Northern Trust Corp (NTRSO) 2003 Q2 法說會逐字稿

Welcome to this Northern Trust Corporation second quarter 2003 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, Steve. Good morning, and thank you for joining us to review Northern Trust’s second quarter financial results. Here with me today in Chicago are Bev Fleming, our Director of Investor Relations, Harry Short, Controller, Steve Fradkin, Executive Vice President, Finance, and Mark Betty 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 website at Northerntrust.com. I would also like to mention that this July 16th 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 through our website through July 23rd. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

In keeping with our practice, I need to make the 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, projected profit improvements, business prospects and positioning with respect to market and pricing trends, strategic initiatives, reengineering and outsourcing activities, new business results in 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 2002 annual report and our periodic reports to the SEC for additional information about factors that could affect actual results.

This morning, Northern Trust reported second quarter 2003 earnings per share of 30 cents, as compared to 56 cents reported in the second quarter of 2002. All of the financial results being reported today, in both our press release and this conference call, are presented according to U.S. generally accepted accounting principles. At our April 15th first quarter earnings conference call, and in our June 23rd press release, we highlighted for you a number of important strategic initiatives currently under way at Northern Trust. Let me review those for you this morning. First, we continue to invest for the future success of our core businesses. For example, we have completed two strategic acquisitions that bolster our competitive positioning in two key businesses. Our acquisition of the passive asset management business of Deutsche Banc has been completed and we successfully transitioned $65 billion in managed assets. Given the strength of the equity markets since the transition of these assets beginning on January 31st, and new assets added by acquired clients, total managed assets from this acquisition have grown to $73 billion as of June 30th.

Our second acquisition was Legacy South, a $300 million asset management firm in Atlanta, Georgia. This transaction gives us entry into the attractive Atlanta wealth market where we will be able to leverage our industry-leading personal strategy. That acquisition closed at the end of April. The final purchase price is approximately $11.5 million.

Second is we continue to focus our resources on businesses where we have a clear leadership position and where growth and profitability dynamics are favorable. To that end, we have closely evaluated all of our businesses and have exited or outsourced some so that resources can be allocated to those with the best future potential. For example, we sold our Atlanta-based Northern Trust retirement consulting business, also called NTRC, to Hewitt Associates in mid-June and acquired on the loss on the sale of $20.2 million. In June, we also completed the sale of our Higgins Road (ph) retail branch, on the northwest side of Chicago, to First Midwest Bankcorp and recorded a $17.8 million gain in the second quarter. We also outsourced our mortgage processing operations to Cendant Mortgage Corporation. All of these actions represent a commitment to focusing exclusively on growth businesses where we have a competitive edge in the marketplace.

Third, on June 23rd, we announced expense reductions, including staff eliminations and other items designed to better position Northern Trust for improved profitability. Those three initiatives, one, investing in our core businesses, two, exiting or outsourcing non-core businesses or functions, and three, reducing the expense base, all have been undertaken with considerable analysis and care and are designed to improve the core designs trajectory of Northern Trust.

I refer you to the table on page two of today's earnings press release. Let me summarize for you the items contained in that table, and included in our second quarter financial results. First, severance costs in the second totaled $22.9 million. Of that total, $19.5 million is included in compensation expense and reflects severance-related charges associated with our previously announced elimination of approximately 700 positions. The remaining $3.4 million reflects outplacement services relate to the staff reduction. This amount is included in other operating expense. Second, occupancy expense in the second quarter includes a $16.1 million charge associated with a reduction in leased and owned office space as a result of the lower staff levels. Third, a $9.5 million charge associated with software write-offs is reflected in other operating expenses. Fourth, other income reflects the $17.8 million gain on our sale of our Higgins Road retail branch in Chicago.

In addition, you will note in today's press release that we are reflecting the sale of our retirement consulting business as a new line item, discontinued operations. All prior periods have been restated to reflect NTRC as a discontinued business. In our second quarter income statement, you will see a $14.8 million or 6 cents per share loss associated with this discontinued business. This net figure is not set forth in the table on page two of today's earnings press release. It includes the following three components. First, a $20.2 million pretax loss on the sale or five cents per share after tax, principally reflecting the write-off of unamortized technology investments and severance costs associated with staff not hired by Hewitt Associates. Second, a $4.1 million second quarter pretax loss from operations, or one cent per share after tax. And finally, the NTRC discontinued operations line on our income statement includes a $9.5 million income tax benefit. Unlike the $20.2 million pretax loss on the sale of NTRC, the $4.1 million pretax loss from operations and the $9.5 million income tax benefit are not shown in the press release table. I'm outlining them for you in this conference call so that you can reconcile to the discontinued operations net loss of $14.8 million. The five items shown on page two of our earnings press release add up to $50.9 million pretax and $31.8 million after tax, or a 14 cents per share net charge.

Now that I've shared with you the items included in our second quarter financial results, I would like to proceed with a review of our second quarter's major revenue and expense items. I remind you that we have restated all prior periods to remove revenues and expenses associated with the sale of NTRC. Revenues in the second quarter were $551 million. Essentially unchanged as compared to last year's second quarter. Although our revenues were flat year over year, we were pleased to report that second quarter revenues were up 8% sequentially. Let me highlight for you the four items that comprise this $42 million sequential revenue increase. The largest item was the increase of $17.6 million in other operating income, primarily related to the $17.8 million gain on our sale of the Higgins Road retail branch in Chicago. This is followed by an increase of $12 million in foreign exchange trading profits from the first quarter, due to higher client volumes and greater currency volatility. Securities lending fees increased $6.3 million versus the first quarter, due to the traditional second quarter securities lending international dividend season. Finally, I'm delighted to report that trust fees and PFS increased $2 million sequentially representing the first sequential quarterly increase in five quarters. Our personal financial services businesses unit reported second quarter trust fees of $146.3 million, a decrease of 5% or $8 million as compare to the year ago quarter. As I noted earlier, PFS trust fees were up 1% or $2 million sequentially. Fees reported by our Illinois offices were down $2 million year over year, and up $700,000 sequentially. Florida fees were down $2 million from last year's second quarter, but were up $1.4 million sequentially. You'll recall from our previous conference calls that Illinois fees are based on the prior quarters’ ending asset values, while Florida fees are based on asset values throughout quarter. Therefore, Florida experienced a greater benefit from the quarter’s rising equity markets as evidenced by a 9% increase in the daily average for the S&P during the second quarter. Our remaining ten states had a sequential increase of $1 million or 2% in their trust fees.

Trust fees and our wealth management group, which serves family typically with assets of $75 million or more, were down $2 million versus a year ago, and $1 million sequentially. Assets under administration and wealth management were $71 billion, up 6% from one year ago and $7 billion or $10.5% from March 31st. Managed assets and wealth management totaled $14.5 billion at the end of the second quarter, down from $15 billion one year ago, and up from the $14.2 billion we reported at March 31st. Our PFS new business results in the second quarter were a positive $10 million in net new annual lies trust fees sold, up from $8 million in the first quarter. Assets under administration in PFS at June 30th were $173 billion, up 6% from a year ago, and up 11% from March 31st. Assets under investment management of $94 billion were up 3% from a year ago and up 8% from $87 billion at March 31st. Corporate and institutional services trust fees of $147.6 million increased 1% from last year's second quarter and were up 8% or $11 million on a sequential basis. Included in C&IS trust fees during the second quarter, were three months or $5.3 million in total fees related to the passive asset management acquisition. The first quarter included only two months or $3.2 million in total fees from this acquisition. Security lending fees equaled $28 million and accounted for $6 million of the sequential increase, primarily reflecting the traditional second quarter international dividend season. C&IS custody fees, $54 million were down 1% from last year. Sequentially, custody fees were up $1 million. Investment management fees of $52 million, were up $5.7 million versus a year ago and up $3.3 million or 7% sequentially. Net new reoccurring trust business sold in C&IS for the second quarter was $16 million in annualized fees. This performance is indicative of the terrific wins C&IS has achieved in the United States and the global markets. Remember, that net new business was also adjusted to remove the NTRC results due to its sale in June.

In the second quarter, both our assets under administration and assets under management increased substantially to record highs of $1.8 trillion and $423 billion respectably. Assets under administration in C&IS were up 11% from a year ago to $1.66 trillion while managed assets of $329 billion were up $104 billion or 46% on a sequential basis. Our managed assets increased $51 billion from $278 billion at March 31st. Included in our C&IS managed assets at the end of the second quarter were $70.4 billion in passive assets acquired. We are now the third largest institutional index manager, a position which gives us the prominence to get into passive manager searches and the scale to compete successfully. Global custody assets totaled $589 billion at quarter end. Up 19% from a year ago, and 24% from March 31st. The international segment of C&IS continues to exhibit very strong sales success, particularly in Europe and the United Kingdom. We've recently announced several big global custody wins in the UK and the Nordic region. For example, last week, we announced two significant wins. A $9 billion global custody mandate from AMF pension in Sweden and a $9.8 billion global custody mandate from BAE Systems, a defense company in the United Kingdom. These are a high profile win and indicative of the momentum we have achieved in the international arena.

The 19% year-over-year increase in global custody assets outstrips a decline of 9% over that same time period in the EFA (ph) index. Our three foreign exchange trading desks reported trading profits of $33 million compared to $37 million in last year's second quarter, and $21 million in the first quarter of this year. The sequential increase reflects increased client volumes and greater currency volatility. Other operating income in the second quarter equaled $35 million, as compared to $18 million in the same period last year. Sequentially, other operating income was up $17.6 million. As I mentioned earlier, included in other operating income is the $17.8 million gain that we reported on our sale of the Higgins Road retail branch in Chicago. Net interest income equaled $150.1 million, down 8% or $13 million from a year ago and down 2% or $3.4 million sequentially.

You are all very well aware of the unprecedented low interest rate environment that now exists. This is placing a significant drag on our net interest income. As long-term assets, primarily residential mortgages and short-term assets, primarily include money market assets are repricing as very low rates. This has squeezed our net interest margin to 1.76%, down from 1.99% last year, and 1.87% in the first quarter. Total loans averaged $17.5 billion. Unchanged compared to a year ago. Residential mortgages grew 2% to average 7.8 billion dollars and represent 44% of our total loan portfolio. Commercial loans averaged $4 billion, down 7% from a year ago reflecting the continued lackluster economic conditions resulting in tighter management of working capital and lower capital expenditures by our commercial clients. Personal loans were up 10% to $2.5 billion. Our provision per loan losses were $7.5 million in the second quarter. During the quarter, net charge-offs equaled $4.9 million, only 11 basis points on average loans. We increased our reserve for credit losses to $172.7 million, from $160.3 million one year ago.

The ongoing underperformance of the economy continues to impact our middle market business lines. Non-performing assets increased to $108 million at June 30th, up $14 million from $93.6 million at end of first quarter. At the current level, non-performing assets are comparable to last year's $111 million level. Expenses during the second quarter of 2003 equaled $412.5 million, up $66 million from the year ago quarter and up $63 million sequentially. The special items that I reviewed at the beginning of this conference call account for the bulk of this increase. Compared to a year ago and last quarter, compensation expense was up $19 million which reflects $19.5 million in severance costs. Total staff at June 30th was 8,239 people, down 1,100 positions from a year ago, and a similar amount from March 31st. The sale of our retirement consulting subsidiary and the Higgins retail branch in Chicago resulted in 670 positions being eliminated. The remainder of the decrease in our staff as of June 30th, related to the previously announced severance program. Almost two-thirds of our stated goal of 700 positions had been eliminated as of June 30th. The additional positions will be eliminated over the next year. Employee benefit expenses were up $2 million from last year, and only $100,000 sequentially. The year-over-year increase was driven by the increased pension expense we are experiencing this year, which we commented on in the first quarter conference call. Occupancy expenses were up $20 million year over year, and $17 million sequentially. Again, primarily due to the previously discussed charge of $16.1 million associated with excess office space. Other operating expenses were $23.6 million higher than last year's second quarter and up $26.3 million sequentially. Both the year-over-year and sequential increases include the previously discussed amounts for software write-offs and outplacement services. In addition, the sequential includes higher consulting, legal, investment performance, and subcustodian fees.

During the second quarter, we completed the previously announced redemption of $120 million in auction rate preferred stock. Accordingly, we will no longer have a preferred dividend payment. We repurchased 39,000 shares of Northern Trust common stock in the second quarter, at a cost of $1.4 million. Diluted shares were up 410,000 shares from March 31st to 223.8 million shares. We can purchase an additional 12 million shares under our buy-back authorization. Finally, in keeping with our practice, we increased averaged common equity by 6% to a record $2.9 billion in the second quarter.

Three months ago, we signaled that management was working very hard to position Northern Trust to continue to succeed going forward. During the quarter, a number of management actions were taken on both a strategic and operational basis to put the company on a path to higher profitability. As we enter the third quarter of 2003, the challenges of historically low -- of the low interest rate environment and a sluggish economy are quite evident to all of us. But the sharp rebound of the stock market from its March lows makes for a brighter outlook than three months ago. Most importantly, we are continuing to win new business in the marketplace and we are investing in our core growth businesses. And we look forward to reporting to you going forward on the success of our efforts. Now, Steve, will you kindly open the call for questions or comments from our participants.

Thank you, today's question-and-answer session will be conducted electronically. To ask a question, press the star key followed by the digit one on your Touch-Tone phone. Please make sure your mute function is turned off so your question will register in the queue. Again, that's star 1 if you will like to ask a question. Ken Usdin (ph), UBS.

Perry, how are you?

Very good, Ken. Thank you for joining us.

My pleasure. A couple of quick questions for you. I was wondering if you could expand upon net new business a little bit. Previously you'd been talking about kind of gross exit declining and I was wondering if that trend continued and also kind of your outlook for prospective new business in both C&IS and PFS?

I didn’t understand. What did you say, gross exit?

You had pointed out recently that one of the reasons that the net numbers were so low because you were having more exits than adds in prior years, and that trend had started to reverse itself maybe in the first quarter. I was wondering if that continued to be it, meaning that you are having less customer losses and also your general thoughts about sentiment of market so far as perspective new gains.

Okay, well, the momentum is decidedly higher. If you look at the six month numbers for net new business for the -- in both of our businesses, we have net new business of $50 million this year compared to $42 million last year. I think what you may be referring to is in last year's first quarter, we were impacted in our C&IS area by a number of corporate merger and acquisitions, where our client was acquired by another entity who is not a client of ours and in the trust assets pension or the profit sharing assets were then consolidated into the custodian of the acquiring entity. And there in that first quarter of last year, we were significantly impacted by about five, if my memory serves me right, by about five of those events. I think our momentum is very, very strong. I have highlighted to you the new business results that we got in C&IS and reported on, and if you recall in the second quarter -- the April conference call, I mentioned that we were bringing in Electa and several other very, very major and substantial entities. Scottish Power being another one, an international fund for agricultural development. Those were very substantial wins that we got in the first quarter that transitioned in the second quarter, and of course the two that I talked about in this conference call today, Ken, haven't transitioned yet.

Right.

And they're still going to be coming in. I think our momentum is very good decidedly better than what it was last year and the numbers speak for themselves. It's $50 million in net new business after six months this year compared to $42 million last year. So I think we've got far better momentum than I was able to report a year ago at this time.

Okay, great. And the second question was, I was wondering if you could discuss a little bit, your perspective thoughts on just how you expect the timing of the relative expense saves to be coming through the next year? Is it very lumpy in the third quarter or is it spread out? How do we think about that?

As we said in the press release, we expect the actions that we took in the second quarter to benefit our pretax income by approximately $70-75 million on an annual basis. As you look at that, look at it in an annual context, about half of that has been done, it’s accomplished, and begin to be reflected in the other half, will come in during the next four quarters. I can't give you any guidance on, as you said, the lumpiness or the smoothness of it. But there will be a number of initiatives, and we will benefit. I expect it to be an irregular pattern if I were to conjecture, it won’t be absolutely smooth. Divided by four. But it gives you a good sense of direction of what we expect the benefit to be, and if you look forward, you can expect on an annual basis half of it was done in the second quarter. And then the rest is to come, and it will – you know, I don't think it'll be exactly even but that's about the best judgment I have at this point in time because we've got some additional work to do.

Okay, thanks, Perry.

Thank you, and again thanks for joining us, Ken.

Our next question – Livia Asher (ph), Mitsubishi Trust.

Good morning, Perry.

Hi, Livia. Nice to have you with us today.

My pleasure. Two questions, unrelated. One is -- and I apologized if you covered this, but on the sheets where you show the assets under administration. C&IS was up $51 billion first to second quarter, yet you brought on the passive business which is roughly $70 billion, so there's a $20 billion gap there, and --

Okay, okay, I understand your question, Livia. Livia, at end of the first quarter we had transitioned $51 billion of that -- you have to say $51 billion was in our numbers as of March 31st, and then as of June 30th, it's -- the number they gave you $73 billion. So you've got a 20 --

I got it.

A $20 billion that came in from March 31 to June 30th.

Thank you.

You should be able to reconcile with that guidance.

Right, and the second and totally unrelated, it was interesting you mentioned that non-performers were up because of the middle market customers, and I mean generally banks are reporting earnings of large corporate credits seem to be getting better and I know that you don't participate in that, you are more a middle market lender. The middle market kind of customer is finally exhibiting some undue stress even while the large corporate is getting better. These guys kind of hung on as long as they could and now seeing increased problems in the smaller corporates?

It's very dangerous to generalize. All of these with specific events. But as you -- the basic issue, Livia, as we all know, the economy has underperformed here for several years. And this has put terrific pressure on smaller companies. There's no ability to raise prices, and various industries are impacted in various ways based on what their competitive factors are. But it has been very tough going for a lot of smaller, privately-held businesses. And there's been this issue that the general economy has not had the robust pattern that it had in the '90s, and as you know, we've had the general economy at best has been growing about in the range of 1.5% to 2% for a long time. That's a tough environment and you've got tough pricing pressure and then you have got costs that are going up. So some entities – and then you've got special competitive situations in given industries, et cetera, and they all combine and it puts pressure. In terms of our pattern as I took pains to point out with approximate $108 million that we have on non-performing now, we’re at a comparable range that we were a year ago, and we peaked at about $118 million I think if memory serves me right in the early part of 2002. So we are moving sideways, Livia, is what I can best tell you, and the lack of significant economic growth is really the issue and very severe price competition as everybody out there is trying to reduce costs. And everybody is initiating upon everybody else to get lower prices and it is putting significant price pressure on a lot of smaller companies who don't have the flexibility that larger companies might have, but if you look at the scene, there’s some larger companies in America that are still having some tough issues.

Great. Thank you so much, Perry.

Thank you for joining us, Livia. Steve, who is next?

We have Tom McCrowan (ph), KBW.

Hi, good afternoon.

Hi, Tom.

How are you? Couple of questions on the expense side. I want to make sure that I have the right analysis. If you adjust the second quarter comp. and employee benefits numbers for 19 of the 22 odd severance cost, you got about $192 million run rate, which is flat sequentially versus the first quarter, correct?

I think that's what I said in my call.

Yep. So the $30 million or half of the $70 million expected cost savings, I think you just said that, was in the numbers. Where will we see that? Where should we see that?

Well, when you look at -- where we're at, as I indicated, is the space part has essentially been taken. We took the space adjustments, and so I don't think you'll see anything in that line and then it'll come in the other lines.

Okay. And on the other operating expense lines, the net income trends, it was up about $25 million, half of which was due to the software charge and a portion of the severance costs. But I can't account for the other half. It was up a lot, but what was that due to?

Well, as I said in my call, it's a potpourri of other items. You are right in recognizing that the software write-offs and the and the outplacement are in there. We had a higher professional fees, which I would call in on consulting and legal. We had investment, higher investment performance fees and then we had higher subcustodian fees. We have got more assets under administration and we have to pay custodians around the world for keeping custody of them. So it's a whole potpourri.

Okay.

And then of course, we had the -- in the second quarter, we had three months of the Deutsche Banc passive asset acquisition and in the first quarter we only had two months since we acquired it on January 31 and that sequential differential, three months of Deutsche Banc in the second quarter compared to two months in the first quarter.

Great, fair enough. Thank you very much.

Thank you.

Our next question, Nancy Bush, NAB Research.

Good morning, Perry.

Hi, Nancy, nice to have you here. Is it the sun shining out in Georgia today?

It’s – sort of. [Laughter.]

Okay.

Perry, what do the people in PFS, your relationship managers And, et cetera, sort of your business gatherers, telling you about sort of that the number of new accounts, number of people inquiring? I mean, what kind of momentum are we seeing here as a result of better market trends in terms of new accounts and new bodies coming in the door?

Okay, one statistic that you can grab ahold of, Nancy, on that, is the sequential quarterly increase in our net new business in PFS, it went up from $8 million in the first quarter to $10 million in the second quarter. That's a good move given what, you know, individuals in America are coming out of, relative to a very tough environment. There is more activity, but to be very honest with you, individuals were really shell-shocked by what happened in the equity markets the past three years, and there's a decidedly more conservative bent there, but when you put it all together, you know our brand, our reputation, et cetera, it all comes together that we are seeing, more momentum coming through. It is obviously not at levels that we had in the late 1990s, but you know, we're not back to those levels in terms of general market environment, the general economic outlook. But we're getting more positive traction. We've got $2 million more in net new personal trust fees in the PFS market in the second quarter than we had in the first quarter, and I think that's a good indicator. That, you know, it's a little bit better.

Anything as far as geographies that are notably performing better on the new business win side than the others? And I'm talking about PFS's here?

It's coming across the whole franchise. Some of the newer areas that we have are working off of lower basis than they had in -- because they are newer and their new business gives you a bigger percentage increase to what we are all about, but we are seeing it all across the franchise.

Okay, thanks.

Okay, thanks again for joining us, Nancy.

Our next question - Rachel Bernard (ph), Morningstar.

Hi, good morning.

Hi, Rachel, are you here in Chicago?

I am. Just up the street from you guys, up on Wacker Drive.

Okay, thank you for joining us.

No problem. Thanks for doing this.

What can we respond to?

I had -- I had a couple questions actually around the passive asset management acquisition. I just wanted to make sure I can follow the track from the original amount announced to $120 billion to now your $73 billion. About I guess $25-30 billion of that was the Fidelity stuff that left. Is the rest of that just market depreciation?

Did you say market depreciation?

Yeah, in terms of the managed assets.

Well, okay -- well, okay, this is what you have to do. Of the $120 billion was as of the market as of June 30th of 2002.

Right.

When we started that. Well, you know what happened in last year's third quarter.

Right.

Okay. So that was not the asset base that really existed when we announced the deal at the end of September or had our first transition coming through January. So if you look at it in that context, from June 30th of last year, which was what we reported the outlines of transaction on at end of September, yes, you've had significant market depreciation.

So, the Fidelity money that was left was really the only significant money that you didn't transition?

Yeah, because they essentially brought it in-house.

Right, right.

They essentially brought it in-house. They'd had it in-house and put it out, and decided as a result of the change for reasons that made sense to them that they were going to bring it in-house. So we didn't lose that to any other third party, it basically went back to Fidelity. And you know, I think you can say, we essentially got the bulk of the rest of it. We didn't get all of it but we got an overwhelming, you know, part of it, when you make those adjustments.

Can you tell us maybe what percent of the expected revenues you got? What is the revenues on the $73 billion that you got?

The expected revenues on the $73 billion. Well, our whole transaction was based on revenues. We didn't go public with what those revenues were at the beginning. Can you help me out a little bit? Where are you trying to land on this one?

Well, I guess at the end, I would love to know, you know, how many basis points in revenue you expect to get on this, if that makes sense.

We didn't go forward on the basis point, but our – there were a number of very positive features to this transaction for us. Number one, it strategically brought us from a level of $60 billion where we were at before the transaction. We now are a vary – we are the third largest index fund manager out there and therefore, as I said it puts us in a competitive position. Also, you have the opportunity as we've said in various presentations that we've made, both Bill Osborn and I in various conferences, and made clear in our communication on this, that they were additional revenue opportunities that we could achieve from securities lending activities, lending these securities, and transition services. And so, therefore, we expected to get more than just the fees associated with managing the various index funds. But we have not gone public with any basis points on this.

All right. So I guess we can assume for purposes of trying to figure out what those fees might be, it is going to be similar to the assets that you already manage on the C&IS side?

Well, the assets that we manage on the C&IS side are not all exclusively index fund related.

Yeah, right.

I don't know your model so I just can't probe any further, but there is -- there is, you know, -- there is a distinct difference between you actively manage accounts and then you’re working with index funds by varied definitions. And you at Morningstar know that better than anyone.

Okay. Thanks. I appreciate it.

Thank you for joining us.

Our next question - Brian Harvey (ph), Fox-Pitt Kelton.

Thank you.

Hi, Brian.

How are you doing, Perry?

Okay.

Good. I just had a question on the net new business growth. Can you segment any of that as a business that you've gotten from Deutche GSS? You talked a little about GSS at your analyst day. And I wanted to see if you can talk a little bit more about what is actually coming through in some of these net new business numbers.

We haven't segmented on that basis other than it was a strong quarter in C&IS. We've gotten in the year to date in C&IS $32 million of net new annualized trust fees compared to $20 million in the first half of last year. So that gives you a sense of the momentum that we have, and we're not breaking it out in the segments that you indicated.

Okay.

But the – there’s strong new business and momentum there and I tried to give you a signal by the names. We're getting some very, very substantial pieces of business.

Okay. Is that also true about the level of RFPs, then? It seems from your comment, there's acceleration in the amount RFPs out there.

I didn't comment specifically on the RFPs, the opportunities continue to exist out there.

Okay. My last question is just on the passive management business that you have. Is there any new business wins you can report since transitioning that business over, getting like you said the number three position now? Any new opportunities that have come your way?

There are -- I can't give you any names at the moment, but yes they have. As we indicated, the business is coming from -- the increase in the assets that we got, that segment of our business reflects new business coming in, increased performance because of higher equity markets and of course completing more transition of assets from the first quarter to the second quarter. And then -- we do say that we've gotten many passive wins and that's in our press release and in our website. But I don't have specific names to give you. We're not giving specific names in that area. But whole increase, as you looked as I talked, I think to Livia earlier, we had $51 billion at March 31st. We have $73 billion at June 30th. There are three pieces to that. One piece is the transition of the remaining client base that we had not accomplished as of March 31st. Then you had obviously the increase in the markets, the equity markets during the second quarter, and then just as importantly, we've gotten new business our way from clients that we transitioned, brought in more business and then we've gotten some others that have come to us because we are now a bigger factor in the index fund business.

Right.

It's working the right way. And we have more -- we hope to have more to report on those lines as we go forward. That's why we pursued the acquisition, and also the opportunities as I said earlier, in another caller this, the securities lending and transition fee opportunities are rather material, when you're working with this kind of an asset base. See, we have more than doubled our asset base from where we were a year ago in index funds. About $60 billion and now we've added $73 billion in total on the Deutsche Banc side. So now we're a major factor and we will get more opportunities.

Okay, thank you, Perry.

Thank you.

Our next question - Mark Fitzgibbon, Sandler O'Neill.

Good morning, Perry.

Good morning, Mark. Good to have you on the caller list.

It's good to be here. The first question I had, I know that the New York office has been only opened a short time, but --

It opened on Monday of this week.

Right.

This is the third day.

Right, but your PSS officers have been beating the bushes here for the last several months.

I hear that.

I have heard that. And I wondered if you could give us a sense what kind of traction they are getting, thus far? Is there a number in terms of the size of the New York book that you could share with us at this point?

No, I don't have any numbers to share with you. But you're very familiar for all of the rationale that we went in there. We have a client base, a substantial one that we developed over the years in the New York -- metropolitan New York market, particularly the wealth management segment, and that's a terrific referral base that we're working from. And so we're very optimistic. This is the third day, and I'm glad to hear that we're there. Our leadership is in place there, and we’ll be adding to that staff. But I don't have any specifics here, 2 1/2 days into it to share with you. And we hope -- we went there because we expect to report a lot of good news going forward.

Got you, and then separately, I wondered if you could just sort of remind us what your target capital ratio is?

In what context are you talking about? Bossel (ph)?

Bossel, but also just your your standard tangible capital ratio or leverage ratio.

Well, okay, first of all, we want to be substantially above well-capitalized. By any measure. And as you look at the trend report we gave you, the tier one capital is essentially running at about 11%. The total capital went down a little bit because of our redemption of the auction preferred. That to get technical with you, Mark, was part of tier two. Soul see a slight decline from 15% to 14.2% in total capital, and you can essentially attribute that to our redemption of $120 million of auction preferred.

I presume also the buyback had a bit of a negative impact on that as well?

Well, the buyback as I said was rather modest in this quarter. We essentially did not do much. We only did about 39,000 shares, total cost of $1.4 million and the net result for us was that our actual shareholders equity which we look at -- common shareholders equity went up about $40 million, and that of course kept us along the historical path that we've shown ever increasing common shareholders equity, and then you asked about the leverage ratio. We have always -- we've been running here the past couple of years, about around 8% which is not much leverage given where others may number terms of their balance sheet. So on the balance sheet side, we're keeping it highly capitalized and then also, if I may just expand, with a very high liquidity component to it. About half of the balance sheet is in very short-term governments and money market assets, and I mean 90 days or less.

Perry, given the risk that you've -- I mean perceive on the balance sheet, are you hoarding capital with the idea that acquisition opportunities might present themselves, or for some other reason?

I don't -- hoarding capital. We have a business that has historically been a growth business, and you know the substantial flows that all of these trust assets under administration represent and our goal is to be substantially well capitalized, and as in times like this, strong capital positions engender, a lot of confidence amongst our existing customers, and really attract those that we would desire to do business with, both on the corporate and personal side. So we historically have been profiling a very, very strong capital position. Be it defined of either by common shareholders equity or regulator risk-base capital levels. We want to be at most strongest and most robust level. It serves us very well in terms of differentiating ourselves in the marketplace. It attracts business. And of course it enables us to handle an ever larger growing volume of funds flowing through this organization, as you know, we have a $1.8 trillion as we're talking today under administration, and there's a lot of buys and sells that go on a daily basis by the almost 1500 or so money managers that we have, and we want to be in a robust capital position to handle any and all requirements that they might have in the securities settlement process.

Gotcha. Well, thank you for your honesty, Perry.

Well, thank you. I am flattered by that. I always try to be nothing but honest on this.

You are always very candid. I appreciate it.

Thank you, Mark.

And again, that's star 1 if you would like to ask a question. Our next question - Gerard Cassidy, RBC Capital Markets.

Good afternoon, Perry.

All right, Gerard. Is the water warm up in Portland or is it still cold?

No, it’s finally warming up. We have had some sunshine. That wasn't you at the home run derby the other night, was it? I thought I saw you sitting behind the dugout.

No, I wasn't there, but it was a heck a show.

Yes, it was.

It was terrific, though. We didn't have some of our Chicago legends there, Sammy Sosa, which would have been more prodigious, but those guys hit it pretty well there at Cellular Park.

They sure would. A question for you, you mentioned something about the pricing pressure that some of your customers are feeling on the credit side and in the middle market area. How about in your institutional business? Are you guys finding that the bidding for business, whether it's some the Deutsche Banc from State Street or the general institutional business that pricing is more intense today than maybe 12 months ago?

It's always been intense. I can't give you that it is any different today. As you know, it's now been over a decade that we've talked about pricing pressure in the institutional side, and it really hasn't changed significantly for me to make a comment, other than to say it is different today than it has been. It is a very competitive environment out there. Not any different than it has been. You know when I was talking about the middle market, it was those businesses in terms of trying to raise their prices. You know, you're not getting any price relief as a manufacturer or a distributor.

Right, right. In terms of on a go-forward basis, are there any other parts of your company that may not fit into the long-term strategic plan that we may actually hear of another announcement of the sale of maybe additional branches or parts that don't fit in today?

Well, we won’t -- you know, we always have been and right now, more intensively, given the environment that we're in, we'll continue to look very, very closely at the profitability parameters of all of the activities that we're involved in. We need to be performing at much higher levels than we had been in the recent past year, and one scope of that is what we've undertaken here. I don't have anything specific to share with you, but believe me, we have metrics in place that we need to achieve with our various businesses. On both sides, PFS and C&IS. It's the only way that we can ensure ongoing success. We took some very, very significant moves in the second quarter, both Bill Osborn and I took great pains to foreshadow that to the marketplace but we will continue to intensively look at our business and manage it, and the major part of what we've done, if -- I don't have anything in line that is at all in proportion to what we did in the second quarter, but as any good business, we need to intensively review anything and everything that we're doing. But we don't have anything along the lines that we reported the past 90 days that we're working on right now.

Great. Thank you.

That magnitude, that proportion.

Great, thank you very much.

Having no further questions, Perry, I would like to turn the conference back over to you for any additional or closing comment.

Steve, thank you very much, as I said in my closing remarks, we took some very, very major steps during the second quarter to improve the profitability of the business, and we look forward to our October conference call. And hopefully we'll be able to report our progress in achieving success on these initiatives. Again, many thanks for joining us. Steve, that concludes the conference call.

Thank you, this does conclude today's conference. Thank you for your participation. You may now disconnect.