Northern Trust Corp (NTRSO) 2002 Q2 法說會逐字稿

Good day, everyone and welcome to the Northern Trust Corporation 2nd Quarter 2002 Earnings Conference Call. Today's call is being recorded. Conducting the teleconference today is the Chief Financial Officer, Mr. Perry Pero. Please go ahead.

Thank you, Denise. Good morning. And thank you for all of you for joining us to review our 2nd Quarter financial results. Here with me today in Chicago are Bev Fleming, our Director of Investor Relations, Harry Schwartz our Controller and Mark Betty of our Investor Relations staff. For any of you that receive our Earnings Release or Financial Trend Report via e-mail or fax this morning, they are both available on our website at northerntrust.com.

I would also like to mention that this July 15th call is being webcast live and is accessible through our website. The only authorized rebroadcast of this call is the replay that will be available on our website through July 22nd. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

In keeping with our practice for these conference calls, I need to make the Safe Harbor Statement. What I say today may include forward-looking statements such as statements that relate to our financial goals, dividend policy, expansion and business development plans, business prospects an positioning with respect to market and pricing trends. New business results and the outlook. Changes in securities market prices. Credit quality. Planned capital expenditure and technology spending and the effect of any extraordinary events and various other matters, including changes in accounting standards and interpretations on our business. Actual results as you know, of course, could differ materially from those indicated by these statements. I urge you to read, as always, our 2001 annual report and our periodic reports to the SEC for additional information about factors that could affect our actual results.

This morning, we reported 2nd Quarter earnings per share of 56 cents, down 1 penny from last year's 2nd Quarter and equal to this year's 1st Quarter. Net income totaled $126.8 million. To put these results in perspective, I would like to highlight what we feel are the principle headlines for the quarter.

First, this performance reflects the extraordinary and prolonged weakness in the equity market. After adjusting for the $9.2 million non-recurring gain we experienced last year from the formation of our lockbox joint venture, our revenues were essentially flat versus last year. Trust fees of $313 million were down modestly from last year's 2nd Quarter, primarily reflecting the boost we received at that time in our securities lending spreads as the Fed funds rate was reduced three times during last year's 2nd Quarter.

The second headline is that the expense theme we have pursued since late 2000 continues. We remain committed to aggressively managing the business to control our expense base. Expenses were up just 1% versus last year.

The third headline is our ability to maintain the level of our managed assets, despite the prolonged and extraordinary weakness in the equity markets, our assets under management at $327 billion were down only 4% from a year ago and down 3% from the 1st Quarter. Since we are not solely a manager of equities, this decline is much lower than the overall declines in the equity markets. For example, during the past 12 months, the S&P 500 was down 19% and the Nasdaq was down 32%. Likewise, in the 2nd Quarter alone, the S&P 500 was down almost 14% and the Nasdaq declined almost 21%. The small decline in managed assets was also achieved by the positive impact of our new business successes.

The final headline is the rebound in our new business results. Not withstanding the tough equity environment and the uneven economic environment, our net new trust fees during the quarter rebounded from the 1st Quarter as our CNIS business returned to a more normalized level. You will recall that CNIS net new trust fees in the 1st Quarter of this year were below the level we have reported during previous quarters due to the merger or acquisition of clients that were essentially out of our control. These are the four major business themes you should associate with our 2nd Quarter performance.

Now I would like to provide you with a detailed review of the quarter's major revenue and expense items. Revenues in the 2nd Quarter were $564 million, down $11 million as compared to last year's 2nd Quarter and up $11 million from this year's 1st Quarter. If we adjust from the $9.2 million non recurring gain on the formation last year of our lockbox joint venture, revenues were essentially flat versus last year. On a sequential basis, the revenue increase was primarily due to an increase in our foreign exchange trading profits.

Our personal financial business unit reported a 1% decrease in 2nd Quarter trust fees as compared to the year-ago quarter. Fees reported by our Illinois offices were down $3 million or 5% sequentially. Some of this sequential decline relates to a lower level of seasonal tax services.

Florida fees were also down $3 million or 6% from the 1st Quarter. Reflecting that Florida calculates its fees on asset levels during the quarter and therefore saw a more significant impact from the falling equity markets during the quarter. The remaining 10 states had a sequential increase of $1 million in their trust fees.

Trust fees and our wealth management group, which serves families typically with assets of $100 million or more, were up $2 million or 11% from a year ago and essentially flat sequentially. Trust assets and wealth management were $67 billion, up 16% from one year ago and down $3 billion or 5% from March 31st. Managed assets in wealth management totaled $15 billion at the end of the 2nd Quarter, unchanged sequentially.

Our PSS new business results in the quarter were $11 million in net new annualized trust fees sold. This is equal to our 1st Quarter results and down from last year's 2nd Quarter level of $16 million.

The prolonged weak stock market environment makes this a challenging time to get new business from personal clients, respected clients are lengthening their decision cycle and even when we do win the business, asset values are, of course, lower than they were in 2000 and 2001. Trust assets under administration and PFS at June 30th were $163.4 billion, up modestly from a year ago and down $10 billion from March 31st. Assets under investment management of $92 billion were down 3% from a year ago and down 5% from March 31st.

In looking ahead, I remind you as we have said in past conference calls, that with the exception of Florida and California, trust fees and PFS are based on the level of trust assets at the end of the previous quarter. Thus, 3rd Quarter fees will be based on the lower level of trust assets at the end of the 2nd Quarter. Also, in CNIS, a portion of its trust fees will be based on its level of trust assets at the end of the 2nd Quarter. Corporate and institutional services trust fees of $159 million declined 3% from last year's 2nd Quarter and were up modestly on a sequential basis.

During the 2nd Quarter, CNIS fees were up 1% from last year to $51.1 million. Sequentially, CNIS custody fees were down $1 million. Investment management fees of $46.4 million were up 4% versus a year ago, primarily driven by institutional money market fund fees. Retirement consulting fees of $17.2 million were up 14% from last year's 2nd Quarter, reflecting new business. Securities lending fees at $33 million were down 22% or $9 million from last year's 2nd 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 2nd Quarter by a total of 125 basis points. Of course, this year there were no changes in the Fed funds rate. Sequentially, securities lending fees were up $5 million or 16%, again reflecting the seasonal impact of the traditional international dividend season during the 2nd Quarter.

Net new recurring trust business sold in CNIS for the quarter was $18 million in annualized fees. These results were a rebound from the unusually low level of $8 million in net new trust fees in the 1st Quarter. All of you will recall that 1st Quarter CNIS net new business was adversely impacted by the fact that five custody clients were acquired in and their business was transitioned to the custodians of the acquiring entities.

Trust assets in CNIS were down 1% from a year ago to $1.5 trillion while managed assets were down $11 billion to $235.6 billion. On a sequential basis, our managed assets decreased $6 billion from $241.5 billion at March 31st. Included in our CNIS trust assets are global custody assets, totaling $496 billion at quarter end, up 13% from a year ago signaling the continued strong new business flows we are experiencing internationally. Our three foreign exchange trading desks reported trading profits of $36.9 million, compared to $40.5 million in last year's 2nd Quarter and $24.3 million in the 1st Quarter of this year. These improved sequential results stem from higher FX client volumes and an increase in currency volatility as the U.S. dollar weakened against other major currencies during the 2nd Quarter.

Net interest income equaled $163.2 million, up 2% from a year ago and 1% sequentially. Total loans averaged $17.6 billion, which is down 2% compared to a year ago. Residential mortgages grew 9% to average $7.6 billion and now represent 43% of our total loan portfolio. Commercial loans averaged $4.3 billion, down 15% from a year ago while personal loans were even at $2.2 billion. The net interest margin was 1.99%, up from 1.96% last year and 1.92% last quarter. Our provision for loan losses of $5 million was less than half of last year's $11.5 million number and equal to the 1st Quarter's level.

Non-performing assets at $110.6 million were up only 1% from a year ago and down $8 million from $118.7 million at the end of the 1st Quarter.

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 $4 million year-over-year, an increase of only 1%. Compared to a year ago, our compensation expense is down $8 million, primarily reflecting a lower level of incentive-based pay. Sequentially, compensation expense was up $5 million, all of the sequential increase is attributable to incentive compensation and reflects the fact that 1st Quarter incentive compensation typically includes a true-up of actual payments for the prior year versus the accrual during that year.

We continue to closely manage staff growth, total staff at quarter end was 9,384 people, up only 1% from a year ago and down 24 positions from last quarter and 69 from year-end. We continue to differentiate ourselves from other firms during this economic slowdown by having had no across-the-board layoffs. We have maintained our platform of highly experienced and talented people and are very well-positioned to grow the business when economic conditions turn around. Employee benefit expenses were up $2 million from last year because of higher health costs and changes to our 401(k) and ESOP benefit plans. Sequentially, employee benefit expenses were down $2 million, reflecting lower FICA expense.

Other operating expenses were $8 million higher than last year's 2nd Quarter and $10 million higher than this year's 1st Quarter. This increase in the 2nd Quarter was the result of two unusually large processing errors that we experienced in corporate actions. These two errors dampened the outstanding efforts by our people to control expenses in this very tough environment. During the quarter, we repurchased 773,000 shares of Northern Trust common stock at a cost of $41 million. Diluted shares were down 821,000 shares from March 31st, primarily due to our stock buyback program. We can purchase an additional 3 million shares under our buyback authorization.

Finally, in keeping with our practice, we increased average common equity by 10% to $2.7 billion in the 2nd Quarter.

In closing, very simply, we continue to be challenged in our management of the business by the extraordinary and prolonged weakness in the equity markets. Now, Denise, please open the conference call for questions or comments for our participants.

Thank you, today's question and answer session will be conducted electronically. If you would like to ask a question, press the star key followed by the digit 1. Again, that is star 1 to ask a question. We will pause a moment to assemble our roster. We will go first to James Elman with JLF.

Yes, thanks a lot. Great work considering the markets.

Thank you, James.

Yes.

You're located where?

In New York City right now.

Okay. Thank you for joining us.

Well, thank you very much. Just a couple of quick questions, one would be in terms of foreign exchange revenues, should we expect the growth that we saw on a link quarter basis to be a bit less this quarter if the U.S. dollar does not continue to weaken at the same rate? Number two, as I recall in the 1st Quarter and as you just mentioned, you had unusual activity with mergers and acquisitions where you lost business. We saw a recovery of growth in that business line in trust assets. Was some of that due to unusual mergers and acquisitions bringing you business?

I will answer the latter one first. We did not have any unusual mergers and acquisitions that, you know, caused us to rebound and you correctly reflect -- recall the factors in the 1st Quarter, that resulted in the unusually low level of new business.

Relative to FX, obviously I -- I can't give you a forward look that on that, but we basically, as I said, we had a higher level of -- of our clients investing in foreign markets, which gave us good client volume and we had, during the quarter, you know, an extraordinary movement in currencies Vis-a-vie the dollar. The most vivid example of that is the euro, which started the quarter on April 1st at about 87 cents a share and moved up at the end of the quarter to about 99 cents a share. That's an extraordinary level of volatility and if you look at us historically, I -- I encourage you to look at us on a quarterly basis and go back to other periods where there was extreme volatility such as the 3rd Quarter of 1997, the 3 -- that was when Southeast Asia collapsed. The 3rd quarter of 1998, when we had the default by Russia on its internal debt. You saw extreme volatility in the currency markets and you saw an associated movement in our results. So, there -- that -- that is about the best perspective I can give you, James.

And one other quick question.It seems on the processing, the couple of processing errors that you had, I take those are a one-time event and hopefully they will go away and we will see the growth in expenses there kind of leveled down going forward; that correct?

That's the view we have of what occurred.

All right. Great, thanks a lot for the time.

Thank you for joining us.

Next we go to Christopher Marinac with SunTrust Robinson Humphrey.

Hello.

Hey, Perry, good afternoon. Can you -- can you talk about the pace of new openings going forward among the PFS side? Will we see any changes to that, Perry, or will it remain the same outlook as you've given in the last few quarters? Perry, can you hear me?

Mr. Pero, we seem to have difficulty with your line. We will pause for a moment to...

Okay.

Once again, Ladies and Gentlemen, we still are connected, we're pausing a moment to check the speaker's line.

We haven't done anything here, Denise.

You're sounding clear now.

Chris, can you hear me.

Yes, I can hear you Perry, just fine.

We didn't do a thing here, it must have been the transmission here between the conference call center and to you. I apologize for that, but we had nothing to do with it. Can we start again, Chris?

Sure, I was asking you regarding new openings of the PFS side. Will the pace of that be any different than what you've said in the last quarter or two on this call, you know, --

We have no near-term changes in our outlook for the pace of new office openings. Los Alpos is the only one we have targeted for this year and of course we continue to invest in existing locations and expanding to more permanent locations, principally we're doing one in Las Vegas and we have a significant enhancement to our facility in Bloomfield Hills, Michigan. So, we're continuing to invest in our locations, but we are not planning to change the pace of new office openings given, as you well know, the challenge that's we're all facing here in the external marketplace.

Okay. Very well. And, Perry, as a separate topic, can you discuss what you think will happen in the industry going forward as it relates to, you know, linking new business on the lending side to new processing business, you know, as it relates to other large corporate clients? Will it be different means on how you address that on to win business going forward?

That has been ever since the custody business started, that relates particularly with the [Arissa]- related plans to Corporations.

There has been a linkage between the providing of banking services and the achievement of the revenue services from the -- the custody product. The clients, as we've said many times, want us to be in that business and there has been a linkage. I don't see any material change amongst the providers, as you know, we have always tried to make our credit exposures very much in line with our size and our capital position, but I really don't see any change in -- in the requirement on the Arissa side with the pension plan sponsors that they will not want a linkage of a corporate credit services. And that is a key part of our business.

Okay. Very well. Do you imagine any -- any major contracts coming up that you might be able to win on that side, going in in the next two or three quarters?

I don't have any information to share with you along that line.

Okay. Great, Perry. Thank you very much.

Thank you for joining us, Chris.

We go next to Mike Holden with T. Roe Price.

Good morning, Perry.

Good morning, Mike. Thanks for joining us from Baltimore.

Actually I'm calling from Provo today.

Provo, Utah.

Actually, it's Provo, Spain. On vacation.

Oh! You're calling across the Atlantic. Thanks for joining us, are we coming through loud and clear, you're coming through loud and clear on this side.

Absolutely. Just one quick question. A lot of people when - you talked about expense control. Even when the markets are tough, you're investing somewhere, can you talk about what are the focused areas for investments across the Corporation?

Well, we -- first of all we continue to invest significantly in technology. All aspects of that. That's a competitive advantage we have and we are continuing to invest aggressively. As I said in my response to Chris Marinac, relative to our PFS franchise, although we have reduced the temple of new office openings, we continue to make significant investments in terms of enhancing current locations that we're in. And I've had a significant number of upgrades last year and we have them in process this year. And we are continuing to invest in that regard.

And then we -- we -- we continue to -- as you know, we have a high-touch delivery relative to our business, both on the -- on the corporate and the personal side, with seminars and conferences, we'll continue to highlight those conferences, those speaking engagements, the book clubs, et cetera, we're continuing to invest the necessary marketing dollars.

And most importantly, we are continuing to invest in our people. To maintain staff levels, you know, without broad across the board layoffs in this current environment, we think is a distinguishing feature, particularly for those in the financial services industry, where as you know, many other providers have undertaken significant across the board cutbacks. So, we're -- we're continuing to be very careful in protecting the essence of what we feel is a very highly focused and differentiated business. Is that a -- is that response meeting the essence of your question? Thanks.

Yes, it did.

You're welcome.

We'll go next to Catherine Murray, J.P. Morgan.

Good afternoon.

Hi, good afternoon, Catherine.

And I would also congratulate you on a good quarter in light of very tough situations here.

Well, thank you very much. We acknowledge it is a tough and extraordinary period.

Yep, yep. Perry, just a couple of questions. First of all, I'm wondering how you think about the expense earnings trade-off going forward if these tough market conditions persist for a number of -- a number of quarters in the future? In other words, would you continue to basically hold the line on expenses as opposed to reduce expenses, even if revenue isn't growing much?

Well, we're managing the business, you know, day by day, week by week, month by month. The challenge has been, you know, for us, like you and all others out there on the conference call, none of us expected the duration of the current bear market to be as long as -- as it is or as deep as it is. You know, quite frankly we are in a bear market of historic proportions.

So, we feel that we have, you know, two businesses that are highly differentiated, we're continuing to get new business, which, you know, signals to us that -- that we have a -- a competitive position out there and we will, you know, carefully manage the business month by month, quarter by quarter and I can't go out that far, you know, you and I have chatted in the past, Catherine, and the view that's, you know, you and I know you had and others on the conference call and ourselves were such that in July of 2002, none of us were expecting the markets to be in the position that they are in today.

Right.

So, I'm very challenged in trying to take a forward look and getting the telescope out and looking out as far as you want me to do. We're basically trying to maintain the essence of this franchise with our people and the profitability because we -- we think we are highly differentiated and are facing two markets and if you take an intermediate view, let alone a long-term view, we still have excellent growth opportunities.

Okay.

So, we will monitor it. That's the best I can do for you on that one, Catherine

That's fair. And one other unrelated question, you mentioned the new business you were booking on the international side and the CNIS business. Could you elaborate on that, please?

We're having exceptionally strong success in the United Kingdom and Northern Europe, Scandinavia and the Netherlands and Switzerland. We're having very, very strong success and very good tempo of business. We have an exceedingly strong competitive position and a very talented group of people in London and here in Chicago, that are doing an extraordinary job to achieve the level of sales success. And to have our global custody assets grow 13% is a good indicator of success. As you know, global markets have also been going down. We've offset a lot of downdraft in terms of global markets by the significant new business that we're getting. It's a very strong performance over there, particularly in Europe.

Great, thank you, Perry.

You're welcome. Thanks again for joining us, Catherine.

Next we go to David Long, Robert Baird.

Thank you, good morning, Perry.

Good morning, David.

My first question has been answered, but my second question, I wondered if you could quantify the effect that the two unusual large processing errors you had in the quarter?

As I said in my remarks you saw the sequential increase was $10 million.

Right.

In operating expenses, these errors essentially accounted for that increase.

Okay, fair enough.

Denise, we can go to the next person on the queue, if there is one.

We'll go next to Chip Dickson, Lehman Brothers.

Good afternoon, Perry.

Good afternoon, Chip and congratulations on your new responsibilities!

Thank you.

And thanks for joining us, I'm pleased that you're still going to be following us!

Well, um, a couple of questions, one is on what kind of errors were the processing errors, where were they involved and where is a normal level of costs that you might incur for processing errors and then any asset quality watch you can comment on? And finally, this is, I think you get a seasonal benefit from securities lending and how much was it?

First of all, the operating errors, essentially you wanted a sense of what they were?

Yes, how much is a normal run rate for them?

Well, we had -- this was an unusual quarter. This was not a normal quarter. One of them, to give you a little perspective, related to a stock tender offer in which we overtendered and had to acquire the security in the open market. That's to flush out what we mean by corporate actions. And the other one, I can't give you as much detail because it involves a situation where we intend to pursue a legal course of action to resolve the loss. I'm sure, Chip, you can appreciate I can't comment on any detail on that.

Sure.

I say our level of loss was outside of the boundaries of what we do. Your second question had to do with asset quality trends?

Yes, watch list trends?

Well, they're -- they're staying stable, there is a lot of pressure in terms of this uneven economic expansion. Let me say that we're not seeing a lot of improvement. Despite, we're in a quandary that you see in the financial press and the TV commentators have and this link between the macroeconomic numbers that are coming out and then what's happening in the real world with our clients, you know, we had a GDP growth of over 6% in the ast Quarter. We didn't see business conditions with our clients that mirrored that kind of a growth in GDP, which is usually in boom times with that kind of a level. So, I would say there is no decided improvement in watch trend lists that -- that we're seeing.

And, of course, I want to highlight -- and re-emphasize the point that was most gratifying to us, our level of non-performing assets, from the 1st Quarter to the 2nd Quarter, came down by $8 million, Chip. And that -- that was really gratifying to us. And as you know, our -- our asset quality, if you look at our non-performing assets, has essentially remained rather constant during this period with a spike in the industry. And your final point, you asked if there was a seasonal benefit in our CNIS trust fees from the dividend fees, the international dividend season.

Yes.

Yes, there was. You can basically see it on the trend report, where in the 1st Quarter we were about $28 million and we went up about $5 million to about $33 million. The reason, again, emphasizing why it is not as pronounced as last year, last year was an extraordinary period where the -- when the Fed funds rate was reduced as aggressively three times by 125 basis points that, really widened the spreads on the cash collateral.

You know, we're dealing with almost 100 -- $100 billion of cash collateral and then in the 1st Quarter, this year, to get really technical with you and help your analysis, I look at my chart of the Fed funds rate. The last Fed funds declined by the Fed, the 11th and final one occurred in December of 2001 and we had some benefit from that carry over into the 1st Quarter of this year.

So, I think that gives you everything you needed to know about securities lending and the international dividend season. It is about the best I can do with it.

Thanks a lot, Perry.

You're welcome.

Next to Casey with Millennium Partners.

Hi, Perry, thank you very much for the call.

Thank you. Thanks for joining us.

No problem. Two quick questions for you, can you update us on the company's sensitivity to the global markets in terms of revenue and net income for us?

Well, the general sensitivity that we get -- you're talking about the equity markets, right?

Yes.

Okay. The general guidance we've given for some time now and it still holds true in the current environment as we look at our numbers, is along the following lines. If there's a 10% upward or downward movement in the global equity markets, we encounter an upward or downward movement our trust fees of about 4%. And since trust fees are a little over half of -- over 50%, a little over 50%, 55% of our revenues, that results in our overall revenues moving up or down 2%.

Okay.

And you can then, you know what our profit margins are and so forth and you know what the tax rates are and you can make a judgment on the net income impact.

Okay. And then I guess the natural follow-up would be that -- you know, can you comment occurrent consensus at 232, considering we're at a run rate of 224 and the recent market weakness should be coming through in the second half of this year, it seems the consensus is pretty high.

You may be rather recent to the conference call, but our practice has been that we do not have any forecast out there and we do not comment on the consensus. We take it -- consensus estimates out there, we take it a quarter at a time.

Okay it was worth a shot. Thank you very much.

Thank you.

Next we go to James Elman, JLF.

Just a --

Hi -- I'm glad you got a follow-up, as they say in the press conferences! We allow follow-ups here to you and anyone else. James, what can we follow up with?

Maybe following on that question, maybe asking it a little differently. I'm thinking about modeling things out. Is it fair with your price and getting paid on your assets on beginning of period levels that, we're kind of going to see flat to down EPS for the next couple of quarters and then we will see some growth next year, is that a fair way of looking at it?

Well, all I can tell you, let me re-emphasize the -- the way our fees are calculated against our trust assets. In PFS this quarter, the 3rd Quarter, with the exception of -- of -- of our business in California and Florida, the trust fees will be based on the level of assets as of June 30th, administered and managed.

In Florida and California, which would account for about 40% of our overall trust fees, they are essentially priced contemporaneously against the market. So, that is a -- a model outline that I can give you for PFS and as I said in the conference call, also, there is a portion of our -- of our fees and CNIS, particularly the custody service fees which were $51 million or essentially about a third of the fees that we had in the 2nd Quarter. Those fees are calculated, generally speaking on the level of the assets that we have administered and managed at the end of the prior quarter.

So, that gives you a general outline of what our fees are, what the calculation basis and as I said on one of the earlier responses, trust fees overall are about 55% of our revenues in the 2nd Quarter. I hope that helps you, James.

So, just to kind of clarify that in my thinking, just because levels in the market were significantly lower on June 30th than on March 30th, just at least for the trust fees without any significant new wins, they would be flat to down, that area would be flat to down, is that a fair way of looking at it?

Let me respond to you this way. Without -- in the -- in the 2nd Quarter, with the SMP, you had about a 13 to 14% decline from the end of the 1st Quarter and the Nasdaq you had about a 21% decline. So, we obviously are going, you know, you've got a much -- you've got a lower base of assets. Now, specifically in PFS, it went down in the managed side from $96 billion of managed assets to $92 billion of managed assets so you've got a -- a lower level of assets at the end of the 2nd Quarter than you did at the end of the 1st Quarter, essentially reflecting the general downward market moves that we experience. So as you project forward, you're working off of a $92 billion asset base of managed $96 billion base that you had assets and PFS, compared to a in the 2nd Quarter --

Right, right.

Am I be laboring it too much?

No, no, I wanted to be sure I was thinking about it correctly. You've addressed it.

I know I was a little Dick and Jane there, but I like to have clarity for you and others on the call. If I did take pains in my opening comments to, again, remind everyone of that pricing basis in our trust fees.

Very good. Thank you again.

Thank you again, James.

We'll go next to Judah Kraushaar, Merrill Lynch.

Hi, Perry, how are you?

Well, you know, to be quite frankly, we are gratified we're maintaining the earnings power of the Corporation at a time like this, Judah. Both you and I are experiencing a market like we used to read about.

Yep, it's no fun.

I mean, you know, I was telling [Bill Eiseman] I got to go back to 1939 to '41 to find, you know, a duration as long as this and I don't remember any of that?

At least '39 to '41 was the start of the recovery years. So, thank you!

Okay.

I hope this isn't repetitive, I missed the formal part of your remarks.

What can we help you with.

First, can you update us on the unfunded long commitments in terms of the distribution of some of the larger unfunded commitments? Have you given a thought changing your methodology for reserving? Some banks are telling me that, in the cases of a funding situation, even if the ratings don't change, they're thinking of allocating more reserve under that scenario. Are you doing anything like that?

I don't have anything specific to share with you along those lines. We've been calculating the adequacy of out loan loss reserve a very consistent and constant basis here for quite a few years and what you see in our $160 million reserve is essentially a calculation along the -- the similar lines.

I mean in our calculation, we do we do give some consideration to the commitments that we have out there and, you know, there is a -- there is, they say in the trade, a factor that we apply against that, but we've been consistent applying a -- a factor on a process that hasn't changed and I don't have anything before me now that the staff has come up with that will signify a material change in that. As you know, we've been very conservative on the -- on the lending side for -- for a long time. And I don't -- I'm unaware of any changes that we have in the works.

Okay. And in terms of distribution of unfunded commitments, in terms of some of the larger exposures, can you give us flavor?

No general change from what they've been. You know, our large ones, you know, relate to the basic custody business that we have.

Right.

You know, as you know, to put it in perspective for you and others, when you look at essentially the Top Fortune 200 firms in the employee benefit area, we have approximately, you know, 25% of them. And that's some of America's, you know, largest corporations. As I said earlier in responding to someone else, we do have credit commitments there.

You're right.

I have no changes there.

It seems like another bank as illustrated, if you got stuck with one large exposure from an investment grade company that loses investment grade it could wipe out the reserve quickly. I wondered if you're thinking at all, whether the policies have to change at all?

Well, you know, the -- you know, we've, you know, historically encountered that, but we're trying to manage it, with, you know, as I said earlier, with exposures in keeping with our capital position, reserve position, et cetera and you have eluded to a risk that not only occurred in the current quarter, but it occurred at the end of last year and, you know, we're all mindful of that and at all times trying to be, you know, prudently reserved if is my best response to you, Judah, on that.

Two other, unrelated questions, Perry. I hope you didn't address this, but, in PFS last quarter, you eluded to some attrition and the recent accounts that signed up. What does attrition look like this quarter versus normal? And secondly, to what extent would you have an interest in pursuing acquisitions or joint ventures in the custody business in Europe?

First of all, in PFS, to us, the net new annualized trust fees were $11 million, Judah, which is identical to what they were in the 1st Quarter. You know, you know how the environment continues to be challenging and ever more difficult as we go quarter by quarter in the market and I will share with you the pattern was essentially the same in the 2nd Quarter as we encountered in the 1st Quarter and people that are -- are newer to the the client base, late 1999, 2000, if -- you know, made decisions that were comparable to those made in the 1st Quarter because of the -- the very difficult results they've had in the stock market. But nothing significantly out of the pattern that we had in the 1st Quarter and essentially the 2nd Quarter reflected the 1st Quarter results.

Right.

The big plus in our new business is I wanted to highlight for everyone, Judah. I know others heard this earlier, in CNIS we're up to $18 million in new annualized business, up from $8 million, which was an extraordinarily low number for us.

I saw that.

And very much in the pattern that we've had in quarters in prior years.

Right.

So, when you consider all that's going on that was very good. Your final point was what thoughts, if any, do we have about joint ventures and particular reference to acquisitions and you made Europe. We have always been on the lookout for opportunities. We continue to be on -- on the lookout for opportunities, custody business is a very key business for us and we are very much aware of what's available in the marketplace. If we're not immediately aware of it, many others out there do make us aware of it. We're looking at everything out there. We feel we're aware of it, whether we will consummate anything is to be seen.

Right. Okay. Good, Perry, I appreciate the response.

Thanks again for joining us, Judah. Denise, we have more people on the line from what I'm seeing here.

Yes, we will go next to Brian Harvey with Fox-Pitt Kelton.

Hi, Brian.

Thank you and good morning. Two questions, first, Perry, can you just comment about the level of buyback and what your thoughts are on that. I know in the past, the buyback has been used to offset the employee stock plans, just with the stock down here, is there any thought about increasing the pace of the buyback?

Well,the -- you correctly highlight the pattern that we've followed. Obviously with the -- with the lower price, you know, for a given amount of dollars, we can buy back more shares than we were able to do with, you know, given amount of dollars, but a specific answer to the direction you're coming at, no, we had no material change in mind or considering at this point in time, as I said in my opening remarks, we have approximately 3 million shares left in our authorization and that's, you know, our position and we don't expect to make any change in the pattern of our buyback.

Okay. You know, unrelated question, can you just talk about the level of asbestos MPAs you have currently?

Sure, I'd be happy to. Our total non-performing loans right now are $110 million. We have a total of $40 million in exposure that's asbestos-related. And that is between the WR Grace and USG, both companies, as you know, went into bankruptcy a couple of years ago. And that is our exposure. The exposure is down from a peak of about $77 million, $78 million. A year ago.

Okay. And just lastly, can you just comment about the 7 and 8-rated credits, maybe if you don't want to talk about the level, maybe just directionally how they're looking this quarter, real to last quarter or year end?

I don't have the specific numbers here in front of me, but as you saw from the -- the asset -- best guidance I can give you is the asset quality trend is evidenced by our non-performing assets. They went down by $8 million from the 1st Quarter to the 2nd Quarter, which, you know, given the fact that business conditions continue to be very uneven out there is a signal that we're continuing to maintain asset quality; the best I can give you.

Okay.

And, you know, our 10Q will have all of that detail when we come out with our 10Q in mid-August, as all the numbers get rolled up for me. But, you know, you get a good sense of our asset of maintenance quality, I feel, by how the non-performing asset number has performed.

Okay, thank you, Perry.

We'll go next Ron Mandle, GIC.

Perry, hi.

Hi, Ron, how do you enjoy your new position?

So far, so good. Except for the minor detail of the stock market.

Well, all of us have that same Excedrin headache.

Yeah, I guess it wouldn't be different anywhere else. Well, what I wanted to ask about is your business -- your planning for new business over a period of time. I know you said for a while you're only opening one office this year, investing in some of the existing offices. It seems to me with many of the banks and brokerage firms targeting your PFS business, that, you know, how do you think about not opening opening offices to be ready offices versus should you be for hopefully a better market, you know, when would you start that again versus trying to maintain the current level of earnings, which may be hurting you in the longer-term?

Well, we -- we are looking at opportunities that -- that -- there are opportunities out there. We just, you know, we're trying to manage -- it is a balancing act at this point in time in terms of where to go, how to go, when you go into a new area. It will take at least three years to make it positive and we need to look at the drag that that would bring about on the business. But there are opportunities there. Others are, as you say are looking at this business, but they've got a long ways to go to get anywhere near a franchise that we have, the brand name that we have.

So, my point is that some of us are investing now and you're not and they will be more ready three years from now for business from the areas that you're not in than you will be.

But in the areas that we're in, we've made a significant investment this year, last year and the prior year in terms of upgrading our presence.

Uh-huh.

And that, I don't feel anyone should minimize that.

Right.

We have -- and you know what our offices look like and as we're talking now, you know, we're building an absolutely Northern Trust first-class office in Las Vegas.

Uh-huh.

If you're ever in the Detroit area go up by Bloomfield Hills and you will see a real signature Northern Trust office. And we've got other locations. In St. Louis last November, we opened right across from the Ritz Carlton after having been in a suite, so, I don't think that you and the others should associate the lack of physical new openings coming on that we're not investing in the business. We're making a significant investment and then also upgrading in areas. So, we're mindful of your point.

Could you --

You know, Ron, the best thing for all of us would like to have is the markets to just stabilize. That really is the point. I mean, you know, to be in this downdraft is a challenging management situation and I think we're doing a pretty good job trying to balance all the of factors.

In terms of, you know, the physical investment you mentioned, have you also added sales staff to these various offices and did you --

Of course.

Can you give some numbers on how total sales staff in to 18 months? PFS has changed in the last 12

I don't have the numbers in front of me, but we're constantly upgrading and moving people. We've changed managers in certain areas and just upgraded. We're constantly investing in people, but I can't give you a specific number as to, you know, what you're asking for in terms of sales staff and managers and so forth, but, you know, there's only two things we do here, you know, personal trust and private banking and CNIS and believe me, we're investing both of them on the people side.

Good, thanks.

We'll go next to Chip Dickson, Lehman Brothers.

Good to have you on the follow up, Chip.

Thanks, Perry.

What can I clear up or expand upon?

If you could give us your composition on your assets under management, equity, money markets and fixed income and how it's changed and talk about the sources rank made global custody and the weakness in retirement services.

Okay. Let me give you -- on the managed assets, in PFS from the 1st Quarter to the 2nd Quarter, we -- the -- the total number went down from $96 billion to $92 billion. The equity piece went down from about 49% of the number to about 46% of the number. So, that is the major change and obviously that caused an increase in the fixed income and cash. On the corporate side, the CNIS, we are -- we have all the rest of the - the business, the managed asset profile, equities are and they've always been lower, they've been at 25% and essentially flat from the 1st to the 2nd Quarter. And as you know, in that part of the business, approximately half of the assets under management have essentially been cash. One of the biggest portions of that, the security lending cash collateral.

Right.

So, what we see overall is the amount that -- that is accounted for by equities has come down a tad bit. But overall not bad to -- in terms of what we've -- how we've maintained the level of managed assets, given the kind of market downdraft we're getting.

Yeah.

And so, help me out, the second question was...

Just the global custody...

Yeah, as I highlighted on prior questions in that regard, the particular strength we're having in global custody, the United Kingdom, we're having very, very strong success, both in the -- particularly in the public sector, but also in the private sector. And in Europe, northern Europe, Scandinavia and the Netherlands and Switzerland, we've had very good success.

And retirement services was off a little bit this quarter?

No -- well it was modestly down on the trend, but year-over-year it was up and you're talking about a $400,000 change quarter-to-quarter sequentially, but it is up from $15.1 million a year ago. So, I don't have anything to provide in terms of additional perspective for you, Chip, on a $400,000 change on the total number of revenues there. Thanks for joining us and you're entitled a third follow-up if you need it, Chip.

Next to Ken Houston, UBS Warburg.

Thank you, good afternoon.

Hi, good afternoon, Ken.

Two really quick questions about rates.

About what? Excuse me?

Interest rates.

Interest rates, okay.

Can you talk a little bit about how the balance sheet is positioned for rising interest rates later in the year?

As I commented on the prior conference calls, we do not take any discernible level of interest rate risk in terms of our portfolio and the management of the balance sheet. Our annual report will give you a good proxy for the level of risk that -- that we have with regard to movement of interest rates.

If memory serves me right, if we have about -- holding everything constant and have about a 200 basis point movement in interest rates during the course of the year, step up an equal amount every month, we will -- we will have at risk about $15 million to $20 million of net interest income, which compares to a total net interest income last year on an annualized basis of $650 million, so -- and that's holding everything constant and not doing much. So, we essentially are today in the same position we've been in prior periods that we have a very minimal level of risk associated with the movement of interest rates than how we have our balance sheet positioned. And that's been a traditional aspect of how we've managed the business.

And to put it into real historical perspective for you, you can go all the way back to 1993 and see that each and every increase in net interest year, we've had a continuous income here at the Northern, which basically confirms we don't take interest rates and during those periods, we've had significant ups and downs. Even in the very low interest rate environment, we're -- a modest percentage increase, but yet a percentage increase year-over-year on interest income.

Great, thanks, Perry. One further question On treasury management, obviously the trend of fees has been pretty solid, consecutively and year-over-year. Is there a point where clients will start to keep in compensating balances instead of paying fees that could impact your fee generation on that side?

What is happening there, the -- the total measurement of our business there is the revenues and fees, as you probably noted, have been going up quite a lot. There's been a substitution in that -- the level of compensating balances and the interest rates that the balances earn is decidedly lower this year than last year given the movement in interest rates and as we said in our press release, to put this in perspective for you, the -- the -- the overall revenues were $29 million, fees accounted for $23 million of that. And essentially the -- the revenues are the same, but a year ago the -- the fees were $20 million, out of the 29.

So, what you're having is a shift in how we're going compensated and going forward and responding to the latter part of your question, if interest rates do go up, obviously the earnings on the compensating balances will be higher and therefore you will not be seen for giving a level of business the compensation being as great on the fee part.

Okay, great, thanks.

I hope that was clear for you.

We'll go next to Casey Emberence, Millenium Partners.

Hey Perry.

You're entitled a follow-up, too, Casey. Everyone is.

Okay. One quick question. I was skimming at the "Wall Street Journal" and reading the Coke article. Can you comment on Northern Trust option expensing and how it effects [INAUDIBLE]?

As we point out in the footnote on our annual report, last year we earned about $496 million or so in the option expense was about 9 to 10%. It was off 48, $49 million. And that's in a footnote to our annual report and I've got the annual report here and I'm trying to get the right one for you here to refer you to it. It will be -- okay, if you go page 87 of our annual report.

Okay.

If you don't have it, you can have that -- I said 4 -- it is $487 million was the -- I gave as $10 million more than we had in the -- in the stock option expenses, as I said, $49.9 million, approximately 10% of the number.

Okay.

Page 87 of our 2001 annual report.

Okay. It seems a little bit higher than other financials. Do you think there is any likelihood that it will be run through the income statement?

Well, we will, you know, that's the big debate in Congress and we will go anyway that, you know, we're told to go on that. I -- I did read the Coke article this morning and, you know, obviously, you know, when I read the comments on it, we have the full disclosure, so, we will, you know, it will be comparable, everywhere will be comparable to going one way or the other.

Okay, thanks very much.

Next we go to Judah Kraushaar, Merrill Lynch.

Another follow-up.

Hi, Judah!

I want to be sure I got this right,your last "Q", you have a contingent liability comment. You talk about standby credit of $2.5 million. Is that talking about the unfunded the paper back stocks? Or am I missing something here?

Essentially that -- bulk of our activity there is there is a lot of activity that we have for not-for-profit institutions that have a variable rate notes out there, variable rate notes out there. The total amount is about $2.6 billion that we have. There are industrial revenue bonds out there that were being sold in the market backed up with our credit. We are not in the business of backing up commercial paper with standby letters as I understand our business.

That is really the off-balance sheet commitment exposure. There is nothing else I'm missing here, right?

Do you have the annual report there? Go page 58.

You don't have supplemental disclosure in the Qs? That's what I was looking for?

I just have to defer and go offline with you. I don't have all of that. But if you go to page 58, our commitments and letters of credit are all in one footnote there. We have the legally bonding commitment to extend credit. The commercial letters of credit and what you're talking about is the standby letters of credit. I encourage you to look historically over time and you won't see much of a change in that profile. It's been very consistent.

Okay. Thank you.

And you know, in the Q, ruffling through it here, it was on page 7 of our 10Q of March 31 getting technical here with you, you will find the contingent liability, stand by letters of credit there. But the commitments, since done on an annual basis. But you're not going to see much change. Is that fair, Judah?

If I have a question, I will follow-up. Okay.

There appears --

Denise, any triple follow-ups out there?

There appears to be no further questions. I'd like to turn the call back over to you Mr. Pero for additional and closing remarks?

Thanks for joining us. And I want to say, I particularly appreciate the few congratulatory comments we got as some of you opened your questions. This is truly, as I said & closing my prepared remarks this morning, an extraordinary and challenging period and I think we're living it in a period here that is truly historic bear market and we're very gratified here and the entire management team, all Northern people, to be able to maintain the profitability of the business the way we've been able to do it. With that, Denise, we will close the conference call and look forward to visits with all of you in October as we report our 3rd Quarter results. Again, many thanks for joining us. Denise, we can sign off.

Thank you. Thanks for joining us for today's conference. You may disconnect at this time.