Northern Trust Corporation (NTRS) Q2 2018 Earnings Conference Call Transcript

NTRS earnings call for the period ending June 30, 2018.

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Jul 19, 2018 at 8:39AM
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Northern Trust Corporation (NASDAQ: NTRS)
Q2 2018 Earnings Conference call
Jul. 18, 2018, 2:00 pm ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone, and welcome to the Northern Trust Corporation's Second Quarter 2018 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Director of Investor Relations Mark Bette for opening remarks and introductions. Please go ahead sir.

Mark Bette -- Director of Investor Relations

Thank you, Jonathan. Good morning everyone and welcome to Northern Trust Corporation's Second Quarter 2018 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. For those of you who did not receive our Second Quarter Earnings Press Release and Financial Trends Report via email this morning, they 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 July 18 call is being webcast live at northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through August 15. 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 2017 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.

Biff Bowman -- Chief Financial Officer

Good morning everyone. Let me join Mark in welcoming you to our Second Quarter 2018 Earnings Conference Call. Starting on page two of our quarterly earnings review presentation, this morning, we reported second quarter net income of $390.4 million. Earnings-per-share were a $1.68, and our return on common equity was 16.5%. As noted on the second page of our earnings release, this quarter's results included $6.6 million of severance-related and restructuring charges.

The quarter also included $22.1 million in fee revenue and $21.8 million in expense related to our acquisition of UBS Asset Management's fund administration units in Luxembourg and Switzerland, which closed at the beginning of the fourth quarter of 2017. Included in the $21.8 million in expense was $2.6 million relating to integration activity. Before going through our results in detail, I would like to comment on some macro factors impacting our business during the quarter.

Equity markets had a mixed impact for us during the quarter. End-of-period markets were favorable on a year-over-year basis, what the S&P 500 and MSCI EAFE indices increasing 12.2% and 3.3% respectively. On a sequential basis, both indices increased with the S&P 500 up 2.9%, and the EAFE up about 2.5%. Average daily markets for these indices were slightly lower on a sequential basis. As you will recall, some of our fees are also based on lagged pricing, and in the prior quarter of the S&P 500, was down 1.2%, while the EAFE was down 5.1%.

The markets were also lower for some of our month lagged pricing. Short-term interest rates continued to increase during the quarter, driven by a rate hike from the Federal Reserve. 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.

Both the British pound and euro ended the quarter up 2% versus the prior year as compared to the U.S. dollar favorably impacting revenue, but negatively impacting expense. On a sequential basis, the British pound and euro declined 6% and 5%, respectively compared to the U.S. dollar. The sequential changes had an unfavorable impact to revenue and a favorable impact to expense. Let's move to page three and review the financial highlights of the second quarter.

Year-over-year, revenue increased 14% with non-interest income up 12% and net interest income up 21%. Expenses increased 6% from last year. The provision for credit losses was $1.5 million versus a credit of $7 million one year ago. Net income was 46% higher year-over-year. In the sequential comparison, revenue was up 2% with non-interest income, flat, and net interest income up 8%. Expenses were essentially flat compared to the prior quarter.

Net income was 2% higher sequentially. Return on average common equity was at 16.5% for the quarter, up from 11.6% one year ago, and up from 16% in the prior quarter. Assets under custody and administration of $10.7 trillion increased 15% compared to one year ago and decreased slightly on a sequential basis. Included in assets under custody administration is $575 billion relating to the acquisition of UBS Asset Management's fund administration units in Luxembourg and Switzerland.

Assets under custody of $8.1 trillion increased 10% compared to one year ago and were flat on a sequential basis. The year-over-year growth was driven by favorable market impacts and new business. On a sequential basis, the benefits from favorable markets and new business were offset by unfavorable moves in currency exchange rates. Assets under management were $1.1 trillion, up 12% year-over-year and down 1% on a sequential basis.

The year-over-year increase was driven by favorable markets and new business flows, while sequentially, the decline was primarily relating to lower end-of-period securities lending collateral level as well as unfavorable moves in currency exchange rates. Let's look at the results in greater detail starting with revenue on page four. Second quarter revenue on a fully taxable equivalent basis was $1.5 billion, up 14% from last year and up 2% sequentially. Excluding the acquisition, revenue was up 12% from last year.

The favorable translation impact of changes in currency rates benefited year-over-year revenue growth by approximately 0.5%. Trust investment and other servicing fees represent the largest component of our revenue and were $943 million in the second quarter, up 11% year-over-year, and up 1% from the prior quarter. Excluding the UBS acquisition, fees were up 9% on a year-over-year basis.

Foreign exchange trading income was $79 million in the second quarter, up 58% year-over-year, and flat sequentially. The year-over-year increase was primarily due to higher client volumes and increased foreign exchange swap activity in our treasury department. Volatility, as measured by the G7 index, was down both on a year-over-year and sequential basis. Other non-interest income was $71 million in the second quarter, down 13% compared to one year ago and down 6% sequentially.

The year-over-year decline was primarily due to non-recurring net hedge gains recognized in the prior year and a decline in the current quarter relating to the valuation of existing swap agreements related to Visa Incorporated's Class B common shares. The Visa swap valuations were also the key contributor of the sequential decline. Net interest income, which I will discuss in more detail later, was $423 million in the second quarter, increasing 21% year-over-year and 8% 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 $552 million in the second quarter up 13% year-over-year, and up 1% on a sequential basis. The quarter included $22.1 million in fees relating to the acquisition of UBS asset management, funded ministration units in Luxembourg and Switzerland. Excluding these fees, CNIS fees were up 9% compared to the prior year.

The favorable translation impact of changes in currency rates benefited year-over-year CNIS fees by approximately 1%. Custody and fund administration fees, the largest component of CNIS fees, were $377 million up 15% compared to the prior year and up 1% sequentially. This line does include the UBS acquisition-related fees. Excluding these fees, custody and fund administration fees were up 8% compared to the prior year.

The year-over-year growth was driven by new business, favorable currency translation and markets. The sequential increase was primarily driven by new business, partially offset by unfavorable currency translation and lower markets. Assets under custody and administration for CNIS clients were $10.1 trillion at quarter end, up 16% year-over-year and down 1% sequentially. These results include $575 billion relating to the UBS fund administration acquisition.

Year-over-year excluding the acquisition, the increases primarily reflect favorable markets and new business. Sequentially, the benefit of markets and new business were offset by unfavorable movements in foreign exchange rate. Recall that lag market values factor into the quarter's fees with both quarter lag and month lag markets impacting our CNIS custody and fund administration fees.

Investment management fees in CNIS of $113 million in the second quarter were up 14% year-over-year and up 3% sequentially. The year-over-year and sequential growth were both impacted by new business as well as a change to gross revenue presentation for certain clients. Markets had a favorable impact to the year-over-year growth but had an unfavorable impact on a sequential basis.

There was a corresponding increase to third-party advisor costs in outside services expense, as a result of the change to growth revenue presentation. Assets under management for CNIS clients were $862 billion up 13% year-over-year and down 2% sequentially. Favorable market impacts and their new business were the drivers of the year-over-year growth, while the sequential decline was driven by a lower level of end of period securities lending collateral as well as unfavorable movements in foreign exchange rates.

Securities lending fees were $30 million in the second quarter up 23% year-over-year and 16% sequentially. On a year-over-year basis, higher volumes were partially offset by lower spreads. For the sequential comparison, higher spreads were the primary driver of growth. Securities lending collateral was $174 billion at quarter end and averaged to $184 billion across the quarter. Average collateral levels increased 38% year-over-year and 1% sequentially.

Other fees in CNIS were $32 million in the second quarter, down 10% year-over-year and 7% sequentially. The year-over-year decline reflects lower subadvisor fees. The income associated with subadvisor fees has an associated lower expense and outside service category. This decline in subadvisor fees is consistent with the prior two quarters when we discontinued a service offering. The sequential decline was primarily attributable to seasonally higher benefit payment fees in the first quarter of each year.

Moving to our wealth management business, trust investment and other servicing fees were $391 million in the second quarter, up 8% year-over-year and down 1% sequentially. Within wealth management, the global family office business fees increased 11% year-over-year and 1% sequentially. The year-over-year growth was driven by new business and favorable markets while the sequential performance was driven by new business, partially offset by unfavorable markets.

Within the regions, the year-over-year growth was driven by favorable markets, higher fees resulting from the adoption of the new revenue recognition standard and new business. Sequential performance was impacted by unfavorable month lag markets.

Assets under management for wealth management clients were $287 billion at quarter end up 8% year-over-year and down slightly sequentially. Moving to page six, net interest income was $423 million in the second second up 21% year-over-year. Earning assets averaged $114 billion in the second second up 4% last year. Total deposits averaged $96 billion and were down 1% year-over-year. Interest bearing deposits increased 1% from one year ago to $74 billion.

This growth was offset by a 9% decline in non-interest bearing deposits which averaged $21 billion during the second quarter. Loan balances averaged $32 billion in the second quarter and were down 5% compared to one year ago. The net interest margin was 1.48% in the second quarter and was up 20 basis points from a year ago. The improvement in the net interest margin compared to the prior year primarily reflects the impact of higher short-term interest rates partially offset by a balanced sheet mix shift.

On a sequential quarter basis, net interest income was up $30 million or 8%. Average earning assets declined 1% sequentially driven by decreases in deposits partially offset by higher short-term borrowing. On a sequential basis, the net interest margin increased 10 basis points primarily driven by the benefit of higher short-term interest rates as well as lower premium amortization. You will recall that premium amortization totaled $19 million in the first quarter as we shifted our remaining life assumption estimation methodology.

That change will lead to a more consistent quarterly amount that we expect to be within the $10 million to $12 million range going forward. The prior quarter's results included a onetime $7 million true-up adjustment to align the remaining amortization. The current quarter reflects the new methodology with premium amortization at the lower end of the $10 to $12 million range. Looking at the currency mix of our balance sheet for the second quarter, U.S. dollar deposits represented 69% of our total deposit.

This compared to 71% one year ago and is unchanged from the prior quarter. Turning to page seven, expenses were $997 million in the second quarter and were 6% higher than the prior year and up slightly on a sequential basis. As previously mentioned, the current quarter included $21.8 million in expenses associated with UBS acquisition, the current quarter also included $6.6 million in expense associated with severance and other charges. For comparison purposes, note that one year ago our results included severance and other charges of $22.8 million, while the prior quarter included $8.6 million.

Excluding both UBS acquisition and called out expense items, expense for the current quarter was 6% higher than a year ago. Excluding charges in both the current prior quarter expenses was up slightly. Now keeping to total non-interest expense, I would like to break down the year-over-year growth further. Starting with the adjusted 6% year-over-year increase, approximately 1.5 of a point of growth was from the unfavorable translation impact of changes in currency rates primarily the British pound and the euro.

Excluding currency impact therefore, our year-over-year expense growth rate was approximately 5.5%. With respect to the remaining increase in year-over-year expense growth, the following items were key drivers within the category. Compensation was higher driven by increased incentive compensation and this year's base-pay adjustments which were effective in April. The impact of staff growth on salaries was more than offset by staff actions and our ongoing location strategy efforts.

Benefits were higher primarily due to an increase in retirement plan expenses, medical costs and higher payroll tax withholding compared to the prior year. Outside service costs were higher driven primarily by higher third-party advisor fees, sub-custodian costs and technical services partially offset by lower consulting sub-advisor costs. There was a corresponding increase to trust investment and other servicing fees as a result of the higher third-party advisor fees due to the change to gross revenue presentation.

Equipment and software expense was up year-over-year due to higher software amortization costs. Occupancy-related costs were higher compared to the prior year primarily due to accelerated depreciation related to a previously announced facility exit in one of our Chicago locations.

Other operating expenses were lower than the prior year. Primarily driven by a lower level of charges associated with accounting, account servicing activities, lower FDIC costs, and lower staff relocation expense, partially offset by higher business promotion.

Shifting to the sequential expense view. Excluding the expense charges in both the current and prior quarter, expenses were up slightly. Compensation expense declined sequentially, primarily reflecting lower expenses related to long-term performance-based incentive compensation, resulting from higher charges recorded in the prior quarter, associated with incentive grants to retirement eligible employees. This quarter's compensation included $11 million in expense associated with retirement eligible staff versus $32 million in the prior quarter. Partially offsetting the decline from equity-based compensation, were higher accruals for cash-based incentives and the impact of base pay adjustments, which were effective April first. The impact of the base pay adjust and so on salaries, was partially offset by staff actions and our ongoing location strategy efforts.

Outside service costs were up sequentially primarily relating to higher levels of third-party advisor fees, technical service, consulting cost, and sub-custody expense.

Equipment and software expenses were higher sequentially primarily due to increased software amortization and software support costs. Other operating expense increased from the prior period primarily due to higher business promotional spend, and staff-related costs, partially offset by lower FDIC and other miscellaneous expenses within the category.

Staff levels increased approximately 4% year-over-year, and less than 1% sequentially. Approximately one half of the year over year staff growth was the impact of UBS acquisition. The remainder of the growth, was all attributable to staff increases in lower cost locations, which include; India, Manila, Limerick, Ireland, and Tempe Arizona. Partially offset by reductions in our higher or low, higher-cost expenses.

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. Concurrently, we are embedding 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 second quarter results, reflect approximately $23 million in expense savings, reducing the year-over-year expense growth rate by approximately two and a half points. This would equate to approximately $92 million on an annualized basis, against the $250 million goal.

I'd like to highlight a few examples of our progress to date for you. We continue enhancing productivity by leveraging automation technologies such as robotics, to increase efficiency of existing processes within our fund accounting and transfer agency businesses. We have optimized the organization of technology and operations to streamline processes and decision-making, enhanced productivity, and more closely align these functions with our clients. 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, pre-tax margin and ultimately our return on equity. The ratio of expenses to fees is a particularly important measure of our progress, as it addresses what we can most directly control. Reducing this measure from where it was previously, as high as 131% in 2011 to the levels we see today, is a key contributor to the improvement in our pre-tax margin and ultimately our return on equity.

Turning to page 10. Our capital ratios remained strong with common equity tier one ratio of 13.2% under the advanced approach and 12.4% under the standardized approach. The supplementary leverage ratio at the corporation was 6.8%, and at the bank was 6.2%, both of which exceed the 3% requirement that became applicable to Northern Trust effective at the start of the year. With respect to the liquidity coverage ratio, Northern Trust is above the 100% minimum requirement, became effective at the start of 2017.

As Northern Trust progresses through fully based in Basel three 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 three rules. In the second quarter, we repurchased $1.8 million shares of common stock at a cost of $191 million. As we announced in June, our 2018 capital plan received no objection from the Federal Reserve. In it, we requested authority to increase our quarterly common dividend 31% to $0.55 per share.

Yesterday, our board of directors formally approved the planned dividend increase. The capital plan also provides the flexibility to repurchase up to $1 billion of common stock. The timing and amount of shares repurchased will depend on various factors including but not limited to Northern Trust business plans, financial performance, other investment opportunities, and general market conditions including share price.

In closing, Northern Trust continued to deliver solid financial results in the quarter, growing earnings per share 50% over the prior year and achieving return on average common equity of 16.5%. Our assets under custody administration and assets under management were up 15% and 12% respectively, versus the prior year. Importantly, as we seek to drive profitable growth, we delivered positive operating leverage and positive fee operating leverage, both on a year-over-year and a sequential basis.

On an organic basis, our fee and expense growth rates were better aligned. Profitability continues to be strong in each of our businesses. Our wealth management business grew pre-tax income by 16% versus one year ago while improving the pre-tax margin from 39% to 41%. Our C and IS business, similarly, drove strong year-over-year performance with pre-tax income growing 41%, and the pre-tax margin improving from 28% to 33%. Both businesses delivered strong year-over-year operating and fee operating leverage.

This year, the Northern Trust will again kick off the FedEx Cup playoffs, progress 21st to 26th at Ridgewood Country Club in Paramus, New Jersey. The Northern Trust tournament remains a strategic asset for us as we continue to grow our business in the Northeast and in particular the Greater New York area. Last year's business promotion expense increased approximately $17 million sequentially in the third quarter and we would expect a similar trend this year.

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

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, just a quick reminder, please limit your questions to one question plus a relevant follow-up question. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Brian Bedell with Deutsche Bank.

Brian Bedell -- Deutsche Bank -- Analyst

Good morning, folks. Good morning. Maybe, just to start out with the balance sheet and just look at the growth maybe on a year-over-year basis, the deposit levels have come down a little bit on a year-over-year basis. Maybe if you can just talk about what you're seeing on deposit behavior in the wealth management segment versus your C and IS segment, and think about how we should think about balance sheet growth going forward, given you certainly have a lot of capital capacity. Then, you use suburb funds as well. Does this have doubled on a year-over-year basis? And maybe just talk about the strategy behind that.

Biff Bowman -- Chief Financial Officer

Okay. I'll start with question one around the balance sheet and the growth. I'll focus first on the wealth management deposits.

We have seen that level come down a bit. There are couple of factors that we would highlight there. First is, obviously, we've moved into an increasing rate environment. Particularly, our clients at the higher end of the wealth spectrum, have an array of opportunities to invest their cash. It couldn't be on our balance sheet, and we do what we can to provide competitive pricing and opportunities on our balance sheet, but they also may be looking at cash funds and or other investments to deploy their cash.

So, when we've seen that over the span of a year, we've seen those balances move. Most of those, more than half, about two-thirds have moved somewhere inside of the Northern Trust into either cash funds or other products and capabilities where we've seen those move internally. The second thing on the deposit side which we see sequentially in the second quarter is, we do see some sequential moves for tax purposes, and we've seen that seasonally in the past.

So, on the wealth deposits, while we've seen some of that come down on the wealth side, it's really the deployment of that, and in some cases, that's just moved from balance sheet to other funds at the Northern Trust. Some, approximately, a third or so as we described, it could have moved to other products somewhere outside of the Northern.

We remain competitive, we track our peer set closely, and do what we can to ensure that our pricing remains competitive to attract and pay on those wealth deposits. Because they're very valuable deposits as you know. On the institutional side, I would say those deposit balances can demonstrate a little more volatility based on A: Our growth profile, we grow and they go up. But those are large sophisticated asset owners who may deploy those assets into the market at any time and opportune time.

A meaningful portion are very operational in nature, but we can see some movement in that from quarter-to-quarter and year-over-year. The competitive nature, the pricing on those, we have fewer competitors than we do in the wealth, but it's a little less transparent. So, we monitor and have dialogues with our clients and do what we can to price those deposits appropriately. As you might imagine, some clients are on pre-negotiated rates, and some are on standard rate cards. Again, we monitor that closely.

We're competitive in the world, and deposits, and we will be in both spaces to continue to be competitive. I think, generally, the growth in our balance sheet that we've seen over time is just been the success of our business growth strategy. You've seen, high single to low double-digit growth rates in our firm and fees, and that generally manifests itself in overtime, a growing balance sheet.

Mark Bette -- Director of Investor Relations

Short-term.

Biff Bowman -- Chief Financial Officer

Then, short-term borrowed funds, the second part of that, I would say, what we do because of our strong capital levels, we have the ability to do some discretionary leveraging, which does produce incremental net interest income for our shareholders. Given our financial strength and the leverage, we're lack of leverage constraints that we have as you see in our results. Its allowed us to utilize that. It can have the added benefit, the borrowed funds of helping the LCR as we manage that.

So, it does add to that, those borrowed funds where we typically borrow can have the added benefit of helping out on the LCR as well.

Mark Bette -- Director of Investor Relations

No doubt. That's super helpful, and maybe just in a follow up, just the organic growth. We've obviously had some headwinds on the FX side in the market, returns were mixed in a sequential basis. But if we look at the actual AUM in wealth management, if you can just talk about your general organic growth in wealth management, maybe in the second quarter versus, say, to the first quarter in a year-over-year basis?

Biff Bowman -- Chief Financial Officer

Yeah. I'll start maybe what I talked the whole firm first. The organic growth rate which we fairly consistently been talking about in fees, has been- we've talked about in the mid single digits book called the 4% to 5% range. We again had a quarter where we were in that range we saw. Specifically to well, we did see some slowing up the organic growth rate in wealth from first to second quarter, and again that was impacted less by gross new business than it was by flows. The flows if we think about it, can have things like tax payments in early second quarter, on tax day, and or deployment of that cash, and or investment in the markets, and or potentially even loan pay balances, second homes or other items have become less tax attractive. Those combined, could create some flow pressures on values and AUM inside of our portfolios. But generally, the gross new business portion of that organic growth continued to be very strong in the business.

Operator

Thank you. Our next question comes from Michael Carrier, with Bank of America Merrill Lynch.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Thanks guys. Hey, Biff. Maybe just one more on the net interest revenue outlook. How should we be thinking about it for the rest of the year in terms of balance sheet growth, given that it doesn't seem like maybe there is a lot of demand but you're able to use the short-term funding, and then if we do get another rate hike, what's the expectations in terms of that flowing through to the NIM?

Biff Bowman -- Chief Financial Officer

Yeah. So, if we obviously don't give guidance but if I look at the impacts of a future hike, what I would say is the first thing we've got to look at is the asset side of the balance sheet for us, and I would say you can see that we remain asset sensitive. We are heavily impacted by short-term rates, one-month libor primarily and three-month libor moving. So, if those move up with a rate hike they would likely, the asset sensitivity remains in the balance sheet as you can see by relatively low duration. So, I think the asset side still has sensitivity to rate moves.

Then we go to the important factor which is, what happens with the liability pricing in that. What I will just say there is, we're doing our best to be both disciplined in our pricing on the liability side, but we also need to be competitive. So, we have to be both. You have a view on what the competition is doing and others do. We monitor them as well, and we remain competitive. It's important for us to be competitive in that and landscape. I think we want to be a disciplined firm. I think you can see that in our betas and others, but we also have to be competitive. Our clients expect and deserve competitive rates and we will be mindful of the market when we do that. So, the betas haven't reached one, so they are expansive to at least per NIM.

Then the second part of your question was on the balance sheet size. That's a reflection of our new business opportunities and some of the nuances of where our clients are either deploying cash or elsewhere. So, I'm certainly not going to be able to give you a projection on that, but I could give you some of our thinking on how we think the asset and liability side could move.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Yeah, OK. Then just as a follow-up on the FX and the trading income, you mentioned the swaps again this quarter just I don't know if you mentioned the magnitude but just wanted to get some color because we saw the activity, but maybe like I know it's volatile and lumpy in the quarter.

Biff Bowman -- Chief Financial Officer

Yeah. So, you're right. So, if we looked at our FX total of $78 million, $79 million, approximately $18 million of that was from the treasury swap. But, remember as we said last quarter, and that was largely swapping dollars into euros and that drove a positive FX variance. As you might imagine, that actually hurt or suppressed net interest income to the tune of about $14 million. So, the trade produced $18 million of FX at the expense, if you will, of $14 million of NII.

That trade, if you look at sort of a euro-dollar swap curve or something like that, you can see that spread has narrowed Sam. So, it is possible that in the quarter, if that maintains, you could see some redistribution between FX, that $18 million in NII in the quarter. We'll provide better color later in the quarter as we see that unfold. So, I would say that's generally what we've seen on the FX rates.

Our core FX supporting our clients was actually up 20% year-over-year when we look at what we would consider our traditional FX support of our asset servicing business as well. So, good trends in both of those components.

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

All right. Thanks a lot.

Operator

Thank you. Our next question comes from Alex Blostein with Goldman Sachs.

Alex Blostein -- Goldman Sachs -- Analyst

Hi [inaudible] Hi Biff, good morning. So, question on expenses for you guys, so I heard you $92 million of annualized run rate expenses over 250 in 2Q. I think that's up from 55 last quarter. So, I guess can you walk us through the pace of realizations for the remaining of this year and how we should be thinking about it for 2019. I guess secondly, as I think about I guess sort of the jumping off point for expenses, backing out severance looks like you guys are around $990 million for this quarter. Other than the Northern open, is there anything else we need to be mindful of as you're thinking about 3Q expenses specifically?

Biff Bowman -- Chief Financial Officer

So, I'll take those in two parts, right? The first is on value for spend and the run-rate. Alex, the answer on that is we continue to have a really strong pipeline of opportunities to get after and we're getting that as fast as we can. So, the pacing of that you did see some acceleration in there and the team here remains focused on getting after it as fast as we can. I know we have talked about it being fairly, evenly distributed over three years, we're going as fast as we can and if we exceed that expectation we're happy. But, we also are getting after some of the things that had the quickest and I won't say easy, because none of them were easy, but the fastest return but we continue to look at an array of opportunities.

So, we think and we're committed to that $250 million. So, can't give you much more on that front. In terms of the third quarter, we gave you the Northern Trust Open. I would say, the only other item in the quarter is we have actually some modest decline in equity incentives from I think we had 11 in this quarter mark and the we should see some modest decline in the equity incentives as they ratchet down during the course of the year. I'd say other than that, it would be nothing that you wouldn't jump off and your run-rate of jumping off it at 981 is reasonable, correct?

Alex Blostein -- Goldman Sachs -- Analyst

Got it, great. Then just a quick follow-up on cost, about saving out the cost. Credit not a huge deal obviously, but we've seen you guys put up a negative provision for many quarters. The first time it turned positive, obviously credit remains quite benign, so maybe just kind of what's going on there would be helpful.

Biff Bowman -- Chief Financial Officer

Yeah. So, we had one credit that we had a specific reserve for that drove it, one individual credit. So, we would not see any trends, unique and credit quality remains at very strong and positive levels and it's better I can say that was very, very strong credit quality right now in the cycle.

Alex Blostein -- Goldman Sachs -- Analyst

Yeah.

Biff Bowman -- Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Ken Usdin with Jefferies.

Biff Bowman -- Chief Financial Officer

Hi, Ken.

Ken Usdin -- Jefferies -- Analyst

Hi, Biff. How are you doing? Just one more question on the expense growth rate. So, you showed on the slide 6% year-over-year growth and I believe that would also be inclusive of the change in accounting presentation. So, I'm trying to understand if you adjust for that change and FX translation, what you really saw as the underlying core growth rate and expenses on a year-over-year basis.

Biff Bowman -- Chief Financial Officer

Yes. Ken, let me walk you through that real quick if I could. I think that's a good question. If we took the charges out at the second quarter from last year and the charges out of this quarter, we think the expense growth rate would have been closer to eight. I would take two points of that out for UBS. It's attributable to UBS. Currency is about a half a point and then revenue recognition or net-to-gross presentation, however you want to call it, is about another point of that and that point is also offset by some of our.

Mark Bette -- Director of Investor Relations

On the fee side?

Biff Bowman -- Chief Financial Officer

No, what it is offset on the fee side, it's what we got out in our GFS business.

Mark Bette -- Director of Investor Relations

Sub-advisory.

Biff Bowman -- Chief Financial Officer

Sub-advisory, thank you. So, if you do that walk, Ken, you go from 8% down to about 4.5% as a core expense growth rate in our expenses.

Ken Usdin -- Jefferies -- Analyst

Right, OK.

Biff Bowman -- Chief Financial Officer

So, then [inaudible] or sub-advisory.

Ken Usdin -- Jefferies -- Analyst

Okay, and that's only, and then we'll see what happens going forward to your points about the comp comparisons, but Northern Trust and the comp stuff, those are year-over-year things that we're already in there. So, it's really just about how the business grows in terms of that rate of growth from here.

Biff Bowman -- Chief Financial Officer

Yes, that's right.

Ken Usdin -- Jefferies -- Analyst

Okay, perfect. Great, thank you. Then, just a question on just core business and wins and such, obviously, the markets were down and it looked like the global piece was more of a negative in terms of the AUC where if I look at the global assets under custody. Can you just talk us through just what type of win quarter it was in terms of new assets put on and any updates on your just kind of underlying growth pipeline would be great. Thanks.

Biff Bowman -- Chief Financial Officer

We continue across both businesses to see strong new business opportunities and we highlight some of those with press releases. Very strong. In the AUC piece, particularly the sequential comparator, the currency was really a pretty meaningful driver of what was flattish sequential. It was I think about two points of a currency impact. As you remember, we have a fairly significant global custody asset mix of our AUC, so we have a lot in other currencies. I think about 65% is in dollars, the 35% is and then.

So, the currency impact was pretty meaningful. So, I know you'd asked about the new business trends, but in the AUC specifically, I would say that the currency was a meaningful driver in more than offset market and new business uplifts in the quarter. We continue to have a significant and pipelines and healthy, healthy growth opportunities in both businesses.

Operator

Thank you. Our next question comes from Marlin Mosby with Vining Sparks.

Biff Bowman -- Chief Financial Officer

Hi, Marty.

Marlin Mosby -- Vining Sparks -- Analyst

Hey, good morning. So, you know where I'm heading. If you look at your NII number, it only represents 28% of your revenues, but it actually generates about 82% of your bottom-line pre-tax profit. So, it's a pretty important portion of what you manage. We've got the data now to show that interest-bearing deposit rates haven't increased precipitously.

You may get a little bit more as we think you will get elasticity from here forward, so you'll get that low curve. DDAs have been relatively sticky. So, there's not like they're running off in big portions. Yet, we still have $25 billion sitting in cash, and we got a duration on our securities portfolio is probably about a year and a half. So, at some point in the cycle, we need to defend against the next cycle, which is when rates come down in which that 82% of our profits gets squeezed.

So, I just wanted to kind of put that back out there again and see how you're thinking about that ALCO, and what timing of that you might be looking at.

Biff Bowman -- Chief Financial Officer

Thank you, Marty. What I would say is as all the points you made are factors that we contemplate in our ALCO committee. We meet regularly, and we think about duration management, we think about liquidity management, we think about credit equality in the portfolio. We have active and regular dialogues. I'm certainly mindful of your views on those. We continue to have active debate about what we should be doing to that portion of the balance sheet on a regular basis. So appreciate your comments.

Marlin Mosby -- Vining Sparks -- Analyst

You've been continuing to roll the expenses relative to your core fees down. So, expenses are still 6% higher, but that is significantly better than what we've seen in the past. These efforts that you have should continue to push that ratio closer to 100% I would expect over the next couple of years. So, that's the other piece of the initiatives that really does create a lot of leverage to the income statement.

Biff Bowman -- Chief Financial Officer

Yeah, we're internally very focused on that measure. Because we think the majority of our expenses, the majority not all, but the majority of our expenses are tied to generating trust fees. So, we think it's a very prudent measure. It's not a perfect measure, but it's a very prudent measure to look at operating leverage in our business and performance leverage in our business, and we continue to drive that down if you did the calculation at our wealth management business, you will see it's actually sub that 100%, and you see that manifest in 41% pre-tax margin in that business.

But there is still opportunity left in there, and we talked about that a little bit, our value for spend options, our opportunities, and we're committed to continue to focus on that, and try to do the best levels we can.

Marlin Mosby -- Vining Sparks -- Analyst

It's been impressive improvement, so appreciate that. The other leverage piece we have on the balance sheet with 3% yields out there in the marketplace, there is a lot of income that can still be kind of garnered through this process. Yet still, de-risk not risk the balance sheet anymore. So, thanks.

Biff Bowman -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Brennan Hawken with UBS.

Biff Bowman -- Chief Financial Officer

Hi Brennan.

Brennan Hawken -- UBS -- Analyst

Hey, how are you doing Biff? Thanks for taking the question. I apologize if you hit on this before, I don't think you did. Any update on the- I think you've previously called it the $5 billion to $6 billion of non-operating balances incident being noninterest-bearing deposits.

Biff Bowman -- Chief Financial Officer

Yeah. We haven't commented on it. We continue to have regular dialogues with those. Because those are typically large clients that are associated with our GFS business, our global fund services business, and we have regular dialogues. It has remained at that level for four to five quarters now so we think that at least a pretty meaningful portion of that is there for operational or other liquidity needs.

We haven't seen that move, it could, we talked about that. So, I can't predict. But in our regular dialogues with our relationship people and the owners of those balances, they continue to- seem to need them there for liquidity and or other strategic investments purposes. So, they're ready to go. So, we haven't seen that change now for four quarters.

Brennan Hawken -- UBS -- Analyst

Okay, that's encouraging. Then, thinking about, I believe you said that 69% or so of the deposits are not in U.S. dollar. Are you still mostly pound oriented? Can you remind us of that mix? Then, how should we think about, from what we hear, expectations are pretty good for an August rate hike from the BOE.

How should we think about that, how should we think about expectations for beta given that the Bank of England is still in very much in the early stages of raising rates?

Biff Bowman -- Chief Financial Officer

Clarify, 69% of our deposits are in dollars. I think you said are, I think.

Brennan Hawken -- UBS -- Analyst

Yes, sorry, I got it backwards.

Biff Bowman -- Chief Financial Officer

Sixty-nine percent are in dollars, so the 31% that aren't, pound is our largest next balance, 12% of ours and then euro would be next. But your specific question then around the BOE rate rise, our clients that we have that have pound balances, we would benefit from another hike from the BOE. Our betas are not one there. Again, as I said earlier, we have clients in all currencies that are on what I would say more negotiated rates, and then we've got some that are on standard rate cards.

The standard rate cards betas would be more pre-established, and then the majority that are on standard rates would be able to affect the beta through the cycle. Still coming off of a pretty low base, so if it behaves like it has in the U.S. there should be some opportunity there for expansion.

Brennan Hawken -- UBS -- Analyst

Thanks for that.

Operator

Thank you. Our next question comes from Geoffrey Elliott with Autonomous Research.

Geoffrey Elliott -- Autonomous Research -- Analyst

Hello, good morning. Hi, thank you for taking the question. You've now been above the top-end of the 10% to 15% average range for a couple of quarters. Can you give us an update on what you're thinking, given lower taxes and we seem to be in a bit of a higher rate environment than when you were down at the lower end or even below the lower end of the range a few years ago?

Biff Bowman -- Chief Financial Officer

So, we don't have any change or nothing that we would comment on as of today, but we continue to look at this and we'll keep you posted. I think the one item that you pointed out in there that we look at as a truly secular change is the tax rate has changed. So, that will certainly be one of the important factors as we consider that range that we will contemplate. A quick example would be in this quarter, you can do this calculation. But effectively, it added about 1.7 points of ROE. So, X that we would have been at the very high-end of our existing 10% to 15% range. But as I said, we'll keep you posted as we look at that.

Geoffrey Elliott -- Autonomous Research -- Analyst

What's held you back from changing that sooner? I guess we're seven affect months post-tax reform now and the tax impacted leases is fairly mechanical. So, what stopped you coming straight out adding at 1.7 points or whatever the number is to that range?

Biff Bowman -- Chief Financial Officer

I think Geoff, your comment assumes that all of those dollars flow through, the competitive landscape didn't change, the people didn't choose to price that away. We've six months in the tax reform here ordering perspective. Our view is, we certainly wanted to observe how the tax reform was absorbed into the economy and our clients into our P and L before we raised to make those changes because you don't know exactly how it would end up flowing through financial statements until you looked at the competitive landscape. We're taking that time to observe that, absorb it and observe it, and then have the right strategic dialogues with all of our key constituents.

Geoffrey Elliott -- Autonomous Research -- Analyst

Got it. Thank you very much.

Operator

Thank you. Our next question comes from Vivek Juneja with J.P. Morgan.

Vivek Juneja -- J.P. Morgan -- Analyst

Hi. Couple of questions. So, I want to go back to the short-term borrowings leverage question, try a different tact. How much more leverage can you add? How much more room do you have?

Biff Bowman -- Chief Financial Officer

Well, that's a complicated question in this sense. Some of that borrowing that we do is I will say dry powder that we want available for liquidity purposes and other. So, we don't always necessarily want to tap that fully because we like it available for other reasons in the marketplace. The second is as you might imagine that it has somewhat constrained the name. It is producing incremental NI which I know is valuable, but we do look at the overall balance of that and then we do also look at leverage ratio and others which we're not terribly tight on as you say, but we do evaluate all those factors when we look at the amount of discretionary leveraging we choose to do.

Vivek Juneja -- J.P. Morgan -- Analyst

Would you say you still can bump this up a little bit further?

Biff Bowman -- Chief Financial Officer

Our ratios would allow us, but we have to put it into the calculus that I just gave you where we look at a whole series of factors like liquidity and other items, so we can move it around and contemplate that from quarter-to-quarter.

Vivek Juneja -- J.P. Morgan -- Analyst

It's completely different question. Technology investments, can you give us an update on where you are in that trajectory of investing because I know you've been trying to automate and digitize and where are you? Any color or any details on that?

Biff Bowman -- Chief Financial Officer

Yeah, so we continue to have significant investment in the business. This is a technologically intensive and capital intensive from that perspective business. I think we published in our K we spend somewhere around $2.5 billion on both capex and expenditure, on a rolling three-year program. So, I think we've given about $2.5 billion from 17 through 19 that we would contemplate in terms of technology spending and our expense associated with that.

That's meaningful against our revenue base, that's meaningful against the competitive landscape in which we operate and we think that our technology efforts are certainly competitive and we hope in many cases lead the competition. But I know it's a primary focus and discussion point among our board and our management team.

Operator

Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities.

Mike Mayo -- Wells Fargo Securities -- Analyst

Hi.

Biff Bowman -- Chief Financial Officer

Hi Mike.

Mike Mayo -- Wells Fargo Securities -- Analyst

I just wanted to confirm one more time the way you look at core revenue growth and core expense growth year-over-year. But I think I heard you say is that, core and we can get rid of the accounting impact, the FX, the UBS deal, core revenues were up 12% year-over-year and core expenses were up 4% year-over-year, is that right? Or do you want to change my assumption there?

Biff Bowman -- Chief Financial Officer

No, you're pretty close. I would say, Mike we would probably look at core revenue was up if I exclude any year-over-year currency or the acquisition. Would be up mid 11, a little over 11 and you're right on expenses. So, that's what we would look at core revenue of core expenses: 11, and 4.5. Something like that.

Mike Mayo -- Wells Fargo Securities -- Analyst

I think you're going to win the award for greatest operating leverage for the quarter measured that way. But how should we think about that going ahead? Should we think of some of these expenses being lumpy or you don't get 700-basis-point point wrapping leveraged one quarter, which I assume without having not as good operating leverage in future quarters. You did mention the $17 million for the marketing in the third quarters. So, I guess that will impact, though I guess you still have count year-over-year. So, what kind of operating leverage are you looking for for this year on a go-forward basis?

Biff Bowman -- Chief Financial Officer

Obviously, both the revenue and it's expense component to that, so it depends on how markets perform and any rate lift and others. But I know that we're focused on driving operating leverage into the franchise. Particularly, fee operating leverage into the franchise. So, if we look at that, our fees grew somewhere adjusted around 7%, if we stripped out all that noise versus that 4.5.

So, we're still we're driving 2.5 to three point of fee leverage, that is a very important focus. Then the second thing I would say is, we're very focused on organic leverage. So, the rate, we can organically grow our fees versus the rate that our expenses grew organically. So, if our expense growth rate was 4.5, some of those were inorganic factors in there. So that growth rate would have been lower. If our fees were, as I've told you, somewhere in that four to five range, we're getting to that organic fee leverage.

I think we wrote the script as well. So, organic fee, leverage fee, operating leverage, and total operating leverage will remain commonly held discussions around here in terms of focus.

Mike Mayo -- Wells Fargo Securities -- Analyst

To be clear, that 7%, your fee growth, excludes the UBS impact and if it doesn't, what is the growth year-over-year excluding UBS?

Biff Bowman -- Chief Financial Officer

So, that does exclude. it. I took currency, and I took the acquisition out of our fee numbers, and that's where you get it.

Mike Mayo -- Wells Fargo Securities -- Analyst

How is UBS doing in terms of retention, cross-sell, metrics that you guys had internally, is it above, in line, below?

Biff Bowman -- Chief Financial Officer

Yes, its exceeded expectations to date in terms of revenue growth and performance.

Mark Bette -- Director of Investor Relations

Yes, and the one thing Mike I would add is that, the AUA relay into the UBS that we called out, was $575 billion, which is down sequentially from 607, and that was really a currency factor there. So, not a lost business issue or anything like that so, everything's going along pretty well.

Biff Bowman -- Chief Financial Officer

[inaudible] from the acquisition though.

Mark Bette -- Director of Investor Relations

Yes.

Operator

Thank you. Our next question comes from Gerard Cassidy with RBC.

Gerard Cassidy -- RBC -- Analyst

Hi Biff

Biff Bowman -- Chief Financial Officer

Hi Gerard.

Gerard Cassidy -- RBC -- Analyst

Sticking with the comments on M and A, can you give us your outlook for opportunities? Obviously, the UBS transaction sounds like it's going well. You guys have done a number of deals over the years. Is there anything that you see on the horizon that could look interesting to you, whether it's in a different product line or just enhances an existing product line?

Biff Bowman -- Chief Financial Officer

Yeah. If you look at some announcements that were public, we closed what I would call the SeaTech technology. The technology acquisition in the quarter. We talked about an investment in Lumen and others. What we've done is found opportunities I think to partner with or work aside or acquire some products and capabilities to get to market quicker and to I think, create some speed solutions for our clients. So rather than a large acquisition, that's where we have over the last two quarters.

Focused more of our energy and some of our capital, is those types of moves. We obviously stay tuned to the market, and should opportunities come up? We pay attention and we get the people to call on us that gives us those advises. But I'd say what you've seen in the public domain is more of a targeted smaller acquisitions or investments in products and capabilities or technologies that I think help move us forward.

Gerard Cassidy -- RBC -- Analyst

Very good. Then, going into the organic side, over the years, you've obviously grown organically the private wealth business by expanding into different geographies outside the home base in Chicago. Can you give us an update on what you're thinking over the next 12 to 18 months of potential organic expansion of the private wealth, personal wealth business, geographically?

Biff Bowman -- Chief Financial Officer

Yeah. So, we are absolutely continue to look at anywhere where there's a high opportunity set for wealth markets. There are pockets along the East Coast where there's high net worth opportunities, where we're under penetrated. What I would highlight for you though in that strategy is that we don't always need to have a physical location there. There are some markets where virtual teams have covered that and we've had tremendous success in certain cities where we actually cover them with virtual teams and have been successful with that approach.

So, we feel pretty good about our coverage in the wealth space but we will continue to look at those opportunities if we have a geographical gap but I think we're pretty excited with our model to be able to close that.

Operator

Thank you. Our next question comes from Brian Kleinhanzl with KBW.

Brian Kleinhanzl -- KBW -- Analyst

Thanks. Good morning. This looks like on the new business wins, and I don't want to quantify the numbers. Can you at least directly say if it's up or down quarter-on-quarter?

Biff Bowman -- Chief Financial Officer

I mean on a year-over-year basis, I would say yes. I mean, I don't know, especially when you think about the institutional business quarter-on-quarter, there was a positive impact on the fees, I would say. The actual new business that's recognized can be lumpy from quarter-to-quarter but there was sequential benefits as well as year-over-year benefits from new business.

Brian Kleinhanzl -- KBW -- Analyst

Just as you look out for the organic revenue growth. I mean, when you look out at the asset servicing, what's the driver of this organic growth that you're seeing? Is it coming from client switching, from other providers? Is it really just the new phase of outsourcing you're seeing picking up? I mean, can you help us get a better understanding of where it's coming from?

Biff Bowman -- Chief Financial Officer

Yes, sure. Good question. I would say we have seen a lot of it in our institutional side has been with asset manager clients providing asset servicing to asset manager clients. To your point, some of that has been their drive to look at their cost structures in a difficult environment and so opportunities for middle back office and to other places where they can outsource or partner with somebody has driven some of that.

Look, if you're with the right managers, they also have growth so we get some distributed growth as well. I think that's particularly true in our hedge fund services space, where we've had the opportunity and good fortune to partner with some partners, some clients who have been very successful in growing their own books, and therefore our organic growth goes with them as they either launch new funds or grow their AUM themselves.

Then geographies, I would add. We've had great growth as we've talked about in Australia but we've had great growth in other regions of the world. The Netherlands has had terrific success. We opened an office in Seoul, South Korea and other parts of the world. So, geographical, it's some distributed growth by partnering with the right folks and then it's the macroeconomic environment is causing some folks to look at outsourcing and to other opportunities.

That's driven a lot of our C and IS growth. You're right and in the more traditional pension space, that's more of a takeaway game, we do very well in that takeaway game but there's probably not a lot of new defined benefit plans being opened for instance. So, it's really a market share kind of game which we continue to do well in.

Brian Kleinhanzl -- KBW -- Analyst

Great. That's all. Thanks, Biff.

Biff Bowman -- Chief Financial Officer

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.

Duration: 68 minutes

Call participants:

Mark Bette -- Director of Investor Relations

Biff Bowman -- Chief Financial Officer

Brian Bedell -- Deutsche Bank -- Analyst

Michael Carrier -- Bank of America Merrill Lynch -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Ken Usdin -- Jefferies -- Analyst

Marlin Mosby -- Vining Sparks -- Analyst

Brennan Hawken -- UBS -- Analyst

Geoffrey Elliott -- Autonomous Research -- Analyst

Vivek Juneja -- J.P. Morgan -- Analyst

Mike Mayo -- Wells Fargo Securities -- Analyst

Gerard Cassidy -- RBC -- Analyst

Brian Kleinhanzl -- KBW -- Analyst

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