Apr 20, 2010
Executives
Bev Fleming – Director, IR Bill Morrison – EVP and CFO
Analysts
Betsy Graseck – Morgan Stanley Robert Lee – KBW Mike Mayo – CLSA Brian Foran – Goldman Sachs Brian Bedell – ISI Group Howard Chen – Credit Suisse Gerard Cassidy – RBC Capital Markets Clare Hart – JP Morgan
Operator
Good day everyone, and welcome to the Northern Trust Corporation first quarter 2010 earnings conference call. Today’s call is being recorded.
At this time I would like to turn the call over to the Director of Investor Relations, Bev Fleming for opening remarks and introductions. Please go ahead.
Bev Fleming
Thank you Andrea. Welcome to Northern Trust Corporation’s first quarter 2010 earnings conference call.
Joining me on our call this morning are Bill Morrison, Northern Trust’s Chief Financial Officer; Aileen Blake, our controller, and Preeti Sullivan from our investor relations team. Also joining us this morning is Allison Quentin [ph], who will be joining the investor relations team in Northern Trust in May, as Preeti embarks on a new role in corporate and institutional services.
We welcome Allison into the investor relations team at Northern Trust and wish Preeti well in her new role. Both Preeti and Allison will attend our New York Investor Day on May 26.
For those of you who did not receive our first quarter earnings press release or financial trends report by email this morning, they are both available on our web site at northerntrust.com. In addition, this April 20 call is being web cast live on northerntrust.com.
The only authorized rebroadcast of this call is the replay that will be available through April 27. 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 2009 annual report and our periodic reports to the Securities and 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 Bill Morrison.
Bill Morrison
Thank you Bev. Let me add my welcome to those of you listening to Northern Trust’s first quarter 2010 earnings conference call.
Earlier this morning Northern Trust reported first quarter 2010 net income of $157 million equal to $0.64 per share. To assist you in understanding our performance this quarter, we’ve organized today’s remarks into the following sections.
First, I’ll discuss market conditions that impacted our performance in the first quarter. Second, I’ll review our financial performance focusing on those items that most impacted our results.
Third, I’ll offer our perspectives on the near term environment as well as the strong competitive positioning of Northern Trust. And finally, Bev and I will be pleased to answer your questions.
The equity market environment improved for the fourth consecutive quarter. The S&P 500 was up 46.6% when compared with one year earlier and increased 4.9% during the first quarter.
Let me give you the equity market trends that are most relevant to our fees. Equity market performance calculated on a one quarter lag basis, which is the methodology used for calculating C&IS custody and PFS Wealth Management fees, was strong.
The S&P 500 increased 23.5% year-over-year on a one quarter lag basis. On a sequential quarter basis the one quarter lag markets 5.5%.
Using the one month lag methodology that applies to PFS fees, excluding Wealth Management, the S&P 500 was up 34% versus the prior year and up 3% versus the first quarter. The positive impact of improving equity markets while welcome and encouraging was diminished in our performance by the ongoing negative impact of historically low short-term interest rates.
For example, in the United States overnight interest rates averaged only 14 basis points in the first quarter. Three-month rates averaged only 26 basis points and short-term rates for the euro and sterling were also at low levels by historical standards.
Our economists expect central banks to maintain their low interest rate policies until January of 2011. Low interest rates are impacted our performance most noticeably but pressuring both net interest margin and the fees that we earn on our money market mutual funds.
With that environmental background, let me review our first quarter results. Revenues in the first quarter equaled $908 million, up slightly about $3 million compared to last year’s first quarter.
On a sequential quarter basis revenues decreased 4% or $43 million. Trust investment and other servicing fees are the largest component of our revenues representing 57% of total revenues in the first quarter.
Trust investment and other servicing fees of $515 million increased 25% year-over-year, but were down 6% on a sequential quarter basis. In our institutional business, C&IS trust investment and other servicing fees totaled $297 million in the first quarter, an increase of 44% year-over-year, but were down 10% on a sequential quarter basis.
C&IS fees include three primary revenue areas; custody and fund administration, institutional asset management and securities lending. Let me discuss the performance of each of these in the first quarter.
C&IS investment management fees equaled $64 million in the first quarter, up 5% year-over-year, yet down 1% compared with last quarter. Our results in the first quarter were negatively impacted by approximately $4 million in waived fees associated with institutional money market funds.
As I mentioned earlier, fee waivers are one area where low interest rates are directly pressuring our revenues. Absent fee waivers, C&IS investment management fees would have shown growth of 12% year-over-year and 3% sequentially.
These results show the impact of the improving market environment on our institutional index and managers businesses, as well as new business in both institutional index and short duration. Securities lending fees equaled $56 million in the first quarter, including approximately $38 million in positive marks associated with the one mark-to-market investment fund used by certain securities lending clients.
This compares with $52 million in negative marks in the first quarter of 2009 and $70 million in positive marks last quarter. The first quarter’s positive impact of $38 million reduces to approximately $57 million the cumulative impact that negative marks have had on our securities lending fees going back to the third quarter of 2007.
Excluding the impact of the mark-to-market fund across all periods, C&IS securities lending fees declined approximately 60% year-over-year and 12% sequentially. On this adjusted basis, the year-over-year and sequential declines are primarily attributable to lower spreads as maturing investments were reinvested at lower rates.
The three components of our institutional fees that I’ve just discussed are all impacted by the value of assets that we custody, administer or manage for our institutional clients. Let me review our various institutional client asset levels with you.
Institutional assets under custody equaled $3.4 trillion at quarter end representing a double digit increase of 32% versus last year and an increase of 1% versus last quarter. Global custody assets, an important high growth sub component of total C&IS assets under custody equaled $2 trillion at quarter end, up a very strong 44% year-over-year and 1% on a sequential quarter basis.
The increase in institutional assets under custody represents improving equity markets and new business partially offset in the sequential quarter comparison by the weakening of the euro and sterling relative to the dollar. Managed assets for institutional clients were $498 billion at quarter end, up 27% compared with one year ago and up 3% sequentially.
Securities lending collateral equaled $121 billion at quarter end, up 27.5% year-over-year and 6% sequentially. As you compare our performance with market indices, notes that equities represented about 45% of total C&IS managed assets at quarter end with the significant majority of those equity assets being managed in index strategies.
Let me now switch to our personal financial services business. Trust investment and other servicing fees in PFS were $218 million in the first quarter representing an increase of 7% year-over-year.
PFS fees declined 1% on a sequential quarter basis. The improving equity market environment was a welcome tailwind on both the year-over-year and a sequential quarter basis as I mentioned earlier.
Also our net new business results in PFS were very strong in the first quarter, increasing over 50% when compared with last year's first quarter and 33% when compared with last quarter. The first quarter of 2010 was in fact the best first quarter we have ever seen in PFS gross new business going back to when we began tracking this metric in the early 1990s.
We are seeing clients and prospects alike begin to move back into the market and beginning to focus on implementing longer-term investment strategies. Unfortunately some of this momentum was masked by the impact of fee waivers on PFS money market mutual funds, again due to the very low level of short term interest rates.
These fee waivers reduced PFS trust investment and other servicing fees by $16 million in the first quarter compared with fee waivers of $11 million in the fourth quarter of 2009, and $8 in the third quarter. Fees in PFS are derived from the assets that we manage and custody for personal clients.
PFS assets under management were $149 billion at quarter end, up 14% compared with a year ago and up 3% from last quarter. Assets under custody in PFS equaled $341 billion at quarter end, up 21% year-over-year and up 3% from last quarter.
Recent new business success and improving markets combined to fuel this higher level of personal client assets at quarter end. As you evaluate PFS performance, note that about 35.5% of PFS managed assets and 44% of PFS custody assets were equity securities at quarter end.
Net interest income equaled $240 million in the first quarter, down 17% when compared to the first quarter of 2009. Our net interest margin was 1.44% in the current quarter, 24 basis points lower year-over-year.
On a sequential quarter basis, net interest income declined 2% and the net interest margin actually increased by 1 basis point. During the first quarter, interest rates remained at historic lows since spreads tightened at the short end of the yield curve.
For example, the spread between the overnight Fed effective rate and the three month LIBOR averaged only 12 basis points in the first quarter compared with 15 basis points in the fourth quarter and 105 basis points in the first quarter of 2009. Low rates, tighter spreads and the reduced value of non interest related funds continue to pressure net interest income and the net interest margin.
Foreign exchange trading income was $80 million, down 39% compared with the first quarter of 2009 and down 9% compared with the last quarter. Currency volatility was meaningfully lower on a year-over-year basis and was also lower on a sequential quarter basis, although the rate of decline in volatility appears to have slowed.
Client volumes partially offset lower volatility as trading activity continued to recover with more stable market conditions. During the first quarter, our loan loss provision was $40 million unchanged from last quarter.
Net charge offs equaled $31 million down just slightly from $32 million last quarter. Non-performing loans, however, increased $41 million sequentially to $319.5 million, with about half of the increase related to residential real estate.
Other real estate owned increased $16 million, principally related to two commercial real estate properties which converted from non-accrual to ORE. Now, let me shift my comments to a review of the key expense categories that impacted our first quarter performance.
Expenses equaled $620 million in the first quarter representing an increase of 4% year-over-year. Total expenses were essentially flat on a sequential quarter basis.
Compensation expense equaled $275 million, up 6% year-over-year and 2% sequentially. Recall please that the equity based component of total compensation expense was impacted in 2009 by the reversal of prior expense accruals for performance stock units, which were not expected to divest.
These reversals reduced our total compensation expense in both the year earlier quarter as well as the prior quarter. Compensation expense adjusted for these accrual reversals would have increased less than 1% year-over-year and would have declined 1% sequentially.
Staffing levels were approximately 12,500 full time equivalent positions at quarter end, an increase of 2% year-over-year and less than 1% sequentially. New staff positions were concentrated in our Asia Pacific region.
Employee benefit expense equaled $63 million in the first quarter, down 4% year-over-year and up 15% sequentially. The sequential quarter increase primarily reflects higher FICO [ph] expense, which is a normal seasonal pattern for us and others, as well as higher health care and pension expense.
Outside services expense equaled $106 million in the first quarter; an increase of 10% compared with last year, yet was down 11% sequentially. The year-over-year increase primarily reflects higher investment manager sub advisory fees, which are influenced by higher market values and higher technical services.
The sequential increase primarily reflects lower cost associated with technical, legal and consulting services. Equipment and software expense equaled $67 million in the first quarter, up 8% year-over-year and down 8% sequentially.
The year-over-year increase reflects depreciation expense associated with ongoing investments in technology. The sequential decline represents the typical annual pattern where expense associated with depreciation and amortization of equipment and capitalized software is typically lower in the first half of the year.
Other operating expenses equaled $67 million in the first quarter down 5% year-over-year and up 7% sequentially. Recall that our expenses in this category during 2009 included the impact of the now expired capital support agreements.
Included in our first quarter 2009 expenses was $8 million associated with the capital support agreements. Similarly the fourth quarter of 2009 included $12 million in final expense associated with the funding and exploration of the capital support agreements.
Aside from the impact of the capital support agreements, other operating expense reflects higher business promotion and FDIC insurance premiums. Our effective tax rate in the first quarter was 34%.
The tax rate in the first quarter reflects the impact of the write-off of the deferred tax asset as a result of the recently enacted federal healthcare legislation. Let me wrap up today’s call by offering our thoughts on two frequent topics of discussion, the environment within which Northern Trust operates currently, which recently has been challenging on several fronts and the strategic positioning of our company, which remains quite positive.
Similar to my environmental comments last quarter, improving equity and fixed-income markets continued to be beneficial to both our clients and our businesses. That said, short-term interest rates remain at extremely low levels, and our economists do not expect rates to rise meaningfully early 2011.
As noted throughout my remarks today, this adversely affects net interest income, securities lending, and money market mutual fund fees. Likewise, the still challenging economic environment drove non-performing assets higher in the quarter by $57 million.
Most of that increase was centered in the real estate markets both residential and commercial. Our long-standing conservative and relationship oriented lending practices have allowed us to weather this cycle better than most banks, but our non-performing asset trends are reflective of the difficult economy and the stress is being felt by even the most conservative of lenders.
Offsetting the near-term macroeconomic environment is the excellent competitive positioning of Northern Trust businesses. Perhaps the best reflection of that strong strategic positioning is the outstanding new business we achieved in the first quarter.
In our personal business, first-quarter net new business increased over 50% year-over-year and 30% sequentially. Our new business results in the month of March alone were the best achieved since we began tracking this metric.
We are also seeing success with both existing clients and new clients, who appear to be moving back into the market, as well as focusing on longer term investment strategies that Northern Trust is particularly qualified to implement. In our institutional business, net new business increased 11% on both a year-over-year and sequential quarter basis, representing our highest level of net new business since the first quarter of 2008.
The expanded relationships with many existing clients, won a number of new relationships during the quarter, and ended March with a solid pipeline in both North America and around the world. In sum, our focus at Northern Trust remains on our clients and on the very attractive businesses within which we have chosen to compete.
We continue to feel very positive about the long-term positioning of Northern Trust. 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 we will need to end today’s call to allow sufficient time for all of us to get to our annual meeting. Please accept our apologies in the event that we have to close off Q&A period earlier than is our normal practice.
Now Bev and I would be happy to answer your questions. Andrea, would you please open the call for questions.
Operator
(Operator instructions) And our first question will come from Betsy Graseck with Morgan Stanley.
Betsy Graseck – Morgan Stanley
Good morning. Thanks.
Bev Fleming
Hi, Betsy.
Bill Morrison
Hi, Betsy.
Betsy Graseck – Morgan Stanley
Hi. A couple of questions.
One is can we talk a little bit about the money market funds business, I just wanted to get your sense as to how your plan is – how your results are going relative to plan to retain that portfolio, and what your goals are as rates start to raise to attain that business internally?
Bill Morrison
We have seen a very slight decline in our money market assets taken at the top of the house level during the first quarter. Relative to the issue of how we plan to deal with recouping the level of money market fees that we are giving up today, which is meaningful, is predicated on the assumption that we will share part of the increase in yields in our funds that result from higher rates with clients, and our assumption is we will share roughly 50% of that increase with clients, which extrapolates out to us needing 50 or 60 basis points in increases in short-term rates in order to recoup the level of fees that we are currently rebating.
Betsy Graseck – Morgan Stanley
Okay. And that is primarily US dollar denominated, is that right?
Bill Morrison
Yes.
Betsy Graseck – Morgan Stanley
Okay. Could you – and the second question is just a follow up on, could you discuss your plans for the capital that you do have, you know, I know we don't know exactly how much excess capital you have given the fact that regulars aren’t out with their commentary yet with regard to Basel III.
But will you give us a sense as to how you would like to use capital as you learn how much excess you have.
Bill Morrison
Well, the ongoing process of defining and defining to me means getting regulatory consents around what the definition of our excess capital is after whatever buffers are decided upon, it is still going to take some time to get through. Northern has just entered the parallel run process for the external parallel run for Basel II.
So we're just at the beginning of the process. Assuming, to respond more directly to your question, that we had some clarity around that, we would like to do the things that you and others who own our stock would like to see us do, including perhaps buybacks on stocks at what would turn out to be attractive prices.
I don't think we are going to be able to do that in the near-term until we get the kind of definition we are looking at – we're looking for. And so, we have become a little more focused than traditionally has been the case on acquisition opportunities both for the personal side of our business and the institutional side of our business, and in our investment management business.
Obviously, we have not done anything materially, but we are out there looking in all segments.
Betsy Graseck – Morgan Stanley
And is there anything in particular that is defining what you are looking for in terms of any geography or product?
Bill Morrison
Yes. In PFS Betsy, we are looking to add more client and support professional concentration in the north-eastern Mid-Atlantic States, and same kind of approach in the Western United States, principally in California.
Again those initiatives are mostly client acquisition focused, and in the institutional side of our business, I think we are a little more focused on capabilities, principally in the fund administration business, but across the product range both in Europe and the US and Asia. We looked it a lot, haven't done anything yet.
Betsy Graseck – Morgan Stanley
Okay. All right, thanks very much.
Operator
Our next question comes from Robert Lee with KBW.
Robert Lee – KBW
Thanks. Good morning.
Bev Fleming
Hi, Lee.
Robert Lee – KBW
Real quickly, back to the money fund business, on the fee waivers understanding that I guess the expectations that rates stay here for the remainder of the year, but would you expect to see – maybe some modest improvement. You have kind of had cash market rates kind of down sort at January lows, and there are some other money fund companies talk about seeing a little bit of easing after pressure.
Not elimination, but little bit of easing of the pressure heading into Q2. Do you see some of that?
Bill Morrison
We look at that every day in hopes that we will see the kind of improvement you just described. It is up-and-down, but there has been a tiny bit, but Rob I don't see anything material so far.
Robert Lee – KBW
Okay. And you know maybe sticking with the asset management business; I mean the new business trends in the past have been pretty good the past year.
And I guess you know, held up reasonably well in the first quarter based on your comments. Any color you could give us about you seeing that kind of slow up at all or that business kind of continuous at that pace it had been last year, are you seeing any kind of change there?
Bill Morrison
The investment management business or new business broadly?
Robert Lee – KBW
Well, I was thinking really in particular that flows into the past business within investment management?
Bill Morrison
I don't think we see any significant change either way. You know, new business across both sides of our client facing businesses are strong, pipelines are very strong.
We remain quite optimistic.
Robert Lee – KBW
Okay. And, you know I just wanted to clarify some of the comments you made about your new business pipelines, and I apologize, I probably didn't write down properly, but were you suggesting that in PFS you start to see side investors or clients rerisking, to some extent you are starting to see pick up once again in new business activity and new client wins?
Bill Morrison
Yes. I think the specific comment was March was the best month in PFS since we began keeping records and a lot of that is clients that are new to Northern, or we can't really comment necessarily on whether they are becoming more risk tolerant although the suggestion is that they are.
Our internal clients, our existing clients are also – our existing clients are also becoming a little more active, but there is nothing in our statistics around asset allocation that would suggest that they are suddenly becoming much more risk tolerant.
Robert Lee – KBW
Okay, and –
Bev Fleming
Rob, this is Bev, one of the statistics we did say in case you missed it during the call is that at the end of the quarter of our PFS assets under management, the equity portion was about 35.5%. So it was up a little bit from the end of the year, but not in a meaningful way that would suggest that people are jumping back in.
I think the point is that we are just seeing people start doing things, start talking to us. So whether or not they are actually starting to take on more risk is yet to come.
Robert Lee – KBW
Okay, great. And one last question, just on the comp line, I know, if I recall usually Q1, there is besides the spike in benefits, that there is usually a seasonal jump up in incentive compensation accruals, I guess, for how you have to account for option grants and whatnot.
So could you possibly quantify – give us some sense of what that kind of seasonal impact would have been in Q1? And what I guess mostly goes away or somewhat goes away in subsequent quarters?
Bev Fleming
One of the things you will note is that there is some relatively meaningful noise in the component of share based compensation related to performance stock units, and that is because we actually reverse prior expense accruals as Bill mentioned in his prepared remarks in both the first quarter of 2009 and in the fourth quarter of 2009. And again that is all disclosed in our annual report prior 10-Qs and we will provide the details next week.
In addition to that, your other question is that there is traditionally some seasonal uptick in stock option expense portion of share-based compensation because of the fact that any stock options issued to retirement eligible employees need to be immediately expensed in the first quarter. Obviously that didn't have as much of an effect last year, because stock option grants were lower last year as a result of circumstances you are aware of.
So you will definitely see that the performance of stock had the impact on last year, and you will also see an uptick in the first quarter in stock option expense because of the seasonality that you exactly described.
One of the things you will note is that there is some relatively meaningful noise in the component of share based compensation related to performance stock units, and that is because we actually reverse prior expense accruals as Bill mentioned in his prepared remarks in both the first quarter of 2009 and in the fourth quarter of 2009. And again that is all disclosed in our annual report prior 10-Qs and we will provide the details next week.
In addition to that, your other question is that there is traditionally some seasonal uptick in stock option expense portion of share-based compensation because of the fact that any stock options issued to retirement eligible employees need to be immediately expensed in the first quarter. Obviously that didn't have as much of an effect last year, because stock option grants were lower last year as a result of circumstances you are aware of.
So you will definitely see that the performance of stock had the impact on last year, and you will also see an uptick in the first quarter in stock option expense because of the seasonality that you exactly described.
Robert Lee – KBW
Is it possible that that seasonality impact and how much of that kind of fades away over the subsequent quarters, just from the – for the retirement eligible employees?
Bev Fleming
You know, I think I do have that figure. Let me find it.
So why don't we –
Robert Lee – KBW
We can circle back.
Bev Fleming
Yes. Because I can get – I can give you the retirement eligible portion of share-based compensation for the first quarter.
Is that the percent number that you are looking for?
Robert Lee – KBW
Yes.
Bev Fleming
I think it is a little over $6 million.
Robert Lee – KBW
All right. Great.
Thank you very much.
Operator
Our next question comes from Mike Mayo with CLSA.
Mike Mayo – CLSA
Good morning.
Bill Morrison
Good morning Mike.
Mike Mayo – CLSA
Could you just help with the disconnect – I mean, your franchise is showing growth, what you said. So PFS gross new business was the best this quarter since you've kept records, best in March since you've kept records, I want to know what is gross new business, how you define that.
And then assets under custody, it is up and you said new business is the best since the first quarter of 2008. Asset under management are up, so the core franchise is growing.
At the same time the revenues aren't doing a whole lot. So can you quantify the impact of all of the seasonal and all of the nonpermanent factors that are hurting revenues to help fix that disconnect that I'm having?
Bill Morrison
Well, I think the biggest issue Mike on the personal side is the money market fee waivers. As to the impact of what you said you wanted to get a definition of how we calculate gross new business or net new business, it's typically the annual dollar amount of fees that are forecast by a new client relationship or an addition from an existing client.
So if you define it that way you could bring in a substantial piece of business in March, it will be reported in March and you wouldn't see any revenue impact on that until the period beginning in April. We don't count new business at Northern trust until it is funded.
So you should have a direct correlation to the time that the new business is announced and the beginning of the fee stream connected to that new business.
Mike Mayo – CLSA
How much of the new business was new clients versus you know additional businesses with existing clients?
Bill Morrison
I haven't seen the detail on that yet, specifically from March but generally it's about 50-50 Mike.
Mike Mayo – CLSA
And who are you getting new clients from?
Bill Morrison
Everyplace.
Mike Mayo – CLSA
If you are – okay, I mean, big banks, brokers –
Bill Morrison
It is across the board. I don't think that you know, there are a lot of times where I could tell you, look, we are getting most of our business from one of two places and you and I have had those conversations in the past.
Now I can tell you that there is one or two principal sources of business. It's, you know, in this environment where mostly everybody is deemed to be safe.
You get back to these issues that we like where clients are looking for high quality of advice, consistency of service teams and companies that do business the right way. And so it's from all over the place Mike.
Mike Mayo – CLSA
And I don't want to put words in your mouth, then, so does that mean the second quarter revenue numbers are partly baked in as the new business both from PFS and C&IS rolls through?
Bill Morrison
No, they will certainly be improved relative to that new stream of business, yes. Now, you don't know what you're going to lose in the second quarter that could make that run in a different way, but I think it's important to say that on both sides of the business, but particularly the personal business, our loss business experience has been among the best it has ever been.
So at least through the first quarter, very high levels of gross new business, very low levels of lost business, and that should all things being equal drive the kind of revenue experience that you are talking about.
Mike Mayo – CLSA
So, all in, last follow-up should this be the low point of the year?
Bill Morrison
No. You know, if – it depends on what we lose going forward Mike.
Mike Mayo – CLSA
All right, thank you.
Operator
Our next question comes from Brian Foran with Goldman Sachs.
Brian Foran – Goldman Sachs
Good morning.
Bill Morrison
Good morning.
Bev Fleming
Good morning.
Brian Foran – Goldman Sachs
How should we think about normalized SEC lending revenues? You've tended to average 11 to 12 basis points of your cash collateral, the industry as well over the past decade.
When we look at the current run rate, excluding the mark-to-market being about half of that, is it all cyclical or is there any structural change in the revenue realization in your opinion?
Bev Fleming
Well, I think that we definitely saw in the first quarter the impact of interest rate environment, and the narrowing of spread there. But we also are seeing clients choose to take less risk in their collateral reinvestment guidelines.
So that's having an impact as well.
Brian Foran – Goldman Sachs
Is there any dimension you can put on, you know, if interest rates were normal right now and clients were showing their current risk appetite? Would we be kind of 10 basis points versus the historical 11 to 12 or would it be 8 basis points.
Just trying to understand how much of it is the interest rate environment and how much of it is lower risk appetite?
Bev Fleming
I don't think we’ve provided any disclosures to break it down that way Brian.
Bill Morrison
But it's a combination of both, in fact.
Brian Foran – Goldman Sachs
Okay, thank you.
Operator
Our next question comes from Brian Bedell with ISI Group.
Brian Bedell – ISI Group
Hello, can you hear me?
Bill Morrison
Yes, hi Brian.
Bev Fleming
Hi Brian.
Brian Bedell – ISI Group
Hi. I'm not sure if you have disclosed this yet but if you haven't, can you give me the breakdown of the equity fixed in the money market and the C&IS asset management and the same for PFS, I know you did the equity in the PFS.
Bev Fleming
For C&IS asset management, it was 45% equity, 14% fixed income and 41% short duration. For PFS equity it was 35%, fixed income was 33% and short duration was 32%.
Brian Bedell – ISI Group
And was that – that's 35.5 in the equity?
Bev Fleming
Yes, I'm giving you rounded numbers.
Brian Bedell – ISI Group
Up a little bit. Okay.
And then just to reconcile again the growth in new business, the comment on the growth in new business, I guess in terms of – Bill, you talked about what may or may not have already been funded, and if we look at PFS assets, both managed and custody, they're up 2.5% to 3% linked quarter, so – and you would have thought the market would have been largely responsible for that, you know, maybe some new business flows, are you basically saying of the gross new business, most of it is not funded in that end of period number?
Bill Morrison
No, most of it is funded.
Brian Bedell – ISI Group
It is.
Bev Fleming
Yes.
Bill Morrison
Yes, in fact I’m saying Brian that we don't report news business unless it is funded.
Brian Bedell – ISI Group
Great, great, okay.
Bill Morrison
None of it is not funded.
Brian Bedell – ISI Group
Okay, so you must – I mean, with the asset numbers being up just about 3% linked quarter, you must have had some significant outflows, is that a fair statement or…?
Bev Fleming
Yes, I'm not sure which line item you're referring to Brian.
Brian Bedell – ISI Group
I’m using like, just like the assets under management and PFS going from 140 – hold on one second, using 145 to 149 in the quarter.
Bev Fleming
Okay, I wanted to make sure I knew which line item you're referring to.
Brian Bedell – ISI Group
And then the 331 to the 341 on the custody side.
Bill Morrison
Some of this, I think, comes out of our wealth management group and PFS. Wealth has had a fair amount of cash go out basically and they have also had a shift between assets that we’ve accounted as managed assets, cash typically that has been put into investment programs, more broad investment programs that we custody, but we don't run.
So you've got money moving out, staying within Northern, but moving out of AUM and then moving into AUC and there is, obviously it has been in AUC, but there is a resultant decline in fee revenue because of that. So that may speak partly to your observation.
Brian Bedell – ISI Group
Okay, okay. So the basic takeaways, the gross new business trends are good but are you still seeing some – a mitigating factor from the items that you mentioned?
And then I would also say is there also an impact from clients paying taxes on the negative side?
Bill Morrison
Sure.
Brian Bedell – ISI Group
And that's seasonally high in the first quarter or more, do you see it more in the first couple of weeks this April?
Bill Morrison
It's actually higher in the second quarter as you would expect around April. There is planning for it.
There is money moved around in advance. So it is spread across both quarters.
Brian Bedell – ISI Group
Okay, great, and then the total fee waivers, I'm sorry, can you repeat that the total amount that you’ve waived on money market fees for the quarter?
Bill Morrison
It's roughly $20 million, $16 million in the personal side and $4 million in the institutional side.
Brian Bedell – ISI Group
Great, great, and then just one last question on credit quality. It seems that you're now down to this $40 million run rate.
I know it's always tough to predict but based on what you are seeing on credit quality as of right now, do you think that provision level is sustainable going forward?
Bill Morrison
I can't say, you know, we look at it every quarter and as I've commented the last couple of quarters it's extremely lumpy and this quarter is a pretty good example of how lumpy it can be. We – as we measured it this year, we thought – or this quarter rather we thought $40 million was the right number based on the consistent process that we perform every quarter.
We are going to have to take it quarter by quarter.
Brian Bedell – ISI Group
All right, okay. Great.
That's what I had. Thanks very much.
Bill Morrison
Thank you.
Operator
Our next question comes from Howard Chen with Credit Suisse.
Howard Chen – Credit Suisse
Good morning Bill. Good morning Bev.
Bev Fleming
Good morning.
Bill Morrison
Good morning Howard. How are you?
Howard Chen – Credit Suisse
Good, thanks. It looks like a tick-up in loan balances this quarter.
Could you just discuss Bill the broader environment and appetite for the lending that you do?
Bill Morrison
Yes, that's a very, very small up-tick in loans balances, but an up-tick none the less. Yes, I think generally that trends would be as we discussed previously that is our large corporate business continues to be very slow.
I think our large corporate borrowers are continuing to access the credit, the fixed income markets and not use their bank lines. That seems to be continuing.
There is some pretty good loan demand in certain parts of the PFS franchise. As you all know, the recovery is very uneven in the United States, and it is true in our franchise as well.
So we are seeing growth in places like Texas and the northeast, some parts of the Midwest and northern California, but there is relatively limited quality demand in some of the more challenged states in our franchise, including Florida and Arizona and others. So it's pretty uneven Howard.
Howard Chen – Credit Suisse
Okay.
Bill Morrison
I wouldn't say that there has been a turnaround and that loan demand is on the upswing. Let us say we are where we are.
Howard Chen – Credit Suisse
Okay, thanks. That's helpful.
And then on the asset servicing side I think you know, you and management have been of the belief that we didn't see more assets servicing market share shift during the height of the financial crisis due in part to the SEC lending gates that were up. As we continue to normalize here, where are we in that conversation Bill?
Bill Morrison
We are just – we are kind of following it. You know, we're looking at it every month and seeing what's happening.
Bev commented a minute or two ago on the PFS side of the business with the exemption of those wealth management clients, who are moving, and remember wealth management has about 44% of its AUM in cash. Those clients are moving into more aggressive programs, some of which benefit us and some don't.
The PFS business is really not doing much at all. You know, our equity percentage I think was up 1% quarter to quarter and that's principally market-driven.
So we can't point to anything that says that our PFS clients are becoming more aggressive. However, the new business results suggest that personal clients, perhaps not previously our clients are becoming a little more aggressive, but it's not in our asset allocation to districts yet.
Howard Chen – Credit Suisse
Okay, I'm sorry maybe I mis-stated the question. I was curious on the asset servicing side.
We’ve talked in the past about some of these securities lending gates being up and that's not, you know, driving a lot of market share shift?
Bill Morrison
Right.
Howard Chen – Credit Suisse
From your perspective wanted to know from an industry perspective, where are we in that conversation of the SEC lending gates being you know, up or down?
Bill Morrison
As far as we know, those gates are up substantially everywhere, except we're probably the most lenient in that regard among the key players in this business.
Howard Chen – Credit Suisse
Okay.
Bill Morrison
So very little change.
Howard Chen – Credit Suisse
Okay, and then finally I know you have to go but not to beat this to death, but another follow-up on the new business trends in your commentary in March. Any specifics you could share on just you know geographies or products that that business seems to be skewed towards?
Bill Morrison
In terms of geographies it is pretty consistently spread on the personal side of the business around the United States. I think all of our regions were strong.
That's looking at the numbers that even stand out.
Bev Fleming
Yes, in the Midwest – the Midwest and the southeast both did particularly strong on a sequential quarter basis.
Bill Morrison
Right, and as you know, those two are our biggest units by far in PFS.
Howard Chen – Credit Suisse
Okay. Great.
Thanks very much for taking the questions.
Operator
Our next question comes from Gerard Cassidy with RBC Capital Markets.
Gerard Cassidy – RBC Capital Markets
Good morning, Bill. Hi, Bev.
Bill Morrison
Hi, Gerard.
Bev Fleming
Hi, Gerard.
Gerard Cassidy – RBC Capital Markets
A question for you guys. Bill, you mentioned that the wealth management clients had about 44% of their assets under management in cash.
If you go back to '07, '06, during the peak of the market, where would that number have been about?
Bev Fleming
Well, first of all Gerard I want to make sure that you and others recall that when we refer to wealth management, we are specifically talking about the family office clients at the very high end of the wealth spectrum that we are not talking about our PFS clients in totality. We can tell you that from the perspective of PFS clients overall, we are at 35%, 35.5% right now.
I would say most normally in recent years, we’ve probably been into the maybe the 50% range. We peaked at maybe 60%.
So for PFS, the core PFS clients we’re still meaningfully below, but for wealth management families, it was not unusual for us to have a high proportion of cash we manage.
Gerard Cassidy – RBC Capital Markets
And that 60% was in equities, correct, Bev?
Bev Fleming
Oh, yes.
Gerard Cassidy – RBC Capital Markets
Okay.
Bev Fleming
That was the peak –
Gerard Cassidy – RBC Capital Markets
Correct. And regarding the fees, the waivers that you guys indicated on the money market mutual funds, $20 million, $16 million personal, $4 million institutional, when that comes back, we should see that show up I assume in the fee lines for PFS and C&IS.
Is that right?
Bill Morrison
Yes, absolutely.
Gerard Cassidy – RBC Capital Markets
And if I heard you correctly, earlier, we need to see Fed funds somewhere around 50 basis points to 75 basis points for them to come back or do we need it higher?
Bill Morrison
No, I think I said 50 basis points to 60 basis points higher than they are today so that would get you some place close to what you said to a 70, 75 bibs, but again remember that we are making the assumption unlike some of our competitor that we will have to share some of that rate increase with our clients to keep the balances and I don’t think certain others have that assumption into their planning, but we do intend until we see that there is another option to share 50% of that market increase in yields with our clients.
Gerard Cassidy – RBC Capital Markets
So if we're fortunate enough to be seeing higher rates a year from now, and say Fed funds is 150 basis points or 200 basis points, you would – I would assume be able to capture all of those fees, is that fair? Because you're splitting with–?
Bill Morrison
Yes.
Gerard Cassidy – RBC Capital Markets
Okay. And then…I'm sorry?
Bill Morrison
It is a lower number than that. It is 60 basis points to 75 basis points, or 60 basis points to 75 basis points in short-term rate environment that would allow us to share 50% of our increased yield with clients and earn back all of our rebated fees.
Gerard Cassidy – RBC Capital Markets
Do you expect to be able to recapture the fees that have been waived thus far?
Bill Morrison
No, no, no. There is going back on these, but we will seize rebating fees entirely when we are at.
Gerard Cassidy – RBC Capital Markets
I see. You referenced earlier the spread between I think it was the Fed funds rate and the 30-day LIBOR rate.
Bill Morrison
Correct.
Gerard Cassidy – RBC Capital Markets
Is that most important to look at for the securities lending business? That part, I didn't fully capture.
Bill Morrison
Yes. That is why we put it in there.
That is the relationship that drives the investing spread and securities lending.
Gerard Cassidy – RBC Capital Markets
And I think you said it is the lowest that you guys have seen in many, many years, if not at a record low?
Bill Morrison
That is right. And that is why our core earnings from SEC lending are where they are.
Our volumes are up a little bit, in fact I said up 27% year-over-year, but the spreads are down dramatically because of that spread phenomenon.
Gerard Cassidy – RBC Capital Markets
And then finally, if we are stuck in this low rate environment for another 12 months, and we don't see rates higher a year from now, are there expense reduction programs you can implement to help offset some of the pressures on your revenues and your margins?
Bill Morrison
There always are. We have been trying to manage expenses judiciously, and maintain the integrity of our client facing teams and our technology budgets, because today's environment on both sides of the shop, personal and institutional is quite complex.
We need strong consistent teams of client support to maintain our business and to generate the kinds of new business that we are pleased to be able to talk about this morning. Up until now, we're happy with where we're and we will see what the future brings.
Gerard Cassidy – RBC Capital Markets
Thank you for your time.
Operator
And our last question today will come from Clare Hart with JP Morgan.
Clare Hart – JP Morgan
Hi, good morning. I think Gerard sort of asked my question, but just taking a step back from it, maybe a top line perspective, or a high level perspective, how do you think about sort of negative operating leverage?
In any given quarter, it sounds like it might just be what happens as you sort of continue to fill out and support the brand and your people in the front office and that sort of thing, but beyond one quarter, let's say, how do you think about negative operating leverage or operating leverage in the model?
Bill Morrison
You know, we almost like it, and we are targeted to generate positive operating leverage almost all the time. In this kind of environment, it just hasn't been possible for us to do that.
And frankly when macroeconomic conditions drive the level of reduction that we have seen in some of these revenue categories, I don't know how we could have recognize positive leverage over the past couple of quarters when you take the non-recurring stuff out particularly. We are optimistic that the growth rates in the business and the facts that these economic conditions can't last forever, it won't last forever.
It will get us closer to where we historically have planned to be.
Clare Hart – JP Morgan
I guess just, the way I was thinking about it was over the course of the call, we've talked about a lot of things where fees were waived and different opportunities, new business wins and that sort of thing, so from my perspective as I hear that, I think that should, as the top line essentially comes back, we should be able to see some of the benefits of that on the bottom line, so to speak. I don't feel like you've been sort of holding back on expenses that will sort of come back and forth as we see the revenue come back and forth, I guess is my question really?
Bill Morrison
I would think that you have that exactly right. So that is exactly how we are thinking.
Clare Hart – JP Morgan
Okay, thank you.
Operator
And with that there are no further questions. I would like to turn the call back over to today’s presenters.
Bill Morrison
Okay. That is all we have.
We thank you very much for joining us, and we will talk to you all shortly. Have a good day.
Operator
Again, this does conclude today's call. Thank you for your participation.