Northern Trust Corp (NTRSO) 2010 Q3 法說會逐字稿

Good day, everyone. Welcome to the Northern Trust Corporation's third quarter 2010 earnings conference. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to the Director of Investor Relations, Bev Fleming. Please go ahead.

Thank you, Jill. Welcome to Northern Trust Corporation's third quarter 2010 earnings conference call. Joining me on our call this morning are Bill Morrison, Northern Trust Chief Financial Officer, Aileen Blake, our Controller and [Allison Quaintance] from our Investor Relations team. For those of you who did not receive our earnings press release or our financial trends report via e-mail this morning, they are both available on our website at northerntrust.com. In addition, this October 21 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through October 28. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our Safe Harbor Statement.

What we say during today's conference call may include forward-looking statements which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because of the realization of those results is subject to many risks and uncertainties. I urge you to read our 2009 Annual Report and our periodic reports to the Securities and Exchange Commission for detailed information about factors that could affect actual results. Thank you again for joining us today. Let me turn the call over to Bill Morrison.

Thank you, Bev, and good morning everyone. It's my pleasure to speak with you today about Northern Trust's third quarter earnings. Earlier this morning, Northern Trust reported third quarter net income of $156 million or $0.64 a share. This compares to reported earnings per share of $0.77 in the third quarter of 2009 and $0.82 in the second quarter of this year. Recall that our earnings last year and last quarter each benefited from reductions and an indemnification liability related to Visa. We provided operating earnings in the relevant quarters which exclude the impact of Visa items. To reiterate, operating earnings per share equaled $0.72 in the year ago quarter and $0.78 last quarter.

Before I begin reviewing our performance in the third quarter, let me remind you that market conditions continued to influence our results, specifically uneven equity markets and very low interest rates. Equity markets as you know improved during the third quarter with the S&P 500 and IFA indices rising 10.7% and 6.5% respectively. However, recall that equity markets declined 12% in the second quarter which is relevant to our businesses which use a quarter lag methodology in calculating some fees, specifically C&IS custody and PFS Wealth Management. Likewise, equity markets declined 7.7% in the third quarter using the one-month lag methodology which is relevant to fees that we earn in PFS excluding Wealth Management. While we're certainly encouraged by the performance of the equity markets in the third quarter, particularly during the month of September, we remind you that some of the fees that we earn are based on lag calculation methodologies.

The level of short-term interest rates is very relevant to our earnings and has had an ongoing negative impact on net interest income, some investment management fees, and securities lending revenues. As you know, interest rates remained at extremely low levels throughout the third quarter. In the United States, overnight interest rates averaged only 19 basis points in the third quarter, unchanged from the second quarter. Three-month LIBOR averaged 39 basis points, a decrease of five basis points sequentially. Short-term interest rates for the Euro and Sterling were also at low levels by historical standards, although short-term interest rates in the Euro increased modestly.

With that environmental backdrop, let me review our third quarter results. Revenues in the third quarter equal $899 million, down 3% compared to last year's third quarter and down 8% sequentially. Trust, investment and other servicing fees are the largest component of our revenues, representing 58% of total revenues in the third quarter. Trust, investment and other servicing fees of $519 million decreased 1% year-over-year and 5% sequentially. In our institutional business, C&IS trust, investment and other servicing fees totaled $293 million in the third quarter, down 5% year-over-year and down 7% on a sequential quarter basis. C&IS fees include three primary categories -- custody and fund administration, institutional asset management, and securities lending.

Before I move into a review of our C&IS fee trends, please make note of the commentary in our earnings press release that C&IS custody and fund administration fees were increased and investment management fees were decreased by $4.3 million each as a result of the fee classification. Prior periods have not been restated so you'll want to be mindful of this reclassification as you evaluate those two institutional fee categories. C&IS custody and fund administration fees were $159 million in the third quarter, up 6% year-over-year yet down 2% sequentially. Excluding the reclassification that I mentioned earlier, C&IS custody and fund administration fees would have been up 3% year-over-year and down 4% sequentially.

The year-over-year increase reflects new business success in global custody and fund administration as well as improved market values, partially offset by unfavorable exchange rates primarily against the British Pound. The sequential quarter decline primarily reflects the impact of quarter lag markets which were down 12% as well as unfavorable exchange rates, partially offset by new business in global custody and fund administration. We are very pleased with our new C&IS business results in the third quarter with net new business at its best level since the fourth quarter of 2007. On a year-to-date basis in 2010, C&IS net new business is 16% higher than the first nine months of 2009 and we have a healthy pipeline globally of new business opportunities. Cross-selling to existing clients along standing an important contributor to C&IS fee growth has been particularly strong in 2010.

C&IS investment management fees were $61 million in the third quarter, essentially flat year-over-year and down 13% compared with last quarter. Waived fees associated with institutional money-market mutual funds equaled $2.5 million in the third quarter, up from only $800,000 one year ago and similar to $2.6 million last quarter. Absent fee waivers and the fee reclassification, C&IS investment management fees were up 9% year-over-year and down 6% sequentially. The year-over-year growth reflects improving markets and new business in our index management, institutional mutual fund, and manager of manager businesses, partially offset by higher money-market fee waivers. The sequential decline primarily reflects lower quarter lag equity markets and a decline in average institutional mutual fund balances.

Securities lending fees totaled $56 million in the third quarter, including approximately $39 million in positive marks associated with the one mark-to-market investment fund used by certain of our securities lending clients. This compares with $57 million in positive marks in the third quarter of 2009 and $37 million in positive marks last quarter. As mentioned in our earnings press release, all of the remaining securities in the mark-to-market fund were sold during the third quarter. The mark-to-market fund is now entirely invested in a short duration fund, thus eliminating any mark-to-market impacts on our securities lending revenues going forward.

Securities lending fees excluding the mark-to-market impact equaled $17 million in the third quarter and declined approximately 30% year-over-year reflecting lower spreads. On a sequential quarter basis, securities lending fees decreased 41%. The sequential decline was not unexpected and represents a normal aftereffect of the traditional second quarter seasonal peak and securities lending due to the international dividend season.

Our institutional fees are impacted by the value of assets that we custody, administer or manage for our institutional clients so let's look at the various C&IS client asset levels. Institutional assets under custody were $3.6 trillion at quarter-end, representing an increase of 10% both year-over-year and sequentially. Global custody assets, a sub-component of assets under custody were $2.2 trillion, up 13% year-over-year and up 15% on a sequential quarter basis. The sequential quarter increase reflects higher global equity market values, the strengthening of the Euro and British Pound Sterling relative to the new business dollar and new business success. Managed assets for institutional clients were $509 billion at quarter-end, up 8% compared with one year ago and up 10% sequentially. Securities lending collateral equaled $112 billion at quarter-end, up 1% year-over-year and also sequentially. Average securities lending collateral, however, was down 4% compared with the second quarter.

Now let's move to the Personal Financial Services business. Trust investment and other servicing fees in PFS were $225.5 million in the third quarter. PFS fees increased 6% year-over-year and decreased 1% on a sequential quarter basis. Year-over-year growth was driven by new business and improved market values, offset partially by the impact of fee waivers on PFS money-market mutual funds due to the very low level of short-term interest rates. Money-market fund fee waivers reduced PFS fees by $10.4 million in the third quarter compared with PFS fee waivers of $8.1 million in the third quarter of 2009 and $12.9 million last quarter. The sequential quarter decline in PFS fees was driven by lower month lag and quarter lag equity markets partially offset by new business and lower mutual fund fee waivers.

Year-to-date, PFS net new business increased approximately 20% from the level achieved in the first nine months of 2009. That said, as the year has progressed we've seen a certain amount of malaise and indecision with prospective clients given market volatility and by that, I refer to the flash crash in May and the generally weak economic conditions. Fees in PFS are derived from the assets that we manage in custody for personal clients. PFS assets under management were $149 billion at quarter-end, up 5% compared with a year ago and with last quarter. Assets under custody and PFS were $349 billion at quarter-end, up 8% year-over-year and up 7% sequentially. Approximately 34% of PFS managed assets and 43% of PFS custody assets were invested in equity securities at quarter-end, both slightly higher than last year due principally to improved equity market levels.

Net interest income equaled $243 million in the third quarter, down 2% when compared to the third quarter of 2009 and essentially flat sequentially. Our net interest margin was 1.44% in the current quarter, 10 basis points lower year-over-year and three basis points lower sequentially. Interest rates remain near historic lows and spreads were tighter, both on a year-over-year and sequentially at the short end of the yield curve. For example, the spread between the overnight Fed effective rate and three-month LIBOR averaged only 20 basis points in the third quarter compared with 26 basis points in the third quarter of 2009 and 25 basis points last quarter. Growth in earning assets which were up 4% year-over-year and 1% sequentially was more than offset by the negative impact of low rates and tight spreads.

Foreign exchange trading income was $89 million, down 4% compared to the third quarter of 2009 and down 23% compared with last quarter. The sequential quarter decline reflects the normal second quarter to third quarter seasonal pattern and a reduction in volatility during the third quarter versus the second quarter. Other operating income of $28 million decreased 21% year-over-year and 26% sequentially. The primary driver of the decrease was $6.3 million in pre-tax losses that resulted from the discontinuance of cash flow hedges relating to hedging non-US dollar denominated revenue and expense transactions.

In the third quarter, we recorded $14 million in credit related other than temporary impairment on residential mortgage-backed back investment securities held within our balance sheet securities portfolio. This amount is reflected in the investment security transactions line on our income statement and primarily reflects additional deterioration on five previously identified impaired securities. That said, the quality of our balance sheet securities portfolio remains high with 87% of the portfolio rated Triple A as of September 30.

In the third quarter our loan loss provision was $30 million, half of the $60 million provision recorded last year and $20 million below our $50 million provision last quarter. Net charge-offs were also $30 million, down $16 million year-over-year and $8 million sequentially. Non-performing loans declined $18 million sequentially to $327 million at quarter-end. Of the $18 million decrease in non-performing loans, $9 million was in the residential real estate portfolio and $8 million was in the commercial real estate portfolio. Some of the reduction in non-performing loans moved into other real estate-owned which was up $6 million in the third quarter. At quarter-end, non-performing assets equaled 1.35% of total loans, a ratio that continues to position Northern Trust favorably among our banking industry peers.

Let me shift my comments now to a review of the key expense categories that impacted our third quarter performance. In all comparisons to the prior year in the prior quarter, I'll be referring to operating expenses which exclude the Visa benefits that impacted prior periods. Total expenses equaled $622 million in the third quarter, representing an increase of 1% year-over-year and a decrease of 1% sequentially. Compensation expense equaled $273 million down 4% or $10 million year-over-year. The primary driver of lower compensation expense was a decline in equity-based compensation which equaled $11 million in the third quarter of 2010 and $18 million in the third quarter of 2009. On a sequential quarter basis, compensation expense was down 2% or $5 million primarily reflecting lower accruals for cash-based incentives. Staffing levels equaled approximately 12,700 full-time equivalent positions at quarter-end, an increase of 2% year-over-year and less than 1% sequentially. New staff positions were generally concentrated in the Asia Pacific region.

Outside services expense equaled $111 million in the third quarter, an increase of 2% or $2 million compared with last year but were down 3% or $4 million sequentially. The year-over-year increase primarily reflects higher expenses associated with investment manager sub-advisory fees and technical services. The sequential decrease primarily reflects lower sub-custodian fees and technical services. Equipment and software expense equaled $73 million in the third quarter, up 11% or $7 million year-over-year and 4% or $3 million sequentially. In both comparisons, the increase reflects depreciation expense associated with ongoing investments in technology.

Other operating expense equaled $63 million in the third quarter, an increase of $9 million or 16% year-over-year but were down 1% or $1 million sequentially. The year-over-year increase reflects a number of items including higher charges associated with account servicing activities and higher business promotion, partially offset by a reduction in the accrual established last quarter for the United Kingdom bonus tax. The sequential quarter decline reflects the lower impact of the UK bonus tax and lower FDIC premiums, partially offset by higher charges associated with account servicing activities. Our effective tax rate in the third quarter was 34.5% compared with 33.5% in the second quarter primarily driven by a change in the geographic mix of earnings. Our tax rate for the first nine months of 2010 was 33.9%.

Now let me sum up with a few closing comments. Although the environment in which Northern Trust is operating remains challenging, I'm encouraged by what we're seeing across a number of fronts. For example, client acquisition and retention in 2010, that is net new business from both personal and institutional clients is up 18% compared with the first nine months of 2009. Client assets under custody and managed assets have both increased nicely year-over-year. Those were 10% and 8%, respectively, reflecting higher market values, new business success, and client retention. Our expense management has been sound with 1% growth in total non-interest expense year-over-year and 1% contraction and expenses on a sequential quarter basis.

The overall quality of our loan portfolio improved in the third quarter with non-performing assets, net charge-offs and the loan loss provisional all coming in at levels better than the second quarter. And our capital position which has been an important differentiator for many years, remains strong with a Tier 1 capital ratio of 13.2% and a Tier 1 common ratio of 12.7%. So notwithstanding the challenging environment, we continue to serve our clients with distinction and we remain confident in our strategic, competitive, and financial positioning. Thank you for your time today and Bev and I would now be happy to answer your questions.

Thank you. (Operator Instructions) Our first question today comes from Howard Chen with Credit Suisse.

Hi, good morning everyone.

Hi Howard.

Bill, on the PFS business, could you just give us a sense of what you're seeing client engagement-wise by the various segments as you look at them?

Well, okay, the three segments would be -- well, the four segments would be our institutional segment, wealth management, wealth advisory service and private client services. Actually we've had pretty strong growth across all four segments and I would say that the principal driver of new business in PFS has been the wealth advisory sector or segment which you will recall is focused on clients with $10 million to $200 million in liquidity. The institutional segment which focuses on principally foundations and endowments with less than $250 million and investable assets has been growing strongly but it's off a relatively small base. PCS is doing reasonably well. I would say wealth management has not been so strong this year based on the lack of M&A activity and the lack of wealth creation in the United States, so again, principal business driver and the wealth advisory segment.

Great, thanks. And then shifting gears, given all we've seen with short-term rate movements, Bill, could you just give a sense of where your NIM maybe exited the quarter and where you anticipate that to be all else being equal?

Well, we were at 1.4% I think on average we were a little bit lower than that right at the end of the quarter and there are some dynamics that obviously would suggest that if rates stay where they are and everything else stays equal, net interest margin will probably drift a little bit lower here. And those are principally the reinvestment of our investment portfolio which you all know is quite short and if we continue to reinvest in common duration and common credit quality, we'll see some small degradation there. We're going to have I think some -- or we're seeing some impact on our net interest margin from what's happening in the residential mortgage-backed market from a pricing point of view as we begin to modify some loans for our existing clients. So there's no question, if everything stays the way it is going into the future, we'll have a little bit of net interest margin deterioration.

Okay, and then it sounds like what you're saying there's nothing that you're necessarily changing in terms of philosophy on the investment side or the funding side, it just seems a little bit more normal course. Are there more proactive actions that you would or are thinking about taking to protect that a little bit more?

Howard, we are always talking about that and looking at the option. I would say on the funding side there's very little room left to reduce funding cost. On the asset side, the principal area where we can do something is in the investment security portfolio. We've seen what others have done as a view and we're not inclined to follow suit at the present time. Let me just leave it at that.

Great, thanks. Final one for me, we got clarity on Basel III during the quarter. Any if all thoughts you can share on just how you're thinking about the proposals like capital leverage and liquidity and any adjustments you think you might need to make to conform?

Well, you have in our press release what our capital ratios were at the end of the quarter. As we understand Basel III and I have to quantify what I'm about to say by saying there could be significant changes between now and final implementation by US regulators. But based on what we know today, we could comply with Basel III from a capital point of view with some margin given our balance sheet dynamics at September 30.

Okay, thanks and then just clarification on that, Bill. You said capital but leverage and liquidity in the proposals?

Well, I can't comment on liquidity specifically because I don't think those proposals are final yet and of course, the leverage ratio is proposed at 3% and has a number of add-ons on the asset side as to how the leverage ratio would be calculated. Probably the biggest one for us would have to do with indemnified sub-custodian arrangements. Not an issue for us, really. Much more to come.

Many thanks for taking all the questions.

We'll go next to Jeff Hopson with Stifel Nicolaus.

Okay, good morning. You mentioned that new business continues to be driven by existing clients so I'm curious, are these more new products or are you getting more penetration down into the middle office, et cetera, from existing clients. And my sense is that with the strong equity markets here, your strong new business, at what point do you think some of your ongoing recurring fees can offset some of the negative effect from lower interest rates?

Jeff, it's Bev. Let me start with a clarification and then I'll hand it off to Bill. I don't think we did say that new business was exclusively driven by our existing clients. I think we said in the C&IS section that we did have strong new business from our existing clients which actually has been something that's been in place for quite some time. I would say that our C&IS, our add-ons of additional business with existing clients over time roughly 50/50, sometimes 60/40, sometimes 40/60 so I just wanted to clarify it wasn't exclusively from existing clients although that was quite strong.

Right okay but from those existing clients, anything driving the new business of new products or just adding more services to those existing clients?

Well, I think in our C&IS space, it's really quite a diversified experience in terms of what different services existing clients are looking at and it's not really concentrated in any particular area. We have custody clients who are interested in fund administration and investment outsourcing clients. We have investment outsourcing clients who are interested foreign exchange services, so it's really very well diversified across the product offerings that C&IS offers and I think that's great personally. We view that as quite a positive.

The one thing I would add and maybe point you to our Investor Day presentation from earlier this year is that from a new product development perspective, certainly our clients like our industry are facing a lot of complexity and regulation and reporting requirements. So we and others have seen opportunities from a new product development perspective to support our clients as they go through an environment where their needs are evolving as well.

Okay, thank you.

We'll go next to Tom McCrohan with Janney Capital Markets.

Hi guys.

Hi Tom.

Bill, you mentioned the 18% growth versus 2009 towards the end of your prepared remarks, I think is net new business. Is that in revenue dollars or can you clarify what that was?

Yes. The way we report new business is our gross new business minus our lost business and we reported when it's actually booked or when it's actually lost and the methodology is net dollars based on a full year of fees.

But that is a fee calculation, Tom.

Right. Not an asset calculation.

How does that 18% number, can you give some context how that compares with historical numbers?

You mean in terms of growth rates within a nine-month period?

Yes, it seems pretty strong and you didn't really put an adjective to it but it seems like it's pretty strong.

Yes, it's pretty strong. We would agree.

Well the quantification would simply be that it was 18% on a year-to-date basis better than last year.

That's great.

Right.

And then on PFS, is there a market share metric that you could share with us as far as you gaining share and you're tracking that in any way?

It's very difficult to do, Tom. So I'm afraid we don't have anything to offer you. There's so many different types of companies that serve the market that we go after. It's banks and asset managers and brokers that pulling it all together all of the organizations that serve the affluent in trying to come up with a numerator and denominator to do that type of a calculation is extremely difficult. So I'm sorry we don't have anything to offer you there.

Okay and then lastly on securities lending, is there some type of leading indicator that you can share with us that will help us keep track of the demand environment, the securities lending?

I can get back to you on that Tom. I can certainly ask my colleagues in securities lending.

I would say certainly short selling, maybe market volatility, like the VIX, would be some things that might be an indication but as you know, the demand side is influenced by the leverage that the borrowers choose to take on and that there's a number of different ways that you can evaluate that.

Okay, great. Thanks very much.

We'll go next to Robert Lee with KBW.

Thanks. Good afternoon.

Rob.

Hi. Couple of quick questions. First, Bill, I understand your comments about in the wealth management segment of the PFS business, not a lot of M&A so maybe not as much wealth creation. So if I look at the fee line there in your page four of your disclosure of your trends report, you're seeing that it's been actually down over the last 18 months pretty flat to the last three quarters -- excuse me, last year and a half, revenues have been flat the last three quarters. Is that where most of the fee waivers in PFS are hitting and that's why that's been trending down flat or is it really something else there too? I'm understanding that maybe there's not a lot of new account creation because of M&A but what's impacting the existing client?

Well I think the story in wealth management is more around the mix in our asset management business. We had a big in flow of cash and short duration business here in 2008 and 2009 and of course that generates an investment management fee. And then as our wealth clients here more recently seem to be getting more confidence and putting more risk in their solutions, they're moving out of managed cash and out of our investment management fee world into an environment where we're collecting a custody fee on a more risk intensive investment solution, in some cases implemented by somebody else so that's the dynamic there.

Okay, and maybe a little bit more color also in the C&IS business on the custody business and you've had -- as you pointed out pretty good new customer wins and if I look at least asset growth in the last year, north about 10%, but if I break it down and looks like virtually all of the growth or most of the growth is still being driven outside the US. Could you comment a little bit about what you're seeing domestically in the C&IS business, has that business really just been stagnant and the markets up so you're seeing assets rise a little bit there or how should we think about the domestic trends specifically?

I think we're -- our opportunities are probably a little bit greater internationally and have been for a while but that's not to suggest that our domestic business does not growing at a reasonable pace or for that matter at a good pace. Also, we've had successes in the IOO space, investment operations outsourcing space, recently and a number of those opportunities have been global opportunities which impacts our business not only here but elsewhere as well. So I think we would and particularly Steve [Franken] who runs the business was here, I think he would tell you that the opportunities are probably still greater in the institutional business outside the United States but there's still considerable opportunity for us here and we're realizing that.

And we've talked about our funded new business but we really haven't talked about our pipeline and we talked about our pipeline last quarter but I'd update that and say that our pipeline across all of our product segments in C&IS across all geographies is quite strong and you all know that the transition period, that is the time from which we win a piece of business until the time that we book it and then report it as new business in C&IS is much longer than it is in PFS. And so pipeline strength and won not-funded business which would not be reported in the new business line is extremely important to future revenues.

Okay, and thank you and maybe one last question. Following up on capital, understanding that Basel is not finalized but presumably will be over the coming months or couple quarters. Looking out ahead, you seem pretty comfortable with where you'll be post-Basel III from a capital perspective. You guys never cut your dividend but once you were over that hump, is there anything we should be thinking about or how would you be thinking about that point deploying your capital? Would it be maybe we'll go back to buying back stock to offset some options issuance or stock issuances. Is there any change, anything, any priority you have post-Basel for your capital?

Well, just let me take the dividend first. We never cut it. it's reasonably competitive within the financial services space. In fact I'd say at the top of the pile to be more specific and so we'll continue to evaluate our dividend from time to time as we always have. We believe that the best way to employ excess capital if we can get everybody to agree that we have excess capital and we think ultimately we'll be able to do that is to invest in our businesses, to make acquisitions that augment our capabilities or expand our presence and our client count in both businesses. And I've -- we've said this before but in the PFS space it's more around building presence in some of the very high wealth concentration markets in the United States, including the Northeast, mid-Atlantic and West and expanding our wealth management business a little bit in Europe and in Asia.

On the institutional side, it's more around capabilities and the fund administration business and possibly in the custody client acquisition business but those goals are unchanged business unit by business unit. And of course, we would have interest in certain investment managers that fit our prioritization in NTGI, but my quicker answer to your question would be we think the best utilization of that excess capital is building our client facing businesses. Longest and best benefit to the shareholders over time.

Okay, great. Thank you for taking my questions.

Our next question comes from Glenn Schorr with Nomura Securities.

Hi, thanks very much. I know it's not a big number coming off a small base but if you look at the interest rate trends, found it interesting to see such a big percentage increase or just a lift-off bottom in the yield you're paying on the non-US time deposits and just curious if there's any comment you can make from there. Is that pressure from client, is that a currency thing? Just curious.

I think, Glenn, this is Bev. You hit the nail on the head when you said is it a currency thing and that's exactly what's going on here. The rate we pay both on the non-US office time deposits which would be the liability side as you know is the driver of our balance sheet and then the rate that we earn on the category called money-market assets or the sub-component time deposits with banks is a blended rate based on holdings in those two accounts at a variety of different currencies. And one of the things that has been going on here, as you know, we've been relatively successful in the Asia Pacific region in recent years and in particular in Australia, and what happened is that in both of those categories, the funding side and the asset side, the proportion of those two line items that are now denominated in the Australian dollar is higher. And as I'm sure you're aware, the Australian dollar is paying I think it's 4.5% on an overnight rate and 4.88% on a three-month rate, so you've got a mix there from a currency perspective which is driving that -- those two line items.

Got it. Very helpful, Bev. Just curious on the last question you were asking, you were talking about won but not funded business, but correct me if I'm wrong, I didn't miss it. You didn't say what that number was on an asset basis. Do you have those numbers handy?

We didn't say and we haven't said.

Is it bigger than a bread box? I'm kidding. Okay, how about frozen asset management land, I would imagine that the stars are aligned towards your passive business but do you break that out?

Did we break out flows in asset management?

Into the passive business specifically.

Well, one thing that I can say about the index business for us. We did have about $286 billion in Global Index AUM at the end of the quarter and that was a record. So hopefully that's helpful to you.

It's growing. There's a shift from passive to active in the -- excuse me from active to passive in the business and you all have seen that in the industry and it's taking place here as well.

So, okay. And you're pretty well positioned given your pension client base and your passive manager so I get that. Do you sense a strong desire to reposition the portfolio from the pension clients meaning if you look at what's gone on with this huge credit rally like everyone is underweight equity on the pension side and they tend to do it in more lumpy clumps, do you all expect much movement as we crossover year-end?

It's hard to quantify that expectation on the part of our pension clients. I would think that pension clients would be looking hard at that issue, hard to look for and be confident on conclusions there though.

Okay. And then finally just a small one. On the OTTI, I know it's a small number and some of it is episodic but in the quarter it felt like spreads rallied and things did fine. Just curious what drove the OTTI adjustment now?

If you went back and looked at the detail on those securities, those are subordinated residential mortgage-backed securities in difficult markets and while generally the dynamics around residential mortgage-backed should be flat or maybe even improved a bit on a national level, these particular geographies subordinated positioning and the vintages of the mortgages in these portfolios are going the other way. So it does seem counterintuitive we would be taking increased OTTI, I agree with that but it is issue-specific, locality and subordination.

Well thanks very much all.

Okay.

We'll go next to Mike Mayo with CLSA.

Good afternoon.

Hi, Mike.

My main question is the month and average for the S&P 500 was flat, both from the first to the second quarter and from the second to the third quarter, the assets under custody are up 10%, global custody assets are up 15%, gross new business is up 18% yet linked quarter C&IS fees fund administration down 4% sequentially. So it -- you're selling more widgets but your revenues from these widgets if you want to use that as an analogy is going down and I'm having a tough time reconciling the two trends.

I think it's a timing issue, Mike, due to the quarter lag I talked about in the opening comments.

But don't you value this off the month and averages of the S&P 500?

No, Mike, for C&IS custody and fund administration a significant portion of those fees would be earned based on prior quarters ending asset values so there would definitely be a lag in the fees there and the prior quarters S&P was down 12%.

And then on the personal side of the business, most of our revenues are lagged a month and since most of the gain in the S&P and the US was in September, that gain hasn't been recognized in the fee calculator.

We should see a lot more of this into the fourth quarter then?

Yes.

But you also mentioned something with an exchange rate. Can you talk about a dollar amount there? Was there a negative exchange rate impact on your C&IS fees this quarter and if so what was that?

We didn't disclose the breakdown but there definitely was an unfavorable exchange rate on the sequential quarter basis and that just has to do basically with our hedging strategy. You set your hedges 12 to 18 months ago so that would be a pretty normal phenomenon in an environment like we're in.

So wouldn't you expect with the weaker dollar it might have been a positive but I guess it wound up being a negative with the hedging?

With the hedging, that's right Mike.

You're thinking spot rates and we're talking hedge rates.

Okay and then a separate question. No reserve release, is that because you see some concerns out there even though your trends were favorable or are you just more conservative?

Mike, we've always been pretty conservative in this area. We've got a reserve to total loans of 1.17% and some of the markets we're in are still pretty tough, so we're going to look at the next couple of quarters and see where we are.

And can you be more specific about which markets because you're seeing some banks with higher NPAs, not you.

Yes.

And they seem to be more in the midwest. Is that where you're seeing it or elsewhere?

Not really. The markets that I'm concerned about are Florida, Arizona, Nevada, to a lesser extent southern California, but the one that really is important to us is Florida because we have probably, well, we have about $6 billion in funded loans in Florida and a lot of commercial real estate loans and a lot of residential real estate loans there. So it's -- as you well know, the improvement in the economy is very regional in the US and Florida is reasonably slow in terms of recovery, so we're just watching that carefully and as I say, we need a couple of more quarters around it.

Last question. Securities lending, $56 million. You had the $39 million of benefit so does that mean the run rate going forward is $17 million for securities lending?

Yes, that's correct.

That's lower than it had been.

That's right. Again, you've got the narrowing between the Fed funds rate and LIBOR spreads and you all track that pretty well.

But that going down does that mean personnel expense might show a little decline?

We're always looking at personnel expense across the businesses.

Okay, thank you.

And Mike, one thing that I would add is that the $17 million that you cited that actually is the same as what it was in the first quarter. In the second quarter obviously it went up because of the international dividend fees as well as the spread environment so I just wanted to point out for those on the call that the amount ex the mark-to-market fund was pretty much exactly the first it was in the first quarter.

Right.

Thank you.

Certainly.

We'll go next to Brian Bedell with ISI Group.

Hi folks.

Hi Brian.

Taking onto the (inaudible) question, to what degree are you having success with some of the pension plan clients about talking about raising core fees in lieu of the much lower securities lending environment that's obviously going to stay depressed for a while because of the spreads?

Yes, we're still working on that. We've had several successes but I wouldn't say that it's been a major driver of our fee revenue to this point, but it's a very high priority and Steve [Franken] and his people are working on it every day, every month.

Did you sense there's some potential progress that will be made for next year or do you think it's even longer cycle than that?

Well, it depends on the segment you're in and a lot of our public funds business its contractual so we probably won't make much progress there until those contracts come up if then. But I've been encouraged by a number of conversations we've had with clients where they appreciate the need for Northern to value the relationship and to feel like we've got some benefit from it. And they've been pretty realistic about that how -- about how that issue impacts their service level and so we've had positive outcomes in areas where I wouldn't have expected it, so still very hard to quantify the future opportunity there.

Okay, that's helpful. I'm looking at the C&IS managed assets and if I'm correct it looks like organic growth on the equity side was about 10% in the quarter of just backing out a market return assumption, so was that indeed a large index inflow or was it in part due to transition management or if you could just clarify?

Well, it wouldn't be transition management because that wouldn't be reflected in an AUM figure. Let me see if I have anything handy that can help you there, Brian. We might need to take this offline.

Sure, we would do that. That's fine. I can move on.

Okay.

Just then on as we think about expenses and the flexibility around that, clearly as you've outlined organic growth has been very strong across both businesses. How do you think strategically about spending on the initiatives that you have been doing in terms of the new product rollouts, advertising, bringing on folks to service the new assets? How do you think about like to what degree you have some flexibility around the weak environment if the environment stays very subdued for the next two to three quarters? Are you able to throttle back expenses to some degree or would you rather just continue to reinvest in the business because that's going to give a longer term benefit to you?

Well, we would rather reinvest in the business if we can do that and do it with prudent financial results and we have been doing that and I must say as I get around and we spent the majority of this week in London and we'll talk about our wins and why we win. There's a very high appreciation today for the quality of what we do and the service level which we get out to our clients both on the institutional side and on the personal side. At the same time, there's a high level of appreciation for our single operating platform and the fact that when we put technological improvement on to that platform, it benefits all geographies and all types of clients and part of the reason that we're able to sell effectively on to that single global operating platform is the fact that we're spending a fair amount of money on it.

And you'll notice that one of the categories in which we have increased expense pretty well back for several years now is depreciation expense as we depreciate what I think relative to our peers are relatively high capital expenses. We would not want to stop spending on technology because it's driving, I think, a good percentage of our wins currently, similarly there's a greater appreciation for the quality of our service and our connectivity with clients, so it's a tough issue. The quick answer to your question is we would like to continue to invest in our business as long as we prudently can.

That's helpful, and just on the compensation line, to what degree was that impacted by the $39 million mark-to-market gain this quarter?

None. We don't have any specific compensation arrangements around that category of our business.

Great. That's helpful and just very lastly just on acquisitions. Maybe as we think about you've talked about the mid-Atlantic region being very attractive from a PFS strategy perspective. If you could just update us on what your thinking about the plans in that region and if acquisition is on top of the list?

Well number one, we've publicly said we're going to open an office in Washington DC and I believe we've signed a lease and should have that built out and opened middle of the summer next year but frankly that's a small step. We're going to have do a number of other things to build the size and scale we want in that market so we've been working hard to try to identify prudent ways to expand that business. Sometimes you can't make people sell.

Right, so just de novo expansion might be the best course?

Well, no. I don't think, well, I don't know what you mean by --

Opening up --

No, no, not de novo. In fact I think the best course here is acquisitions of existing businesses that are consistent with our wealth advisory space and our wealth management space approach to that market. Doing it one account at a time will take a little bit too long for me.

Right, right, so more core PFS businesses, not more regional banking type franchises?

Definitely not regional banking franchises.

Great. Thanks very much for taking my questions.

Pleasure.

We'll go next to John Stilmar with SunTrust.

Good afternoon, hi guys.

Hi John.

Hi. Just wanted to drill into a little bit more of the new business win. I believe the number was 18% that you've referenced and we also -- you provided the qualification of it being strong. I guess I'm being (inaudible) and asking for a little bit more detail and is it strong in building? Is it strong in declining? Is it strong and stable? Can you give me an inflection? I just don't remember what the comparable statistic was the prior quarter.

Well, I believe the numbers that we quoted were 20% growth from our personal business nine months-to-nine months and 16% growth for our institutional business, and I don't have the growth rates compared to prior nine month periods or quarter-to-quarter handy. We can try to come back to you on that. I would just say that from a macro point of view, and I made these comments earlier in this call, the personal clients, while we are winning and particularly in the higher end new business in the personal side, a lot of people are caught in the headlights as a result of the flash crash and what people think are inadequate explanation of how that happens, so there's still a lot of concern about going to more risk intensive solutions on our personal client side.

There's a lot less of that on the institutional side as you would expect and a lot less of that in our wealth management space. I would probably say that in the third quarter, our growth in new business even though it's different than what the percentages tell you what I take into consideration the pipelines is probably stronger in the institutional side than it is in the personal side. And I would have told you at the end of the first quarter and the end of the second quarter exactly the opposite.

And John one thing I would restate which we said in the conference call is that for C&IS, the new business in the third quarter itself, because these percentage rates we're quoting year-to-date, in the third quarter itself was the best that we've seen since the fourth quarter of 2007. So I think that's a very specific comparison that we can make for you and I think if you add to that Bill's comments about our view of the pipeline globally, I think that would speak to pretty sound excitement about what we're seeing in the institutional business.

Great and then just with that enthusiasm, with all due respect is this a Northern Trust specific or are you finding that there's just the macro themes that we've been talking about for some time with new products, new services themselves are starting to get traction? Or is it really that there's a specific or isolated distinct advantage at Northern Trust absent the longstanding relationships that you've had with your client segments?

Well, as you and I'm sure most of the people on this call have done this week, we certainly have listened to what our closest peers said earlier in the week and I think all of us are speaking with enthusiasm about opportunities in the global marketplace. So where we do have some specific wins to Northern Trust that we're very excited about, I would say that we're just in an environment right now where opportunities for the businesses that we are in on a global basis are quite good.

Great. Thank you for the clarity.

Particularly in the fund administration and including the IOO space and some of that business as you all know is new to the industry -- the IOO business.

Wonderful. Thank you guys.

Thank you.

This concludes our Q&A session.

Thank you for your time today. We will see you -- we'll speak with you next in January when we release fourth quarter earnings.

Thanks so much, everybody.

This concludes today's call. We thank you for your participation.