Northern Trust (NTRS) Q2 2019 Earnings Call Transcript

Northern Trust (NTRS -0.42%)
Q2 2019 Earnings Call
Jul 24, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the Northern Trust Corporation second-quarter 2019 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the call over to the director of investor relations, Mark Bette, for opening remarks and introductions.

Please go ahead, sir.

Mark Bette -- Director of Investor Relations

Thank you, Paula. Good morning, everyone, and welcome to Northern Trust Corporation's second-quarter 2019 earnings conference call. Joining me on our call this morning are Biff Bowman, our chief financial officer; Lauren Allnutt, our controller; and Kelly Lernihan from our investor relations team. Our second-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 July 24th 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 August 21. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Now for our safe harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2018 annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.

[Operator instructions] 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 2019 earnings conference call. Starting on Page 2 of our quarterly earnings review presentation. This morning, we reported second-quarter net income of $389.4 million.

Earnings per share were $1.75, and our return on common equity was 15.9%. This quarter's results included $4.9 million of severance-related and restructuring charges within expenses. This compares to $12.3 million in the prior quarter and $6.6 million one year ago. Before going through our results in detail, I would like to comment on some of the macro factors impacting our business during the quarter.

Equity markets performed well during the quarter, but were mixed on a year-over-year basis. Compared to the prior year, the S&P 500 ended the quarter up 8.2%, while the MSCI EAFE was down 0.8%. On a sequential basis, end-of-period markets were favorable with the S&P 500 and EAFE indices increasing 3.8% and 1.6%, respectively. Recall that some of our fees are based on lagged pricing, and those comparisons were favorable on a sequential basis but mixed versus one year ago.

On a month-lag basis, the S&P 500 and EAFE were up sequentially 6.7% and 4.9%, respectively. On a year-over-year basis, the S&P 500 was up 6.7% while EAFE was down 2.1%. On a quarter-lag basis, the S&P 500 and EAFE were up sequentially 13.1% and 9.6%, respectively. On a year-over-year basis, the quarter-lag S&P 500 was up 7.3%, while EAFE was flat.

U.S. short-term interest rates were lower during the quarter on average as seen by the sequential declines in average one-month and three-month LIBOR of six and 18 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 4% and 3%, 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 down 2%, while the euro increased 1%. Let's move to Page 3 and review the financial highlights of the second quarter. Year over year, revenue was flat, with noninterest income down slightly from one year ago and net interest income up 1%. Expenses increased 1% from last year.

The provision for credit losses was a credit of $6.5 million in the current quarter, compared to a provision of $1.5 million one year ago. Net income was flat year over year. In the sequential comparison, revenue increased 2%, with noninterest income up 3% and net interest income down 1%. Expenses declined 2% compared to the prior quarter.

Net income increased 12%, sequentially. Return on average common equity was 15.9% for the quarter, down from 16.5% one year ago and up from 14% in the prior quarter. Assets under custody/administration of $11.3 trillion increased 6% compared to one year ago and were up 4% on a sequential basis. Assets under custody of $8.5 trillion were up 5% compared to one year ago and up 4% sequentially.

Both the year over year and the sequential performance was driven by favorable markets and new business, partially offset by the impact of unfavorable moves in currency exchange rates. Assets under management were $1.2 trillion, up 3% on a year-over-year basis and up 2% on a sequential basis. The year-over-year performance reflected higher markets and new business, partially offset by lower period-end securities lending collateral. The sequential increase was driven by higher markets partially offset by outflows.

Let's look at the results in greater detail starting with revenue on Page 4. Second-quarter revenue on a fully taxable equivalent basis was $1.5 billion, flat compared to last year and up 2% sequentially. Trust, investment and other servicing fees represent the largest component of our revenue and were $955 million in the second quarter, up 1% from last year and up 3% sequentially. Foreign exchange trading income was $60 million in the second quarter, down 23% year over year and down 9% 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. Volumes were also down on both a year over year and sequential basis, but the mix of trades had a favorable sequential impact. Other noninterest income was $73 million in the second quarter, up 3% compared to one year ago and up 15% sequentially. The year-over-year increase was primarily due to a valuation adjustment to Visa-related swaps in the prior-year quarter and income relating to a bank-owned life insurance program implemented in the current quarter, partially offset by lower brokerage and treasury management fees.

The sequential performance was driven by the bank-owned life insurance program and lower Visa-related swap expense. Net interest income, which I will discuss in more detail later, was $425 million in the second quarter, increasing 1% year over year but down 1% sequentially. Let's look at the components of our trust and investment fees on Page 5. For our corporate and institutional services business, fees totaled $549 million in the second quarter and were down 1% year over year but up 3% on a sequential basis.

The translation impact of changes in currency rates reduced year-over-year C&IS fee growth by almost 1.5%. Custody and fund administration fees, the largest component of C&IS fees, were $385 million and were up 2% year over year and up 3% on a sequential basis. The year-over-year performance was driven by new business, partially offset by both unfavorable currency translation and unfavorable markets. On a sequential basis, the impact of favorable markets and new business was partially offset by unfavorable currency translation.

Assets under custody/administration for C&IS clients were $10.6 trillion at quarter end, up 6% year over year and up 4% sequentially. Both the year over year and sequential performance was primarily driven by favorable markets and new business, partially offset by the impact of unfavorable moves in currency exchange rates. Recall that lagged market values factor into the quarter's fees, with both quarter-lag and month-lag markets impacting our C&IS custody and fund administration fees. Investment management fees in C&IS of $111 million in the second quarter were down 2% year over year but up 6% sequentially.

The year-over-year decline was primarily due to adjustments in the prior year due to a change to gross revenue presentation, partially offset by favorable markets. The sequential performance was primarily driven by favorable markets. Assets under management for C&IS clients were $887 billion, up 3% year over year and up 2% sequentially. The year-over-year increase was driven by favorable markets and new business, partially offset by lower securities lending collateral levels.

The sequential growth was primarily driven by favorable markets. Securities lending fees were $22 million in the second quarter, down 28% year over year and down 4% sequentially. The year-over-year decline was primarily driven by lower volumes, as well as lower spreads. The sequential decline was driven by lower spreads, partially offset by higher volumes.

Securities lending collateral was $163 billion at quarter end and averaged $164 billion across the quarter. Average collateral levels declined 11% year over year and were up 4% sequentially. Moving to our wealth management business. Trust, investment and other servicing fees were $406 million in the second quarter and were up 4% compared to the prior year quarter and up 3% sequentially.

The year-over-year performance was primarily due to new business and favorable markets. The sequential increase was mainly attributable to favorable markets. Assets under management for wealth management clients were $293 billion at quarter end, up 2% year over year and flat sequentially. The year-over-year increase was primarily driven by favorable markets, partially offset by outflows.

On a sequential basis, favorable markets were offset by outflows. The outflows were mainly within cash products and, in part, were relating to a change in our product offering where we discontinued the sweep of client deposits into off-balance sheet money market funds. Moving to Page 6. Net interest income was $425 million in the second quarter, up 1% year over year.

Earning assets averaged $106 billion in the second quarter, down 8% from the prior year. Total deposits averaged $89 billion and were down 7% versus the prior year. Interest-bearing deposits declined 4% from one year ago to $72 billion. Noninterest-bearing deposits, which averaged $18 billion during the quarter, were down 17% from one year ago.

Loan balances averaged $31 billion in the quarter and were down 4% compared to one year ago. The net interest margin was 1.61% in the second quarter and was up 13 basis points from a year ago. The improvement in the net interest margin compared to the prior year primarily reflects a balance sheet mix shift and the impact of higher short-term interest rates. On a sequential quarter basis, net interest income was down 1%.

Average earning assets declined 4% on a sequential basis as deposit levels declined 2% from the prior quarter. It is worth noting that more than 85% of the sequential decline in deposits was related to lower wholesale deposits, which we use for leveraging purposes within our treasury group. These accounted for approximately 3% of our non-U.S. office deposit balances in the second quarter.

Client deposit levels were down less than 0.5% on a sequential basis. On a sequential basis, the net interest margin increased three basis points, primarily reflecting a balance sheet mix shift, partially offset by lower short-term interest rates. We did not see the opportunity for foreign exchange swap activity within our treasury function to the extent we have seen in the last several quarters. The activity this quarter resulted in approximately $2 million of foreign exchange trading profit, with a slightly less amount that when we gave up in net interest income.

This quarter's results were more in line with business as usual results. For comparison, in the prior 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 second quarter, U.S.

dollar deposits represented 60% of our -- 67% of our total deposits. This is down from 69% in both the prior-year and prior-quarter periods. I wanted to highlight two items for you to note as we look at our sequential trends: First, during the quarter, we implemented a bank-owned life insurance program that had the effect of moving $1 billion from earning to non-earning assets. The program was in place for approximately half of the quarter and resulted in an approximate $3.5 million decline in net interest income and a $4.2 million increase within the other operating income, as well as a tax benefit.

On an annualized basis, we would expect the program to benefit net income by approximately $40 million, with a $36 million increase within other operating income offset by a decline of an estimated $29 million in net interest income and a tax benefit of an estimated $7 million. Second, as I referred to when we discussed wealth management assets under management, during the quarter, we had a change in our deposit products whereby we discontinued the sweep of client deposits into off-balance sheet money market funds. This change resulted in an increase of approximately $4 billion in period-end deposits that you should see on our savings, money market and other line within our balance sheet. Turning to Page 7.

Expenses were $1 billion in the second quarter and were 1% higher than the prior year and down 2% sequentially. As previously mentioned, the current quarter included $4.9 million in expense associated with severance and other charges. For comparison purposes, note that the prior year and prior quarter included $6.6 million and $12.3 million in charges, respectively. Excluding the called-out charges, expenses for the quarter -- current quarter was up 1% from one year ago.

The impact of favorable currency translation benefit expense by just under 1 percentage point on a year-over-year basis. Excluding charges in both the current and prior-year quarters, the following items were key drivers within the expense categories: Compensation was higher, primarily driven by higher salaries due to base pay adjustments and staff growth, partially offset by lower expenses related to long-term performance-based equity incentives; employee benefits expense was slightly higher due to higher payroll withholding tax, partially offset by lower medical costs and retirement expenses; outside service costs were up slightly due to higher technical services expense, partially offset by lower third-party advisor and sub-custody expenses; equipment and software expense was up year over year, mainly due to higher software-related spend; other operating expenses were up from the prior year due to higher miscellaneous expense, partially offset by lower FDIC premiums and lower staff-related spend. Shifting to the sequential expense view. Including the expense charges in both the current and prior quarters, expenses were down 1% sequentially.

Compensation expense declined, primarily reflecting lower expenses related to long-term performance-based equity incentives, partially offset by higher salaries due to base pay adjustments and higher cash-based incentive accruals. The prior quarter's equity incentive expense included $30 million in expense associated with retirement-eligible staff. Employee benefits increased sequentially, primarily due to higher medical costs. Outside services declined sequentially due to lower technical services and legal-related costs, partially offset by higher third-party advisor fees and sub-custody expenses.

The lower level of technical services did benefit from approximately $6 million in one-time vendor expense credits during the quarter. Other operating expense increased from the prior period, primarily driven by higher business promotion expense. Staff levels increased approximately 6% year over year and 2% sequentially. The staff growth was all attributable to staff increases in lower-cost locations, which include India, Manila, Limerick, Ireland and Tempe, Arizona, partially offset by reductions within our higher-cost locations.

As we have discussed on previous calls, through our Value for Spend initiative which we started in 2017, we have been 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 second-quarter results reflect approximately $47 million in expense savings, reducing the year-over-year expense growth rate by approximately two and a half points.

This would equate to just under $190 million on an annualized basis against the $250 million goal. Turning to Page 8. A key focus has been on sustainably enhancing profitability and returns. This slide reflects the progress we have made in recent years to improve the expense-to-fee ratio, 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. We remain focused on continuing to drive organic growth in our business and managing our expenses to improve our efficiency and productivity. Turning to Page 9. Our capital ratios remained strong, with our common equity tier one ratio of 13.6% under the advanced approach and 13.2% under the standardized approach.

The supplementary leverage ratio at the corporation was 7.6% and at the bank was 6.9%, both of which exceed the 3% requirement that became applicable to 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 three implementation, there could be additional enhancements to our models and further guidance from the regulators from the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel three rules. During the quarter, we repurchased more than 2.9 million shares of common stock at a cost of $271 million.

As we announced in June, our 2019 capital plan received no objection from the Federal Reserve. In it, we requested authority to increase our quarterly common dividend to $0.70 per share. Yesterday, our board of directors formally approved the plan dividend increase, which represents a year-over-year increase of 27% and a sequential increase of 17%. The capital plan also provides the flexibility to repurchase up to $1.4 billion of common stock.

The timing and amount of shares repurchased will depend on various factors, including but not limited to, Northern Trust's business plans, financial performance, other investment opportunities and general market conditions, including share price. In closing, despite the impact of a mixed global macroeconomic environment, we performed well during the quarter, increasing our pre-tax margin to 34% and generating return on average common equity of 15.9%. Our balanced business model continued to generate organic growth with each of our client-facing reporting segments of wealth management and C&IS contributing approximately 50% of our earnings. We are excited about our competitive positioning within each of our businesses.

In wealth management, our holistic advice approach continues to resonate with prospects and existing clients. We continue to deepen our talent and expertise with key hirings across our business. In C&IS, we continue to have success in growing our asset servicing business as evidenced by wins announced during the quarter such as Magnetar Capital, Anchorage Capital and the World Bank. Our technology, operational expertise, client focus and flexible operating model continues to support our strategy very well.

We remain focused on providing our clients with exceptional services, improving our productivity and driving profitable growth. Thank you again for participating in Northern Trust's second-quarter earnings conference call today. Mark and I would be happy to answer your questions. Paula, please open the line.

Questions & Answers:

Operator

Thank you. [Operator instructions] We'll take our first question 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 questions. So curious about the -- thinking about the deposit costs, interest bank deposit costs for the non-U.S. office line.

You had called out the reduction in wholesale deposits, which I'm sure was helpful, but just wanted to confirm whether or not there was any other noise falling through that line that we should think about. And then thinking about deposits sort of broadly, how should we think about the deposit costs for those $4 billion in interest-bearing that you flagged in your end of period resulting from the termination of the money market fund program?

Biff Bowman -- Chief Financial Officer

OK. On the additional color on the deposits in the foreign office deposits, in addition to the lower leveraging amounts that we highlighted, we really had two individual clients that accumulated large deposits in the first quarter, and they deployed them in the second quarter. We would consider that normal operating flow that we see from time to time in between quarters so we could really identify that movement in the foreign office deposits excluding those that were impacted by the lower leveraging in a handful of clients. In the case I just highlighted, two clients really made that move.

So not uncommon for us to see builds in certain periods and then the deployment of that in other periods, and so we'd say normal flow there. In terms of how should we think about the pricing of the deposits in the retail space or in our wealth from the closure, if you will, of our anchor sweep product, we did offer rates for those individuals that -- attractive rates for that that allowed those to maintain. That had a -- that has a finite period, and when that rolls off, then they will be at market rates on the competitive front.

Mark Bette -- Director of Investor Relations

And Brennan, I would just add, if you look at the savings, money market and other line, you did see an increase sequentially in the costs, which is partly reflective of what Biff indicated but then also, the Fed increase in December, there was a lagged pricing impact in the retail deposits. So that wasn't quite fully reflected in the first quarter yet. So that's another part of the sequential impact.

Brennan Hawken -- UBS -- Analyst

OK. And then Biff, do you still expect -- I want to say that you had flagged during a presentation intra-quarter that you expected deposit betas to be quite high in the event of a Fed rate cut, near 100% as I recall. Is your expectation still that they would be that high? And why do you think that betas are going to be so much higher on the way down than we have seen in prior historical periods of Fed rate cuts?

Biff Bowman -- Chief Financial Officer

Yes. It's still our view that the betas will be -- let me separate first retail and institutional deposits. It's our view certainly on institutional deposits, which make up the majority of our balance sheet, that the betas will be pretty high and almost like say, almost symmetrical as they were on the way up. As the most recent betas were pretty high, we think that, that same beta favorability would happen on the way down.

So perhaps not in 100%. That depends on the competitive landscape but high on the way down. So that's what we see institutionally. On the retail space, I think it's really a function of the competitive landscape there.

So they moved up fairly slowly so we benefited from the early days of the rate hikes, and then that beta moved up over time. I think you could probably also see some of the same symmetrical path down in betas on the retail space. But there's a much more transparent market to understand the pricing there, and we need to remain competitive in that landscape. So I guess I'd summarize and end by saying I think we still believe that the overall, the betas will be pretty high on the way down and pretty fast.

If you get closer and closer to a zero-bound for U.S. dollars, that could create some compression as we get closer to that, but there's still a few hikes before we get there.

Operator

And moving on, we'll go to Glenn Schorr with Evercore.

Glenn Schorr -- Evercore ISI -- Analyst

Hello there. Quick one related to fee rates. Mark, it's obviously very strong year to date. I'm just curious how -- particularly in the U.S., curious how breakpoints, fee caps play a role and make it hard for us to look at any custody fee rate trends.

And maybe you can throw in there a comment about what kind of fee rate on the new assets coming in the door coming in.

Mark Bette -- Director of Investor Relations

It's Mark. There's a lot that goes into that, so we don't specifically look at fee rates internally because of really the mix of business can be quite different. So you could have a very large custody mandate with assets where the fees might be small compared to a small assets under administration mandate where the fees are larger. So as far as the trends go there, it's hard to pin down something there.

I would say though, that as we've highlighted before, when you look at that line, about 40% of the fees are not asset value-related. So in general, you would get the fees moving less than what you would get the assets moving, assuming that asset mix is coming out of the same rate, which it's not. I would say that some of the places where we're winning are in places that we do have, when you talk about hedge fund services and areas like that, that does usually generically, it would have a higher beta or a higher fee rate and what say, domestic custody would have as a -- for instance.

Biff Bowman -- Chief Financial Officer

Yes. Glenn, I would just add, second part of your question was the new assets coming onboard, the fee rates. I think Mark's point is important there as the types of wins we're having where it's growth, and I think we mentioned Magnetar and Anchorage hedge funds. There's still good value added and the fee base there and then there's other large just pure asset servicing custody wins where the competitive landscape, the basis-point yield might be a bit lower.

So you've got to really look at the mix coming in, and we've got a pretty nice mix, both globally and product set mix, so we get a nice blend of rates coming in on the new business. It's not all just in lower margin fee rate business.

Glenn Schorr -- Evercore ISI -- Analyst

I appreciate all that. Maybe one quick follow-up to Brennan's question. I hear you loud and clear on the high betas on the way down on the institutional side. I'm curious, is there a difference in client segment -- by client segment in the retail side? I'm surprised to see such rate sensitivity.

It's not what I think of when I think of Northern Trust Wealth Management.

Biff Bowman -- Chief Financial Officer

Yes. I think what you have to look at there is you've got to look at the beta over a much longer period than just one quarter because we could have been behind the market, slower to the market over periods of time, and you can see beta moves in certain periods that look larger than a beta than you expect because we're catching up from some competitive landscape. And I will still say, it is still competitive for even high net worth deposits. You've got sophisticated investors who are looking when yields get to some differential with the market that are seeking, at least for the cash portion of their business balances, they're looking for market rates, and so we need to remain competitive.

It may not be quite as dependent -- as competitive as those that are relying on retail deposits but it remains competitive.

Glenn Schorr -- Evercore ISI -- Analyst

OK. Thanks very much.

Operator

And next, we'll go to Mike Carrier with Bank of America.

Biff Bowman -- Chief Financial Officer

Mike, hi.

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

Good morning, and thanks for taking the questions. Maybe the first one, just on the expense growth, so that's been coming in better this quarter and year to date versus kind of the targeted in line with the organic growth rate. Just curious, should we be expecting maybe any new spend like in the second half of this year? Or could that be coming in lower just given the revenue backdrop and some of the uncertainty, whether it's -- you mentioned some of the FX but also the rate backdrop.

Biff Bowman -- Chief Financial Officer

Yes. So here, I would say the environment we're operating in, it's not lost on us, right? So a net interest income environment that looks like it will become more difficult in terms of the -- where rates are moving. So we really want to continue to drive our organic revenue and our franchise, but we have to be mindful of the macro headwinds that we're facing. We can't just singularly focus on that.

So that means I think the disciplines that you've seen in the first six months of this year, and I think even longer term than that, they're vital to our profitability. They have to remain. So we are focused on certain disciplined capital deployment for projects, return-seeking projects, disciplined expense management around occupancy, procurement, business promotion, location strategies, automation driving it, organizational design, all things we've talked about, those are even more in focus. They've been in focus.

You've seen the benefits of our focus of them, but they're even more in focus as we are recognizing the environment that we're entering. And I can tell you that I think some of the cultural behaviors that we've embedded as a part of Value for Spend are now part of the disciplines that will help us, we think, continue to execute on that in the second half of this year and in the future. So there is not a planned ramp in those expenses because we are -- we're certainly cognizant of the environment we're operating in, and there is a strong focus on maintaining those. What I will say, though, and want to be clear is we think our organic growth rate is still a very important governor, if I could say that, on what is allowable for that expense growth rate.

So we still want to grow our franchise organically, and there is some expense needed to fuel that organic growth. But as long as that's proportional and appropriate with enough spread in it, we think we can move it forward and move the profitability the firm forward.

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

OK. And then I just wanted to follow up on NII. So you mentioned your expectations on deposit betas, and then just if we go down the path of getting a few Fed cuts, just anything from like a positioning or duration, the balance sheet, like has anything changed? Or do you expect anything? And then just so I'm clear on like the deposits, you mentioned on the institutional side some of the activity that you saw on the non-U.S. You mentioned some of the things that you guys do on like the deleveraging.

And then it sounds like on the retail side, you're seeing some money move on. When we just think about the start to jump off on, is that roughly unchanged because you had the depression like of the institutional but you're having the retail come onboard?

Biff Bowman -- Chief Financial Officer

Yes. Let me break that into two parts. One, you're talking about the balance sheet jump-off point sort of from a size. And then the first is sort of, I think, more of an outlook on net interest income, and I think we'll give a little color there.

I would imagine people want to hear that. If you looked at our net interest income from the Q1 to Q2, when we stripped out, there was some favorable impact from the lower FX swap activity, but we implemented BOLI, which we took our earning assets down. If you netted those out, our sequential decline was probably just under 3%. I know we reported 1% but those factors moved it around.

If we look at the current implied curve and we assumed two rate cuts in July and September, we would think in the third quarter that we would see about a 2% to 3% decline in net interest income from this quarter's reported net interest income, and that includes the impact of BOLI and other things in there, so we would see somewhere around 2% to 3%. In the fourth quarter of this year, we would say flat to slightly down from there. And again, that's reliant on a whole series of factors. How did the betas play out? How does our balance sheet play out over that time in terms of volume and mix? There's a lot of factors.

But based on our best modeling and our best forecast at this point, relatively modest decline in net interest income in Q3 and flat to slightly down in Q4 based on our current thinking in there. In terms of the balance sheet size, Mark if you want to --

Mark Bette -- Director of Investor Relations

Yes. I would -- I guess if you look at the average balance sheet and you're thinking about that as your starting point, and which is probably the best thing to do because we do have period-end deposit flows that spike up, the one thing I would point to is this change in the sweep product in wealth management where that was really only a partial quarter. It happened at different points throughout the quarter. So for that line, the savings, money market and other looking at the end of period for that might be a little bit closer to where it might run during the quarter, but that remains to be determined.

But that's how I would position as far as a balance sheet jump-off point.

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

OK. That's helpful. Thanks a lot.

Mark Bette -- Director of Investor Relations

OK.

Operator

And next, we'll go to Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, Biff. Hi, good morning. A couple of follow-ups to that. One is if your rate cuts were all in July, if you got your rate cuts in July, is there a material change to the numbers you just described or not really?

Biff Bowman -- Chief Financial Officer

Not really. In fact, it might be very, very modestly better to get 50 basis points than two 25s. A 50 and a 25 would -- we would probably have to get back to you what that is, but we know it is, but it might be a little bit more impacting. But a 50 is very modestly better.

So I would -- I could say roughly for your projections probably about equal over two quarters.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. And then can you just give us some color as to what the decisioning was behind the BOLI? What was the reason for that? And should we expect more either BOLI-like types of transactions going forward or other securities, asset repositioning that you might be doing in a changing rate environment?

Biff Bowman -- Chief Financial Officer

Yes. We have -- as you know, we've embarked on what I will call a balance sheet optimization-type program, and we've looked at certain asset classes or certain yield opportunities on our balance sheet. We had no BOLI investments, which made us relatively unique in the marketplace. And in the current yield environment and particularly with the declining rate environment, the benefits of that actually were pretty powerful as we cited.

It's $14 million of benefit in net income for our franchise. It does take down NII --

Mark Bette -- Director of Investor Relations

On an annualized --

Biff Bowman -- Chief Financial Officer

On an annualized basis, it does take down our NII, but it will flow-through the other income line, and you saw some of the benefit of that in just sort of one half of one quarter. We're always looking at optimization efforts. I can't say whether we would add more or less BOLI, for instance, in this transaction, but this was our first pass at it.

Betsy Graseck -- Morgan Stanley -- Analyst

I guess, I was just wondering like how you decided to size it the way you did. Was it as you kind of indicated, you were the only one who didn't have it, so was there a relative positioning vis-a-vis peers? I'm just trying to wonder why $1 billion.

Biff Bowman -- Chief Financial Officer

Sure. There's several factors that, a, limit the size. There's regulations as to how much as a percent of your capital that you can have. But remember, we have counterparty credit exposure then that we have to go out to with very high credit quality carriers that we now have this credit exposure to.

And so our credit group also is providing input as to the sizing of the portfolio. And when we put all that together, it added up to a billion dollars for now.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. So you would say -- I should take from that, that you're optimized on the BOLI positioning?

Biff Bowman -- Chief Financial Officer

As we sit here today, we have $1 billion in there. We're always looking at those opportunities. I can't say whether we'd go higher or lower in the future, but I think we're here for some period of time.

Betsy Graseck -- Morgan Stanley -- Analyst

Got it. OK.

Operator

Thank you. And next, we'll go to Alex Blostein with Goldman Sachs.

Biff Bowman -- Chief Financial Officer

Hey, Alex.

Alex Blostein -- Goldman Sachs -- Analyst

Hey, guys.

Biff Bowman -- Chief Financial Officer

Hey, good morning.

Mark Bette -- Director of Investor Relations

Hey.

Alex Blostein -- Goldman Sachs -- Analyst

Hey, guys. Thanks for the NIR guidance. I know you guys typically don't get into explicit guidance but given where we're in the cycle, I think it was definitely appreciated, so thanks for that. A question for you guys around expenses again.

So given the fact that historically, you've been sort of aiming to align expense growth with organic fee growth, so call it four-ish percent, five-ish percent or something like that. In light of a tougher backdrop from NIR, and that obviously tends to be a much higher-margin type of business for you guys, is there an emphasis to potentially bring that down below the organic fee growth levels? In other words, could we still anticipate some of the positive kind of operating leverage or dynamic even with your current NIR outlook?

Biff Bowman -- Chief Financial Officer

Yes. I think we are looking at that hard, Alex. As like you said, we can't ignore the backdrop we're in, and pressure on one of our important revenue lines, net interest income, may put additional pressure that we have to look at on our expense line to widen out that leverage that you're talking about. Some things will naturally happen there.

I think it's important. For instance, I will tell you certain cash-based incentive plans. If net interest income goes down, they're going down. So that will give us some natural reduction in our expense lines if that's the backdrop.

But then the discretionary items I described, we may have to continue to push harder and harder on some of those levers to widen out, if you will, the organic leverage in our business, to overcome, if you will, some of the pressures we see on net interest income, for instance.

Alex Blostein -- Goldman Sachs -- Analyst

Yes. Second question around foreign exchange trading. So last quarter, I believe there was a $13 million swap benefit in that line, so I kind of think apples to apples, you've seen an improvement sequentially and in a fairly difficult environment. So curious again kind of -- and I know that's been a focus for you guys to kind of drive some of the organic initiatives in foreign exchange trading to gain some market share, so maybe a little bit on kind of what's going on underneath the surface within that part of the business and any better way for us to think about kind of the go forward?

Biff Bowman -- Chief Financial Officer

Yes. So you're right. At the core, the core FX actually did pretty well if you'd strip the swap impact out of that. I think there's a couple of factors in there.

One is we saw our share of FX transactions that we got from our client base increased from quarter over quarter. So we're communicating, marketing better products and capabilities, so we captured a higher percent share of trade. Even in a lower volatility environment, we've captured more share of trade. And we also saw a little bit higher volume in some of the emerging market currencies in the quarter from our client base.

I don't know if that's true for everyone but from our client base, that in of itself, also has a little wider spread. So the combination of those two, I think, actually drove a relatively good core FX performance quarter over quarter.

Alex Blostein -- Goldman Sachs -- Analyst

Great. Thanks so much.

Operator

And next from Wolfe Research, we'll go to Steven Chubak.

Steven Chubak -- Wolfe Research -- Analyst

Good morning. So I just wanted to ask a follow-up on the securities book. Appreciate all the detailed NII guidance. And as we model the securities yield and layer in the forward curve, can you just remind us what percentage of the book reprices each quarter? And where does the overall duration of the book sit today given some of the extensions you've been doing?

Mark Bette -- Director of Investor Relations

So the overall duration of the book, let me answer the second part, is at 1.3 years, and we have been adding some duration, you're right. But that duration that we've added has been somewhat muted as the longer rates have come down and obviously creates a view of faster prepayments. And so that has the impact of shortening the durations, so we're lengthening it with our purchases, but the actual come-down of the rates in the long end of the curve mutes it. But we're still longer at 1.3 than we've been traditionally where we've run probably closer to one or 1.1 on the terms of the duration.

Biff Bowman -- Chief Financial Officer

As far as the repricing goes, we've talked about before how our securities portfolio is kind of divided between a shorter and a longer. The shorter book is probably -- it's a little bit less than half of the total securities book, and that's where you would get mostly when you think about one-month LIBOR and three-month LIBOR, that repricing would happen fairly quick, obviously, within a quarter. And then the other part of the book, the longer book, that, as you get securities rolling over, you put something on two years ago, it rolls over and then you reinvest that. So that would happen on more of a staggered basis across a period of time.

Steven Chubak -- Wolfe Research -- Analyst

And just one follow up for me on some of the deposit growth commentary. I think there's a big debate about how much of the rate headwinds can be offset with volume growth. And you noted that deposit betas should be elevated on the way down. But just given overall a more sophisticated client base, how are you guys thinking about the pace of organic deposit growth that you can generate within both retail and institutional? And just looking out to the forward curve, you gave some very helpful detail on '19.

Just as we look out to 2020, do you believe there's a path to generating sufficient NII or volume growth to offset some of those rate headwinds?

Biff Bowman -- Chief Financial Officer

If we look out the 2020, I would say we're going to start to become more reliant on an organic growth rate that we've talked to you before in our asset servicing business primarily to drive the custody growth and the deposit growth that you're talking about. We could be more aggressive in our pricing to try to attract deposits. But given the construct of our balance sheet, that type of funding need has to make good economic sense for us to want to do it. And we don't have a big loan portfolio to fund, for instance.

So I think the growth rate in our deposits is going to come from at least some -- most of that will come from just the organic growth we've seen in our fees. So if we've talked about 4% to 5%, some portion of that would come with deposits. Not all of it because we do fund administration and other work which may not come with custody deposits on the balance sheet, but much of it comes with custody deposits. So I think that becomes more of the benchmark for the balance sheet growth.

And to your point, depending on how rates move, it probably would be difficult to make it up with volume to your point. What I would say is if we get more than two insurance type cuts that the Fed may -- that we would project, but you put your projection on it, if we get more than two and we start to get into something that looks more like quantitative easing, historically, I think the custody banks have been the recipients of the liquidity that's pumped into the system. And so we could see deposit growth and balance sheet growth move at a much faster rate if this becomes more than a one or two rate cut cycle.

Steven Chubak -- Wolfe Research -- Analyst

That's very helpful. Thanks for taking my questions.

Operator

Moving on, we'll go to Jim Mitchell with Buckingham Research.

Biff Bowman -- Chief Financial Officer

Jim, good morning.

Jim Mitchell -- Buckingham Research -- Analyst

Hey. Just two questions. First, maybe one last one on the deposits. Noninterest-bearing actually was flat on a sequential basis while your peers were down.

They've been highlighting declines going forward. I guess is that sort of that organic growth you were talking about? What's keeping your noninterest-bearing flat? And how do you think about that over the next, I guess, looking over the next couple of quarters?

Biff Bowman -- Chief Financial Officer

Yes. Let me walk you through that again. So we had about $18 billion in average noninterest-bearing deposits, I think, in the quarter. And if you look at those, about 85% of those are in dollar.

So of the dollar deposits noninterest-bearing, 25% are wealth management deposits. Those have been historically very sticky, and they have remained sticky for a long time. Another 25% are sort of our treasury cash management business. They're there for balances to pay fees, etc.

Those two have been fairly sticky. So I think you've got kind of half of the dollar-based noninterest-bearing that have been and remain pretty sticky. That leaves sort of the other 50% there which are part of core institutional asset servicing. Many of those, we think, are just part of operational needs and been there.

We kind of talked about $3 billion to $4 billion sort of being, what I would say, was perhaps yield-seeking that was sitting there in noninterest-bearing. And we've seen -- we have regular dialogues with those clients. We believe those are also there for the liquidity purposes. We certainly have seen runoff in noninterest-bearing over the year.

But more frequently, we think most of that has sought -- the yield-seeking piece that have sought yield already. So we've seen a little bit more stability in noninterest-bearing in the last two quarters.

Jim Mitchell -- Buckingham Research -- Analyst

OK. That's helpful. And maybe just bigger picture, I know you guys have been talking about efforts to boost organic growth and wealth. Maybe you can just sort of update us on what you've been doing there and what -- any evidence you had of that accelerating, that will be helpful.

Biff Bowman -- Chief Financial Officer

Yes. So we -- as you could see with our wealth management reported figures, they had a strong quarter, very strong quarter, very healthy margins and good fee growth rate year over year, some of that driven by markets but some of that driven by organic. And again, they continue to look at geographies where we have -- want to increase our market share. We don't always have to have a physical presence as we've talked in the past.

There are certain cities and markets where we've got -- grown our market share without having to have a physical presence, and those are generally very attractive pieces of business with low physical overhead needed to get there. We can serve it out of Chicago or Florida or New York or wherever. And then I would say our product suite, particularly our holistic advice, our Goals Powered solutioning, has resonated and particularly resonated with people in an environment where we've seen a little bit more volatility, certainly interest rate uncertainty. Markets are favorable, but you've got a lot of people looking at the landscape, the geopolitical landscape, and there's some certainties on the horizons.

And so we think our technology and tools led to pretty increased strong organic growth in that business as well.

Jim Mitchell -- Buckingham Research -- Analyst

So I mean, is there any hard number you could point to in terms of new account openings or flows picking up to help us?

Biff Bowman -- Chief Financial Officer

Yes. We don't really --

Mark Bette -- Director of Investor Relations

That's nothing that we've disclosed.

Biff Bowman -- Chief Financial Officer

Yes. We don't disclose that. I mean, you look at the fee growth rates and the business and make your own assessment of the market impacts of that and you can probably get to an underlying core growth rate.

Operator

Moving on, we'll go to Marty Mosby with Vining Sparks.

Biff Bowman -- Chief Financial Officer

Thank you, Marty.

Marty Mosby -- Vining Sparks -- Analyst

Good morning. I wanted to ask you about the leverage -- the deleverage this particular quarter. It looked like they were deposits that were outside the United States and were you kind of using that as a source of being able to take some wholesale funding, very low and then redeployed it in the United States at a higher rate? Is that some of the FX translation? Is that why you wanted to get out of it? What was the motivation for it? And what was the trigger to get out of the leveraging strategy you had out there?

Biff Bowman -- Chief Financial Officer

Well, I'll split this question with Mark. But the strategy for getting out of it is, Marty, the wholesale funding. The return on it, quite frankly, has gone to about zero. So from a return -- given an incremental return, the cost of wholesale funding and the investment that we were putting it in was generating a very low to no return in this environment.

So we took the decision to pull some of the leveraging off. And I think, Marty, the currency or the -- where it sits on the balance sheet, these are euro-dollar deposits. So the wholesale deposits where we went to a money fund or something like that, it's a wholesale deposit. Mark, I don't -- I mean, a euro-dollar deposit.

Mark Bette -- Director of Investor Relations

Yes. So we weren't -- we're not crossing currencies with it so we're keeping it in U.S. dollars, and it is -- you do see it certainly short-term borrowings in other line where we do -- we'll do sprint biddings that are home loan bank borrowings. And then the wholesale deposits flow-through the non-U.S.

office line. So it's a combination of those two that we use for leveraging purposes. But we -- it is on the liability side, U.S. dollars, and then U.S.

dollars on the asset side as well.

Marty Mosby -- Vining Sparks -- Analyst

Gotcha. And then we've talked extensively -- I've been an advocate for expanding the duration to protect NII as you end up having these declines. What is your perspective in the sense of doing, not doing that as you gone through the cycle? And why wouldn't we have been more proactive and defensive to protect against a fairly valuable part of our income stream, which is this net interest income?

Biff Bowman -- Chief Financial Officer

Yes. So Marty, over a year ago, we start talking about here about the duration extension of the portfolio and have been executing on that. I know at 1.3, that still seems perhaps short in duration to the average. But for our portfolio, that's a fairly meaningful increase.

And again, we take that duration. We don't do it through any credit additions. It's generally done through duration of treasuries and added. So we have been doing some of that over the periods, and there obviously are other hedges and swaps and other things that we can do into the portfolio to help look at that.

So we've been -- I would say we've been contemplating a rate move for at least one year from our ALCO and have been executing on some of that behind the scenes. So I think it's one of the reasons our -- actually our net interest income and others has held up reasonably well. Obviously, we continue to look at that. And some of those decisions now, with the way the shape of the yield curve is right now, there is some NII give up in protecting against the -- a long-term move down in rates, as you might imagine, based on where the very short end of the curve is now versus the long end.

But we have taken some of those decisions, so thanks.

Operator

Moving on, we'll go to Ken Usdin with Jefferies.

Ken Usdin -- Jefferis -- Analyst

Hey, thanks. Good morning, guys. Biff, just one more thing on the NII first. So if I take the $3.5 million impact from the BOLI and then the $29 million for the year, effectively, are you saying that, that the decline in 3Q is really just from the BOLI and that core NII dollars are basically going to be flattish? Is that the right way to think about it?

Mark Bette -- Director of Investor Relations

Well, this is Mark. You would -- we also had a benefit from the FX swap so -- but in a way, you're right. I mean, if you added back BOLI, you would be flat, but that was because of the fact that we had a benefit from the FX swaps, which was basically offset by what we saw play out with the interest rate environment.

Ken Usdin -- Jefferis -- Analyst

Right. OK. And then my second question, just on the cost side. So Value for Spend is expected to run rate by the end of this year, and it's been a 3-percentage-point helper to the cost growth rate.

So as we look out into past 2019 -- or sorry, it's going to run rate by next year. But you've gotten a good chunk of it already. So the magnitude of help, does it stay the same as you go forward? Like are we going to expect 3 percentage points of help on an ongoing basis? Or do you have to think about reupping the plan at some point to maintain this right balance? Any thoughts there?

Biff Bowman -- Chief Financial Officer

Yes. Thanks, Ken. So your thinking is right. The 2% to 3% kind of per-annum benefit that you've talked about is what we are seeing.

In terms of will we reup Value for Spend, let me frame it this way. The answer to that is to meet the sort of the financial model that we've talked about, which has set an organic fee growth rate, we've talked 4% to 5%, then we look at our expense base beneath that and we say we've got certain inflationary price expenses coming at us. We've got certain investments that we want to make and, we've got certain expenses that we need to fuel that 4% to 5% growth rate. If we want to get leverage in that equation, I guarantee you, you would need a productivity offset to make that math work.

So if you got 4% to 5% growth rate, you add in inflationary expenses, you add in investment needs, you add in the expenses needed to grow that 4% to 5%, you probably produce something higher than a 4% to 5% expense growth rate. What we're saying is that needs to be the productivity we need to get on an annual basis in our franchise to drive leverage into that business. And your magnitude is in the area code that we're thinking about, the 2% to 3% kind of range every year. A good way we think about it is it's got to be at least as much to offset inflation.

So if our expense improvements have to be at least enough to offset inflation, then you have your cost to drive the new business and you've got some available for investment. And that's the way we think about it. The more we drive in productivity, the more we share in profitability and investment opportunities for the firm.

Operator

And next, we'll go to Gerard Cassidy with RBC.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Hi, Biff. Biff, can you -- I know the modeling is challenging and nobody can really predict the future on interest rates with 100% accuracy, but I recognize we're all focused on the short end of the curve. What happens in your guys' outlook if the long end of the curve actually rises due to maybe a trade settlement with China, stronger economy, and we're looking at a two and three quarters 10-year in the first going into the first of next year. How does that affect what you guys have been talking about on net interest income?

Biff Bowman -- Chief Financial Officer

I think, Gerard, the answer to that is that it probably depends on how the steepness of the curve moves between the short end and the long end. So if the long end moves up and the short end moves up in parallel, it's a different impact that if the short end stays where it is and the long end moves up and we get steepness in the curve. From a loan book perspective, we don't have nearly as much mortgage-based credit that's going to be impacted by the type of move you're talking about in the long end of the curve. So I would say less impactful to us in that space.

But the investment opportunities along the curve and the spread they offer from the short end of the curve does matter to us. So I guess I would have to say it depends on how the rest of the curve shifts with that move in the long end.

Gerard Cassidy -- RBC Capital Markets -- Analyst

OK. Yes. Because I was assuming the short end drops 50 but the long end stays, so you have a so-called bull steepener in the curve, is what I was thinking. But thank you.

And the second question, when you guys step back and you look at the challenges that companies always face and opportunities that you guys have, what are some of -- aside from interest rates since we've talked about that, what are some of the challenges that you guys foresee that you have to overcome maybe in the next 12 or 18 months when you look out of the businesses?

Biff Bowman -- Chief Financial Officer

I would say if we look -- there's always a significant demand for technological investment for our business, and we compete particularly on the asset servicing side in a highly technologically driven field and so making sure we make the right investments in that technology to remain competitive. Along with the word competitive, I would say we are in a competitive marketplace. And while I would say we have seen pretty similar type fee pressures that we talked about in the past, compression of 1.5% to 2% in the marketplace, we're in a competitive environment with good competitors. And so we want to monitor the competitive nature there.

So we got to remain vigilant to the competitive landscape on the horizon. And on the wealth space, I think it's one of opportunity. So what -- you asked what the challenges are. I think for that, it's what are the right pockets to grow in.

Where do we want to -- where do we have less market share than we would like? And where can we get to that client base because where we are established, we do very well in those markets, and I think there's opportunity for us in certain markets where we're maybe underrepresented.

Gerard Cassidy -- RBC Capital Markets -- Analyst

Great. Thank you.

Operator

Moving on, we'll go to Brian Kleinhanzl with KBW.

Biff Bowman -- Chief Financial Officer

Hi, Brian.

Brian Kleinhanzl -- Keefe, Bruyette & Woods -- Analyst

Hey, good morning, guys. Quick question on the expenses, the trust and investment fees and when it came down again this quarter. It's been kind of trending lower over the past couple of years. But given your pullback on expenses, are you still expecting that to trend lower from here? Is it just a more challenged environment which is expected to kind of flatten out for a while?

Biff Bowman -- Chief Financial Officer

So that question I would say we do hope that over long periods to evaluate that, that we want to continue to drive more productivity in. So we've not achieved sort of nirvana in terms of that rate. What I think we have to be cautious of is we have seasonality in our business, for instance, next quarter, we have the Northern Trust Open, which puts pressure on expenses in a quarter. And obviously, markets can be volatile and drive the fee line, and our expenses can't necessarily react in 90 days to a market that can move.

But if you look over longer periods of time, the answer is there is continued focus on driving that down. And I would give you an example. If you do these calculations between our two businesses, they're quite different. And the mature Wealth Management business does drive that expense a few ratio lower than the one to five for instance.

And so I would say the answer is over long measurement periods, they're still absolutely focused inside the firm on continuing to improve that. You may see quarterly moves that go up or down just based on seasonality and/or market volatility.

Brian Kleinhanzl -- Keefe, Bruyette & Woods -- Analyst

OK. And a separate question. On the agency MBS portfolio, are they going to see a drop off in yield like the other banks have seen in premium amortization? What was the impact from premium amortization this quarter? Or is there something of a lag effect for you?

Biff Bowman -- Chief Financial Officer

Yes. So I think we've talked to you about premium amortization being somewhere around the $10 million to $12 million in a quarter, and it was inside of that range in this quarter, yes. So the nature of our portfolio and the way we've modeled that and everything, it produced premium amortization that was much in the range we've sort of guided to.

Operator

[Operator signoff]

Duration: 69 minutes

Call participants:

Mark Bette -- Director of Investor Relations

Biff Bowman -- Chief Financial Officer

Brennan Hawken -- UBS -- Analyst

Glenn Schorr -- Evercore ISI -- Analyst

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

Betsy Graseck -- Morgan Stanley -- Analyst

Alex Blostein -- Goldman Sachs -- Analyst

Steven Chubak -- Wolfe Research -- Analyst

Jim Mitchell -- Buckingham Research -- Analyst

Marty Mosby -- Vining Sparks -- Analyst

Ken Usdin -- Jefferis -- Analyst

Gerard Cassidy -- RBC Capital Markets -- Analyst

Brian Kleinhanzl -- Keefe, Bruyette & Woods -- Analyst

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