Northern Trust Corp (NTRSO) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust corporation first quarter 2005 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Director of Investor Relations, Bev Fleming. Please go ahead.

Thank you, Lars. Good morning, and thank you for joining us to review Northern Trust's first quarter 2005 financial results. Joining me this morning are Steve Fradkin, our Chief Financial Officer; Aileen Blake, Controller; and Mark Betty from our Investor Relations team. For those of you who might not have received our results by e-mail this morning, they are both available on or website at NorthernTrust.com. In addition, this April 19th call is being webcast live on NorthernTrust.com. The only authorized rebroadcast of this call is the replay that will be available through April 26th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our Safe Harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates or expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2004 annual report and our periodic reports to the SEC for detailed information about factors that could effect actual results. Now let me hand the call over to Steve Fradkin.

Thank you, Bev, and good morning, everyone. Let me extend my welcome to all of you listening to Northern Trust's first quarter 2005 earnings conference call. Earlier this morning Northern Trust reported record first quarter 2005 earnings per share of 63 cents, up 11 % compared to the 57 cents we reported in the first quarter of 2004, and up 5% from the 60 cents we reported in the fourth quarter of 2004. Net income equaled a record $139 million, up 9% year-over-year, and up 5% sequentially. As we have done in recent quarters, we'll be dividing today's call into several sections.

First, I'll highlight some of the key financial items contributing to our first quarter results. Second, I'll review our first quarter numbers in some detail, providing you with our perspective on the specific performance achieved on each of the major line items with noteworthy changes. Third, I'll provide a few comments on our acquisitions of the financial services group, Baring Asset Management, which closed March 31st. Fourth, I'll review for you the impact of stock option expensing at Northern Trust, and finally, I'll share some observations on recent momentum in our businesses. Bev and I will then be pleased to take your questions.

We are very pleased with our first quarter results. The revenue momentum that we experienced in 2004 continued into the first quarter. We experienced strong growth in trust investment and other servicing fees. Our performance on the net interest income front was also very positive. As interest rates have begun to move to more normalized levels, we continued the improvement in net interest income that started three quarters ago. First quarter expenses were well managed. Recall that the expense level we reported in the fourth quarter of 2004 was higher than our full year run rate, primarily due to year-end benefit expenses and incentive compensation associated with above-plan performance that was by driven by our strong fourth quarter results. The combination of solid revenue, growth, and disciplined cost management resulted in two percentage points of positive operating leverage for the quarter.

Let me highlight for you several key factors that influenced our results in the first quarter. First, we experienced good top line revenue growth, particularly in institutional fees and net interest income. Second, the market environment in which we operate was uneven during the quarter. Equity markets were down across the board, which is particularly relevant for our asset management fees. The impact of the quarter's lackluster market environment was offset somewhat by revenues which are priced on a one quarter lag, as is the case with our CNIS custody and PFS wealth management fees.

Recall that the fourth quarter of 2004 experienced a better market environment than the first quarter of 2005. Interest rates, on the other hand, continued to rise, providing a stimulus to net interest income.

Third, credit quality again remained very strong, resulting in no loan loss provision being recorded during the first quarter. Recall, however, that this compares to a $5 million negative provision taken in last year's first quarter.

And lastly, I want to point out a line item titling change you may have noticed in our earnings release this morning. Effective this quarter, we changed the titling of what was formerly called Trust Fees in our income statement to Trust Investment and other Servicing Fees. This change did not result in any recategorization of revenues, but was simply made as an enhanced descriptor of the underlying line items.

With that backdrop, let me review our key revenue drivers in the quarter. Total revenues of $621 million were at record levels in the first quarter, up 7%, or $43 million, compared to last year. Trust investment and other servicing fees were the biggest contributor to year-over-year growth, up 9%, followed closely by growth in net interest income. On a sequential basis, revenues were up 3% or $18 million versus the fourth quarter of 2004 with institutional fees, personal fees, and net interest income all contributing to the solid sequential growth. Corporate and institutional services fees of $185 million increased 11%, or $18 million year-over-year, led by custody and securities lending.

CNIS fees were also up a solid 7% on a sequential basis. The components of total CNIS fees performed as follows. Custody fees and CNIS increased 16% year-over-year to $76 million, and increased 10 percent sequentially. Recall that CNIS custody fees are built primarily on a one quarter lag. At December 31st, the S&P 500 was up 8.7% for the quarter, thereby offering good market support for sequential custody fee growth. The strong year-over-year growth in custody fees was driven by the continued strength of our global business. Global custody assets at March 31 equaled $1 trillion, an increase of 29%, or $229 billion versus one year ago, and rose 6%, or $60 billion sequentially. Global custody assets now represent 43% of total CNI assets under custody, up from just 15% one decade ago. Securities lending fees equaled $34 million, up 22% versus one year ago, and up 12% compared to the fourth quarter. The year-over-year and sequential increases were both primarily driven by growth in the volume of securities on loan. Securities lending collateral volumes equaled a record $210 billion at March 31, up 34%, or $53 billion versus one year ago, and up 12%, or $22 billion sequentially.

Volume growth this quarter was driven by new business and higher demand. Demand in the marketplace for lent securities has picked up in recent quarters due to improvement in the overall economy and renewed M&A and IPO activity. Investment management fees in CNIS at $59 million were up 2% versus one year ago, and up 1% sequentially. As of year end, approximately 36% of our managed assets in CNIS were equity assets with the remainder represented by short duration, fixed income, and other alternative asset classes. Within the CNIS investment management fee line, we saw strong growth in manager of managers, Europe, and Japan. Offsetting strong double-digit growth in each of these areas are was a reduction in fees earned on cash management products.

Assets under custody in CNIS equaled $2.4 trillion at March 31, up 19%, or $389 billion from a year ago, and up 3%, or $61 billion versus last quarter. Approximately half the sequential increase represented $33 billion in custody assets acquired with the March 31 closing of the financial services group acquisition. New assets transitioned during the quarter were partially offset by the negative impact of the equity market environment, and foreign currency translations. CNIS managed assets of $478 billion were at record levels, up 15%, or $63 billion versus last year, and up 4%, or $16 billion from year-end. Over 80% of the year-over-year increase in CNIS managed assets was the result of outstanding growth in our securities lending business, with me balance reflecting growth in our quantitative business for institutional clients. The sequential growth in CNIS managed assets was due to growth in securities lending collateral, which was up $22 billion to $210 billion at March 31.

Some of you will have noticed that we have enhanced our asset reporting conventions this quarter. Our press release text, tables, and financial trends report now reflect the period ending values for assets under custody. We had formerly used the term, Assets Under Administration, as opposed to Assets Under Custody. As we begin the integration of the FSG acquisition and reflected on the product growth characteristics of our business in recent years, we decided that reporting on assets that we custody was the most appropriate convention for investors. In the past, we reported on assets under administration, which included the value of assets that we managed for clients but did not custody, as well as some assets where we provided administrative services, but were not acting as custodian. Our discussion of FSG, coupled with the continuing shift in our business mix, provided a stimulus to enhance our disclosures in this area. The growth in our managed but not custodied asset base accelerated with our acquisition of the Deutsche Banc index business. As the third largest institutional index manager in the world, we are winning both new relationship mandates and opportunities linked to our position as custodian. The growth in our fund administration business, where we are not custodian, is linked both to our success in the back and middle office outsourcing area, and to the FSG acquisition. FSG's core business is fund administration with custody as a cross-sell opportunity. We now report assets under custody and have recast prior years to reflect this definition.

Our personal financial services business unit reported first quarter fees of $172.5 million, an increase of 7% compared to the year-ago quarter. Sequentially, PSF fees were up 4%. For those of you who maintain detailed fee models on PSF fees, recall that all PSF states are on a consistent monthly fee methodology. Using this monthly methodology, the S&P 500 was up 5% compared to the month-end values relevant to our fourth quarter fees. The only exception to this approach is our wealth management group which serves families with assets of $75 million or more. Similar to CNIS custody fees, wealth management fees are based primarily on a one quarter lag.

Recall that the major equity market industries were up as of December 31st, with the S&P 500 up 8.7% from September 30th to December 31st. This positive market environment combined with excellent new business results fueled $21 million in first quarter wealth management fees, up 14% versus a year ago, and up 9% sequentially. Assets under custody and wealth management equaled $101 billion, up 13%, or $12 billion from one year ago, and up 1% sequentially. Managed assets in wealth management totalled $20 billion at March 31, up 12% year-over-year, and up 2% as compared to December 31. Our wealth management group has experienced very strong growth in recent years, indicative of our unique leadership position at the ultra high end of the affluent market. Over the past five years, wealth management custody assets have grown at a compound annual growth rate of 12%. This compares quite favorably to the overall down drafts in that markets during that same time period with the S&P down 5% on a compound annual growth basis and the NASDAQ down 15%. Northern Trust currently enjoys a relationship with 24% of the Forbes 400 richest Americans.

Total assets under custody in PFS at March 31 equaled $210 billion, up 8% from a year ago, and essentially flat sequentially. Managed assets in PFS equaled $111 billion, up 4% from a year ago, and up 1% from December 31.

Foreign exchange trading profits equaled $38 million during the first quarter, down 8% versus last year, and down 10% sequentially. The primary driver of both the year-over-year and sequential performance was currency volatility which was lower during the quarter, particularly in the major European currencies. . The diminished volatility was partially offset by higher client volumes. Treasury management fees equaled $20 million during the first quarter, down 15% compared to last year, and down 2% compared to the fourth quarter. Due to the rising interest rate environment, some clients are paying for a higher proportion of treasury management services through compensating balances.

Other operating income in the first quarter equaled $20 million, up 2% year-over-year, and down 21% sequentially. Recall that during the fourth quarter of 2004, we sold two non-performing loans and recorded a gain of $5 million on the sale. This gain was reflected in other operating income last quarter, and accounts for the entire sequential decline. Net interest income equaled a record $172 million, up 13%, or $20 million, from a year ago, and up 4% sequentially. Our net interest margin equaled 1.79%, it's highest level since the first quarter of 2003. The net interest margin was up 6 basis points from last year, and up 13 basis points sequentially.

Three primary factors fueled the year-over-year increase. First, and similar to the last two quarters, we continued to benefit from the higher absolute level of interest rates. Higher rates benefited deposit spreads in two ways. First, deposit spreads are returning to to a more normalized level from the depressed levels seen when rates were very low versus historic norms. Second, the industry continued to lag increases in retail deposit rates. Northern Trust has a private client interest bearing deposit base that averaged $9 billion in the first quarter. As short-term interest rates continued to rise during the quarter, retail deposit pricing lagged the corresponding increases in loan asset yields that are tied to short-term market rates such as LIBOR, fed funds, and prime. The combination of a return to a more normalized deposit spreads and deposit rate lag effects served to increase our spread on retail deposits during the first quarter as compared to the year earlier and sequential period.

Second, the year-over-year comparison benefited from a decline in long-term funding costs, due primarily to the growth in non-interest-related funding, as well as the rolloff of some higher cost long term funding.

And finally, continued growth in our global custody business provided a corresponding increase in foreign office time deposits, which averaged $14.6 billion during the quarter, up 27% year-over-year, and up 2% sequentially. This growth in foreign deposits can be seen in part on the asset side of the balance sheet in the money market asset category, which was up 18% year-over-year. These same three factors, normalized deposit spreads, coupled with lagged retail deposit rates, lower long-term funding costs, and strong growth in our global business, all contributed to the sequential increase in net interest income of $7 million.

Loans during the first quarter averaged $18.1 billion, up 5% compared with year-ago levels. Loans to individuals were up modestly, with residential mortgages up 2% versus last year to $8.1 billion, and personal loans up 13% to $2.9 billion. Residential mortgages represented 45% of our total average loan portfolio at quarter end. Commercial loans increased 3% from year ago to average $3.5 billion in the quarter.

As I mentioned at the outset of this call, credit quality continues to be very strong. Non-performing loans totaled $34 million, down from $72 million one year ago, and up $1 million sequentially. We experienced net recoveries during the quarter of $400,000, and recorded no loan loss provision. Recall that in last year's first quarter, we recorded a negative loan loss provision of $5 million. Our loan loss reserve of $131 million covered total non-performing loans almost four to one as of March 31.

Now let me shift my comments to a detailed review of expenses. Expenses during the first quarter of 2004 equaled $395 million, up 5% from the year-ago quarter, and down 1% sequentially. FSG integration costs totalled $2.1 million in the first quarter of 2005, with the majority of that cost falling into the other operating expense category. Compensation expense equaled $178 million, up or $13 million year over year, and up 6%, or $10 million sequentially. The year-over-year increase in compensation expense reflects annual merit salary increases and higher incentive compensation. The sequential increase relates primarily to higher incentive compensation due to 2004 true-ups and 2005 planned funding. Our acquisition of Baring's FSG did not have a material impact on compensation expense in the first quarter.

Staffing leveling equaled 8,844 full-time equivalent positions at March 31, up 850 positions from last year, and up 822 from year-end. The majority of the quarter's additional staff levels relate to our March 31 closing on the acquisition of the financial services group of Baring's, which added 785 positions in line with our expectations.

Employee benefit expenses equaled $46 million in the first quarter, up 21%, or $8 million versus last year, and down 1% sequentially. One-third of the $8 million year-over-year increase relates to higher domestic pension expense, which we estimated in our 2004 annual report would be $10 million higher in full year 2005 compared to full year 2004. The remainder of the year-over-year increase in employee benefit expense was split almost evenly between higher medical, FICA insurance, and defined contribution plan expense.

On a sequential basis, defined contribution plan expenses were down almost $7 million, reflecting the true-ups that we took in the fourth quarter, due to 2004's record corporate performance. This sequential decline in defined contribution plan expense was offset by the normal first quarter step up in FICA insurance and higher pension and medical expense as I discussed previously. Other operating expenses of $121 million were down 2% year-over-year, and down 9% sequentially. Recall that other operating expenses in the first quarter of last year included an $11.6 million related to a securities processing error. We had no similar expense in this year's first quarter.

Offsetting that year-over- year benefit to other operating expenses were the following items. New business during the past year led to a normal step up in subadvisor, subcustodian and depository fees. Hiring and relocation costs were greater this year than last, reflecting integration efforts associated the FSG acquisition, continued growth globally, and further expanse of our PFS franchise. Business promotion expense was higher, due primarily to below normal travel expenses in the first quarter of last year, and consulting fees were elevated due to FSG integration efforts. Other operating expenses in the first quarter included $1.8 million in expense associated with our FSG integration efforts.

Regarding the sequential decline in other operating expenses of $12 million, let me outline the key drivers of that change. The fourth quarter included a charge to settle a lawsuit related to an issue that dated back to the 1990s. The fourth quarter also included incremental legal and other advisory expenses associated with an opportunistic transaction that did not materialize. Business promotion expense was lower sequentially as travel typically slows down in the first quarter of each year, and staff related expenses were lower sequentially primarily due to lower hiring costs.

We repurchased 837,000 shares of Northern Trust common stock in the first quarter at a cost of $36 million. Diluted shares averaged 221.7 million, down 700,000 from last quarter. We can purchase an additional 5.9 million in shares under our buy back authorization. In keeping with our practice, we increased average common equity by 8% versus one year ago to a record $3.3 billion at year-end. This represents the 68th consecutive quarter that we have increased common equity.

Let me now offer some perspectives on our acquisition of the financial services group of Baring Asset Management. We noted in late November, when we announced this transaction, and again on March 31, when we closed, that this is a very important strategic acquisition for Northern Trust. The key to this acquisition is that it substantially enhances our ability to serve clients in the important global fund managers segment. We have added new capabilities, including hedge fund, private equity, and property administration. We have enhanced existing capabilities in London, specifically fund administration and fund accounting. We have added expertise in the form of highly talented and experienced staff focused exclusively on this segment. We have expanded our global geographic footprint with new offices in the Channel Islands, and expanded positions in London and in Dublin. And we join forces with the new group of highly satisfied clients with whom we can grow in the years ahead.

The acquisition closed on March 31 for a purchase price of 260 million British pounds sterling which equates to approximately $500 million U.S. dollars at current exchange rate. Then purchase price is subject to certain adjustment for 120 days after the close. We chose to finance this acquisition with the sterling debt issuance totaling 250 million British pounds sterling. The debt was issued in early March, and settled on March 11. Our primary goal in utilizing sterling denominated debt to finance this transaction was to hedge our foreign currency exposure. The FSG business that we acquired generated $167 million in revenues in 2004, and operated at a pretax profit margin of 33%. With the March 31 closing of this transaction, we will own FSG for nine months in 2005. We expect the acquisition to be modestly diluted in to 2005 earnings by between 4 and 6 cents per share, which continues to be consistent with our previously disclosed expectations. This estimates includes integration costs of approximately $25 million, of which we recorded 2.1 million in the first quarter of 2005. This estimate also includes intangibles amortization which will be more fully disclosed in our first quarter 10-Q report and financing costs on the sterling debt.

In the final minutes of this call, I will provide some broader thoughts and perspectives on the first quarter and our businesses. A few comments about expensing of stock options. Late last week, the Securities and Exchange Commission issued a final ruling delaying the date when calendar year companies like Northern Trust are required to begin expensing stock options. Northern Trust is closely monitoring that evolving situation, particularly any similar pronouncements that might be forthcoming from the financial accounting standards board. This noted, let me review our disclosures to date on the topic of options expensing. Northern Trust reported in its 2004 annual report that we will begin expensing stock options in the second half of 2005. We further noted in our annual report that we expect the income statement impact in the second half of 2005 to be approximately two cents per share.

In February of 2005, Northern Trust granted 2.4 million in stock options. The terms of those grants provided for full vesting on March 31, 2005, which compares to a one to four year vesting period for the grants issued in February of 2004. If the February 2005 grants had contained the same vesting terms as the prior year grants, the second half impact would have been four cents per share instead of the estimated two cents per share. One way to help you understand this is to point out the pro forma disclosure that you will see in our first quarter 10-Q. In that filing, as in prior 10-Qs, and in our annual report, we will include a table that show this pro forma impact, if we had expensed stock options in the first quarter. You will see that earnings per share in the first quarter on a pro forma basis would have been 52 cents per share as compared to GAAP reported earnings per share of 63 cents. This 11 cents per share pro forma impact to first quarter EPS includes 8 cents attributable to the February 2005 grant, which was fully vested on March 31. Our decision to vest the February 2005 options on March 31, 2005, was influenced by the fact that approximately 55% of our outstanding options granted prior to 2005, have an exercised price that is above current market price. With respect to the 2005 grants, no compensation expense relating to these options will be included in our income statement after we begin expensing stock options.

Let me now wrap up by commenting on the momentum we are seeing in each of our businesses. In PFS, we see continued momentum in our new business efforts. New business results in the first quarter, gross, net, and the leverage ratio were the highest they have been since the fourth quarter of 2002. Investors are showing row receptively to our consultative approach to solving their financial challenges. This is an area that differentiates Northern Trust. We offer integrated solutions delivered locally from banking on to trust, financial planning, investment management, and estate planning.

We are also seeing good momentum in our wealth advisory services business, which focuses on delivering compensation solutions through a multi-manager investment program to clients in the 25 to $75 million asset range. This business complements our industry-leading wealth management group which has shown excellent growth in recent quarters and currently oversees more than $100 billion for over 300 families. Our leading positioning within the U.S. private client arena continues to strengthen.

In CNIS, our global business continues to shine. As I mentioned earlier, we are very excited about the FSG acquisition. This an important, strategic acquisition for us in the growing and attractive fund manager market.

We also look forward to the completion of due diligence with Insight Investment Management in the United Kingdom. Our exclusive negotiations with Insight cover a range of back and middle office outsourcing services.

Finally, we were excited to receive formal approval during the first quarter to open a representative office in China. This is a developing market that merits our attention and focus.

And lastly, a comment on our investment arm, Northern Trust Global Investments, which is now the 9th largest asset manager as ranked by Global Investor magazine. Our product range is broad, having been enhanced in recent years to line up with the needs of our core private and institutional climates. Products that exhibited particular strength during the first quarter of 2005 included securities lending, manager of manager, international equity and value equity. We continue to be very well positioned to serve the investment needs of our target markets, private clients in the United States, and institutional clients worldwide.

In closing, we feel very good about our performance during the quarter, and about our current positioning and future opportunities in the market in which we compete. Before I conclude, I want to point out that our annual shareholders meeting begins at 10:30 central time this morning. As is customary for our first quarter calls, I will need to conclude today's call allowing sufficient time for all of us to get to the annual meeting. Accordingly, please accept my apologies in advance in the event that we have to end the question-and-answer period earlier than we would otherwise normally do. And now, Bev and I would be pleased to answer any questions you might have. Lars, please open up the call for questions.

Thank you. The question and answer session will be conducted electronically, and if you would like to ask a question, you may do to so by pressing the star key followed by the digit one on your telephone keypad. For those of you joining us on speaker phone today, be please make sure the mute is to turned off to allow the signal to each our equipment. Once again, if you'd like to ask a question press star one at this time. Our first question comes from Mike Mayo with Prudential.

Good morning.

Good morning, Mike.

First question is, securities lending was pretty good. How do the volumes compare with the second quarter of last year, and the reason I ask is, do you get the usual second quarter bump, or is that kind of been the run rate right now?

In terms of the traditional second quarter bump, if you want to term it that way, the international dividend season is traditionally occurring in the second quarter, so we have historically seen the improvement in securities lending, and there would be no change in that phenomenon. There was nothing about the international dividend season that drove the volume increase.

And in CNIS, pricing pressure, or lack of it, how does the pricing environment compare to a few quarters go, or a year ago?

Good question, Mike. I think there continues to be pricing pressure in the CNIS business. It's a very competitive business. You have a small group of very tough and committed players in that business, and there is pressure in that business, but we continue to win in the market place, and I think the other thing I would add to that, Mike, is, you know, we have always seen pricing pressure in the CNIS business, and have always had to be proactive in many instances in managing our pricing environment with our clients. So it's tough, there continues to be pricing pressure there, but I don't think there's a substantial change between now and what we've seen over the last four to eight quarters.

And the acquisition, FSG, in the second quarter, how should we think about the dilution one quarter from now?

We haven't given anything in terms of quarterly dilution. We've continued to look at 4 to 6 cents for the year, but I don't have any quarterly guidance that I can provide.

And last question, the PFS new business you said is the best since fourth quarter of '02, I'm just trying to reconcile that with what we've seen from some of the retail brokerage firms. I guess, is it just in the high end, or is it moving down?

We're seeing it across the board. We continue to be very strong at the high-end, the wealth management and wealth advisory activities clearly have momentum, and cadence, but we also saw very good results across the PFS franchise, particularly in Florida this quarter.

Thank you.

You're welcome.

Just as a reminder, if you would like to have a question, please press star one. We'll take our next question from Joel Gomberg with William Blair.

Thanks. Steve, just asked another way, the 23 million remaining charges for the acquisition, when can we expect that? Is it spread out over the next couple of quarters or next quarter?

It will likely be spread out over a couple of quarters, Joel. We don't have a specific timetable that I want adhere to, and, remember, that transaction closed on March 31. We had a done a lot of work in advance of that transaction, but we were constrained in some of the things that we would do, so we wanted to connect with the employees there, the management team there, validate all of the plans that we had, reconcile them to how the current team looks at the business. So it will be spread out through the year.

Okay. Could you also comment on some of the newer offices you've opened up on the East Coast and Minneapolis, how that's coming along?

Sure. Our momentum in the East Coast generally continues to be very good. New York, Connecticut. We had very good, albeit off a small and initially growing base, very good success in Delaware. In Boston and Minneapolis, we have continued to work on the build out of our new premises, and both of those offices will be in permanent new space probably around July, so the momentum in the East Coast has been good. New York continues to click along nicely, Delaware is coming on very fast. Again, albeit small, and our new franchises in Minneapolis and Boston. It's a little early to talk about momentum, but we've certainly been well received in both of those markets, and are chipping away in our earliest.

Okay. Last question. You actually showed a little loan growth during the quarter. Any thoughts on trends there?

Yeah, I think we saw a bit of a pick up in our middle market loan growth and the loan growth across our PSF franchise. We did not see any large growth in the corporate sort of CNIS space, so that was positive. I would hate to call that anything remotely exemplifying a trend, but it was encouraging.

Thanks, Steve.

You're welcome.

We'll take our next question from Robert Lee.

Hi, goes. Good morning.

Good morning.

Just a real quick question on FSG. I think when you first announced the acquisition, and I apologize if you mentioned this earlier, you a also talked a little bit about your expectations for '06 in terms of being -- I think you had talked about it being a nickel accretive in '06. Is that still the case? Has anything changed there?

Yes, we've made no changes on our forecast for 2006. You know, again, our goal is to, now that the transaction is closed, we want to revalidate that, but there's nothing that we've seen at this point that changes the forecast or the initial comments we made both with respect to 2005 or 2006.

Great. That was it. Thank you.

You're welcome.

And we'll take our final question from Ken Usdin from Banc of America Securities

Thanks, good morning. Quick question on the balance sheet and net interest income. I know you've been able to enjoy the benefit from lagging pricing on some of the positives, especially the foreign bucket. Can you talk about just is there any catch up from the consumer side yet? Do continue to believe that you'll be able to enjoy that benefit, and how are the dynamics changing, as far as your ability to price deposits?

Thanks, Ken. A couple of observations. One, in terms of that lagging phenomenon, just for the purposes of clarity and consistency, I want to highlight that that's an industry phenomenon versus a Northern Trust trust phenomenon, so we're mixed into the trees there. Two, it's very difficult to predict how long that will continue, but, you know, the one thing I would say is that the higher absolute level of interest rates is also improving the margin opportunity. Remember, forgetting the lag effect, if you will, just the fact that rates are at higher levels creates some of that opportunity, and I'm not able to quantify how much is just the higher absolute higher level, and how much is the lagging effect, but that is a phenomenon. So it's really very difficult to forecast. I think we continue to be well positioned, assuming the Fed continues down the path that is implied in the marketplace, and, as you know, we've had good growth in foreign office time deposits, and that, too, reflecting the growth in our global business hopefully will contribute, but very difficult to forecast the lag phenomenon, and how long that going to impact us.

Okay. But on a general positioning perspective from the margin, do you consider this a base that you have established here?

I don't know that I would say I consider it a base. I consider it, you know, as we have -- if you have think about us in historic terms, Ken, you know that the net interest margin years back, before all of the rate drops, was at 2%, and we're still well below that. And what we have said consistently for some time is that if rates get to more normalized levels, we would expect to benefit and see net interest income improve substantially. So, I think I want to stay away from using the term base, but I think I would say we feel very good about the direction, and the trends holding all else constant should be favorable for us in the future.

Okay. Great. Thanks, Steve.

You're welcome.

We did have a follow-up question from Mike Mayo with Prudential.

Hi, just one follow-up on the stock options, so if they say you can delay expensing stock options, are you going to delay, or are you definitely going to start expensing these in the second half?

The answer is, Mike, I think we have to wait and see what they say. Obviously the timing of this was inopportune given where we were in the cycle of closing the books and completing our Q and so forth, but I think I want to want to wait and give our board a chance to respond on that. But, clearly, that would be a change that we would have to think about and make a decision on.

We have one more question from Rob.

Okay.

Steve, does the dilution this year include the 23 million in charges?

The 4 to 6 cent dilution from FSG Baring's, does that include the charges?

The integration costs?

Yes.

Yes, it does.

Yes, it does.

Okay. And-- all right. Thank you.

Okay.

And that does conclude our question-and-answer session. At the time, I'll turn the conference back to our moderators for any additional or closing remarks.

Thank you very much, Lars, and thank you everyone for joining us. As we said, it's a terrific quarter, and we're looking forward to talking with you next quarter on how things are moving along with FSG. Thank you very much.

That does conclude today's conference. We thank you for your participation. You may now disconnect.