Northern Trust Corp (NTRSO) 2002 Q1 法說會逐字稿

Please stand by. We're about to begin.

Good day, everyone, and welcome to this Northern Trust Company first quarter 2002 earnings conference call.

Today's call is being recorded.

Conducting the teleconference today is Mr. Perry Pero, Chief Financial Officer.

Mr. Pero, you may begin.

Thank you, Steve. And thanks to all of you for joining us today to review our first quarter financial results.

Here with me today in Chicago are Bev Fleming, our Director of Investor Relations; Harry Short, Controller; David Eddy, Treasurer; and and of our Investor Relations staff.

For any of you who did not receive our earnings release or financial trend report via e-mail or fax this morning, they are both available on our Web site at northerntrust.com.

I would also like to mention that this April 15th call is being Webcast live and is accessible to our website. The only authorize re-broadcast of this call is the replay that will be available on our website through April 22nd. Northern Trust disclaims any continuing accuracy of the information provided on this call after today.

In keeping with our practice, I need to make this safe harbor statement. What I say during today's conference call may include forward-looking statements such as statements that relate to our financial goals, dividend policy, expansion plans, and business development plans, business prospects and positioning with respect to market and pricing trends. New business results and their outlook. Changes in securities market prices. Credit quality. Plain capital expenditure and tech . And the effect of any extraordinary events and various other matters including changes in accounting standards and interpretation in our business.

Actual results, of course, could differ materially from those indicated by these statements. I urge you to read our 2001 annual report and our periodic reports to the SEC for additional information about factors that could effect actual results.

This morning, we are pleased to report first quarter earnings per share of 56 cents up two percent from last year's first quarter. Net income totaled $127.6 million. The quarter was marked by a continuation of our strong control of expenses. And for the first time in several quarters the achievement of sequential quarterly growth in our trust fees. Total trust fees were $316.4 million in the first quarter. Up four percent from last year's first quarter and also up four percent from the fourth quarter of 2001.

The $12 million increase in trust fees during the first quarter was the largest sequential increase in trustees for us since the second quarter of 2000 if you exclude last year's second quarter which benefitted from the traditional seasonal peak in securities loaning fees due to the international dividend season.

The expense theme that you heard in all of last year's conference calls continues. We aggressively manage the business such that our expenses reflect those of last year. This effort resulted in a productivity ratio of 161 percent, exceeding our goal of 160 percent and comparable to last year's 161 percent ratio.

The achievement of low-growth in our expenses was an imperative, as we also exhibited no growth in our revenues. The good growth I commented on was essentially offset by a decline in our foreign exchange trading results which experienced their lowest quarterly performance since the third quarter of 1998 because of volumes and minimal currency volatility during the quarter.

Despite continued weakness and sluggish performance in the equity market, our assets under management at $338 billion were up modestly from a year ago in year-end, signaling the positive impact of our new business successes.

Our net new trust fees during the quarter, particularly in C&IS, were below the level we have reported during previous quarters. Our gross new business was quite comparable to our performance in the fourth quarter, but we were impacted in C&IS by the movement of trust assets in the business due to corporate decisions, such as the merger or sale of a client that was essentially out of our control. I will provide you with more detail later in this call when I share with you the specific details of our performance.

Now, I would like to provide you with a detailed review of the quarter's major revenue and expense items.

Revenues in the first quarter were $553 million. Essentially flat as compared to last year's first quarter and up $3 million from last year's fourth quarter. For the $11 million increase in trust fees from a year ago was offset by lower foreign exchange trading results.

Our personal financial services business unit reported a two- percent increase in first quarter trust fees as compared to the year-ago quarter. The first quarter marked the first time since the third quarter of 2000 that we have reported a sequential increase in T.F.S. trust fees.

The offices, which calculate fees based on the level of assets at the prior quarter end were up $4 million or eight percent sequentially. Florida fees were unchanged from the fourth quarter reflecting that Florida calculates its fees on asset levels during the quarter and therefore saw a neutral impact from the flat equity markets in the quarter.

Our remaining 10 states have a sequential increase of $2.2 million in trust fees. Trust fees in our wealth management group, which serves families typically with assets of $100 million or more, were up $1.3 million or seven-and-a-half percent. Both from a year ago in . Its trust assets were $70 billion, up 18 percent from a year ago, and eight percent from year-end.

Managed assets and wealth management totaled $15 billion at the end of the first quarter.

Our PFS new business results in the quarter were disappointing, at $11 million in net new annualized trust fees sold. This is down from last year's first quarter level of $15 million, and the fourth quarter's level of $16 million.

The weak stock market environment makes this a challenging time to get new business. And we also experienced during the quarter a higher level of lost business, particularly from newer clients who have been especially impacted by the stock market decline of the past two years.

Trust assets under administration in PFS at March 31st were $173.4 billion, up eight percent from year ago, and $6.6 billion, or four percent, from December 31st.

Assets under investment management of $96 billion were up three percent from year ago, and up two percent from year-end.

Our corporate and institutional services trust fees six percent over last year's first quarter to $158 million.

During the first quarter, C&IS custody fees were up three percent from last year, $52.4 million, mainly driven by strong business flows in global custody.

C&IS custody fees are based on the previous quarter's ending custody asset levels. So the first quarter was positively impacted by the levels at December 31st.

Investment management fees of $48.2 million were up nine percent versus a year ago. They were primarily driven by institutional money market funds and cash sweep fees.

Retirement consulting fees of $17.6 million were up 15 percent from last year's first quarter, reflecting new business.

Securities lending fees, at $29 million, were down four percent, or $1 million from last year's first quarter. This decline essentially reflects the boost we received last year in our securities lending spreads, as the Fed funds rate was reduced three times during last year's first quarter.

Our net new recurring trust business sold in C&IS for the quarter was $8 million in annualized fees. This is an unusually low level of net new trust fees in . The following are some of the major factors contributing to this result:

During the quarter, five major custody clients were acquired and their business was transitioned to the custodians of the acquiring entities. Also, a large investor in the funds of our investor manager custody client transferred their assets to a separately managed account. This resulted in the movement of these particular assets to another custodian. The investment manager, however, remains our custody client.

If we exclude the assets transition from extraordinary items our net new annualized trust fees in would have been approximately $18 million compared to last year's $19 million.

Trust assets in were up four percent from a year ago to $1.54 trillion while managed assets were down slightly to $241.5 billion. On a sequential basis, our managed assets increased $5.4 billion from $236 billion at year end. The $8 billion increase in our securities lending cash essentially accounts for the sequential quarter increase. Included in our trust assets are global custody assets totaling $470 billion at quarter end which are up 13 percent from a year ago.

Our three foreign exchange trading desks reported trading profits of $24.3 million compared to $34.9 million in last year's first quarter and $27.2 million in the fourth quarter of last year. During the quarter our client volumes were lower and volatility in major currencies declined. Both of these factors led to the lower fees.

Our interest income equaled $160.9 million down slightly from a year ago in two percent sequentially. Total loans averaged $17.7 billion which was flat compared to a year ago. Residential mortgages grew nine percent to average $7.5 billion, representing 42 percent of our total loan portfolio.

Commercial loans averaged 4.6 billion. Down nine percent from a year ago. While personal loans declined six percent to 2.1 billion. The net interest margin was 1.92 percent. Down from 2.05 percent last year and 2.04 percent in the fourth quarter of last year.

Unlike last year's fourth quarter, our provision for loan losses $5 million was comparable to last year. Non performing assets at $118.7 million were slightly ahead of last year's 112.7 million. Essentially reflecting the challenging economic environment being experienced by our middle-market clients.

As I commented at the beginning of this call, a positive aspect of our performance has been our continued success in managing expenses. Expenses were up only $1 million year-over-year and $3 million sequentially. Compared to a year ago, our compensation expense is down $8 million, reflecting the transfer of staff to the , which was formed in the third quarter of last year and a lower level of incentive base pay.

We continue to closely manage staff growth. Total staff at quarter-end was 9,408 people. Up only two percent from a year ago and down 45 positions from last quarter. We continue to differentiate ourselves from other firms during this economic slowdown by having had no layoffs. We have maintained our platform of highly experienced and talented people. Consequently, we are very well positioned to continue to grow the business.

Employee benefit expenses were up $2 million from last year, reflecting changes to our 401(k) and ESOP benefit plans. Other operating expenses are $4 and-a-half million higher, reflecting the impact from the . This increase that is related to the is essentially a change in geography of expenses on the income statement. It's the higher other operating expense line is essentially offset by lower compensation, benefits and occupancy.

When viewed on a sequential basis, compensation was down $3 million, essentially reflecting lower incentive base pay. Employee benefit expenses were up $9 million sequentially, reflecting higher FICA expense in changes to our 401(k) and ESOP plans.

The other operating expense line is down $4.8 million sequentially and mainly reflects the elimination of goodwill amortization and lower travel, hiring and other discretionary expenses.

In summary, it should be quite evident to all of you that we are continuing our relentless focus in management of our expense base.

During the quarter, we repurchased 802,000 shares of Northern Trust common stock at a cost of $46 million. Diluted shares were down 400,000 shares from December 31st, primarily due to our stock buy-back program.

In keeping with our practice, we increased average common equity by 12 percent to $2.7 billion at March 31st. We can purchase an additional 3.8 million shares under our buy-back authorization.

In closing, I would like to repeat what I said several times during these opening comments. The economic and stock market conditions are not what we would like. And therefore, we shall continue to aggressively manage the business to achieve success.

Now, Steve, would you kindly open the conference call for questions or comments from our participants.

Certainly. Today's question-and-answer session will be conducted electronically.

If you'd like to ask a question, you may do so by pressing the star key, followed by the digit one on your touch-tone telephone.

Once again, that is star one to ask a question.

And we'll pause just a moment to assemble our roster.

We'll take our first question from Judah Kraushaar with Merrill Lynch.

Hi, Perry. How are you?

Good morning, Judah.

A couple questions.

Sure.

First, could you clarify on the PFS side, kind of what you did on the corporate side?

In terms of disaggregating the new fees sold from gross sales versus the attrition. I heard your comments on the attrition rates. What's going on in terms of the pace of gross sales?

And I'm wondering whether you're surprised. I would have thought, in a tough market environment, that an advice-centric model would tend to become more valuable to people. And your experience seems to be suggesting the opposite.

And so I'm curious how you read that.

Well, we have a modest decline in our gross business, and the - you know, what you're facing out there is an environment where many people are challenged by what they see daily in terms of stock market returns, and a hesitation in terms of making a final decision to, you know, come on board.

The - if you notice, though, our assets under management continued to increase. They increased in the first quarter in from where they were at the end of the fourth quarter. But there -- it's a more difficult environment out there. When you look at what's happened in terms of the decline in the equity markets you do get some hesitation, particularly from people more on the lower part of the scale as opposed to people on the upper part of the wealth scale.

Is the -- what's the concentration in the your asset management product towards or your emphasis towards growth? Is this environment encouraging you to shift thinking about whether you have any major product whether you need to build up the values .

Well, absolutely. As we are into doing a mixed shift. You may recall that in May of 2000 we acquired in West Palm Beach, Florida. They were a long trade value manager with very good value results staying true to that investment style and we established a mutual fund as a result of that, Northern Trust Value Investors. And its performance has been exemplary. It's been a top-tier performer. And we had been, you know, changing the mix of the asset allocation for and making them aware that at times like this a more alternative approach would be proven.

As you know, historically we have been a manager as you indicated in your comments. And, you know, on a relative basis we're doing well with the goal performance, but the problem is, oh, since two years ago its come down on an absolute basis. Relatively we do OK, but it's very hard to stomach declines on the part of customers.

Second question, Barry. In your wrap-up at the end you sort of mentioned you expect an environment where you've got to be tough on managing the business. And I guess I -- it was small numbers but I was struck by the decline in staff on a lean quarter basis. I can't remember when you actually had a decline in . Is that signally sort of a new effort on sort of staff levels even though you haven't had layoffs. Are you rethinking that? Are you thinking that just that you could get a material cut in staffing this year?

Well, we've been in a staff stabilization mode for some time. And like all businesses, you know, when we have people leave we rethink the requirements of the job and do re-shifting of responsibilities and are looking at headcount aggressively.

That, you know, when you look at the decline, though, 45 is rather modest in a headcount of over 9,000 but it does signal the very hard approach we're taking relative to our headcount. And yes, I mean, will we see opportunities to combine and will see people leaving the staff and taking advantage of the opportunities that normal attrition provides you maybe not to replace those posts. And we're looking very carefully on every item that's, and every post, that's being replaced to make sure that it's totally justified and that we can't do changes in the work required around a given post. And we will continue in this mode until the markets change.

No change in the no layoff policy?

As of right now, we have had no general layoffs and that's something that we've aggressively tried to avoid. And when you look at our - the reason I highlight that is for two reasons, . A lot of expense reductions are being achieved out there by mass layoffs. We have not had them. And it's most important to us, even our business, which focuses on the very high touch with clients, that we keep in place the expertise, the capabilities and the people that we have. So that is the reason I highlight that for you so that you can put in context that this expense management is a very very aggressive one and is not being driven by just the mass layoff of people. And it is not being driven by such a factor.

Lastly, Perry. I'm just curious, when you think about the potential end of declining rates and the possibility the higher rates sometime later this year - when you think about the impact of that scenario both on the margin lending revenues, I'm curious sort of how you're thinking about the year in total and, you know, in terms of rate assumptions and sort of how that's translated into those two new revenue laws.

Well, our - you're talking about the net interest margin for the bank as a whole, right?

The bank as a whole and then securities lending under ...

Well, you know, our history has been one that we have managed very very tightly relative to interest rate risk and, as you know, , our line has been essentially an upward and onward one and you conceive on how we've managed that interest income that it didn't, given our model, did not decline precipitously when rates declined 475 basis points on the short end. There always is an impact, but it's never been material.

And as you know, I don't go out and forecast relative to what we, you know, expect. But I can give you a sense in terms of the interest rate risk and the interest rate phenomenon. We've done a pretty good job of managing that against its overall impact on net interest income, which you can see is never a volatile item in our income statement.

And in securities, and all you've got - it's not just the interest rates. You've also got the volume considerations.

So the question is, you know, what happens to volume also will determine that.

You know, we did have a decline in spreads, but you saw the lending did go down somewhat, but it was not that much of a decline - $1 million year-over-year, as I indicated.

So, we're pretty tight in terms of our managing the organization so that we're not being inordinately buffeted by the movement of interest rates either up or down. And I think our history proves that.

We shouldn't be thinking of a vulnerability here on absolute dollars of spread revenues for lending revenues just if those rates go up?

What - you said, we should not be thinking about - what did you say?

We should not assume, necessarily, that that would create a downward vulnerability in those two revenue streams?

Well, there's a volume consideration. You know, it depends on, you know, what the demand for securities are.

And of course, you know, and I need to remind you that, as we go into the second quarter, you should all have - you and the others in your model - that you've got the international, you know, dividend season that's coming up in securities lending. Which always occurs in the second quarter.

OK. Thanks.

So it's a factor to add into your thinking, also.

I appreciate that. OK, good, Perry. Thank you.

You're welcome, Judah. Thank you for coming on board.

Next person on the line, Steve.

Certainly. We'll go next to George Bicher with Deutsche Banc.

Hi, Perry. Good after ...

Hi, George. Thanks for joining us.

You're welcome. On the C&IS new business front, I was wondering if you could give us a little more color in terms of nature of the client, mandates you've been getting.

Specifically, I'm most interested in the nature of the non-U.S. clients, if you're seeing - what kind of demand you're seeing there.

And then if you could also comment a little bit on the RFP levels in the marketplace.

Well, in terms of the demand in C&IS, the international part continues to be one of the strongest parts of our C&IS business. A good proxy for that is the global custody asset line.

And we took quite a bit of care in putting our annual report together this year to give you a sense of some of the names that we got last year in the international area, you know, very high profile names. And we continue to enjoy that success.

It's basically in the United Kingdom, the Benelux countries and Scandinavia, and then in Southeast Asia, the Hong Kong- Singapore part of the world are areas that we have enjoyed very, very good success particularly being area that I highlighted.

The opportunities continue to exist out there and it's a question of capturing developed a very positive profile of business success in that international part of the market place, .

And you see demand remaining firm as seen by levels?

On the international side there continues to be a very good interest absolutely for our people in the market place.

Has the domestic demand flowed?

Well, the -- let me put it this way. The domestic demand at a lower level than the international area.

OK. Thanks, Barry.

You're welcome.

Our next question comes from with .

Hi, Barry, how are you?

OK, . Thanks for joining us.

Good. Two questions for you. One, can you talk about the directives at the branch level regarding expenses for entertainment and the spirit of the expense curtailment that you spoke about on your comments?

What we have tried to do with our expense management programs is to be very careful in those expenses where directly impacting our efforts with the clients. We have tried to be very, very judicious and very careful on how, if at all, we change our activity in terms of events, business development with clients. That's our key.

Most of it has been behind the scenes effort and we have -- obviously we have not had, as I indicated with the layoffs -- the people that are out there meeting the clients, marketing towards prospects are very much in place. So, it would be very hard on the outside to see any difference in the profile of our activities. The events are at the same levels. Just last week we in Florida had a celebration of our 25 years in Sarasota. Had an outstanding turnout. We continue to have the high profile book club luncheons throughout the corporation.

So the -- we continue to have investment forums for our clients. And we have not decreased at all the tempo of these activities. So, we'd be hard pressed to find much of the change in our profile if any in the market place.

OK. That's helpful. And as separate follow-up, Barry, can you comment anything on the trends in seven and eight credits?

Well, as you saw going from the third quarter to the fourth quarter with our annual report, they came down. And then you saw that our performance in the non-performing area was not that significantly different from where we had been. That should give you a sense of where at. It's very hard to forecast what's going to happen. I mean it's the business conditions that determine that.

And the , which will be coming out about May 15th, a month from now, will provide the detail. But you get a sense by what I just shared with you in terms of where the level of non-performers were and you saw where we trended from the third quarter to the fourth quarter. I mean here's nothing materially different there.

OK. That's great. Super. Thanks, Perry.

Thank you, Chris. Steve, we're ready for the next person on the line.

OK. We'll take our next question from with .

Hi, Perry.

Hi, Tom. Good to have you on board, also.

Well, thank you. It's great to be here, as always.

On the trading line, can you give us a sense of what numbers could have been theoretically if client volume was stable?

I don't have such a number before me. I just - I don't have any such number. Volumes are down, though, as I indicated. Client volumes. And you know the general environment that's out there. You know, to put it into perspective for you, Tom, you know, the foreign exchange trading profits for us result from the fact that we have approximately 1,500 or so investment managers that manage the money for various clients, particularly on the C&IS side.

And they're obviously doing less in terms of their investment activity in various markets and that has resulted in lower client volumes for us.

Is there some feedback from the front-line that perhaps the people are expecting some gradual improvement in activity?

Well, you know, business people are always optimistic and you need to be optimistic. But I don't have any specific information to share with you relative to, you know, correlating that view vis-à-vis our trading results.

OK.

You know the tone. You're on Wall Street. The tone these days and what they're doing around the world.

All right. All right.

You know again, this ... is exclusively, you know, stems from our C&IS part of our business.

Right. Right. Right.

So I just wanted to make sure that, you know, the others on the line also, you know, clearly understood that, that that's the part of the business that we're involved in in this area.

If I may follow up with two different questions.

Sure.

The discussion about the net business sold, the annualized fee numbers, ...

Yes.

... I think you noted in your discussion prior to the Q&A that it seemed as though some of the newer clients were a little more eager to leave or hesitant to join.

Can you talk a little bit about any alteration in what I would characterize as retention strategies, either for new clients or for clients that are at the lower end of the wealth scale?

OK. Basically, the point of reference, you know - you said, eager to leave. I might take exception to the eager to leave.

Basically, what we have going on, the phenomenon, clients that came on board, you know - yesterday was the second anniversary of the day that NASDAQ broke in April of 2000. You know, we all remember that break of 700 points or so in the NASDAQ average. Since then, and you know, the stock markets have not been positive.

And if you've had a client that came on on that period or shortly before that period, and we, of course, you know, had a heavy emphasis in the '90s on the growth stock style of investment management, that it is very hard, almost impossible to get positive results the past two years if you're exclusively in growth stock.

Now that's the framework that has caused, you know, some of the people came on board. And there's obviously lower investment results than they would have had if they'd come on in the '90s.

Your other part of your question was, what have we done to modify our programs in order to retain and - these clients and all our other clients?

It's really, my answer would be a follow-on to how I responded to Judah.

In May of 2000, we acquired the Value Manager. We have begun to establish the mutual fund, Northern Trust Value Investors, and also expanded other investment offerings that give us the platform, above and beyond just the growth style relative to equity.

And we have been migrating clients in their asset allocation to have different investment styles devoted to various aspects of investing styles, so that it's not exclusively or inordinately weighted toward growth.

And in these uncertain times, that balance, in terms of the mix of asset allocation, is one that should serve our clients in good stead going forward.

And in the - and of course, during this period, in order to communicate this, our portfolio managers have really intensified their level with communication with our clients to make sure that we are in line with what their expectations are. And also apprise them of thoughts and suggestions that we would have relative to changing the asset allocation so that the probability of success would be higher. So, yes, we've been changing, we've been modifying. And that's an imperative when you have a new market environment such as we've had the past two years.

Great.

Is that responding to your question or should I amplify it further?

Well, if I could seek out a little bit more input in the sense it would be, I think, instrumental and beneficial to your shareholders if there's some way to gauge how successful that effort has been, perhaps, in the way of new money flows into those value funds and how much business you've retained versus lost. I'm sure investors would find that type of information helpful in some form or fashion.

Well, you know, the trust value investors you can see the growth in the assets that are committed to those funds. I don't have the particular numbers here in front of me, but that would be a good proxy. That's a very good public proxy for the level of success and you can easily track it with a publicator of what the fund size was at its inception with us when they came on board and what it is today and there has been an increase.

OK.

And those are clients of ours and we've shifted some of them into that mutual fund.

Great. One last question, if I may. The last quarter there was a lot of discussion about one large Houston-based client and the degree of losses taken. Could you update us with that exposure? As you did last quarter.

Sure, I'd be happy to. Essentially no change, . We -- as I shared with you 90 days ago our exposure after the charge offs in the fourth quarter was $19 million and that's what it is this morning.

Thank you, Barry.

You're welcome.

And now we'll go to of .

Thanks. Good morning, Barry.

Hi, , good morning!

Just a couple of things. One, it appears on your employee benefit line that you tend to ramp it up at the beginning of the year and then it can trail off over the rest of the year. If you would talk about that, what it implies for the year. And also, it looks like the balance sheet growth was depended on borrowed funds and just, I'm wondering if that's what you expect going forward.

OK. The simple answer on the employee benefit - it's FICA. They know the Social Security taxes that - and healthcare costs up. And Social Security has an awful lot to do with ...

You know, everybody at the beginning of the year, everybody, you know, starts paying Social Security and then people trail off as they meet the maximum amount for Social Securities payments, which I referred to as "FICA". I think that and this year, in particular, we enhanced our ESOP Plan and our 401(k) Plan because our original ESOP that we put in place in 1989 came to an end at the end of last year, and we wanted to replace that benefit.

So, but you traditionally see a first quarter spike in year-after-year and it's all FICA. That give you perspective on the income statement?

Yes. It does.

OK. Now, on the balance sheet, I'm sure you're looking at the average one, right? OK. And other purchased funds, it's really a mix of what we - our other purchase funds really are a reflection of what position we take in the government and other taxable securities, depending on how we position the bank. And as you know, these are all very very short-term placements. Thirty to 45-day asset positions. Essentially U.S. Governments and agencies.

And the purchase funds is a way to finance it. And it's the whole of, you know, you've got fed-fund purchases in there. You've got treasury tax and loan deposits coming in there. So it really is driven by how we're positioning the bank in terms of our interest rate risk model. As you know, we take a very minimal position on interest rate risks such that, you know. Rates move up and down basis points from where we thought they were going to be. We have an impact of - in doing nothing, we've had the maximum impact during the course of the year of about $20 million or so.

So, it depends on what our view is of interest rates. Where we're positioned. And there's no strategic long-term purchase of funds in that category.

OK. If I could just one other thing. When you've been talking about the new business, if you were to characterize your pipeline - it is a pipeline - your pipelines, it sounds like, would be down. And I'm just wondering kind of relatively how much they're down on a year-over-year basis.

Well, the Pipelines are - in the C&IS area, as I responded earlier, you know, we're getting very, very good demand and opportunities on the international side.

The pipelines are not as strong on the domestic side. And on the personal side, you know, our people have many opportunities out there, and it's a question of bringing about the close, closing sale.

There are many opportunities that our people throughout our 82 offices are pursuing. And the challenge is then to effect the close, particularly with those individuals on the lower part of the wealth scale, as opposed to those on the higher part of the wealth scale.

I shared with you, in wealth management we continue to grow very, very nicely, which is the upper scale, which is very much driven by custody and investment management services for individuals with $100 million or more.

So the opportunities are there. On the personal side it's, in effect, getting the close. And for all the factors that I commented on in my earlier responses to some of the other participants, Chip, is getting the people to make the decision to sign on.

Thanks a lot.

We'll take our next question from David Long with Robert Baird.

Good morning, Perry.

Good morning, David.

Yes. I just had a quick question for you.

I've been seeing some positive signs with the Midwest manufacturing sector in general. I just want to get your opinion on that comment, and also if you've seen any pick-up in loan demand over the last few months from the sector.

Well, it's been hard to find the in this, you know, out there.

You know, some of our clients, particularly in the Middle West - and you're here in the Middle West - it's still very, very challenging.

There might be a modicum of - but, I don't want to overstate it and over-promise. You know, one month doesn't certainly make a year in all that.

I think it continues to be very challenging in terms of what we see in our middle market borrowers. It's just, as a general statement.

There's always a whole profile of clients. Some do better than others. But I think all of them are being challenged by the slowdown in business conditions that they face in their particular sector.

So I don't want to get overly optimistic at this time with some very, very early bird signs. And we have a ways to go.

And the other part of your question was ...

Just if you had any comments as far as what you've been seeing in the loan demand from the sector.

Well, loan demand has not increased. I mean, I think the pattern that we shared here with our report, and the commercial and industrial area still continues to be slack.

OK. Thanks, Perry.

We'll take our next question from , Investor Group.

Yeah, Perry, how are you ...

Hi, David. David, where are you located?

In Charlottesville, Virginia.

Great. Good to have you on board.

My question is, has there been any change in your accounting treatments versus say last year or the fourth quarter on any items? In other words, have you gone to be more conservative on, you know, things like revenue recognition and expense recognition or has there been any change?

The only major change for us -- like with all corporations not just in financial services - - no longer amortizing goodwill.

No, I know that. I'm just saying, have you -- I mean, that was mandated by the accountants.

Right. We're and completely respond to your question. No changes in answer. Other than the goodwill, no changes.

OK. And how much was the goodwill in last year's first quarter?

Two-point-six million.

Two-point-six-million. OK. Thanks, Barry.

And now we have a question from with .

Barry, Hi. How are you?

OK, .

Good. I was calling in the this regard. I wanted to ask about the comment that you made about hurting your fee income growth -- your net new business growth. And I guess I'm that would count against you because it seems like there could also be periods when that would be a benefit for you. And I don't know, could you just elaborate on that point? Have there been periods in the past when that's been a benefit in your net new business? And if this were something special in hurrying the gross new businesses in this period?

Well, , obviously we're all reading the Wall Street Journal about, you know, businesses being acquired. And so we just had an unusual bunching up in the first quarter of five major corporations that we were the custodian for being acquired by another entity and the business transitioned to the acquired custodian bank.

In other periods we've benefit both ways. But I think we had an unusual bunching up is the best way that I can phrase it in the first quarter. And more than we have had in prior periods. But yes, we unfortunately were on the wrong side this time as it related to the business combination. But in other instances we're on the right side.

But then you following question is, Barry, can you recall a quarter where you had five business firms that were the acquirers? I'm hard pressed to come up with that. So I think all and all, , is that we can say in this quarter we were just were unfortunate in having five of them occur and all of the transitions occur within that the one quarter.

And more normally, are the - is any of the activity a plus or a minus for you?

Well, I think over this - over the years, I think we would have a modicum of a plus. You know, it depends on, you know, you have big mergers and small mergers and looking at the amounts wrong. It's a very hard, you know, to shoot from the hip and give you, tilt you strongly one way or the other.

Yeah.

I think in the long run it essentially evens out for an entity such as us.

OK. And just related question . Before I get too much, but, you know, it takes time between when deals are announced and when deals are closed. How quarter look in that regard compared to the first?

I don't have a schedule of what's going to happen. I think, Ron, just to put it into perspective for you and others. When you think of our custody business, you know we've been very big in the business. And the business has been, you know, the pension plans, profit sharing plans, of the major corporations.

And if you look at the Fortune 200, a lot of them are clients of ours. And activity occurs in this group of companies and sometimes we're on the side where we benefit and sometimes we're on the side where we're loss. That's the context of our business. That is a major sector of our custody business.

Yeah. I was just trying to understand the broader perspective. So that's helpful. Thanks.

Thank you for joining us, Ron.

Thanks, Perry.

Next up is with .

Hi. I'm sorry.

Is it ?

No. Actually, this is T.C. Ambrooks from Millennium.

T.C? Hi, T.C. Where are you all located, T.C?

It's K.C. and we're located in New York City.

Oh, OK. I'm sorry.

Yeah. Sure. No problem. Just a quick question for you. It seems like Northern Trust, for the most part's died as a growth story. But the main theme today that's been discussed has been about expense control. And, you know, any data points we should be looking at into the future that you could see some pipeline growth in assets? Because you suggested that the pipeline is not that full for asset flows and I was just wondering if you could update us on S&P targets or tax refunds or anything of that sort.

I don't have any perspective on tax refunds for you.

Yeah.

The business is - essentially, what we're managing here and the story that I try to communicate is the top line growth has nothing there essentially due to the weakness in the markets. We did have sequential growth from the fourth quarter to the first quarter in our trust fees. You should take note of that. There was about a $12 million move. And that's the first sequential move we've had in our total trustees in some time.

So, there is a renewal of the growth, however, not at the levels that we've been accustomed to achieving in prior periods, which was double-digit revenue growth.

And, as a result, we've had to very intensively manage the business in order to present the earnings that we are presenting to our shareholders.

But the top line for the - in terms of trustees, which is about 57 percent of our revenues, for the first time showed sequential quarterly growth, when all is said and done.

But, yes. We are a growth story. And there is a big element of an expense story in our report today.

But that is an imperative, given the fact that we're not getting the overall revenue growth that we historically got. And it's two factors.

The principal factor is the tone of the markets. There is a correlation between the level of the markets and what we're all about in terms of assets under management, et cetera.

So, the story is one where we have seen some modest improvement here, in terms of trustees from the fourth quarter to the first quarter. But there's still a ways to go before we get to the levels that we enjoyed in the 1990s. And as a result, we're managing the business very intensively.

OK. And then, could you remind us. Do you kind of break out any sensitivity to the markets?

Well, we've had, for you and others that are listening, we've had an overall guidance that we've given over the years, that if the - for a year - if there's a movement of 10 percent plus or minus in the global equity market, we've historically seen about a four percent movement in our trustees in the same direction plus or minus. And our overall revenues are about half that, plus or minus two percent, depending upon move.

That, of course, is a very, very general law of guidance and sense of direction that we've given over time.

OK. And you're on a lagging kind of mark, right?

Part of our business is within the quarter, and the others are lagging where we were at the end of the previous quarter.

OK, great. Thank you very much for your time.

Thank you for joining us.

Once again, that is star one to ask a question. And now we'll go to Charles with Neuberger Berman.

Hey, good morning, Perry. How are you?

Good morning, Charles. Thanks for joining us.

You're welcome. Thank you.

You're in the New York office, right?

Right. You've got it.

I just - I was just - I just had two unrelated questions. The first was on the size of the buy-back and whether I'm right to think of that as being larger than usual. And if I am, if that's any, you know, shift in strategy relative to capital ratios, or relative to kind of the at this moment. And just how you're thinking about capital. And my question was just on the goodwill -- am I right to assume that when I look at a year-over-year comparison that the of the goodwill doesn't show up in the '01 time period? So it's kind of a one sense additive against the year that includes the expense versus the year that doesn't.

Well, in goodwill -- last year we amortized goodwill. This year we haven't amortized. You got 2.6 million of ...

Right, OK.

So that's ...

You've been very open with that. So I just wanted to make sure.

You asked the question in terms of the level of the buy back, in terms of the number of shares?

Right. I mean ...

It's pretty tight. Last year in the first quarter we bought back 810,000 shares.

OK. So there's been no real shift there.

No, no real shift.

OK. And in terms of your capital ratios, you still feel comfortable at these levels relative to the conservative nature that you run the business?

The answer is yes. We try to be a very well capitalized financial services enterprise.

Terrific. Well, thanks again for the call, Barry.

Thank you for joining us, .

You're welcome.

We'll take our next question from the with .

Good afternoon, Barry.

Hi, .

This question for you: with these trends that you're experiencing on the new business-side in both and , has there been any change in pricing?

No.

OK. So you're not going to alter your pricing policy to try to either keep and/or attract new business? You're just going to pretty much accept this as the way it is right now?

Well, , let's back up a minute. On the side, as you well know, each pricing decision for each of those clients is a customized one that matches up very much against what the service level is going to be. The mix of the services that they get. And it ends up being a very, very customized price for each client on the corporate side. And it really depends on what they're going to buy from us.

And you know, most of the pricing like I said, that has historically been talked about on the side has always been the poor custody piece. And that, you know, that pricing has never changed. But you always have a mix in terms of the total revenue that we expect to get from a relationship is what we focus on.

And then on the personal side, of course, I mean, you have the same thing going on in the higher up you go in terms of the wealth scale. You have a very negotiated position as everything gets very, very customized.

I guess my question was if you're losing, I mean, as you said on the side, you seem to be loosing customers at the lower end. I mean, has there been any thought about, you know, repricing some of the lower end relationships to try to hold onto the business?

The best way I can one are our people on the front lines determine, you know, what the pricing will be in a relationship. There are guidelines out there and we leave that to the front line portfolio managers, account managers, to negotiate what we feel on both sides is a fair and equitable price.

OK. Thanks.

So, there is a lot of latitude. We're not just , you know, something across the board.

OK. Thank you.

It appears there's no further questions.

At this time, I would like to turn the conference back over to you, Mr. Pero for any additional closing remarks.

Thank you, Steve. Appreciate all of you joining us again this morning. And we look forward to being on the line with you 90 days from now to review our second quarter results. Thank you very much.

Steve, we can go off the air now.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect at this time.