Northern Trust Corp (NTRSO) 2004 Q3 法說會逐字稿

Good day, everyone, and welcome to the Northern Trust Corporation third-quarter 2004 earnings conference call. Today's call is being recorded. Conducting the teleconference today is the Director of Investor Relations, Bev Fleming. Please go ahead, ma'am.

Thank you, Sheila. Good morning, everyone, and thank you for joining us to review Northern Trust's third-quarter 2004 financial results. Joining me this morning are Steve Fradkin, our Chief Financial Officer; Harry Short, Controller, and Mark Bette, my colleague in Investor Relations.

For those of you who might not have received our earnings release or financial trend report by e-mail this morning, they are both available on our Web site, www.northerntrust.com.

In addition, this October 20th call is being webcast live on Northern Trust.com. The only authorized call is a replay that way of the available for October 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 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 these results is subject to many risks and uncertainties.

I urge you to read our 2003 annual report and our periodic reports to the SEC for detailed information about factors that could affect actual results. Now let me hand the call over to Steve Fradkin.

Thank you, Bev, and good morning, everyone. Let me extend my welcome to all of you listening to Northern Trust's third quarter 2004 earnings conference call. We will be conducting today's conference call in four sections.

First, I will highlight some of the key financial items in our third quarter results. Second, I will review our third quarter renumbers in some detail, providing you with our perspective on the specific performance achieved on each of the major line items.

Third, I will take a few minutes to share some observations on developments we're seeing in our business and finally Bev and I will be pleased to take your questions.

Earlier this morning, Northern Trust reported third quarter 2004 earnings per share of 52 cents, up 2 percent compared to the 51 cents reported in the third quarter of 2003, and down 12 percent from the 59 cents reported in the second quarter of this year.

It is important to remind you that on August 10, we announced a settlement in principal of a litigation matter relating to our California subsidiary. We took an after-tax charge of $10.6 million or 5 cents per share, in the third quarter related to this proposed litigation settlement.

The issue and dispute involves approximately 300 open and closed trust accounts that we acquired in 1992 from Trust Services of America which was then a subsidiary of California Federal Bank. We are pleased to be putting this Legacy problem behind us. The 5 cent per share charge is included in our 52 cents reported earnings per share for the third quarter.

Let me now highlight for you six key factors that influenced our results in the third quarter. First, the market environment in which we operate improved versus last year but was a negative during the third quarter itself.

The S&P 500, NASDAQ and EBA indices were up 12 percent, 6 percent, and 20 percent, respectively, as compared to September 30 of 2003. Market performance in the third quarter, however, was down. For the third quarter the S&P 500, NASDAQ and EBA indices were down 2 percent, 7 percent and 1 percent, respectively.

All market indices remain well-off their all-time highs achieved in March of 2000.

Second. Trust fees in our Corporate and Institutional Services business unit equaled $165 million in the third quarter, up 9 percent versus a year ago and down 6 percent from the record performance posted in the second quarter. This drop in C&IS trust fees from the second quarter to the third quarter is not unusual and reflects the end of the traditional second quarter annual seasonal peak in securities lending driven by the international business season.

Third. Foreign exchange trading profits equaled $26.5 million in the third quarter, down from a record $47.5 million in the second quarter. Currency volatility declined significantly in the third quarter, leading to the lower sequential results.

Fourth. Total non-interest expenses equal $377.8 million for the third quarter, very consistent with the level of total expenses seen in both the first and second quarters of this year. The increase in other operating expenses, due to the proposed litigation settlement, was essentially offset by a corresponding decrease in compensation and employee benefit expenses.

I will provide greater detail on expenses later in the call.

The fifth factor includes influencing our third quarter results was credit quality which, again, remained very strong. Nonperforming assets equaled $65 million, down from $68 million last quarter and $100 million one year ago. We recorded no loan loss provision during the quarter and experienced only $1.3 million in that charge-off.

The sixth key factor that influenced our results in the third quarter was our tax provision. Our provision for income taxes in the third quarter was $53.9 million, down 8 percent or $5 million as compared to the year earlier quarter. Our effective tax rate in the quarter was 32 percent as compared to 33.8 percent one year ago.

The lower tax provision in 2004 reflects our lower level of pre-tax earnings as well as relative changes in where income was earned, which reduced overall state income tax requirements.

Now let me take a few minutes to review our key revenue and expense drivers in detail. Total revenues in the third quarter were $560 million, up 4 percent compared to last year. The biggest contributor to this year-over-year growth was trust fees which were up 8 percent. On a sequential basis, revenues were down 4 percent versus the second quarter of 2004 with weaker foreign exchange trading profits and seasonally lower C&IS securities lending fees partially offset by growth in PFS trust fees and net interest income.

Let me discuss each of our major revenue line items in detail. Corporate and Institutional Services trust fees of $165 million increased 9 percent, or $14 million, from last year's third quarter, demonstrating strong year-over-year growth. C&IS trust fees were down 6 percent or $11 million on a sequential basis, reflecting the previously referenced end of the international dividend season for securities lending.

Custody fees in C&IS increased 18 percent or $10 million year-over-year to $68.5 million and declined 1 percent or $500,000 separately. The strong year-over-year growth in custody fees was driven by our global custody business. Global custody assets at September 30 equaled $868 billion, an increase of 31 percent or $207 billion versus one year ago, and 5 percent or $39 billion sequentially.

The modest sequential decline in custody fees resulted from lower transaction volume in the third quarter. Securities lending fees equaled $25.5 million, up 1 percent versus a year ago and down 30 percent or $11 million as compared to the second quarter.

The second to third quarter sequential decline is not unexpected and is consistent with what we have experienced in prior years. In fact, the sequential decline at this time of the year has averaged 27 percent dating back to 2000.

As a reminder to those of you who don't follow securities lending closely, the second quarter of each year is traditionally the seasonal peak in securities lending, a phenomenon directly related to the international dividend season.

To a lesser degree, securities lending spreads were also compressed in the short run by the June 30th, August 10th, and September 21st Fed fund rate increases. Demand for borrowed securities and new client growth continued to be positive and can best be seen in securities lending collateral volumes, which equaled a record $169 billion at September 30th.

This record level of securities lending collateral is up 42 percent versus one year ago, and 5 percent sequentially. Investment management fees in C&IS of $57 million were up 5 percent or $3 million versus one year ago, and up 1 percent or $1 million sequentially.

As of September 30th, approximately 37 percent of our managed assets in C&IS were equity assets with the remainder representing short duration, fixed-income and other alternative asset classes. Assets under administration in C&IS were up 27 percent from a year ago to $2.2 trillion and up 5 percent, or $107 billion versus last quarter.

Approximately 60 percent of the sequential increase in our assets under administration relates to a new fund manager client in our global fund services segment, the transitioned assets to Northern Trust during the quarter. C&IS managed assets of $429 billion were up $92 billion, or 27 percent from last year, and up 1.5 percent from last quarter.

Both custody and managed assets in C&IS were at record levels on September 30th, notwithstanding lower market sequentially.

Our Personal Financial Services business unit reported third quarter trust fees of $162 million, an increase of 6.5 percent or $10 million, as compared to the year ago quarter. Sequentially PFS trust fees were up 1.5 percent $2.4 million. Illinois and Florida, our two largest states, both achieved solid year-over-year and sequential increases in trust fees. The year-over-year performances driven by both new client wins and market appreciation while the sequential increase resulted exclusively from the business.

For those of you who maintain detailed fee net (ph) model on PFS trust fees, recall that were now on a consistent monthly fee methodology across all PFS states. Using our monthly fee methodology the S&P 500 was down slightly, .2 percent, as compared to month-end values that were relevant to our second quarter fees.

This is an important factor in our performance and is indicative of the fact that our private client franchise did not get any help from the equity markets in the third quarter. Trust fees in our Wealth Management group, which serves families typically with assets of $75 million or more, equaled $19.6 million, up 15 percent or $2.5 million vs. a year ago. Wealth Management fees were up 5 percent or $1 million sequentially.

Again, for those of you with detailed fee models, our Wealth Management fees remained on a one quarter lag. Recall that the major equity market indices were up modestly as of June 30th with the S&P 500 up 1.3 percent on a quarter lag basis.

Assets under administration and Wealth Management equaled $95 billion, up 23 percent or $18 billion from one year ago and up $500 million or one-half of 1 percent from last quarter. Managed assets and Wealth Management totaled $18.9 billion at September 30th, up 13 percent from $16.7 billion one year ago and up 6 percent from $17.8 billion at June 30th.

Northern Trust currently serves 24 percent of the Forbes 400 richest Americans, indicative of our unique leadership position at the ultra-high end of the affluent marketplace.

Total assets under administration in PFS at September 30th equaled $205.4 billion, up 14 percent from a year ago and flat versus June 30th. Managed assets and PFS equaled $105.7 billion, up 7 percent or $7 billion from a year ago and up 1 percent or $1 billion from June 30th.

As I mentioned earlier, foreign exchange trading profit equaled $26.5 million during the third quarter, down 8 percent or $2 million versus last year, and down 44 percent or $21 million sequentially. The primary driver of both year-over-year and sequential performance was currency volatility, which was down slightly year-over-year, primarily in the major European currencies, and down dramatically on a sequential basis.

Currency volatility in the third quarter of 2004 was at its lowest level since early 2003. A further contributor to the sequential decline was a slowdown in volumes, which typically happens during the summer months. Security commissions and trading income equaled $11.4 million, down 17 percent year-over-year and 12 percent sequentially.

Historically, retail commissions, including equities, fixed-income and mutual funds have represented the bulk of this revenue line item. Fixed-income volumes were particularly weak on a year-over-year basis with the rise in rate environment as a key contributing factor.

The sequential decline relates primarily to transition management revenues earned in C&IS which can be uneven, quarter to quarter, based on the number and size of transition assignments completed. In the third quarter, we completed a larger number of transition assignments for institutional clients.

However, the engagements completed represented a smaller overall dollar value for the period and, accordingly, a lower level of transition-related revenues.

Other operating income in the third quarter equaled $19.6 million as compared to $20.7 million in the same period last year and $19.2 million last quarter. The largest components of other operating income are various banking related fees such as loan deposits and letter of credit fees. There were no significant changes up or down in this line item during the third quarter.

Net interest income equaled $153 million, up 4 percent or $5 million from a year ago, and up 4 percent or $6 million sequentially. Our net interest margin equaled 1.66 percent, down from 1.67 percent last year, yet up from 1.60 percent last quarter.

Recall that last quarter we had a negative adjustment to net interest income of $2.5 million, which effectively lowered the margin by 3 basis points. Without the client-related adjustment our net interest margin in the second quarter would have been 1.63 percent.

Given the heightened level of interest in net interest income trends associated with the Federal Reserve rate hikes, let me profile net interest income in a bit more detail. I will start with the sequential increase of 4 percent or $6 million. You will recall that during our second quarter conference call, we talked about the short duration nature of our securities portfolio, and how we expected to experience some pressure on net interest income in the third quarter.

We did, indeed, experience spread pressure on the securities portfolio in the third quarter as anticipated. However, that pressure was offset by lagged increases in retail deposit rates. At September 30th, Northern Trust had a retail deposit base of $9 billion, related to our PFS business. As short-term rates rose during the quarter, retail deposit pricing lagged the corresponding increases in loan asset yields that are tried to short-term market rates such as LIBOR, Fed funds and prime.

This lag served to increase our spread on retail deposits during the third quarter which more than offset the margin pressure that indeed was felt on our securities portfolio.

The other factor that contributed to the sequential increase in net interest income was the previously mentioned $2.5 million negative adjustment to net interest income that was recorded in the second quarter of 2004. Looking at the year-over-year increase in net interest income, you will note that we saw a $5 million increase despite a 1 basis point decline in the net interest margin.

This year-over-year increase in net interest income relates primarily to the growth in the average balance sheet of $1 billion as compared to a year ago. The growth in our average balance sheet emanates directly from strong growth in our global custody business.

The growth in our global business manifests itself on the balance sheet by growth in foreign office time deposits. Over the past five years, foreign office time deposits have grown by 13 percent on a compound annual growth basis. As our global custody of assets have grown, so, too, has the level of short term deposits that clients placed on our balance sheet.

This growth in the balance sheet, combined with the aforementioned lag in retail pricing, more than offset the drag on the securities portfolio caused by the recent rate increases.

I hope that this explanation helps you to understand the dynamics of both our sequential and year-over-year increases in net interest income. In sum, the diversity of our business model, as exemplified by strong C&IS international growth and the PFS deposit base, coupled with conservative balance sheet management provided benefits notwithstanding the interest rate hikes.

Loans during the third quarter averaged $17.5 billion, essentially flat compared with year ago levels. Loans to the individuals were up modestly with residential mortgages up 3 percent versus last year, to $8 billion, and personal loans up 7 percent to $2.6 billion.

Residential mortgages represented 46 percent of our total average loan portfolio at quarter end. Commercial loans declined 14 percent from a year ago to average $3.2 billion in the quarter. Commercial loan demand remained soft with considerable liquidity in the marketplace.

As I mentioned at the outset of this call, credit quality continues to be very strong. I also want to mention that the results of the annual shared national credit exam were communicated to us during the third quarter and we were pleased that they had no impact on our credit quality. Our provision for credit losses in the third quarter was 0 compared to a $5 million provision last year and a 0 provision last quarter.

Nonperforming assets totaled $65 million, down from $100 million one year ago, and $68 million last quarter. Our 0 provision for the quarter is representative of the strong credit quality in our loan portfolio.

Now let me shift my comments to a detailed review of expenses. Expenses during the third quarter of 2004 equal $378 million, up 9 percent or $30 million from the year ago quarter, and flat sequentially. As you think about our expense base this quarter there are three particular items that you should consider in your analysis.

First. Included in the third quarter's expense total is the $17 million pretax charge related to the previously announced proposed litigation settlement. Second. As a result of that charge, we had weaker corporate earnings performance, which directly impacted the rate of accrual on our ESOP expenses. On a sequential basis employee benefit expenses were down 22 percent or $9 million. Essentially all of that decline is attributable to an adjustment in the ESOP expense, including backing out much of the prior quarter's accrual.

Third. Last year's third quarter included a $6.2 million special charge, associated with the strategic efforts we undertook in the second and third quarters of 2003.

Keeping those items in mind, let me provide you with detailed on the third quarter's expenses.

Compensation expense equaled $162 million, up $4 million dollars or 2 percent year-over-year and down $5 million or 3 percent sequentially. The year-over-year increase in compensation expense reflects annual salary merit increases offset by a reduction in incentive compensation due to weaker corporate performance.

The sequential decline in compensation relates almost entirely to a reduction in incentive compensation, due to lower corporate performance that was caused by the charge for the proposed litigation settlement.

Staff levels continue to be managed tightly and equal 7980 full-time equivalent positions at September 30th, down 114 positions from last year and 50 from June 30.

Employee benefit expenses equaled $33.5 million in the third quarter, up percent or $1 million versus last year, and down 22 percent or $9 million sequentially.

The year-over-year increase in employee benefit expenses relates to our anticipated higher pension expense as described in our 2003 annual report and higher health care cost, offset by a reduction in expense for our employee stock ownership plan. As I mentioned earlier, the sequential decline in our employee benefit expenses related to a reduction in ESOP expense.

Let me provide you with a little more color on our third quarter ESOP expense, as it does impact your view of the run-rate in employee benefit expenses. Expenses associated with our ESOP plan are accrued monthly, based on a corporate earnings performance. Our strong earnings performance in the first half of 2004 was negated in the third quarter by the $17 million charge for the proposed litigation settlement. So we need to reverse our year-to-date accruals for the performance piece of the accrued ESOP expense.

The nine-month year-to-date total for employee benefit expense is the best representation of the true run-rate for this expense category, as it removes the swing between the second and third quarters that resulted from the impact of the charge for the proposed litigation settlement on our corporate performance. Occupancy expense of $31 million were up $1 million or 4 percent compared to the prior year and essentially were flat sequentially.

Equipment expenses of $21 million were down very slightly year-over-year and were up $1 million or 5 percent eventually. There were no significant items impacting either occupancy or equipment expense this quarter.

Other operating expenses of $131 million were up $25 million or 23 percent year over year, and up $15 million or 13 percent sequentially. About two-thirds of the year-over-year increase relates to the $17 million pretax charge for the proposed litigation settlement that I mentioned earlier.

The remainder of the year-over-year increase reflects higher volumes and new business. Which has the effect of increasing both global sub-custodian fees as well as sub advisor fees in our manager of managers business. In addition, we did increase business promotion and advertising efforts in the third quarter as compared to the year earlier periods.

We repurchased 891,000 shares of Northern Trust common stock in the third quarter at a cost of $37 million. Diluted shares averaged 222.5 million, down 900,000 from last quarter. We can purchase an additional 7.5 million shares under our buyback authorization.

Finally. In keeping with our practice we increase common equity by 8 percent versus one year ago to a record 3.2 billion at September 30th. This represents the 66th consecutive quarter there we have increased common equity.

Let me now take the final minutes of this call to provide some broader thoughts and prospectus on the quarter and our business.

First. Let me highlight a change that we have made to our public reporting disclosures, effective this quarter. You will have noticed in our earnings release and related trend report issued this morning that we did not provide net new business results for C&IS and PFS. Beginning this quarter, we will no longer report our estimates of annualized fees projected to be earned as a result of net new business. We chose to eliminate these estimated projections, which are dependent on various factors in the future such as market performance, client asset allocation decisions, transaction volumes and other factors, in our current and future reporting.

Instead, we will conform to industry practice and report actual results as represented by changes in assets under administration and managed assets. We will, as appropriate, continue to comment upon the impact of new business on our results of operations. And we will do so without providing any estimated revenue projections.

Our decision to change this reporting practice was taken without regard to current period results. In fact, let me remind you that we reported record trust assets under administration of $2.4 trillion, up 25 percent, and record managed assets of $535 billion, up 23 percent.

It should also be noted that our client assets under administration and management are not entirely comprised of equity securities and, accordingly, compare all the more favorably versus the 12 percent year-over-year rise posted by the S&P 500 during the same period.

Put quite simply, we believe that reporting actual results, rather than giving estimated projections, is more appropriate, given current regulatory expectations regarding public disclosure of forward-looking statements.

Second. A reminder about the expensing of stock options. We continue to account for stock based incentives under APB opinion number 25 and to disclose pro forma impact under FASB number 123. Our form 10-Q filing will show that the pro forma impact of expensing stock options was 10 cents per share in the first nine months of 2004 versus 19 cents in the comparable period last year. The lower pro forma impact reflects the elimination of our broad-based stock option plan and the elimination of our cash equivalent bonus options.

Our traditional executive stock option program remains in place. We plan to start expensing stock options when the final guidelines are issued and become effective. At this point, that is expected to occur in July of 2005, based on the recent six-month delay announced by the FASB on October 13th.

Third, I want to offer some high-level perspective on our PFS and C&IS business unit. In PFS, we are seeing continued progress notwithstanding the headwinds of difficult markets, record oil prices, geopolitical uncertainty, rising rates, and the coming elections -- all of which bear on the psyche of individual investors. The evolution underway in the private client business toward consultative advice, and a growing demand for comprehensive solutions, is a positive one for Northern Trust in that it plays to our strength.

We offer a deep and comprehensive product array which differentiates Northern Trust from many firms targeting the affluent marketplace. Client needs evolve and grow, whether clients need a mortgage personal loan, loan for the family business, mutual funds, separate account management, fiduciary services, financial consulting, Wealth Management services, or a range of other capabilities Northern Trust is positioned to serve and to do so on a full-service basis locally.

I also want to point out that on September 30th, we opened a trust only office in Wilmington, Delaware. This new office continues our expansion in the Northeast corridor and will have immediate benefits for clients who wish to obtain the advantages of a Delaware site for trust accounts. In C&IS, we're pleased with the continued strength in our financial performance and momentum.

While we were disappointed with the news during the quarter -- that the Illinois State Board of Investments chose not to renew its $10 billion custody and $2.9 billion index Asset Management assignment with Northern Trust -- this decision will not have a material impact on Northern Trust and was more than offset by a number of exciting developments across the C&IS business unit.

First. We are seeing continued success in the Global Fund Services segment. As previously mentioned, during the month of August, we transitioned $64 billion in assets from a major new fund manager client. We also won our first fund accounting client in the United Kingdom during the quarter.

Second. In expanding our client presence in Europe generally and in the Nordic region more specifically, our standing presence in the -- Europe generally and the Nordic region more specifically continues. This quarter, we announced that Folksam, a prominent Swedish insurance company, selected Northern Trust as sole global custodian for $17 billion in insurance in mutual fund assets.

This win is particularly noteworthy, displaying geographic, segment, and product specific leadership. This is the first time that a non Swedish bank will be able to provide custody and related services to a Swedish mutual fund. This achievement is very representative of our innovation and highly customized client center solutions.

Third. We continue to win in the domestic market. Most recently exemplified by our announcement yesterday that the $12 billion Los Angeles Board of Fire and Police Pension commissioners selected Northern Trust as their global custodian. Those assets transitioned to Northern Trust during the month of October.

And, finally, our plans to open a representative office in Beijing, China, are coming together. We expect to be open in the first half of 2005 and are excited about the long-term prospects in the Chinese marketplace.

In closing, the core demographics of our businesses continue to be attractive and Northern Trust is well-positioned in our are chosen markets from a product, service and geographic perspective.

We are winning in the marketplace and continue to focus on our clients, their needs and our own conservative management philosophy, which served us well this quarter.

And now, Bev and I would be happy to take any questions you might half. Sheila, please open the call for questions.

(OPERATOR INSTRUCTIONS) James Mitchell. Buckingham Research.

Good afternoon, guys. Two quick questions, one on the options expenses. It has obviously come down quite a big year-over-year. Should we expect that same trend going into next year? And then I have a second question.

Thanks for your question. I think, as we have talked about, we continue to manage the business with the expectation that we will expense options. And we have taken steps to manage that program effectively. I think what you have seen is consistent with our actions. And I would not forecast where we will be next year but I think it is consistent with the way we have tried to manage the business under the assumption that we will be expensing.

Understood but with getting rid of the broader program, should we -- is that fully in the numbers right now? Or should that sort of -- not that you can predict the actual number -- but should that generally -- the impact of that decline?

No. You are already seeing the impact of that now so you should not see a multiple of that if that is the question.

That is helpful. On the buybacks you got your capital levels, certainly, very strong. Given where the stock is of late, why not be more aggressive and really take full advantage of timing effect of lower shares?

As you know, we are very strongly capitalized and that has always been important to our client base. It is important for our credit ratings. And there are a number of other factors in the environment that we're mindful of. We're still working through Basel 2. We still like to have acquisition flexibility, and our board remains very optimistic about the opportunities to continue to invest in this business.

So we like the position that we are in. It does give us flexibility and that is really our position at this point in time.

Brian Harvey. Fox-Pitt Kelton.

I just wanted to expand upon the discussion on managers income. I'm trying to understand, Steve, if you can help us with maybe what your models are indicating to you when you talked about the impact of rising rates? And just seeing what we have realized this quarter, was it just the better-than-expected deposit growth? Or the ability to manage the rate move or just try to help us understand the change from last quarter to this quarter?

I think, Brian, it is a couple of things. As we had indicated, there were some specific securities in our securities portfolio that had been put into that portfolio before the anticipated rate hikes. So we felt that in the investment portfolio we would feel some pressure, and we did feel that pressure.

The offset really came as a consequence of the lag in deposit rates. It's not that our deposit rates increased -- it's not that our deposits increased materially, it is just the lag in rates paid on those retail deposits. So the investment portfolio did experience exactly what we had anticipated, but we benefited because of the retail deposit side more than we had thought we might.

Should we expect that lag to catch up to us in future periods, or if we are still in sort of this rising rate environment, that sort of dynamics should continue in the future?

A lot not sure I can forecast that lag. I don't think we forecasted it very well for you this quarter. That is a phenomenon I am sure that exists, but I really cannot give you any guidance how long that phenomenon will last or when it will catch up with us.

Thank you.

Brian Bedell. Merrill Lynch.

Good afternoon. On that question on the deposit pricing, can you talk about the pricing characteristics of your foreign time deposits since they seem to be growing much more quickly than your other deposits? What type of general pricing flexibility you have in that deposit base versus your retail deposits?

Well, Brian, you know as we indicated the foreign office deposits are really a function of our global custody business, and those are deposits held on behalf of large institutional investors. They are generally very short-term because it is residual cash waiting to be redeployed elsewhere. So the pricing in that market is tight.

I don't know that I can characterize for you what flexibility we have, but I think what I would say is that you're dealing with large sophisticated institutions and the money is short because that is the whole purpose of it being there.

Okay, thanks. On the securities lending book, do you want to comment about rate sensitivity there? Clearly State Street was shortening their duration significantly, but do you expect given the rate increases that we have seen recently and perhaps one more in the fourth quarter, that you will see less spread pressure in your securities lending business versus the third quarter?

Brian, all I could say there is we have not materially changed our book as some others have. We have been operating in a very consistent manner with where we were. As I say, when you put the sequential decline in context, coupled with three Fed rate hikes during the quarter or effectively during the quarter, you can say that there really was no substantial difference in the way we were managing the book. So we have been very consistent with that and are operating our securities lending business in the same way we always have. No philosophical change.

Okay, and for the tax rate, clearly it has been trending down. It sounds like a big portion of that is probably increased business from outside the U.S., or at least lower tax jurisdictions. Is there anything unusual in the third quarter that we should not be continuing to model this generally down?

I think a couple of things to keep in mind in relation to the tax rate. When you look at the Corporation as a whole, we are filing five federal income tax returns, 50 state income tax returns in 37 states, 21 foreign income tax returns, and there are a lot of moving parts in that.

I think as you look at it year-over-year, I would offer you the following observations. First, our taxable income was down this quarter as a consequence of the litigation charge, and our tax exempt income was up a bit. That mix shift did impact our effective tax rate.

Secondly, as you correctly point out, we are growing internationally, which does serve to lower some of our state income tax requirements. I think that the rate this quarter is unusually low, but I cannot really give you guidance as to where it will be. I think we should move back to more of our historic norm is the way I would think about it.

That is helpful, great. And just one final question. On the net new business, would it be possible -- I understand the annualization makes it a bit of a forward-looking projection -- would it be possible to revisit disclosing the net new business sold as just a one-quarter essential absolute level in the future?

So in other words, you typically annualize the fees (inaudible) annualized and net new business, would it be possible to -- for instance if you win a contract in the third quarter, you would say okay, this contract has this much of revenue for that third quarter, and here is the net new business impact.

Yes, I understand your question now. There are so many moving parts in that process that are dependent on transaction volume and so forth, that we just don't feel it is appropriate given the current climate, and I think you say that in what other competitors are doing. So we have decided to conform to the norm and not try and project it. It is just difficult to do.

Nancy Bush. NAB Research.

Good afternoon. I know that you're not discussing net new business, but in the past couple of quarters the divergence between net new business trends and C&IS and PFS have been fairly marked. And it would seem that looking at the numbers this quarter that they are starting to converge a bit more. Would that be a correct assumption that PFS is kind of catching up with the rest of the shop there?

I think what I would say is that PFS is clearly exhibiting more strength than it has in the past. And you know if you look at our assets under administration, you looked at our Assets under Management, which is in the aggregate, you can see the strong year-over-year growth. You can see the strong sequential growth, not in terms of absolute percentages, but relative juxtaposed against the market. And clearly PFS has -- we're seeing more activity in that pipeline.

Is the activity -- because one of the places we been talking about activity being fairly soft is at sort of the entry end, the $1 to $5 million in investable assets. Can you provide any color as to how that segment, if that segment is still lacking confidence and not showing up, or if you are seeing a little bit more activity there?

I think we are seeing more activity in the pipelines in the traditional $1 to $5 million space. I think there are a variety of macro economic factors that we are all cognizant of. Oil, geopolitical, rising rates, the election and so forth.

But I think overall my sense would be that the pipelines there have picked up. We are seeing a lot of activity at the top end of the market in our Wealth Management business. So I think it is picking up.

Remember in the third quarter we endured a lot of disruption in Florida with the hurricanes and so forth, and while I cannot quantify what was missed, I can tell you that there was -- we had a lot of office closures and a lot of people focused on things other than new business, both clients and our staff.

You anticipated my next question, which was where there any sort of direct expense impacts in Florida? Was there any office damage or anything that might have crept into the numbers?

Let me just try and give you some context. The basic answer to your question in a material sense is no. But let me give you a little color around Florida, and for those of you that don't follow Florida that closely, they were in a situation where we had an unprecedented level of hurricanes over a period of six weeks. Four hurricanes in six weeks.

Hurricane Charlie, we lost 14 days and had to close 12 offices in Florida. Hurricane Frances, we lost 46 business days across 18 offices. Hurricane Jeanne, 10 business days across five offices. The only major damage that we suffered was in our Vero Beach office which is significant damage. We are not yet able to say what the final ruling will be, but the top of our building in Vero Beach was blown off and then there was water damage from the rain.

And you know we had 350 staff without power and water and all the rest of it. So in terms of economic damage, I don't think it was a material event for us for the quarter. But in terms of disruptive business damage, it was significant.

Great. Thank you very much.

Mark Fitzgibbon. Sandler O'Neill.

Thank you. Good afternoon, Steve. First question I have for you is I wonder if you could give us maybe a progress update on your Northeast private client office expansion. I know the last couple of quarters you have been hesitant to do that because they were sort of just getting up and running. Can you share with us any metrics or progress?

Well, we are not offering any direct metrics. I think what I would say is that we continue to feel very positively about what is going on in the Northeast. I won't consign it to New York. We have an office in Stanford, Connecticut and our end process in Boston, and of course we have the new Wilmington, Delaware facility that just started on the trust only side.

I think we continue to see very good traction, lots of opportunities. I would add that we are, if you will recall, operating at the top end of the market in the Northeast. And so it takes time to convert people with hundreds of millions and billions of dollars to the bottom line, but we feel very good about what is going on there and it is exceeding our expectations in terms of opportunity.

Okay. And then the second question I had for you is on C&IS. I wondered if you could share with us whether you are seeing more or fewer RFPs out there on the global custody side of the business?

I think that is a good question. I think from a C&IS perspective I would offer a couple of thoughts. One, the pipeline in all regions is still solid. We are seeing very significant opportunity with large funds. I would say there is more complexity in what we're seeing. So it may be that it takes longer to get to the end of the sales cycle, but no, there does not seem to be a drop-off in volume or opportunity or activity that we can discern.

And again, we transitioned a $64 billion client in August. You heard about City of LA folks, and it gives you a sense. There are big decisions being made, and we are feeling good about that.

And the last question I have for you, Steve, is on sort of the retail deposit or savings account numbers. You said that you were able to lag your deposit rates as shore rates went up. I guess I am wondering, how much do you think you will be able to continue to lag those as shore rates move up? Is there a lot of flexibility or not a lot of flexibility?

This is Bev speaking here. First of all, I want to mention to make it clear that this is an industry phenomenon. This is not just something that Northern Trust is doing. So the fact that retail deposit rates have lagged industrywide is really what is benefiting us. We will always try and remain as competitive as we can be with what is going on in the industry. So as the industry chooses to move along, then we would certainly for competitive reasons have to move with it.

Mike Mayo. Prudential Equity Group.

What was the personnel expense be excluding the charge?

What would the personnel expense be?

Mike, I'm not sure that we understand your question. Are you referring to --?

Let me just ask directly. The ESOP expense, so normal rate is around 38 million and you are around 34 million, so it is like 4 million below normal.

Go-ahead.

Is that correct? Did I understand that correctly? You said take the year-to-date amount as a run-rate and you were below that this quarter.

That is correct. (multiple speakers)

Okay. Is there anything else that would conceptually offset that kind of onetime benefit?

No.

Okay. As far as Florida is concerned, Florida was up despite all the hurricanes. So what is going so well in Florida?

Well, I think --

To Nancy's earlier question, we are seeing encouraging signs within the PFS space. You know it is incremental change, but you saw when we were reporting net new business, that we were improving year-over-year and improving sequentially, and I think we are hopeful that that trend will continue. And Florida is a manifestation of what we are seeing elsewhere around the country.

The other thing I should say about the Florida line item that you're referring to is the trust fee line item from Florida, which was up sequentially as well as year-over-year, keep in mind that that is what we're earning on existing clients. So we're earning recurring fees off of existing business. So the impact of these unfortunate hurricanes in Florida, that would not be the type of line item that you would say an impact on that.

And you mentioned some pickup in PFS in the 1 to 5 million group. It sounds like that is a little bit better than what you saw last quarter. Is this an inflection point? I don't want to read too much into that comment.

Yes and I don't know if actually I should clarify. We are seeing pickup broadly based. The Wealth Management group has continued to be strong for sometime. We have seen growth in our wealth advisory space, which is that $25 to $75 million space. What I should have said more effectively is that the $1 to $5 million space feels a little bit better to us.

But I cannot tell you if it is an inflection point. I certainly cannot tell you if it is a trend. And as you know, there are a number of macroeconomic factors that can gyrate people ranging from the price of oil to the election one way or the other. So I cannot tell you if it is an inflection point.

Then lastly with regard to your outlook, can you give any kind of sense of where some line items are going? More specifically, it looks like you deleveraged the balance sheet a little bit this quarter. Why did you do that? What do you think you will do going ahead?

We really have no -- as you know, we provide no guidance. So there really is no comment on the outlook. And as to the balance sheet, there really was no substantial philosophical change in how we manage the balance sheet. So I would not over read into anything you are looking after on a line item basis.

Okay. I guess because borrowings were down 4 percent, earning assets were down 1 percent?

Yes, there is no substitute philosophical change underlying that.

Joel Gomberg. William Blair.

My question has been answered. Thanks.

Ken Usdin. Banc of America Securities.

Steve, I was just wondering if you can update us on the passive wins year-to-date? You have been kind of giving us a good read on that, how that is coming along.

Sure. Passive assets in terms of Assets under Management are approximately $187 billion as compared to $185 billion last quarter and $168 billion at year-end.

Just to give you the sort of context on growth, you will recall last year after we acquired the Deutsche Bank business, we brought in in addition to the Deutsche business $40 billion. And then in the first half of this year, through the first six months, we were at $29 billion. If you add the third quarter, we are at $33.6 billion year-to-date. So add another $5 billion in the quarter.

Okay, great. And one more question on the securities portfolio. Those assets that were underwater, are they now completely worked through as far as getting past them in the normalization?

Yes , they are.

Okay. So they are out of there?

They are gone.

Okay, great. And then the final thing, on the employee benefits versus the entire plan, is that based on net income, or can you tell us what metric it is based for when you have to adjust for the incentives?

Yes, corporate net income.

It is total corporate net income? Okay. Thanks

Brian Bedell. Merrill Lynch.

Just a couple of follow-ups. What was the equity fixed-income cash breakdown of the PFS, Assets under Management?

Give me a second to get there. For PFS, equities were 50 percent, fixed-income was 38 and short duration was 12.

Okay, great. And then for C&IS?

For C&IS managed assets, it was 37 percent equity, 15 percent fixed, and 48 percent short duration.

Just one question. In terms of the international opportunities or the things you are doing in Europe to build your servicing businesses, has there been any change philosophically in how you are willing to invest in those businesses ahead of the revenue that is coming in from the contracts given all the opportunity that you're seeing, or are you really trying to do it at a very slow and measured pace?

Nothing is slow and measured in Europe I would say. As you know, Brian, we have had tremendous growth over there for the better part of a decade, and I think we've continued that trend through this quarter. I would say a couple of thoughts.

One, the volume of opportunities continues to be good as is the size. There is intense competition out there and there is increasing complexity. As to whether we are willing or able to get in front of things, if you want to call it that, we have done that. We did do that with our Luxembourg office that was open for some very strategic reasons, and it is almost like New York. It's an expense before it's a revenue center. We have done that in China, although China is not Europe I think in terms of jumping out in front of the market, and we have put a lot in as an example at a more product or tactical level into our UK fund accounting, into our efforts to deal with folks in the Swedish market. So we definitely are running out in front of the opportunities, but we're not just laying down bricks and mortar across Europe. We're doing it in other ways.

Right. Is it your sense that the momentum in the revenues that are coming in or the deals coming in is giving you a relatively quick payback on that, or do you foresee a much more slower return on investment?

No, we continue to see that as attractive margins, very good business.

Great. Thanks very much.

At this time, we have no further questions. I would like to turn the conference back over to the speakers for any additional or closing remarks.

Well, thank you very much, Sheila. On behalf of Northern Trust, let me thank you all for joining this call. We look forward to your joining us for our next quarterly call in January. Thank you. Have a good day.

And that does conclude today's presentation. We thank you for your participation, and you may disconnect at this time.