State Street Q3 2007 Earnings Call Transcript

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State Street Corporation (NYSE:STT) Q3 2007 Earnings Call October 16, 2007 9:30 AM ET

Executives

Kelley MacDonald - Senior VP ofIR

Ron Logue - Chairman and CEO

Ed Resch - EVP, CFO and Treasurer

Analysts

Mike Mayo - Deutsche Bank

Nancy Bush - NAB Research

Brian Bedell - Merrill Lynch

Ken Usdin - Banc of America

Gerard Cassidy - RBC CapitalMarkets

Dave Hilder - Bear Stearns

Andrew Marquardt - Fox-PittKelton

Tom Mccrohan -Janney Montgomery Scott

Operator

Good morning and welcome to theState Street Corporation's Third Quarter Conference Call and webcast. Today'sdiscussion is being broadcast live on State Street's website atwww.statestreet.com/stockholder. This call is being recorded for replay. StateStreet's call is copyrighted; all rights are reserved. The call may not berecorded or rebroadcast for distribution in whole or in part without expressedwritten authorization from State Street, and only the authorized broadcast of thiscall is housed on State Street'swebsite.

At this time, I would like tointroduce Kelley MacDonald, Senior Vice President for Investor Relations with State Street.Please go ahead.

Kelley MacDonald

Good morning, everyone. BeforeRon Logue, our Chairman and CEO and CFO Ed Resch begin their remarks, I'd liketo remind you that during this call we may make forward-looking statementsrelating to the Corporation's business and financial goals, plans and prospectsand its business environment, among other things.

Actual results may differmaterially from those indicated by these forward-looking statements, as aresult of various important factors including those discussed in State Street's2006 Annual Report on Form 10-K and its subsequent filings with the SEC.

We encourage you to review thosefillings including the sections on risk factors concerning any forward-lookingstatements we make today. Any such forward-looking statements speak only as oftoday October 16, 2007, and the Corporation does not undertake to revise suchforward-looking statements to reflect events or changes after today.

In addition, information relatedto this webcast, including information concerning and reconciliations ofnon-GAAP measures referred to in this webcast is available on the InvestorRelations section of our website, www.statestreet.com/stockholder under theheading Annual Reports & Financial Trends.

I would also like to remind youthat this morning we will be using several slides to illustrate some of thematerial that Ed Resch will present regarding conduits. You can access thesefrom our website and some are also included as an addendum in our trendspackage which is also available on our website.

Now I will turn the call over toRon.

Ron Logue

Thank you, Kelley. Good morning.We have a lot to cover this morning. We've organized this discussion into threeparts. First, I will focus on the strength of our fundamental business, assetservicing and asset management, which is obvious when you look at the numbers.I will comment on our stronger than usual new business wins, discuss betterthan anticipated success with the integration of Investors Financial, and ingeneral terms talk about our asset-backed commercial paper program and StateStreet Global Advisors' active fixed income funds that have received presscoverage lately.

Ed will then provide specificdetails with respect to our results, the investment portfolio and ourasset-backed commercial paper program. I will then return and discuss ingeneral terms some of the lessons learnt from the unprecedented market turmoilthis industry has experienced this quarter. And describe some other things, wethink we need to do to protect this Company from similar events in future,while at the same time, as we did this quarter, find ways to benefit frommarket disruptions in the future.

State Street this morningreported a strong nine-month performance with increasing revenue and operatingearnings per share in each successive quarter. Excluding the tax adjustmentsrecorded in the second quarter of 2006 and the merger and integration costsrecorded in the third quarter of 2007, our operating earnings per share for thefirst nine months of 2007, grew 21% and our revenue grew 25% compared to thesame period in 2006.

In the third quarter ouroperating earnings per share grew 39% and our revenue grew 48% compared to theyear-ago quarter. We achieved 15.8% operating return on equity compared to16.4% in the third quarter of 2006.

Excluding the revenue from InvestorsFinancial, comparing the third quarters of both years, revenue grew 34%, andoperating earnings per share grew 45%. Excluding the merger and integrationcosts, we once again achieved positive operating leverage on a sequentialquarter basis, and when compared with the prior year's quarter. This marked the12th consecutive quarter in which we achieved positive operating leveragecompared to the prior year's quarter.

Strength in our asset servicingand asset management businesses continues to drive our results.  The servicing fees in the third quarter wasup 37%, and management fees was up 26% compared to a year ago. While marketconditions in the third quarter presented challenges, which I will address in aminute, it also created more opportunities in foreign exchange and insecurities finance than we usually expect in the third quarter, which hashistorically been a softer quarter for these businesses.

Revenue from foreign exchangeincreased 98% from the year-ago quarter, and 29% from the second quarter. Andsecurities finance was up 90% from the third quarter of 2006, and up 2% fromthe second quarter of 2007, a seasonally strong quarter. But it is the strongresults this quarter in our core businesses, asset servicing and assetmanagement, and continual new business wins which will drive consistent revenuegrowth. We had a particularly strong quarter for new business wins, both in assetservicing and in asset management. In asset servicing, we won 281 new mandateswhich represented $825 billion in assets.

In asset management, we won 61new assignments which represented $26 billion in net new assets. Three of thenew large asset servicing wins, we cannot name yet, but some of those we can,include on the servicing side, Credit Suisse Asset Management, Australia hascontracted with State Streetto provide custody services for over a AUD11 billion in assets.

State Street was awarded a $20billion mandate to service [Paul Finn & Company], a fast growing hedge fundmanager. Services include middle office servicing, accounting, as well as, taxand treasury services. State Street was also appointed to provide servicing for26 billion pounds or $52 billion in Pro Group Limited, and owner/manager of U.K. insurancefunds. Services there include custody, fund accounting, derivatives processing,securities finance and transition management.

State Street was appointed by theNational Pension Service, South Korea's social security system to provide globalcustody, securities lending and related services. State Street has also beenappointed to provide a comprehensive range of investment services to Lucida plc,our U.K.bulk annuity provider. We will provide global custody, investment accounting,performance measurement, securities finance, transition management andcompliance monitoring requirements.

State Street has been appointedto provide custody, administration and transfer agency services for their newlylaunched offshore funds of the Abu Dhabi Investment Company, a government ownedInvestment Company based in the United Arab Emirates. State Street won an awardfrom Bank of America's Excelsior Funds which they acquired as part of their acquisitionof U.S. Trust Company, for which we will provide custody, fund accounting,reporting and compliance services for $22 billion in assets.

The Minnesota State Board ofInvestments rehired State Streetfor five years as a master custodian for $59 billion in pension and stateoperating funds.

I would also like to call to yourattention the wins from ten new funds in private equity servicing, the resultsof two acquisitions we have made, Investors Financial and [Palmary]. We nowservice 85 clients with $82 billion in private equity assets in threelocations. We also won, but cannot specifically name yet, three large U.S. mandatesrepresenting more than $335 billion in assets for which we provide custody andaccounting out of the $825 billion in new wins this quarter.

State Street Global Advisors alsoadded significant new business. The Illinois State Board of Investment hiredState Street Global Advisors to manage $276 million in an MSCI EAFE Index Fund.SSgA was selected by the Pension's Trust for Charities and VoluntaryOrganizations in the U.K.to manage a 602 million pounds enhanced equity mandate.

In the Teacher's RetirementSystem of the State of Illinois,State Street Global Advisors won $270 million in Indexed Managed Funds. Taiwan'sBureau of Labor Insurance has granted State Street Global Advisors a $200million mandate to run the fund's passive fixed income assets.

The EUR33.4 billion funds theyreserved in Francehas renewed State Street Global Advisors for a two-year contract to implementFRR's tactical allocation and its currency risk hedges. As I mentioned earlier,net new business at SSgA in the third quarter was $26 billion. Now let me turnto our balance sheet.

Net interest revenue and netincome margin again performed very well, achieving a 75% increase in fullytactical equivalent net interest revenue compared to the third quarter of 2006,and a net interest margin of 173 basis points during the third quarter of 2007.

Our investment portfolio isperforming as expected. None of the securities have been downgraded or put oncredit watch. As you can see from the improvement over the past year in netinterest margin, our strategy is bearing results.

Ed will provide further detailsabout these results in our outlook in a minute. On the expense side, excludingthe merger and integration costs, our expenses grew at a rate less than therate of growth in revenue, which resulted in about 260 basis points of positiveoperating leverage on a sequential quarter basis.

We achieved positive operatingleverage of about 580 basis points in the third quarter of 2007 compared withthe third quarter of 2006. Our 12th consecutive quarter of positive operatingleverage compared on this basis.

Let me now offer some backgroundto our asset-backed commercial paper program, which has garnered significantinterest during the past few months. As I am sure you are all aware, the marketfor fixed-income products continues to be challenging. States Street hassponsored an asset-backed commercial paper program since 1992.

We created these programs in the US, Europe, and Australia. Primarily for our mutualfund customers, who invest in the commercial paper for their money marketfunds. We currently sponsor and administer four asset-backed commercial paperprograms.

The ratings on the asset-backedin the CP are primarily AAA or AA. Most of the assets benefits from assetspecific credit enhancement. In addition, State Street provides liquidity andcredit facilities to the conduits, as we have disclosed in our SEC filings inthe past.

We now have concerns as to theoverall quality of the underlying assets in the conduits. It's important tohelp our investors understand the differences between our conduits and those ofmany commercial bank sponsors. We included a Moody's Chart in our trendspackage on page 10, which you can download from our Investor Relations website.It provides an overview of our conduits as of September 30, 2007 versus a peergroup of 30 banks sponsors of multiseller conduits as of June 30th, 2007.Including a summary of the asset composition and ratings of the assets held inthe conduits.

A review of these slides shouldprovide you with the view as to the high quality of our assets versus the peergroup. During the quarter, we saw the spread between the rates paid oncommercial paper issued by the conduits and the yield on the assets narrow fora period of time. This pricing has put some pressure on our margins in thisbusiness. However, you should know that this business represents less than 1%of our total annual revenue. So, the amount of decline is not material forState Street overall.

As we've noted, the commercialpaper has been sold to customers everyday. However, it has been our practice,if needed, to hold a small amount of a paper on our balance sheet from time totime. The holdings of State Streets sponsored asset-backed commercial paper atSeptember 30th, 2007 were about $730 million, which is primarily related to ourAustralian conduits. At no point in the quarter or subsequently, we have morethan $1.250 billion of conduit asset-backed commercial paper on our balancesheet.

The back up lines and letters ofcredit currently remain undrawn. As of yesterday, October 15th, we held about$222 million on our balance sheet.

Let me now comment on the recentpress coverage of the active fixed income funds at State Street GlobalAdvisors. We disclosed this morning as of September 30th, 2007, SSgA manages $2trillion in assets, of which $244 billion is in fixed income. Of these fixedincome assets, approximately $36 billion is fixed income that is activelymanaged, including government bonds, credit, and structured products.

12 of these strategies withexposure to sub-prime represented about $7.8 billion on June 30th, 2007 andabout $2.6 billion on September 30th, 2007. These asset-backed securities areprimarily rated AAA or AA. The disappointing performance of these strategieswas further exacerbated by some customers who redeem their assets down at theheight of the market disruption.

A complaint was recently filedagainst State Street Global Advisors by Prudential Insurance Company. The basisof the complaint is that we allegedly did not correctly communicate theinvestment objective of the funds. We deny this allegation and attempt tovigorously defend our position.

Our pipeline remains strong, andwe haven't had any major disruptions to the normal course of our business trackas I mentioned earlier, we recorded $26 billion in net new business at SSgA inthe third quarter. And our total fixed income assets under management increasedby more than $20 billion since June 30th, about $1 billion of which is inactive fixed income.

As I said, we are pleased toachieve strong results for both the third quarter and the first nine months ofthe year. The consolidation of the Investors Financial is now well underway andwe are confident that we will achieve our customer revenue retention target of90%.

Given success of theconsolidation today, we more than halved our expected EPS dilution from $0.14to $0.06 this year and from break-even to modestly accretive next year.

Starting this quarter, we willtrack our progress each quarter to 2008, so you can evaluate our results justas we did with the Deutsche Bank transaction.

As you can see from the pressrelease issued this morning the performance of the business we acquired fromInvestors Financial was excellent, adding $221 million in revenue. We reported$0.05 dilution per share from the acquisition ahead of our model that weprovided in February when we announced the transaction.

The consolidation is proceedingaccording to plan. We have also retained key talent from Investors Financialand have outlined plans for conversion with the customers, and their accountsare being converted according to our plans. As they convert, we are removingthe costs on schedule.

Let me reiterate our updatedgoals for the year that we discussed last quarter. Excluding the merger andintegration costs in 2007 and the impact of tax adjustments in the secondquarter of 2006, we expected growth in operating earnings per share of 10% to15% on revenue growth of 20% to 22%. We also expected to achieve operatingreturn on equity of 14% to 17%. Based on the nine-month performance andassuming the markets remain relatively stable, our full year outlook now callsfor us to perform above the top of these ranges.

Now I will turn the call over toEd, who will provide some of the details of our financial performance, furtherinformation about the asset-backed commercial paper program, as well as somedetails as to our expectations for the rest of the year.

Ed Resch

Thank you, Ron and good morning,everybody. The first nine months of the year demonstrated the strength of ourbusiness. We reported strong growth in both fee and net interest revenue. Andplease note that all of the numbers I am presenting will include the results ofInvestors Financial, except where I specifically note that there is adifference.

Our growth in asset servicing,asset management, securities finance revenue continues at a combined rate ofabout 23% compared to the first nine months of 2006. Securities finance andtrading services revenue, particularly foreign exchange was unexpectedly strongin the third quarter given the volatility in the market. And we continue toexpand globally introducing new services through a broad base of customers.

We reported strong net interestrevenue growth of 75% on a fully taxable-equivalent basis, comparing the thirdquarter of 2007 with the third quarter of 2006. And on the same basis, netinterest revenue was up 21% comparing the third quarter of 2007 with the secondquarter of 2007.

Our net interest margin improvedto 173 basis points in the third quarter, up 51 basis points from last year'squarter and up 9 basis points from the second quarter. Obviously, the positivetrends I mentioned last quarter continue into this quarter. I'll provide moredetail on our net interest income and margin in a few minutes.

We achieved positive operatingleverage compared to the third quarter of 2006, as well as, when comparing thethird quarter of 2007 with the second quarter of 2007. For the 12th consecutivequarter, our assets under custody were at a record level for State Street atthe end of the quarter. Our assets under custody were $15.1 trillion, comparedto $11.3 trillion on September 30th, 2006. The custody assets from InvestorsFinancial stood at $1.9 trillion as of September 30, 2007. Our assets undermanagement of $2.0 trillion also stood at a record level at the end of thisquarter.

As Ron noted, the businessacquired from Investors Financial continue to perform well. As we reported thismorning, total revenue compared to the third quarter of 2006, includingInvestors Financial was up 48%, and excluding Investors Financial, totalrevenue was up 34%.

In the third quarter, we saved anannualized $120 million excluding certain variable expenses that are tied tothe revenue increases from the acquired Investors Financial business.

Our expectations are still thatwe will remove $350 million in annualized cost from the Investors Financialcost base with approximately $230 million in annualized cost to be removed overthe next 15 months.

As we convert client accounts, wewill be able to reduce the expense base at Investors Financial. Due to thecontinued strength and revenue growth from customers we acquired from InvestorsFinancial, we now expect the acquisition to be about $0.06 dilutive to 2007earnings per share. A reduction of more then half of our original $0.14dilutive outlook.

I hope you find an opportunity toreview our earnings press release distributed this morning. Please review thefinancial statements included with our earning press release and in ourfinancial trends package on our website for detailed information on ourfinancial results.

Now to discuss the results. Wereported earnings per share of $0.91 including the merger and integrationcharges associated with Investors Financial. This was up 10% compared to $0.83per share from the prior year quarter and down 15% compared to the secondquarter of 2007. Excluding the merger and integration costs, operating earningsper share were $1.15, up 39% from last year and up 7% from the second quarter.

Revenue totaled $2.2 billion forthe quarter. An increase of 47.9% from last year's third quarter, compared witha 42% increase in expenses, excluding the merger and integration costs to $1.5billion. Compared to the second quarter of 2007, revenue was up 16.6% and expensesincreased 14.0% excluding the merger and integration costs. Return on equitywas 12.6% or 15.8% excluding the impact of the merger and integration costs,compared with a return on equity of 16.4% from the third quarter of last yearand with 19.2% in the second quarter 2007.

Servicing fees were up 37% fromthe third quarter of 2006 and up 22% from the second quarter. Management feeswere up 26% from the third quarter of 2006 and up 5% from the second quarter.

Performance fees were about $19million down from $29 million a year ago and down slightly from $20 million inthe second quarter of 2007.

Unusually strong volatility inour foreign exchange business drove a 98% increase in foreign exchange tradingrevenue compared with the third quarter of last year and up 29% from the secondquarter.

Brokerage and other fees were up$38 million or 66% to $96 million from the previous year's third quarter. Thisincrease was due primarily to $21 million in fees from Currenex. Brokerage andother fee revenue was up 12% from the second quarter of 2007.

Also due to fixed income marketdisruptions, we saw more volume in securities finance than we usually see inthe third quarter. Securities finance revenue was up 90% from last year's thirdquarter due primarily to higher volumes and improved spreads. And was up 2%compared to this year's second quarter due to the additional revenue from theInvestors Financial business partially offset by slightly lower spreads andslightly lower volumes.

At quarter end, we have $678billion in securities on loan and the duration of the securities lending bookwas 27 days.

Net interest revenue on a fullytaxable equivalent basis increased $206 million or 75% from $275 million to$481 million, and was up $84 million from the second quarter.

In addition, compared to thethird quarter of 2006 net interest margin of 173 basis points was up 51 basispoints and up 9 basis points from the second quarter of 2006.

The favorable trends that I citedduring the first and second quarter calls continued in the third quarter.Higher levels and a favorable mix of customer deposits, a continued favorable non-USrate environment, a higher yield on reinvestments in our securities portfolio,and a higher level of low cost funds. Of course, we added about $13 billion inaverage assets from Investors Financial, which also contributed to the increasein net interest revenue.

Due primarily to the InvestorsFinancial assets we acquired, we increased the average size of the investmentportfolio from $61.2 billion a year ago to $74.6 billion during the thirdquarter and up from $67.7 billion in the second quarter of 2007.

Mortgage-backed securities in thethird quarter of 2007 represented about 41% or $30.9 billion of the averageinvestment portfolio. Floating rate asset-backed securities in the thirdquarter of 2007 represented about 34% of the average investment portfolio or$25 billion.

The credit quality of theportfolio at September 30th, 2007 has remained about the same as at lastyear-end. 95% is invested in AAA or AA rated securities. As of September 30th, 2007,89% was invested in AAA and 6% in AA rated securities. None of our investmentportfolio securities were down graded or put on the watch list last week byMoody's.

I said on last quarter's conferencecall that, if the current trends we saw continued, we expect our net interestmargin for the full year 2007 to be in the range of 155 basis points. Since thetrends continued and in fact improved in the third quarter, plus the benefit weexpect to receive from the recent 50 basis point rate reduction by the Fed, wenow believe we will be above that level for 2007, more likely in the range of160 to 170 basis points.

This assumed that market trendscontinue, that our transaction deposits continue to run at these historicallyhigh levels, and we continue to benefit from the favorable mix of customerdeposits.

Looking towards 2008, we expectthe net interest margin to improve to an average for the year in the rangebetween 185 to 195 basis points. This outlook for next year assumes that thecurrent high level of transaction balances and spreads continue, and that wewill maintain the existing favorable mix of customer liabilities.

We expect to see the investmentportfolio re-priced upwards, as older fixed rate securities mature in agenerally stable interest rate environment worldwide. The balance sheet isexpected to grow between 5% and 10% over normalized 2007 levels.

Our duration gap has not changedsignificantly from year-end. Our assets are about 12 months and our liabilitiesare about 9 months. The investment portfolio duration is about 1.5 years downslightly from 1.6 years in the third quarter of 2006 and down from 1.7 years inthe second quarter of 2007.

Since there has been continuinginterest in the asset-backed securities collateralized by sub-prime mortgagesheld in the available for sale portfolio, which totaled $6.6 billion atSeptember 30th, 2007.

Let me provide some detail. Firstof all, the securities have issued with sub-prime mortgages as collateral, andthey are 73% AAA rated and 27% AA rated. They have performed very well and thecurrent percentage break down which is down from 80% AAA and 20% AA in thefirst quarter reflect the pay downs we have received.

Each vintage year from 2003through 2006 has outperformed the Moody's performance data. All of the assetspurchased in 2006 and the small amount that we purchased in 2007 are AAA rated.In addition, these securities have an average 37.6% credit enhancement on themversus a 5% to 8% historical cumulative loss experience in the marketplace. So,what that means is that even if losses were to double, we still have more thantwice as much cushion as we need before we would have a loss.

So, we remain very comfortable interms of our entire asset-backed position, including the position that isbacked by the sub-prime mortgages. Now, I will provide more detail oncomparable expenses.

Salaries and benefits expenseswere up 43% from the third quarter of 2006 and up 13% from the second quarterof 2007, largely attributable to the cost associated for the staff that joinedState Street from Investors Financial, as well as, the impact of incentivecompensation due to our improved performance and benefits expense.

Transaction processing expensesincreased up 36% compared to the year ago quarter and 17% from the secondquarter of 2007 due to increased volumes in the asset servicing business. Otherexpenses were up 81% compared to the year-ago quarter and up 16% compared tothe second quarter of 2007 due primarily to cost associated with InvestorsFinancial. The effective tax rate for the quarter was 35%.

Again, I would like to remind youthat in a few minutes, I'll refer to several slides that are available on ourwebsite. But now, let me share with you our capital plans and answer some ofyour questions about the asset-backed commercial paper conduits.

First, remember that during thefirst half of 2007, we read our ratios higher than our targeted levels, due tothe expected impact from the acquisition of Investors Financial and the plannedshare repurchase associated with that transaction.

The principal capital ratio thatwe managed to is the Tier 1 leverage ratio. We will continue to target between5.25% and 5.75%, but may allow this to drift upwards towards 6% if conditionswarrant.

On July 20th, 2007, we executed a$1 billion accelerated share repurchase program. At September 30th, 2007, ourTier 1 leverage ratio stands at 5.35%. Our tangible common equity ratio is3.49%. Our tangible common equity ratio reflects the growth in the balancesheet from increased customer deposits, and the increased level of liquidity wecarried in response to market conditions in the third quarter.

Due to the high level of interestin our asset-backed commercial paper program, I will take a few minutes torefer you to several slides which are available on our website. For yourinformation, the data provided by Moody's is as of June 30th, 2007, and StateStreet's data is presented in the aggregate as of September 30th, 2007.

I would like to begin bydescribing our approach to conduits. First, they are driven by customer demandfor high quality, highly rated commercial paper. These are principally ourcustomers that manage money market mutual funds. The conduits are managed by ourStructured Product Group and are subject to a rigorous credit review process,which includes independent oversight of all asset purchases.

The conduits are included in ourcontingency plans, both in terms of funding and capital. We believe ourapproach to the asset-backed commercial paper market is different than mostother programs and that no assets from State Street balance sheet are sold tothe conduits, rather they are sourced from the market.

The first conduit was created in1992 and now in 2007, we have four. The expansion overtime of the conduits hasbeen in response to the customer demand for asset-backed commercial paper. Thefinancial performance of the conduits during this time period has been verystrong. They have never suffered a credit loss on any asset they purchased, evidenceof a strong credit discipline that I just referred to.

Also, State Street in its capacityas a liquidity and credit provider has also never experienced the loss fromhaving to fund under those facilities. State Street plays several roles,administrator, liquidity provider, and dealer for which we earn fees, but alsonow that we have 10 other dealers across the four conduit programs. Those feesare payout of the difference between the yield on the assets versus the yieldon the commercial paper and the conduits. The fees associated with the programare reported on the processing fees and other revenue line in our incomestatement. The fees represented about $61 million in 2006 revenue and year-to-datein 2007 were about $50 million.

What are the ratings on theassets that are held for use in the conduits? If you would, please turn toslide 1. Let me make sure you are all aware, most of the assets are pools ofconsumer assets and our investment grade.

Now let me detail some of theaggregate ratings of the assets within the four conduits that back thecommercial paper. 62% is AAA. 15% is AA. 8% is A, and 10% is not rated by arating agency. However, I should point out that our Enterprise Risk Managementgroup reviews all purchases in the conduits and the assets in this group arestructured to maintain a T-1 or similar conduit rating.

Those three categories represent95% of the total. The remaining 5% is rated BBB. Let me differentiate theseratings from the average ratings of holdings of a multiseller peer group usingdata provided by Moody's which is graphed on page 10 in the trends packageprovided on our website also.

First, let me reiterate, theassets in State Street's sponsored conduits are not sourced from our balancesheet. All State Streets conduits hold 62% in AAA rated securities. A peergroup of the major multiseller conduits holds 12%. While State Streets conduitshold 15% in AA rated securities, the peer group holds 13%. While State Street holds10% that are not rated, the peer group holds 41%. While State Street holds 5%rated as BBB, the index of the major multiseller bank sponsors holds 13%. Andwhile State Street holds essentially no assets rated below BBB or belowinvestment grade, the peer group holds 10%. The point of this detail is toprovide data that will help you differentiate generally between the commercialpaper issued by our conduits and that of other programs.

These comparisons may help youunderstand the confidence we have in the quality of our assets. While as thecountry of origin of the assets and to whom do we sell this commercial paper,please turn to slide 2. The asset allocation is as follows. About 42% of theassets originate from the United States, 30% from Continental Europe and theUnited Kingdom and 22% from Australia. The weighted average maturity of theconduit assets is about four years.

The conduits historically sellthe asset-backed commercial paper in four currencies with about two-thirds ofthe asset-backed commercial paper denominated in US dollars, a little more than20% is denominated in euros and sterling and about 15% is denominated inAustralian dollars.

What types of assets arerepresented in the conduits? Please now turn to slide 3. Let me outline in theaggregate the types of high quality assets in the four conduits against whichthe commercial papers are issued.

First, mortgages. US residentialmortgage-backed securities represent about 15% and have an average FICO scoreof 712 at origination. Australian mortgages represent about 18%. Europeanmortgages represent about 15%. UK mortgages represent about 8%.

Next step to the mortgage-backedsecurities are student loans, which totaled about $3.3 billion or 11% of thetotal. Almost 83% of which are protected by a 97% guarantee by the US Federalgovernment.

Next in order are auto andequipment loans which represent about 9% of the assets or $2.6 billion. Thencredit cards receivable which represent about 7% of the assets or $2.1 billionand finally other which includes mostly trade receivables, CLOs and businessand commercial loans, 17% or $5 billion. These assets are sourced from thirdparties and not from State Street's balance sheet. No single asset classrepresents more than 2% of total portfolio assets, except trade receivables at3%.

For the sake of time, I will notreview the characteristics of each of the asset types held within the conduits,but if you later review the other slides I have provided, you can see in moredetail the characteristics, as well as, our risks and control procedures.

So, what happened in the thirdquarter? Overall, the asset-backed commercial paper program performed very wellin a period of extreme market stress. We believe that our asset quality was amajor point of differentiation for our conduits during the period of time whensome weaker programs faded away and the overall asset-backed commercial papermarket contracted significantly.

There were immaterial negativefinancial consequences to State Street in the third quarter as revenue from theconduits declined to about $11.1 million in the third quarter from $13.8million in the third quarter of 2006 and from $17.4 million in the secondquarter of 2007.

As the third quarter progressedand investors became increasingly concerned about the credit quality of theunderlying assets in conduits, the rates that issuers had to pay onasset-backed commercial paper increased. These rates are generally recorded asspread over the relevant index. For example, the overnight rate or one-monthLIBOR. For State Street, our asset-backed commercial paper spreads widened outto as much as 50 to 75 basis points over the overnight rate, and 60 to 80 basispoints over the one-month rate. These spikes did not last long as they occurredin the weeks leading up to the FOMC meeting in mid-September, at which time theFed decided to lower the Fed funds target rate by 50 basis points to 4.75%.

This move helped to contractspreads. Since the FOMC meeting, our spreads have gradually contract itscurrent levels of around 5 to 20 basis points versus the overnight ratedepending on the currency and zero to 35 basis points versus the one monthrate, again depending on the currency.

Our overall weighted averagematurity of the commercial paper at the end of the third quarter of 2007 wasapproximately 15 days, compared to approximately 21 days at the end of thethird quarter of 2006, and approximately 22 days at the end of the secondquarter of this year.

The conduits are separate legalentities in which State Streethas no direct ownership and they meet the requirements of FIN 46-R and aretherefore unconsolidated. Similar to most conduit structures, the conduits havethird party investors in the form of subordinated debt, owing our first lossposition, bearing the majority of the expected losses of the conduits asdefined by the accounting rules FIN 46-R.

We held $730 million in State Streetsponsored asset-backed commercial paper on our balance sheet at September 30,2007, most of which was associated with the two Australian conduits, which aremuch smaller than either of the other two. We believe that because September 30is the year-end for several major Australian banks, there was a negative effecton our ability to place asset-backed commercial paper in the Australian marketat quarter end.

At no point during the quarterdid we hold more than $1.25 billion of the conduits asset-backed commercialpaper on our balance sheet. As of yesterday October 15, 2007 we heldapproximately $222 million on our balance sheet.

I realize you're probablyinterested in implications for State Street should assets come on to ourbalance sheet under existing contractual arrangements with the conduits or as aresult of the consolidation of the conduits.

We do not anticipate theconsolidation of the conduits we will present the following information forpurposes of illustration, given the amount of interest this topic has received.

It is possible that assets couldcome on to State Street's balance sheet as a result of existing contractualrelationships between State Street and the conduits, as we disclosed there arenotes to our financial statements. State Street provides the conduits withliquidity lines that backstop the asset back commercial paper. These are referredto as liquidity asset purchase agreements and they are provided to enhance thelevel of protection that a holder of the conduits commercial paper has beyondthe high asset quality of the conduits that I have already spoken about.

If a credit problem occurred withan asset in one of conduits subject to certain conditions. The liquidity assetpurchase agreement could be invoked by the conduits requiring State Street topurchase the asset from the conduit at par. In the event the fair value of theasset in less then par State Street would be required to take the loss uponpurchase of the asset. In the recent market with spreads on virtually all assetclasses except U.S treasuries having widened, this would result in a loss. Thisloss may be recovered in future periods, depending on State Street's action after the asset ispurchased.

It is also possible the conduitassets and liabilities could come onto State Street's balance sheet through aconsolidation of one or all of the conduits. This would occur if State Street failedto meet the accounting requirements for non-consolidation under FIN 46-R whichis a complex accounting standard. This is assessed each quarter and morefrequently if events warned, if consolidation were to occur pursuing to FIN46-R then the conduit assets and liabilities would come onto State Street's balance sheet at fairvalue. Basically to recognize an extraordinary loss at the date ofconsolidation if the fair value of the asset succeeded the fair value ofliabilities, as they do in today's market conditions.

This loss would reverse back intoincome over the remaining life of the assets, assuming the assets were held tomaturity and State Street recovered the full principal amount of the securitiesas anticipated. To quantify the income statement impact of State Street, if allof the conduits assets were purchased under the liquidity asset purchaseagreements or a consolidation event were to occur in the future using September30th, 2007 estimated fair values, the loss would be approximately $215 millionafter tax. If the assets are the result of the consolidation under FIN 46R.This would be an extraordinary loss for financial reporting purposes.

From a funding standpoint, therisk I just described is included in our contingency funding plan. We believethat we can access multiple sources of liquidity to fund such asset purchases.Our sources of this liquidity includes sales of other assets, re-borrowingassets, issuing corporate commercial paper, issuing bank CDs and time depositsand accessing the Fed discount window. We in fact, as part of our contingencyplan in the third quarter, raised approximately $7 billion in incrementalliquidity, given the market environment. This is one of the causes of ourbalance sheet growth in the quarter.

In terms of the impact on ourcapital ratios, if a consolidation did occur, however, our capital ratios,primarily the tangible common equity ratio, would be stressed for a period oftime. The potential for such stress is in fact considered in our contingencyplan.

From a regulatory capitalperspective, the consolidation of the conduits assets and liabilities would cause only a modest reduction in theTier 1 and total risk-based capital ratios. The impact on the Tier 1 leverageratio depends on how and when the consolidation might occur, since this ratiois a function of the company's average assets over the entire quarter.

Based on our current projections,we believe that we will remain well capitalized from a regulatory capitalstandpoint. If all of the assets and liabilities of the conduits came on to our balance sheet, ourtangible common equity ratio would be adversely effected. While this ratiowould be lower than our internal target, we would need a few quarters toreestablish our tangible capital ratio within our target ranges.

So in conclusion, the first ninemonths of the year represented a strong performance for State Street. We are continuing tobalance growth and revenue against our expenses, so as to achieve positiveoperating leverage on an annual basis. We hope that the information we haveprovided about our conduit program has allowed you to differentiate between ourprogram and those of other sponsors.

We continue to be confident aboutperforming above the top of the ranges for 2007 that we have provided assumingmarkets remain relatively stable. And now, I will turn the call back to Ron.

Ron Logue

Ed, thank you. Well, looking upback over the quarter, I am struck not only by the significant performance ofour core business, but also by our ability to react to what has clearly been anuncharacteristic fixed income market. One of the reasons we have been able todo this, is that State Streethas a long, established, conservative, risk compliance and credit capability.

We have talented people who notonly perform credit analysis for us, but who also outline scenarios formanaging risk, whether it affects our balance sheet, our conduits or ourinvests management business.

Regarding the conduits, I havebeen asked recently, will you get out of this business, or will you reduce thesize of this program? As we discussed earlier today, this program supports ourcore business. As we entered the business in 1992, we have never experienced acredit loss through this program.

So now, we will not exit thebusiness. We apply strict, risk and compliance procedures to the assets wepurchased, and we will continue to do so. We will however, review this programin the light of a type of market disruptions we have experienced and maintain aprogram that is consistent with our ability to absorb the assets on our balancesheet if necessary without significantly impacting our capital ratios.

This issue is not about creditquality or liquidity, it's about balance sheet capacity.

So, let me summarize. We havereceived excellent feedback from the Investors Financial customers with whom weare planning conversions. We have added employees to State Street who have beenrecognized for their customer service and who will contribute to our ongoingsuccess.

The acquisition strengthened ourlead in our high-growth businesses such as services for mutual funds, hedgefunds, offshore funds and investment manager operations outsourcing. And wehave added the capability to service private equity investments.

SSgA continues to offer more than250 different strategies to our investors across the globe. We continue toprudently manage our balance sheet to improve the return from our net interestrevenue without taking significant credit or interest rate risk. Same time, growthin our non-US businesses continues to outpace the growth in the United Statesas we execute against our goal of achieving 50% of our total revenue fromnon-US sources.

And finally, we have takensignificant US customers and significant assets away from our competitors thisquarter. We now begin the last quarter of 2007 with strong nine-month resultsfrom both State Street and the acquired Investors Financial business, and withour consolidation of our Investors Financial exceeding expectations.

We have confidence that we shouldbe able to exceed the financial targets we established for growth in revenueand operating earning per share and achievement of operating return on equityassuming markets remain relatively stable.

So, now Ed and I are happy totake your questions.

Question-and-Answer Session

Operator

Thank you very much, sir.(Operator Instructions). And our first question today will come from Mike Mayofrom Deutsche Bank. Your line is open, please go ahead.

Mike Mayo - Deutsche Bank

Good morning.

Ron Logue

Good morning, Mike.

Mike Mayo - Deutsche Bank

New business for servicing of$825 billion, I guess, that's 5% of the assets under custody, how much of thatis in third quarter results and who are you winning that from?

Ron Logue

There's not a lot in the thirdquarter results, because some of them are big transactions that will begintaking place fourth quarter and into the first quarter, and we are winning themfrom all of the traditional competitors.

Mike Mayo - Deutsche Bank

That's the big guys like in thebig four also are smaller?

Ron Logue

Big guys.

Mike Mayo - Deutsche Bank

Okay. And if it's 5% assets undercustody should we assume that servicing revenues will go up 5% or is there amultiplier effect?

Ron Logue

Well, there could be a multipliereffect depending on the products and services that they buy right away.Traditionally, you start with custody and accounting and sell other productslately. You seem to be selling more products sooner in a cycle.

Mike Mayo - Deutsche Bank

Investors Financial, that $315million of savings, how much have you achieved in the third quarter?

Ron Logue

I think we said 120?

Ed Resch

30 million in the quarter.

Mike Mayo - Deutsche Bank

$30 million?

Ed Resch

$30 million in the quarter,right.

Mike Mayo - Deutsche Bank

Out of the $350 million?

Ed Resch

That's the 120 annualized, Mike.

Mike Mayo - Deutsche Bank

And you said the margin 1.73% inthe third quarter next year should go between 185 and 195?

Ron Logue

Correct.

Mike Mayo - Deutsche Bank

So if we take the midpoint ofthat, that would get us to NII 10% higher or we'll be doing something with thebalance sheet that would make NII not go up that much.

Ed Resch

I think our thinking right now ismore in the former camp, Mike.

Mike Mayo - Deutsche Bank

And would that be due to IFIN ordue to the core of business. The reason I say that is you will be getting $0.05more if you eliminate the dilution from IFIN and if the margin improves the wayyou say it will that would be another $0.05 and I don't want to double count?

Ed Resch

You are not double counting. TheIFIN fund is a contributor to that. It's part of it. But you have to rememberthe IFIN effect on the portfolio was about 1/6 or 1/7 the size of the State Street portfolio.So, the main driver still is the improvement. It's the State Street side of the equation, if Ican call it that. And it relates to the assets that are maturing in theportfolio, that are the older ones as well as the strong flows that we have talkedabout now for several quarters on the State Street side.

Mike Mayo - Deutsche Bank

And your guidance in the past,you've tried to be conservative, but if you take the $1.15 plus the $0.05 ofthe margin, plus the $ 0.05 for IFIN, you are up to a $1.25 run rate. Timesfour you get to $5 run rate before any growth. So, I want you to just pull usback down to earth here. What was kind of above trend this quarter, may be ifyou can address FX trading volumes, and at least this quarter's NII? And thereason I say that is we don't have those numbers for the second quarter withoutIFIN?

Ed Resch

Right. The things that were abovetrend in the quarter, Mike, were the things that you mentioned. The securitieslending, which normally as a sequential quarter decline, it obviously did notdo that this year. A contributor to that was IFIN. But again not the maincontributor to the relative strength in the third quarter.

Mike Mayo - Deutsche Bank

How much was sec lending upwithout IFIN?

Ed Resch

Sec lending was up $3 million intotal. IFIN was $7 million of that.

Mike Mayo - Deutsche Bank

Okay.

Ed Resch

So, the old State Street was down a little bitsequentially. So, you have the strength in sec lending. You have the volatilityin the marketplace given what went on and the fixed income market is drivingreally strong FX.

Mike Mayo - Deutsche Bank

How much was FX baseline?

Ed Resch

IFIN contributed $22 million tothe sequential quarter increase.

Mike Mayo - Deutsche Bank

Okay.

Ed Resch

Okay. And then you have the NIRperformance that we've already talked about. So, if you put that all togetherand say that we performed inline with our expectations coming into the quarter,we would have been right around what Street consensus was for the quarter.Okay. So, you can almost say that around $0.20 of the overall performance wasdue to those factors, IFIN's overall performance, FX and NIR and sec lending.So, that's what really drove us. So, I think your $1.25 construction times fouris a little bit aggressive given what I just said about the strength in thethird quarter.

Mike Mayo - Deutsche Bank

Okay. So, may be closer to $1.5times four, is that penalizing too much?

Ed Resch

I don't want to go --

Mike Mayo - Deutsche Bank

That's fine.

Ed Resch

Over yet.

Mike Mayo - Deutsche Bank

And then just on the ABCPdiscussion, everything you are talking about the $250 million loss that hit thecapital, that's all hypothetical still, is that correct aside from the littlebit you took on?

Ed Resch

Absolutely.

Mike Mayo - Deutsche Bank

And what percentage probabilityor just color can you give on that likelihood of this coming on the balancesheet?

Ed Resch

Well, I mean it's clearly greaterthan zero because who knows what could happen. But we think it's very, veryremote that a consolidation event would occur and based on our history that wetalked about from the standpoint of our conduit performance on the asset side,as well as, the implications to that of State Street is never having had acredit loss in the conduits or a liquidity asset purchase agreement called bythe conduits against State Street, I think you can say the same thing aboutthat side of the equation.

Mike Mayo - Deutsche Bank

How much did revenues go downthis quarter due to ABCP, that wasn't clear?

Ed Resch

In the range of $5 million to $10million.

Mike Mayo - Deutsche Bank

Okay, so you might not see thatcome back?

Ed Resch

We might.

Mike Mayo - Deutsche Bank

And lastly, but actually twomore; the Barclays contract with IFIN, if you have a renegotiation, what wehear about it, have you had one, can you comment?

Ron Logue

If we have one, you will hearabout it. We continue to process through the quarter. Service is good, and weare still doing all of the processing that IFIN did.

Mike Mayo - Deutsche Bank

And then lastly, the fixed incomefunds that are actively managed dealing with subprime, it went from $8 billiondown to $3 billion in the last three months. So, does that mean your potentiallegal exposure is $5 billion, and if it isn't can you size potential risk?

Ron Logue

It's hard to size potential risk,Mike, people get in and out, there were withdrawals, transfers during thatperiod of time. So it's a difficult thing to do.

Mike Mayo - Deutsche Bank

Alright, thank you.

Operator

And moving on our next questionwill come from Nancy Bush with NAB Research. Please go ahead.

Nancy Bush - NAB Research

Good morning. Well Ron, I hadjust sort of a qualitative question for you first. All the press coverage thatyou got during the third quarter, about the funds and the ABCP's, etcetera, howmuch did you have to ramp up the time spent sort of client hand holding duringthe period and were there substantial worries that were voiced by your clientas a result of all this. I mean, so, what was the client reaction is sort ofthe bigger question?

Ron Logue

Well, I think the media made moreout of it, than it actually happened, Nancyto be honest with you. First of all, as I am sure you know, we are known forconstant client coverage. So, there weren't any gaps there. We were constantlydealing -- using the relationship managers that we have dealing with theclients. Were there more questions, yeah, but nothing to the extent that therewas panic in the streets here?

Nancy Bush - NAB Research

Alright.

Ron Logue

I mean, as I said, the media madefor out of this than what actually happened.

Nancy Bush - NAB Research

Okay. And also your commentaryabout the ongoing size of the ABCP's, and your comment about what happened. Areyou ascribing some likelihood to a reoccurrence of what happened in the thirdquarter, in other words, do you see the market as having changed in some waythat we get more of these fixed standard deviation event, that will play intoyour thinking about the ongoing size of the conduits.

Ron Logue

Well, there is no question thatwill play into our thinking about the conduits. And as I said, I mean I don'tthink anybody would have anticipated 100% loss of liquidity and it's tough tocreate a contingency plan for something like that. But, for a period of timethat's exactly what happened. And so, I think we need to rethink some of thatespecially as it relates to our capital, and we are going to do that.

Nancy Bush - NAB Research

Okay. Also, I had a question foryou, the benefit of the Fed cut, would you just remind us how this plays intoongoing margin and when the benefit sort of runs out, I mean assuming that wehave sort of a one-and-down event here.

Ed Resch

Well, with everything else beingheld constant, which is hard to do Nancy,the 50 basis point cut as the Fed just did, is worth about $50 million to us onnet interest revenue on an annualized basis. A lot of that given where we areconstructed is frontloaded today. So, there will be more in Q4 and Q1 and therewill be in next Q2 and Q3. But, we are still in a position where a 25 basispoint cut is worth about $25 million or $30 million to us on an annualizedbasis.

Nancy Bush - NAB Research

And Ron, one another question foryou, if I may? Has there been any changes in portfolio management at SSgA as aresult of the issues with the funds or if you would just remind us what thelong-term record of these funds is and whether clients are still interested inthat long-term record?

Ron Logue

Well, there has been no changes Nancy. The long-termrecord has been very good. And I think to prove a point is the fact that weadded about $1 billion in active fixed income in the quarter.

Nancy Bush - NAB Research

All right. Thank you very much.

Operator

And our next question today willcome from Brian Bedell from Merrill Lynch. Please go ahead. Your line is open.

Brian Bedell - Merrill Lynch

Thanks. Good morning, guys.

Ron Logue

Hi, Brian.

Brian Bedell - Merrill Lynch

Just a few questions. Startingwith the business wins that you said that funding over the next couple ofquarters, these are mostly custody and accounting mandates. Do you have alsosec lending assignments and effects both in there as well?

Ron Logue

Yes.

Brian Bedell - Merrill Lynch

You do. Okay. So that leads intothe next question. Clearly the volumes in volatility were very strong in thequarter. But, if you had to mention roughly, what proportion of third quarterupside and effects in sec lending was due to just your cross sale into yourother custody mandates and also, I think, TIAA-CREF was coming online in seclending?

Ron Logue

Yeah. I tried to say obviously aswe keep adding customers, the FX securities lending haven't really gauged thatfrom that point. But my bet would be that it's relatively small.

Brian Bedell - Merrill Lynch

Okay. But you are sayingbasically these new mandates are coming on with additional cross sales as well.

Ron Logue

Yes.

Brian Bedell - Merrill Lynch

Okay. And the pricing of thesemandates should we assume that there -- will ensure that the larger deals arepriced lower given the scale and size arguments to that. But should we expectroughly similar pricing on assets under custody overall with these pricing?

Ron Logue

I guess I will characterize themas market price. Any time there is accounting whether -- it's not a commoditykind of pricing.

Brian Bedell - Merrill Lynch

Right. Okay. Great. Ed, yourtarget of 185 to 195 for '08, what are your assumptions for the Fed fundsrates, say at the end of the '08 and the European Central Bank rates on that?

Ed Resch

I will give you all theassumption that underlie that Brian. In terms of Fed funds, our currentassumption is that there will be 475 flat throughout all of '08 or the dollarswill stay where they are until the middle of the year and they will increase 25basis points. The euro will increase one more time this year, and then go up tofour in a quarter and stay flat. The pound will stay where it is, 575 flat fromnow through the end of next year. And Japanese yen will have one more increase,25 basis points and be 75 basis points flat for all of next year.

Brian Bedell - Merrill Lynch

Okay. So fairly staticconditions. If the Fed gets further and ECB stays in your target range, isthere an upside to your NIM, guidance based on that?

Ed Resch

Sure. It depends on how and howmuch and when the Fed would have cut. But based on what I said before in termsof a Fed rate cut, all else equal, that's a positive event for us.

Brian Bedell - Merrill Lynch

Alright and...

Ed Resch

Let's say modestly though Brian,I mean assuming it's another 25, because there is not a huge impact to thenumbers I gave for '08 .

Brian Bedell - Merrill Lynch

Right. And then just for therates that you are paying on foreign deposits, you were able to keep that lowagain. Can you talk about your confidence and your ability to keep that let'ssay well below the ECB rates going forward?

Ed Resch

As the foreign central banks haveraised rates, we have had the ability to lag as we've talked about. That willwork itself through in a quarter or so, if they stop raising and things willcatch up.

Brian Bedell - Merrill Lynch

Right, so that I mean in otherwords you have come down from that 365 in the first quarter to 329 in thesecond quarter and 325 this quarter. So, what you are saying is we shouldexpect upside pressure on that and in the fourth quarter and first quarter?

Ed Resch

Yes.

Brian Bedell - Merrill Lynch

Buyback towards sort of what youwere before in the first quarter?

Ed Resch

Yeah. I think that's a goodguess.

Brian Bedell - Merrill Lynch

Okay, great. And just within, Ronif you want just talk about one question on the conduit again. With your plans for the future size of that, if you werenot to buy any assets into the conduits, if you were to stop doing that, howlong would it take to runoff? I know you don't want to close it to zero, butjust to gauge the size of that?

Ron Logue

No, I think as quoted theweighted average maturity of four years.

Brian Bedell - Merrill Lynch

Right, okay. So, we should juststraight line that basically?

Ron Logue

Yeah.

Brian Bedell - Merrill Lynch

Okay. Is your plan to sort of letthat run down for the time being?

Ed Resch

Yeah, I don't want to telegraphanything we're going to do that, but we're definitely going to look at it interms of relationship to the capital ratios. And obviously compare that to themarket conditions and take advantage of the market conditions and converselydon't be disadvantaged by the market conditions in that period of time.

Brian Bedell - Merrill Lynch

Right.

Ed Resch

But directionally you are right.

Brian Bedell - Merrill Lynch

Right, in just terms of, I meanjust using that, I mean clearly it's the earnings contribution doesn't seem tosupport any kind of additional hit on the capital that you bring on.

Ron Logue

Right.

Brian Bedell - Merrill Lynch

I think you mentioned quickly onIFIN, you said the retention is currently on track you have retained all of theclients so far or most of the clients?

Ron Logue

On the top 30, we only know ofone that's leaving.

Brian Bedell - Merrill Lynch

Okay. So is it fair to say youare ahead of your 90% retention target as of right now?

Ron Logue

Oh yeah.

Brian Bedell - Merrill Lynch

Okay great. And then the $141million M&I charges what should we expect for charges going forward fromthe M&I one?

Ed Resch

Brian, we're going to be inlinewith what we have modeled, its just that the nature of the charge this quarterwas front loaded. The main drivers of the charges, because we abandoned our oldheadquarters building at 225, Franklin Streets, so over $90 million of the $140is because of that. But we're going to be over the transaction right in themiddle of the range we put out.

Brian Bedell - Merrill Lynch

Okay, the most of its already putthrough essentially a good chunk of it is already charged off?

Ed Resch

Yeah, but I mean the range was$250 million to $275 million, so we are going to be in the middle of that forthe whole transaction.

Brian Bedell - Merrill Lynch

Right and that's coming through'08 essentially.

Ed Resch

Yes.

Brian Bedell - Merrill Lynch

Yes, okay. Great thanks verymuch.

Ron Logue

Thanks Brian.

Operator

And our next question today willcome from Banc of America's Ken Usdin. Please go ahead.

Ken Usdin - Banc of America

Thanks. Good morning.

Ron Logue

Hi, Ken.

Ken Usdin - Banc of America

Hi, Ron. Ed, could you just walkthrough again on the capital side, 3.5% TCE this quarter? Just any idea of whenyou expect to rebuild? How gradual that will be? And then your plans for justfuture capital management, when might we see you buying back stock in thefuture, and any changes in the capital management strategy?

Ed Resch

Right. Well, in terms of the TCE,we can rebuild that fairly quickly just based on internal capital generation.And I would expect that we'd be above 4%, again holding everything constantwithin two quarters based on how much we can move it in a quarter. It's in therange of 40 basis points or so per quarter up.

In terms of the accelerated sharerepurchase, that's still ongoing. When it's concluded we will obviouslyannounce that. But that's still progressing. And in terms of the fourthquarter, I think it's fair to say given everything that we have talked abouttoday on the call relative to capital and other things, we are not going to bebuying back any stock in the fourth quarter and as we move forward into '08 wewill be still carrying forward our philosophy of buying enough to offset comprelated dilution, but committing to not much beyond that. We want to retain ourflexibility from a capital standpoint. So, back to I would say business asusual, at least at this point going into '08.

Ken Usdin - Banc of America

Okay. Got you. And on IFIN, youmentioned $30 million on 120 run rate this quarter. I know you are on track toget 350. Can you just talk about where you are as far as timing of getting to350? Are you are ahead of plan at all? Are we going to see kind of ratable? Canyou just run us through, now your current thinking as far as that deal model ofrecognition of cost saves?

Ed Resch

Yeah. I think that the deal modelas we outlined it is basically in line from an expense reduction standpoint,where the reductions will occur pretty much ratably overtime as we've modeledit, lined up with the conversions that I talked about.

The real increment from aperformance standpoint on the IFIN transaction versus the deal model has beenon the revenue side, where we've had stronger revenue than we anticipated.We've had, as Ron noted, higher than a 90% revenue retention rate. Saying it inanother way, we've had less than 10% attrition. So, the driver are the justhaving a dilution or a little bit better than having a dilution is on therevenue side.

So, expenses will come out as wemodeled ratably. Most to be accomplished by the end of next year, maybe we'llhave a little bit spilling over in to the first quarter of '09 from the expensestandpoint.

Ken Usdin - Banc of America

And from an accretion dilutionperspective, can we take the same magnitude of change in '07, and take that tothe magnitude of accretion versus the original flat guidance, or is there evena little bit more pickup because you get into the business going better thanyou expected also?

Ed Resch

Well, I wouldn't extrapolate thestrength this quarter into '07. I think that we had a better start from arevenue standpoint, as I pointed out and what we had modeled. But as we thinkabout '08 right now, based on everything we are seeing with the customers andall the conversion plans that are in place, we are going to do better than flatnext year. But I wouldn't want to get too far into that at this point.

Ken Usdin - Banc of America

Okay. And then last thing just onIFIN also, just on the revenue side, can you give us even just some color ofany examples of revenue synergies? I know you hadn't quantified any, you hadstill the net negative synergy built into your model upfront. Can you talkabout your outlook on revenue synergies? Any examples you've already gotten ormagnitude of such?

Ron Logue

Ken, this is Ron. We are verypretty sure we are going to get some cross-sale revenue. Those things arebeginning to start, but you are not going to see anything in the third quarterand in the fourth quarter of any substance. A lot of that will happen as thoseaccounts get converted. So, we don't see a whole lot there right now in termsof what we consider a cross-sale, and as you know there was no cross-salerevenue in the deal model.

Ken Usdin - Banc of America.

Right. So that's not in your planfor '08 either?

Ron Logue

Well, some will be, but it's notnecessarily in the plan.

Ken Usdin - Banc of America.

That's what I mean. It's not inthe plan for '08, okay. Thanks a lot.

Operator

Our next question today will comefrom Gerard Cassidy with RBC Capital Markets.

Gerard Cassidy - RBC Capital Markets

Thank you. Hi, Ron.

Ron Logue

Hi, Gerard.

Gerard Cassidy - RBC Capital Markets

Question on the business wins, Iknow it's a sensitive subject, but how much of the business wins may have beendue to your large competitor that's going through an integration just versuspure plain old, good old fashion business wins?

Ron Logue

It's hard to tell, Gerard. Ithink there is a lot of other thinking going on when big organizations move. Alot of it really has to do with accounting, not necessarily custody, and someof these situations are caused by realization that accounting no longer wantsto be internalized, and usually when that happens there, there aren't too manyorganizations that they can go to so and get things done at scale as they arebig organizations. So that plays a big role.

Gerard Cassidy - RBC Capital Markets

I see. And then Ed on youroutlook for the different interest rate environments from the different partsof the world, can you list the top two which has the biggest impact on themargin?

Ed Resch

Well, the biggest one, by far, isthe USrate environment, and then probably to say a year old after that Gerard.

Gerard Cassidy - RBC Capital Markets

Great. Thank you.

Ron Logue

Sure.

Operator

And our next question will comefrom Dave Hilder with Bear Stearns. Please go ahead.

Dave Hilder - Bear Stearns

Good morning and congratulationson a great performance, and thanks for the guidance. Just a couple of unrelatedquestions, Ron, it certainly seems like directionally you are thinking aboutreducing the size of the conduit, is that fair?

Ron Logue

Well, we are going to take a lookat it. I think it's very, very important that we protect our capital ratio, andI think probably the one big variable this quarter is the kind of marketdisruption that we've seen, and I think we need to make sure that we can beprepared for very unusual, I guess, I had used the word unprecedented markettype disruptions coming from different angles, and one of the ways to deal withthat is to insure your capital ratio, and I think that's important. Soovertime, directionally you are going to see us do things that protect thoseratios, and this could be one of those things.

Dave Hilder - Bear Stearns

That certainly sounds like a goodstrategy. In the quarter, Ed, could you tell us what roughly the amortizationof intangible expenses was?

Ed Resch

Sure. Okay for Q3 $15 millionplus another $17 million. So $32 million of intangible amortization and thatincludes both Currenex and IFIN.

Dave Hilder - Bear Stearns

Okay. Great. Thank you. And onthe IFIN, the one of the top 30 clients of IFIN that you know is leaving. Iassume that's Barclays.

Ron Logue

No.

Dave Hilder - Bear Stearns

And then this is a tougher one onthe Prudential suit, Ron, you described the complaint is really outlining adisclosure of communication issue. But the complaint also notes that State Street was ina risk of fiduciary. And as I understand the standard of judgment there wouldbe higher for a liability, really more of a prudent investor standard ratherthan simply a disclosure issue as you might have in a different type of action?

Ron Logue

As you might imagine, I reallycan't comment based on the litigation, Dave.

Dave Hilder - Bear Stearns

Okay. Well, I did want to giveyou a chance.

Ron Logue

Yeah. Okay.

Dave Hilder - Bear Stearns

Thanks very much for all theinformation you've provided.

Ron Logue

You're welcome.

Operator

(Operator Instructions). Movingon, we will now hear from Andrew Marquardt from Fox-Pitt Kelton. Please goahead.

Andrew Marquardt - Fox-Pitt Kelton

Good morning, guys.

Ron Logue

Good morning.

Andrew Marquardt - Fox-Pitt Kelton

Sorry, if I missed it, but interms of the net interest margin outlook, can you talk about the sensitivity tothe ECB and changes in the rates there?

Ed Resch

Well, it's the second mostimportant currency after the US dollar, but still the vast majority of thesensitivity as it relates to our rate expectations is relative to the USdollars. So, I don't want to put it in terms of a basis point affect on them,but it's not terribly significant relative to the dollar.

Andrew Marquardt -Fox-Pitt Kelton

Okay. And then what would be thescenario that would make the margin in general go down for you guys? It seemslike there are a lot of factor that make you go up.

Ed Resch

Well, I think the biggest onewould be if we saw a reduction in the currently favorable customer flows thatwe've talked so much about. If they were to decline overall, if they were to beless transaction accounts, which are a very low cost for financing or there wasto be a less attractive mix. That's probably the biggest potential risk if Ican call it that. It's what we have said in terms of the margin. But again wedon't see those things happening. And that's why we gave the guidance that wegave relative to next year.

Andrew Marquardt - Fox-Pitt Kelton

Great. That's helpful. Lastly, interms of asset-backed CP programs, can you comment in all about the news aroundthe creation of the super conduit over the weekend and then early this week,and how that might affect your dealings with the situation and any color on that.

Ron Logue

It's probably something that'sbeneficial for the market. But it's not really going to affect us, because wedon't have any sales as you know. So, you wouldn't see us participate in it anyway but anything that can come to market is going to be a plus for us.

Andrew Marquardt -Fox-Pitt Kelton

Okay. Thank you.

Ron Logue

I think we can take one morequestion.

Operator

And the final question fromtoday's roster will come from Tom Mccrohan from JanneyMontgomery Scott. Your line is open. Please go ahead.

Tom Mccrohan - Janney Montgomery Scott

Hi. Thanks for taking the call.

Ron Logue

Hi, Tom.

Tom Mccrohan - Janney Montgomery Scott

Great results. Couple offollow-up questions, most have been answered. The treasury-led [master] conduitthat's been discussed in the papers, are you guys participating in thosediscussions in anyway?

Ron Logue

No. We are not.

Tom Mccrohan - Janney Montgomery Scott

Would you benefit from that inany way or --?

Ron Logue

No. We don't think so. Because wedon't have any sales other than the market generally benefiting would help us.But we have no need to participate. We don't have any of those types of assets.So, there would be no direct benefit.

Tom Mccrohan - Janney Montgomery Scott

No direct benefit. Great. And inconnection with the relatively weak US dollar, can you guys just quantify if atall, how your results could have been benefiting from a weak US dollar?

Ed Resch

Yeah. Overall Tom, it's a coupleof percentage points of revenue growth on an annual basis.

Tom Mccrohan - Janney Montgomery Scott

Yes.

Ed Resch

And that obviously offset to themost part by a similar growth in expenses, given the fact that we are matchedpretty much in terms of revenue in expense by currency.

Tom Mccrohan - Janney Montgomery Scott

Perfect. Okay. And my lastquestion, really just again on the TCE ratio, Ed from your earlier comments, itseemed like the ratio was really adversely impacted somewhat from you guystaken a more defensive posture during the quarter. You talked about being alittle more liquid, and you had previously talked about a projected pro formaTCE ratio of about 4.4% I believe, if you guys close the IFIN deal. So, if wejust assume that the 3.5% ratio we saw this quarter is primarily a function ofsimply this posturing?

Ed Resch

Well, that's part of it. As I'vesaid, as part of our contingency planning, given the market events that we sawraised incremental liquidity, and that at quarter end was about $7 billion, andthat was held and obviously invested on the asset side in short-terminstruments. So yes, that's part of it. But, again it's going to take us acouple of quarters all out sequel to build our ratio back to where we want itto be.

Tom Mccrohan - Janney Montgomery Scott

When you talked about growth nextJune, the balance sheet of 5 to 10, also the kind of a normalized balancesheet, you are normalizing pretty much for the added liquidity?

Ed Resch

Well, yes right, exactly. So, ifyou take out the incremental liquidity we had in the third quarter, you cankind of roll the balance sheet forward and apply growth rate to it.

Tom Mccrohan - Janney Montgomery Scott

But what would have been anormalized balance sheet this quarter?

Ed Resch

Well take about $7 billion of theaverage.

Tom Mccrohan - Janney Montgomery Scott

Take $7 billion off, okay.

Ed Resch

Yes.

Tom Mccrohan - Janney Montgomery Scott

Great, thanks very much.

Ron Logue

Okay.

Operator

And there is no additional timefor further questions. I would like to turn the call back to the Mr. Logue foradditional or closing remarks.

Ron Logue

Thank you, and thank you all forattending. I know we gave you an awful lot of data today. We thought it wasvery important given what's happened in the third quarter, that you have whatyou need that would hopefully differentiate some of the programs we have fromsome of the others. And again, I thank you very much for the time.

Operator

Thank you everyone for yourparticipation. That does conclude today's conference. Everyone have a greatday.

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