number -- approximately ten-- of our more sophisticated clients.
None of these clients uses this mark-to-market fund exclusively for their collateral investments. All have other less aggressive funds to round out their total collateral investments.
Let me now comment on our other revenue line items, starting with net interest income, which accounted for 25% of revenues in the fourth quarter. Net interest income equaled a record $247 million, an increase of 19% or $40 million compared with last year.
On a sequential quarter basis, net interest income equaled a strong 8% or $18 million. The two primary drivers of the year-over-year and sequential quarter increase in net interest income were balance sheet growth and a higher net interest margin.
Average earning assets equaled $56 billion in the fourth quarter, an increase of 14% or $7 billion year over year, and 5% or $2.5 billion sequentially. Our balance sheet growth remains liability driven, which in turn drives this strong growth in earning assets.
Non-US office time deposits remain the fastest growing liability on our balance sheet, averaging $31 billion in the fourth quarter, up 30% or $7 billion versus last year and up 14% or $4 billion sequentially. This strong growth in non-US office time deposits is directly related to our international success in the institutional custody business which I discussed earlier.
Our net interest margin in the fourth quarter equaled 1.74%, up 7 basis points from the prior year and up 5 basis points sequentially. Both the year over year and sequential increases in the net interest margin were driven by wider spreads between overnight rates and one to three month rates, combined with three Fed rate cuts in September, October and December.
Foreign exchange trading income of $111 million was outstanding and equaled a record, up 105% or $57 million compared with the fourth quarter of 2006. On a sequential quarter basis, foreign exchange trading income increased 21% or $19 million.
The key drivers of our quarterly results in foreign exchange were volume and volatility, both remained very high in the fourth quarter with client volumes up significantly both year over year and sequentially. Currency volatility was also quite high, due in part to continue disruption in the credit markets.
Other operating income equaled $30.5 million in the fourth quarter, an increase of 22% or $6 million compared with the prior year and an increase of 34% or $8 million sequentially. Both the year over year and sequential comparisons to higher levels of overdraft’s income related primarily to institutional custody operations, and a higher net impact of currency revaluations related to our non-trading activities.
Credit quality remained exceptionally strong at year end, with non-performing assets equal to only $29 million, down $8 million or 21% from a year ago and unchanged from September 30. Non-performing assets equaled only 12 basis points of total loans at year end.
During the fourth quarter, we recorded a loan loss provision of $8 million compared with the provision of $2 million in the fourth quarter of last year and $6 million in the third quarter of 2007. The majority of our loan loss provision in the fourth quarter reflects growth in our commercial loan portfolio.
Now let me shift my comments to a review of the key expense categories that impacted our fourth quarter performance. Expenses during the fourth quarter of 2007 equaled $782 million, which includes the $150 million Visa-related litigation charge that I discussed earlier.
Excluding that charge, expenses equaled $632 million, representing an increase of 23% or $118 million from the year-ago quarter. On a sequential quarter basis, excluding the Visa charge, expenses were up 12% or $66 million.
Compensation expense equaled $283 million and increased 27% or $59 million from the year-ago period. Approximately half of the year-over-year increase in compensation expense reflects higher incentive compensation due to improved corporate performance.
The remaining primary contributor was an increase in staff to accommodate growth and expansion. Staff levels equaled approximately 11,000 full-time equivalent positions at quarter end, up 12% year over year.
Our office in Bangalore, India now numbers approximately 725 staff members, up over 440 FTE from year end 2006. On a sequential quarter basis, compensation expense increased 9% or $23 million, primarily reflecting year-end true ups of incentive compensation and increased staff levels.
Employee benefit expenses equaled $62 million in the fourth quarter, up 16% or $9 million versus last year and up 9% or $5 million sequentially. The year-over-year increase was driven primarily by three key items: a fourth quarter 2007 true-up of expatriate expenses, a higher company matching contribution to our 401-K plan based on improved performance, and a rise in FICA insurance.
The sequential increase primarily reflects the expatriate and 401-K match items in addition to higher pension costs in London and Guernsey. Outside services equaled $109 million, an increase of 23% or $20 million compared with last year, and 10% or $10 million sequentially.
The year-over-year increase primarily reflects higher consultant and technical expenses as well as an increase in several expense areas that are driven by increasing client volumes such as global sub-custodian fees and investment management sub-advisory fees. The sequential increase was driven primarily by higher consultant and technical expenses.
Equipment and software-related expense equaled $59 million in the fourth quarter, up 4% or $2 million year over year and up 10% or $6 million sequentially. The year-over-year increase is primarily attributable to the higher software amortization resulting from continued investment in technology.
The sequential increase represents typical annual patterns where the expense associated with the depreciation and amortization of equipment, and capitalized software is typically higher in the second half of each year compared to the first half. Other operating expense equaled $232 million in the fourth quarter, which includes the previously mentioned $150 million charge related to Visa.
Excluding that charge, other operating expense equaled $82 million, an increase of 50% or $27 million compared with last year. On a sequential basis, other operating expense increased 41% or $24 million.
Two primary factors drove the year over year and sequential quarter increases in this expense category. First in the fourth quarter we experienced higher than normal charges associated with securities processing activities.
Two in particular totaled $11 million. In one case, we recognized a loss of approximately $7 million related to the execution of a client trade.
In the second case, we recognized a loss of approximately $4 million related to a misunderstanding associated with the client instruction. In the fourth quarter we also had higher business promotion and advertising expenses in the other operating expense line item.
Our provision for income taxes in the fourth quarter equaled $33 million, resulting in an effective tax rate equal to 23.4%. This compares to a tax rate of 29.5% in the fourth quarter of last year.
The lower tax rate on a year-over-year basis primarily reflects three items: first, we recorded a lower level of taxable earnings due to the Visa charge. Second, we are now earning a higher proportion of our earnings from operations in countries with more favorable tax rates.
Finally, catch-up adjustments were made to certain State income tax reserves. Northern Trust repurchased 1.2 million shares of common stock in the fourth quarter at a cost of $88 million.
Diluted shares averaged 225.6 million. We can purchase an additional 8.7 million shares under a buyback authorization approved by our Board of Directors in October of 2006.
In keeping with our practice, we increased average common equity by 11% versus one year ago to a record $4.4 billion at year end, representing our 79th consecutive quarter of increasing common equity for almost 20 years running. Let me close with a few thoughts on what we achieved in 2007 relative to several core themes that we established at the beginning of the year.
In our personal financial services business unit, we began to 2007 with an objective to continue strengthening the service, capability and value proposition that we bring to our private clients. Doing this successfully we thought would enable us to consistently achieve double-digit rates of growth in trustees.
That goal was accomplished in both 2006 and 2007. PFS trust investment and other servicing fees increased 15% in 2007, following our 10% growth in 2006.
Growth rates in excess of 10% were achieved consistently across each of the four quarters in 2007. This achievement represents a renewal of consistent, double-digit year-over-year growth last seen in PFS trust fees in the year 2000.
This performance was broad-based across geographies and client segments, including private client, wealth advisory, and wealth management. In our corporate and institutional services business unit, one of our primary objectives in 2007 was to continue to build and grow our business serving global fund managers.
To that end and as evidence of our positive progress in this important strategic segment, our global fund services segment reported an increase of over 70% in revenue transitioned in 2007 versus 2006. We expanded our fund manager client base in 2007 and achieved a significant milestone with the successful migration of Insight Investment Management’s back and middle office operations to Northern Trust’s platform, including over 600 client portfolios representing approximately $190 billion in Insight assets under management.
Across the board in 2007 with fund managers, pension funds, public funds, local authorities, insurance companies, foundations, endowments, and sovereign wealth funds the most frequently cited reasons for appointing Northern Trust included service, technology, and reputation. For Northern Trust Global Investments, one of our primary 2007 objectives was to achieve renewed growth in our institutional asset management business.
Here to we were happy to report 13% year-over-year growth in institutional asset management fees in 2007 as compared to 2006. Double-digit growth was evident consistently throughout 2007 as each individual quarter recorded growth at least equal to 11%.
Growth was primarily driven by money market, quantitative and manager of manager products. Money market growth was the strongest in our institutional mutual fund products, which increased 19% year over year and equaled $38 billion in short duration mutual fund assets as of year end.
In our worldwide operations and technology business unit, a key objective in 2007 was to focus on the development of our global operating model. We have a truly global footprint with clients in over 40 countries around the world and a sub-custodian network that allows us to settle trades for clients in over 90 markets.
This worldwide footprint necessitates a global operating model. With our major operation centers distributed across three regions of the world covering all time zones, we have the physical presence and operational resilience to effectively and efficiently serve our global client base.
To put some perspective around this, several years ago we put plans in motion to significantly increase our presence in the Asia Pacific region. The implementation of these plans accelerated in 2007.
Our office in Bangalore, India employed 725 Northern Trust partners at year end, up from less than 300 at year end 2006. From this office we are well positioned to closely serve our growing base of clients in the Asia Pacific region while also adding to our ability to provide around the clock, cost efficient support to our global client base.
In India, there are some 26 discrete operational functions that run as an extension of global teams based out of Chicago, London, Dublin, Limerick, Luxembourg and Singapore. Functional activity supported in Bangalore are broad ranging from trade processing, income collections and reconciliations, to valuations, reporting and fund accounting.
At a corporate level, the primary objective in 2007 was to build the Northern Trust brand. As many of you know, we launched new television and print advertising in 2007.
Our communications strategies emphasize our brand now more than ever before. The Northern Trust Open, which will be held at the Riviera Country Club in Los Angeles, will be a breakout event for us in terms of building name recognition and reaching our target audience.
We estimate that 450 million households in 150 countries will be exposed to our message and to the strength of the Northern Trust brand during this premier golf tournament in February. 2008 even more so than 2007 will be a year in which our brand awareness is extended on both a national and global basis.
In closing, our operating results in the fourth quarter signified the strength of the strategic business model of Northern Trust. We are very pleased with the financial results that we are reporting to you today including strong top line revenue growth and attractive double-digit operating earnings per share and net income growth achieved amidst a challenging macroeconomic environment.
Now, Bev and I would be happy to answer your questions. Nicole, please open the call for questions.
Operator
(Operator Instructions) And we’ll take our first question from Mark Fitzgibbon with Sandler O’Neill.
Mark Fitzgibbon - Sandler O’Neill
Good morning and thank you for taking my question. Steve, I wondered, if you look at assets under management and assets under custody, they were relatively flattish from the linked quarter.
I’m curious; could you share with us what was the impact on each of these from market action and what was attributable to the fund [post]?
Steven L. Fradkin
Mark, I think when you look at it overall, one I would say that we are very pleased with the asset aggregation that we had in both categories. I think what you are probably focusing on is the assets under management linked quarter but remember that the primary driver of that declined linked quarter was a $14 billion decline in our securities lending collateral, which was driven by this deleveraging phenomenon that we’ve been talking about.
If you exclude that, our assets under management actually increased 2% sequentially, which is better than the S&P which was down 3.8% and the [EEPA] which was down 3.2%. So we feel very good about the asset accumulation and I think that explains the assets under management sequentially.
Mark Fitzgibbon - Sandler O’Neill
Okay. And then the second question I had, Steve, you’ve obviously heard and read about a lot of the problems that other institutions are having down in Florida and I know that your business is very different but I wondered if you could share with us maybe some of the trends that you are seeing in your loans down there.
And is that perhaps why you added so aggressively to the loan loss provision, or the loan loss reserve this quarter?
Steven L. Fradkin
Well, let me just start with the loan loss, the provision, which was an $8 million provision. That was not linked in any specific way to anything in Florida.
That was driven by growth in the commercial loan portfolio, so no linkage there. I would say when we look at Florida more generally, our fees in Florida were $53 million in the fourth quarter.
They were up 8% year over year and a point sequentially. Our new business in Florida in the fourth quarter was very strong and more than double what we did in the fourth quarter the year before, so the Florida business continues for us to be excellent and growing.
That said, I think there is a build-up of competition in Florida and Florida has its own, as you suggested, unique set of issues with respect to a troubled housing market, condo inventory and so forth. But there is a ballot in Florida that is coming up on the 29th that will help Floridians address or might help them address the real estate tax issues and a number of other things.
So when we look at Florida, both for the quarter and for the year, we feel good about it. It continues to be an important part of our franchise.
We like the positioning. The asset accumulation there was good.
The new business was very good and very strong, so I think we are different than the aggregate macro issues that you are hearing about in Florida.
Mark Fitzgibbon - Sandler O’Neill
Thank you.
Operator
We’ll take our next question from Nancy Bush with NAB Research.
Nancy Bush - NAB Research
Good afternoon, guys. I know, Steve, you pointed out that you are broadly diversified in both PFS and CNIS and the action in the equity markets does not have a one-for-one direct impact there, but if you could just summarize for us your exposure to the equity markets.
I think you said it was 46% in the allocated portfolios and PFS. Is there a similar number that I could use to look at CNIS?
Steven L. Fradkin
Let me make one point and then Bev’s going to give you that number. I think -- I want to be clear -- we are broadly diversified, not immune.
So I wouldn’t want anyone and Nancy, you know this well, I wouldn’t want anyone to draw the conclusion that what is going on in the markets and so forth doesn’t touch us. We just wanted to make the point that it’s not a one-for-one on the upside and it’s not a one-for-one on the downside.
Bev, you can --
Bev Fleming
Nancy, in terms of those statistics, in PFS, as you said, the equity market portion of AUM was 46%. In CNIS, the equity portion of assets under management was 35%.
Nancy Bush - NAB Research
And on the issue of the short duration, fixed income fund that has been a pain I guess for a couple of quarters now, how large is that fund and is sort of the -- are the participants in that fund continuing to hang in there? What’s happening?
Steven L. Fradkin
I don’t know if I have the size of that with me, but I’ll --
Bev Fleming
Well, I can. The particular fund represents about 5% of our total securities lending collateral pool, which equaled $270 billion, so 5% of that total $270 billion securities lending collateral pool.
Steven L. Fradkin
Let me make a couple of points here, and this is very consistent with what we described last quarter but it bears mentioning. If you look at our securities lending results, up 32% year over year but as we said, we had to endure the negative marks, if we weren’t -- if this were not a fund in which we had to have a mark-to-market, the comparable securities lending fee would have been up a little over 140%, so that gives you a flavor for what happens between, in this environment, at least, a mark-to-market and not marking to market.
And remember that the mark-to-market occurs because these are pooled funds. If these were run as separate accounts, you do not need to mark it to market.
Bev Fleming
Nancy, if I could give you a number relative to what Steve just mentioned, in the third quarter we told you in this call that had that mark-to-market fund been a custom fund or one that was not required to be mark-to-market, our third quarter securities lending revenues would have been $36 million higher. That was third quarter.
The comparable number and the way that Steve did that calculation to show you an adjusted growth rate, the comparable number for the fourth quarter was $46 million, so that’s what gets you from the actual year-over-year fourth quarter growth of 32% to this adjusted number that Steve provided of 142%.
Nancy Bush - NAB Research
And clients are continuing to hang in with the fund, or what is -- what sort of -- I mean, 5% of $270 billion is $13.5 billion. What was the similar number in the third quarter at the end of the third quarter?
Bev Fleming
For the size of the fund?
Nancy Bush - NAB Research
Yes.
Bev Fleming
I think it was slightly higher than that.
Nancy Bush - NAB Research
All right, great. Thank you.
Operator
Our next question comes from Mike Mayo with Deutsche Bank.
Mike Mayo - Deutsche Bank
Good afternoon. Can you just clarify the one-timers a little bit more?
You said there were $11 million of one-time client related expenses and I guess that’s offset by the low tax rate. A couple of questions -- how much of the lower tax rate is permanent, since you are more outside the U.S.
now than you were before?
Steven L. Fradkin
Maybe a little color -- we had historically been at an effective tax rate around 35%. We talked a year or so ago about our expectations that that would probably, you know, a lot of puts and takes but move down a point or so.
Obviously this quarter we have a lot of noise with Visa and some other adjustments. As we look forward, Mike, we really -- we expect that to be in a more normalized environment around 33%, and that more normalized look emanates from the continued growth of our global business and the effects that that has from APB 23 and also some state tax law changes in Illinois.
So that’s -- you know, obviously it will move around but that’s the level that we currently think is reasonable to think about without any noise in the quarter.
Mike Mayo - Deutsche Bank
And then even after the $11 million of client related expenses, which I think or look one-time, other expenses were still up another $12 million. Is that due to the ads and promotions that you talked about?
Steven L. Fradkin
No, I think our expenses were up across the board, whether you want to look at compensation, outside services, operating expenses, and so forth. It was broad-based.
Clearly advertising and marketing expenses were up significantly year over year but I’d say we have a scenario where we are growing revenues by 25% year over year. We’ve got a global franchise.
We’ve got a host of initiatives in process and as we’ve talked about in other past calls and past years, we very much try as best we can to calibrate our revenue growth and expense growth, and sometimes we do that a little better than others. But the short answer to your question is no, it is not exclusively related to marketing and advertising.
Mike Mayo - Deutsche Bank
And then the $46 million mark-to-market hit that you took this quarter above the $36 million in the third quarter, while it’s not one-time, should we expect that to repeat? Because I guess if you didn’t have that this quarter, EPS would have been higher by a dime or more.
Steven L. Fradkin
What I’d say is that it is very volatile in the markets and I certainly can’t predict what will happen but I think our continued belief, Mike, is that on the assumption that we’re right and that these securities, there’s no default on these securities, we would expect the things that had been marked down in 2007 to inure to our benefit in 2008 and beyond. And the exact timing of that will be a function of what happens in the markets and how things are valued, but yes, these are unrealized marks.
Mike Mayo - Deutsche Bank
And then, getting to the other comment, are you -- in the past, I think I heard you say your revenues, for every 10% stock market decline, your revenues could be hurt by 1%, and you talked about the composition of equities in your business. Is that relationship still true?
Bev Fleming
Mike, the relationship is actually a 10% movement in the markets translates into a 4% movement in our trust, investment, and other servicing fees. And since those represent about half of revenues, you get to about a 2% impact on total revenues, not the 1% figure you just cited.
So 10-4-2 is the relationship broadly, broad markets defined, up or down.
Mike Mayo - Deutsche Bank
And as you look out at 2008, you have a lot of new business. On the other hand, you could have a little bit of a drag with a lower stock market.
How do you think about that?
Steven L. Fradkin
Well, I think -- you know, it’s really more a question how you think about that. We have to operate and run a business and serve clients day in and day out and we continue to like the business model, the markets we’re in, the value proposition that we’re gaining, and new business results, both in PFS and CNIS have been very strong.
So we are going to try and do that whether the markets help us or hurt us. That’s how we look at it and obviously, we’d like the markets to be on the positive side but that’s not always going to be the case.
It doesn’t really change how we think about trying to keep clients and earn new ones. Obviously on the margin, on the expense side, if we have a dimmer environment we have to rope in our discretionary spending.
But that’s not a new phenomenon for us.
Mike Mayo - Deutsche Bank
And then lastly, as it relates to the revenue growth that you had this year, what is the competitive environment like? You had two of your competitors kind of merging and everybody says pricing is no better, but are you seeing any benefits?
Steven L. Fradkin
No, I think the competitive environment is as stiff as ever. We had two competitors merge but they are big and they strong and they are effective.
So as we have said in the past, in environments like this, and it will move around, whether there is disruption because of M&A transactions or financial stress that competitors have, we generally like that environment. Our new business results, again, we’ve very strong across both businesses and there was disruption across both.
But I wouldn’t attribute it specifically to the mergers, Mike, that you’re talking about. So the markets that we are in are big and we like the opportunity to continue to capitalize it and on it an obviously some of the stress that the non-trust bank competitors are having that -- organizations we compete with on the private wealth side, hopefully that will inure to our benefit but we’ll have to see.
And I think on the pricing side, it continues to be institutionally a very, very competitive market. There are no lay-ups there.
Mike Mayo - Deutsche Bank
Thank you.
Operator
Our next question comes from Gerard Cassidy with RBC Capital Markets.
Gerard Cassidy - RBC Capital Markets
I don’t know if you guys have mentioned this, but have you guys announced your ownership in the Visa, or what it will be when the company goes, assuming it goes public this year?
Steven L. Fradkin
No, Gerard, I don’t think we have done that.
Bev Fleming
Gerard, you’re talking about the value that we will attain when the Visa IPO occurs?
Gerard Cassidy - RBC Capital Markets
No, no, not the -- no one’s really going that far but we are receiving from other companies that will own 3% or 5% of the company once it goes public and then people are making estimates about what that would be worth.
Steven L. Fradkin
We have not announced that so I am not sure I want to do that here, but you can probably work some directional math because when you look at what everyone else -- and everyone is announcing charges with relation to Visa and there is a certain proportionality, so that can probably get you close. I think I’d want to talk to our General Counsel before I give the number specifically.
Gerard Cassidy - RBC Capital Markets
Sure, no, that’s fair. The other question is obviously new business wins is an important part of your business, as well as some of your peers, as well as the selling of additional products to existing customers, both on the personal side as well as the corporate and institutional side.
Are you guys finding it easier or harder, for that matter, selling existing customers on the corporate side more products? Is that an easier sale today than maybe three, four, five years ago?
Steven L. Fradkin
You know, I can only give you intuition here but I think the cross-selling to institutional clients -- I don’t think, I know that that is absolutely critical and an important part of our growth. I don’t think it’s any harder today and arguably, and this is -- I don’t have data in front of me.
I don’t want to say it’s easy but maybe it’s easier because there is a lot of complexity out there and a lot more granularity of choice, and I think there is a dimension that says you like to make those choices with people you know, people you’ve worked with for years and so forth. And so certainly if I were to back into the answer, I’d say when we look at our new business results in CNIS, there is still a very consistently significant piece coming from expanding existing relationships with clients.
So a long way of saying I don’t think there’s a change on that front that we can discern.
Gerard Cassidy - RBC Capital Markets
Is it more important in terms of when you guys look at your revenue growth in a particular quarter, are you generating more of the revenue growth from existing clients taking on more products or is it new clients coming on board?
Steven L. Fradkin
It’s typically 50-50, you know, 60-40, 40-60 -- it moves around but directionally, and that number, Gerard, has been consistent for the 22 years I’ve been here.
Gerard Cassidy - RBC Capital Markets
Okay, and then finally on the golf, are you -- are we going to see an up-tick in marketing expenses in the first quarter or have you already started to incur some of those expenses in preparation for your sponsorship of the tournament?
Steven L. Fradkin
No, I’d say -- obviously we had some expense in the fourth quarter as we get ready for this tournament in February, but I’d say the major up-tick on that will be in the first quarter. Clearly we’re going to do what we can to moderate that as much as possible but I think it would be fair to say that, you know, it’s a significant event for us and we’ll feel that in the first quarter.
Gerard Cassidy - RBC Capital Markets
Sure. Okay, thank you.
Operator
Our next question comes from Thomas Mccrohan with Janney Montgomery Scott.
Thomas Mccrohan - Janney Montgomery Scott
I just want to circle back quick to your sensitivity to equity market valuations and how your clients’ equity allocation decisions could potentially change depending upon return expectations? What has been your experience in the past with clients shifting their equity allocation levels of both PFS and CNIS during difficult equity markets and what were their allocations during past economic downturns?
Steven L. Fradkin
You know, Tom, I think that’s a very difficult question to answer. You have within the -- we have such a wide spectrum of clients.
You have the conservative clients and the aggressive clients. One pulls back and is very concerned about capital preservation and the other thinks there is a tremendous buying opportunity.
So I would be hesitant to in the aggregate try and describe that phenomenon for you.
Thomas Mccrohan - Janney Montgomery Scott
Have you seen -- at a minimum, can you comment on the last recessionary period, if you did see clients, both on the high net worth side, institutional side, reduce their proportion of equity exposure?
Steven L. Fradkin
I don’t have the data that could validate that in front of me, Tom, so I’d prefer not to comment on it.
Thomas Mccrohan - Janney Montgomery Scott
Fair enough. Okay, thanks.
Operator
Our next question comes from Brian Bedell with Merrill Lynch.
Brian Bedell - Merrill Lynch
Steve, if I can ask maybe a little bit of a long question, but as we move into 2008, your thoughts about the momentum of organic growth in your main businesses? I guess what I’m getting at is the asset servicing business, the [inaudible] in the U.S., and then also if you can comment on your PFS business.
When I see momentum of that organic growth, it has generally been on an up trend over the last several quarters. Do you see that momentum or improvement continuing into 2008 or do you think that maybe moderates somewhat, you know, if we are in a normal market environment let’s say.
And then in spending on that, you mentioned a number of things in terms of accelerating expansion in India and other expenses [inaudible] with the global operating model, but do you feel well prepared from an infrastructure perspective to take on that new growth with limited additional expense, or do you think there’s a lot more expense in growth initiatives or infrastructure involved with that?
Steven L. Fradkin
Well, let me try and address the first question to start with, which is the momentum question. I think one thing, I would say this on 2007 in the aggregate, because if you had said to us at the beginning of 2007, oil is going to move up 57% and credit spreads are going to widen dramatically and markets essentially for the year are going to be up the S&P 3.5% and the ESOP a little over 1%, and currency, the dollar is going to depreciate against 14 of the top 16 currencies and housing, sub-prime, et cetera, I am not sure you would have concluded that we would have had the momentum that we were able to garner in 2007.
My point being it’s very hard to predict. If I speak to the question of new business, both in PFS and CNIS, remember that our new business results for PFS in 2007, they were up about 13% year over year, which was the best year we’ve had since 2001.
If I look at CNIS, our new business was up 11% for the year, which is the best we’ve seen since 2000. So as to the momentum of winning core clients in the franchise, we feel very good about it.
Now, will the environment dampen enthusiasm? I don’t know but in terms of competing in the marketplace, we feel very good and the results are the best we’ve seen in some time.
As to the ability to have the infrastructure and support and capabilities to accommodate that growth, that is a never-ending quest. We feel very good about our capabilities but we are not done.
We will continue to build out India. We will continue to build out Limerick.
We will continue to invest in some technological capabilities for clients and so forth, so no, it’s -- you know, we feel good that we can support the clients but as our business continues to grow, the demands of our clients continue to evolve and we will need to spend. Obviously the question is trying to make sure that your rate of growth on revenue and expense are appropriate and as we’ve talked about before, we’ve had neutral or positive operating leverage 17 out of the last 20 years.
We don’t get it right every year but our record is pretty good and that’s what we are going to try and do in 2008.
Brian Bedell - Merrill Lynch
And do you think you have reasonable flexibility if the markets do turn down and volumes turn down in FX and securities lending? As you are spending out on these initiatives to build up the technology, do you feel that you have some expense flexibility to ratchet that down and still hit your goal of positive operating leverage in ’08?
Steven L. Fradkin
Well, we do absolutely have some expense flexibility. The question is how big is the degradation in the markets and how does that impact our fee line?
And also, how much do we want to do that? I mean, there are -- clearly we want to have positive operating leverage and that’s in our plan for 2008 and we will try to achieve that, but you also have to look at what you do and remember that you are in this business for the long term.
So there are times if the markets are sharply down where our goals are on average over time across cycles and we’ll have to evaluate that as we go. So yes, we do have flexibility.
We would use that if markets or the environment puts us in that position, but it’s not the only thing we’re striving to achieve.
Brian Bedell - Merrill Lynch
Okay, and then just a couple of housekeeping questions; on the compensation line, the increase in the quarter, was there any factor in that from the Visa settlement in terms of incentive compensation?
Steven L. Fradkin
No.
Brian Bedell - Merrill Lynch
And on the securities lending, I understand you are trying to manage that I guess a little bit more for liquidity going forward. In other words, you wouldn’t be purchasing I guess riskier instruments on a go forward basis and so how you are managing the fund now obviously is sort of using the existing securities that you had already purchased, and so they should accrete back into lending fees.
How should we think about that timing of that accruing back in, assuming they pay at par?
Steven L. Fradkin
You know, as I said, it’s very difficult to project that but you know, between now and into 2009 and it’s hard to project the timing because the markets are extremely volatile.
Brian Bedell - Merrill Lynch
Is that a safe assumption that you are managing it now more for liquidity or are you continuing to purchase instruments that have credit risk?
Steven L. Fradkin
Well, everything has some credit risk but I would say we have a high degree of liquidity in that fund, but I certainly can’t say there’s no -- there is credit risk and there always will be.
Brian Bedell - Merrill Lynch
Okay, and then just lastly, do you guys -- this might come out in the annual report, but would you be able to update us on your share of revenue and earnings from outside the U.S. for 2007?
Steven L. Fradkin
You’ll have to wait until the financial annual report.
Brian Bedell - Merrill Lynch
Okay, great. Thanks very much.
Operator
Our next question comes from Robert Lee with KBW.
Robert Lee - Keefe, Bruyette & Woods
Just a quick question; on net interest income, if I remember correctly, I think you have it in the press release that through 2007, there was about $11 million or $13 million of adjustments related to how you had to account for leases. Does that reverse or go away in 2008?
Steven L. Fradkin
Well, what you are referring to is the impact of FSP 13-2 which relates to the accounting for change and projected timing of cash flows related to leases. That’s a variable number because it depends on your projection of the resolution of some leasing issues.
Our full year impact was $13 million, so a degradation to net interest income of $13 million, and the fourth quarter was about $3.5 million. So that can move around I guess is the answer.
Robert Lee - Keefe, Bruyette & Woods
Okay, and I’m just curious, you’ve had such strong growth, particularly in the fourth quarter, your foreign office timed deposits. When you look ahead to the environment and client behavior, is there anything to make you think that the growth trajectory of that could slow, either because of client preference or was there a year-end liquidity surge and you sort of expected that would sort of back off?
I mean, how should we think of that in ’08?
Steven L. Fradkin
Well, if you have a good way to think about it, let me know. I think we have generally seen growth in foreign office timed deposits directionally move with the growth in global custody assets but obviously the liquidity that our clients have and leave with us is going to move around, so it’s a very hard number to predict.
But directionally up. If you think we’re going to be a bigger and more successful asset servicer, we should on average over time continue to grow the non-U.S.
office timed deposits, but it’s hard to land on the head of a pin.
Robert Lee - Keefe, Bruyette & Woods
Okay, and I’m just interested in your thoughts behind this -- I noticed that over the course of the year I guess it was the investments and -- obviously short duration but investments in agency securities have declined, even though you’ve grown the balance sheet and clearly your money market assets on the balance sheet have grown. What was the -- was it just the environment, just unattractive spreads, just a desire to tighten up the balance sheet even more to make you shrink that?
Bev Fleming
When you think about our earning assets, what I would suggest that you do is we view our balance sheet investments in the securities portfolio, which are primarily agency securities, and in money market, assets is relatively interchangeable. And both are short-term, both are highly rated.
So I would say that when you think about the two of those, you need to look at both categories together, all right? When we think about it from a spread perspective, the spread that we earn on our U.S.
dollar deposits that are invested in U.S. currency, agencies, obviously, or money market assets would be comparable to the spread that we earn on Euro or Sterling deposits that are invested in time deposits in their respective currency.
So look at the two together and think of it as we do in terms of comparable spreads that are earned based on how they are invested. Is that helpful?
Robert Lee - Keefe, Bruyette & Woods
Yes, it is. Thank you.
That’s it. Thanks.
Operator
The next question comes from James Mitchell with Buckingham Research.
James Mitchell - Buckingham Research
A quick question back on the securities lending, obviously if you look at just adding back the $46 million, you were up 46% I think sequentially on a normalized basis, yet balances at least at period end were down. What is driving the sequential revenue growth?
Is it just securities lending spreads as the short-term interest rates come down that your spreads are widening pretty meaningfully? And then if that’s true, how do we think about that if the Fed continues to cut rates?
Does that continue to prop up those spreads and how that works through the system over ’08?
Steven L. Fradkin
Well, the benefit of Fed rate cuts in part always depends on whether they are anticipated or unanticipated. Unanticipated rate cuts are good.
Anticipated rate cuts kind of get priced in, if you will. So it depends -- the answer is it kind of depends what happens there.
But the big phenomenon here, Jim, is this mark-to-market phenomenon and it kind of depends how that plays out and the pacing of it really depends what happens and do these things start to correct and at what speed.
James Mitchell - Buckingham Research
Right, no, fair enough but how do we think about the sequential improvement on a -- if we sort of ignore the mark-to-market, you guys had a pretty big jump in the fourth quarter without really volumes growing. So what was the driver there?
Was it spreads widening?
Bev Fleming
It was absolutely spreads widening, consistent with what you are hearing from others.
James Mitchell - Buckingham Research
Okay, and it should be, since you are kind of -- you are investing in one to three month, basically money market rates versus short-term rates, and as long as short-term rates continue to come down, there’s going to be benefit, I would assume, vis-à-vis the money market rates, which are slower to catch up, I would say, right?
Steven L. Fradkin
That’s the analysis that you’ve got to do.
James Mitchell - Buckingham Research
Okay. Fair enough.
And that the similar way to think about your net interest income in terms of your margin, which came up a little bit this quarter? Should we continue to see some benefits there?
Steven L. Fradkin
Yes, it is the same. I think generally speaking, when rates come down we get a relatively short-term benefit that inures to us.
James Mitchell - Buckingham Research
Okay, great. I just want to confirm that.
Thanks.
Operator
The next question comes from David Long with William Blair.
David Long - William Blair
Thanks. My questions have been answered.
Operator
Our next question comes from Ken Usdin with Banc of America.
Ken Usdin - Banc of America
Just two quick ones; first of all, just on the net interest margin as well, Steve, just given that last comment about lower short rates helping, are there any offsets or -- can you just walk through the positive and negative drivers I guess of the margin as you look out?
Steven L. Fradkin
Well -- positives and negatives of the --
Ken Usdin - Banc of America
You’ve detailed in the past what things are either benefiting or hurting the margin, so I just want to make sure that -- is it more leaning to the positive of -- that the short rates coming down are more of the positive than anything else that you might experience as far as spreads or anything?
Steven L. Fradkin
Well, when you have short rate -- you know, short rates coming down, if that’s the way you want to look at it, we also have the continued growth of the lower margin asset phenomenon. So you kind of have to triangulate amongst where you think rates are going on the one hand but also this continued growth in the non-U.S.
office time deposit, which is good but they are generally lower margin assets than traditional loans. And that phenomenon too is continuing for us.
Ken Usdin - Banc of America
And that was my second question, which is can you just walk us through the loan growth, where you are seeing it, is it geographically diverse? Is it product specific?
What are you seeing there?
Steven L. Fradkin
We have had very good growth on the commercial front. We’ve had good growth on the personal front.
It’s actually pretty broad-based, Ken, I’d say. So the loan portfolio for us has been extremely clean.
As you know, our philosophy has been to be a relationship lender to those clients that fit our credit standards and our success on the loan portfolios is quite broad. But I guess the driver would be the commercial, the personal, and some of the activity we have internationally.
Ken Usdin - Banc of America
And the last question is just your ’07 results, like others, were really helped by the extremely strong volatility in volumes that we all saw in foreign exchange. I’m just wondering what your just broad market view is of the volatility conditions and relative to your thoughts on the broader market environment -- do you expect that to stay around or do you expect that to change or decrease over time?
Steven L. Fradkin
Well, I’m not foreign exchange expert, Ken, so take this comment with a grain of salt -- look, conditions in 2007 from a foreign exchange perspective, both the volatility and in our case the volume were very strong. I mean, you had phenomenal results and you can look at the trend and see the history, and so it would be -- I can’t predict what the future will be but from a planning perspective, you certainly wouldn’t, or we certainly wouldn’t want to envision or assume, I should say, that same kind of volatility.
It’s just been very, very strong. So where it’s going to land, I don’t know but those were very, very strong results and I think that’s worth keeping in mind as we move into 2008.
Ken Usdin - Banc of America
Okay. Thanks a lot.
Operator
Our final question is a follow-up from Brian Bedell with Merrill Lynch.
Brian Bedell - Merrill Lynch
Sorry, just one quick follow-up; on the foreign office time deposits, I see the rate on those went down by about 23 basis points linked quarter -- can you just describe the factors that influenced that? Was that the Bank of England cut in December or are you able to effectively link some of that pricing to Fed rate cuts?
Bev Fleming
Our non-U.S. office time deposits are not exclusively in non-U.S.
dollars. There are some dollar deposits in there so that would be partially I think where you are coming from, Brian.
Brian Bedell - Merrill Lynch
Okay, so a continued Fed rate cutting campaign should be one factor in potentially driving that rate down in the future?
Steven L. Fradkin
Mm-hmm.
Brian Bedell - Merrill Lynch
Okay. Great.
Thank you so much.
Operator
And there are no further questions at this time. Mr.
Fradkin, I would like to turn the conference back over to you for any additional or closing remarks.
Steven L. Fradkin
Thank you all for joining us for our review and we’ll look forward to updating you at the end of the first quarter.
Operator
And this does conclude today’s conference. We appreciate your participation.
You may now disconnect.