Northern Trust Corporation
Q2 2009 Earnings Call Transcript

Published: 23 Jul 2009

[Operator:]

Welcome to the Northern Trust Corporation second quarter earnings conference call. Today’s call is being recorded. At this time I would like to turn the conference over to the Director of Investor Relations Bev Fleming.

[Bev Fleming:]

Welcome to Northern Trust Corporation’s second quarter 2009 earnings conference call. Joining me on our call this morning are Steve Fradkin, Northern Trust’s Chief Financial Officer; Aileen Blake, Controller and Preeti Sullivan from our Investor Relations Team. For those of you who did not receive our second quarter earnings press release or financial trends report via email this morning, they are both available on our website at www.NorthernTrust.com. In addition, this July 22nd call is being webcast live on www.NorthernTrust.com. The only authorized rebroadcast of this call is the replay that will be available through July 29th. 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 2008 annual report and our periodic reports to the Securities & Exchange Commission for detailed information about factors that could affect actual results. Thank you again for your time today. Let me turn the call over to Steve Fradkin.

[Steven L. Fradkin:]

Let me join Bev in welcoming all of you to Northern Trust’s second quarter 2009 earnings conference call. Earlier this morning Northern Trust reported second quarter 2009 net income of $314 million, an increase of 46% versus a year ago period. Net income applicable to common stock which includes the impact of both dividends and discount accretion related to the redemption of preferred shares in the quarter equaled $226 million or $0.95 per common share. This compares with net income of $216 million or $0.96 per share earned in last year’s second quarter. To assist you in understanding our performance this quarter, we have organized today’s remarks in to the following sections

[Operator:]

(Operator Instructions) Your first question comes from Brian Foran – Goldman Sachs.

[Brian Foran:]

I apologize, I joined late and so if I missed this in the prepared remarks, but in the past you’ve talked about the market share gains in PFS not translating to revenue because a lot of clients were sitting in cash. Are you still experiencing the same level of market share gains? Either way, are the market share gains over the past nine months still sitting in cash or is that a potential revenue tailwind in the future?

[Steven L. Fradkin:]

Brian, I would just [inaudible] with the term market share gains only because our general counsel would not like that term, market share is very hard to gain. But, I think I would instead say momentum and very good performance in terms of winning but I can’t technically prove to you market share. With that caveat I would say I guess two observations

[Operator:]

Your next question comes from Michael Mayo – Calyon Securities (USA), Inc. Michael Mayo – Calyon Securities (USA), Inc. The margin and spread revenues, it’s down for you, it’s down for all the trust banks, can you just give us some context of what’s driving that and where you think the spread revenues go? You’re kind of retracing from the steps you took over the past couple of years in terms of NII.

[Steven L. Fradkin:]

Well, I think you know we have a long standing and conservative philosophy vis-à-vis our securities portfolio. I think it’s far to say as exemplified by recent results relative to the industry that that philosophy on average over time has served us very, very well. We haven’t changed that philosophy and we are not seeking additional risk in our investment portfolio in a quest for higher yield. On the securities portfolio, we’re continuing to purchase the highest quality securities, agency debentures, agency mortgages, government guaranteed debt and on average these assets have a repricing characteristic for us of less than 90 days. Speaking to the next interest margin more directly, as I said it was at 1.59% down nine basis points from 168 last quarter and down 19 basis points from a year ago if you adjust the year ago period for that onetime leasing issue. While we can’t provide any guidance as you know, let me offer a couple of observations that I hope will help. First, I’d say that very low interest rates adversely impact the value of our non-interest related funding. An example of that would be the value of our non-interest related funding averaged about 38 basis points across the first three quarters of 2008 versus 18 basis points in the most recent second quarter. As you know Mike, the very low rates also compress spreads earned on the value of our non-US office timed deposits. When the rates are at absolutely low levels there is just very little room for taking deposit rates lower. That same phenomena holds true for our PFS deposit rates. Then of course, as the investment portfolio matures, we’re reinvesting at lower rates so there can be upsides to our net interest income to offset this in the form of pricing power on the loan portfolio and growth in the volume deposits but as we saw in the second quarter, as the equity markets surged, deposits particularly our non-US deposits within the CNIS business rotated off the sidelines and in to the market which is something we would expect to see. Michael Mayo – Calyon Securities (USA), Inc. The non-interest related fees, those are deposits your customers leave with you and you get kind of an inputted benefit from that? Is that right?

[Steven L. Fradkin:]

Yes. The so called non-US or foreign office timed deposits are, if you will, the residual cash or cash as an asset class that principally our non-US clients leave with us. Michael Mayo – Calyon Securities (USA), Inc. I know this is not a new situation but to the extent that you’re making less money from the deposits your customers leave with you, is there a way to charge them more fees to compensate?

[Steven L. Fradkin:]

Well, I think Mike we look at it as we’re constantly navigating through environmental changes and we don’t generally go to our clients and say, “Because interest rates are at very low levels we’re going to increase your fees tomorrow.” I think if we thought that was going to be a sustained ongoing factor that would be irreversible if you will we’d probably have to think about that on average over time. But, we think this is a market phenomenon and we’ll move through it. Michael Mayo – Calyon Securities (USA), Inc. Separate, global assets under custody grew what 21%? Is any of that in Asia? And, is there a way for you to expand in Asia more aggressively? And, in which countries if you were to do so?

[Steven L. Fradkin:]

Well, our asset accumulation has been strong and that has been a global phenomenon across America, the European, Middle East and African region and across the Asia Pacific. I guess my first answer is yes, we are expanding and successfully sowing Asia. Some of the things that have been public that you’ve seen most recently would be our success in places like Australia and New Zealand across that region. But, the success have been broader than that so Asia Pacific has been important to us. Michael Mayo – Calyon Securities (USA), Inc. Last question, PFS or just generally assets under managements up 7%, it’s fine but I thought you had the chance to go gangbusters in terms of all the dislocation in the market between some banks pulling away and all the mergers and you mentioned Florida is doing well but shouldn’t you be investing a lot more aggressive there? And, can you just elaborate whether it’s Florida or other markets where you’re seeing the best growth.

[Steven L. Fradkin:]

Mike, let me offer a couple of thoughts and Bev may have some as well but, if you look at our PFS assets under management, year-over-year they’re down 4.2% but that compares with a 28% decline in the S&P 500. So, we feel very, very good about our success in PFS, our asset accumulation and I think you just have to keep it in the context of what has happened to the broader markets.

[Bev Fleming:]

One statistic Mike that might help you is that as of the end of June, the asset allocation of our PFS assets under management was 31% equities, 31% fixed income and 38% short duration so very important to recognize that less than a third of our PFS assets under management are invested in equities. Michael Mayo – Calyon Securities (USA), Inc. Has that changed from like two years ago?

[Bev Fleming:]

Absolutely. Michael Mayo – Calyon Securities (USA), Inc. I’m just trying to get a sense of how well you got your clients out of the market or whatever? Two years ago it was what?

[Bev Fleming:]

It’s not just our clients, it’s not just us making tactical asset allocation changes in our client portfolios but it’s also just the fact that the markets have gone down so much. Mike, ask me that question offline or anybody else that wants to but, I want to say that north of 50% equity at some point over the course of the last four or five years, something like that.

[Steven L. Fradkin:]

I think Mike in the aggregate we’ve done well for clients relative to their objectives.

[Operator:]

Your next question comes from Glen Shore – UBS.

[Glen Shore:]

Two quickies, digging underneath the covers in the NIM compression, it might not feel it but it was better than I thought and I think it’s isolated to the yield on money markets as painful as a 1.12% yield is, it could have been worse. I’m just curious about anecdotally what kind of money funds are you sitting in because I know that I’m getting killed, getting like 20 basis points.

[Bev Fleming:]

The first thing I would say and then I will let Steve get to your question, the money market assets on the asset side of earnings assets is primarily timed deposits with banks. So, your reference to money funds I wouldn’t necessary characterize it that way.

[Glen Shore:]

Then, in terms of the competitive environment, I feel like as Mike just pointed out, your assets are growing at an above market appreciation rate so it’s clear that especially on the global side you’ve done well for many years in taking share there. You’ve done it through JVs at times but you’ve done it mostly on the organic front so my question is, is there plenty of owners of these businesses that have their own share of issues and need to delever and raise capital. You certainly are more than capable of winning them one client at a time like you always have, any thoughts on more of a bulk deal along the way?

[Steven L. Fradkin:]

Sure, we feel obviously well positioned vis-à-vis capital and flexibility. As you know, our story for a long period of time has been one of organic growth and we’re proud of that story and we think candidly that while we have had some modest acquisitions over the years we think we side step a lot of problems by not jumping in to some acquisitions that didn’t turn out so well. That said, we are always looking at opportunities and as we have said on more recent calls, the number of opportunities out there is more and the pricing on those opportunities is better but I would say Glen that there is no fundamental shift in our view which is we know how to grow this business organically and we’ve proven that consistently over time so we’re going to be very judicious to the extent that we execute on the M&A transactions as another avenue for growth. We definitely though will not rule it out.

[Glen Shore:]

I appreciate that, I was looking for the confirmation that there is stuff out there and it sounds like there is?

[Steven L. Fradkin:]

Yes.

[Operator:]

Your next question comes from Nancy Bush – NAB Research.

[Nancy Bush:]

Two questions, one of your competitors in reporting earnings mentioned that some sec lending clients who had dropped out of the program came back during the quarter and indeed they picked up some new ones. Did you see a similar phenomenon and can you comment on whether your view on the future of sec lending has changed at all?

[Steven L. Fradkin:]

Nancy, our view really hasn’t changed. I don’t have the specific numbers but our sense is that that would be an accurate statement. It’s always difficult to call the bottom but we’re feeling better about the environment. Clearly, the fixed income markets whether you saw that in the benefit, the reversal in the mark-to-market fund or otherwise probably gave a little shot of adrenaline. So, I think that would probably be a fair characterization. My only caveat to that is we’re still living in very interesting times and I think we’ll wait to make a final call on where the bottom was until we can look back with the benefit of real history.

[Nancy Bush:]

Speaking of interesting times you guys had the dubious distinction of becoming one of the TARP poster children because of the golf tournament brew-ha-ha and I’m just wondering even though that you’re out of TARP now is there any thought that promotions are going to have to be scaled back or any of those kinds of things until we sort of get out of this hyper political environment?

[Steven L. Fradkin:]

I think look, we never said - we will continue with the Northern Trust Open in February next year and we’re excited about it. As always, we want to be thoughtful and in line with what’s going on in the world but we’re excited about doing that and we have a number of other things we do. We clearly want to balance expense management but that’s part of our overall plan with clients and prospects and we will continue that.

[Operator:]

Your next question comes from Thomas McCrohan – Janney Montgomery Scott, LLC.

[Thomas McCrohan:]

I guess the general sentiment I guess we’re all hearing from the custody bank management teams is that things fortunately have stabilized somewhat and directionally the fee income trends have improved at least relative to the first quarter. So I mean directionally, do you feel that stabilization is kind of the term to use here? And, what in your mind is the risk to this trend not continuing for the back half of the year?

[Steven L. Fradkin:]

Well, I think clearly and Tom I tried to convey this in the remarks, there are cross currents. It’s undeniable that the second quarter with the S&P 500 moving up nicely and credit spreads improving that everyone felt better. But, a quarter does not make a year, a quarter does not end the cycle and there are other cross currents that make it more challenging. I think the way we’re thinking about it is that’s great and we feel good about that and we hope that continues but one has to be vigilant and I think everyone, not just the trust banks but others are still signaling, at least from what I’m seeing, that the environment is still tricky out there so there’s going to be some navigation. So, we do feel better but we’re not ready to call it a victory yet.

[Thomas McCrohan:]

That makes sense. I guess one of the pot holes I see on the road ahead is just related to the credit side. I was wondering if you can potentially talk to kind of reserve levels and what do you think is a reasonable level? I mean end of the quarter about 1% reserves to loans and if you look back in history for you guys there’s been plenty of years where you’ve had reserves well above 2% so what’s changed in your opinion, if anything, that would preclude reserves to loans not going up to 2% of loans over the next year or so?

[Steven L. Fradkin:]

Well, you build reserves and then as things get bad some of those reserves come down in the form of non-performers. We feel very comfortable with the loan portfolio. Again, when you think about our portfolio it’s quite different from many other banks. We’re about 37% residential real estate and that’s our high net worth client base, 25% commercial, 11% commercial real estate, 17% personal loans and then 10% other. The quality of the portfolio continues to be very sound but, relative to year ago levels and two years ago it’s clearly worse as you would expect in this environment. But, I think in the context of our total $29 billion portfolio, we still feel good.

[Bev Fleming:]

Tom, I was just going to make one other point which is the 1% figure that you’re talking about is the highest level that it’s been in five years. So, I think the 2% figure that you’re citing is dating farther back in time than prior to 2004 which is what I’ve got in front of me.

[Thomas McCrohan:]

He does, I went back all the way to 1990, I was just looking at some levels and you had consecutive years close to 3%. I’m sure the loan portfolio has changed dramatically, I’m just trying to draw comparisons to the compositional loan portfolio today relative to other prior five years ago periods when you had higher reserve levels. Is it today’s portfolio is more higher quality less lumpy C&I loans and therefore are justified to have a lower reserve level? That’s what I was trying to drive at.

[Steven L. Fradkin:]

I think what I would say to that Tom is we have continuously gotten more strategic focus over the years tied to relationships. So, we’d like to think we’re considerably better than we were back in the early 90s on this front.

[Bev Fleming:]

I do think a higher proportion of our loan portfolio today versus the year 1990 would be related to personal clients that is for sure.

[Operator:]

Your next question comes from Robert Lee – Keefe, Bruyette & Woods.

[Robert Lee:]

A quick question on just what you’re seeing up there in terms of decision making on the institutional side of the business? I mean certainly we’ve heard from many different places that the decision making process is getting kind of pushed out yet despite that you seem like you’ve had pretty good new business trends. Are you starting to see any rumblings that maybe people are starting to make decisions a little quicker than they were or maybe RFP pipelines in some business are starting to build up again?

[Steven L. Fradkin:]

I think it’s probably good news from our standpoint in the sense that new business is good even though decisions have still been pushed out. So, I think we would echo that sentiment that amidst a crisis that asset servicing and so forth may not be the top decision people want to deal with so we have seen some decisions pushed out but we’ve done well notwithstanding that. So, as you know, it is lumpy even when decisions aren’t being pushed out so we don’t worry too much about that. Our pipelines are solid, our new business has been good. Yes, there have been some decisions pushed out but we’ve still got plenty to work on and plenty of opportunity.

[Robert Lee:]

Maybe a follow up, if you look over the past year or so you guys have been taking advantage of dislocations out there, competitors pulling back, in growing your loan portfolio in a couple of different places. I’m just curious how you feel about that, if you’re still seeing that there’s much opportunity at this point or is that just the economy even though maybe flattened out some as it stays pretty rough that maybe your appetite for growing some of those has diminished and you’ve kind of for a lack of better way of putting it taken kind of the low hanging fruit?

[Bev Fleming:]

Well Rob, the loan portfolio is up about 1% on a year-over-year basis. I think what you might be talking about is that there was a period of time over the last couple of quarters where we did see some opportunities come our way because other lenders were not as active in the market so you did see an increase in our commercial loans for example and in some opportunities for example in the healthcare not for profit world associated with the auction rate securities marketing seizing up. But actually, much of that did flow off the books this particular quarter. So, our lending strategy is the same as it’s always been, relationship oriented and we had the opportunity in recent quarters to help some of our clients who needed some credit and we were happy to help them if they were credit worthy. But, I wouldn’t say that you should think of that as a new trend in terms of our lending because the strategy is not changed at all.

[Steven L. Fradkin:]

Just to put an exclamation point on it, same strategy client driven so even as there is disruption and there are if you will more opportunities for a bank with a strong balance sheet, we’re not interested in capitalizing on those for opportunities sake, it’s got to be part of the broader scheme and we’ve been very zealously consistent about that.

[Robert Lee:]

Maybe just one last question on the PFS business, I think you may have touched on this earlier but certainly you guys again have benefited from the issue that many competitors have and picked up clients and what not. But, as the markets have done better the last four or five months and maybe some of the large mergers and other things have kind of taken place already, are you starting to see that potential PFS clients, they’re becoming a little more complacent that maybe there’s a little less urgency to some movement and that you would expect maybe the pace of that to slow down?

[Steven L. Fradkin:]

Rob, I would say no. It just depends what data point you want to use. If you want to go to the peak of this most recent crisis, post Lehman and where people were panicking in herds and flocking, yes it has moderated. But, we see very good pipelines, very attractive clients and while it’s true that some of the if you will financial disruption has – sometimes there’s M&A disruption, sometimes there’s competitors having financial problems and we benefit from both. While it’s true that some of that financial disruption has moderated the third leg of that stool is poor service and capabilities. We have found that some of the prospects that we’ve talked to just feel under served in some institutions and are looking for the kind of breadth, depth, stability and consistency that we provide. So again, like the CNIS new business, it will be lumpy and it’s not a flock the way it was at the peak but the pipelines are strong and the opportunities are absolutely there.

[Operator:]

Your next question comes from Ken Usdin – Bank of America.

[Ken Usdin:]

Can we talk a little bit about the recovery items? My first question is about do you accrue comp for the recovery of the sec lending marks and the reversal of the CSAs?

[Steven L. Fradkin:]

The answer is no, we don’t specifically link to that. We’re thinking about the totality of our performance relative to our plans and the expectations of our board and so that would be the driver. When our board considers compensation they do think about the totality and the quality of those earnings not just the absolute levels.

[Ken Usdin:]

That’s in regards to like yearend executive comp, I just mean in terms of the way you accrue it. Like through this quarter you had $260 million of positive delta just from those two items and I’m just wondering how much of that actually flowed through on the expense side as well.

[Steven L. Fradkin:]

Right but, the way we think about and accrue for comp is the full year look not just a what did you do for the quarter. It’s what are our plans for the year, how are we progressing against those plans, what is the outlook our internal outlook for where we think we’re going to land and obviously sometimes we move it around. Sometimes we’re a little lower and we’ve got to catch it up and sometimes you’ll find that we have to reverse some because we got ahead of where we were based on our outlook. So think of it not as we had a couple of unusual items and we booked a lot of incentive comp for them, think of it as we’re constantly calibrating to the overall performance.

[Ken Usdin:]

I was just wondering because if I tease out those items, compensation expense is up $30 million but revenues only grew a little bit so I was just wondering if there was a correlation at all. My other question is just as far as the CSAs are concerned, could you just walk through what happens from here? Meaning, the $550 exposure is down to $200 with the combination of the recapture and some pay downs so I guess what’s kind of left as far as what’s been taken through the income statement and what can still be recovered on the CSA side going forward?

[Steven L. Fradkin:]

Ken, the $550 was the maximum aggregate. That $550 now goes to $200, the fair value of that as of the end of the second quarter was $125 million. That will be trued up or down between now and the expiration which is on November 6th of this year.

[Bev Fleming:]

The $125 million has already flowed through as expense.

[Ken Usdin:]

So the maximum recovery is $125 from here?

[Steven L. Fradkin:]

Yes.

[Bev Fleming:]

Theoretically, yes.

[Ken Usdin:]

If everything went according to plan or whatever, if everything worked out well there’s $125 still in expense that could be recovered further?

[Steven L. Fradkin:]

So if you hold everything equal and say everything goes perfectly well and the CSAs expire and they’re not needed in theory.

[Bev Fleming:]

But what you’re describing is the best case scenario. The fact that we have $125 million in booked liability associated with the $200 million commitment would suggest that as of June 30th that’s what we expected the commitment to be.

[Ken Usdin:]

And the same thing, in the perfect world scenario there’s $222 million in the sec lending related marks that if everything went perfectly that’s what still potentially recoverable if everything went perfectly?

[Steven L. Fradkin:]

Correct.

[Ken Usdin:]

Then the last quick question, just on securities lending, it looked like if you do x out the adjusted to adjusted sec lending, revenues were kind of flat first to second. So, I was just wondering if you could give us a little bit more color on did you not see the typical seasonality, was there pressure on core spreads, was it a volume issue? Can you just kind of talk core to core for a little bit?

[Steven L. Fradkin:]

One, I guess what I would say is remember that we’re in a low interest rate environment which always compresses the value of securities lending and, as we’ve talked about Ken over the last several quarters as leverage has come out of the system demand has come out and some supply has come out as clients have been less willing to participate. Also, remember that we have offered our clients a staged withdrawal feature, some of our competitors have just put gates up and said, “You can’t get out.” Whereas at Northern Trust we have provided clients the ability to get out in a managed way so that no one is prejudiced. I think those are kind of the drivers of where we were in the second quarter.

[Ken Usdin:]

Was there seasonality? Was there international dividend seasonality underneath all of that?

[Steven L. Fradkin:]

Yes, there was.

[Operator:]

Your next question comes from Betsy Graseck – Morgan Stanley.

[Betsy Graseck:]

Just a question on capital and I realize that there might be opportunities out there but you’re sitting with the TC to TA of 7.5 and the core tier I of over 12. I’m just wondering, to the degree that either you’re not the best bid or opportunities are not emerging as quickly as you anticipate, at what stage do you start thinking about either raising the dividend or buying back stock? And, what are the triggers that would lead you to have to think about it?

[Steven L. Fradkin:]

I guess a variety of thoughts there Betsy, one across a variety of cycles it’s been suggested that we’re too conservative in relation to capital and all the rest of it as you well know and that’s an observation to which we have been well accustomed and one we try and handle gracefully. I think 2008 sort of stressed that for a lot of people and for all the modeling and stress testing and the unthinkable multi stand deviation of events actually happened and it was a moment where our capital strength truly mattered. I think the way we think about ourselves is with a very long standing set of philosophies and set of practices to being conservative on capital on the one hand though equally conscious about capital efficiency on the other hand. I think we have a pretty good track record if you look at us on a ROE basis, a PE basis over any reasonable period of time. As we sit here today I guess I’d distill our thinking down to a couple of key thoughts. One, erring on the side of capital strength amidst this very disruptive and unpredictable environment is imperative. While the second quarter there were a lot of nice data points that made us feel better, a quarter does not end this period. Second, it seems to us that regulators will continue to access the well capitalized guidelines and I don’t know what they’re going to do there but we want to be in a position of unquestionable strength and financial flexibility if anything changes. Third, remember that the industry and Northern Trust are working through the Basel II initiative and we want to err on the side of solidity rather than coming up short as that implementation approaches. Then I guess the last two points Betsy would be we carry industry leading credit ratings which we think are valuable, our clients think are valuable and one component is our capital strength and we want to keep that well intact. Lastly, our board continues to see attractive growth opportunities and as I mentioned to I think it was Glen, though we are not highly inquisitive and our growth has been fueled organically, we do want to have financial flexibility should we see things come up. We have kept the dividend. As we said in the call we’re one of only two banks in the top 25 that did that. We have built upon our capital strength and at least for now we want the fog of the battle to clear before any real shift in our thinking, if at all.

[Betsy Graseck:]

You want more history, you need to get understanding if the regulators are going to change any of their capital guidelines or not and then as you indicate then you’ve got the Basel II going on. Could I just ask a little bit about the Basel II? That’s something I thought needed to be side-by-side for a year, no later than starting 4Q ’09, is that your understanding or has anything changed there?

[Steven L. Fradkin:]

We have the parallel run that will go through 2010. There are a lot of moving parts to Basel and again, we and everyone else are at varying stages. We’ve done a lot of work but I guess my point was you’re not done until you’re done. We just want to tread judiciously through this and make sure we don’t get any surprises.

[Betsy Graseck:]

Have you started that parallel run or not?

[Steven L. Fradkin:]

No, we have not.

[Betsy Graseck:]

But you expect that you will at least starting in 4Q ’09?

[Steven L. Fradkin:]

In first quarter of ’10.

[Betsy Graseck:]

1Q ’10?

[Steven L. Fradkin:]

Yes.

[Operator:]

Your next question comes from Howard Chen – Credit Suisse.

[Howard Chen:]

I know there’s a lot of moving parts to it but any color on where net interest margin exited the second quarter?

[Steven L. Fradkin:]

No, I don’t have anything beyond that which we’ve said.

[Howard Chen:]

Then a follow up on the core securities lending business and core spreads look stable to me quarter-on-quarter. I know some of the other industry players saw somewhat of a lift in spread due to one particular security, I’m trying to gage a sense of whether you saw that as well and there were other offsets? Just some of the moving parts within the spreads.

[Steven L. Fradkin:]

I don’t think there’s anything notable that comes to my mind but we can follow up offline if there’s anything that Bev you find.

[Bev Fleming:]

I don’t know whether the others are referring to the seasonality that is common in the second quarter and we did see that. I don’t have any specific securities that I would reference in that regard but we definitely did see some seasonal uplift as we said earlier.

[Howard Chen:]

Then third and finally on my end, regarding credit quality, I know less meaningful for you and there was a question earlier, I just wanted to get a bit more color on this quarter’s tick up and loss rate and increase in NPAs. Steve, last quarter you were pretty helpful in kind of talking about some of the concentration of a certain handful of credits that was driving some of the uptick.

[Steven L. Fradkin:]

Our non-performing loans Howard went from $167.8 million last quarter to almost $228 million so an increase of $60 million. About 84% of that increase was due to four loans that went to non-performing status. Several of those were commercial real estate related, one was residential property. I think if there’s a theme it’s a real estateish theme which probably doesn’t surprise you.

[Operator:]

Your next question comes from John Stilmar – SunTrust Robinson Humphrey.

[John Stilmar:]

Just real quickly, in the custody business it seems obvious the US dollar and the ascent of the equity markets have had a really positive impact on assets in their custody. But, you also saw a Q-over-Q growth in revenue in the CIS custodial business. That seemed a little counter to the one quarter lag in which I would have expected it to decline. Is that just because of the US dollar or was there something else going on underneath which may signal a more positive revenue trajectory?

[Steven L. Fradkin:]

John, philosophically we try and hedge our currency exposure. Of course, one can’t do that perfectly so you have to sort of separate the assets under custody or assets under management which we just translate through what’s the market value and what’s the currency effect versus our results which we try to hedge. I think what’s going on there is less about currency and more about performance, keeping clients, winning and all the rest of it. I think that would be our view.

[John Stilmar:]

Shifting focus to the PFS segment, it seemed like the growth in revenues for PFS segment, it seemed like the growth in revenues for PFS fees itself came almost exclusively from your strong footprint in Illinois and Florida. Both are very challenged states, you talked a little bit about the Florida increase – is most of that just because of relative asset exposure therefore like for instance a [inaudible] of the equity markets or is there something else going on underneath other than what you briefly alluded to with Florida? Any more color there would be appreciated.

[Steven L. Fradkin:]

I think it’s real new business, winning clients in the open market. As I said, Florida was an example where the new business in the quarter and particular in the month of June was very, very strong. It’s good old fashioned shoe leather, getting out, winning clients who have come on to wealth or taking them from other places that they’ve been.

[John Stilmar:]

Lastly, as we think about the operating margin on the business as a whole, how should we think about the overall operating margin given that maybe the first quarter’s revenues may be depressed by the lag base of some of your fees and therefore might put some pressure on operating margin? Is this sort of a near term trough in operating margins, are we treading water here or is this going to represent a platform with which to continue to deploy expenses?

[Steven L. Fradkin:]

Historically John if you look back you’re going to see that we run at about a 35% pre-tax margin very consistently on an annualized basis. On a quarterly basis though you’re going to get a lot of movements based on what’s happening with net interest income and the low rate environment or what’s happening with fx in a volatile currency environment. We don’t give any guidance but what I’d say is we’ve been very consistent on average over time but there will be periods and environmental conditions where we’ll be a little bit better or a little bit worse.

[Operator:]

Your next question comes from Marty Mosby – FTN Equity Capital Markets.

[Marty Mosby:]

I just had one quick follow up, what I was curious about was the $122 or $125 million worth of expense related to the agreements, that is your best case outlook right now so you’d have to have a perfect situation to recapture that whereas the $222 million over in the mark-to-market that you’ve already written down, you’re going to recapture that, it’s just a matter of timing?

[Steven L. Fradkin:]

You are correct. I think we’d like to thank everyone for participating in this second quarter call and we will look forward to updating you on our third quarter call on October 21st. Thank you very much, have a great day.

[Operator:]

Once again ladies and gentlemen this will conclude today’s conference. We thank you for your participation.