When investors think of Northern Trust (NASDAQ:NTRS), they likely think of private banking services for many of the most affluent families in the United States. Northern Trust's roots date to 1889, when the bank was founded to help manage the wealth of Chicago tycoons who were leading the country into the industrial era. But while its reputation may be rock-solid, its recent third-quarter results reveal the risk involved in its line of business.

Private banking remains a valuable and desirable enterprise. The relationships that Northern Trust forms with its clients tend to endure for generations. In addition, the market for private banking services -- a segment defined by individuals with at least $1 million of investable assets -- is growing faster than the overall population. With a highly regarded reputation, a wide breadth of advisory expertise, and numerous office locations throughout the country, Northern Trust is well-positioned to continue to gain share in this competitive market.

Most of the revenue generated by Northern Trust's private banking activity comes from fees based on the value of assets under management. Northern Trust's Corporate and Institutional Services unit also earns much of its income from fee-based services. Together, fees earned by these two units generate more than half of Northern Trust's revenue. This arrangement is attractive because it makes the bank's revenue stream relatively stable.

The third-quarter results, however, should remind investors that Northern Trust is engaged in significantly riskier activities than simple asset custody or management. Revenues from foreign exchange trading fell by $31.6 million, a 38% decline from the second quarter. Revenues from securities lending dropped by $20.3 million, a change of 33%. Northern Trust's net interest margin, the interest rate spread between income from the bank's loans and interest expense for short-term funds, declined slightly and pressured overall net interest income. Net interest income was also hurt by higher provisions for loan losses. The combined result of these items was that third-quarter earnings slipped by 3%, despite growth in custody and management fees.

These unwelcome results in the third quarter are a reminder of some of the risks contained in Northern Trust's stock, but they should not overshadow the bank's competitive strengths and growth prospects. Year-over-year results tell a different story, with noninterest income up 10% and net interest income up 8%. Year-to-date performance for Northern Trust has been robust, with a 13% increase in net income compared to the first nine months of 2005. The company is also seeing its investment in international expansion pay off with a 30% increase in global custody assets. Accordingly, investors might consider Northern Trust an attractive investment at a current P/E multiple of 20. At such a valuation, the bank's stock compares favorably to rivals like JPMorgan Chase (NYSE:JPM), Charles Schwab (NASDAQ:SCHW), and Mellon Financial (NYSE:MEL).

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Fool contributor Michael Leibert welcomes your feedback. He does not have a position in the shares of any of the companies named in this article.