Northern Trust Corp (NTRSO) 2002 Q4 法說會逐字稿

Good day, everyone. Welcome to this Northern Trust Corporation fourth 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, sir.

Thank you, Michele. Good morning and afternoon good afternoon to all of you. Thank you for joining us to review our fourth quarter financial results for Northern Trust Corporation. Here with me today are Bev Fleming, our Director of Investor Relations, Harry Short, our Controller, Steve Fradkin, Executive Vice President - Finance, and Mark Betty (ph) and Linda Casiak (ph) 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 January 22nd call is being web cast live and is accessible through our Web site. The only authorized broadcast of this call is the replay that will be available on our Web site through January 29th. Northern Trust disclaims any continuing accuracy of the information provided in 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 and business development plans, business prospects and positions with respect to market and pricing trends, new business results and outlook, changes in securities market prices, credit quality, including reserve levels. 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, 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 affect actual results.

2002 was a challenging year for Northern Trust, highlighted by continuing weak economic conditions and the unprecedented third consecutive year of declining equity markets. This morning, we reported fourth quarter earnings per share of 43 cents, down 4% from the previous year's fourth quarter.

Net income, total $96m. Our earnings per share for 2002 of $1.97 were down 7% as compared with the $2.11 reported in 2001. This translated into net income for the year 2002 of $447m, down from the $487.5m in 2001. Very clearly, we are disappoint disappointed to report earnings declines for both the fourth quarter and the full year.

As you know, Northern Trust's business model is built around our private wealth management and fiduciary franchise, our global institutional trust processing activities, and our global asset management business.

These businesses are impacted directly by the steep declines in the equity markets, which lower the value of these assets, and therefore the associated revenues earned on those assets.

Further, sluggish economic conditions have resulted in historically low interest rate levels, which impact our interest rate sensitive revenues from such activities as securities lending and a lower return on our balance sheet as assets.

Ours is a differentiated profile than the financial services industry and worthy of note as you analyze our performance.

Now, let's review our fourth quarter major revenue and expense items. Revenues in the fourth quarter were $523m, down 6%, as compared come compared to the previous year's fourth quarter, and 2% from the third quarter.

During the fourth quarter, there were four specific revenue line items that drove the year over year decline in our revenues.

First, the securities lending component of our corporate and institutional trust fees declined $13m, or 38% from last year's fourth quarter. In 2001, the spreads earned on securities lending cash collateral benefited from three reductions in the federal funds rate during the fourth quarter, which totaled 125 basis points, compared to only a 50-basis point reduction in the fourth quarter of 2002.

Secondly, trust fees and our personal financial services business declined $5m or 4% year-over-year due to the lower level of the stock markets markets, which was only partially offset by the new business we continued to win in the marketplace.

Third, foreign exchange trading profits declined $8m, or 31%, versus the fourth quarter of last year, because of less currency volatility and lower client volumes.

Finally, our other operating income was $13m lower than last year. I will provide you with the details of this decline later in this call.

The combined impact of these four items led to the disappointing year-over-year decline of $35m in our fourth quarter revenues.

Now, I'd like to review each revenue line item in detail for you.

Our personal financial services business unit reported a 4% decrease in fourth quarter trust fees as compared to the year-ago quarter. PFS trust fees were also down 1% sequentially. Fee generation in this business unit continues to be hampered by the ongoing weak equity markets. 41% of the manage the managed as assets in PFS are invested in equities.

Fees reported by our Illinois offices were $1m, down both year-over-year and sequentially. You'll recall that Illinois prices off the previous quarters ending assets values. At September 30th, the S&P 500 Index stood at 815, down 18% for the third quarter. Since our Illinois fees were down only 1%, this performance is reflective of the fact that we are not solely an equity manager and also that we continue to be successful in winning new clients.

Our Florida fees were up slightly from the third quarter. Again, please recall that Florida calculates its fees on asset levels during the quarter. Although the S&P 500 Index at year-end was up 8% from September 30th, it is average daily market values that are the most relevant indicator of fee performance for Florida.

During the fourth quarter, the average daily value of the S&P 500 was down 1% when compared to the third quarter.

Our remaining ten states had a sequential decrease of $1 million or 3% in their trust fee fees.

Trust fees in our wealth management group which serves families typically with assets of $100m or more were up 5% versus a year ago, and flat sequentially. Trust assets and wealth management were $65 billion, equal to one year ago, and up $3 billion or 5% from September 30 30th.

Our managed assets and wealth management totaled $14 billion at the end of the fourth quarter up 3% year-over-year and unchanged sequentially.

Our PFS new business results in the quarter were a positive $12m in net new annualized trust fees sold for the year. And for the year, we generated $41m in net new business, equivalent to 7% of total PFS trust fees.

This is a good performance, given the persistent weak stock market environment and its negative impact on investor confidence.

Our leverage ratio for both the quarter and the full year, that is the ratio of PFS business one to business loss, stands at a respectable 3 to 1, meaning that we are winning 3 times more PFS business than we are losing and expanding our share in the marketplace. Trust assets under administration and PFS at December 31st were $156.7 billion, down 6% from a year ago ago, yet up $6 billion from September 30th.

Assets under investment management of $88 billion were down 7% from a year ago and up 2% from $86 billion at September 30th.

Corporate and institutional services trust fees of $147.2 million declined 8% from last year's fourth quarter and were down $3m on a sequential basis.

Securities lending fees essentially accounted for the year-over-year decline. During the fourth quarter, securities lending fees were $21 million, down $13m from last year, but up $4m from the third quarter. The lower securities lending fees compared to last year, stems from narrower spreads earned on the cash collateral and a lower lendable base because of the market decline.

In last year's fourth quarter, securities lending benefited from three declines in the Fed funds rate, totaling $125 basis points. As you know, 2002's fourth quarter saw only 1 one rate cut of 50 basis points on November 6, 2002.

During the fourth quarter, CNIS custody fees of $52m were up 2% from last year. Sequentially custody fees were down 9% because these fees are calculated on the value of assets at the end of the previous quarter, and therefore reflect the lower market values at September 30th.

Investment management fees of $44.8m were down 4% versus a year ago. Retirement consulting fees of $17.2m were down 5% compared to last year's fourth quarter and up 4% sequentially.

Net new recurring trust business sold in CNIS for the quarter was $14m in annualized fees. Trust assets in CNIS were down 11% from a year ago to $1.35 trillion, while manage the managed assets were down $11 billion to $214.8 billion.

On a sequential basis, our managed assets increased $7.4 billion from $207.4 billion at September 30th. Included in our CNIS trust assets are global custody assets, totaling $472 billion at year-end, up 4% from a year ago and 5% from the end of the third quarter.

The international segment of CNIS continues to exhibit strong sales success, particularly in the Nordic region of Europe and the United Kingdom. [Inaudible] reported trading profits of $19m compared to $27m in last year's fourth quarter and $26 million in the third quarter of this year. As I mentioned earlier, these lower results stem from lower FX client volumes and lower currency volatility.

Other operating income in the fourth quarter equaled $10.8 million, as compared to $24 million in the same period last year. There are two key items to note this quarter in other operating income.

First, you'll recall that we announced in late November 2002, a $4.8m write-off of our entire equity investment in the global straight-through processing association. GSTPA, based in Zurich, Switzerland was an industry funded initiative to create a global trade management system. The association announced in late November that it was suspending operations because of insufficient demand for its product and the related inability to obtain additional funding. Northern Trust was one of 41 GSTPA member firms. The write-off of our $4.8 million investment is accounted for in other income.

Second, during the fourth quarter, we completely charged off an $8.7m aircraft lease to United Airlines. $4.6m of that lease charge-off represented the residual value of the leased aircraft and was written off against other income.

These two write-offs, GSTPA and United Airlines accounted for the bulk of the year-over-year decline in other operating income.

Net interest income equaled $164.3m, up slightly from a year ago and 1% sequentially.

Total loans averaged $17.6 billion, which is down 1% compared to a year ago.

Residential mortgages grew 5% to average to average $7.8 billion and now represent 44% of our total loan portfolio.

Commercial loans averaged $4 billion, down 19% from a year ago, reflecting the lack luster economic conditions resulting in tighter management of working capital and lower capital expenditures by our commercial clients.

Personal loans were up 13% to $2.4 billion. The net interest margin was 1.85%, down from 2.04% last year and 1.98% last quarter.

The further lowering of the Fed funds rate during the quarter impacted the value of our non-interest-related funds, and therefore reduced our net interest margin.

Our provision for loan losses was $7.5m in the fourth quarter. During the quarter, net charge-offs equaled $7.4m, which included $4.1 million charged-off on the previously mentioned United Airlines aircraft lease.

Credit quality is a bright spot in our fourth quarter performance. Non-performing assets equaled $95m at year-end, down $15m from a year ago and down $13m from the $107.6 million at the end of the third quarter.

Expense management remains an important priority for us, expenses were up only 4% or $13 million, year-over-year. For the full year, 2002, they are up only 1.6%.

Compared to a year ago, our compensation expense was up only $700,000, primarily reflecting annual merit increases. Sequentially, compensation expense was down $3.5m, reflecting a year-end true-up of incentive compensation. Also, we continue to closely manage staff. Total staff at year end was 9,317 people, down 136 positions from a year ago. Employee benefit expenses were up only $600,000 from last year and were down $7m sequentially.

The sequential decline in employee benefit expenses mainly reflects the year-end true up of our 401(k) plans corporate match to reflect our reduced annual net income in the normal fourth quarter decline in FICA payments.

Other operating expenses were $11m higher than last year's fourth quarter and up $18 million sequentially.

The year-over-year increase is attributable to higher software amortization costs related to our intend investments in technology. Also, our travel costs in this year's fourth quarter were higher compared to 2001, which had abnormally low travel post the tragedy of September 11th. And this year, we made the decision during the fourth quarter to more aggressively invest in our brand by significantly increasing advertising.

The sequential increase in fourth quarter other operating expenses reflects a number of expense categories. The majority of this higher level of expense in the quarter is related to increased advertising and business promotion, higher technical and consulting expenditures, increased legal expenses, a higher level of technology expenses, and a variety of miscellaneous expenses.

During the quarter, we repurchased 345,000 shares of Northern Trust common stock at a cost of $12.5m. Diluted shares were down 900,000 shares from September 30th to 224.2m shares. Primarily due to our stock buy-back program and the decline in the stock price, resulting in fewer option shares in the money. We can purchase an additional 1.6m shares under our buy-back authorization.

Finally in keeping with our practice, we increased average common equity by 8% to a record $2.83 billion in the fourth quarter.

As I said at the beginning of this call, we are disappointed in our fourth quarter and full- full-year results. This has clearly been a challenging year for the markets and for Northern Trust.

However, as we embark on this new year, we do so with a level of optimism and coughs confidence that is based on our very focused business strategy that targets attractive markets with excellent growth prospects. We made considerable progress during 2002 on a number of critical themes that support our business strategies. Progress that continues to position Northern as the leader in the markets we serve.

These themes and our progress in 2002 include the following - Our 82-office PFS franchise is without peer in the private client business. We continue to expand this valuable franchise as evidence by our pending entry into the Atlanta and New York City markets. We continue to invest in our existing office infrastructure through ongoing efforts to expand, move and refurbish existing facilities.

We remain focused on expanding the reach of our global custody services into attractive growth markets. We continue to make excellent progress across the globe from Europe to Asia as evidenced by a 26% compound annual growth rate in our global custody assets over the past 5 years, as compared to our decline in the EFA index during the same period of 4%.

2002 was particularly gratifying as we secured major mandates, particularly in Europe from some of our key competitors. Our commitment to world class positioning in the global as asset management business continues with considerable progress under underway. Our pending acquisition of the passive asset management business of Deutsche Banc will make us one of the top three providers of index fund management globally.

Finally, the strength of the Northern Trust brand has never been more evident than this past year, when despite the most severe global bear markets in generations, we have continued to win significant new business in both of our markets. To be able to close on new business in the amount of $84 million in total net new annual fees during the market and economic climate of 2002 is a tribute to our people and to our strategy.

This achievement gives us a high degree of confidence in the competitive positioning of Northern Trust and our ability to achieve growth for our shareholders.

Please open the conference call for questions or comments from our participants.

Thank you, the question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit 1 on your touch tone telephone.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and we’ll take as many questions as possible. Again, if you would like to ask a question, please press star 1 and we will pause a moment to allow everyone to signal.

And we will take our first question from Tom McCandless from KBW.

Good morning, Perry.

Good morning, thank for joining us.

Thank you for having the call for investors.

A couple of quick questions. I guess the one that's burning on my mind is the other expense bulge in the fourth quarter which would appear somewhat uncharacteristic of Northern Trust. I think investors would be enheartened by the fact that you are revving up marketing expenditures again. What I would like to know is - can you help us understand proportionately how much of the $18m increase in other expenses is due solely to the marketing expenditures.

Well, thank you, Tom for the question. There is no question that that stands out in our expense profile.

The detail I provided in the call and you said it was uncharacteristic in your question, but I looked at the pattern of our other operating expense line, going back to 1998, and in each of those fourth quarters of each of those years, we have had a significant increase in the level of those expenses in that line-item.

You, of course, need to acknowledge that that is just one part of our overall non-interest expense, the total non-interest expense is only up about $3m or so. And this category is in that total $360m.

If you go back to 1998, we had increase of -- and in each of the years that I'm going give you, I found it quite interesting that the fourth quarter was the peak year for other operating expense. In 1998, as we reported it, it was up 17%. In 1999, the fourth quarter compared to the third quarter sequentially and other operating expenses was up 25%. In the year 2000, our reported amount in that fourth quarter was the highest for the year, but we only had a 4% sequential increase. Last year, we had an 8% sequential increase, and the year -- and then in this report that we are providing you this morning, we are up about 17%.

To get real perspective on that, I'd refer you to page 77 of our annual report where we give a rather detailed schedule, highlighting all of the expenses that are in that category. So my first response to you that there is a historical pattern here, that the fourth quarter in this line-item is the highest quarter during the year and we have a spike.

Therefore, marketing and business promotion is one part of it. On that schedule on page 77 of the annual report will give you the whole proportion of the technology, the business promotion and the other expenses. We did increase the tempo of our advertising, specifically, and you should have seen ads, particularly seen in the "Wall Street Journal" and in other publications highlighting our theme of trust.

And of course, overall, the major effort we made on expenses which reflected in only the over overall year-over-year increase of 1.6% was the significant control of the headcount where we were down 136 people year-over-year and this is the first decline we've had in many years, and as you recall -- I know you followed us for a long time -- you go back to the decade of the '90s, we were going up on a per annum basis 7 to 9%.

When you look at the overall non-interest expenses, they were very well behaved in the fourth quarter. You appropriately asked a very appropriate question there, what about this other operating expense line.

I gave the detail in my prepared comments, and then I've supplemented here by giving you an historical pattern that this is not unusual. This is not uncharacteristic of the essence of our expense structure where we have this fourth quarter spike, if I may use that word, or increase in this category in each of the past four quarters.

And we will, of course, in the 10K report which we will issue by the end of February, beginning of March ,will give you all of the detail of that category, but as a good refresher, Tom, go to page 77 of our annual report that -- of the 2001 Annual Report, you'll get a good profile of that detail. I hope this is helpful for you.

It's helpful. Not quite the answer I think I was looking for, but it was definitely helpful. Maybe I could ask another related question.

Sure.

That is, is there any way that you could quantify us for us the true-ups that you mentioned in compensation and 401(k) contributions?

Those sound like or it's easy to infer from your comments that those might be reverse accruals. Is that what that truly is?

Yes, you've got the essence of that. In other words, in our 401(k) plan is correlated toward the earnings performance of the corporation and the payout is based on achieving a certain target. We did not achieve, obviously, a certain target. Our earnings were down over $40 million from a year ago, so therefore, the contribution that we'll be making to our 401(k) plan will be less than was originally planned. So therefore, our accrual rates during the course of the year were too high and were essentially reversed.

The other part that you can clearly see, Tom, in the compensation line is really in the incentive based compensation, there are some true-ups. The most obvious one again is we had no plan to be $40m lower in net income, so therefore, that incentive payment related to the overall profitability of the corporation, the accrual was too high in earlier periods and was reversed. And then you have other incentive payments that we relate to marketing, relate to investment management performance and there was a modicum of reversals in the accruals we had taken up to the fourth quarter. This is pretty traditional and straightforward, truing-up of the accruals for these particular categories.

Yes, agreed, and totally appropriate, I was just curious as to whether or not you would be willing to share with us the quantifications of those reversals.

How much was reversed in the fourth quarter between comp and employee benefits.

If you look at the employee benefit line, I'll give you this guidance, it went from $34 to $27m. The majority of that was in our 401(k) reversal.

Just going back to the first question, and I will promise to get off the phone.

You can have a triple.

Are there any of the items that you mentioned in the other expense growth during the quarter marketing, technology, IT, miscellaneous, are there any of those items in the $18m sequential quarter increase, that you might consider unusual or typically nonrecurring?

Well, I'm not going to be cued in this response, but in the pattern of expenses, some are regular, some our irregular and all of that came to bear in the fourth quarter. As I try to signal, if you look at the history of the Northern in the prior fourth quarters, we have a significant up-tick in the fourth quarter in this category.

In prior years, our expense line was a lot lower, but back in 1999, in the fourth quarter, we had in this line item, we had a $17m increase, when we went from $72 million in that year's third quarter to $89m.

There is a pattern here, Tom, that appears to obviously different factors in different years given the events, but there is a definite pattern that appears in our profile of expenses where the fourth quarter appears to be the highest in this category and the year 2002 worked out the same way.

Well, Perry, you'll be happy to know that Northern Trust is not the only company in the financial services world where that phenomenon exists. Last question, really --

Thank you.

One of clarification. That is the PFS new business wins versus loss, the 3 to 1 ratio that you cited. Would that be covering the fourth quarter or does that reference the full year 2002?

The leverage ratio for the full year in PFS is 3 to 1.

Thanks, Perry, congratulations.

We will take our next question from Joel Gomberg with William Blair.

Thanks.

Good morning. It's a cold day here in Chicago.

Sure is. On that PFS question, could you expand a little bit on the new business, you know, slightly higher this quarter than the other quarters?

Yes.

Are you experiencing less loss of clients? Or are you seeing some pick-up in some particular regions?

And then also, should we assume that you are spending more on branding and advertising is helping some of the new business efforts there?

Joel, in our new business success in PFS, as you know, very well know, the buck bulk of our business is in the clients with the $1m to $5 million area, and then we've got larger clients, you know, much more substantial wealth. We have had is significant success with some very large individual pieces of business that have come our way, through terrific marketing by our associates, and the climate in the fourth quarter was a little more positive than the very difficult third quarter climate, as you well know, and the stock market really went down rather substantially, and impacted the confidence of all of the citizens out there, including those that are in our targeted market segment.

So we did have an up-tick. Being here in Chicago, you've obviously noted through the local business magazines and the newspapers here, we've increased the tempo of our Trust Northern ads, and we've enhanced our marketing. That was a concerted effort to get out front and center and emphasize the positives of our brand.

There is a lot of appeal that we have at times like this in the marketplace, and people are looking for a trusted advisor and we appear to meet that, and we did rebound from the third quarter last year was the most challenging one that we encountered. And you know the environment that existed in that third quarter, the news headlines on scandals and so forth.

And so the advertising and marketing efforts are obviously impacting the positive business results.

With a little more bias towards the wealth management group?

We've had bigger success with the -- Our tempo with wealthier clients has been on a sustained regular basis. And we've increased the success of the ones in a more targeted group of $1 to $5m than we had in the third quarter.

Okay. Last question. Could you comment about your CNI loan portfolio. It is down 19% for the year. Is there a change in strategy there? Should we continue to see that portfolio come down in '03 as well?

Well, the significant impact there is that our client group, you know, business people act in in -- the bulk of our lending is in middle market businesses and these business managers have taken a very tight rein of their businesses, of managing the heck of their receivable levels and inventory levels and also very cautious with regard to expenditures for additional plant, equipment, et cetera.

And that has brought about the decline, which is over $900 million. We're continuing to get new clients with loan commitments and so forth, however, they are not borrowing.

There has been no change in our strategy, which was also part of your question, if I remember it correctly. Joel, this is really a reflection of the economic environment.

And then the third phenomenon is, as you know, long-term rates have been, you know, at historically low levels, and our middle market borrowers, our creditworthy borrowers, and there has been a lot of funding of bank debt that they've had with us and other banks into the long-term funding market.

So there's been a shifting of the outstandings to the other more long-term providers.

It's working capital management, lower level of capital expenditures. They are trying to reduce interest expense and then funding out into the long-term market. So no change in strategy, Joel.

Thanks, Perry.

You're welcome.

Our next question comes from Kenneth Usdin with UBS Warburg.

Hi Perry, how are you?

Good, good morning. Thanks also for joining us.

My pleasure. A couple of quick questions for you.

I was wondering if you could talk about the balance sheet a little bit, size, expand the deep and width of the decline in the loan book. Can you talk about that as you think about, first of all, what occurred in the quarter and then how you're thinking about managing that going forward.

On an average basis, you are right to observe that it increased. On an as-of basis, it is essentially the same where it was in terms of its size a year ago at this time. And the bulk of the change you see in the short-term money market assets, government security side, which is really a positioning our bank relative to what our outlook is for interest rates and trying to capture some narrow spreads in the market. But really, essentially, no strategic fundamental change in our balance sheet strategy.

The biggest difference is what Joel highlighted, the decline in the loans, and then a shift into the money market assets and other securities.

But as an as-of basis, the balance sheet of December 31, 2002, was almost identical in its size to what it was in December 31, 2001.

Okay. If we take that a step further, if the balance sheet is flattish going forward and I’m assuming the margin continues to be under pressure, can we assume that net interest income will likely be down in the '03, versus '02?

Well, I don't forecast. Net interest income for the year was up a year 2002. However modestly, for you and others that are listening, as I said in one of my comments here in the conference call that we're unique, we're very unique in that interest income, because this was the 19th consecutive year that we've increased net interest income despite all of the peaks and valleys that we've seen in interest rates.

It should highlight for you and the others the very low risk profile we take with regard to positioning the bank against movements and interest rates. We just don't bet on movement and interest rates in a and are very tight with our detailed schedules and the 10-K highlight for you. But we had a record year in that interest income, and not everyone can say that in the financial services business, and it was the 19th consecutive year, but I don't forecast.

Thanks for pointing that out.

Thanks for joining us.

Can I ask one more question?

Sure, Tom had three.

I just wanted to know if you could give us a little bit of color on asset quality quality. I notice you did have better recoveries in the quarter and non-performers were down.

Could you give us a little more color on how you're feeling about your 7 and 8 as you normally talk about them and credit quality in general.

Well, I think we're doing very well when you consider how sluggish and lackluster the general economy is performing, and in our nonperforming assets, as I've said in prior periods, we have we have $95m, as I said in my opening comments, but there's a concentration -- continued concentration as I've highlighted in other quarters, of approximately $49m of that total is in really two categories.

One is asbestos, and we have $40 million in two asbestos related credits, USG and W.R. Grace, which have been in bankruptcy for sometime, and then we have remaining of our secured Enron exposure, approximately $9 million.

And so that gets us to about 52% 52%, 53% of nonperforming assets assets. So if you take that out, we have about $45m or so out of a loan portfolio of a little under $18 billion that's not paying us interest or nonperforming. I think that's pretty good when you consider what the general economy is all about these days. It's having a lot of difficulty getting traction, particularly in the manufacturing sectors and in the middle west it's been more severely impacted than other areas, and I think we've done a good job.

Therefore, that's why I said, we feel we're presenting a positive profile. Obviously, it's up from the very very, very low levels we used to have three and four years ago when the economy was booming, but it's still a very, very modest part of our overall credit portfolio.

Great. And the final thing is, is the United charge-off, the extend of your United exposure, whether it's credit or other fee related?

Simple answer, yes.

Excellent. Thanks a lot, Perry.

As a reminder, if you would like to ask a question question, please press star 1. Next we will go to Nancy Bush with NAB Research.

Good morning, Perry.

Hi, Nancy, welcome back to the followed.

I guess in some years, it doesn't pay to get out of bed.

We're not down, as I said. We're viewing things with an optimism. Nancy, you and I have never seen markets like this.

I hope to never again.

We feel the same way.

This is more of a qualitative than a quantitative question. When you look at the things in 2002 that didn't go the way that you wanted them to, many of them were obviously not under your control, market levels, et cetera.

But when you look at the things that were under your control or under the control of management, what didn't you do as well as you would have liked to and what have the remedial steps been?

Well, we were very keenly disappointed with, you know, having to write-off the GSTPA investment. That was a key strategic investment for -- we are a huge global securities operation, and that not coming to pass was a disappointment. We were in there with 41 other people, and then to go back, you know, it's part of the record.

We obviously were very disappointed in the problems we had in the second quarter that had to do with corporate actions, and you recall that was was, as I shared in that July conference call, a $10m problem.

So those are some items, and then the final item is the -- again, the -- we made a strategic investment in my CFO, and we had to unfortunately share with you and my in my third quarter call that we had to write-off our total investment in my CFO, and it was $15m.

Those are three areas, that I would say there's always a link linkage to the external world, but we were disappointed. I mean, the corporate action losses had nothing to do with the external environment. That was the most pure one in response to your question.

So, we've tightened up our procedures. Our response, what have we done about it? We reviewed what went wrong, why it happened and re-engineered the process as the systems people say, to make sure that we are as tight with regard to the controls and those activities as is possible to be.

That's my fairest response to you, Nancy, in that area. It was a very difficult year in that regard, in that we were impacted by all of the external factors and then had these unfortunate somewhat very internal factors that didn't go our way.

Looking back, are you satisfied with the actions that you've taken as far as office openings, et cetera, I guess the non-actions would be a better description of, it the fact that you have not been as aggressive in the past two years in opening new offices, I think, as you would initially anticipated that you would be, and is there a rethinking of that?

We've increased the tempo, Nancy. We're going to Atlanta, Georgia. We hope to close Legacy South here in the first quarter. Up by the northwest suburbs area area, Parkridge, Illinois, we'll be opening a new office, and then we're going to be putting a wealth management team in New York City up on Park Avenue where we located with our Deutsch passive investment management business.

The other part, Nancy, we've spent a lot of money, the past several years, expanding, moving to new locations, a number of our office sites. We will continue to do that in the year 2003.

Thanks very much.

Thank you.

Next we will go to Chris Merinac with SunTrust Robinson Humphrey.

Hi Perry, how are you?

Very good Chris, thank you.

Follow-up on the net new business trends. Can you remind us back in the third quarter what is the apples and apples comparison there. I know you had $10m total.

Sure, I'll be glad to. The number in CNIS in the third quarter was net $3m. We increased that to $14m, and the PFS world, the third quarter was $7m, and it increased to $12m.

But the loss business you had in Q3 on the CNIS side how much would that be if you were to add that back to the numbers back in Q3?

We don't divulge that.

Okay. But in terms --

It's an increase in the tempo. When you look at it, the net went from 3 to 14 in CNIS.

Okay. Very good. I guess a separate question on capital. What would be your threshold or interest in terms of if capital where to decline to support a share buyback initiative? How much change would you accept?

If capital were to decline, I don't understand where --

If you were to lower the capital ratios to fund the shareholder repurchase initiative, how much would you be willing to change it?

That's not at all in our metric. We're very proud of having some of the highest capital ratios and some of the highest credit ratings out there. That's what makes the Northern Trust brand sell at this point in time. As you know, in our share buy buyback, we've taken the delusion from the issuance of incentive compensation via stock options has been our plan, and we've essentially, if you go back to 1995, our fully diluted share count was 225m, and in 2002 we were 224, 225 million in that whole period. We've issued well over 30 million shares.

Our view was really relative to our risk based ratios, our capital ratios to have them on the premier side, the strongest side, because it is what sells in the marketplace, and highly differentiates us.

To digress, for a moment, Global Finance Magazine, in its October 2002 issue, had an article on the 50 safest banks in the world. Well, the Northern Trust is listed as number 44 in that listing around the world and there are only four banks in the U.S. that are in that listing, and as you know, as a size bank we are approximately 35th or so largest bank. And to be included is only one as one of the four banks in the top 50 from the U.S. as the safest banks, really is something that promotes our image in the marketplace. And one that is most reassuring to our clients, and continuing to enable us to differentiate ourselves. Lowering our capital ratios just doesn't fit into the capital management strategy of the Northern at all.

That's clear. Thank you very much.

Our next question comes from Roger Lope with Marksen International.

Hi, thanks for taking my question.

Hi, Roger. Where are you located, Roger?

White plains, New York, Perry.

Great.

My question is this. Can you comment on the frequency of clients coming back to you in the context of the equity market being down close to 40% in the three years and saying let's reevaluate our fee structure, particularly in the PFS side of the business.

I don't have any comment or perspective on that to share with you. All of our fees are, you know, individually negotiates with clients. They have fee schedules and so forth. I have no particular comment or information that I can share with you on along those lines.

I'll take that as a no comment as opposed to not giving me any color.

Anything further, Mr. Lope?

Well, the one thing you have is the major correlation, as you know, when your assets are down, our fees are based on assets and the fees get lower if you have a lower asset base.

Sure, okay, thank you.

The next question comes from Brock Vandersleet (ph) with Lehman Brothers.

Hi, Brock thank you for joining us.

Thank you. Could you comment following on an earlier question on credit quality about what we should be assuming for provisioning going forward.

Again, as I said earlier on a question in a different area, we do not forecast.

Okay. Next question then. There was a recent announcement that Fidelity is pulling out -- pulling their business back internally from the business they’d allocated to Deutsch which I know you've purchased. There was six index funds that Fidelity has elected to manage internally. How much of an impact is that going to have on the transaction and the economics?

Not much. Fidelity made a decision that was strategic to its own purposes and one that they thought at this time that they didn't want to have outside provider service, and since the Deutsch was getting out of the business, they felt it was an opportune time to bring it in-house. If memory serves me correctly, years ago Fidelity had this in-house and outsourced it and decided to bring it back.

Is the in-sourcing of this service a trend that you would see or is this kind of a one off of a very large --

That was a one off, and the the -- and in terms of our Deutsch transaction, the key to it, what we will be paying is only for those clients that transition to us. So we will, originally Fidelity was in the profile of business that Deutsch had. They will not be transitioning to us, and so therefore since our agreement is essentially we're going to pay for that business that comes to us, it will impact our purchase price.

Okay, thank you.

Next we will go to Kyle Seminero (ph) with T. Rowe Price.

Hi Perry.

Hi Kyle.

How are you doing?

Terrific. Where are you calling us today?

Baltimore, Maryland. I have follow-up question to Tom McCandless’ question on other operating expense.

Sure.

Could you clarify as to whether the quarterly run rate is closer to $100m or $118m as it was this quarter?

I can't give you any guidance along those lines.

Okay.

You know, it's been a very volatile item. If you look at it, I mean, that has a high degree of volatility. As I told Tom, if you look at our annual report and the whole profile of the expense items that are in that category, you will clearly see that, and each fourth quarter, I'm not predicting the future, but when I look back yards backwards, each fourth quarter, we seem to have a peak. That's not a forward looking statement promising it'll be that going forward, but when you go back to 1998 as I did earlier with Tom, it's just the peak. It's a whole variety of causes, Kyle.

Okay. And following up on the question on net interest income, you mentioned 19 consecutive years of interest income growth.

Yes.

Could you give us a sense for a sustainable net interest margin going forward?

We've essentially, if you look back, the business has been tracking about 2%. If you go back several years, interest rates were higher. We're in that. And the reason for that is, we do not have a credit card portfolio with all of the high- high-yield assets. We just don't have those high-yielding assets that others have. We're not in those businesses.

Okay, so you would expect it to be closer to 2% going forward forward?

Well, I'm giving you a guide. You look backwards, that seems to be the level we’ve been at. We don't have any strategic plans to change the profile of our assets and go into credit cards or other mass retail consumer products that others have, particularly in credit cards that they are enjoying particularly wide spreads at this point in time. We just don't have that. Nor any plans to get into it.

Last question on other operating income, assuming that $8 to $9m of that was nonrecurring GSTPA and United, would that number have been $18 to $20m, and is that a decent run rate going forward?

I'll respond to the first part of your question, that yes, those GSTPA was certainly a non nonrecurring item.

Right. Do you expect more nonrecurring items going forward?

I have no idea. None of us do. I think just like in your business I don't think you know what the nonrecurring items are going to be.

Thank you.

As a final reminder, if you would like to ask a question, please press star 1. We will now go to Casey Ambrich (ph) with Millennium.

Thanks for hosting the call. One question regarding the MPAs. Can you update us on your watch-list trends and specifically, I notice that your credits were at 7 and 8, increased to 319m from 278m. Is that deteriorating or improving?

Well, that was -- you are talking about the 10Q that we issued in November relative to the third quarter, right?

Yes.

In that report, you had the share national credit commentary from us that resulted in the higher provision for credit losses in the third quarter. And all of that commentary related to the uniqueness of the shared national credits and that spike that you noted, that we commented on in the third quarter 10Q was essentially related to all of our commentary in that report on the shared national credit.

Okay. So that being said, should the 7 and 8 rated credits be flat at 319 or improved?

We're not going to forecast going forward.

But you know the number for the fourth quarter?

We will come out with the 10K and we will highlight specifically what they were at the end of the fourth quarter, but we don't have that information public now.

Okay. And then one other quick question for you, kind of a bigger picture, could you kind of discuss the seasonality of the new business, you're seeing the new wins?

For example, down in Florida, the PFS tends to do better in the winter, and you know, maybe bring in some thoughts on the corporate institutional side in light of the State Street and Deutsch Banc deal.

To hit it at a high level than Florida during the summer months and in Arizona during the summer months, there isn't as much activity as you get in the winter months. I mean, I don't mean to be cute, but there is particularly in those two sunshine states, an element of that seasonality which is -- there aren't as many people there during the summer months and obviously our tempo of our activity would reflect that. But then you get an offset that that -- I wouldn't place much on the seasonality and the rest of our business, but there is no question in Arizona and in Florida and certain of the offices, it gets a little quiet in the summer time.

Okay. I guess I'm just trying to true up, the higher expenses we saw in the fourth quarter due to advertising and so forth, are they going to mitigate going into summer? Or are we at a new elevated run rate?

Let me just say, we increase the tempo of our advertising in the fourth quarter from where it had been earlier this year.

Okay. Thank you very much, Perry.

Thank you.

Finally, we will take a follow-up question from Tom McCandless.

Tom, you got the grand-slam homerun. This is your fourth won, you went around the horn here.

That means I'll have to skip next quarter.

No, no, no, I'm trying to be a little light-hearted. What can we respond to, Tom?

Does Northern Trust have unrealized securities gains?

When you look at our financial statements, you'll see that the bulk of our securities are in the available for sale. There is 8 to 9m that are in the available for sale.

The only ones that we haven't held to maturity, which are our municipals, which we have at cost, they obviously have a gain, but we're -- we're holding those to maturity, and they have a gain because interest rates have come down substantially from the levels that they were at when we purchased those municipals.

But no, we do not have, you can see the security gain line item, investment securities transactions is almost diminimus. There is odds and ends that come through, but essentially, we are not positioned that way. Of course, that's what brings about the success that we've had relative to net interest income. We're not taking bets relative to moving securities. You see it on a steady net interest income that we've been able to report as opposed to episodic large security gains as interest rates move.

We don't bet on interest rates. Our board, it clearly wants us to focus on providing the client service and generating shareholder wealth as opposed to taking bets on interest rates.

Okay. Great.

Does that respond? Does that give you -- that's where you'll find -- you'll find that the only historical cost is municipals an there is a gain, but we're not selling them.

Right, no, that's what I expected. Just a follow-up to the expense question. Perry, were some of the costs related to the upcoming transaction to acquire the passive business of Deutsch Banc, were those costs also included in the fourth quarter?

No, no. Those will be with the transaction which we expect to have here in the first quarter.

Okay.

Those costs are not there. Those will be matched with the transaction. And they'll be part of a purchase price, too, depending on various categories of cost. That does not account for what you were trying to ask earlier, Tom.

All right. And then finally, in recognition that my memory is fading me, could you share with us what the expectations would be in terms of the cost of dealing with pension and options in '03 for Northern Trust?

Well, we have made no decisions relative to changing our practice relative to expensing of options. We'll continue until the final rules get promulgated by FASB and then we'll be governed accordingly. But we have not been expensing options. We do give the footnote disclosure in our annual report as to what their costs are.

And on the pension, I don't have anything to share with you. I just give -- our 10K will give you all of the detail, but I don't have anything to share with you now.

But on the options, we'll be governed by what the promulgations are by FASB and we'll follow the trend.

Okay, Perry, thanks a bunch.

Thank you, Tom. Thank you for joining us and appreciate your active participation.

Michele, do we have anyone else on the line?

There are no further questions at this time. I will turn the conference back over to you for additional closing remarks.

Again, to all of you, thank you for joining us, and we look forward to briefing you in April on the results of our first quarter.

Again, thank you for your interest in Northern Trust Corporation.

We can close the conference call call.

Thank you for your participation.