Northern Trust Corp (NTRS) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation third quarter 2007 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.

Thank you. Welcome to Northern Trust Corporation's third quarter 2007 earnings conference call. Whether you are participating in today's conference call live or via replay, we sincerely appreciate you taking the time to listen to Northern Trust's third quarter 2007 financial results.

Joining me this morning are Steve Fradkin, our Chief Financial Officer; Aileen Blake, Controller; and Preeti Sullivan, from our Investor Relations team; in addition we are joined this morning by Bill Osborn, Chairman and Chief Executive Officer who will provide some opening remarks.

For those of you who have not received our third quarter earning press release or financial trend report by e-mail this morning they are both available on our website at northerntrust.com. In addition, this October 17, call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through October 24. 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 currents 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 risk and uncertainties. I urge you to read our 2006 financial annual report and our periodic reports to the SEC for detailed information about factors that could affect actual results. Again, thank you for your time today. Let me now turn the call over to Chairman and Chief Executive Officer, Bill Osborn. Bill?

Thank you, Bev. First of all I want to thank all of you for listening to me and working with it me over the last 12 plus years. I am in an outside Board meeting this morning and therefore I'm going to make some comments and then I will be available this afternoon back at the bank if anyone wants to call me and ask me any specific questions, but let me first all comment on the fact that yesterday in our Board meeting the Board of Directors approved a succession plan where I will step down at the end of the year as Chief Executive Officer and Rick Waddell I will assume the CEO role effective January 1, of 2008. I will remain Chairman of the Board and I have not put down nor has the Board decided on any specific retirement date for me as Chairman. My intention is to continue to work with the Company and to be focused very much on client relationships, strategic issues that we're going to continue to deal with and doing whatever I can to continue to help Rick and the rest of the management group.

I have worked on on this transition plan for well over two years, actually I started probably 12.5 years ago, but but it's really been accelerating over the last couple years and it's really driven at this time by the fact that I think the Company is in absolutely terrific shape, we have great momentum, as you saw, in our third quarter earnings and all of our business year-to-date. Our global franchise continues to expand, our personal business, our high net worth business has just been doing terrifically well, and I see it has a lot of momentum and we've got a great management group. This is really the issue. Rick is ready to go. He's chomping at the bit to take over and after 12.5 years it's time for me to get out of the way and let a group take over that I know that will just drive us to greater heights.

I will continue to be around to help out wherever I can and I am very, very confident in the future of our organization. I know that Rick and Steve and the whole group will continue to have the very open dialogue that I've maintained with all of you and I appreciate all that you all have done to support me and the Northern. This is a very special organization and I know that you'll continue to have the same relationship with Rick as you have had with me going forward.

Now I'm going to turn this over to Steve but I just want to tell you again if anyone has any specific questions, they can call me. I also want to mention, I know there's a lot of, there will be speculation. I am in perfectly good health. The Company is in great shape and this is literally a personal decision based on the fact that we have a great group that's ready to go forward. Again, thanks very much and I'm going to sign off now. Bye bye.

Thank you, Bill, and good morning, everyone. Let me extend my welcome to all of you listening to Northern Trust Corporation's third quarter 2007 earnings conference call. Now before I provide you with an overview of our third quarter performance let me offer just a few comments on the management changes announced yesterday and just discussed with you by Bill.

I hope that all of you will join me in congratulating Rick Waddell our new Chief Executive Officer effective January 1, 2008. As many of you know, Rick is a 32 year veteran of Northern Trust with a very diversified experience set spanning our banking, private client, strategic planning, wealth management, institutional, and more recently investment businesses. Rick has worked for Northern Trust both in a headquarters context and from outside Chicago and we're delighted to have someone with his breadth of experience and knowledge of Northern Trust serving as our next CEO.

I'd also like to take a moment to offer a few comments on behalf of the management team with respect to Bill Osborn's decision to step down as CEO while remaining Chairman of the Board again all effective January 1. Bill has been a true leader and steward of Northern Trust Corporation not only during his 12 years as Chief Executive Officer but also across his entire 37 year career. At a time when the conventional wisdom said that size and consolidation were the watch words for banks and that only the big would survive, Bill eschewed large scale M&A transactions and plowed ahead with industry leading growth rates on an organic basis. When people said that he led a small Midwestern institution Bill defied them by building a premium national wealth management franchise in the United States that now serves approximately 20% of the Forbes 400 wealthiest Americans.

When critics said that he ran a group Company but that the organization would never be able to compete globally, he led the Company in a transformation that took it from earning approximately 7% of its net income from international activities in 1992 to approximately 35% in 2006, the vast majority of which again was done organically. When some said he was too conservative with the balance sheet and should take more risk, he ignored their admonitions, and avoided the pitfalls of on time items and restatements that others experience. And when people told him that it was either corporate performance or philanthropy but that the two could not coexist he ignored them yet again and consistently led the Company in making philanthropic contributions equal to approximately 1.5% of pre-tax profits per year in addition to the countless hours of his own time and energy that he spent on civic issues all while the Company still performed at the highest levels relative to others in its peer group.

On behalf of all of his colleagues and friends here in Chicago, across the country, and around the world, I want to thank Bill for his incredible and indelible contributions to Northern Trust. We look forward to his continuing work as CEO for the remainder of 2007 and his counsel as Chairman of the Board of Directors thereafter. With that let's move into a discussion of our third quarter performance.

Earlier this morning Northern Trust reported very strong third quarter 2007 earnings of $0.93 per share, an increase of 26% compared to the $0.74 that we reported in the third quarter of 2006. Net income equaled a quarterly record of $208 million representing an increase of 27% year-over-year. This was our 11th consecutive quarter of double-digit year-over-year growth in earnings per share and our 10th consecutive quarter of double-digit year-over-year growth in net income. Accumulation of client assets under custody and assets under management was robust. Assets under custody equaled a record $4.1 trillion on September 30, representing an increase of 24% compared with one year ago. Assets that we manage on behalf of the clients experienced strong growth as well equaling $761 billion at September 30, up 14% compared with the year ago.

Now we've organized our earnings call today into three sections. First, for the benefit of those of you that maintain detailed models on Northern Trust I will outline two items that you should consider as you analyze our third quarter results. Second, I'll review our financial performance focusing on those areas that most impacted the third quarter's results. And third, I'll comment on an exciting announcement we made on Monday and also offer a few perspectives on the strategic positioning of Northern Trust in light of the volatile market conditions that existed in the third quarter. As always, Bev and I will then be pleased to answer your questions.

As you analyze our third quarter financial performance, I want to draw your attention to two items that impacted our reported results. First, in the third quarter Northern Trust recorded a gain of $6.3 million on the sale of shares of CME Group which is the parent company of the Chicago Mercantile Exchange. The gain on the sale of these shares is shown in our income statement in the investment security transactions line. Second, during the third quarter we recorded an income tax benefit of $5 million. This item relates to new state tax legislation enacted in the third quarter. We currently estimate based on our current interpretation of the tax law that our deferred income tax reserves will be overstated by $5 million as of January 1, 2008, when the new law becomes effective. Therefore, we recorded a $5 million benefit in the third quarter as required by FAS 109.

With that background let me review the quarter's key performance drivers. I will start with revenues, focusing on the major items that impacted our results. Total revenues equaled $892.5 million in the third quarter up a strong 19% or $143 million compared to last year's third quarter. Revenues grew 1% or $10 million on a sequential quarter basis. Recall that the second quarter is typically a seasonally strong quarter as a result of the international dividend season in securities lending.

Trust investment and other servicing fees represent the largest component of our revenue mix accounting for 57% of total revenues in the third quarter. We are very pleased with the continued strong growth in this important revenue category across both our private client and institutional businesses. Trust investment and other servicing fees increased 16% or $71 million to $509 million compared to the third quarter of last year. Within this line item PFSs trust investment and other servicing fees equaled a record $227 million in the third quarter and grew 17% or $33 million versus last year's third quarter. This is our fourth consecutive quarter of double-digit year-over-year growth in PFS trust fees and the best year-over-year growth rate that we have achieved in PFS quarterly fees since the third quarter of 2000. On a sequential quarter basis PFS trust fees increased 1% or $3 million.

Our excellent PFS fee growth reflects strong net new business. PFS net new business on a year-to-date basis represents the best nine month period achieved since the first nine months of 2001. In addition to excellent net new business results, the equity market environment relative to our quarterly PFS fees also provided support for the quarter's 17% year-over-year growth in fees. Recall that our private client business across all PFS states is on a consistent monthly fee methodology with a one month lag. Using this monthly methodology the S&P 500 was up 15% compared to one year ago. Equity market support was not evident on a sequential quarter basis as the S&P 500 was flat compared to the second quarter using the PFS month lag methodology.

Keep in mind, too, that PFS manages broadly diversified portfolios for clients. The asset allocation of PFS managed staff as of September 30, was 49% equities, 24% fixed income and 27% cash and other asset classes. Our fee growth in PFS is derived largely from growth in client assets whether winning new clients or doing more to support the needs of existing clients. We were very pleased with our ability to aggregate private client assets at attractive rates of growth in the third quarter. PFS assets under management equaled a record $147 billion at September 30, up 15% or $19 billion from a year ago and up 2% or $2.5 billion sequentially.

Assets under custody in PFS also equaled a record reaching $329 billion at quarter end. PFS assets under custody increased 36% or $86 billion from a year ago and were up 3% or $10 billion sequentially. The ultra wealthy client segment within PFS which we call the wealth management group continues to be an outstanding contributor to our growth. Wealth management serves the complex needs of some of the world's wealthiest families. We currently work with 20% of the Forbes 400 richest Americans. Forbes published its 25th anniversary edition of the Forbes 400 in September. The minimum net worth required to earn a spot on the Forbes 400 list in 2007 rose to $1.3 billion in wealth signifying the very high end of the wealth market. The average size of our custody relationships with the approximately 380 families served in Northern Trust wealth management group crossed the $0.5 billion mark at September 30.

Fees in our wealth management group for the third quarter equaled $33 million, an increase of 16% or $5 million compared with last year. This fee growth was fueled by excellent year-over-year growth in wealth management client assets. Custody assets in wealth management equaled $192 billion at September 30, up 55% or $68 billion from one year ago. We also manage a portion of the assets that our wealth management clients have placed in custody at Northern Trust. Managed assets in wealth management totaled $29 billion at September 30, up 18% or $4 billion year-over-year.

On a sequential quarter basis wealth management fees declined 4% or $1 million. This sequential quarter decline in wealth management fees is not reflective of the core positive trends that we're seeing in the business. Rather, the sequential decline in wealth management fees resulted from a prior period adjustment. The sequential quarter trend in custody assets was strong in wealth management with assets under custody increasing $7 billion or 4% compared with June 30. Wealth management assets under management equaled $29 billion at September 30, which while lower than the $30 billion high reported at June 30, again primarily reflected an adjustment from the prior period.

Switching to our institutional business, C&IS, trust investment, and other servicing fees equaled $282 million in the third quarter, an increase of 16% or $38 million year-over-year. C&IS fees declined 9% or $27 million when compared with the seasonally strong second quarter. C&IS fees include three primary revenue areas, custody and fund administration, institutional asset management, and securities lending. Let me just discuss the performance of each in the third quarter.

C&IS custody and fund administration fees equaled $159 million in the third quarter, up 27% or $34 million year-over-year. This strong double-digit custody fee growth was driven by market growth, new business, particularly in global custody and higher transaction volumes during the quarter. Sequential growth in C&IS custody fees was also strong, up 8% or $11 million compared with the second quarter. Sequential growth was also driven by market growth in new business including strong new business in fund administration.

Recall that C&IS custody fees are billed primarily on a one quarter lag basis. For the year-over-year comparison the S&P 500 was up 18% versus the prior year on a one quarter lag basis and the EFA index was up 20%. Market growth on a quarter lag sequential basis was also supportive of fee growth with the S&P 500 up 5.8% in the second quarter and the EFA index up 4.9%.

An important contributor to C&IS custody fees is our ability to successfully aggregate client assets. Institutional assets under custody equaled a record $3.8 trillion at September 30, up 24% or $722 billion from a year ago and up 3% or $118 billion versus last quarter. International activities continued to fuel the institutional asset and fee growth in the third quarter. Global custody assets equaled $2 trillion at September 30, an increase of 31% or $476 billion from a year ago. The third quarter represents the 18th consecutive quarter that we have represented double year-over-year growth in global custody assets. On a sequential quarter basis global custody assets were up 5% or $91 billion.

Investment management fees in C&IS equaled $73 million in the third quarter, an increase of 15% or $9 million year-over-year. Growth was driven by both new business and positive markets. New business results were strong in short duration assignments including institutional mutual funds and cash suite products and in quantitative management. Note, too, that in our institutional asset management business we manage a wide array of asset classes for clients. The asset allocation of C&IS managed assets as of September 30, was 33% equities, 9% fixed income, and 58% short duration and other.

Institutional investment management fees increased 2% or $1 million on a sequential quarter basis. Managed assets for institutional clients equaled $615 billion at September 30, up 14% or $75 billion from last year and down 1% or $8 billion sequentially. The sequential decline primarily reflects a lower level of securities lending collateral reflective of the deleveraging phenomenon that occurred during the third quarter as a result of the challenging fixed income environment. C&IS securities lending fees equaled $33 million in the third quarter representing a decrease of 19% or $8 million compared with last year's third quarter and a decrease of 55% or $40 million compared with the record $73 million that we posted in the seasonally strong second quarter of 2007. Securities lending collateral equaled $284 billion at September 30, up 14.5% or $36 billion versus one year ago and down 5% or $16 billion compared with June 30.

Now let me pause for a moment and provide some perspective around our securities lending results in the third quarter. Securities lending is a low risk value added product that has been a consistent source of incremental return for our clients over a long period of time. The credit market environment in this year's third quarter had a negative impact on securities lending results that we're reporting today.

Let me start by describing the mechanics of securities lending to you, after which I'll describe the factors that impacted our third quarter securities lending results. Securities lending is a service that is offered to our clients. Northern Trust acts as agent for our clients in the administration of the securities lending program. For those participating clients we lend their securities to high quality credit committee approved financial institutions. Now I should add as well that we do not lend securities directly to hedge funds.

In return for the lent securities, borrowers provide collateral typically in the form of cash equal to 102 to 105% of the borrowed amount. The lender of the securities pays the borrower a rate of return on their cash collateral called a rebate rate which generally floats with the Fed federal funds rate. On behalf of our clients who have lent their securities to approved borrowers we invest their cash collateral in a variety of investment pools. Our clients select which investment pools they would like to have their cash collateral invested in depending on their return objectives and risk tolerance. Investment options available to our clients for their securities lending collateral span a risk/reward continuum of short duration investment management products.

Our clients earn a return on their participation in securities lending based on the spread between what is earned on the collateral and what is paid to the borrower as a rebate rate. These earnings are apportioned between the client, the owner of the lent securities, and Northern Trust, the agent of the program at a negotiated percentage amount. Our securities lending results in the third quarter were adversely impacted by this summer's disruption in the credit environment which began with concerns in the subprime mortgage market and spread to the fixed income arena more broadly. It is also important to note that there were positive offsets in our securities lending business to the subprime mortgage contagion in the third quarter including strong demand for treasury securities and the Federal Reserve's 50 basis point reduction in the federal fund's rate later in the quarter.

This noted, the extreme credit market disruption did negatively impact returns achieved in one cash collateral investment fund used for securities lending. Approximately 6% of our $284 billion in securities lending cash collateral is invested at our client's selection and discretion in a total return mark to market short duration, fixed income fund. This is our only meaningful fund that is structured as a mark to market fund and understanding this designation is essential to understanding the impact during the quarter. Our other cash collateral investment options do not recognize mark to market fluctuations in the yield.

The consequences of being a mark to market fund during the third quarter of 2007 were severe as fixed income securities were repriced across even the highest quality instruments. Asset value changes, in this case asset value markdowns flowed directly through to total return of the fund, thus impacting the earnings of a small number of our securities lending clients during this period and Northern Trust's security's lending fees as well. While the environment was a challenging one for this fund in particular and therefore, for our overall securities lending revenues, I do want to make a few key points.

First, this mark to market fund has followed its investment guidelines consistently and appropriately. No atypical portfolio management decisions were made in the fund prior to, during, or after quarter end. Its performance results reflect the full impact of the extraordinary market environment. Second, the fund does not use leverage. Third, the fund did not post a negative total return for the third quarter. Put another way, the fund earned a positive annualized return for the third quarter of 2.72% to be precise. Keep in mind, however, that securities lending revenue is earned based on the spread between what is earned on the collateral pool and what is paid in terms of the rebate rate. With this fund having earned 2.72% annualized in the third quarter and fed funds averaging a little over 5%, you can see how the negative net spread on this specific fund would yield negative securities lending earnings across the quarter.

Fourth, the fund has a very high quality profile, 64% of the securities held in it are rated either AAA or AA. Fifth, the fund is conservatively managed with an interest rate sensitivity of 65 days and a credit based weighted average maturity of 1.65 years as of September 30. Sixth, the third quarter total return of the fund reflected negative marks to market on a broad mix of holdings. We do not believe at this time that there exist any permanent impairment of any holdings. All of the asset markdowns recorded in the fund during the third quarter are unrealized and we expect, given what we know that all of the fund's holdings will mature at par as expected. Any such future positive marks to market would similarly be reflected in the yield of the fund and the resultant securities lending revenues. And lastly, the fund is used as a securities lending cash collateral option by only a small number, approximately 10, of our more sophisticated clients. None of these clients uses this mark to market fund exclusively for their collateral investments. All have other less aggressive funds to round out their total collateral investments.

Moving on through our revenue line items let me shift our discussion to net interest income which accounted for 26% of revenues in the third quarter. Net interest income equaled a record $228 million, an increase of 15% or $30 million compared with last year. On a sequential quarter basis net interest income increased a strong 9% or $20 million. The driver of the year-over-year increase in net interest income was balance sheet growth. Average earning assets equaled $54 billion in the third quarter, an increase of 18% or $8 billion year-over-year. Growth in average earning assets was broad based with money market assets up 22%, securities up 25% and loans up 12%.

Client oriented growth on the liability side of the balance sheet continued to fuel the increase in earning assets. Once again, and consistent with trends and prior quarters liability growth was driven by non-U.S. office time deposits which averaged $28 billion in the third quarter up 26% or $6 billion versus last year. This strong growth in non-U.S. office time deposits is directly related to our international success in the institutional custody business which I discussed earlier.

The strong sequential growth of 9% in net interest income was driven by several factors. First, recall that in the second quarter net interest income was reduced by $7 million representing the entire first half amount related to our adoption of FSP 13-2, the FASB standard pertaining to leverage lease accounting. The comparable third quarter amount recorded for FSP 13-2 was $2.5 million resulting in a $4.5 million favorable sequential swing. In addition, net interest income in the third quarter benefited from wider spreads between overnight rates and one to three month rates. This widened spread at the short end of the yield curve was driven by the disruption in the credit markets during the quarter and late in the quarter by the Federal Reserve Bank's 50 basis point cut in the federal funds rate.

Our net interest margin in the third quarter equaled 1.69% down 4 basis points from the prior year and up 11 basis points sequentially. The 4 basis point year-over-year decrease in our net interest margin reflects a mix shift on the assets side of our balance sheet that I have described in past calls. As I mentioned earlier, our international business has been a strong growth driver at Northern Trust for over a decade. As this business grows, our clients place their short term cash on our balance sheet in the form of non-U.S. time deposits. These deposits in turn have been predominantly invested on the asset side of our balance sheet in lower margins, short term money market assets and securities which profile differently when compared with the relatively higher margins associated with traditional loans. This mix shift in earning assets which is directly linked to the success of one of our core growth strategies is the primary reason for the decline we reported in our net interest margin.

The sequential increase in our net interest margin of 11 basis points was driven by the same two factors that influenced the sequential increase in net interest income. First, the lessened impact of SFP 13.2 and second, wider spreads between overnight rates and one to three month rates.

Foreign exchange trading income of $92 million equaled a record, up 74% or $39 million compared with the third quarter of 2006. On a sequential quarter basis foreign exchange trading income increased 13% or $11 million. The key drivers of our quarterly results in foreign exchange were volume and volatility. Both were very high in the third quarter with client volumes up significantly both year-over-year and sequentially. Currency volatility was also quite high due in large part to the disruption in the credit markets. This was clearly an unusual third quarter for our foreign exchange activity in that the summer months are typically the quietest and therefore, more often than not the seasonally slowest of the year for foreign exchange trading. The normal July/August slowdown certainly did not occur in the summer of 2007.

Other operating income equaled $23 million, a decrease of 19% or $5.5 million compared with the prior year and a decrease of 21% or $6 million sequentially. The majority of the year-over-year and sequential declines resulted from currency revaluations attended to hedging activities and the small additional loss accrued in the third quarter with the disposition of the Isle of Man fund administration business. Recall that other operating income in the second quarter of 2007 was elevated as it included a $4.9 million gain on the sale of leased equipment partially offset by a $3 million initial loss on the Isle of Man's business.

As I mentioned at the outset of this call, during the third quarter we sold shares of the Chicago Mercantile Exchange and recorded a gain of $6.3 million. Northern Trust has held seats on the Chicago Mercantile Exchange and the Chicago Board of Trade for many years. The initial public offering of the CME and its subsequent merger with the Chicago Board of Trade resulted in a publicly traded share ownership position by Northern Trust in CME Group which was the source of the shares that we sold.

During the third quarter we recorded a loan loss provision of $6 million compared with the provision of $6 million in the third quarter of last year and $4 million in the second quarter of this year. The majority of our loan loss provision this quarter reflects loan growth as average loans increased 12% year-over-year and 3% sequentially. Nonperforming assets totaled $29 million at quarter end down $3 million from $32 million at June 30, and equaled only 12 basis points of total loans on September 30. We recorded $2 million in net charge-offs during the third quarter.

Now let me shift my comments to a review of key expense categories that impacted our third quarter performance. Expenses during the third quarter of 2007 equaled $567 million, up 19% or $90 million from the year ago quarter. On a sequential quarter basis expenses were up 2% or $11 million. Compensation expense equaled $260 million and increased 20% or $44 million from the year ago period. The year-over-year increase in compensation expense reflects higher incentive compensation, additional staff to accommodate growth and expansion, our April, 2007 annual salary merit increases and market and promotional increases.

Staffing levels equaled approximately 10,600 full-time equivalent positions at quarter end including approximately 630 staff at our operations center in Bangalore, India. Total staff count was up 11% from last year. Staff in India was up from 430 full-time equivalent positions year over year from the 200 -- sorry, staff in India was up 430 full-time equivalent positions year-over-year from the 200 reported last year and increased 26% from last quarter. On a sequential quarter basis compensation expense increased 3% or $8 million primarily reflecting increased staff levels. Employee benefit expenses equaled $57 million in the third quarter, up 8% or $4 million versus last year and down 3% or $2 million sequentially. The year-over-year increase was primarily driven by higher staff levels partially offset by lower pension costs. The sequential decline primarily reflects normal seasonal declines in FICA insurance.

Outside services equaled $99 million, an increase of 31% or $24 million compared with last year and 6% or $6 million sequentially. The year-over-year increase reflects, primarily reflects higher expenses driven by increase in client volumes such as global subcustodian fees and investment management subadvisory fees. In addition, technical and consultant services increased year-over-year. The sequential increase was driven primarily by higher consultant services. Equipment and software related expense equaled $54 million in the third quarter, up 4% or $2 million year-over-year and down 4% or $2 million sequentially. The year-over-year increase is primarily attributable to higher software amortization resulting from continued investment in technology. The sequential decline primarily reflects a $3 million software writedown taken in this year's second quarter.

Occupancy expense in the third quarter equaled $39 million, up 16% or $5 million year-over-year and down 7% or $3 million sequentially. The year-over-year increase is primarily attributable to higher rent and building operation costs. the sequential decline primarily reflects a $3 million rent expense adjustment in the second quarter of 2007 which represented a catch-up related to certain rent escalation causes in existing leases. Other operating expense equaled $58 million in the third quarter, an increase of 21% or $10 million compared with last year. On a sequential basis other operating expense increased 8% or $4 million. The primary drivers of both the year-over-year and sequential increases were charges related to securities processing activities and employee hiring and relocation expenses. Our provision for income taxes in the third quarter equaled $93 million, resulting in a tax rate equal to 30.8%. This compares to a tax rate of 34.6% in the third quarter of last year and 33.2% in the second quarter of this year.

The lower tax rate on a year-over-year basis primarily reflects two items. First, we recorded a state tax benefit of $5 million related to the new tax legislation as I mentioned in my opening remarks and second, we continue to benefit from our adoption of APB 23. Recall that in the fourth quarter of 2006 and in the first two quarters of 2007 we recorded tax benefits associated with our decision to indefinitely reinvest earnings of certain non-U.S. subsidiaries. The sequential decline in our tax rate primarily reflects the $5 million state tax benefit.

Northern Trust repurchased 1.2 million shares of common stock in the third quarter at a cost of $77 million. Diluted shares averaged 224 million. We can purchase an additional 9.8 million shares under a buyback authorization approved by our Board of Directors in October of 2006. In keeping with our practice we increased average common equity by 11% versus one year ago to a record $4.2 billion at September 30.

Let me close with one exciting update that I hope you all heard about and then a few thoughts on the positioning of Northern Trust, particularly in light of the volatile and disruptive market environment that we all had to contend with in the third quarter. This past Monday we jointly announced with the PGA Tour that Northern Trust has become the title sponsor for the PGA's historic golf tournament at Riviera Country Club in Los Angeles beginning in February, 2008. With this five year agreement the tournament will be named the Northern Trust Open marking the beginning of a transformation process for this high profile tournament. The Northern Trust Open will provide us with another platform to showcase our premier brand and raise our brand awareness. The men and women who play, who watch, play, and enjoy golf mirror our target demographic.

We have been continually building and extending our global brand awareness through increased advertising in print, online, and on television and through prominent sponsorships. The Northern Trust Open will help continue to drive our brand awareness both in the United States and around the world. This major event enjoys great media exposure reaching more than 450 million households in more than 150 countries. Viewed from any angle, global reach, demographic fit, client interaction, philanthropic support, and brand synergy the Northern Trust Open represents a terrific platform to strengthen the Northern Trust brand.

And now let me shift from marketing to the market environment. As you know, the third quarter posed extremely challenging market conditions, particularly in the month of August. We saw the result of this in a variety of Company crises, earnings preannouncements, and earnings releases with weaker results. Financial services firms had to contend with the subprime mortgage crisis which then morphed into a broader contagion. Equity, fixed income, and currency markets were all volatile and the federal reserve also jumped into the fray with a 50 basis point rate cut late in the quarter. The environment tested many great firms and a wide array of financial services business models.

This was a period in which the strength of Northern Trust's strategy, business position, and execution was clearly in evidence. Though not immune from the dynamics of the broader environment in which we and our clients operate, we were very pleased with the strength of our results and the inherent quality embedded in our management processes. Our client focus and conservatism across cycles continues to serve Northern Trust and its shareholders well. We have in our view an attractive and enduring business model.

Our attractive and enduring business model is evident in the intensity of our focus. We concentrate our efforts on only two very targeted client segments, institutional clients served by our corporate and institutional services business unit and private clients served by our personal financial services business unit. These two client facing business units are supported by our investment management arm Northern Trust Global Investments which delivers a wide range of investment management solutions to our target clients and by our worldwide operations and technology unit which delivers products and services to our clients on one integrated operations and technology platform globally.

We have not strayed from this focus. We have not sought entry into tangential businesses such as retail consumer lending, subprime mortgage origination, subprime mortgage packaging or wholesaling, credit cards, or investment banking. Our attractive and enduring business model is evident in our commitment to organic growth. We have not chosen to take -- or undertake rather, large scale culture changing mergers and acquisitions to drive our revenue growth. Our use of M&A has been very selective and strategic. We have undertaken acquisitions only to facilitate entry into new geographic markets or to assist us from a product perspective in meeting the needs of our target clients and where we have undertaken acquisitions they have been managed within the broader enterprise and the management of our overall risk profile.

Our attractive and enduring business model is evident in the strength of our balance sheet. We maintain a conservative securities portfolio that takes limited credit, currency, and interest rate risk. That conservative stance positioned us well to manage through the difficult fixed income environment in the third quarter. We also have excellent loan quality, a hallmark of Northern Trust's relationship lending strategy for many years. Our relationship lending strategy consistently applied across the years means that we do not provide bridge financing on private equity or leverage buyout deals. Nonperforming assets actually declined in the third quarter and represented a minimal 12 basis points of loans a figure that historically rates among the best of the largest banks in the United States. In addition, we do not have any off balance sheet commercial paper conduit facilities.

Our attractive and enduring business model is evident in our capital strengths. Northern Trust maintains very strong regulatory capital ratios. All of our subsidiary banks maintain capital ratios above the level required for classification as well capitalized, and we have increased our share of stockholders' equity at Northern Trust for 78 consecutive quarters or over 19 years, a record that we believe is unmatched among large banks in the United States. And our attractive and enduring business model is also evident in our asset management business where we have dramatically expanded the array of capabilities available to our clients in recent years. We make little use of various strategies that have been in the headlines of late. Our investment strategies do not employ leverage with the very small exception of modest leverage employed in our 130/30 strategies. We also have only very small holdings of subprime asset back securities in some of the our investment portfolios, and those holdings are limited to short term AAA traunches, representing the most senior traunches in the structures.

In short we continue to focus on the targeted market and client segments that we have served well for many years and that continue to have excellent long term growth demographics. This is a strategy that has served us well in both good times and tumultuous times such as those experienced in the most recent quarter. In closing, our performance in the third quarter again validated our focused business strategy and our consistent, attractive, and enduring business model. We are very pleased with the financial results that we are reporting to you today including strong top line revenue growth and attractive double-digit earnings per share and net income growth. And now Bev and I would be happy to answer your questions. Please open the call for questions.

(OPERATOR INSTRUCTIONS) We will take our first question from Mike Mayo with Deutsche Bank. Please go ahead.

Good afternoon.

Hi, Mike.

Just some questions on the one timers. You mentioned right off the bat, the tax benefit and the sale on the CME shares. It seemed like a couple of other items. Outside services, it was up 6 million. Should we consider that core or was that temporary?

Bear with me, Mike.

I'm really just trying to see if there's any unusually high expenses that might go away.

No. I think, Mike, the -- obviously the CME is one time. The tax rate was one time, but there was nothing dramatic that comes to my mind that would be additive to that.

Mike, when we do have items that we know that you all would consider as one time, we do try to disclose that in that upfront section of our call, so had we had any other items that we felt you should be aware of, we would have mentioned them during the call.

Okay. Other income being down 6 million from the second quarter?

Well, we gave some of the detail, Mike, there during the prepared remarks.

I don't think there's anything to add.

And you spent a lot of time on securities lending. If we were thinking about normalizing that, how might we go about that?

Well, I think, Mike, as I said on securities lending, you really have to understand this construct of a mark to market fund versus a constant dollar NAB and there are a variety of guidelines that drive the appropriateness of when one would have one structure versus another, but I want to emphasize understanding that vehicle structure really is critical because a mark to market fund is fully transparent and if you have the same holdings in a custom count, a nonmark to market fund, we would have reported dramatically different results. So, for example, our holdings in the mark to market fund, if you had the exact same holdings and exact same profile and put those in a custom account, our securities lending results would have increased by approximately 70% compared to what we reported which was a 19% year-over-year decline. So I mean it's a very dramatic point that needs to be understood.

The other point that I would make, Mike, is it's difficult I think for any of us to "normalize" securities lending. Keep in mind that typically the third quarter would have seen a decrease from the second quarter which is typically the seasonal peak and, of course, as you saw in some of our peers that didn't happen because of the fact that the market environment was so tumultuous in the third quarter. So it's difficult to normalize when you're coming off of such a tumultuous period.

The other thing I'll add, Mike, to that because I'm sure you or someone else will have the question is when you think about the timing of the recoupment of that yield, that is going to be very difficult to predict and it's impossible for me to predict exactly how quickly that's going to happen because you need the credit markets to stabilize and -- but I guess what I would say without giving forward-looking guidance which we don't give is that with all those caveats noted and assuming that there's no change in impairment or anything like that, we would estimate that the yields on the mark to market fund would reflect positive marks as we progress from now through 2008. So sometime over the next 18 months the headwind that we got on mark to markets this quarter will be recouped as we move into 2008.

So we don't have long to wait to see that?

No. Again, I can't predict with pinpoint accuracy, but that's our best guess at this point in time.

And then just one separate question. On the processing business, good revenue growth, but the revenue growth was almost twice as fast as the growth in assets under custody linked quarter. Just wondered if you had any color on that and you're operating in a consolidating world, are you seeing any benefits from that and also the international growth within processing?

That's about a half hour question, but, what I would say, Mike, is look. We feel terrific about our asset servicing business and the growth rates there and have no apology for the success that we've had in keeping and aggregating new clients on that front. Pipelines remain strong. International growth, as in past quarters has been strong. As to the asset management business we feel very good about the growth this quarter on the assets under management front. You are correct in noting that the rate of growth, if you want to compare that to our assets under custody, differs, but remember you have a vastly different asset allocation paradigm for our managed assets. So I think it's being a relatively small equity asset manager, I think it's a mistake to impute market growth to our assets under management growth. So we feel good about the growth this quarter.

And international?

International continues to be terrific. Global custody assets up 31% year-over-year, pipelines are strong, had a great one with the State of Tennessee which was a $29 billion public fund and tempo is consistent with past quarters.

And pipelines are strong. Do you ever quantify that? I know some of your competitors do.

No, we don't give any metrics on number of clients in the pipeline or prospects in the pipeline or dollar value, but we continue to feel very good and as you said, the market is consolidating. There's a small group of players there. So there's I think plenty of opportunities for all of us.

All right. Thank you.

You're welcome.

We will take our next question from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

Thank you for taking my question and first let me echo my congratulations to Bill and Rick on their new rules. Steve, I wanted to first, just to ask the securities lending question a different way, how much would you estimate that one mark to market fund affected the securities and lending line this quarter?

Well, again, Mark, if you think about it, we reported results that were down 19% year-over-year. If you impute and this is rough math, but if you take the exact same holdings as resided in that fund and their status and you put them in a custom account which is not mark to market, that result would have swung us from being down 19% to up 70, 70%. So the transparency of a mark to market fund had a dramatic effect on reported results and again I think the key point here is absent impaired holdings or a change in what we know is that that should be a tail wind for us, again difficult to predict exactly when it will hit, but it should strengthen our securities lending results over the next 15 months or so.

Okay. And then the second question I had relates to assets under management which were down I think about $5 billion or 1% linked quarter. Was that a function of performance within the products or it was a function of fund flows or fund outflows I should say?

Sorry. The function under management was really just a function of the securities lending collateral and the deleveraging that we saw. So, it wasn't really, what you might think of as traditional core asset management.

Okay.

Mark, if you take securities lending out of the total assets under management, the sequential growth goes from a decline as you mentioned of 5% to actually an increase of 2.4% and I show that the S&P 500 was up a little less than 2% and we are not exclusively an equity manager. So I think actually we feel quite good about that when you take into account the deleveraging phenomenon in securities lending.

Okay. And then also I noticed your non-U.S. loans have risen fairly rapidly and are just approaching 2 billion now. Can you give us a sense for the kinds of loans that you're making outside the U.S.?

A lot of that, Mark, relates to the fund administration business that we acquired from -- several years ago from FSG. These are liquidity lines. These are not traditional, if you will, corporate loans. These are all attendant to the business we undertake with fund managers. So it's a very, very clean portfolio and one that we're very comfortable with.

And the last question is wondered if you could give us a sense for what the pipeline looks like in the C&IS business. Is it increasing, decreasing, stable and maybe where's that coming from?

I think the pipeline is terrific, so I'd be hesitant to imply a level of precision on increasing, decreasing, relative to last quarter, but I'd say it's very strong. We've got a lot of great activities, great opportunities. They're all around the globe. They cross a wide array of segments and I think that's one of the things you got to think about. You got to think about the whole globe opportunities in virtually every country. You got to think about the wide array of segments from insurance companies to foundations to endowments to fund managers to pension funds to a whole host of opportunities and then you have to think in terms of the relatively small number of firms globally that are equipped to serve those opportunities and I think when you look at it in that construct, you can understand just how big the opportunities are I think for all of us.

And, Mark, if I could add one point on your question about our non-U.S. loan portfolio, when we issue our 10-Q in a few weeks, we include a table on loans and one of the things that you see in the table and you would have seen in the past is that included in that non-U.S. line item in addition to what you would consider to be traditional lending as Steve described would be short term advances associated with processing of custody assets. So you should -- and you will see when we issue our 10-Q that that line item short duration advances actually was a significant driver of the growth in non-U.S. loans.

So there's a traditional overdraft phenomenon associated with being custodians for these funds.

Thank you.

You're welcome.

We'll take our next question from Jason Goldberg with Lehman Brothers. Please go ahead.

Thank you. You mentioned security processing related charges. If you can just expand on that and is this tied to not doing something on a timely basis and can you quantify that?

Sure. Jason, we have as you know, we process trillions and billions and at any given point, though, there's a lot of automation and a lot of high quality. There will be losses associated with missed processing, missed input, not timely handling a corporate action or whatnot and so we did have a modest degree of that this quarter. I don't -- it's a normal part of the business. You can't get away from it and we'll go in fits and starts. So that is an aspect that we had to deal with this quarter, but I don't look at it as a major factor or in any way signaling a trend.

Okay. You don't care to quantify it?

No, we're not quantifying it.

And then you mentioned the wealth management trough this quarter it sounded like?

Sorry. Say that again, Jason.

You mentioned an adjustment in the wealth management line or it sounded like maybe it was a true-up. I was hoping you could expand that.

No. It was just a prior period adjustment to our -- we had, the instance that comes to mind, we had a client come in very late in the second quarter and we miscoded them in terms of assets under management versus assets under custody. We caught it after we had released results. So it's just a prior period adjustment to what we had said last quarter. I think the key point, Jason, is you wouldn't want to look at the reported down draft sequentially as indicative of the trend because it's just an adjustment.

Got you. Any thoughts on eliminating the mark to market fund from your set lending offering?

This is a client driven decision. If clients want to be in a pooled vehicle with this kind of profile, it really has to be a mark to market fund. So it's not -- there's not a lot of discretion. If you want -- to the extent that you want to be in a fund with this characteristic, you couldn't make this -- you couldn't appropriately make this a constant dollar NAV. The question would be do clients want separate accounts rather than a participating in a pooled vehicle and obviously if they do want that, we'd be happy to accommodate them, but again, I think you would want to look closely at this as a timing phenomenon.

Got you. And then also I guess what would be the normalized I guess tax rate? I know the last couple quarters have been a bit not so normal?

Well, we've traditionally been at a 35% plus or minus tax rate. As you may recall back in 2006, we talked about the implementation of APB 23 and how that would likely on average over time bring us down a point. We've been lower than that more recently, again this quarter at 30.8% but we also had the one time state tax benefit. So, I don't know that I can give you absolute guidance on that.

The one thing that you can do, Jason, is you can adjust the 30.8% for the $5 million tax law change impact and that would get you to 32.5% for the quarter. So it would be appropriate to remove that $5 million from your thinking going forward because that was affected by just this tax law change.

And again, this is going to move around a bit because of the growth in our -- to the extent that our international business grows at a more rapid rate and the business in those tax beneficial jurisdictions that will have a more dramatic effect. So there will be a little bit of movement in the tax rate.

Okay. And then just lastly, I guess year-to-date the operating leverage is running a bit negative. You guys have a long history of positive operating leverage particularly when the markets are higher. Any thoughts around expense management?

Well, I think essentially we were neutral this quarter, 19% revenue growth, 19% expense growth. I think if you, depending on what adjustments you want to make. I think we're modestly positive year-to-date. But you're rate, the operating leverage is much closer to neutral than it it is to significantly positive. I guess on the expense front, Jason, I would offer a couple of observations. One, remember that we have a fair amount of volume associated growth. We've got a lot of activity, subcustody fees, subadvisor fees. So as our assets grow, as we win new clients, that is part of the scenario that we have to deal with.

We've also brought on a fair number of staff. You're seeing our head count is up 11% year-over-year and the overall not withstanding of the third quarter turmoil, the competition for talent has been high and that drives some of our expenses. And we're continuing to invest on a variety of front in capabilities if you look at our back and middle office outsourcing, if you look at our pooling, you look at derivatives, alternative asset processing and the like. Some of the things we're doing on the technology, our geographic expansion, our expansion in India. So as always we're trying to balance the expense growth within the construct of our revenue profile and so far I think we've got it where we want it to be, but it is not as positive as we've been in past quarters but again we look at that as a time and space thing and we feel now is the right time to do some things that are going to help our clients and the market opportunities that we're seeing.

We will take our next question from Glenn Schorr with UBS.

Just one quickie, the yield on PFS assets as imperfect as a calculation it is, but assets are growing at a lot quicker pace than the revenues. I'm just curious on how much would you attribute that towards things like open architecture versus specific products that clients are more interested in these days?

I think, Glenn, you have to remember that our PFS assets include the wealth management being the very, very large end of the market and so when you try and look at the, sort of the managed asset equation it's going to get skewed a bit because when we bring on these very large wealth management clients while we almost always are managing some assets it's a relatively smaller proportion. When you manage money for a $5 million client, you tend to manage all of it directly or through open architecture. When you take on a $5 billion client, we have investment management fees for 15 to 20%. So I think if I understand the root of your question, the phenomenon you're seeing is the dramatic growth in our assets under custody driven by our wealth management franchise.

Is it fair to say -- so then the real question becomes is the like for like margin stable enough? In other words, within wealth management specifically is the yield on incremental assets similar to what's on the books for other wealth management customers?

I don't have the science in front of me, so I'm just going to give you a directional observation, but we have not seen in our PFS e-business a degradation at all of the pre-tax profit margin. Now again you have to remember some of this gets skewed because using the wealth management example you can take on a very large family that has a very significant single stock concentration and so the assets can go up quite dramatically, but the fees won't go up as dramatically and they may be affected in part by a single stock concentration as well. So if you look at our pre-tax profit margins at the corporate level, at the segment level they've been rock solid and consistent. So I don't see any degradation at this point.

Okay. That's helpful. Thank you.

You're welcome.

We will take our next question from Gerard Cassidy with RBC Capital Markets. Please go ahead.

Thank you and good afternoon, Steve.

Hi, Gerard.

Can you guys give us any color on how the foreign exchange markets are behaving so far in this month? I know it's early, only a couple of weeks, but are you guys seeing any follow-through on increased volatility and volumes like you show in the third quarter?

Well, I don't really have any comments on the fourth quarter. What I would say is A, we had a terrific third quarter result, $92 million, up 74%, I think all of you know -- 74% year-over-year and 14% sequentially. All of you know that that was a very unusual phenomenon relative to history. Just to put that, Gerard, in context for you, in 1998 our full year foreign exchange trading results were in the [100 million, 300 million and $400 million] range so really a very very strong quarter and if you juxtapose it sequentially if you look at the last six years on average we've seen a 23% decline from second quarter to third quarter in foreign exchange as compared with our 14% increase. So it was a very unusual period. August was clearly a significant contributor to that, but we'll have to see. It's a very difficult line to predict. So we'll have to see what everyone wants to do in the fourth quarter.

Sure. Wasn't there a period, I don't know if it was '04 where we had this happen once before the third quarter outdid the prior, or the second quarter because traditionally as you pointed out everybody's foreign exchange revenue is dropping this quarter meaning your competitors and yourself but I thought this happened once before.

I don't have the data going back historically. It certainly can happen and as you know, there's a lot of variability around foreign exchange in any given quarter, but I think it's fair to say on average over time all of you take a summer holiday and it slows things down for us. This quarter that was not the case and it was not the case in a pretty significant way.

Okay. The second question was I know you addressed the CME group stock gain. Is there still more on your books, unrealized gains in that particular security or ownership position?

Yes. We continue to own about 13,000 shares of the CME group stock.

Okay. Thank you.

You're welcome.

We we will take our next question from Tom McCrohan with Janney Montgomery Scott. Please go ahead.

Hi, Steve, hi, Bev. Got a question on India. When do you think we'll start to see, or you'll start to see some of the benefit from, moving more of your staff to India with staff costs up 18% year-over-year? I was kind of wondering when you're going to see the growth rate in staff costs come down a little bit?

I think, Tom, we're already seeing the benefits of India in terms of a stable workforce, in terms of a talented workforce, in terms of our primary mission which was to have an operation center in the time zone as opposed to replacing staff elsewhere. So we feel very, very good about India. It's been a incredible success story for us and we anticipate that that will continue to be a growth area for us. So in terms of the overall growth picture, the other thing, Tom, to remember is that India, though it's successful, though it's growing, and though it's important is not a replacement for operating in London, Chicago, New York, L.A. and many other expensive centers. So as our business grows, we still need talented people in what I'll call more expensive places and we have to hire them. So I would not encourage you to look at India as a direct offset for staff elsewhere. Our staff is growing everywhere around the world. It's just growing in India faster.

Okay. I'm just trying to get a read on your thoughts kind of longer term capability to generate operating leverages. This is kind of the new model where staff costs because FICA talent is so fierce in those kind of geographies you talked about and the skill levels you need have just permanently become more sophisticated. So you're just paying a lot more for people. You have to run your fund administration business and asset management business, is that what we're kind of seeing and is that going to be a factor over the next couple years?

Well, Tom, I think we go through lots of cycles both within quarters and across years and I guess my response would be as always we're trying to balance the revenue and expense equation and I think we've done a very good job of that historically. We don't get it every quarter. We won't get it every year but certainly 16 out of the last 19 years we've done it and year-to-date depending on how you want to do your calculations, I think we're right there thus far but it is fair to say we're continuing to invest in the business. We had a top line revenue growth of 19% and we're working hard to keep up with the demands of those clients and what they need.

So rest assured we're very mindful of the balance that we want to have. It's one of our strategic financial targets on average over time across cycles, whatever terminology you want to use and we're working to manage to it, but it can't be the only thing that we think about in managing the business. So, India is a piece of that but certainly not all of it.

Great and then just on business disruptions, I think someone asked but I'm just going to ask a follow-up, have you seen any new business wins this quarter as a consequence of or as a benefit of some of the industry merger and acquisition activity both on the high net worth side and the C&IS side?

Well, I can't speak for the client reason as to why, so I would be loathe to make that attribution. What I would say is we continue to like our position demographically without disruption. From what I've seen I can see some clients that have moved, my guess is it's not exclusively because of disruption but it's -- that probably wasn't additive but there hasn't been a sea change in the environment and as we've talked about in the past calls we wouldn't expect that. We expect this to -- to the extent the disruption is additive to us we expect it to happen over time, one client at a time. So I think there are some anecdotes that I could point to, but it's not a wholesale sea change.

Fair enough. Thank you.

You're welcome.

We will take our next question from Robert Lee with KBW. Please go ahead.

Thanks. Good afternoon.

Hi, Rob.

Hey. Two quick questions. Not to -- at the risk of beating a dead horse with SEC lending understanding how it should reverse over time, I'm assuming that depends, that baked into that is the assumption that the 10 or so investors in that fund maintain their investments and don't choose to liquidate in which case you would end up sort of effectively locking in the lower values?

That's correct. You would need that to happen and you would, of course, not -- you'd need to not have any impairment on any of the holdings. I think on the client dimension of that these are sophisticated clients that understand that phenomenon and, I can't speak for them, but that's an accurate statement.

Okay. Secondly and I apologize if you had addressed this before, but can you talk a little bit about the fed rate cut and how we should be thinking about your net interest margin, if the fed is pursuing on the course of cutting fed fund's rate. Would it have much of an impact or are you relatively neutral at this point?

We think on an annualized basis, Rob, that it would be relatively neutral. We're short, we're relatively well matched, and so when you look at it on an annualized basis it's not a significant driver for us.

Okay, great. That was it. Thank you very much.

Thank you, Rob.

We will take our next question from Brian Bedell with Merrill Lynch. Please go ahead.

Hi. Good afternoon. Most of my questions have been asked and answered but just on the SEC lending once again, so you said, if I heard you right you said about a 70% increase year-over-year if it were not for the markdown on the book?

That's correct.

So it's about 36 million in additional SEC lending revenue, so that would have been, depending on what kind of operating margin you're putting on that go to $0.08 or $0.09 of EPS this quarter?

Well, I won't do that math for you, but I'd say yes, it would have dramatically changed results.

Right. And given you've by my calculation well over another 100 additional basis points of operating leverage, but what you're saying is over the next I think you said 18 months is when those securities within that pool mature. Is that correct?

Well, I think what we believe is that over the next and again, this is not -- this sounds more pinpoint than it is, but we believe that over the next 15 months or so we would see the headwind that we experienced this quarter become a tail wind. Again, to Rob's point that assumes that the clients don't leave the fund and force us to realize losses and it assumes that no credit degradation, no default on any of the securities, but yes, difficult to predict, but over the next 15 months or so.

Right. So two things there. If they were to redeem that and you realized the losses you've already marked them down so, you would not realize additional losses assuming that the markets hadn't changed?

I believe that's correct.

Okay. And then secondly, just given that that was your normal run rate was closer to 70 million in the quarter would suggest that once again there's several cents of EPS that we would back back into your normalized run rate. I know it's very difficult to predict SEC lending quarter by quarter and clearly this quarter was strong but clearly your core trends run rate is significantly higher than this.

Well, again, we don't give guidance, so I can't help you with that, but, what I can say is as I tried to suggest to you, the construct of this vehicle is critically important to understanding the accounting and if you just look at the headline but don't understand why it happened, you might have, in my view at least the wrong context around at least what we think is going on for us and perhaps for others.

Right. But I guess the other question would be given that this does create volatility in your SEC lending business just having a mark to market fund, is it something that you would consider either letting run down so that you don't have that option anymore for clients and you just stick with treasuries or is it something that you think you'll keep going?

Well, I think a couple points on that, Brian. One, remember this was an extremely, extremely unusual period. We've had volatility in other quarters but it hasn't manifested itself as dramatically. So I think you do probably have an outlier in terms of the event. Two, it's client driven. If clients want to be in a pooled vehicle with this kind of profile, it has to be mark to market. So we could only do that if clients said to us, we want a custom account. We don't want to be in a pooled vehicle and obviously if they did, we would be happy to help them with that.

But your clients shared in the loss in this as well, too, correct?

Correct.

Right. So maybe going forward they'd be less inclined to use this type of product I would think.

I'm not sure about that. I think these are pretty sophisticated clients. They understand what happened with credit spreads and again I'm imputing across a number of people, but I think most of them understand that this -- and believe that this will revert and are comfortable with that.

Right. And they'll get that back, okay. Now just a couple of the -- some questions that were asked before. Did you say there was a $3 million loss in other operating income on the sale of the equipment from Isle of Man in the third quarter?

No. We had a 3 million last quarter and we had a very modest, I think it was about $1 million this quarter addition to that.

In other operating income?

Yes.

Right, okay. And then similar thing with other operating expenses does include some of the charges for the securities processing activities. I know you didn't want to frame that, but clearly the 4 million increase was at least partially due to that I would assume?

That's correct.

Right. Okay.

Again, that's obviously we don't want any or if we have them, we want them to be as small as possible, but you just can't process trillions, billions, and millions of transactions and never have any of that, so that's -- that's something we have to deal with.

Part of the business, that's right. And then you talked about some small subprime positions in portfolios. Can you just elaborate on that? Are these portfolios on the balance sheet or are these in investment management products?

Our subprime, if you step back and look at it, Brian, from a corporate level and the total picture subprime is extremely modest and not of concern. On the credit front loan portfolio no direct exposure to any model line broker or originator of subprime mortgages and we have no exposure to any organization whose business is exclusively in subprime lending. If you look at the securities portfolio, the balance sheet, our subprime exposure is really relative to the overall investment portfolio is minimal and the holdings that we do have are of subprime asset backed securities they're at the front end of the capital structure, very short average lives, from our vantage point not at all of a concern and then within our asset management business we have very de minimus exposure in our active equity mutual funds and separate accounts, no discernible exposure in our fixed income mutual funds or separate accounts. So, we feel very, very comfortable with -- we don't like the environment that it's causing but from a Corporate standpoint we just don't see it as a major issue for us.

All right, great. That's helpful and then just on the, in terms of the NIM expansion in the quarter I know the money market asset yields went up pretty significantly, looked like sort of the major driver yields going from 450 to 487. What was sort of the main cause of that?

We had on the NIM, I guess first you got to go back and remember that in the second quarter we had reduced our net interest income by about $7 million because of the adoption of FSP 13-2.

Right.

The leverage lease matter. So you got to remember that that was the full -- sorry, first half year effect degradation in the first quarter.

Right.

So if you adjusted that, we reported a net interest margin of [158] in the first quarter. It would have been -- sorry, in the second quarter. It would have been [161] and then, so I think that was a prominent aspect of the differential.

Right. But you still got a pretty good yield jump on your money market assets.

Yes, we did.

Within that specific line. Is there more allocation to LIBOR based products within that?

Well, the money market assets on our balance sheet, Brian, are predominantly time deposits with foreign banks.

Okay.

So you would be seeing impact of both the euro and the sterling in there.

Okay. So that's good, then, with the Fed environment, right? Because then if you have any kind of extension of duration with time deposits, especially if they're in international -- at international yields and then you have the Fed cutting rates late in the quarter, that could reduce your liability, the Fed would reduce your liability funding in certain areas on the funding side while your asset yields, theoretically wouldn't depreciate as much. So that should bode well for 4Q and--?

But remember our duration is still pretty short.

Yes, no. I know. I was looking for the near term directional impact and I know you don't typically give color on future direction of NIM but I was just trying to get a sense of that. Okay, great and then just last on the tax rate. Same thing there, I know you don't give guidance on that but what is the case -- it seems like the tax rate has been trending down and that has been driven by greater business in international jurisdictions which might have lower tax rates. What would be the case for the tax rate going up? Is is there any kind of good case for that or should we consider you're growing an international business over time it's growing at a more rapid rates than your U.S. business as a positive for potential declines in the tax rate over time?

Yes. The tax rate is going to move around but think, Brian, you've got it right. At the end of the day the driver of the -- and forget this quarter but just on average more recently, the driver of the decline has been our adoption of APB23 and the growth of our international business which is consistent with that. So difficult to predict exactly where it would land but we did say that when we adopted in 2006 that we thought directionally it would improve our tax rate over time and that certainly seems to be the case.

Great. Thanks very much.

You're welcome.

If there is anybody in the queue, I think we've probably got time for maybe one more and then we'll get people get back to work.

And we do have one final participant in the queue and we will take our last question from Ken Usdin with Banc of America Securities. Please go ahead.

Thanks. Hey, guys, I promise to make it quick.

Thank you.

Two quick ones. First of all, just on the credit front you built the reserve a little bit for the last couple quarters. MPAs are still down. I'm just wondering any migration trends that you're seeing like in the 7, 8, buckets or any change in the quality of the portfolio underneath that's causing the abrasion?

The answer is no. Our 7 and 8 rated loans, were at $76 million at quarter end compared with 75 million last quarter. So we have not had a significant change in the view there.

Okay. And the second one is just on the institutional asset management front was the SEC lending collateral decline the sole reason for AUMs to be down sequentially?

Yes.

Okay. And any color on just how fund flows were in the institutional asset management business, ex SEC lending?

Well, we don't do fund flows like the mutual fund company, but if you took out that degradation, our institutional assets under management were up a little over 2% I think is the number.

And we talked about short duration and quantitative being the two drivers there.

Right. Okay. Great. That's what I was looking for. Thanks again.

Okay. Well, thank you all. It's been a long call. We appreciate your listening in and your questions, and we'll look forward to giving you an update at our next quarterly conference call. Have a great day.

Ladies and gentlemen, this will conclude today's conference call. We do thank you for your participation, and you may disconnect at this time.