Northern Trust Corp (NTRSO) 2003 Q3 法說會逐字稿

Good day everyone and welcome to the Northern Trust Corporation third quarter 2003 earnings conference call. Today's call is being recorded. Conducting the teleconference today is the Director of Investor Relations, Ms. Bev Flemming. Please go ahead maam.

Good morning and thank you for joining us to review Northern Trust's third quarter financial results. We are taking a slightly different approach to today's call compared to previous earnings calls you may have participated in. I have the pleasure of sharing our Safe Harbor Statement with you, I will then hand the call over to our Chief Financial Officer, Perry Pero. Perry will provide you with a detailed review of the quarter's business highlights and financials, wrapping up with a strategic view of the momentum in our businesses.

Joining Perry and me today are Harry Short, Northern Trust Controller, Steve Fradkin, Executive Vice President - Finance and Mark Bette, my colleague in Investor Relations.

If you didn't receive our earning release or financial trend report by e-mail this morning, they are both available on our web site at northerntrust.com. I also need to mention that this October 15 call is being webcast live and can also be found on our web site. The only authorized rebroadcast of this call is the replay that will an available through October 22. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for the Safe Harbor Statements. What we say during today's conference call may contain forward-looking statements, such as statements relating to our financial goals, dividend policy, expansion in business development plans, projected profit improvements, business prospects and positioning with respect to market and pricing trends, strategic initiatives, re-engineering and outsourcing activities, 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 in 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.

Now, let me hand the call over to Perry.

Thank you, Beverly. Good morning and let me extend my welcome to all of you listening to Northern Trust's earnings conference call this morning.

Earlier today, Northern Trust reported third quarter 2003 earnings per share of 51 cents as compared to 43 cents reported in the third quarter of 2002 and 30 cents reported in this year's second quarter. This is the first year-over-year increase we have reported in our earnings since the first quarter of last year. As you know, during the past year we have undertaken a number of strategic and operating initiatives to position Northern Trust for continued growth.

Highlights in today's earnings announcement include the following: First, we had revenue growth greater than expense growth due to new business success over the past year, acquisitions and, of course, the much-improved equity markets.

Second, both our trust assets under administration and managed assets are at record levels of $1.9 trillion and $436 billion respectively. Included in our managed assets at the end of the third quarter, were $70 billion in acquired passive assets.

Third, trust fee growth was at the highest quarterly growth rate since the fourth quarter of 2000. And finally, our initiatives to lower our cost structure are working, evidenced by the lower level of expenses that contributed to our improved profitability.

Although historically low levels of interest rates continue to challenge us as net interest income declined, our other revenue sources more than offset that decline. An important factor in our earnings per share in net income growth is the significant decline in our provision for credit losses to $5 million this quarter from last year's $20 million level.

A year ago, the Share National Credit Regulatory Review migrated certain loans to special mention and substandard, necessitating a larger provision. This year's review had no comparable migration, enabling to us have the lower provision. We recognize that our profits and performance are not at the record levels we reported in 2001 but we made progress in the third quarter in getting back to that level of performance.

Now, I would like to proceed with a review of our third quarter's major revenue and expense items. Revenues in the third quarter were $539 million, up 4% as compared to last year's third quarter. All components of non-interest income participated in this year-over-year increase with institutional fees, personal fees, foreign exchange and brokerage income, all contributing to the growth in revenues.

In addition, remember that last year's third quarter included a $15 million write-off of our equity investment in My CFO and a $8.5 million gain on the sale of leased equipment by our leasing our subsidiary, Norlease. On a sequential basis, revenues were down 2% versus the second quarter. However, you will recall that our second quarter included a $17.8 million gain from the sale of our Higgins Road retail branch in Chicago.

Our Personal Financial Services business unit reported third quarter trust fees of $152.5 million, an increase of 3% or $5 million compared to the year-ago quarter. PFS trust fees were also up 4% or $6 million sequentially. Fees reported by our Illinois offices were up $2 million year-over-year and up $2 million sequentially. Florida fees were up $500,000 from last year's third quarter and up $1 million sequentially.

You will recall from previous conference calls that Illinois fees are based on the prior quarter's ending asset values. Florida's fees are based on asset values throughout the quarter. Therefore, Illinois benefited from the June 30 market values where the S&P 500 was up 14.9% from March 31. Likewise, Florida experienced a benefit from the third quarter's rising equity markets as evidenced by a 6.7% increase in the daily average of the S&P 500 during the third quarter. Our remaining states had a sequential increase of $3 million or 7% in their trust fees.

Trust fees in our Wealth Management group, which serves families typically with assets of $75 million or more, were down $1 million versus a year ago and up $500,000 sequentially. The year-over-year decline primarily reflects a transfer of certain client accounts to the Illinois trust business.

Assets under administration in Wealth Management were $77 billion, up 25% from one year ago and $6 billion or 8% from June 30. Managed assets in wealth management totaled $16.7 billion at the end of the third quarter. Up from $14.6 billion one year ago and up from $14.5 billion at June 30.

Our PFS new business results in the third quarter were a positive $6 million in net new annualized trust fees sold as compared to $7 million in the third quarter of last year. Assets under administration and PFS at September 30 were $181 billion, up 20% from a year ago and up 5% from June 30. Assets under investment management, up $99 billion or up 15% from a year ago and up 5% from the $94 billion level at June 30.

Corporate and Institutional Services trust fees of $151.5 million increased 13% or $18 million from last year's third quarter and were up 3% or $4 million on a sequential basis. Securities lending fees equaled $25 million and accounted for $8 million of the year-over-year increase, primarily reflecting wider spreads and greater volumes.

CNIS custody fees of $58 million were up 2.5% from last year. Sequentially, custody fees were up $4 million, led by global custody. Investment management fees of $54.5 million were up $7.1 million versus year-ago and up $2.5 million or 5% sequentially.

Included in our third quarter investment management fees were $5.3 million in revenues associated with the passive asset management acquisition, up from $4 million in this year's second quarter.

Net new recurring trust business sold in CNIS for the third quarter was $11 million in annualized fees. Assets under administration in CNIS were up 35% from a year ago to $1.74 trillion. While managed assets of $337 billion were up $129 billion or 62%.

On a sequential basis, our managed assets increased $8 billion from $329 billion at June 30. Included in our CNIS managed assets at the end of the third quarter were $67 billion in passive assets acquired.

Global custody assets totaled $661 billion at quarter-end, up 47% from a year ago and 12% from June 30. The international segment of CNIS continues to exhibit very strong sales success. I hope that you've been monitoring our press releases to see the steady pace of new global business that we've been announcing.

Our three foreign exchange trading desks reported trading profits of $29 million, compared to $26 million in last year's third quarter and $33 million in the second quarter of this year. The year-over-year increase reflects increased client volumes and continued currency volatility.

Other operating income in the third quarter equaled $21 million as compared to $11 million in the same period last year. Recall that in the third quarter of 2002, we wrote off our $15 million equity investment in My CFO, offset partially by $8.5 million in gains on the sale of leased equipment by our leasing subsidiary, Norlease.

Sequentially, other operating income was down $14 million. As I mentioned earlier, included in other operating income last quarter was the $17.8 million gain that we reported on the sale of the Higgins Road retail branch in Chicago.

Net interest income equaled $147 million, down 9% or $15 million from a year ago and down 2% or $3 million sequentially. The unprecedented low interest rate environment continued to place a significant drag on our net interest income as residential mortgages were refinanced or modified and money market assets repriced at very low rates. This has squeezed our net interest margin to 1.67%, down from 1.98% last year and 1.76% in the second quarter.

Total loans averaged $17.5 billion, down slightly compared to a year ago. Residential mortgages were unchanged from last year and averaged $7.8 billion, representing 45% of our total loan portfolio. Commercial loans averaged $3.8 billion, down 10% from a year ago, reflecting the continued lackluster commercial loan demand as the economic recovery has not been a broad-based one. Personal loans were up 8% to $2.4 billion.

As I mentioned earlier, our provision for loan losses was $5 million in the third quarter as compared to $20 million last year. During the quarter, net charge-offs equaled $5 million, only 11 basis points on average loans. Our reserve for credit losses increased to $172.7 million from $168.4 million one year ago.

Non-performing assets decreased to $100 million at September 30 from $108 million at the end of the second quarter. Our asset quality continues to be in a leadership position when compared to our peers in the industry.

Expenses during the third quarter of 2003 equaled $347 million. Up 3% or $9 million from the year-ago quarter and down $65 million sequentially. You'll recall that the third quarter of, excuse me, that the second quarter of this year included charges of $48.5 million. In our third quarter, we had $6.2 million in charges for reduced lease office space needs and the replacement of software.

In late June, we announced initiatives to reduce our expense base by 70 to $75 million annually over the next 12 months. We now believe that we will reach the high end of that range or an estimated $75 million in annualized savings by June of 2004.

During this year's third quarter, we successfully achieved approximately 65 to 70% of that annualized amount or approximately $12 million for the third quarter. This quarter's expense reductions fall into two categories. Compensation and benefits and other operating expense.

Now, let me review each expense line item in detail for you. Total compensation and benefit expense in the third quarter was $191 million and compares to second quarter compensation and benefit expense of $192 million when adjusted for the $19.5 million severance charge.

Within the compensation line item are salary and incentive expenses. Salary expense declined $5.4 million sequentially but was offset by a higher level of incentive expense because of the improved level of corporate and business unit financial performance in the third quarter versus the second quarter. Salary expense is lower because our total staff at September 30 was 8,094 people, down 145 people from June 30.

Occupancy expenses were up $2.2 million year-over-year and down $16 million sequentially. Essentially, reflecting the $16 million charge we took in the second quarter. Occupancy expense in the third quarter included a $2.8 million charge associated with the reduction of leased space in downtown Chicago, offset by real estate tax refunds.

Equipment expense totaled $21.5 million, essentially flat versus last year and down $1 million or 5% sequentially. Other operating expenses of $105.8 million or $8 million higher than last year's third quarter, yet down $27 million sequentially.

The third quarter of this year included $3.4 million in charges for software write-offs. The second quarter of this year included $9.5 million in software write-offs and $3.4 million for out-placement services. Adjusting for the charges in both quarters, other operating expenses were down $17.6 million or 15%.

Business promotion expense was down $3.5 million sequentially, with approximately half of that decline attributable to a fine-tuning of our promotional efforts and the other half representing the normal summer slowdown in our promotion run rate. Outside services purchased was down $4.3 million sequentially. Again, about half of that sequential decline represents efforts to lower the run rate of technical and consulting expenses.

We repurchased 830,000 shares of Northern Trust common stock in the third quarter at a cost of $35 million. Diluted shares were up $800,000 from June 30 to 224.7 million shares. We can purchase an additional 11 million shares under our buyback authorization. Finally, in keeping with our practice, we increased common equity by 6% to a record $3 billion at the end of the third quarter.

In our July earnings conference call, I told you that we were looking forward to reporting on the success of our various strategic and operational initiatives to grow the business. This morning's report is the first indication that our efforts focusing on core growth are working. I can assure you that management is very actively focused on that effort.

Let me take the final minutes of these opening remarks to highlight some of the growth initiatives and successes we have under way in each of our businesses. In CNIS, our global marketing efforts continue to be successful. Just last Friday we announced our win of the $28 billion custody mandate from the state of New Mexico, a significant U.S. public fund win for us. Likewise, last week we announced that we had been awarded the $3 billion custody business of U.K. conglomerate Smiths Industries. These two wins are indicative of the success we are having in the institutional market.

Our request for proposal pipeline remains strong with just over 100 RFP in the pipeline globally. And I am pleased to report to you that we continue to win mandates from the former Deutsche Banc custody operation. We reported nine worldwide wins to you in May of this year at our Investor Day Conference in Chicago. That win count now totals 16 worldwide.

In Northern Trust Global Investments, we are very pleased that our acquisition of the Deutsche Banc passive business has worked out just as we had planned. We've spoken to you about four elements of that transaction, which would fuel growth at Northern Trust. The first is our prominent positioning as the No. 3 institutional index manager and the impact that positioning would have on our ability to compete for new mandates.

Historically, a good new business year for us in passive assets would have been 11 to $12 billion in assets. This year, we have won new mandates, totaling $25 billion through the first nine months.

Secondly, a large and growing passive business adds to securities lending collateral volumes. As we had expected, our securities lending volumes are approximately $5 billion higher than they would have been without the new and growing index asset base.

Third, being a large and prominent index manager creates competitive advantage in our growing transition management business. Success in this goal has been achieved as best evidenced by the superior growth you see in our securities commissions revenue line item.

And finally, we felt that the new passive clients that came to us through the Deutsche acquisition would create custody opportunities for us, as well. In 2003, we have converted 11 acquired passive clients to becoming custody clients. As I said at the outset, we made this acquisition for a number of key, strategic reasons and we are hitting on all cylinders.

Our PFS private client business is now positioned within close proximity to 36% of the U.S. millionaire market, given the recent openings of offices in Manhattan and Atlanta. We intend to move into Stamford and Boston, which will get to us our stated goal of being within 40 to 45% of the millionaire market.

The office footprint goal that we laid out back in the late 1990s will soon be realized. With that, our focus going forward will be on filling out that existing footprint with incremental, well-positioned offices and execution around deeply-penetrating our target high-end client base within those markets.

As you can appreciate from these comments, we have a lot to be excited about in each of our businesses. With our strategic positioning in two globe markets and excellent client service staff and leading technology we look forward to reporting our future successes to you.

Now Audra, will you kindly, please, open the call for questions or comments from our participants?

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, please do so by pressing the star key followed by the 1 on your touch-tone phone. If you are using a speaker phone, be sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star 1 to ask a question. Our first come from Mark Fitzgibbon with Sandler O'Neil.

Good afternoon, Perry.

Good afternoon to you, Mark.

You mentioned that you had landed 16 pieces of business from Deutsche. I wondered if you could give us a sense for what the total client assets were on those 16 pieces, approximately?

Unfortunately I don't have that information to share with you.

Okay. And then secondly I know we're sort of in the early stages of the rollout of the new offices in metro New York, but can you give us any kind of status update? How's it going? Any sense of the new business flows and volumes?

Well, we've been open there now for, we opened the middle of July and we're meeting and exceeding all the expectations we had for that effort.

Okay.

We're still in the process, we've added staff, we've gotten some very attractive professionals in the business to join us and looking for others and all the potential that all of us here have chatted with you about, about our excitement about that office, is still all there. We've had no disappointments.

Okay. And then how about the timing of the rollout on Boston? Is that yet been determined?

We are in the process of negotiating space there in Boston and we'll be there in the next several months.

Okay. Thank you, Perry.

Thank you. Thanks for joining us, Mark.

And our next question comes from Brock Vanderbeek with Lehman Brothers.

Thanks very much. Perry, if you could just review the drivers for the Delta and other expenses. You mentioned the $17.6 million decline, you explained the decline in promotional expenses and outside services. That brings you up to roughly $8 million. What's the other half there?

The other part there, as I indicated, you've got a business promotion, we had about 3 and 3 1/2 million dollar increase. I say about half of that is in that category as we're fine-tuning our efforts there. The other half was seasonal. And then the remaining, but comparable, amount would be in outside services purchased such as consulting and other technical services of about a comparable amount. And then you also saw we had a slight decline in equipment expense. And that will get you to about the $12 million level.

Okay. So what's the rest?

Well that's, you know, that's $12 million. Okay, let me back up and see if we're both on the same wave length.

Well, if the adjusted decline is 17.6 ...

Yes.

It should...

Our other operating expenses that moved around that, you know, had nothing to do with the project excellence. Our project in the second quarter where we took the charges that aggregated of, you know, almost $50 million .

Okay. Is that level sustainable?

The operating...

Just the other expense line?

Yeah, the other expense line, you will get a lot of detail in the10Q on that, which we haven't completed, but the part that I signaled to you relative to the $12 million in the line items that I shared with you is truly sustainable and we will increase that since it's only 65 to 70% of the $75 million that targeted that we have in an annualized basis.

So, the simple way to look at it, you take that $12 million in this quarter and multiply it by four, you've got $48 million of it. And we're not sacrificing, you know, any growth opportunities in this process.

Got it. Okay. Thank you.

Thank you.

We'll go next to Brian Harvey with Fox-Pitt and Kelton.

Thank you. Just had a couple of questions on the new business growth this quarter. We saw a bit of a slow down in both CNIS and PFS on a link quarter basis.

Perry, can you put any color behind any of that? Is any of that seasonal? And can you talk about some of the conversations that have gone on on the corporate side as well as the personal side, in moving business over and individual's appetites to get back into the market?

Let's me hit your last one, you summed it up pretty good. The appetite of individuals to get back into the market: It's still on the slow side. People are still hesitant. They're not moving as quickly. Obviously, the market has begun to increase, starting in the second quarter. But, you know, third quarter had somewhat unevenness, although the market was up 2%. So, it's been more challenging to get the individual market to sign up and close on deals and if you notice, compared to last year's third quarter, we're quite comparable, we're only $1 million off and in CNIS, there is a certain lumpiness to, you know, the business as it comes in.

We've,as I had said, our pipeline is strong, we started off the fourth quarter with a significant win in New Mexico and the U.K. conglomerate. That's not in the numbers because this new business is new business that we won in transition during the period and quite frankly, the New Mexico and the Smiths are transitioning as we're now speaking this month. So, there is a certain lumpiness that goes about. But in the personal market, there is still some hesitancy on the part of individuals to close. We still know we're positive in winning new business.

When you look at the numbers year to date on our net new business, to put it in perspective and not just look at one quarter, we've had $67 million of net new annualized trust fee wins this year compared to $51 million last year and if my memory serves me right, that's about 6% of our overall trust fee volume. So, for year to date, we're ahead by about $16 million in net new annualized fees this year compared to what we had after nine months last year.

But your points are correct relative to your observation on the third quarter on a sequential basis being a tad bit lighter than we had in the second quarter.

Okay. Is there any different trends here in terms of the gross business versus the net business? Is there any large losses on CNIS side or...

No. No.

No?

No.

Okay. Thank you.

Nothing along those lines.

Thank you.

Thank you for joining us.

And we'll take our next question come Ken Usdin with UBS.

Hi, good afternoon or good morning, Perry.

It's morning for us, afternoon for you!

Got a couple of quick questions for you.

Sure, Ken.

First of all, on Illinois on the PFS side, you mentioned that's a lag business. In the first quarter, obviously the markets were down and that business, you know, improved 700,000, but in the second quarter, the market was up 15%, yet the revenues were only up $2 million. Seems a little bit of a disconnect. I wondered if there's anything below that, is it maybe a pricing issue or a client defection issue? Any more color on that side?

No, there's no client , the key thing to remember when you talk about the market, let's back up a little bit, is that, you know, we're not all equity-driven. The numbers that you had that I shared with you for our assets under management at the end of the third quarter were, you had 46% of that $99 billion in equities. You had about 38% that was fixed and about 16% that's short.

So, what you have there is, you know, less than half of that business is driven by the equity market. And you need to factor that into your calculation on run rates. You see, you can't take 100% of it and say it's all correlated to the equity market.

Right. Even with half the number, though, you would think you might have gotten a little bit bigger of a bounce, though?

Well, the other thing in terms of our trust fees, they're not all investment management fees. You've got probate fees, you've got executive fees, you've got a whole variety of other fees that come into the picture. It's not exclusively a 100% investment management related activity and you do have variability in those fees. In the first quarter, you've got tax fees. You have a big tax season and you get that coming through. So, you know, we do significant amount of tax work for your clients and those fees are paid in basically the first quarter and portion of the second quarter.

So, there is a whole mosaic of resources that are coming through and then the other thing is that you have a business that is the most maturable business that we have. So, we have a lot more of the fiduciary elements that come to play here than we may in the other states. You know, fiduciary-related as opposed to investment-related.

Right.

That's the perspective that you and the others should always be mindful of. It's not 100% asset management business, it's a fiduciary, you know, investment management business with a lot of fiduciary revenue sources that have nothing to do with, you know, the management of money.

Got it.

Probate, executiveship, trusteeship, tax, services, et cetera.

Okay. The other question was on the other operating income line, you tied it back and excluding the $17 million or so, about the, that was in the second quarter in other operating income, but, you know that business kind of, that line, you know, typically runs 17, 18. It was closer to 21 this quarter. Anything in those numbers that you may be able to tease out to illustrate what may have been outsized?

There's a potpourri of items that move there and you do get variability in that line item over the years. There isn't anything of particular note in that line item that , to use your term, I tease out and give you some perspective relative to a going-forward rate. That's a potpourri of a lot of stuff that goes through the, you know, you've got letter of credit fees, you've got all sorts of sources of income that are flowing through there.

Okay, and then the last question, Perry, it is just on the balance sheet. You've, you know, the balance sheet grew nicely in the quarter and it, you know, with low CNI demand, it's obviously been pushed a little bit more towards investment securities as a percentage of the total asset base over time. Is that driven by the deposit side? It seems like you're, kind of the repos went up and you deposited those into shorter term securities. Can you just give us a little flavor on that ?

What we do, you know, we have a very strong capital base and we try to look for incremental income and what you see in there is we have a forecast of interest rates and we take advantage of that insight by taking essentially positions in government agency securities, which get, you know, funded by purchased monies and we're talking about maturity structures of 90 days or less and it depends on what our outlook for interest rates are and we try to get, you know, 10, 15 basis points of incremental income. You know, we're still well-capitalized and even doing that, the leverage of the Corporation is quite light, I mean, just a tad bit under 8% at 7.8.

So, that's really a very short-term view and it changes from period to period based upon what our outlook for interest rates are. And we basically do benefit, if you recall, when the fed moved at the end of June, we were very, very nicely positioned with a nice government agency portfolio that we got the benefit of for the first two months of the quarter with higher yields on those assets compared to our overnight funding.

I'm giving you an awful lot there, I know, but I don't want you to overread it because it's really a short-term windows of opportunity that we take advantage of to get incremental income.

I gotcha. And then connected to that, though, you know, the low rate environment continues to hurt, is there a point where that kind of at least normalizes, though and you will eventually see better, even short-term yields? Or should we expect the margin to be under pressure until the fed actually does something?

Well, of course, you know, if we don't go below 1%, we will obviously won't stabilized. And our major issue is, you know, we have almost $8 billion, $7.8 billion in residential mortgages. The yield on those mortgages in the third quarter of this year compared to the third quarter of last year, due to all of the refinancing and modification that took place, is lower by a little over 100 basis points. And that is where the pressure is coming from. Pure and simple.

And if rates stay where they are, as you know, we've had a backup in rates. The tempo of modifications and refinancings, as we're now talking, is nothing like it was 90 days ago when rates were at historical lows.

So, to answer your question, if rates have stableized at the current level, both short-term and, you know, the 10-year benchmark on which is the pricing mechanism that is utilized for mortgages, we'll be all right. And, you know, it's the forecast and there's a high expectation out there that the fed has done all that it intended to do on the short-term side of the curve. So, that should enable us to stabilize at the current levels.

But if rates go down and you get another onslaught of modification and refinancing, then the residential mortgage portfolio would be under pressure. But it's, the bottom line is with a 1% overnight rate, there's very little room to play with.

Gotcha. Okay, great, thanks, Perry, appreciate it.

Okay. Hope that was helpful.

And our next question will come from Kyle Cerminara at T. Rowe Price.

Hey, Perry, thanks for taking my call.

Thanks for joining us, Kyle.

My question is: If you take into account all of the offices that you'll opened on the PFS side in the last year, including your New York expansion and into Boston, how dilutive to earnings were those, was this office expansion? And when do you expect them to be accretive?

Okay, well there, in the large mosaic, you know, they're very small. Obviously, as we told you, brand-new offices, the general model we've shared with you, we go into a brand-new area, you have, you know, as a rule of thumb, at least 36 months, if you're in a brand-new geography, based on our experience, before those offices will become positive.

You're looking at a whole network, though, of 82 offices, so, in the scheme of things, these are not either that big of a drag or that big of a positive. You have to look at it at both sides. And we, essentially, have just a profile here where the number of new offices, as you pointed out, is rather modest. Most of our effort has been to expand and upgrade existing offices and there we don't get the pressure that you do with a new office, where you've got to staff it up and you've got to get business.

Like, for example we've invested in Boca Raton and Aventura, Florida with new facilities, which will open here in the next 60 days. Those have a great business base on which they are performing. The new offices will have 36 months, or so, before they turn positive, we're hopeful in Manhattan to, given the very tight focus we're giving for going to a little higher targeted market in terms of investible assets, to maybe shorten what our experience has been in other locations where we've gone into new territories.

But it's not that significant and in Stanford, we already have an existing location there. We have some available space in our Northern Trust Global Advisor, that's our manager/manager business and which has an office location in downtown Stamford. We're basically putting in place a lease hold improvement there for some of the excess space we have in their office space to accommodate the new personal trust office. So, that won't have the real estate and occupancy burden that we would have had, you know, going in to Noval.

And as you know in New York, the other thing to put it in perspective, Kyle, but when we acquired the Deutsche business, we had to have a staff in New York and we had to get space and so we got the space at approximately 56 and Park Ave. There was additional space there. We had to lend a floor and there was more space available than we needed for the passive asset business and so we took advantage of that to put in a first class office upgrade that will be represented of our PSS face-off with the markets. So, they're a little bit different in how we're approaching them in both of those two locations. They're leveraging off of other core businesses.

And last question, which elements of your business are you most excited about in terms of contribution in revenue to earnings over the next few years?

Well, we've got three terrific businesses. In CNIS, I shared with you what our wins have been. The global custody component of CNIS has been extraordinary. Approximately $660 billion in assets under administration now compared to 440. The wealth management component of our PFS franchise is extraordinarily attractive as a growth opportunity as is the basic PFS business and then Northern Trust investment operation, NTGI, it's just extraordinary now.

When you look at what we have in terms of a profile of assets in that business, the growth we're achieving, the complete menu that we have of investment offerings in a variety of segments, all three of them will do very well. We're very excited about them and that's all we're investing in! I mean, if you look at the menu of what we're doing at compared with what everybody else is out there, I think we would be the most narrow of financial services businesses but yet very deep and with significant and meaningful positions in each of these businesses.

You know, we have 1, 2 and 3 positions in a lot of these segments. Wealth Management, we're definitely No. 1. And the whole trust assets under administration at 180 odd billion, we're No. 1. In terms of our positioning in certain parts of the world in northern Europe and the U.K., we're in a premiere position. So, we have the base on which to take advantage of the significant growth opportunities in all three of the areas that we're involved in.

Right. Well, thanks for taking my call and congratulations on a solid quarter.

Thank you, Kyle. Appreciate your ongoing interest in us. Audra, anyone else on?

Yes, we have a question now from Brian Bidell with Merrill Lynch.

Good morning, Perry.

Hi, good morning to you too, Brian.

Good afternoon, here!

Right! We have the time here, we have 10 minutes to go before...

That's right. By the time I'm done with questions, it will be after noon! Hopefully not that long! [ Laughter ] Most have been answered, just a couple or a few. Just, you were talking about the $75 million expense fee run rate by June of '04.

Right.

And you're about 2/3 of the way there. Is this on, sort of, the current revenue base? Or I guess what I'm getting at is, does this exclude variable expenses that come in, you know,line with revenue growth? So, in other words, if your revenue is really kicked up over the next four quarters, you wouldn't get to the $75 million of this?

We will, you know, you've got an ongoing dynamic. You've got an ongoing dynamic, we obviously need to invest in growth if those revenues require some investment, you know, of people and so forth, we will need to do it. But what we're trying to give you is a base on which to go forward from June. We took very significant charges to give you some guidance on what is going on in the business and where the positive expense performance can be discerned and...

Right.

The issue is you have, the biggest part was the salary component because the head count was the biggest part that we had and then you've got a number of other areas, you know, we're getting lighter in terms of some of your leasehold expense because of the charges we took and then the other operating expenses that I spent some time trying to provide some perspective to the, I forget who it was, but several callers back, that we will, those are real intangible and will come through, but they may not, it's not , as you know, a static business model.

Right.

And that's the challenge and we're trying to provide as much guidance as we can. And, you know, if you just stand back, though, and look at our expenses and go to the first quarter, total expenses, take it at that level, you had about $350 million of expenses and here in the third quarter you've got 347.

Yeah.

Well, something positive is happening!

Yep.

And what I'm trying to do is give you a peek into the whole, you know, profile of expenses. You know, we obviously got some growth initiatives going on in New York.

Yep. So, basically it's really on the current revenue run rate. So, as your revenue, you know, we should, you know, model something in the line of, let's say you getting to your cost goals, exclusive of improvements in revenue and other variable expenses that are related to that.

You know, the challenge for Beverly and me on this side is, you know, we have, you know, all of you, there's 20 of you that have estimates out on us and you all have a different model and our challenge is to, you know, I personally don't understand all the details of your models and everyone else has a different profile and that makes it very challenging to respond, you know, in a pinpoint item by item to you.

I think I get the gist of what you're saying.

The gist is that our goal is at the end of June of 2004, when you look at our performance, we're going to be able to give you general guidance as to a $75 million annual savings.

Savings rate, okay.

And as I said earlier, the $12 million number that Beverly will talk to you about later today that we achieved in the third quarter, you multiply that by four, that gives you 48.

Yep.

That's 48 of the 75. So, we've got $27 million to go.

Gotcha.

I mean, now I'm talking at a general level, but that's the way to look at it.

Okay.

And it's the best guidance I can give you and fortunately, I can't get into the detail of your model because I don't know all the aspects of it..

That's okay. That's fair. Just moving on to the revenues. Does the pipeline, you're talking about the 100 RFPs in the pipeline, I think you said globally, I assume you mean including the U.S.?

Yes.

Can you characterize that in terms of, and I know this is a very hard thing to answer, but maybe a general sense of what a typical hit rate is on, or the win rate on the RFPs and over, you know, if you factor in conversion in the sales cycle, over what timing your sense is that you will be able to hit on these, or the RFPs will hit the income statement? Is this something that's, you know, more of a, I don't know, a two- year thing or more of a six-month thing.

You know, we have about a, if you look at, let's answer it this way. You know, because each opportunity is different. When you look at us in the various markets that we're in in CNIS , you know, we're in the, you know, the large corporate pension plan, the U.K. market, the foundation market, et cetera. We're about 30% of those markets and if you look at the top 200 companies in the U.S., we have the defined benefit, or defined contribution plan, for about 30 of them and there's about 60 of them. So, basically 25 to 30. So, I would hope that this pipeline would be representative of the same kind a profile of win.

I see.

But I'm giving you a lot of Kentucky windage there because there's some big ones, I shared with you all this morning, New Mexico. That is a big one!

Yep.

You know, $28 billion in assets. That has quite an impact.

And that one is custody, does not right now include securities lending and phone exchange and other circumstances?

All of that will happen.

You're going to cross that one through that, then.

Of course, that's the Northern Trust model.

What's the typical timing, and I know this varies too, but maybe for this plan, for instance...

I can't talk about a specific plan.

Right.

Frankly I'm not at that level of detail and to be honest, they're all different.

That's fair. And just moving on to the U.K., you know, State Street mentioned how they're doing well in the U.K. and I think you play in a couple of different areas there, you know, versus State Street, but maybe you can elaborate, one thing they said is that the market is very under penetrated in relative to the U.S. in terms of investment outsourcing.

Maybe if you could just comment on, you know, whether you agree with that, first of all. And second of all, do you think it's also much less competitive for you there than in the U.S.? And, you know, what kind of organic growth opportunities do you see coming from that market over the next...

You know, when you talk about competition, the competitors are the same in the U.S. as they are overseas. It's really the U.S.-based providers that really are the significant factors and I won't belabor with you all the laundry list of all of the people that were in the business that were foreign entities that are no longer in it. So, basically we have the same...

Set of competitors.

Same set of competitors. You've got State Street, Bank of New York, Mullen. You know, it's the same. The opportunities are a lot of outsourcing opportunities, you know, fund managers are out there. We're looking as to now provide that for them.

As to, you know, refresh you and the others listening, in 2000 we required All-Star Financial Services, which was, you know, being spun off by [Natwest], which is based in Dublin and there we have the offshore fund management business and that's grown very, very nicely for us. And when we talk of the U.K., we also need to think about Dublin and the opportunities that if provides in the outsourcing opportunities.

So, I did not listen nor have I been so absorbed with our own Northern Trust issues, I haven't gone into detail on what state street has done, but we read that carefully, but I haven't had the time here in the last 24 hours. If I talked about outsourcing opportunities, we see the same opportunities.

Yep.

And we may be competing with them.

They were saying it was, you know, under penetrated relative to the U.S. In other words, where the U.S. has been more forthcoming in outsourcing, you know, back office and middle office operations, the U.K. has sort of turning around in that and beginning to do that. It is a bigger wave of that. I wondered, you know, clearly we see it in your numbers.

When you look at us, in terms of what we've done in the United Kingdom and the public authority market the past several years and the large corporate market, there's no question that the opportunities have been very significant, whether I'd use the word penetrate, but the opportunities are very significant as they're coming to the American model.

Uh-huh. Right.

The, you know, the master custody global custody model. And that's been true, not only there, but as I've said in earlier calls, the Nordic region has been extraordinary for us.

Yep. And the Netherlands, right?

Not in the nordic, but that's been a good market for us. Nordic is Norway, Sweden, Finland, that part. But, yes, we've done very well in the Netherlands.

And just one last question, you know, in the last let's say two or three quarters and it sounds like there's been more momentum building from overseas, would you say that Europe organic growth accounts for most of your total CNIS organic growth? Or is there more...

Yeah, if you look at our press releases since the beginning of the year, you will find there's been a good profile of them. We've had quite a few domestic wins and the total is 33 in number and there is about 10 that were domestic. About 10 to 12 that were international on the CNIS side and NTGI had about 12 to 15, total of 33 announcements that aggregate $95 billion in assets.

Okay. So from that perspective, at least it's, from a new win perspective, it's mixed? It's fairly well mixed between domestic and international.

Oh yes, oh, yes. We've had some, well you know, if we're talking prior quarters, we've got [Meade West Bank] earlier this year.

Okay. Great, thank you very much, Perry. Good quarter.

I hope it was helpful to you.

Definitely.

Thank you for joining us.

Next we go to Joel Gomberg with William Blair.

My question has been answered, thank you.

You going to be at Wrigley field tonight, Joel?

I was there last night, I'm not going back!

Okay! I had to put the Chicago for you because that's the only sad part of all of our lives here today.

Yep.

Okay, Joel.

Thanks.

Okay, thank you.

And now we'll take a question from Tom McCrone with KBW.

Hi, everyone.

Hi, Tom.

How are you?

Very good except for the last item, you know, we're just hoping for hope tonight.

I will pray for you guys.

Okay. Thank you! Okay, what's your question, Tom.

Two quick questions, on PFS, I noticed you kind of emphasized more penetrating kind of the footprint you already have as far as number of offices. Has there been a change in philosophy as regarding that versus focusing more on office expansion?

What we're trying to do, very candidly, is to put into perspective what our objective is in going after markets. And it's, you know, we're not a retail store operation and as I talked about models earlier, you know, a number of people look at models, number of retail stores, I mean we're not a drugstore operation and so forth where you add stores and immediately you get revenues and so forth. It's not that kind of a model. We are geographically positioned to go after a target market by being conveniently located to them and it's our footprint and we use that word footprint and I use that very carefully this morning to try to get the impact of, I think, what you're signaling here.

We want to get to a footprint where we will be in proximity to 40 to 45% of the millionaire market. Right now with the 82 offices that we have in 14 states, we're about 36%. So, our goal is to fill in that footprint, to get to that level, you know, maximize the opportunities and then continue to grow. But it's not just a specific target on number of offices.

Exactly, is there any other penetration rate? You said today you're in proximity of 36% of your target audience.

36%.

Out of that 36%, what's the penetration rate? What's the upside? Do you have 5% of that 36%? Do you know what I mean?

I don't have that level, but there's tremendous opportunity I mean just looking in that 36, you know, we got the one little office in Manhattan, can you imagine the millionaires that are there?

Exactly.

So, we have a long way to go.

Okay.

Tremendous opportunity is the essence of the point. I appreciate your question, though, it gave me a chance to put into perspective the issue of the new offices.

Fair enough. Fair enough. And one quick question on Deutsche bank passive asset management . In the press release it said this quarter, the CNIS trust fees included $7.1 million in fees related to that.

Yes.

So, I guess that's just a run rate, you can annualize that and say about a $28 million run rate for that business today. Is that fair to say?

That's not an unreasonable view.

And then last quarter there was a little over 5 million in trust fees, so, last quarter was annualized running at $21 million.

That's the way the numbers work out.

So, is that incremental, annualized, whatever that is, like an incremental 7 million, is that in the net new business sold number for corporate and institutional? So, is that 7 of that 11 passive equity?

No.

No.

No.

Okay. So.

No, that's not the way to look at it.

How should I look at it?

Beverly will give you guidance on that. You can call her later. That's absolutely not the way to look at the $11 million annualized trust fees.

Okay, I will call her.

She will give you the guidance. That's not the way. I don't want to belabor the conference call with that kind of an explanation.

Thank you very much.

Thanks for joining us.

Yep.

And Mr. Pero there are no further questions. I will turn the conference back over to you.

Well, again, as we always say at the close of these conference calls, thank you very much for joining us. We appreciate your continued interest in the Northern and we look forward to being with you in mid-January to report on the success of our fourth quarter performance. Again, Audra, thank you very much and the conference call is now closed.

And that does conclude today's conference. Again, thank you for your participation.