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Edited Transcript of NTRS earnings conference call or presentation 23-Oct-19 2:00pm GMT

Q3 2019 Northern Trust Corp Earnings Call

CHICAGO Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Northern Trust Corp earnings conference call or presentation Wednesday, October 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark M. Bette

Northern Trust Corporation - Senior VP, Director of IR

* Stephen Biff Bowman

Northern Trust Corporation - Executive VP & CFO

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Conference Call Participants

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* Alexander Blostein

Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst

* Betsy Lynn Graseck

Morgan Stanley, Research Division - MD

* Brennan Hawken

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials

* Brian Bertram Bedell

Deutsche Bank AG, Research Division - Director in Equity Research

* Brian Matthew Kleinhanzl

Keefe, Bruyette, & Woods, Inc., Research Division - Director

* Glenn Paul Schorr

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst

* James Francis Mitchell

The Buckingham Research Group Incorporated - Research Analyst

* Kenneth Michael Usdin

Jefferies LLC, Research Division - MD and Senior Equity Research Analyst

* Michael Lawrence Mayo

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Michael Roger Carrier

BofA Merrill Lynch, Research Division - Director

* Robert Henry Wildhack

Autonomous Research LLP - Analyst of Payments and Financial Technology

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Northern Trust Corporation Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Mark Bette, for opening remarks and introduction. Please go ahead.

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [2]

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Thank you, Anna. Good morning, everyone, and welcome to Northern Trust Corporation's Third Quarter 2019 Earnings Conference Call. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; Lauren Allnutt, our Controller; and Kelly Lernihan from our Investor Relations team.

Our third quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This October 23 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through November 20. 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 expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2018 annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.

During today's question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits.

Thank you again for joining us today. Let me turn the call over to Biff Bowman.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [3]

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Good morning, everyone. Let me join Mark in welcoming you to our third quarter 2019 earnings conference call. Starting on Page 2 of our quarterly earnings review presentation. This morning, we reported third quarter net income of $384.6 million, earnings per share were $1.69 and our return on common equity was 14.9%.

For the quarter, our effective tax rate of 24.4% was higher than prior periods, primarily reflecting higher U.S. taxes payable on the income of the corporation's non-U. S. branches. Our current expectation is that this quarter's tax rate is indicative of our ongoing core rate for future quarters, although it is possible that clarifying guidance from the IRS could favorably impact the corporation's effective tax rate if and when issued.

Before going through our results in detail, I would like to comment on some macro factors impacting our business during the quarter. Equity markets performed well during the quarter but were mixed on a year-over-year basis. Compared to the prior year, the S&P 500 ended the quarter up 2.2%, while the MSCI EAFE was down 1.5%. On a sequential basis, end-of-period markets were favorable with the S&P 500 and EAFE indices increasing 1.2% and 1.1%, respectively.

Recall that some of our fees are based on lagged pricing, and those comparisons were favorable on a sequential basis but mixed versus 1 year ago. On a month-lag basis, the S&P 500 and EAFE were up sequentially 3.7% and 0.9%, respectively. On a year-over-year basis, the S&P 500 was up 4.9%, while EAFE was down 2.3%. On a quarter-lag basis, the S&P and EAFE were sequentially 3.8% and 1.6%, respectively. And on a year-over-year basis, the quarter-lag S&P 500 was up 8.2%, while EAFE was down 0.8%.

U.S. short-term interest rates were lower during the quarter on average, as reflected in the sequential declines in average 1-month and 3-month LIBOR of 26 and 31 basis points, respectively.

Currency rates influenced the translation of non-U. S. currencies to the U.S. dollar and, therefore, impact client assets and certain revenues and expenses. The British pound and euro versus the U.S. dollar both ended the quarter down 6% compared to the prior year. The year-over-year declines favorably impacted expense but had an unfavorable impact on revenue. On a sequential basis, the British pound and euro ended the quarter down 3% and 4%, respectively.

Let's move to Page 3 and review the financial highlights of the third quarter. Year-over-year, revenue increased 4% with noninterest income up 5% from 1 year ago and net interest income up 2%. Expenses increased 3% from last year. The provision for credit losses was a credit of $7 million in the current quarter compared to a credit of $9 million 1 year ago. Net income was up 3% year-over-year.

In the sequential comparison, revenue increased 2%, with noninterest income up 3% and net interest income flat. Expenses increased 3% compared to the prior quarter. Net income declined 1% sequentially. Return on average common equity was 14.9% for the quarter, down from 15.1% 1 year ago and 15.9% in the prior quarter.

Assets under custody and administration of $11.6 trillion increased 7% compared to 1 year ago and were up 2% on a sequential basis. Assets under custody of $8.8 trillion were up 7% compared to 1 year ago and up 3% sequentially. Both the year-over-year and sequential performance was driven by new business and favorable markets, partially offset by the impact of unfavorable moves in currency exchange rates.

Assets under management were $1.2 trillion, up 3% on a year-over-year basis and up 2% on a sequential basis. The year-over-year performance reflected higher markets and new business, partially offset by unfavorable currency translation.

Let's look at the results in greater detail, starting with revenue on Page 4. Third quarter revenue on a fully taxable equivalent basis was $1.5 billion, up 4% compared to last year and up 2% sequentially. Trust, investment and other servicing fees represent the largest component of our revenue and were $976 million in the third quarter, up 4% from last year and up 2% sequentially.

Foreign exchange trading income was $60 million in the third quarter, down 17% year-over-year and down 1% sequentially. The year-over-year decline was primarily related to lower foreign exchange swap activity in our treasury function.

Other noninterest income was $85 million in the third quarter, up 54% compared to 1 year ago and up 16% sequentially. The year-over-year increase was driven by income relating to a bank-owned life insurance program implemented in the prior year, higher brokerage-related revenue and an $8.1 million investment impairment recorded in the prior year. The sequential performance was driven by the full quarter's impact of the bank-owned life insurance program as well as strong brokerage-related revenue.

Net interest income, which I will discuss in more detail later, was $425 million in the third quarter, increasing 2% year-over-year and was flat sequentially.

Let's look at the components of our trust and investment fees on Page 5. For our Corporate & Institutional Services business, fees totaled $560 million in the third quarter and were up 3% year-over-year and up 2% on a sequential basis. The translation impact of changes in currency rates reduced year-over-year C&IS fee growth by just over 1.5%.

Custody and fund administration fees, the largest component of C&IS fees, were $392 million and up 5% year-over-year and up 2% on a sequential basis. The year-over-year performance was primarily driven by new business, partially offset by the impact of unfavorable currency translation. On a sequential basis, the impacts of new business and favorable markets were partially offset by unfavorable currency translation.

Assets under custody and administration for C&IS clients were $10.9 trillion at quarter end, up 7% year-over-year and up 2% sequentially. Both the year-over-year and sequential performance was primarily driven by new business and favorable markets, partially offset by the impact of unfavorable moves in currency and exchange rates.

Recall that lagged market values factor into the quarter's fees, with both quarter-lag and month-lag markets impacting our C&IS custody and fund administration fees. Investment management fees in C&Is of $115 million in the third quarter were up 6% year-over-year and up 4% sequentially. Both the year-over-year and sequential performances were driven by new business and favorable markets.

Assets under management for C&IS clients were $901 billion, up 3% year-over-year and up 2% sequentially. The year-over-year increase was driven by favorable markets, new business and an increase in securities lending collateral levels, partially offset by unfavorable currency translation. The sequential increase was primarily driven by sequential growth in securities lending collateral levels and favorable markets, partially offset by unfavorable currency translation.

Securities lending fees were $20 million in the third quarter, down 17% year-over-year and down 8% sequentially. The year-over-year and sequential declines were primarily driven by lower spreads. Securities lending collateral was $178 billion at quarter end and averaged $176 billion across the quarter. Average collateral levels increased 4% year-over-year and were up 7% sequentially.

Moving to our Wealth Management business, trust, investment and other servicing fees were $416 million in the third quarter and were up 4% compared to the prior year and up 2% sequentially. Assets under management were $300 billion at quarter end, up 2% both on a year-over-year and sequential basis. The year-over-year and sequential performances for both fees and AUM were driven by a combination of new business and favorable markets.

Moving to Page 6. Net interest income was $425 million in the third quarter, up 2% year-over-year. Earning assets averaged $105 billion in the quarter, down 7% from the prior year. Total deposits averaged $89 billion and were down 5% versus the prior year. Interest-bearing deposits declined 2% from 1 year ago to $72 billion. Noninterest-bearing deposits, which averaged $17 billion during the quarter, were down 14% from 1 year ago. Loan balances averaged $31 billion in the quarter and were down 3% compared to 1 year ago.

The net interest margin was 1.61% in the third quarter and was up 14 basis points from a year ago. The improvement in the net interest margin compared to the prior year primarily reflects a balance sheet mix shift, the impact of lower foreign exchange swap volume and the impact of higher short-term interest rates versus 1 year ago.

On a sequential quarter basis, net interest income was flat. Average earning assets declined 1% on a sequential basis as deposit levels were down slightly from the prior quarter. On a sequential basis, the net interest margin remained flat.

Looking at the currency mix of our balance sheet. For the third quarter, U.S. dollar deposits represented 69% of our total deposit. This is flat versus 1 year ago and up from 67% in the prior quarter.

Turning to Page 7. Expenses were $1 billion in the third quarter and were 3% higher than both the prior year and sequentially. The impact of favorable moves in currency translation benefited expense by almost 1 percentage point on a year-over-year basis.

Compensation expense totaled $458 million and was up 5% compared to 1 year ago. The year-over-year growth was primarily relating to higher salaries, driven by staff growth and base pay adjustments, partially offset by the impact of favorable currency translation. On a sequential basis, compensation was up 1%.

Staff levels increased 5% year-over-year and 1% sequentially. The majority of staff growth continues to be attributable to staff increases in lower-cost locations, which include India, Manila, Limerick, Ireland and Tempe, Arizona.

Employee benefit expense of $88 million was up 2% from 1 year ago and was down 2% sequentially. The year-over-year growth was driven primarily by higher payroll withholding and medical costs, while the sequential decline was primarily due to lower withholding costs, partially offset by higher medical costs.

Outside services costs of $194 million were up 4% both on a year-over-year and sequential basis. The year-over-year growth was driven by higher technical services, consulting and legal expense, partially offset by lower sub-custody expense. The sequential increase was primarily due to higher technical services, which had included a $6 million vendor credit in the prior quarter as well as higher third-party adviser, consulting and management, partially offset by lower sub-custody expense.

Equipment and software expense of $152 million was up 4% from 1 year ago and was up 3% sequentially. Both the year-over-year and sequential growth was driven by higher maintenance and support costs and higher depreciation and amortization costs. The year-over-year growth was partially offset by higher software disposition costs in the prior year.

Other operating expense of $92 million was down 5% from 1 year ago and up 20% sequentially. The decline from a year ago was primarily relating to lower FDIC premiums. The sequential increase was driven by higher business promotional spend primarily associated with the Northern Trust golf tournament, which was held during the quarter.

As we have discussed on previous calls, through our Value for Spend initiative, which we started in 2017, we have realigning our expense base with the goal of realizing $250 million in expense run rate savings by 2020. We continue to embed a sustainable expense management approach. Our third quarter results reflect approximately $56 million in expense savings, reducing the year-over-year expense growth rate by approximately 2.5 points. This would equate to approximately $225 million on an annualized basis against the $250 million goal.

Turning to Page 8. A key focus has been on sustainably enhancing profitability and returns. This slide reflects the progress we have made in recent years to improve the expense-to-fee ratio, pretax margin and ultimately, our return on equity. The ratio of expense to fees is a particularly important measure of our progress as it addresses what we can most directly control. We remain focused on continuing to drive organic growth in our business and managing our expenses to improve our efficiency and productivity.

Turning to Page 9. Our capital ratios remain strong with our common equity Tier 1 ratio of 12.9% under the standardized approach and 13.7% under the advanced approach. The supplementary leverage ratio at the corporation was 7.6% and at the bank was 7.0%, both of which exceed the 3% minimum requirement.

As Northern Trust progresses through fully phased-in Basel III implementation, there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules.

During the third quarter, we repurchased 3.4 million shares of common stock at a cost of $307 million. We also increased our quarterly dividend to $0.70 per share. These 2 actions combined represented a payout ratio of approximately 125% for the quarter.

In closing, Northern Trust performed well in the third quarter. Our 4% year-over-year growth rate for both trust, investment and other servicing fees and total revenue compared to our 3% growth in expense generated positive fee and total operating leverage. Our results produced a pretax margin of 33.4% and a return on average common equity of 14.9%. Our balanced business model continues to generate organic growth, and we remain focused on providing our clients with exceptional services, improving our productivity and driving profitable growth.

On a personal note, I just want to offer a quick thank you. As recently announced, I will be stepping down from my role as CFO effective January 1 and retire from the Northern Trust on February 28. I've enjoyed my 5-plus years as CFO and working with each one of you. Jason Tyler, who's currently the CFO of our Wealth Management business, will become CFO as of the 1st of the year. I wish Jason the very best as he takes on this new role, and I am confident he will be very successful in that role.

Thank you again for participating in Northern Trust's third quarter earnings conference call today. Mark and I would be happy to answer your questions. Anna, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll now take a question from Glenn Schorr with Evercore.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [2]

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A question on net interest margin. This comes up in conversation, and I don't know if this is even a good way to look at it, so I want to throw it to you. If you look at you versus your peers, your NIM is highest relative to prior cycle lows when rates were near 0 versus peers. Now I don't think we're even going towards 0 rates -- to 0 rates, but whatever. Do you think that, that is an okay way to even evaluate things? And B, if so, what do you think explains that? It's just that your duration is a little longer than you used to. Just curious on what you think has changed in the mix to -- that you would have been able to sustain that better.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [3]

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That our NIM is higher than other peers, that's your question, [or is it the low]...

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [4]

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Versus prior cycle lows. In other words, where everybody bottomed out when rates were 0, you're in the range of like 37, 40 basis points above that. Others are like a lot closer to it now.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [5]

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I believe that's probably the mix of our clients and the mix of our balance sheet is probably the difference there. I think, a, our retail deposits and our wealth business make up a greater proportion of our balance sheet. You've got to look at a mix between our on -- or foreign office deposits and U.S. deposits and then the loan portfolio relative to the size, and I know it's been flat for us. But all of those combined, I think, produced a slightly different net interest margin versus peers. Because we're not absolutely the same in look and feel as all of those. So I would say it's probably a difference in the mix of the balance sheet that lends itself to that. Because on the institutional side, the pricing is competitive, so we would likely have deposit costs of a similar nature but we have a little bit bigger piece of what I will call the wealth side of the business and I think that may help mute the lows.

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Glenn Paul Schorr, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Research Analyst [6]

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Yes. And maybe just a follow-up. As you look forward, there's a lot of puts and takes on deposit betas not being as close to 100% as everybody hoped they would be on the way down. But knowing what we know today with forwards, with what's expected in further rates, just how do you help us think about next year and beyond, given all those puts and takes around the NIM?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [7]

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Yes. I think you have to probably pull our balance sheet apart a little bit to understand the betas. So if you look at, for instance, on the retail side of our deposit betas, the beta would look low -- low-ish, but we had some -- the discontinuation of our anchor suite and we had some promotional pricing, so the beta would be quite low on that.

If you look at the foreign office deposits, and remember, about half of the foreign office deposits aren't in dollars. But if you look at the move down and then extrapolate how much of that was dollars, the beta was actually quite high. I would say the beta was relatively symmetrical with what we saw on the way where we were as we had rates rising. So it's coming down, I think, in general, along that rate. It's a little cloudier to see this quarter because of some of the promotional things we had in the wealth space and others that worked themselves through at the end of the third quarter, and we would anticipate a more symmetrical beta for that in the fourth quarter. But I think if you look at that, the beta was actually fairly high on what I would call institutional dollar-based deposits.

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Operator [8]

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We'll now take a question from Brian Bedell from Deutsche Bank.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [9]

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Congrats. Best of luck. The question is on the net interest income being a little bit -- obviously, NIM being a little bit better than we thought. Can you talk about the drivers on the short-term side of the balance sheet? So the asset yields on the short side seem to go down less than we would have thought. Maybe talk about the resiliency of that and sort of how should we think about that going into the fourth quarter?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [10]

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I hope that was your phone breaking up there. I couldn't tell if that was you or us. Are you -- can you hear us okay? Your phone broke up.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [11]

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Yes.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [12]

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Okay.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [13]

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You were breaking a bit. Can you hear me better now?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [14]

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I can, yes. Sorry about that.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [15]

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And did you hear my question?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [16]

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I think it was around the short term. Can you repeat it real quickly?

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [17]

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Yes, sure. Yes. Yes, the yields on the short-term side of the balance sheet on the asset side seemed to go down less than we had thought. So I was just wondering if you could talk about some resiliency in that, relative to short-term rates basically. And then is there a catch-up coming in the fourth quarter, assuming we have obviously an October Fed cut?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [18]

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Yes. So if you think about that on the rates and the resiliency, one, you still have to remember that our rates are lapping a period where, in general, a year ago, they're higher today than they were a year ago. So that's part of it. And then if you look at the sequential resiliency or how that would hold up, I think there's probably a series of factors in there in the asset yield. One is we've extended some of the duration in our portfolio, which I think has helped mitigate some of that across those yields.

Currency mix and other things can help mitigate some of the currency yield impacts that you see across the portfolio, and then just a variety of investment strategies that we have and the instruments we have, have held up pretty well across the short-term end of the portfolio. We've got more in securities than we do sort of shorter-duration money market type bank rates at this point. So all of those have held up.

And then last thing I'd add is from our own projections from where we thought we would have in the quarter, the spread between LIBOR and Fed funds was actually a little bit better. Even though it compressed our own projections, it didn't compress as much as perhaps we had forecasted.

In terms of the fourth quarter, I think you had asked, are we just storing this up for the fourth quarter. I think perhaps, it might be beneficial if we give you a quick thought on the fourth quarter as we've been.

Right now, we would suggest that -- and there's obviously a lot of puts and takes in the fourth quarter yet to come. But if we assume one cut from the Federal Reserve this month, we would think that our net interest income would be down approximately 1% to 3% sequentially. So while there is still pressure on the asset yields and sensitivity to that, we still think it's relatively modest in terms of its impact sequentially.

There's obviously a lot of underlying assumptions in that forecast, and we're going to give you an update on that in December as we see the size of the balance sheet and other factors being much more clear 2 months into the quarter. And in fact, whether we get a hike or not, we'll obviously be in there. But that 1% to 3% is off of the $425 million we had this quarter and it assumes one cut in October.

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [19]

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And Brian, this is Mark, just to add one count. When you're really looking at the real short end of the balance sheet, so the short term, let's call it, interest-bearing deposits, so that would be the interest-bearing deposits with banks, the Central Bank deposits, the mix of U.S. currency within that, let's call it, money market kind of category is actually more like 1/3 of the total. So the lower U.S. rates will not have as much of a drag when you're looking at the very short end of the balance sheet for those line items.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [20]

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Right, right. So yes, the geographic diversification definitely helps you. Great. And then just on expenses, you're most of the way through the program, another $25 million. And I know you've said in the past, this is going to be an ongoing effort.

So just on the third quarter, I think expenses were up 3% sequentially versus 2% revenue, but was that all due to the Northern Trust Open unrelated expense? And then going forward, are we still in that position where you're trying to achieve expense growth at a pace that is no higher than your organic revenue growth? And maybe if you want to just comment on organic revenue growth for the quarter.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [21]

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Yes. So the last part of your question is our thinking. We still are having our organic growth rate provide, if you will, as a governor over the organic expense growth rate that the firm should intend to sustain to produce that. The Northern Trust, on a sequential basis, drives about half of the growth rate of expenses, maybe a little less than that but in the vicinity of about half of that. So you can take about half of the growth rate out because of sort of a onetime seasonal event.

But probably more important to your question was around the organic expense growth rates that we're seeing. Again, in line, I think, with -- generally in line with our organic expense growth rate, we've done a good job of getting the organic growth rate in the firm and the organic expense growth rate in the firm better aligned. And that continues to be an internal target and goal that we strive to get those very much in line. If we see organic growth slow, then we try to do as quick as we can to increase the pace of saves in our expense base to achieve that organic leverage or at least organic neutrality, and we are trying to get organic leverage.

Lastly, I think you asked about our organic trends in the quarter. Again, on the fee side, we saw good new business, good growth, and generally in the range as we've talked about, or near the range as we've talked about. And so I think you can kind of see that through our numbers, and the fee growth rate is outstripping markets and is pretty strong versus the competitors, and a lot of that is organically driven.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [22]

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And that's about mid-single-digit pace in terms of what -- in terms of organic growth, is that correct?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [23]

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I think we've talked about a 4% to 5% range.

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Brian Bertram Bedell, Deutsche Bank AG, Research Division - Director in Equity Research [24]

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Yes, exactly.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [25]

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Over time, I think we've explained to you in the past, we have years that it's 3%, we have years that it's 5% and we've tried to circle that range. It's in that, whether what do you want to call that, low to mid-single-digit range is where we're tracking. And I think if you -- but you could back markets out and currency out and probably get there in your own analytics.

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Operator [26]

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We'll take our next question from Ken Usdin with Jefferies.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [27]

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Best of luck, Biff. Can I ask a couple of just cleanup ones? Can you help us just understand the amount that the BOLI increased in both NII and fees, what the Visa expense was and if there was any change in premium amortization sequentially?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [28]

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Yes. I got to write those down, make sure we get all those. The BOLI impact with -- in the third quarter probably reduced net interest income by about $7 million but it produced $9 million or so in other income. And then as a tax benefit, too, it helps the tax rate by approximately 0.2%.

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [29]

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And that was about half reflected in the prior quarter, Ken. So if you're looking at it sequentially, we picked up another about $4.5 million in other operating income and would have had a drag of, call it, $3.5 million on the NII side sequentially.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [30]

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So you wanted BOLI, Ken, make sure we got all...

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [31]

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Yes, the Visa and if there was any change in premium am.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [32]

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Yes. On Visa, on a year-over-year basis, the mark for Visa was pretty comparable. It was actually, I think, slightly lower this year. On a sequential basis, the mark on Visa was up just a little under $7 million sequentially. And that was driven by -- the factors that we evaluate are the Visa stock price, the time to maturity of the litigation and then our ownership interest in that or the conversion factors. And those can move from time to time. And so it was a...

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [33]

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It was a $7 million this quarter but $3 million last quarter. $7 million was the number. But yes, sequential was $4 million.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [34]

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Sequential was a $4 million increase. It was $7 million in total in the quarter and a $4 million increase sequentially. And year-over-year, roughly flat.

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Kenneth Michael Usdin, Jefferies LLC, Research Division - MD and Senior Equity Research Analyst [35]

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Understood. And then just the last -- yes, go ahead. Biff, go ahead.

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [36]

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The premium amortization -- yes. So with the premium amortization for us, we've given you guys a range of $10 million to $12 million. Our portfolio, it has a series of exposures, Ginnie Mae, Freddie Mac, Fannie Mae exposures, but by and large, have a larger concentration of securities that have structural attributes for the loan balances that help minimize prepay variability. So we don't see maybe as much as you might see across other portfolios where you've seen maybe greater movement, it's just the nature of the instruments we hold in our securities portfolio.

So that range is still -- we could see it maybe widen a little bit. We might see it move closer to between $8 million and $12 million than that. But generally, we trade continually in that range. And it hasn't been, I think, a marked impact in terms of its impact on our NII. So hopefully, that explains that. I know intuitively, you may have thought that you would see some pickup in that, but the nature of the portfolio we have and some of the features of that portfolio still tend to be keeping the amortization in a band that is generally in line with what we've guided you guys to.

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Operator [37]

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We'll take our next question from Alex Blostein with Goldman Sachs.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [38]

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Congrats on retirement as well. Real quick on NIR. Thanks for the update there. I guess if I look at the size of the balance sheet and your guidance, what do you guys sort of contemplate there for Q4? So in other words, like balance sheet kind of stays flattish, is that the idea? And then if the bulk of the decline is really driven by the NIM contraction sequentially, if we sort of look at LIBOR effect on spread in the quarter so far and you kind of look at the forecast, it actually looks to widen. It was flattish for the last couple of quarters, now it looks like sort of a positive spread of about 20 basis points. Is it crazy to think that the NIM could actually be a little bit better than what you guys are contemplating because of this wider dynamic between LIBOR and that from spread?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [39]

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Yes. So Alex, what I would say is we've made an assumption about that spread that you just talked about. The indicators would be that it could widen out wider than our forecast. So if that holds true, your comment about our assessment of the balance sheet is generally right about the size of it. And if that spread turns out to be closer to what you described, which is what the markets are indicating, we'll compare that to what we forecast. And to your point, that would probably lead to a little higher NIM. So could there be upside variability? There could. But there are an awful lot of variables. That's why we'll give you guidance at the Goldman Sachs conference in December, where we'll have a lot greater line of sight into the quarter.

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Alexander Blostein, Goldman Sachs Group Inc., Research Division - Lead Capital Markets Analyst [40]

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Totally. Yes, that all makes sense. And then my follow-up around expenses a little bit again, sort of bigger picture maybe beyond this year. But as you guys are kind of coming close to the end of the $250 million program, are there additional areas of savings you can help us sort of ring-fence as we think about sort of the levers you can pull on to make sure that beyond 2019, the expense growth remains kind of in this, I guess, low to mid-single-digit range as you try to align that with organic fee growth?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [41]

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Yes. There certainly are and there's programs under way. And I think it's important, as we've talked, we really are embedding a discipline here, of when we look at our expenses, of looking at it in, call it, 4 categories. One is, we need a certain amount of expense growth to support the type of organic revenue growth we've talked about. So some of that is just needed. So we've got that factored in.

We've got inflation in our business that comes about, you could put your own inflation factor on that. We add that to that amount needed to grow our business and then we've got investment. And when you add all that up, I will tell you that generally adds up to greater than the organic growth rate that we see for fees.

So we are driving -- there has to be productivity baked into any expense planning that will drive us back to that organic leverage amount. And so there has to be productivity of some level, probably at least equal to inflation to make our business model work. So whether we call it Value for Spend or something going forward, there's that level of expense driver in our business.

To tie that in to your question, are there still buckets or opportunities in the expense base? And the answer is absolutely. And I would say there are still lots of areas of procurement that are -- and we cited lower sub-custody expenses in the quarter, we've done some good work around our sub-custody expense, for instance, in the quarter, that's meaningfully changed some of the trajectory there from a procurement perspective.

We still have many projects and capital investments to help drive automation and robotics into our business, and we're doing one in our finance group as we speak right now, modest in size but it's the type of thing that we think are still available to help drive those expenses down. So I think there's the opportunity to drive that productivity that's necessary in the model I outlined for you.

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Operator [42]

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We'll now take a question from Michael Carrier with Bank of America.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [43]

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Biff, over last year, so deposit and interest-earning asset growth has been a bit weaker versus your organic growth trends. I realize partly the rate backdrop. But any other factors that are driving that? And then what do you think could potentially shift maybe the demand by a client?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [44]

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Well, I think the deposit growth has flattened out, you're absolutely right, or maybe even gone in slight decline. But I think again, you probably have to pull apart our businesses here a little bit. On the wealth side, some of the initiatives or the initiative we did around the discontinuation of our anchor suite product has actually brought, if you look -- go back to first quarter, somewhere a little over $3 billion, $3.5 billion of deposits. It's actually probably slightly higher than that. But the part that's most visible to see on the balance sheet is probably a little over $3 billion. So we have grown that side.

On the institutional side, I think we can see the type of variability you'll see there, particularly in foreign office deposits as a normal course of business. We've seen these cycles before. As people maybe shift currency, they shift investment strategies, particularly in reasonably volatile markets. So we have seen some of that playing itself out in particularly the foreign office deposits and the institutional deposits, where we've seen that.

We don't have feedback that it's a pricing-related issue or a pricing [issue] not at market. We get that feedback pretty fast and pretty clearly from our clients. So it's not a pricing-related item. And generally, over time, it will grow with our organic growth rates. So I would say there's not any other trends. What I will say is what you've seen is, I think you've seen the rundown of some of the -- what were excess deposits or those things that were sitting here for rate-related reasons.

The second part of your question is what could change that trajectory. I would suggest it's early, but some of the actions the Fed's taking now and if rates continue to be aggressively lowered, as a general rule, the lower they get, the more likely we are to see balance sheet growth. That's what's happened historically. I don't know if that will play out the same way this time through. That would be speculation. But historically, as quantitative easing or further easing moves, trust banks tend to be the recipients that balances that. So that could drive growth at an outsized rate versus, say, organic growth.

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [45]

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And then Mike, it's Mark, if I could add one other thing. When you're looking at the deposit trends, one thing that isn't clear looking at it externally, if you were to look at the non-U. S. office deposits, say on average, as of the fourth quarter of last year compared to where we are now 3 quarters later, a little bit more than half of that decline has actually been from some of the leveraging activity we do in our treasury group. So that's doing some short-term borrowings. That will show up on the short-term borrowing line, but it also shows up in the mix of -- when we go out and get wholesale deposits.

And the trade there has not been -- the spread that you can get on that has narrowed quite a bit so we've actually kind of pulled back on some of that activity. So like I said, over the last 3 quarters, when you look at average non-U. S. office deposits, about a little more than half of that decline has been lower leveraging activity.

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Michael Roger Carrier, BofA Merrill Lynch, Research Division - Director [46]

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Okay. It makes sense. And then just a small follow-up. The security commission revenues, they came in stronger. I realize there's more volatility in the quarter. But I think you've also been investing in some of the areas of that offering. So just any color on what drove the increase this quarter.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [47]

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Yes, it's a good question. So it is -- we've talked here about, for instance, in our brokerage business, the integrated trade solutions, where effectively we can take on the trading functionality of some of our clients who we may also have relationships with as a fund administrator or others. And we've seen that grow meaningfully. The number of clients has grown meaningfully. And it was a prime driver of that growth. So that line, as you know, is really made up of what I would say brokerage activity, it's made up of fees that we get around certain credit relationships that we have, and it's made up of...

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [48]

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So yes, interest rate swaps.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [49]

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Interest rate swaps, excuse me, which also saw all 3 of those -- thank you, I had to think of the third one there for a second, interest rate swaps. All 3 of those saw growth in the quarter but 2 of those are more episodic in nature. Interest rate swaps are probably triggered by rate movements. And I would say, generally, the brokerage business that we saw, some of that is client growth not just activity in the market. [And we're excited] about that.

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [50]

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Yes. When we looked at it sequentially and we noted in the release that core brokerage activities, interest rate swaps and referral fees, it's probably 1/3, 1/3, 1/3. And certainly, the last 2 of those are more episodic. Sometimes, we have transition revenue that comes through that's a little bit more episodic too, although that was fairly comparable this quarter versus prior.

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Operator [51]

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Our next question comes from Betsy Graseck with Morgan Stanley.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [52]

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Biff, I'm going to miss you. Really enjoy our conversations over the years.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [53]

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I'll sit in the conference.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [54]

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That would be great. Okay. Well, thanks so much for all the time and insights over the years. So a couple of other questions, a little bit of cleanup and a little bit of a strategy question. So on the cleanup questions. The long-term debt cost of funds coming down nicely. I'm assuming that's all swap. Is that what we're seeing? Almost a lockstep with the rate cuts here and so as a result, we should expect that to continue to move down. Is that an accurate statement?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [55]

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It is swap that -- yes. Yes.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [56]

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Okay, okay. And then on the Fed growing the balance sheet, I mean, they've obviously been doing some temporary open market operations just recently going to the promos. I heard you said about the QE. Have you seen any benefit from this? I mean, it's been about a month or so.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [57]

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I would say not. We have not seen any extraordinary sized flows from that at this point. So I'd say that's still pretty early, would be my intuition. It's pretty early to see. And hopefully, in a couple of months, we will have a better line of sight to that. But right now, I would say no, we've not seen any impact.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [58]

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Okay, okay. And then just lastly, a little bit more strategic question. But we talked a little bit about how you're investing in a variety of different technologies to improve your own processes as well as in some areas of [where you're] growing more rapidly. I wanted to understand the rationale for transferring the private equity blockchain technology platform to Broadridge. How is that enhancing your strategic focus and drive?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [59]

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Yes. At that point in time, I think we felt that the distribution opportunities and the growth opportunities with Broadridge were just better moved through their pipe, if I can say that, than they were through ours. But we know we have a client base that helped us deliver that product and capability, and it's one that we think we can and have commercialized inside our own group. But the ability to grow that, I think, more assertively through Broadridge was really beneficial for everything. Mark, if you've got anything else.

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Mark M. Bette, Northern Trust Corporation - Senior VP, Director of IR [60]

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I think that's the best color. It was the best commercial decision for us and that's what we decided on.

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Betsy Lynn Graseck, Morgan Stanley, Research Division - MD [61]

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But you were focused on using blockchain technology or either utilizing it or enabling it for your clients is still intact. Is that accurate even though you transferred it? Because you're a user of their platform, right?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [62]

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Yes, sure. And I want to be clear, that was just one application as it related to sort of fit the private equity field. We're using it in much broader applications than just that field. But that was one where we thought there would be perhaps a commercialization that would be better enhanced through that vehicle and ownership structure than directly owned by us, if you will. But we're using it in a variety of other type of clearing and product capabilities for our clients.

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Operator [63]

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We'll now take a question from Brennan Hawken with UBS.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [64]

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Biff, congrats on your retirement. Wish you the best. I'm sure the golf game will improve. You'll get tickets to the Northern Open in the future.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [65]

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Yes. It's got a lot of room to improve, Brennan.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [66]

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Tell me about it. So on NII, just circling back there. Thanks for all the color on that, really appreciate it. Curious about a couple of different components. Number one, when we look at the forward curve, it looks like the forward curve suggests also a cut in December. And so I know that will be late in the quarter so probably wouldn't have a big impact on 4Q. But should we count on an impact, a comparable impact going forward? Or are your assumptions around beta such that further cuts beyond the next one will have an increasing impact because you're getting -- you would be getting a little bit lower on the deposit cost side, and therefore, less room on that front? Just any additional color you could give there would be great.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [67]

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Okay. So I'll try to peel that apart a little bit. So a December cut would have nominal fourth quarter impact, you're right on that, but it wouldn't have 0 impact. I want to be clear on that. That's why we gave a range earlier because it depends on if pricing started to anticipate that earlier than the actual cut itself and you know how that works.

In terms of the impacts in the 2020, we're not going to give guidance out to 2020 at this point. There are just so many variables to that. But that being said, I think we've talked about the betas, we think, being relatively symmetrical, and I think we think that's how it is. And they are -- as you will pull apart, if you look again at the institutional dollar betas, they were pretty high and that's where they were on the way up, they were pretty high now. I think they would have some symmetry on the way down, so they would probably start to pull back a little bit. I don't know if that's with 1 or 2 or 3 highs, that would be speculation. I don't know where that point of symmetry sort of hits, but I think we would just sort of model something that looks relatively symmetrical from what we saw on the way up.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [68]

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Okay. So -- and just to clarify, like, on the way up, we saw the ramp in betas steadily increase. And so therefore, you guys are starting high and then would -- you'd see the mirror image of that, so betas would decrease.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [69]

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Yes. So I think, Brennan, if we go back, if you remember, the betas were quite low for several hikes. And then they -- the curve starts to steepen, right, through all the symmetry around that. So perhaps, the betas are quite high for some period and then start to come down. I just don't know, is that one hike away? Is that 2 hikes away -- or excuse me, 1 cut, 2 cut or 3 cuts away? I don't -- that would be speculating. I don't want to do that. But I think it's symmetrical look to the way they float on the way up and the way down.

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Brennan Hawken, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Financials [70]

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Got it. Okay. That's clear and totally logical. And my next question is on the excess reserves commentary. Just curious, it seemed like Northern didn't really get hurt, especially versus some of the larger trust bank competitors when reserves were getting drained from the system. So I'm kind of curious as to why you would think the inverse would happen. Why would you benefit with an expansion of reserves, especially relative to some of the larger competitors?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [71]

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I think as a general rule, as the rates get closer -- I think this is your question, as the rates pull back down closer and closer to 0, because we're a asset servicing provider to $11 trillion of assets under custody and administration, we've become somewhat of a natural home for what I will say are cash balances that may be indifferent but want a very financially strong liquid provider. So there's just some natural benefit of that, the tide floating all boats kind of thing like that and coming with it. And so you've got large hedge fund clients or others who say, "I'm indifferent now to a series of investment options."

I will say this time, Brennan, what I think is different is money market reform has happened and government funds and things that -- like gates and other things that were in place, some of those things have been addressed in money market reform. So the ability to have those balances not sit on a bank balance sheet that go to a fund, so they could get paid roughly 0 at a financial institution or get paid roughly 0 on a fund, they may be -- they may consider that more than they have in past cycles where rates have gone low.

So we'll have to see how that plays out. And it depends on how low rates get. I think the rates have to get lower than 1 or 2 more cuts before we would see that kind of impact. It would have to be something that gets close to where we were right after the crisis.

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Operator [72]

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We'll now take a question from Brian Kleinhanzl with KBW.

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [73]

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A quick question on the comp expense. You said it was up and staffing was up 1% quarter-on-quarter. If you go back the past couple of years, you see an uptick 4Q to 3Q as well in comp expense. Is there any reason to think that wouldn't be the same case this year?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [74]

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So I'd have to look to see. I mean there may have been -- there is some incentive compensation that's variable at some point in the fourth quarter. That might be driven by how pretax income goes. As far as the comp sequentially this quarter, one thing that definitely is different than prior years is that we, in the prior years, have had -- we've had, I think, last year about $10 million of equity retirement-eligible expense that was in the second quarter that fell off in the third quarter. We did not have that this year, all of it was in the first quarter. So second to third this year is a different picture than what it would have been in 2017 and 2018.

The other thing I would say about compensation as well. Last quarter, we did mention that we had charges, $5 million of charges. Only $2 million of that was in compensation, about $3 million of it was in outside services. We did have charges this quarter as well. Now we've gotten away from calling those out because we think we're more on a business-as-usual environment with those charges. But I would say when you look at compensation, the charges this quarter were actually pretty comparable to what we had in the prior quarter. So that's another part.

So if you were expecting a decline because the charge is rolling off, we did have some charges in the quarter. But like I said, until they -- if they were to rise up again to a higher level, certainly, we'll call them out. But at this point, we feel like it's more of just business-as-usual activity.

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Brian Matthew Kleinhanzl, Keefe, Bruyette, & Woods, Inc., Research Division - Director [75]

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Okay. And then just a separate question. In C&IS, is there any way to kind of give any color on what new business wins were in the quarter on installed pipeline? I know you've kind of gravitated away from doing that in the past, but any type of color would be greatly appreciated.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [76]

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Yes. We -- you're right, we've gravitated away from that. We don't provide that. I would say we continue to see strong new business wins installed in the quarter. We continue to see a very solid and strong pipeline really across the globe. But particularly, we've seen a real strong interest in the Asian market, in Australia in particular, and a substantial win that I think we published. We did press release World Bank as a win. So that was a very high-profile win that was issued in a press release in the quarter.

So we continue to have strong growth. And as we said, we really look at it more as an organic growth story for us across the fee line, and we were pleased with where we were from a trajectory standpoint in the quarter.

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Operator [77]

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Your next question comes from Jim Mitchell with Buckingham Research.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [78]

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Maybe just one last kind of follow-up on NII, and just thinking through. It seems to me that there's been pretty high betas in Europe. So just getting kind of your view on if there are further cuts there, is that actually -- are you actually liability-sensitive in Europe? Or is it neutral? And then when I think about looking further out, do you have any -- you've talked about extending duration as offsets and things like that, do you have any further kind of ability on the asset yield side to kind of offset some lower rates given how conservative your balance sheet's been?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [79]

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Yes. So in Europe, you're right. On the euro, in particular, the beta was high. And that can be both a factor. We moved obviously a relatively high beta -- or a very high beta with the euro move. And some of that could have been that our rate was actually attractive in that market and that we were catching up from the rate being slightly ahead of the market, if you will, or slightly better than the competitive landscape, which could move that beta a little bit higher than perhaps even the move that you saw there. But -- so that's a driver there.

And then I think it's important to understand our client base. We have clients that are on -- some are on standard rates and some that are on, I'll call it, more specialized rates, custom rates. Some of them move immediately with sort of central bank rates, IOER or ECB. So they'll move really with almost 100% beta, right, with those.

In terms of the duration of the balance sheet, we've moved the duration of the portfolio out to about 1.6 years from an index duration perspective, which as you know, we typically have run a very short duration portfolio closer to 1, 1.1. But we have done some things in light of what we think could be a continued decline in rates. And so we have moved that duration out in the portfolio to help soften some of that and help deal with asset yield issues that you talked about.

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James Francis Mitchell, The Buckingham Research Group Incorporated - Research Analyst [80]

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And is there room for that to do anything else to -- whether to duration out more or flip some of your cash into U.S. rates out of -- from Europe? How do we think about what you can do in your mix to help offset pressure?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [81]

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So the answer to the first part of that is yes, that is a decision that our ALCO committee makes every month. But there is, I think, still room to take that duration out. And from the benefit of the call, we're really not taking any credit risk in that duration. We typically extend the duration of our balance sheet through the use of longer-dated treasuries. So that's the way we get there and we do. But we evaluate that through our ALCO committee regularly, but there is still capacity to take that duration out.

In terms of swapping currencies into dollars or whatever to get the yield enhancement, the swap rates on that have made -- and the cost of doing that, quite frankly, have made that, in many cases, an unattractive trade. So -- and we always have -- we have generally tried to invest largely in the currency -- in currency, in support of our clients and the balance sheet. So they've invested in euros, they've laid their balances off in euros. Their balances would be in euros or sterling, et cetera. But there are, occasionally, opportunities that we can do that swap. But right now, swap rates would make that neutral (inaudible). Yes.

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Operator [82]

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We'll now move to Mike Mayo with Wells Fargo Securities.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - Senior Analyst [83]

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So I think I heard that Value for Spend is 90% done and that your spending initiatives for revenues, inflation and technology should outpace organic growth. Therefore, you need to find productivity savings. So got that. So under the category of productivity savings, what do you have in the way of potential technology saves? For example, how many data centers do you have? Where were they at peak? Where could that go? Or maybe you want to measure that in terms of number of servers. Moving to the cloud what percent are your -- you have been able to get to the cloud? Where are you now? Where would you like to go? But just more generally, what are the technology-driven productivity savings that you could see going ahead, especially now that Value for Spend is in the late stages?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [84]

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There's a lot in that question, Mike. So you're right. So we have absolutely have an ongoing process to look at all the things that you described in there. For instance, number of data centers. We outsource the managed services, for instance. So we've talked about here, where we have looked at things like our mainframe maintenance and others that we've used. There's opportunities to do that technologically with someone else at a lower cost.

We're looking at, very strategically with our Board and our technology group, is the cloud strategy for the firm? I'm not going to comment on that in this call, but that's something that is actively engaged with the Board and others. So it's going to be the primary driver of our productivity has to be in the space of technology because it's the largest part of our spend. So I know that's obvious to you, Mike. But I mean, if we don't get the kinds of savings you talked about, consolidating data centers, cloud-based solutions, et cetera.

I will say what we've done a pretty good job of, Mike, is not running as many duplicative systems. I think we've looked and consolidated across our organization and where we were running multiple applications to do similar services. I think we've done a pretty good job of consolidating that, although I know that we're still looking at the number of apps that we have, if you will, inside the firm in trying to maximize and reduce that. So probably the single largest effort we have right now is around understanding that technology spend and how we can drive that through productivity.

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Michael Lawrence Mayo, Wells Fargo Securities, LLC, Research Division - Senior Analyst [85]

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Well, that helps you get some useful context around that. And just one more time on specific numbers. Do you just -- I'm not saying many do, but the number of asset you have and the number of data centers that you have or at least what you mean when you say mainframe maintenance move to like a third-party data provider, like a data center provider, are you thinking of using one of those?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [86]

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So the -- for instance, if we use a provider of that mainframe, we had our own staff that did the upgrades and maintenance on that. There are firms who provide the hardware and other items for that mainframe, who also have staff that can provide that maintenance. We've done that, instead of having our own staff. But that's a productivity pickup for us because we had our own staff to do that, and there's others who can do it for better cost advantages. So that's how I would describe that, is what that means.

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Operator [87]

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We'll now take a question from Rob Wildhack with Autonomous Research.

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Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [88]

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One more on organic growth, and appreciate the commentary on the alignment of expenses and revenue growth there. But can you remind us on the level of organic growth where those 2 started to decouple a little more and positive operating leverage would really start to show up?

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [89]

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Can you ask that one more time? I want to make sure I follow that.

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Robert Henry Wildhack, Autonomous Research LLP - Analyst of Payments and Financial Technology [90]

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I think you're talking about aligning expense growth and organic revenue growth. And so I'm wondering if there's a given level of revenue growth where the expense growth might not need to stay as closely aligned, and you can really see some operating leverage.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [91]

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Yes. Okay. I don't know exactly where that point would be. But in general, in our 2 businesses, it could be a little bit different. So in our asset servicing business, for instance, there's a required level of expense to generate probably every point of organic growth right now. For most of that, it depends on which business line. If it's traditional custody, that's highly leverageable, there's less expense needed. If it's fund administration, fund accounting, it needs more expense. It has a little bit more, I'd say, a larger expense base that needs to go with it.

In the wealth space, pretty highly leverageable there. So the expense required to grow that point of organic growth there could be different. So I think that's what you're asking, is we could get continued growth. I don't know that there's ever a point where the expense growth stops and the organic revenue continues. I think there's always a piece of that that's needed to get that through that.

So -- but there is certain lines of businesses that are more leverageable than others that widen that gap out. And we've had great success in some of those lines. Particularly, Wealth has had a strong growth rate that you can see in their line versus their industry and their competitors.

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Operator [92]

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And it appears there are no further questions, so we would like to thank you all for your participation. You may now disconnect.

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Stephen Biff Bowman, Northern Trust Corporation - Executive VP & CFO [93]

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Thanks, everyone.