Northern Trust Corp (NTRS) — Q1 2019 Earnings Call Transcript

Thank you, Kerry. Good morning, everyone. And welcome to Northern Trust Corporation’s first quarter 2019 earnings conference call. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; Aileen Blake, our Controller; and Kelly Lernihan from our Investor Relations team. Our first 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 April 23rd 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 May 21st. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our Safe Harbor statements. 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.

Good morning, everyone. Let me join Mark in welcoming you to our first quarter 2019 earnings conference call. Starting on page two of our quarterly earnings review presentation. This morning, we reported first quarter net income of $347.1 million, earnings per share were $1.48, and our return on common equity was 14%. As noted on the second page of our earnings release, this quarter’s results included $12.3 million of severance-related and restructuring charges within expenses. Before going through our results in detail, I would like to comment on some macro factors impacting our business during the quarter. Equity markets rebounded during the quarter, following a challenging fourth quarter. Compared to the prior year, the S&P 500 ended the quarter up 7.3%, while the MSCI EAFE was unchanged. On a sequential basis, end-of-period markets were favorable, with the S&P 500 and the EAFE indices increasing 13.1% and 9.6%, respectively. Recall that some of our fees are based on lagged pricing, and those comparisons are challenging, both versus one year ago as well, sequentially. On a month lag basis, the S&P 500 and EAFE were down 2.6% and 9% on a year-over-year basis, and down 4.7% and 4.1% sequentially. On a quarter lag basis, the S&P 500 and EAFE were down 6.2% and 13.4% on a year-over-year basis, and down 14% and 12.5% sequentially. U.S. short-term interest rates were modestly higher in the quarter on average, driven by the full quarter impact of the Federal Reserve’s December rate hike. On a sequential basis, average one-month and three-month LIBOR increased 15 basis points and 7 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 ended the quarter down 7% and 9%, respectively, 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 ended the quarter up 2%, while the euro declined 2%. Let’s move to page three and review the financial highlights of the first quarter. Year-over-year, revenue was flat with non-interest income down 3% and net interest income up 9%. Expenses increased 3% from last year. The provision for credit losses was zero in the current quarter compared to a credit of $3 million one year ago. Net income was 9% lower year-over-year. In the sequential comparison, revenue declined 2% with non-interest income down 3% and net interest income flat. Expenses increased 1% compared to the prior year. Net income declined 15% sequentially. Return on average common equity was 14% for the quarter, down from 16% one year ago and 17% in the prior quarter. Assets under custody and administration of $10.9 trillion increased 1% compared to one year ago and were up 8% on a sequential basis. Assets under custody of $8.2 trillion were also up 1% compared to one year ago and up 8% sequentially. The year-over-year performance was primarily driven by favorable markets partially offset by the impact of unfavorable moves in currency exchange rates. The sequential performance was primarily driven by favorable markets and new business. Assets under management were $1.2 trillion, flat on a year-over-year basis and up 9% on a sequential basis. The year-over-year performance reflected higher markets and new business, offset by lower period-ending and securities lending collateral. The sequential increase was driven by higher markets and new business. Let's look at the results in greater detail starting with revenue on page four. First quarter revenue on a fully taxable equivalent basis was $1.5 billion, flat compared to last year and down 2% sequentially. Trust investment and other servicing fees represent the largest component of our revenue and were $929 million in the first quarter, down 1% from both last year and the prior quarter. Foreign exchange trading income was $66 million in the first quarter, down 16% year-over-year and down 15% sequentially. Both the year-over-year and sequential declines were driven by lower volatility, as well as lower foreign-exchange swap activity in our treasury function. The sequential decline was also impacted by lower client volumes. Other non-interest income was $64 million in the first quarter, down 16% compared to one year ago and down 15% sequentially. The year-over-year decline was primarily due to lower security commissions and trading income, higher Visa-related swap expense and lower miscellaneous income. The sequential decline was due to a leasing gain recognized in the prior quarter, as well as higher Visa-related swap expense. Net interest income, which I will discuss in more detail later, was $430 million in the first quarter, increasing 9% year-over-year, and flat sequentially. Let's look at the components of our trust and investment fees on page five. For our corporate and institutional services business, fees totaled $535 million in the first quarter and were down 2% year-over-year and flat on a sequential basis. The translation impact of changes in currency rates reduced year-over-year C&IS fee growth by approximately 2%. Custody and fund administration fees, the largest component of C&IS fee, were $375 million, and essentially flat on both the year-over-year and sequential basis. The year-over-year performance was driven by new business, partially offset by both unfavorable markets and unfavorable currency translation. On a sequential basis, the impact of lower markets was mostly offset by new and favorable currency translation. Assets under custody and administration for C&IS clients were $10.2 trillion at quarter end, up 1% year-over-year and up 8% sequentially. The year-over-year performance was primarily driven by favorable markets, partially offset by the impact of unfavorable moves in currency exchange rates. The sequential performance was primarily driven by favorable markets and new business. 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 $104 million in the first quarter were down 5% year-over-year and down 1% sequentially. The year-over-year decline was primarily due to the impacts of unfavorable markets. On a sequential basis, the impact of lower markets was partially offset by new business. Assets under management for C&IS clients were $868 billion, down 1% year-over-year, and up 10% sequentially. The year-over-year decline was driven by lower period-end securities lending collateral, mostly offset by favorable markets and new business. The sequential growth was driven by favorable markets, higher period-end securities lending collateral and new business. Securities lending fees were $23 million in the first quarter, down 13% year-over-year, but up 5% sequentially. The year-over-year decline was primarily driven by lower volumes, while the sequential performance reflected slightly higher spreads. Securities lending collateral was $165 billion at quarter-end and averaged $158 billion across the quarter. Average collateral levels declined 14% year-over-year and were flat sequentially. Moving to our wealth management business. Trust, investment and other servicing fees were $394 million in the first quarter and were flat compared to the prior year and down 1% sequentially. The year-over-year performance reflected the impact of new business, offset by the impact of lower markets. On a sequential basis, the impact of lower markets was mostly offset by new business. Assets under management for wealth management clients were $294 billion at quarter end, up 2% year-over-year and up 6% sequentially. Moving to page six. Net interest income was $430 million in the first quarter, up 9% year-over-year. Earning assets averaged $111 billion in the first quarter, down 4% from the prior year. Total deposits averaged $91 billion and were down 7% year-over-year. Interest-bearing deposits declined 3% from one year ago to $74 billion. Non-interest-bearing deposits, which averaged $18 billion during the quarter, were down 19% from the year ago. Loan balances averaged $31 billion in the first quarter and were down 4% compared to one year ago. The net interest margin was 1.58% in the first quarter and was up 20 basis points from the year ago. The improvement in the net interest margin compared to the prior year primarily reflects the impact of higher short-term interest rates and a balance sheet mixed shift. On a sequential quarter basis, net interest income was flat. Average earning assets declined 1% on a sequential basis as deposit levels declined 2% from the prior quarter. On a sequential basis, the net interest margin increased 6 basis points due to the favorable impact of higher short-term rates. As we have discussed in our most recent quarters, we did continue to see the opportunity for foreign-exchange swap activity within our treasury function. This activity has the impact of reducing our interest income relating to Central Bank deposits, as we swap out of U.S. dollars, but increase our level of foreign exchange trading income. For this quarter, we saw additional foreign exchange trading income of $13 million, offset by $10 million less in net interest income. Looking at the currency mix of our balance sheet. For the first quarter, U.S. dollar deposits represented 69% of our total deposit. This is equal to one year ago and down from 70% in the current quarter. Turning to page seven. Expenses were $1 billion in the first quarter and were 3% higher than the prior year and up 1% sequentially. As previously mentioned, the current quarter included $12.3 million in expenses associated with severance and other charges. For comparison purposes, note that the prior year and prior quarter included $8.6 and $5.7 million in severance and other related charges, respectively. Excluding the called out charges, expenses for the current quarter were up 3% from one year ago. With respect to the remaining increase in year-over-year expense growth, the following items were key drivers within the categories. Compensation was higher, primarily driven by base pay adjustments within salaries, which were effective in April of 2018. The impact of staff growth on salaries was more than offset by staff actions and our ongoing location strategy efforts. Employee benefits were lower compared to last year, primarily due to lower medical expense as well as lower retirement plan costs. Outside service costs were higher, driven by increased technical services and higher levels of legal and consulting costs, partially offset by lower third-party advisor fees and lower sub custodian expense. Equipment and software expense was up year-over-year, mainly due to higher software-related spend. Other operating expenses were up for the prior year due to higher staff-related business promotion and other miscellaneous expenses, partially offset by lower FDIC expense. Shifting to the sequential expense view, including the expense charges in both the current and prior quarter, expenses were flat compared to the prior quarter. Compensation expense increased, primarily reflecting the higher expenses related to long-term performance-based incentive compensation due to the vesting provisions associated with grants to retirement-eligible employees in the current quarter. This quarter's compensation included $30 million in expense associated with retirement-eligible staff. It is worth noting, due to changes in service requirements associated with performance share compensation, there will no longer be an additional component of the retirement-eligible expense impacting the second quarter, as we have seen occur over the previous two years. Employee benefits declined sequentially, primarily due to lower medical and retirement plan costs, partially offset by higher payroll tax withholding. Outside services declined sequentially due to lower third-party advisor fees and consulting costs. The sequential decline in equipment and software costs was primarily due to a prior quarter software-related charge. Other operating expense declined $16 million from the prior period, driven by lower business promotional expense, as well as lower sequential costs associated with account servicing activities, and other miscellaneous expenses. Staff levels increased approximately 5% year-over-year and 2% sequentially. With staff growth being all attributable to staffing increases in lower-cost locations, including India, Manila, Limerick, Ireland, and Tempe, Arizona, partially offset by reductions within our higher-cost locations. Turning to page eight. As we have discussed on previous calls through our value for spend initiative, we are 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. We expect these efforts to slow our expense growth to be more closely aligned with our organic fee growth. Our first quarter results reflect approximately $45 million in expense savings, reducing the year-over-year expense growth rate by approximately 3 points. This would equate to just under $180 million on an annualized basis, against the $250 million goal. We continue to cultivate a healthy pipeline of opportunities. Turning to page nine, 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. While this quarter's ratio of 111 does demonstrate the impact that the macro environment, particularly lower equity markets, can have, we remain focused on continuing to drive organic growth in our business and managing our expense to improve our efficiency and productivity. When we look at our results for this quarter, absent the market impacts, we would say that our expense-to-fee ratio was comparable to where we were tracking in the most recent quarters. Turning to page 10. Our capital ratios remain strong with our common equity tier 1 ratio of 13.5% under the advanced approach and 13% under the standardized approach. The supplementary leverage ratio of the corporation was 7.2% and at the bank was 6.6%, both of which exceeded the 3% requirement that became applicable in Northern Trust effective at the start of 2018. With respect to the liquidity coverage ratio, Northern Trust is above the applicable 100% 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 quarter, we increased our quarterly dividend from $0.55 to $0.60, reflecting a 9% sequential increase and a 43% year-over-year increase. We also repurchased over 2.8 million shares of common stock for $257 million. Despite the challenging environment due to the effects of lagged equity markets and flatter interest rates, our performance remained strong, yielding a return on average common equity of 14%. Our balanced business model continued to drive organic growth, with each of our client-facing segments in C&IS and wealth management contributing about 50% of our earnings. We are confident in our competitive position in appealing markets and our capacity to maintain organic growth. Our focus is on delivering exceptional service to our clients, enhancing productivity, and driving profit growth. As customary for our first quarter earnings call, we will need to wrap up a bit earlier than usual today to allow enough time for everyone to attend our annual meeting, which starts at 10:30 am Central Time. We apologize in advance if we need to conclude the question-and-answer session earlier than normal. Thank you for joining Northern Trust's first quarter earnings conference call today. Mark and I look forward to answering your questions. Kerry, please open the line.

Hi. Good morning. Thanks so much for the updates. I just wanted to understand, as you are thinking through the operating leverage that you delivered on this quarter, was there anything unusual in the expense line? I know you called out a couple of items, but then, the follow-on is, as you're thinking through Q2 and Q3, can we expect the same kind of run rate that you delivered in Q1?

So, other than the charges that we called out in the expense lines, I would say it was pretty much expenses as normal. So, pretty much core run rate in our expenses. We did have a higher retirement eligible impact in compensation of $30 million in the first quarter, but some of the other spend, like business promotion, is sometimes a little bit lower in the first quarter too, but pretty clean.

Yes. And we have the compensation expense in every first quarter, which you can see a flow through, but the rest of the other line items, I think, were pretty much as reported.

I know you don’t give guidance specifically, I'm not asking for that. I’m just wondering the run rate that you're exceeding in Q1, do you think that that kind of pace is something you can continue with, or is there any kind of investment spend that you’d be ramping up on the back of a slower Q1?

We are maintaining our focus on initiatives that enhance our value for spending and are committed to managing our expenses as effectively as possible. Despite this, we are experiencing growth, and when excluding the effects of market conditions, our underlying growth in the quarter was quite strong. Consequently, there are expenses associated with supporting that growth. Overall, we believe that the trend we've seen is a solid run rate, and we will continue to work on improving it through our value for spending initiatives, but it reflects a good rate of progress.

I know you guys don't give guidance obviously, but I was hoping we can talk through some of the NIR dynamics as a jumping off point from here. So, I guess, one, non-interest-bearing deposits down a little bit over $1 billion. I think that you talked about in the past, you thought that kind of the excess number was sort of in that $1 billion range. So, should we be thinking of that being sort of down or do you guys think there's more to go? And broadly speaking, is there anything you guys can do from a firm-specific, idiosyncratic perspective to protect the level of NIR from here or is this pretty much peak NIR for you guys?

Let me explain how we're approaching the situation. First, regarding the volume of our balance sheet, we believe our main control point is through sustained organic growth in our custody business, specifically our assets under custody, which drives balance sheet growth. We've seen positive results in that area and expect this growth to continue, supporting an expanding balance sheet. Now, concerning the non-interest-bearing deposits you've mentioned, we noted that a significant portion of this quarter's decrease originated from one client. While we still have some large, variable deposits that may seek yield, we anticipate they will remain within the previously indicated range of $1 billion to $2 billion in non-interest-bearing deposits. So, we can manage the volume effectively. Next, looking ahead at the balance mix, interest-bearing deposits have increased from about 78% to 80% of our balance sheet, a trend we observe across the industry, which may not be completely within our control. However, we are monitoring it closely. Lastly, we focus on the spread or yield from our assets. Our firm remains asset-sensitive, meaning that if interest rates stabilize, we could still see our assets repricing at higher rates, which is a positive factor. On the liabilities side, we must stay attentive to deposit rates and market pricing amid competition. We have maintained discipline in this area and believe that if the rates remain steady, we may still have the chance to see a gradual increase in our net interest margin over time. That's our current assessment, and while there are many variables involved, we are optimistic about the potential for improvement in the net interest margin if competitive conditions remain stable.

Got it. That’s helpful. Thanks. And then my second question around is just the core fees. I mean, it looks like custody and admin fees in particular came in quite strong relative to a challenging exit as of the end of last year. I know you guys highlighted new business, so maybe expand on that a little bit. Was this a quarter of outsized new business wins that sort of drove fees where we ended up obviously being for the quarter, without obviously naming clients but maybe you can just help us kind of characterize where some of that business is coming from?

Yes. We continue to observe a strong pipeline in both of our business segments, C&IS and wealth, with both showing impressive performances compared to the first quarter of the previous year. Specifically, our C&IS business demonstrated a significantly strong year-over-year comparison regarding new business. We are experiencing a wide array of wins across different geographies, product lines, and client types in both segments. Moreover, on the wealth side, our organic growth rate was at the higher end of the expected range, as mentioned for the first quarter. Overall, we have strong new business momentum, and we benefited from the recovery in the markets during the first quarter, along with some lagged impacts from previous months that also contributed positively.

Biff, maybe just on the expenses. Given that you are already at the $180, the $250, how should we be thinking about timing? I think, you guys said through 2020, but are there any initiatives in place that we should see some steps along the way as we get into 2020?

Yes. So, we've said the $250, we’re continuing to push forward on that and making good progress, as you can see. What I would say is, is that we're trying to build in the DNA and the culture here is, is that ongoing expense savings has to be a part of our regular routine. So, while we've got a program defined at $250 million, we also know that we have to embed culturally the ability to go in there and create economic savings from an expense standpoint on a longer-term basis than just 2020. We've got a program; we’ll define it by 2020. But that discipline of taking some of the inflationary pressures out of our business through strong expense initiatives is embedding and we can see it and it's becoming part of the culture. So, we will continue to attract to the $250 that we've told you about, but I think more importantly is embedding that discipline for forward-looking years beyond 2020.

Could you elaborate on your organic growth and fee performance compared to some of your peers? Specifically, I'm interested in hearing about some of your successes, including insights into your asset mix and client mix, particularly regarding C&IS. How are competitive fee dynamics impacting this, and which product mixes seem to be performing better than the broader industry?

Yes. So, let me pull it apart a little bit on the C&IS side. I would say, first, let's take some regional. We've seen strong growth in our Australia market where we’ve moved up near the top portion of the league tables. I was just talking with Pete Cherecwich before I came in. So, we're near the top of the league charge there in our growth from a graphical perspective there. Luxembourg is another area with the UBS acquisition and other new business. Where we’ve seen outside geographic growth that’s organic, that's strong in the client type, I would say, let me highlight two. We continue to do very well with hedge funds. Our acquisition and hedge fund services has allowed us to grow. I think last year, we cited and continue to see wins in the hedge fund space. I think we had the largest hedge fund launch that was launched last year, is a Northern Trust client; we had a press release on that. But we’ve also been very well in the foundation and endowment space as another example. And we’ve got what I would say is a product and a capability there, front office solution for what I will say a large in-house pools of money, which is commonly or typically done in a foundation endowment. So, that’s two examples of a client type and a geography where I think we’re seeing outsized growth. We’ve got more than those; we can highlight, but we just have a strong performance right now in the growth. In terms of the second part of your question and the competitive nature of the pricing, look, this is a competitive business. I’ve been at the bank 34 years, it’s been a competitive business for 34 years. I would say that we haven't seen it at least in our client mix, the outsized versus normal, which we would typically see somewhere 1.5% to 2% type of fee pressures, which we assume in our organic growth rate, we have to overcome that. We’ve still seen that. And I think that in our client mix, that’s what we’ve seen. I don't know that it's been higher than that right now, but it’s also not lower and it’s pretty constant.

I just wanted to unpack some of the remarks around the NII commentary and recognizing it's not guidance. But I was hoping you could speak to your appetite to the extended duration of the balance sheet, given some concern as the next move could be a Fed easing cycle, and how we should think about against that backdrop, maybe what the deposit trajectory could look like over the coming quarters, if we're in a flat-rate environment?

What we say typically here is, is that we have a process where we go through and look at our own internal projections for interest rates and then we make decisions on how to position the balance sheet. I think, it's fair to say that in the previous quarters, we’ve had some of the interest rate projections that I think are now being held more widely, and we have extended the duration in particularly the long-term portion of our securities portfolio. So, we have that thought process and we do take actions when we see that. So, that provides some protection against that down rate scenario. What I would also say is that if it behaves as normal, the deposit betas on a down-rate cycle are typically pretty fast and pretty high, and we would anticipate that being the case here too. So, depending on just how that rate curve move happens and shifts, we could protect some of that spread in margin in a down-rate scenario, plus with some of the actions we've taken on our asset sensitivity by adding the duration. So, we have contemplated that. I think we've got a lot of news from our investment management firm and our own Chief Economist that have used on the rate trajectories. And we take those all in and then make decisions on the overall ALCO asset liability policy.

And just switching gears to the capital side, you guys continue to run with best-in-class capital ratios. I know you try to avoid deviating from some of your peers and try to manage the similar capital targets through the cycle. Just given some commentary from some of your trust bank peers about increased confidence given some upcoming changes to our leverage ratio, as well as what appears to be maybe a more benign test in the coming exam, how you're thinking about your capital ask, and whether you have increased confidence in your ability to maybe raise your payout target a bit?

Yes. So, we’re pleased to enter this cycle that we just submitted here in April from a position of real strength, as you could see from our ratio, and the flexibility that that gives us entering that period of time. The SLR was not a binding constraint for us. So, that change in definition, while we will take regulatory definitions that end up easing the ratio for us in that case, it wasn’t a binding constraint. So, I pull back on that. What I would say is, in the quarter, I think we had a payout ratio of 119% in the quarter that we cited. So, I think, in the environment we’re in, we don't feel constrained with what we want to ask other than our own constraints, which are, do we have enough capital to support the growth we foresee in the business, do we have enough capital to withstand our own idiosyncratic stresses, do we have enough capital to support our clients’ needs and wants? And I think the answer to that with where we are currently positioned is a pretty strong yes with the 13% CET1. So, again, we like the flexibility that gives us going into positive the review by our regulators.

The C&IS fee rate showed some improvement this quarter, and while I understand this isn't a perfect method to estimate your servicing revenues, it's the best option available. Can you provide some insight? You mentioned new business wins this quarter, which likely contributed to the increase in the servicing fee rate. Is that accurate? Were there other factors as well? It would be helpful to clarify this, considering it's how most of us approach modeling your servicing revenues and what to expect for that metric going forward.

Hi Brennan, it’s Mark. When we analyze the asset servicing fees on a sequential basis, we definitely experienced some market drag primarily due to both monthly and quarterly delays. We estimate about a 2 to 2.5% impact from the markets. Currency performance showed slight improvement, but it was minimal. The new business we acquired in terms of fees largely balanced this out, as fees were essentially flat during the quarter. Our performance in terms of new business was quite strong. The new business we are bringing on tends to come at a higher fee bid rate compared to traditional custody services, and we recently witnessed significant year-over-year changes. For instance, a transition we mentioned last quarter had a lower bid rate than our current segment, as we are adding new global fund servicing business. Ultimately, it comes down to the mix of new business and how the assets at a specific point in time relate to the fees earned throughout the quarter.

Okay, that's clear, Mark. Thank you. The next point is about net interest income and some of your previous comments. I'm combining a few follow-up questions here. You mentioned a significant outflow from non-interest bearing accounts, and you believe non-operating could be between one to two. Did the outflow come from non-operating accounts? Or was it mainly due to competitive pressures? Given that you anticipate net interest margin can continue to improve and deposit growth, it seems you are optimistic about NII growth starting from Q1. Is that correct? Should we be worried about rising deposit costs?

Let me address the second question about upward pressure first. This is related to competitive dynamics. We believe we are keeping up with the market and maintaining competitive pricing in the institutional sector. However, we need to monitor the market closely since our clients are likely aware of pricing from a limited number of competitors, which makes pricing quite transparent, especially in the institutional area. Therefore, we will continue to be competitive. As for upward pressure, I think it's mainly related to deposit pricing. The first question was about...

On the decline in non-interest bearing accounts, this was a situation where our client was seeking other yield enhancements for their funds. I would also point out that about half of the decline was due to non-U.S. dollar currencies, with approximately a third of the decline coming from non-major currencies globally. These transactions likely encountered more frictions in the system, which should not necessarily be viewed as a sign of future trends, as they were not related to the U.S. dollar demand for higher yield.

Maybe just go back to your organic growth trend, especially in the custody and fund admin business. It looks like we should have a decent tailwind coming into the second quarter, both on a markets basis. But also, if you could just comment on the cadence of organic growth. It looks like you said very strong if that came in during the quarter. So, we also have a little bit of a fee tailwind from that. And then, to add on to that, maybe if you can talk about your front-to-back office integration, the open architecture approach. I know it’s counter to State Street. I think you have the partnership with Bloomberg. I guess, how new is that effort and should we expect that to be something that can enhance your organic growth of return?

Sure. Let me address the organic growth aspect first. I will separate the businesses briefly. Yes, we discussed as a firm the range we are comfortable with regarding organic growth. In any given quarter, we could fall within that range, slightly below or slightly above. However, our individual businesses might follow different paths. Our wealth business, as I mentioned, appears to be at the higher end of its historical organic growth range, although that is lower than the target we previously discussed; it shows slightly reduced organic growth. Excluding securities lending, which is significantly influenced by capital markets, our C&IS business also fell within the organic growth range we outlined for that sector. It's difficult to overlook the impact of the securities lending and asset management segments, but when we exclude those, our pure asset servicing business exhibited a solid organic growth rate. That was a positive aspect. In terms of our positioning within the value chain, we do not believe it is necessary to own every aspect of it. For instance, an Order Management System is an example where our goal is to enable clients to utilize our technology for efficient trade communication and processing. The OMS landscape is highly competitive, with many strong providers available. Therefore, we find it essential to partner and integrate with these vendors. As mentioned in our March press release, we have established a relationship with Bloomberg to do just that. This partnership with a key player in the space allows us to enhance our offerings. Ultimately, we believe we do not need to own every component of the value chain; instead, we can collaborate with top providers in various areas to achieve success.

Regarding expense growth on a year-over-year basis, it appears to be around 3% to 3.5%, which seems to be slightly below your organic growth rate for the same period. Is this primarily influenced by the value for spend program as you aim to align your expenses with this growth? Although it may not happen every quarter, it seems like you're making good progress toward this objective.

So, what I would say is, in all transparency and candor, that growth rate is a little higher than that on an organic basis because we had some currency benefits of, call it 4.5 type of a growth rate, which is in the range of where we talked about our organic fee growth rate. So, I think they’re reasonably well-aligned. We’d like to get that organic growth rate and the expenses down a little lower. So, we created leverage to what we talked about. But in full transparency, the reported number has some currency benefit in it. Obviously, fees have some currency drag equal and offsetting to that. But we would have probably pinned it somewhere in the 4.5 type range from the quarter on an organic expense growth rate.

Maybe just a follow-up on wealth management. You noted that the high end of the organic growth range, I know you’ve been investing there to try to accelerate organic growth. Is that sort of early evidence that you’re getting access and maybe just talk a little bit more broadly about what you're doing to drive that organic growth there and what you think the traction is so far?

I would highlight a couple of components regarding this matter. The technology behind our Goals Powered Solutions, along with our holistic advice and goals-driven wealth management approach, has truly resonated with our clients. We’ve clearly differentiated ourselves in the market, as consistently noted by our clients and other influencers who engage with wealthy individuals, acknowledging our unique technology. This has been very successful. Additionally, we have effectively attracted clients in what I would refer to as our virtual markets. While we have physical offices in approximately 60 locations predominantly in major wealth centers, there are other cities where we lack a physical presence. Nevertheless, we have successfully established a virtual team environment to reach these markets, allowing us to connect with cities associated with significant wealth without needing a physical footprint. This strategy has proven to be quite successful. These are two examples of strong growth that are driving us toward a notably significant organic growth rate compared to the industry in wealth management.

That’s helpful and maybe one other question on deposit betas. It seems like this quarter, at least on an aggregate level, your deposit beta has actually slowed versus the last three or four quarters. I think some of your peers are mentioning accelerating deposit betas and high competition. So just trying to get a sense of maybe the difference that you are seeing. Are you seeing that competitive pressure on deposit rates? It doesn’t look like it. Just maybe talk to the deposit beta this quarter and where you think if anything should change going into Q2.

Yes. I caution you to look at one quarter’s beta. We could be catching up, slowing down from previous moves that we’ve made. I think if you go back and look at our beta across the cycle, you can start with the rate cycles as the hikes and go back to 2016. Our beta will look much more like you would expect across a longer horizon. So, I think it's a little bit dangerous to only look at it for one quarter because like I said, we’re going to slow because we were comfortable with our positioning in a quarter or about 75-ish probably percent beta and then lower than that obviously on the retail.

Thanks. I think my phone got cut out for half of your response. I’ll follow up later. Thanks.

I have a couple of follow-up questions. Biff, you mentioned earlier that there won't be the same level of stock-based compensation in the second quarter as there was in the same quarter last year. Could you clarify how much that was a year ago and what the difference will be this year compared to last year?

I guess, Mark, we are having some audio difficulty on our end. And hopefully what we’re saying is coming through. But yes, you are right, the last couple of years, I remember there was extra expense that came through in the second quarter from a retirement eligible performance share. Last year it was $11 million in the second quarter, so we had 32 in the first, 11 in the second just a year ago. This year, we had 30 in the first, but there will not be further retirement-eligible stock expense that would impact the second quarter because of the changes in the service requirements were around the performance shares. So, $11 million was in the second quarter of last year, but this year, we would not have that.

Got it. That's a nice year-over-year starting point helper. And then second one on the deposits. Biff, you mentioned that the customer-related deposits should be growing with the growth of the business, but obviously the balance sheet has been net shrinking because again of that removal of liquidity. But, has the core deposits been growing underneath the surface? And how can you help us like to understand the inflows versus outflows in terms of, trying to guess an estimate when that total earning asset base starts to bottom and turn the corner upwards?

The core operating balances have remained relatively flat, making it challenging to observe all the liquidity fluctuations on the balance sheet. It's important to note that while we are winning new business, some of these new opportunities are more administrative and may not always contribute to balance growth. The diversity in the types of business we secure plays a role here; we typically achieve a balanced mix, with some contracts involving custody balances and others focused on administration. Recently, we've experienced significant wins on the administrative side, which might not generate corresponding balances. This could explain why our assets under custody and administration appear somewhat stable, even as our revenue and fees continue to rise, reflecting the changing business mix. The dynamics of our winning mix and the core balance sheet, which shows stable core operating deposits, are both factors to consider.

I have a couple of questions. You mentioned that you're taking on a bit more duration in your securities portfolio. Could you provide the current security duration and how much is tied to direct repricing on a 30-day basis?

So, the duration of the portfolio has historically been closer to 1, and it’s moved up by 30% or something like that. On the long end of the securities portfolio is longer than that, but the total portfolio has moved up by that 30 or so percent. And the second part of your question broke up. I apologize. Can you repeat that?

I think the exposure of the 30 days within the...

Yes, how much reprices in the next 30?

Yes. On the securities side, more than half of the shorter portfolio is influenced significantly by one-month and three-month LIBOR movements, with a stronger emphasis on the one-month. This portion of the securities reprice relatively quickly. However, regarding the longer portfolio, not all of it will roll over within a quarter or even a year. For example, if you have a two-year book, you need to consider that over a longer timeframe. Does that clarify things?

It does. I have a quick follow-up on the deposit runoff. In the past, you mentioned that you've been able to retain as much as two-thirds of those deposits. Is that still the case, or are you seeing a significant amount of those deposits leaving?

I believe we mentioned that about half of the deposits could transition into a money fund, while the other half would either go to another vehicle within Northern or to an investment option elsewhere. I am not sure if there have been significant changes from what we've observed. We have noticed growth in our cash funds, especially in the institutional sector, and there has been an increase in our cash funds overall. This indicates that with the shift in cash funds, we will typically explore options for clients. Sometimes a balance sheet is a suitable fit, other times it's cash. However, we have managed to capture this within the Company.

Thank you for joining us for the first quarter call. And we’ll look forward to talking to you again in July. Thank you.