Q4 2019 Earnings Call

Ladies and gentlemen, good day, everyone and welcome to the Northern Trust Corporation fourth quarter 2019 earnings Conference call. Today's call is being recorded at this time I would like to turn the call over to the director of Investor Relations Mr., Mark Betty for opening remarks and introductions. Please go ahead Sir.

Thank you David Good morning, everyone and welcome to Northern Trust Corporation's fourth quarter 2019 earnings Conference call. Joining me on our call. This morning, our Michael Grady, our chairman and CEO , Jason Tyler, Our Chief Financial Officer, Lauren all not our controller and Kelly learned a hand from our Investor Relations team our fourth.

Quarter earnings press release, and financial trends report are both available on our website at Northern Trust Dotcom also on our website you will find our quarterly earnings review presentation, which we will use to guide today's conference call.

This January 22nd call is being webcast live on Northern Trust Dotcom. The only authorized rebroadcast of this call is the replay that will be available on our website through February 19th Northern Trust disclaims any continuing accuracy in 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 our northern trust 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 are subject to many risks and uncertainties that our debt.

The call to predict I urge you to read our 2018 annual report on Form 10-K , and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.

During today's question and answer session. Please limit your initial query to one question and one related follow up this will allow us to move through the Q 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 Michael's Reighty.

Thank you Mark good morning, everyone. As you know, Jason Tyler became our CFO as of January Onest as Biff Bowman will be retiring after 35 years in Northern Trust.

We're grateful to best for his many contributions as a trusted colleague and thoughtful leader throughout his time and especially for his significant contributions as CFO for the previous five years I welcome Jason to the CFO role he brings deep financial expertise and leadership experience and I'm confident he will be very successful in the role before Jason goes through.

Through our results in detail I'd like to comment on some of the trends we're seeing in our businesses.

Our performance for 2019 continued to exhibit foundational strength as we executed on a number of growth strategies, while continuing to advance our digital efforts and improve our productivity our results for the year generated a return on average common equity of 14.9%. We also returned a record 1.7 billion to our common shares.

Holders through dividends in the repurchase of 11.8 million shares.

And our wealth management business, our capabilities and positioning continue to resonate in the marketplace on a year over year basis assets under management grew 13% to $314 billion and assets under custody grew 18% to 736 billion on the capability front spurring some of this growth we continue to invest in our.

Into digital and analytics capabilities as well as an innovation around the delivery of goals driven holistic advice.

We also closed out the year with the opening of a new office in Philadelphia, and we renamed the Best Private Bank by the financial Times group for the nighttime out of the last 11 years in some for wealth management. It was a very solid year performance and momentum.

Our corporate institutional services business remains focused on executing its growth strategies digitalizing, the business and innovating for the future to enable scalable growth assets under custody and administration ended the year at 11.3 trillion up 19% from the prior year, we continue to achieve healthy organic growth in our core asset serve.

We're seeing fees within both the asset manager and asset owner segments, driven by our strong positioning. We're also making targeted investments that are expected to continue to fuel growth in areas like front and middle office outsourcing in capital markets. For example, we launched new capabilities in front office solutions integrated trading solutions.

In currency management in 2019, finally, CNS is executing a multiyear strategy to digitize the business to drive more profitable scalable and sustainable growth into the future.

In asset management, we ended the year with 1.2 trillion and assets under management, an increase of 15% from the prior year.

As the industry transitions through key secular shifts we are delivering long term value to stakeholders through onest strengthening our areas of competitive advantage such as portfolio construction quantitative research and liquidity management second prioritizing investment in growth markets in growth segments, such as financial intermediaries.

And family offices, and third shifting our business mix to higher value add products, such as quite active ETF SG and multi asset.

As we enter 2020, we're excited about the competitive positioning within each of our businesses. We remain focused on providing our clients with exceptional service and expertise driving efficiencies into our business and driving profitable growth.

Let me turn the call over to Jason to walk you through the details of our performance.

Thank you Mike Good morning, everyone in the joint Mike in marketing welcoming you to our fourth quarter 2019 earnings Conference call.

On page two of our quarterly earnings review presentation. This morning, you reported fourth quarter net income of $371.1 million earnings per share or $1.70 in our return on common equity was 14.8%.

The current quarter's results included a $20.8 million charge recorded in other operating income related to the decision to sell substantially all the lease portfolio and a $6.8 million software disposition charge recorded within equipment software expense.

As you can see on the bottom on page two the macroeconomic environment was mixed while equity markets with strong short term interest rates in the U.S. decline both on a sequential as well as year over year basis.

Let's turn to page three and review the financial highlights for the fourth quarter.

Year over year revenue increased 3% with non interest income of 4% from one year ago and net interest income flat expenses increased 5% from last year.

The provision for credit losses was a credit of $1 million in the current quarter compared to a credit of $4 million one year ago.

Net income was down 9%.

Year over year.

On a sequential comparison revenue increased 1% with both noninterest income and net interest income up 1%.

Expenses increased 3% compared to the prior quarter.

Net income declined 3% sequentially.

Return on average common equity was 14.8% for the quarter down from 17%, one year ago and 14.9% in the prior quarter.

Assets under custody administration of 100 of 12.1 trillion dollars increased 19% compared to one year ago and were up 4% on a sequential basis.

Assets under custody of 9.2 trillion were up 22% compared to one year ago, and a 5% sequentially.

Assets under management were 1.2 trillion dollars up 15% on a year over year basis, and up 2% on a sequential Dave.

That's a good results in greater detail starting with revenue on page four.

Fourth quarter revenue on a fully taxable equivalent basis was $1.6 billion up 3% compared to last year and up 1% sequentially.

Trust investment another servicing fees represented the largest component of our revenue and were $992 million in the fourth quarter up 6% from last year in up 2% sequentially.

Foreign exchange trading income was $65 million in the fourth quarter down 17% year over year and up 8% sequentially. The year over year decline is primarily related to lower foreign exchange swap activity in our treasury function.

Other noninterest income was $70 million in the fourth quarter down, 6% compared to one year ago and down 17% sequentially.

Other operating income included the aforementioned $20.8 million loss relating to the lease portfolio.

Excluding the lease related loss the year over year growth was driven by implementation with bank owned life insurance program during 2019, and strong security commissions and trading income.

The sequential growth excluding the lease portfolio loss was primarily driven by favorability in the visa related swap.

Interest income, which I'll discuss in more detail later was $430 million in the fourth quarter flat with the other period flight with prior period and up 1% sequentially.

Now, let's look at the components of our trust and investment fees on page five for our corporate and institutional services business fees totaled $567 million in the fourth quarter and were up 6% year over year and up 1% on a sequential basis.

Custody and fund administration fees, the largest component of CNS fees were $397 million than up 6% year over year and up 1% on a sequential basis.

The year over year for performance was primarily driven by new business and favorable equity markets.

Performance on a sequential basis was primarily driven by favorable currency translation and favorable markets.

Assets under custody and administration for Cnf client to 11.3 trillion at quarter end up 19% year over year in up 4% sequentially.

Both year over year and sequential performance was primarily driven by higher markets, new business and favorable currency translation recall that lag the market values factor into the quarters fees with both quarter lag and month lag markets impacting our CNS custody and fund administration fees.

Investment management fees in CNS of $116 million in the fourth quarter were up 10% year over year end up 1% sequentially.

The year over year performance was driven by new business and favorable markets.

A sequential performance was primarily due to favorable mark.

Assets under management for CNS were $917 billion up 16%.

Year over year in up 2% sequentially the year over year increase was driven by favorable markets in new business as well as an increase in ended period securities lending collateral levels.

We've had strong success within our liquidity from.

With significant growth in our institutional cash bonds.

The sequential increase was primarily driven by markets, partially offset by a decline in period end securities lending collateral levels.

During these lending fees were $23 million in the fourth quarter up 4% year over year end up 12% sequentially the year over year increases primarily driven by higher volumes, while the sequential increases primarily driven by higher spreads.

Securities lending collateral was 163 billion at quarter end in averaged $164 billion across the quarter.

Average collateral levels increased 4% year over year end were down 7% sequentially.

Moving to our wealth management business Trust investment and other services servicing fees were $425 million in the fourth quarter were up 7% compared to the prior quarter in up 2% sequentially.

Both the year over year and sequential increases were driven by favorable market and new business.

Assets under management were $314 billion at quarter end up 13% year over year and up 4% sequentially increases were primarily driven by favorable markets.

Moving on to page six.

Net interest income was $430 million in the fourth quarter and flat compared to the prior year.

Earning assets averaged $107 billion in the quarter down 4% from the prior year total deposits average 89 billion and were down 4% versus the prior year.

The net interest margin was one point not 1.59% in the fourth quarter and was up seven basis points from a year ago. The improvement in net interest margin compared to the prior year, primarily reflects the balance sheet mix shift and the impact of lower foreign exchange swapped volume, particularly offset partially offset by lower short term interest rates for.

It is one year ago.

On a sequential quarter basis net interest income was up 1% average, earning assets increased 2% on a sequential basis, while the net interest margin declined two basis points.

It's worth noting that in net interest income results quarter did include approximately $6 million in various one time non repeating items.

During the quarter. We also added to our bank owned life insurance program that was first put in place during the second quarter.

Compared to prior quarter. This quarters net interest income declined by approximately $900000 as a result of the additional Bali, while other operating income benefited by 1.5 million.

The full quarterly run rate will be reached in the first quarter 2021, additional net interest income decline of approximately $2.3 million and other operating income increase of 2.7 million on a sequential basis.

Looking at the currency mix of our balance sheet for the fourth quarter.

US dollar deposits represented 68% of our total deposits. This was down from Seth So was down from 70% one year ago and 69% in prior quarter.

Turning to page seven expenses were $1.1 billion in the fourth quarter and were 5% higher than the prior year and 3% higher versus the prior quarter compensation expense totaled $463 million was up 4% compared to one year ago.

The year over year growth is primarily related to higher salaries, driven by based pay adjustments in staff growth, partially offset by lower incentive expense.

On a sequential basis compensation was up 1% the sequential increases partially due to higher salary expense driven by staff growth and unfavorable currency translation, partially offset by lower cash based incentive accruals.

Employee benefit expense of $93 million is up 2% from one year ago and was up 6% sequentially. The year over year growth was primarily driven by higher payroll taxes, while the sequential growth is primarily due to increased medical costs.

As it pertains to our benefits expense in 2020 due to changes in underlying assumption underlying assumptions, we expect to see an increase in full year pension expense of just over $30 million, which represents is airport, 7% increase in our overall total 2019 expense base.

Outside services costs of 260 million $206 million were up 5% on a year over year basis, and up 6% sequentially. The year over year growth was primarily driven by higher technical services consulting and legal expense.

The sequential increase was primarily due to higher legal and consulting services as well as costs related to increased business volumes, including brokers clearing market data sub custody and third party advisor fees.

Equipment software expense of $165 million was up 8% from one year ago and up 9% sequentially.

Both the year over year and sequential growth were impacted by the previously mentioned software disposition charge of $6.8 million.

The year over year growth also reflects higher depreciation and amortization wall higher software amortization costs contributed to the sequential increase.

Occupancy expense to $57 million was up 15% from one year ago and up 8% sequentially, both the year over year and sequential increases were driven by higher rent.

And building operation costs related to our workplace real estate strategies.

Other operating expense of $88 million was down 1% from one year ago and down 4% sequentially.

The sequential decrease was driven primarily by the Northern Trust sponsored golf tournament in the prior quarter, partially offset by increases in advertising staff related and other operating expense categories.

As we discussed on previous calls through our value percent initiative. We that we started in 2017, we've been realigning our expense base with the goal of realizing $250 million an expense run rate savings by 2020.

Our current quarter results reflect approximately $60 million in expense savings or $240 million, an annualized run rate savings our efforts around value for spending productivity more broadly will not see as we further embed a culture of sustainable expense management across the company expense management as a core emphasis.

And we continue to focus on striking the right balance between productivity growth and investing in the business.

Alternative full year our results in 2019 are summarized on page eight.

Net income was $1.5 billion down 4% compared with 2018 and earnings per share were $6 in 63 cents flat with the prior year.

On the right margin is page, we outlined the nonrecurring impacts that were called out for both years.

We achieved a return on equity for the year of 14.9% compared to 16.2% in 2018.

For full year revenue expense trends are outlined on page nine.

Trust investment other servicing fees grew 3% in 2019 the growth during the year was primarily driven by new business and favorable markets, partially offset by the impact of unfavorable currency translation.

Foreign exchange trading income declined 18% driven by a decrease in foreign exchange swap activity within our treasury function as well as decreases in market volatility and lower client volumes.

Non interest income increased 3% average, earning assets during the year declined by 6% while net interest margin increased 14 basis points. The net result was 2% growth in overall revenue on a reported basis in 2019.

On a reported basis expenses were up 3% from the prior year adjusting for the expense charges in both 2018 and 2019 that are on the prior page expenses were also up 3% from 2018.

Turning to page 10, our capital ratios remained strong.

With our common equity tier one ratio of 12.7% under the standardized approach and 13.3% under the advanced approach the supplementary leverage ratio as a corporation of 76% and at the bank was 6.4% both of which exceeds 3% minimum requirement.

During the fourth quarter, we declared cash dividends totaling $150 million to common stockholders and repurchased 2.6 million shares of common stock at a cost of $264 million. These two factors combined represent a payout ratio of approximately 113% for the quarter.

Also during the fourth quarter, Northern Trust issued $400 million in perpetual preferred stock at a fixed for life dividend rate of 4.7% callable in five years.

Fixed rate dividends for this new issuance are expected to be paid on a quarterly basis with the first dividend declared at our board of directors meeting earlier this week and to be paid April onest of 2020.

Given the November issuance the initial preferred dividend payment will cover approximately five months and therefore is expected to equal $7.6 million in the first quarter 2020 going forward. These fixed rate dividends are expected to be $4.7 million per quarter.

Proceeds to this issuance were used to redeem all outstanding shares a series C preferred stock in January on January 2nd only 20.

First quarter 2200 results will include $11.5 million and accelerated series C related costs.

Now, let me turn the call back over to Mike for closing comments.

Before we open the call for Q today, I wanted to close by talking about our key financial objectives and our performance against these in 2019.

Our primary financial target is to achieve a return on average common equity of between 10% to 15% for 2019 Ari of 14.9% was at the high end of that range. This was the sixth consecutive year. We have achieved our targeted are we.

We're also focused on driving profitable growth and have objective is to achieve both fee operating leverage and positive operating leverage. Although we have achieved positive fee operating leverage in eight of the last 10 years and positive operating leverage in seven of the last 10 years, we did not achieve those for 2019.

As we enter 2020, we're continuing to rapidly evolve the company by providing differentiated services and experiences to our clients in investing in innovative capabilities to do more for our existing clients in gain new clients. We combine this with our intense focus on improving our productivity to profitably grow the company increased.

For our stakeholders.

This concludes our prepared remarks. Thank you again for participating the Northern Trust fourth quarter earnings Conference call today, Jason Mark and I would be happy to answer your questions. David could you. Please open the line.

Absolutely, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad now if you are using a speakerphone. Please make sure your mute function as turned off to a larger signal to reach our equipment. Please note will be allowed one question and one follow up again press star one to ask a question and we'll pause for just a moment to allow everyone an opportune.

Energy to signal for questions.

And our first question will come from Alex boasting with Goldman Sachs.

Hi, guys good morning, everybody.

Mike picking up on the last point I guess, when you talk about operating leverage I guess over the last few quarters, you guys talked about getting organic expense growth to be in line with organic growth not just total fee growth I guess.

A question number one there is the organically grow spill into 3% to 4% kind of range as you look out into 2020, and then secondly.

Should we expect to achieve this level of expense growth for the full year sort of despite the fact that markets are starting off in a very strong point industrial national create more kind of pressure or more tailwinds, rather to two fees and I'm, just wondering whether or not the sort of level of expense growth could be sustainable into 2020.

So.

Alex I think you're thinking about the the framework the right way, which is as I mentioned earlier, we are focused on the objective of generating positive fee operating leverage.

And underneath that is the goal to achieve that on an organic basis as well knowing that that is a higher bar if you well, but the reason why we focus on on an organic basis is because just as you indicated when markets are stronger we expect that we'll get more positive fee operating loss.

Average from that side, it's more challenging.

To achieve that in ill call it lower growth environment than when we do have the tailwinds, but thats why its important to have that.

The primary objective around organic.

In 2019, we did not achieve the organic fee operating leverage.

And that's something that.

Certainly as far as what we're shooting for we're trying to get that so that if we would have achieved that we would had positive fee operating leverage here for the year.

And going into 2020, it's the same objective now is Jason talked about and can go into more detail there are certain aspects of the.

Expense base that role in this case pension as he mentioned for example.

$30 million increase the to the year.

We still look to cover that if you will and tried to just focus on the productivity.

Objectives to try to overcome things like that as well so the goals haven't changed from year to year, we can have different challenges to achieve it.

But as far as what we're trying to achieve its the same objective.

Got it thanks for that and then just on clean up for you for IR. It sounded like there were $6 million of one time I believe it was a benefit and Q4 can you flesh that out a little bits and what are those benefits and maybe help US bridge the kind of the right jumping off point for Q1, 20, and I ours was as we zoning out on the quarter here.

Yeah.

Yes, you got the headline number right is about $6 million. It's a combination of couple of different items. There is some premium and then one thing we didn't headline much where we did have a pay off of a nonrecurring not grow the loan that was on non accrual we picked up another $2 million in interest on that.

And then the FDA adjustment was a little was a couple of million dollars higher. So you add those factors together and you get to two to 6 million.

Thank you. Our next question will come from Jim Mitchell with Buckingham Research.

Hey, good morning, guys.

And we didn't talk a little bit about.

At period end balance sheet, it really kind of spikes.

Is that what should we take that is this sort of transitory because if you look at average balances and we're not that much or is there.

Something thats continuing into one or two that we should maybe.

Our assumptions around deposit growth given that actions et cetera.

Yes, yes, you're you're right. It was it was high actually look back to see if this was a record high it wasn't but it was it was close but the.

More importantly did come it has come back down there obviously as you know the balance sheet is the spike at the end of the quarters in particularly the into the years. This was higher than normal not a record, but already we've seen more normalization as some of the large clients at foot money back to work into the market in different ways.

Okay. Thanks, and then maybe just follow up on the the comp line in expenses going forward.

Just on on you had head count growth of 5%. So how do you how do we think about that kind of upward pressure from head count growth versus your desire to kind of scalable digitization trying to keep core expense growth below organic growth over kind of starting off with.

Much higher employee base, how do we think about the comp line speaks specifically in.

Well couple things or maybe you might be looking at page seven of this press release and you get the comp line, there and I look at it more on.

So my lenses to say what was it what was revenue growth was really trust fee growth over that timeframe and.

It was about six in the quarter percent. So first of all on that comp line, even though it's a tiny bit higher than we'd like to see we did get leverage in that which is which is good and.

We're in a year, where we've got revenue off a lot of our expenses are going to bring a lot of our revenue growth is going to bring with it expense growth and it's going to hit and just about every one of the key expense line items, including comp.

The second thing.

Good for us to think about is that in general we've got the technology investment that we're making in so that part of the reason that number maybe a little higher is that some of the tech investment that we're making in the business or are coming through in that topline.

And third just so you guys you're thinking about at the right way coming into the next year.

We're always going to have the effectively at call. It 30 to 40 million dollar based pay adjustment for the top line and so you think about that on a on the base of business that we have here that's going to lead to almost a point.

And in of itself in the growth. So those are just a couple ways different lenses to think about that line item.

Okay. Thanks, a lot that's helpful.

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley .

Hi, good morning.

Hi, I just wanted to follow up little bit on that regarding just technology in general.

I now pass you've given.

Some insight on what your Tech budget is maybe could you give us a little sense as to how you see that trajecting overtime I know you give guidance, but just understand.

I think thats.

Trajectory is accelerating decelerating and then how you see that shifting over time comp.

Versus non comp as it relates to tack. Thanks.

Yes.

So it's a it's obviously we've got a high sense of urgency as we think about expenses in general and taxes, where it is outsized relative to the other areas and so you're right to hone in on it. The couple of couple of data points. As you think about next year. One is does it take a step.

Back we thought about what we wanted to convey that we know about we don't want to give guidance on expenses, but we do want to tell you. What we know at this point and there are some things that we have high degree of certainty others and you sit at this point coming into 2020, so only deal goes in the rebate.

It's just to put those out one I hinted to a couple of minutes ago net comes down to the the compensation line, we know that we're going to see.

In general about it somewhere between 30 $540 million Justin base pay adjustments based on the business that we have.

Secondly, we talked about pension being a little over $30 million higher and then third is we have a sense right now what ITD IP depreciation is going to look like and that's about $40 million higher for the year in 2020 than it was then it will be as we look back on 29.

Team now some of that is reflected in the fourth quarter and so.

We can yield target for us to to default or should it but we do know that on a year or.

$40 million higher so those are three key items that I think everybody we want to make sure but is aware of that we've got clear line of sight on at this point and the second more broadly as we think about how do we depict the.

The IP budget.

Ended increase it is actually hitting in a lot of different line items. So just we're talking about page seven on the press release a minute ago stay there for a second and if you look at these different line items I actually went back and pulled out hi, T from each of the different components that you can see action.

Finally to get a sense of how much they are impacting those growth areas because I do look it not just comp, which we were talking about a second ago, but all of those line items trying to get a sense of whether we're getting leverage there and obviously the biggest it's very heavily in equipment and software, which is why you'll see that line item do pretty Oliver.

They did so theres also smaller but still meaningful impact that will hit in obviously compensation employee benefits and outside services.

And is it still around $1 billion that you're thinking the tech budget was in 2019 I.

Recall that was.

That the estimate that was given most recently.

Yes Thats. The this is mark yes about we look at a cabinet three year Rolling average so 2019 2020 2021.

A little bit over 1 billion per year and that includes both operating expense as well as capital investments.

Got it okay. Thank you.

Sure.

Thank you. Our next question comes from Brian Bodell, but the Deutsche Bank.

Great. Thanks very much.

Just a question on Eni.

Is there any impact on future net interest income from the sale of the leasing portfolio and if so it can quantify that and then also.

If you can talk about what you're seeing for deposit trends.

Into one Q.

Yeah.

So on that.

With that deposit trends for good on the impact of nor lease and on NIM dairy de Minimis increase nothing to really to think about that.

Clean accounting perspective on how that will set and then secondly on deposit trends coming in more broadly.

I know that its first of all at the strategic focus for us across the business on in both on both the well side and on the in on the CNS side and we've talked about on the wealth side. In particular, we we told you about some strategic initiatives. We have there to bring that brought some money out of the two a seven.

On the onto the balance sheet Thats held in pretty well and then I'd say on the on the institutional side of the business, it's more volatile and Theres no. The initiatives that we have there aren't as aggressive as what we've been thinking about on the well side, but we're still doing everything we can to make sure. We're getting a good share of our deposits of the dips.

Posits coming in from clients is that as the custody book grows and as we're talking to clients across the globe.

Since joining averaging basis.

Is that you're expecting growth Q1 based on those initiatives I know the end of period was was elevated of course, but.

If we think about it averaged average.

And now I think the there there was that the if you think about the asset side and then the funding side. If you think about NIM that the only other item there that have no.

There was a little bit as couple billion dollars higher on that but that didnt really come more from the deposit side. It came more from from trading related activity and so there is nothing I'd call out at this point.

That would lead you to say that deposits would be.

Moderately are significantly different.

Okay, Great and then on organic growth I think you commented on wealth management, you M. being up mostly from the markets just wanted to get a sense now thats been a strong driver of organic growth for free for you guys for awhile I just want to get a sense of the cadence of the organic growth trends in wealth management versus.

The asset servicing business and as you think about expenses are we still thinking about.

Comparable growth.

Our rate in expense growth, even with those headwinds that you've mentioned on the comp pension and the ITC side.

Is that still reasonable to think of Oh.

They have.

So a rate of growth that will be similar to the organic growth if that's still like trending towards the mid single digits.

Let me hit the top side first on the on the growth side in the trends in the wealth business. This business continuing to do well and and Mike touched on earlier this year in some really nice differentiated approach is that business has the market with both here in wealth management resin.

Thats very well and as it the trend there that that continues to be seen in follow through on the financials and you guys are able to see this actually is that that we're doing well at the very top end to the market. So the family office business is growing faster than you can see that numbers we report.

Both the sequential basis in a year over year basis that trend has been going on for awhile and in its attractive and then the second component to how we will see the expenses line differently between the business and the separated in a couple ways. One is that the tech related expenses apply.

But a little bit more towards the CNS side of the business as we think about things like matrix and our strategic operating model those things are going to be allocated a little bit more for the CNS side of the business that said the wealth side of the business is also investing in different ways in there there they're working hard.

On digitizing the business, Mike talked about that earlier that we're probably a little ahead in our investments there on the CNS side, well thats starting to think more about how to reflect the digital transformations that we've seen across the marketplace and how we can take our position with things like altered in wealth management make it even.

More accessible to clients have even better interactions that have better foundational technology.

And we still thinking about organic growth and that sort of mid single digit area on a go forward basis are loaded low to mid single.

And Brian just to confirm or you are talking about whilst or the corporation as a whole good the company is.

No. So maybe just to address that Brian .

Got it across the businesses, so Jason talked about wealth management, we continued to see as you mentioned.

Healthy solid growth in that business thats, the nature of it and.

Again, our strategic imperative in that business as David said eggs increase or accelerate that growth even more we're still seeing a higher growth rate in our asset servicing business.

And so that continues its at the lower end of its range.

But it continues to grow at a healthy rate.

And that strategic imperative for that business is yet to continue that growth, but we want to see that growth be more scalable.

And then I would just also add with our asset management business, we're all well aware of the secular trends.

In the industry, there and I would say.

Certainly impacted our asset management business although.

Comparatively the business is performing well and so its experiencing.

Good positive organic growth just meaning they are able to.

Increase the flows but also then change the mix in such a way that it is offsetting the fee compression that you're seeing across the industry. So it's positive having said that it is at a lower rate than the other two businesses. So you put that altogether.

To your point, we've talked about.

The organic growth rate for our fees that at the company level kind of being mid single digits. That's still the case, where at the lower end of that right. Now so what does that mean well that's why we're focused on our growth strategies and executing on those but thats why one of our other key priority for the company is on continually improving our productivity.

And when we are at the lower end of the growth side, we have to work just that much harder on the expense side to get more.

Savings if you will.

R&D expense side. So that's the strategy, if you well and again.

Focused on trying to execute that so that we can deliver the positive fee operating leverage.

Thank you. Our next question comes from Kevin I, often with Jefferies.

Thanks, a lot.

Hey, Jason can you expand a little bit more on.

Underneath the fact that you said that some of the balances might have gone off the balance sheet can you help us understand either how much you saw is like.

Over and over growth in the earning assets this quarter and then secondarily.

If rates stay stable from here can you talk us through the dynamics of of of NIM in terms of how much asset repricing has to come through and and how much time deposit repricing you can still see happening now that weve onto a more stable level. Thanks.

Sure. So we will on the first I think it's.

Yes.

As these spikes happen late in the quarter isn't it's frankly, a relatively short period of time that these spikes or on the balance sheet and so it comes in late and at least pretty early and so and we're not doing anything fancy when those dollars come in and so frankly, just doesn't impact the overall NIM very much. It does spike that we're obviously look to the back.

Now turning on a daily basis its spikes that.

And but it doesn't I don't think you'd really drives NIM.

At the end of the day and then as we look out into next quarter I don't think that spike should necessarily be reflected in your thought process. As you think about so thats more from a volume perspective, all as you think about although I did hint earlier that kind of that 2 billion dollar increase in that.

In the securities portfolio, I, do think thats likely to come down and that had more to do with I think more idiosyncratic trading that was that what's happening at the time nothing abnormal we just so we're trading some more longer dated securities and the security settlement process led to higher securities being on that.

Really what led to that little bit an average increase and I think that will abate as we think about the rates going forward into first quarter. The thing that we can all see that we'll have maybe more of an impact than what people realizes that fed funds to LIBOR spreads and that did have an impact in fourth quarter.

And when we talk to everyone at the conference. We attended and then on last call. We were looking at spread there is more probably 13 or 14 basis points.

And we thought that was going to go away it actually held in it even expanded a little bit but now that compression that we anticipated is actually come to fruition and if you look at that Delta right now it's more on the 910 basis point land and so that is a factor that if that.

Holds then that would have an impact on what we would think about for NIM for next quarter.

Okay, and then do you have the ability to reprice much on the right side of the balance you could just talk us about customer dynamics outside of just your market index type of deposit cycle How's the discussion going with clients and what opportunities do you still have to reduce rate.

Yes, do just so incredibly different between the businesses.

And so on on the institutional side first of all the deposits there are driven a lot more by our and by our EMEA clients and that in that book those clients or are shopping in real time and so.

We're making very tight decisions on those and we can only we're going to get with the market gives us frankly, and so and we're not in a position to be a price leader there and now on the on the other side. This is the wealth business very different dynamics and there we've talked again about the fact that.

We sunsetted, an anchor suite product and we brought.

Assets from the two a seven funds out of the balance sheet. We're looking much more there and can be done can think about what we want to be strategically in the marketplace and give you. Some headlines on how we talk about it we do want to we want to be very attractive for large depositors and so that's where we're going to be.

Much more competitive and for more of the retail client base, we're going to be less competitive and but at the top end of the market. There. We're always trying to figure out how to attract and and be extremely aggressive about retaining our top depositors.

Thank you. Our next question comes from Steven Chubak with Wolfe Research.

Right.

Hi, good morning.

So just wanted to start off with a question on capital I know that in the past to discuss the business need to manage to higher ratios to ensure you don't deviate meaningfully at least from some of your GC appears are running closer to 12% plus given that you're competing with some of these firms for RFP is and key I was hoping you can maybe just unpack.

Back or speak to some of the competitive considerations such as RFP is versus regulatory constraints it looks like.

The regulatory changes our swinging the right way in terms of SLR relief potential for the elimination of leverage constraints and see car Im just wondering if some of those changes come through how that informs your willingness or appetite to manage to a lower target over time.

It's Mike why don't I start off.

So first of all as you would expect we feel very good about our capital levels.

And our flexibility with regards to capital.

As you highlighted we are I always I cognizant and focused on what the implications would be on the business for our capital levels and that can play into formalized RFP processes, where yes, we want if I compare favorably to some of our competitors.

But also just more broadly and I'll save and subjectively with our wealth management business dealing with large family offices, yes. They are looking for safety and security Conservatives strong balance sheet and so it's up part of the business strategy for us on having said that.

Like any resource play it needs to be balance and so we're comfortable with where we are to your point, we're cognizant of where our competitor capital levels are and to the extent that those move that gives us more flexibility on that front and then the last thing I would add is from a regulatory land as you've.

Talked about.

There are changes on the regulatory front.

Having said that Hey, Dave also recently re categorized banks were a category to bank.

We havent be the only category to bank, which we take as a complement reflecting the unique nature of our business model on but it also does mean once again I, we have to work our way through whatever changes that may mean as far as capital management for us we're not concerned about.

Anything per se, but they're just is some uncertainty until they fully rollout the implications of category too.

On capital management expectations.

No very helpful color and just one.

A follow up for me just to clean up question on the other income line.

When we adjust for the Onetimers in the quarter. It looks like that was a source of revenue strength and I was hoping to gauge the sustainability of some of that strength versus the 50 million core level and for Q and just given some of the guidance on bully related impacts how we should think about what could be a reasonable are appropriate run rate for that line in 2020 recognizing.

Theres always mark to market and other noise.

Steven highest mark.

As you said if you adjust for the lease we would have been at the at closer to the 50 million Mark there was.

The bully benefit came into that line.

That will continue to have a little bit of a bump up in the first quarter like Jason said.

I would say that the the mark to market adjustment on the VSOE was favorable this quarter.

About a $5 million sequential benefit.

Which.

No there was more of a negative drag on that last quarter for some of the adjustments that we made there.

This quarter.

Yeah, when you take that into account as well as the bully.

We did have a little bit higher miscellaneous income and credit and bank related fees, probably higher than normal.

One way that I would say that you can look at that line because it does move around as if you do strip out some of the nonrecurring.

Items that we've had in that line, you're probably looking at an average of about 35 million over the last several quarters and I'm theory you could.

Layer bowling on top of that that would be one way to look.

Great. Thanks for taking my questions.

Barry.

Your next question comes from Brennan Hawken, whether you've yes.

Brent.

Hey, good morning, Thanks for taking my questions I just had a follow up from a few of the questions that have been asked so far.

And just wanted to try and frame it in in the best way to think about one Q Eni and Jason I know welcome to the Circus, our quarterly circus here.

With your friends this call.

I know your predecessor had started to help us think about one quarter out and I I know that was a departure from northern some normal course of business.

I don't know what your plan is going forward, but it does seem like there's a lot of noise. So if you could help us frame how to think about one Q you guys. So some of the lease ports.

Portfolio so.

Im guessing we need to.

Shrink that average, earning asset bucket a bit we've got an over earning of about 6 million you've got the tighter fed funds LIBOR.

You know how should we think about how all this will weigh on anti as we go into four one Q based on what you've seen so far.

All right well I think you for him and I think you got all the pieces.

Away I think about leading into it.

Another couple items, one you talked about the one timers.

Thats really five $6 million secondly, I mentioned, the Livewatch fed funds spread I think thats very important one as you think about how to model this out.

And then you mentioned beauly, which having that in place now for for a full quarter because remember we didnt have it in place last year the benefit of that even if you just assume the same type of economics that we experienced this time should be positive $5 million.

And then lastly, we haven't talked about day count is going to work against us if you're thinking about our on a sequential basis. We'll go from 92 not to 90 to 91 with leap year and but those are the.

Mine those are the big four buckets to to use as a starting point.

Okay.

Thanks for that and then when we spoke about the average balance sheet it looks like.

There was a.

A big a bit of a jump in the other liabilities this quarter.

And it and it's the highest level that it's been in a couple of years by about a billion box.

Should we is that temporary obviously it was enough to skew the average balance for the fourth quarter. So is there something.

Unusual happening that will prove sustainable or should we just expect that to wind down in in one Q.

Yes, its hinting at earlier that.

Had to do with more than nature. The securities were trading that had more time and were in settlement mode for longer and so that's what I think will drive bringing that the securities portfolio down to.

A more normalized level.

Oh, Okay, like TV A's or something.

The mortgage CMBS is mortgages just some nothing we don't normally do just a little higher mix of those items that led to higher level security sitting and obviously, we're not getting the yield on those is there they're sitting in settled.

The other thing it I just mentioned I think its heat. It guide you are there is kind of that a lot of question about where NIM is going and we had gotten into motive of talking about what we expect in effectively providing guidance and I'll say at this point, we do think NIM will be down to.

2% to 4%.

But.

And did not eni will be down 2% to 4%.

And so it's not to say that every quarter, we're going to give that but I do think with we gave you guys handful of different items that you had this square off to get a good launch point and so I think putting it out there this quarter is there.

Okay terrific and that's off the reported number in Fourq you write the 107, what we should base that minus two to four.

The off of the reported net interest income of 430 mounted 30, right, sorry, sorry, Jeff Chuck Thank you.

And so that's not indicating just to be Super clear is not indicated to 159 is going to be down 2% to 4% just that the for the $430 million, we'd expect to be down about two or 2% to 4% based on the items I walk through.

Got it and I are not NIM.

Great.

Thank you.

Yes.

Thank you were next question comes from Michael carrier with a bank of America.

Hi, good morning, Thanks for taking hi, Thanks stand the question.

I want to focus too much on one year, but when you when you look at the thing not hitting the op leverage target.

Was that more of a function of higher necessary investments that came up during the year or was it later organic growth and maybe you expected and since you mentioned some of the expense items heading into 2020 on comp pension in tech.

Are there any areas like maybe real estate that you could see some savings given some of the repositioning that you guys have been working on.

Yes, I'll start with the second which we have mentioned that we expect occupancy to be higher in the short run as we've got some double leased double rent payments that we have effectively include those have been as close to it. We're we're going through a transition of.

Very large number of sheets from a building we've been in for a long time in Chicago to a new a newbuilding, we're starting to move people in this month a lot of the movie going to take place next month and so we're right in the mid to that and so you can imagine we're still obviously paying.

Neil facility.

And also it started a new facility Theres a lot of work that goes around making sure that move is taking place and there are other areas around the around the footprint overall from a real estate perspective that lead to a higher level of rent in the first.

Half of this year.

Now the second half of the year, we should get some benefit from that and so that's something that we'll we'll actually see come down will eventually grow into that run rate that we were expecting to actually see that line have come down second half of of the year like anything you want to add to that yes, just to the first part of your your question there.

About the year and again it is a year but.

Part of the trend there and so what came out of that one much broader perspective pulling back from it is if you looked at our expense base overall, alright, the I'm going to come technology expenses. So this is the expenses for our technology group and the ITC depreciation and amortization represents about 20.

What percent of our cost base and that grew at 8%. If you look at the other 80% of our cost base. It grew at about 2%.

And so I would say across that 80% for the most part we hit on.

Thats the costs related to the business to bringing on new clients and importantly, hitting on our value for spend.

Initiatives and the objectives. There so it's not that we didnt achieve those and then you say well on the technology side.

What happened there and there is if you think about technology or as I think about technology Theres three primary thing that we're trying to achieve there.

One is.

Security to is stability and three it scalability within our technology and if you look at the cost that were related to that in the year.

There were cost that we had on the safety and stability part, which ended up being higher than we would have expected.

Going into the year on but are things that you absolutely do in order to make sure that I you are being able to provided that the value proposition. If you will for your clients.

And then likewise on the scalability, there's certain aspects of that were greater demand for I'll call. It just computing power if you well on the part of our large asset manager clients on some of the asset owner clients. We're just in an environment, where there is greater activity and we didn't achieve the level of I would say scale.

Liability on our platform that we need to be able to achieve so with each of those three not only are we trying to ensure we have a strong say stable secure platform, but we want to increase the scalability on that so a lot of the focus of our technology strategy beyond kind of digitizing the business.

In providing new capabilities for our clients.

It is also saying how do we also get greater productivity out of that platform.

Okay Thats helpful and just a quick follow up tax rate was a little bit lower you guys mentioned some of the drivers I just any like change in terms of the range that you guys typically expect when we think about going forward.

I'll start the this quarter had some impact even from normally is some other small items, none none of which in another themselves worth calling out but I don't.

I don't think you should expect us to be at this 22% level and we talked a bit mentioned last on the call going it's something in the 24 as I do think 24 is a better longer term assumption at this point.

Okay. Thanks, a lot.

Sure.

Thank you. Our next question comes from Robert Wild Act with Autonomous research.

Morning, guys on the CNS business can you give us an update on what you're seeing in the competitive landscape and on the pricing front and then maybe more broadly when you think about the conversations you're having with clients.

Those discussions changed in town or content, all recently and how would you expect them to evolve going forward.

Sure I'd be glad to talk about it so there's a tremendous amount of activity in C and I asked broadly and specifically I'd say from asset servicing and I would say a lot of these changes well certainly they create challenges were very optimistic about the growth opportunities.

That are out there. So if you just give me a minute to run across I think I can address.

Some of these trends that you're looking for so if we think about asset owners.

Even in the parts of the the asset owner space that you might think about as being more stable and just their operating models hi, they have greater needs and greater need certainly leave to lead to more opportunities for us. So if you think about the not for profit sector I healthcare's in an area.

That continues to grow in presents opportunities for us to manage the assets of large healthcare organizations universities, where you have endowment and also the foundation space. They have increased the mix on the investment side to greater use of alternatives and as a result, they have greater needs for how they manage those.

Portfolios in those managers and that's why we've.

Invested in our rolling out what we call front office solutions, because that gives them the capability.

To do that if you look in Australia. For example, some of the large superannuation funds on not only has that been a great growth opportunity for us over the last decade, but likewise youre seeing consolidation within the superannuation complex, which again presents.

Hi changes in the marketplace and opportunities for us in the last thing I would say in the.

Asset owner space is more of the very large sophisticated clients. So if you think about the sovereign wealth funds are actually in sourcing some of the asset management as opposed to allocate and allow to asset managers.

What that requires it then they need to have the capabilities to operate as asset managers. So they have date or greater data needs.

And the nature and timing of what they need is greater in so that provides opportunities for us that that drives a lot of the investments that you hear about.

Because it's now putting them in a in a different position and then if I shift to the asset management space, We talk a lot about the the pressure of the secular trends and we feel that in our asset management businesses as well, but it does create opportunities for us on the asset servicing side because it causes these asset managers to look at.

Every aspect of their business I, including the operation side, and so that presents opportunities for us where they're looking to outsource more activities now historically as you know that's meant mostly middle office.

And what we do in Iowa, we are seeing more of those types of opportunities in the marketplace, but they're also some new activities that previously were just largely done in house by everybody that Theyre now, saying why should they do those and it should it be part of their outsourcing solution. So if you think about the trading side, where we have integrate.

And that's really an outsource trading.

As a service that we would provide to them that enables them to essentially move something thats not core to them and that we can do it better and more efficiently for them and their other opportunities like that.

I would also I just continue with the asset managers to the alternative space where for years. The hedge fund space has presented growth opportunities for us.

Our hedge fund services business continues to grow nicely when large mandates as you saw this last year, but then also I for us in the other parts of the alternative space.

So thinking private equity infrastructure real estate those are areas, where we've had.

Less of a.

Market share our market position there, but it presents.

Larger growth opportunities for us going forward, so overall a high level of activity.

And that's why when we talk about the growth we're optimistic about the growth. We just want to make sure that we're able to bring that on in a scalable way so that we get.

Very profitable growth in the business.

That's really helpful. Thank you.

Sure. Thank you. Our next question comes from Vicki Junisha with JP Morgan.

Hi, Thanks couple of questions. Mike just following up on that last question to talk comprehensively of our lost the volume related opportunities.

How about pricing what are you seeing and.

As you continue to expand into all of these new areas.

Sure.

Good good point and I, there's no doubt.

Clients, one more for less and that cuts across all parts of.

That sector there.

So we look at the fee pressure in the asset servicing business as just ongoing so we don't necessarily see I would take a repricing cycle per se that starts and ends and then we don't do anything its ongoing for us and that's part of the organic growth equation. So we're always netting out.

The not only if we lose the client or are they drop a service, but also if theres repricing that happens in order to maintain the client now the other aspect to that which is just a dynamic.

With that business is because large portions of it are based on the asset levels. The pricing is based on the asset levels and so as you see greater appreciation in the markets then that Doesnt mean, yes, we get the benefit where the fees go up but Thats then when you see greater fee pressure on so it's terrific for us.

Right that the markets are going up it does then I create more focus on the parts of the client base to to look at their fees.

And that's why overall, what we're trying to do is balanced that but also broaden these relationships do more for them. So that they are still very profitable relationships overall.

And as Youre trying to build all of these areas and as you said you need the tech capabilities for that.

Is there room to then the growth rate of that tech spend a little bit on not quite yet.

We believe that there is.

Mark talked earlier about when we think about our tech spend you have fee expense side of it which we focus a lot on here, we talk a lot and Jason's mentioned the increased amortization costs to come through well.

The other pizza that is that Capex piece that Mark mentioned, which is.

The capitalization of those costs happened now they manifest themselves in expenses later, and that's an area where not only we've been focused but I think there's much more opportunity. When you think about how technology has developed these days to be able to do it in a more cost efficient way I think you're all familiar with.

Hi, agile and other methodologies well, we're deploying those but it's still in the earlier stages.

That in my mind will produce savings that first hit through more efficient capital spend and then later over time it results in lower amortization.

Okay, one more if I may on the funding side Youre noninterest bearing deposits did pretty well they actually turned around and grew again in the fourth quarter.

And Conversely, a short term borrowings have been shrinking over the course of 2019. So can you comment on both those is have noninterest bearing deposits basically turned and should be growing or what's your outlook about it and what do you plan to do with short term borrowings.

Yeah, Yeah on the on the demand deposits, we did see an increase sequentially Buck.

I don't think that we're calling this an inflection point.

We've talked before over the last several quarters, we do.

Have especially I would say on the institutional side.

Fluctuations occur quarter to quarter with clients either positioning their assets on or off balance sheet, depending on what they might be doing with their own capital investing so I.

I don't know that we would call out a specific new trend on demand deposits here.

Starting with what we just saw in the fourth quarter love to see how that plays out over several quarters.

And on on the short term borrowing side.

I would say there.

That is a.

If you look back a year ago 345 quarters ago, I would say that some of the discretionary leveraging that we're doing within the treasury area was that was running at a higher level and and now at this point over the last couple of quarters, we've kind of have that down a lower level and that that manifests itself both in wholesale.

I'll deposits on the news on the non U.S. office line, but also on those short term borrowing. So that's it's really just a function of the leveraging opportunity to kind of gross up the balance sheet. The trade there isn't.

At the tripping point, where we would actually go through with that and we've kind of reduce some of that discretionary leveraging that we do.

Not to say, we wouldn't do it again right rate environment today, just isn't providing that trade for us.

Thank you. Our next question comes from Jeff Harte with Piper Sandler.

Mr.

Sorry about that can you hear me now.

Yes.

So a lot of talk about expenses, but kind of with the growth do you guys can deliver on the topline I kind of dig a little more of kind of margins.

In 2019 ex items saw kind of our first pre tax margin compression and what's been a number of years looking into 2020, and given that you need to keep investing and the current rate environment, and what kind of organic fee growth as near the bottom end of the kind of range should.

Should we expect a return to margin expansion in 2020, even with those kind of things facing us.

Yes ill start.

The before we get to pre tax margin yet, we're looking at our expenses relative to our fees.

And the reason why we do that is it the nature of the expenses and how they are lined up against the different revenue streams and so theres no question as.

We're focused on positive fee operating leverage that's because we're safe we want to bring down that ratio first.

And on that front again.

It's affected by market than other things, but thats why we focus on the organic part because we want to be able to to drive that down then if you go to the pre tax margin side, yes. Some of that flows through but as you know then it gets much more impacted by what's happening with the other revenues.

To some extent things like FX and the other income lines, but mostly net interest income and we're trying to trying to provide.

What we see in the marketplace as far as deposits in deposits pricing and things like that and quarter by quarter, but that gives you some indication of as we know from not only last year, but have you. It's really hard to project interest rates and that's a big factor that drives in it and it's also tough at times to predict client deposit activity.

And that drives in it. So that's just saying it's not that we aren't focused on positive fee out positive operating leverage as well. It's just there are more factors that frankly, our out of our control any difficult to forecast to be able to answer a question of like will then.

And your pre Taser pretax margin Gonna go up or down we certainly are aiming for it to go up but there are things that are out of our control.

So we think of kind of an interest rate environment, holding stable and some of that market stuff like FX trading not really declining these pre tax margin kind of expansion should just potentially attainable.

Yeah, it's dependent on the environment, you're right it could make it more more difficult or it can give us a.

At Taylor.

Okay, and secondly, I was the preferred.

Issuance and redemption.

Can you just review what kind of we should be thinking about them that impact on preferred dividends an extra notice some some weird stuff in the first quarter, but then even after that what will kind of run rate, we should be looking at.

Hi, Jeff Mark Yes, so.

When you look at if you if you look back at what our prepared remarks were the new series E will have essentially call a five month dividend in the first quarter.

Which would be 7.6 million Theres also some.

Cost from series fee that we would also have need to recognized upon redeeming. It in the first quarter. So that's 11.5 and then we have the series D, which you see in the first and third quarter of each year. So if you take all that.

Into consideration.

At this point, our expectation is you're probably looking at a preferred dividend right around 30 30.5 million in the first quarter and then in the second quarter, you come down to the normal new dividend for series.

He which is 4.7 million.

And and that would be the new run rate in the quarter, where we don't have the series C.

Hopefully that helps we could talk through it.

Offline if you'd like.

That's great. Thank you [noise].

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

Brian .

Hi, good morning.

Just a quick question of all these expenses I mean, you have a normal expense investment that you're doing was the three items that you laid out the pension expense the base page on the T. depreciation included in that growth rate already are you seeing that you're investing and then you have to still consider these three additional items that are going to be on top of it.

Portion of it so that they say adjustments are is that that's always factored into how we think about our expectations for expense growth. The pension is obviously anomalous and that's one that is not forecast and Mike mentioned earlier, we're not ignoring it we're still we still want.

Do everything we can to get leveraging that and then the depreciation increase.

We've known that we're going to be leaning into more ITC spend in the short run at least in so I'd say the the base pay adjustments fully factored into our long term assumptions the pension not but we're still working hard to try to even cover that and.

The and then the third element of IP depreciation part of that's already in the run rate.

And so that's the key element there, but the increase itself is one we have to own. It we've got it there's a high sense of urgency about making sure we get leverage across decent each of the key expense items, including equipment and software at some point, that's going to be difficult to do in the near term given we're trying to do structure.

Basically but.

But certainly the BTA in a portion of the depreciation reflected in our long term expectations.

Okay, and then separately in the asset management here again, the organic growth not kind of where you want it to be I mean at what point do you need to do something bigger with regards to restructuring the unit or taking more strategic actions there. Thanks.

I think within.

The asset management.

Sector that our asset management business is performing very well.

We talk about the.

The environmental I'd, just because it is going through secular change, but if you just looked at their competitive positioning if you looked at the growth relative to others and then you look at the profitability is performing well and I would say strategically we feel very good about how the business business I is repositioning sub one.

I mean by that is we've been strong and had scale in certain areas like liquidity like index for a long time and what we've been doing over the last few years is repositioning towards some of the higher growth, but also more value added areas, which I talked about so client SG things like that.

And so I those areas, although they represent a smaller portion of the pie if you will.

They are growing they are resonating, but like any longer term strategy. It takes time before you see the you know the impact of that from a financial perspective, but.

As far as thinking bigger if you will I would say, we are and I just talked about I'll call. It the.

The product side of that.

We're also looking not looking at but have been executing our strategy on the distribution side as well.

And it's going well I would say on the institutional side, you saw that not only in the fourth quarter, but the second half of the year.

Thats gone well, but then you also saw last year that we acquired business.

Very small, but immodesty, which is essentially a technology.

Platform, which we are utilizing in the intermediary space and we think again, that's the type the capability that will enable us to take accelerate the growth rate that we already have within there. So.

Yes, secular change, but we feel very good about our strategic positioning there.

Thank you ladies and gentlemen at this time, we have no further questions. So we'd like to thank you for attending the Northern Trust Corporation's fourth quarter 2019 earnings Conference call. You May now disconnect and thank you for joining us this morning.

Oh.

Ladies and gentlemen, good day, everyone and welcome to the Northern Trust Corporation fourth quarter 2019 earnings Conference call today's call is being recorded.

This time I would like to turn the call over to the director of Investor Relations Mr., Mark Betty for opening remarks and introductions. Please go ahead Sir.

David Good morning, everyone and welcome to Northern Trusts Corporation's fourth quarter 2019 earnings Conference call. Joining me on our call. This morning, our Michael Grady, our chairman and CEO , Jason Tyler, Our Chief Financial Officer, Lorne, all not our controller and Kelly weren't a hand from our Investor relations team our fourth quarter.

Earnings press release and financial trends report are both available on our website at Northern Trust Dotcom off on our website you will find our quarterly earnings review presentation, which will use to guide today's conference call.

This January 22nd call is being webcast live on Northern Trust Dot Com you only authorized rebroadcast of this call is the replay that will be available on our website through February 19, Northern Trust disclaims any continuing accuracy or 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 our northern trust current estimates and expectations of future events or future results actual results of course could differ materially from those expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are.

Difficult to predict I urge you to read our 2018 annual report on Form 10-K , and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.

During today's question and answer session. Please limit your initial query to one question and one related follow up that's will allow us to move through the Q and enable as many people it's possible the opportunity to ask questions as time permits.

Thank you again for joining US today, let me turn the call over to Michael Brady.

Thank you Mark good morning, everyone. As you know Jason tally became our CFO as of January 1st as Biff Bowman will be retiring after 35 years in Northern Trust, we're grateful to death for his many contributions as a trusted colleague and thoughtful leader throughout his time and especially for his significant contributions as CFO for the previous.

Five years I welcome Jason to the CFO role he brings deep financial expertise and leadership experience and I'm confident he will be very successful in the role.

For Jason goes through our results in detail I'd like to comment on some of the trends we're seeing in our businesses.

Our performance for 2019 continued to exhibit foundational strength as we executed on a number of growth strategies, while continuing to advance our digital efforts and improve our productivity our results for the year generated a return on average common equity of 14.9%. We also returned a record 1.7 billion to our common shares.

Orders through dividends and the repurchase of 11.8 million shares.

And our wealth management business, our capabilities and positioning continue to resonate in the marketplace on a year over year basis assets under management grew 13% to 314 billion and assets under custody grew 18% to 736 billion on the capability front spurring some of this growth we continue to invest in our days.

Digital and analytics capabilities as well as an innovation around the delivery of goals driven holistic advice.

We also closed out the year with the opening of a new office in Philadelphia, and we renamed the Best Private Bank by the financial Times group for the nighttime added the last 11 years in some for wealth management. It was a very solid year performance and momentum.

Our corporate institutional services business remains focused on executing its growth strategies digitalizing, the business and innovating for the future to enable scalable growth.

Assets under custody and administration ended the year at 11.3 trillion up 19% from the prior year, we continue to achieve healthy organic growth in our core asset servicing fees within both the asset manager and asset owner segments driven by our strong positioning. We're also making targeted investments that are expected to continue to fuel growth.

In areas like front and Middle office outsourcing in capital markets. For example, we launched new capabilities in front office solutions integrated trading solutions in currency management in 2019. Finally, CNS is executing a multiyear strategy that digitize the business to drive more profitable scalable.

Sustainable growth into the future.

And asset management, we ended the year with 1.2 trillion and assets under management, an increase of 15% from the prior year.

The industry transition through key secular shifts, we're delivering long term value to stakeholders through first strengthening our areas of competitive advantage such as portfolio construction quantitative research and liquidity management second prioritizing investment in growth markets and growth segments, such as financial intermediaries.

And family offices, and third shifting our business mix to higher value add products, such as quite active ETF SG and multi asset.

As we enter 2020, we're excited about the competitive positioning within each of our businesses. We remain focused on providing our clients with exceptional service and expertise driving efficiencies into our business and driving profitable growth.

Let me turn the call over to Jason to walk you through the details of our performance.

Thank you Mike Good morning, everyone, who joined Mike in marketing welcoming you to our fourth quarter 2019 earnings Conference call.

On page two of our quarterly earnings review presentation. This morning, you reported fourth quarter net income of $371 million.

Earnings per share or $1.70 in our return on common equity at 14.8%.

The current quarter's results included a $20.8 million charge recorded in other operating income related to the decision to sell substantially all lease portfolio and the $6.8 million software disposition charge recorded within equipment software expense.

As you can see on the bottom page to the macroeconomic environment was mixed while equity markets were strong short term interest rates in the U.S. decline both on a sequential as well as year over year basis.

Let's turn to page three interview the financial highlights of the fourth quarter.

Year over year revenue increased 3% with non interest income up 4% from one year ago, and net interest income flat expenses increased 5% from last year.

The provision for credit losses was a credit of $1 million in the current quarter compared to your credit of $4 million linear GAAP.

Net income was down 9%.

Year over year.

And the sequential comparison revenue increased 1% with both non interest income and net interest income up 1%.

Expenses increased 3% compared to the prior quarter.

Net income declined 3% sequentially.

Return on average common equity was 14.8% for the quarter down from 17%, one year ago and 14.9% in the prior quarter.

Assets under custody administration of 100 of $12.1 billion increased 19% compared to one year ago and were up 4% on a sequential basis.

Assets under custody of 9.2 trillion were up 22% compared to one year ago, and a 5% sequentially.

It's under management were 1.2 trillion dollars up 15% on a year over year basis, an up 2% on a sequential thanks.

That's a good results in greater detail starting with revenue on page four.

Fourth quarter revenue on a fully taxable equivalent basis was $1.6 billion up 3% compared to last year and up 1% sequentially.

Trust investment and other servicing fees represent the largest component of our revenue and were $992 million in the fourth quarter up 6% from last year in up 2% sequentially.

Foreign exchange trading income was $65 million in the fourth quarter down 17% year over year end up 8% sequentially.

The year over year decline is primarily related to lower foreign exchange swap activity in our treasury function.

Other noninterest income was $70 million in the fourth quarter down, 6% compared to one year ago and down 17% sequentially.

Other operating income included the aforementioned 20.8 million dollar loss relating to the lease portfolio.

Excluding the lease related loss the year over year growth was driven by implementation with bank owned life insurance program during 2019, and strong security commissions and trading income.

The sequential growth excluding the lease portfolio lawsuit, primarily driven by favorability in the visa related swap.

Net interest income, which I'll discuss in more detail later was $430 million in the fourth quarter flat with the other period flight with prior period and up 1% sequentially.

Well look at the components of our trust and investment fees on page five.

For our corporate and institutional services business fees totaled $567 million in the fourth quarter and were up 6% year over year and up 1% on a sequential basis.

Custody and fund administration fees, the largest component of CNS fees were $397 million, then up 6% year over year and up 1% on a sequential basis.

The year over year for performance was primarily driven by new business and favorable equity markets.

Performance on a sequential basis was primarily driven by favorable currency translation and favorable markets.

Assets under custody and administration for Cnf clients were 11.3 trillion at quarter end up 19% year over year in up 4% sequentially.

Both year over year and sequential performance was primarily driven by higher markets.

New business unfavorable currency translation recall that lag the market values factor into the quarters fees with both quarter lag and month lag markets impacting our cnf custody and fund administration fees.

Investment management fees in CNS of $116 million in the fourth quarter were up 10% year over year end up 1% sequentially.

The year over year performance was driven by new business and favorable markets.

Sequential performance was primarily due to favorable mark.

Assets under management for CNS were $917 billion up 16% year over year in up 2% sequentially. The year over year increase was driven by favorable markets and new business as well as an increase in ended period securities lending collateral levels.

We've had strong success within our liquidity from.

With significant growth in our institutional cash bonds.

The sequential increase is primarily driven by markets, partially offset by a decline in period end securities lending collateral levels.

During these lending fees were $23 million in the fourth quarter up 4% year over year end up 12% sequentially the year over year increases primarily driven by higher volumes, while the sequential increase is primarily driven by higher spreads.

Securities lending collateral was 163 billing at quarter end and averaged $164 billion across the quarter.

Average collateral levels increased 4% year over year and were down 7% sequentially.

Moving to our wealth management business Trust investment and other services servicing fees were $425 million in the fourth quarter were up 7% compared to the prior quarter and up 2% sequentially.

Both year over year, and sequential increases were driven by favorable market and new business.

The management were $314 billion at quarter end up 13% year over year and up 4% sequentially increases were primarily driven by favorable market.

Moving on to page six.

Net interest income this $430 million in the fourth quarter and flat compared to the prior year.

Earning assets averaged $107 billion in the quarter down 4% from the prior year total deposits average 89 billion and were down 4% versus the prior year.

The net interest margin was one point not 1.59% in the fourth quarter and was up seven basis points from a year ago, improving the net interest margin compared to prior year, primarily reflects the balance sheet mix shift and the impact of lower foreign exchange swap volume, particularly off partially offset by lower short term interest rates first.

As one year ago.

On a sequential quarter basis net interest income was up 1%.

Average, earning assets increased 2% on a sequential basis, while the net interest margin declined two basis points.

It's worth noting that in net interest income unresolved quarter did include approximately $6 million in various one time non repeating items.

During the quarter. We also added to our bank owned life insurance program that was first put in place during the second quarter.

Compared to prior quarter. This quarters net interest income declined by approximately $900000. As a result will be additional Bali, while other operating income benefited by 1.5 million.

The full quarterly run rate will be reached in the first quarter 2022, additional net interest income decline of approximately $2.3 million and other operating income increase of 2.7 million on a sequential basis.

Looking at the currency mix of our balance sheet for the fourth quarter.

US dollar deposits represented 68% of our total deposits. This is down from Seth This is down from 70% one year ago and 69% at prior quarter.

Turning to page seven expenses were $1.1 billion into fourth quarter and were 5% higher than the prior year and 3% higher versus the prior quarter compensation expense totaled $463 million ended up 4% compared to one year ago.

The year over year growth is primarily related to higher salaries, driven by base pay adjustments and staff growth, partially offset by lower incentive expense.

On a sequential basis compensation is up 1% the sequential increases partially due to higher salary expense driven by staff growth an unfavorable currency translation, partially offset by lower cash based incentive accruals.

Employee benefit expenses $93 million is up 2% from one year ago and was up 6% sequentially. The year over year growth was primarily driven by higher payroll taxes, while the sequential growth is primarily due to increased medical costs.

As it pertains to our benefits expense in 2020 due to changes in underlying assumptions underlying assumptions, we expect to see increase in full year pension expense of just over $30 million, which represents is airport, 7% increase in our overall total 2019 expense base.

Outside services costs of 260 million $206 million were up 5% on a year over year basis up 6% sequentially. The year over year growth was primarily driven by higher technical services consulting and legal expense.

The sequential increase was primarily due to higher legal and consulting services as well as costs related to increase business volumes, including brokers clearing market data sub custody and third party advisor fees.

Equipment software expense of $165 million was up 8% from one year ago and up 9% sequentially.

Both the year over year and sequential growth were impacted by the previously mentioned software disposition charge of $6.8 million.

The year over year growth also reflects higher depreciation and amortization, while higher software amortization costs contributed to the sequential increase.

Occupancy expense of $57 million was up 15% from one year ago, and up 8% sequentially, both a year over year and sequential increases were driven by higher rent.

And building operation costs related to our workplace real estate strategies.

Other operating expense of $88 million was down 1% from one year ago and down 4% sequentially.

The sequential decrease was driven primarily by the Northern Trust sponsored golf tournament in the prior quarter, partially offset by increases in advertising staff related and other operating expense categories.

As we discussed on previous calls through our value for spend initiative.

That we started in 2017, we've been realigning our expense base with the goal of realizing $250 million an expense run rate savings by 2020.

Our current quarter results reflect approximately $60 million in expense savings or $240 million, an annualized run rate savings our efforts around value for spending productivity more broadly will not see as we further embed a culture of sustainable expense management across the company expense management as a core emphasis.

We continue to focus on striking the right balance between productivity growth and investing in the business.

Now turning to full year results in 2019 are summarized on page eight.

Net income was $1.5 billion down, 4% compared with 2018 and earnings per share were $6.63 flat with the prior year.

On the right margin of this page, we outlined the nonrecurring impacts that were called out for both years.

Achieved a return on equity for the year of 14.9% compared to 16.2% in 2018.

The full year revenue expense trends are outlined on page nine.

Trust investment other servicing fees grew 3% and 29 teen growth during the year was primarily driven by new business and favorable markets, partially offset by the impact of unfavorable currency translation.

Foreign exchange trading income declined 18% driven by a decrease in foreign exchange swap activity within our treasury function as well as decreases in market volatility and lower client volumes.

Net interest income increased 3% average, earning assets during the year declined by 6% while net interest margin increased 14 basis points. The net result was 2% growth in overall revenue on a reported basis in 2019.

We reported basis expenses were up 3% from the prior year adjusting for the expense charges in both 2018 and 2019 that are on the prior page expenses were also up 3% from 2018.

Turning to page 10, our capital ratios remained strong.

Well, our common equity tier one ratio of 12.7% under the standardized approach than 13.3% under the advanced approach the supplementary leverage ratio at the corporation at 76% and at the bank was 6.4% both of which exceeds 3% minimum requirement.

During the fourth quarter, we declared cash dividends totaling $150 million to common stockholders and repurchased 2.6 million shares of common stock at cost of $264 million. These two factors combined represent a payout ratio of approximately 113% for the quarter.

Also during the fourth quarter, Northern Trust issued $400 million in perpetual preferred stock at a fixed for life dividend rate of 4.7% callable in five years.

Fixed rate dividends for this new issuance are expected to be paid on a quarterly basis with the first dividend declared at our board of directors meeting earlier. This week tend to be paid April onest of 2020.

Given the November issuance the initial preferred dividend payment will cover approximately five months and therefore is expected to equal $7.6 million in the first quarter 2020 going forward. These fixed rate dividends are expected to be $4.7 million per quarter.

The proceeds of this issuance were used to redeem all outstanding shares a series C preferred stock in January on January 2nd 20.

First quarter 2200 results will include $11.5 million, an accelerated seriously related costs.

Now, let me turn the call back over to Mike for closing comments.

Before we open the call for Q today, I wanted to close by talking about our key financial objectives and our performance against these in 2019.

Primary financial target is to achieve a return on average common equity of between 10% to 15% for 2019 Ari of 14.9% because at the high end of that range. This was the sixth consecutive year. We have achieved our targeted are we.

We're also focused on driving profitable growth and have objectives to achieve both fee operating leverage and positive operating leverage although we have achieved positive fee operating leverage in eight of the last 10 years and positive operating leverage in seven of the last 10 years, we did not achieve those for 2019.

As we enter 2020, we're continuing to rapidly evolving company by providing differentiated services and experiences to our clients in investing in innovative capabilities to do more for our existing clients and gain new clients. We combine this with our intense focus on improving our productivity to profitably grow the company increased.

For our stakeholders.

This concludes our prepared remarks. Thank you again for participating the Northern Trust fourth quarter earnings Conference call today, Jason Mark and I would be happy to answer your questions. David could you. Please open the line.

Absolutely, ladies and gentlemen, if you would like to ask a question. Please signal by pressing star one on your telephone keypad now if you are using a speakerphone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Please note will be allowed one question and one follow up again press star one to ask a question and we'll pause for just a moment to allow everyone and operator.

Energy to signal for questions.

And our first question will come from Alex Blostein with Goldman Sachs.

Hi, guys good morning, everybody.

Mike picking up on the last point I guess, when you talk about operating leverage I guess over the last few quarters, you guys talked about getting organic expense growth to be in line with organic growth not just total fee growth I guess.

A question number one there is the organically grow still in the 3% to 4% kind of range as you look out into 2020, and then secondly.

Should we expect to achieve this level of expense growth for the full year sort of despite the fact that markets. Obviously starting off in a very strong point and that should Nashville create more kind of pressure or more tailwinds, rather to fees and I'm, just wondering whether or not the sort of level of expense growth could be sustainable into 2020.

So.

Alex I think you're thinking about the the framework the right way, which is as I mentioned earlier, we are focused on the objective of generating positive fee operating leverage.

And underneath that is the goal to achieve that on an organic basis as well knowing that that is a higher bar if you well, but the reason why we focus on on an organic basis is because just as you indicated when markets are stronger we expect that we'll get more positive fee operating loss.

Average from that.

It's more challenging.

To achieve that in ill call it lower growth environment than when we do have the tailwind, but thats why its important to have that.

The primary objective around organic high in 2019, we did not achieve the organic the operating leverage.

And that's something that.

Certainly as far as what we're shooting for we're trying to get that so that if we would have achieved that we would had positive fee operating leverage here for the year.

And going into 2020, it's the same objective now is Jason talked about and can go into more detail there are certain aspects of the.

Expense base that role in this case pension as he mentioned for example.

$30 million increase the to the year.

We still look to cover that if you will and tried to just focus on the productivity.

Objective to try to overcome the things like that as well so the goals haven't changed from year to year, we can't have different challenges to achieve it.

But as far as what we're trying to achieve its the same objective.

Got it thanks for that and then just on clean up for you for IR. It sounded like there were $6 million of one time I believe it was a benefit and Q4 can you flesh that out a little bit. So what are those benefits and maybe help us bridge the kind of the right jumping off point for Q1 20 at IR as best we zoning out on the quarter here.

Yes, you got the headline number right is about $6 million. It's a combination of couple of different items Theres. Some premium and then one thing we didn't headline much where we did have a pay off of a nonrecurring not flow. The loan that was on non accrual we picked up another $2 million and interest on that.

And then the Ft adjustment was a little was a couple of million dollars higher. So you add those factors together and you get to to six.

Thank you. Our next question will come from Jim Mitchell with Buckingham Research.

Hey, good morning, guys.

And we can talk a little bit about.

At period end balance sheet, it really kind of spikes.

Is that what should we take that is just sort of transitory because if you look at average balances and we're not that much or is there.

Something thats continuing into one too, though we should maybe.

For our assumptions around deposit growth given fed actions et cetera.

Yes.

You're right. It was it was high actually look back to see if this was a record high it wasn't but it was it was close but the more importantly did it has come back down there obviously as you know the balance sheet is the spike at the end of the quarters in particularly into the years. This was higher than normal not a record but already.

Hey, we've seen more normalization as some of the large clients to put money back to work into the market in different ways.

Okay. Thanks, and then maybe just follow up on the the comp line in expenses going forward.

Just on on you had head count growth of 5% how do you how do we think about that kind of upward pressure from head count growth versus your desire to kind of the scalable digitization trying to keep core expense growth below organic growth, but we're kind of starting off with.

Much higher employee base, how do we think about that the comp line space specifically.

Well couple of things or maybe you might be looking at page seven of the press release and you get the comp line, there and I look at it more on.

For 18 versus Q4, 19, and you've got to 4% growth rate there. So the first thing.

So my lenses to say what was it what was revenue growth what was really trust fee growth over that timeframe and.

It was about six in a quarter percent. So first of all on that comp line, even though it's a tiny bit higher than we'd like to see we did get leverage in that which is which is good and.

We're in a year, where we've got revenue up a lot of our expenses are going to bring a lot of our revenue growth is going to bring with it expense growth and it's going to hit and just about every one of the key expense line items, including comp.

The second thing.

Good for us to think about is that in general we've got the technology investment that we're making and so that part of the reason that number maybe a little higher is that some of the tact investment that we're making in the business are coming through and that topline.

And third just so you guys you're thinking about it the right way coming into the next year.

We're always going to have effectively.

Paul.

30 to 40 million dollar based pay adjustment for the top line and so you think about that on a on the base of business that we have here that's going to lead to almost a point.

In of itself in the grow so those are just a couple of ways different lenses to think about that line item.

Okay. Thanks, a lot that's helpful.

Sure.

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley .

Hi, good morning.

Hi, I just wanted to follow up a little bit on that regarding just technology in general I know in the past you've given.

Some insight on what your tech budget is maybe could give us a little sense as to how you see that trajecting over time, I know you give guidance, but just to understand.

You think that.

Trajectory is accelerating decelerating and then.

How do you see that shifting over time comp.

Versus non comp as it relates to tack. Thanks.

Yes.

So it's a it's obviously we've got a high sense of urgency as we think about expenses in general and taxes, where it is outsized relative to the other areas and so you're right to hone in on it. The couple of couple of data points. As you think about next year. One is does that take a step.

Back that we thought about what we wanted to convey that we know about we don't want to give guidance on expenses, but we do want to tell you. What we know at this point and there are some things that we have high degree of certainty of is and you said that at this point coming into 2020, so I want to do those three ball.

But just to put those out one I hinted to a couple of minutes ago that comes down to the the compensation line, we know that we're going to see.

In general about it somewhere between 30 $540 million just been base pay adjustments based on the business that we have.

Secondly, we talked about pension being a little over $30 million higher and then third is we have a sense right now what ITD IP depreciation is going to look like and that's about $40 million higher for the year in 2020 than it was then it will be as we look back on 29.

Team now some of that is reflected in the fourth quarter and so.

We can.

It's hard for us to to develop much of it but we do know that on a year or.

$40 million higher so those are three key items that I think everybody we want to make sure but is aware of because we've got clear line of sight on at this point and the second more broadly as we think about how do we depict the.

But it.

And the increase it is actually hitting in a lot of different line items. So just we're talking about paid seven on the press release a minute ago stay there for a second and if you look at these different line items I actually went back and pulled out hi, tiet from each of the different components that you can see at star.

Finally to get a sense of how much they are impacting those growth areas because I do look at not just comp, which we were talking about a second ago, but all of those line items trying to get a sense of whether we're getting leverage there and obviously the biggest it's very heavily in equipment and software, which is why you'll see that line item be pretty Oliver.

Good so theres also smaller but still meaningful impact that will hit in obviously compensation employee benefits and outside services.

Is it still around $1 billion that you're thinking the tech budget was in 2019 I.

Recall that was.

That the estimate that was given most recently.

Yeah. That's maybe this is mark yes about we look at it kind of an up three year Rolling averaged 2019 2020 2021.

A little bit over 1 billion per year and that includes both.

Operating expense as well as capital investments.

Got it okay. Thank you.

Thank you. Our next question comes from Brian Bodell, but the Deutsche Bank.

Great. Thanks very much.

Just a question on and I.

Is there any impact on future net interest income from the sale of the leasing portfolio and if so if you can quantify that and then also.

If you can you talk about what you're seeing for deposit trends.

In Q1 Q.

Okay.

So on the.

Right that deposit trends for good on the impact of nor lease and on in very de Minimis increase nothing to really to think about that.

Pretty clean accounting perspective on how that was hit and then secondly on deposit trends coming in more broadly.

I know that its first of all at the strategic focus for us across the business on in both on both the wealth side and on the and on the CNS side and we've talked about on the wealth side. In particular, we we told you about some strategic initiatives. We had there to bring that brought some money out of the two a seven.

Funds onto the balance sheet, that's held in pretty well and then I'd say on the on the institutional side of the business, it's more volatile and there's no. The initiatives that we have there arent as aggressive as what we've been thinking about on the well side, but we're still doing everything we can to make sure we're getting a good share of our deposits of the.

Deposits coming in from clients is that as the custody book grows and as we're talking to clients across the globe.

Since joining averaging basis.

You are expecting growth Q1 based on those initiatives I know the end of period with was elevated of course, but.

If we think about it averaged average.

Now I think the there there was the.

The if you think about the asset side and then the funding side. If you think about NIM that the only other item there that have no. There was a little bit as couple billion dollars higher on that but that didn't really come more from the deposit side. It came more from from trading related activity.

And so there is nothing I'd call out at this point that would lead you to say that deposits would be.

Moderately are significantly different.

Okay, Great and then on organic growth I think you commented on wealth management UN being up mostly from the markets just wanted to get a sense. That's been a strong driver of organic growth for free for you guys for awhile I just want to get a sense of the cadence of the organic growth trends in wealth management versus.

The asset servicing business and as you think about expenses are we still thinking about.

Comparable growth.

Rate in expense growth, even with those headwinds that you've mentioned on the comp pension and the I.T. side.

Is that still reasonable to think of Oh.

Uh huh.

A rate of growth that will be similar to the organic growth if thats still like trending towards the mid single digits.

Well, let me hit the top side first on the on the growth side in the trends within the wealth business. This business continuing to do well and and Mike touched on earlier this year in some really nice differentiated approaches as that business has the market with both here in wealth management Red.

Thats very well and as the trend there that that continues to be seen in follow through on the financials and you guys are able to see this actually that that we're doing well at the very top end to the market. So the family office business.

Growing faster than you can see that numbers. We report on both the sequential basis in a year over year basis that trend has been going on for awhile and it's attractive and then the second component to how we will see the expenses line differently between the business when a separated in a couple ways.

One is that the tech related expenses apply a little bit more towards the CNS side of the business as we think about things like matrix and our strategic operating model those things are going to be allocated a little bit more for the CNS side of the business.

That said the wealth side of the business is also investing in different ways in there there they're working hard on digitizing the business, Mike talked about that earlier that we're probably a little ahead in our investments there on the CNS side wealth is starting to think more about how to reflect the digital transformation.

We've seen across the marketplace and how we can take our position with things like bolstered in wealth management make it even more accessible to clients have even better interactions that have better foundational technology.

And so thinking about organic growth and that sort of mid single digit area on a go forward basis are loaded low to mid single.

Brian just to confirm or you are talking about whilst or the corporation as a whole who did the company is.

Yes, so maybe just to address that Brian .

Across the businesses, so Jason talked about wealth management, we continued to see as you mentioned.

Healthy solid growth in that business, that's the nature of it and.

Again, our strategic imperative in that business is that.

The increase or accelerate that growth, even more we're still seeing a higher growth rate in our asset servicing business.

And so that continues its at the lower end of its range.

But it continues to grow at a healthy rate.

And that strategic imperative for that business is yet to continue that growth, but we want to see that growth be more scalable.

And then I would just also add with our asset management business, we're all well aware of the secular trends.

In the industry, there and I would say, that's certainly impacted our asset management business although.

Comparatively the business is performing well and so its experiencing.

Positive organic growth just meaning they are able to.

Increase the flows but also then change the mix in such a way that is offsetting the fee compression that you're seeing across the industry. So it's positive having said that it is at a lower rate than the other two businesses. So you put that altogether.

To your point, we've talked about.

The organic growth rate for our fees at the company level kind of being mid single digits. That's still the case, where at the lower end of that right. Now so what does that mean well that's why we're focused on our growth strategies and executing on those but thats why one of our other key priority for the company is on continually improving our productivity.

And when we are at the lower end of the growth side, we have to work Jeff that much harder on the expense side to get more.

Savings if you will.

R&D expense side, so that's the strategy a few well and again.

Focused on trying to execute that said that we can deliver the positive fee operating leverage.

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

Thanks, a lot.

Hey, Jason can you expand a little bit more on.

Underneath the fact that you said that some of the balances might have gone off the balance sheet can you help us understand either how much you saw is like the.

Over overt growth and earning assets this quarter and then secondarily.

If rates stay stable from here can you talk us through the dynamics of of NIM in terms of how much asset repricing has to come through and and how much do deposit repricing you can still see happening now that we've gone to a more stable level. Thanks.

Sure. So on the first I think it's.

As these spikes happen late in the quarter or is it frankly, a relatively short period of time that these spikes or on the balance sheet and so it comes in late in at least pretty early and so and we're not doing anything fancy when those dollars come in and so frankly, just doesn't impact the overall NIM very much should does spike that we're obviously look to the back.

And on a daily basis its spikes it.

And but it doesn't I don't think it really drives NIM launch at the end of the day and then as we look out into next quarter I don't think that spike should necessarily be reflected in your thought process. As you think about so thats more from a volume perspective, all did you think about although.

I did hand earlier that kind of that 2 billion dollar increase in the securities portfolio I do think thats likely to come down and that had more to do what I think more idiosyncratic trading that was that was happening at the time nothing abnormal we just so we're trading some more longer dated securities and the six.

Surety settlement process led to higher security is being on that's really what led to that little bit an average increase and I think that will update as we think about the rates going forward into first quarter. The thing that we can all see that we'll have maybe more of an impact than what people realize is that.

Fed funds to LIBOR spread and that did have an impact in fourth quarter and when we talk to everyone. At the conference. We attended and then on the last call. We were looking at it spread there is more probably 13 or 14 basis points.

And we thought that was going to go away it actually held to entities and expanded a little bit but now that compression that we anticipated has actually come to fruition and if you look at that Delta right now it's more on the 910 basis point land and so that is a factor that is that.

Holds then that would have an impact on what we would think about for NIM for next quarter.

Okay, and then do you have the ability to reprice much on the right side of the balance you just talked about customer dynamics outside of just your market index type of deposit cycle How's the discussion going with clients and what opportunities do you still have to reduce rate.

Yes, just so incredibly different between the businesses.

And so on on the institutional side first of all of the deposits. There are driven a lot more by our and by our EMEA clients and that in that book those clients or are shopping in real time and so.

We're making very tight decisions on those and we can only we're going to get what the market gives us frankly, and so and we're not in a position to be a price leader there and now on the on the other side that is the wealth business very different dynamics and there we talk again about the fact that.

Sunsetted, an anchor suite product and we brought.

Assets from the two a seven funds out of the balance sheet. We're looking much more there and can begin can think about what we want to be strategically in the marketplace and give you. Some headlines on how we talk about it we do want to we want to be very attractive for large depositors and so that's where we're going to be.

Much more competitive and for more of the retail client base is we're going to be less competitive and but at the top into the market. There. We're always trying to figure out how to attract and and be extremely aggressive about retaining our top depositors.

Thank you. Our next question comes from Steven Chubak with Wolfe Research.

Okay.

Hi, good morning.

So just wanted to start off without a question on capital I know that in the past you've discussed the business need to manage to higher ratios to ensure you don't deviate meaningfully at least from some of your disappears are running closer to 12% plus given that you're competing with some of these firms for RFP is and I was hoping you can maybe just on path.

Jack or speak to some of the competitive considerations such as RFP is versus regulatory constraints it looks like.

The regulatory changes our swinging the right way in terms of SLR OLIF potential for the elimination of leverage constraints and see car I'm. Just wondering if some of those changes come through how that informs your willingness or appetite to manage to a lower target over time.

It's Mike when I start off.

So first of all as you would expect we feel very good about our capital levels.

And our flexibility with regards to capital.

As you highlighted we are I always I cognizant and focused on what the implications would be on the business for our capital levels and that can play into formalized RFP processes, where yes, we wanted to compare favorably to some of our competitors.

But also just more broadly and I'll save and subjectively with our wealth management business dealing with large family offices, yes. They are looking for safety and security Conservative strong balance sheet and so it's a part of the business strategy for us on having said that.

Like any resource play it needs to be balance and so we're comfortable with with where we are to your point, we're cognizant of where our competitor capital levels are and to the extent that those move that gives us more flexibility on that front and then the last thing I would add is from a regulatory lens as youve.

Talked about.

There are changes on the regulatory front.

Having said that a theyve also recently re categorized banks were a category to bank.

We havent be the only category to bank, which we take as a compliment reflecting the unique nature of our business model on but it also does mean once again.

We have to work our way through whatever changes that may mean as far as capital management for us we're not concerned about anything per se, but they're just is some uncertainty until they fully roll out the implications of category too.

On capital management expectations.

No very helpful color and just one.

Follow up for me just a cleanup question on the other income line.

When we adjust for the Onetimers in the quarter. It looks like that was a source of revenue strength and I was hoping to gauge the sustainability of some of that strength versus the 50 million core level and for Q and there's given some of the guidance on bully related impacts how we should think about what could be a reasonable are appropriate run rate for that line in 2020 recognizing.

Theres always mark to market and other noise.

Steven highest mark.

As you said if you adjust for the lease we would have been at the at closer to the 50 million Mark there was.

The bully benefit came into that line.

That will continue to have a little bit of a bump up in the first quarter like Jason said I would say that the.

The mark to market adjustment on the visa with favorable this quarter.

About a $5 million sequential benefit.

Which.

There was more of a negative drag on that last quarter for some of the adjustments that we made there.

This quarter.

Yeah, when you take that into account.

As well as a bully.

We did have a little bit higher miscellaneous income in credit and bank related fees, probably higher than normal.

One way that I would say that you can look at that line because it does move around as if you strip out some of the nonrecurring.

Adams, we've had in that line, you're probably looking at an average of about 35 million over the last several quarters than that in theory you can.

Layer bowling on top of that that would be one way to look.

Great. Thanks for taking my questions.

Sure.

Your next question comes from Brennan Hawken would you be yes.

Brent.

Hey, good morning, Thanks for taking my questions I just had a follow up from a a few of the questions that have been asked so far.

And just wanted to try and frame it in the best way to think about one Q Eni and Jason I know welcome to the Circus, our quarterly circus here.

With your call.

I know your predecessor had started to help us think about one quarter out and I I know that was a departure from northern some normal course of business.

I don't know what's your plan is going forward, but it does seem like there's a lot of noise. So if you could help us frame how to think about one Q you guys sold some of the lease port.

Portfolio so.

Testing we need to.

Shrink that average, earning asset bucket a bit we've got an over earning of about 6 million you've got the tighter fed funds LIBOR.

How should we think about how this will weigh on anti as we go into four one Q based on what you've seen so far.

Right well I think you bring an idea you got all the pieces.

The way I think about leading into it.

Another couple items, one you talked about the one timers.

Truly five $6 million secondly, I mentioned, the Livewatch fed funds spread I think thats is very important one as you think about how to model this out.

And then you mentioned Bali, which having that in place now for for a full quarter because remember we didnt habit in place last year the benefit of that even if you just assume the same type of economics that we experienced this time should be positive $5 million.

And then lastly, we haven't talked about day count is going to work against us if you're thinking about our on a sequential basis. We'll go from 92 not to 90, but the 91 with leap year and that those are the.

Mine those are the big four buckets to.

We used as a starting point.

Okay.

Thanks for that and then when we think about.

The average balance sheet.

It looks like.

There was a.

A big a bit of a jump in the other liabilities this quarter.

And it's at the highest level that it's been in a couple of years by about a billion box.

Should we is that temporary obviously it was enough to skew the average balance for the fourth quarter. So is there something.

Unusual happening that will prove sustainable or should we just expect that to wind down in in one Q.

Yeah, that's us hinting at earlier that.

Had to do with more than nature of the securities were trading that had more time and were in settlement mode for longer and so that's what I think will drive bring that the securities portfolio down to.

A more normalized level.

Okay like PVA is there something.

Mortgage the ABS, Yes, you did mortgages just some nothing we don't normally do little higher mix of those items that led to higher level security sitting and obviously, we're not getting the yield on those is there they're sitting in settled the other thing. It I just mentioned I think it's easy.

You're right. There is kind of that a lot of question about where NIM is going and we had gotten intermodal.

Hocking about what we expect and effectively providing guidance and I'll say at this point, we do think NIM will be down 2% to 4%.

But.

Not in I will be down 2% to 4%.

And so it's not to say that every quarter, we're going to give that but I do think with.

We gave you guys handful of different items that you had this square off to get a good launch point and so I think putting it out there this quarter is fair.

Okay terrific and that's off the reported number in Fourq right, though one of those seven what we should based at minus two to four.

The off of the reported net interest income of 430 mounted 30, right sorry, sorry, Yeah got it. Thank you.

And so that's not indicating just to be Super clear is not indicated to 159 is going to be down 2% to 4% just that the for the $430 million, we'd expect to be down about 2.2% to 4% based on the items I walk through.

Got it and I are not NIM.

Great.

Thank you.

Yes.

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

Hi, good morning, Thanks for taking the hi, Thanks stand the question.

I want to focus too much on one year, but when you when you look at the thing not hitting the op leverage target.

Is that more of a function of higher necessary investments that came up during the year.

It was it later organic growth and may be expected and since you mentioned some of the expense items heading into 2020 on comp pension and tech.

Are there any areas like maybe real estate that you could see some savings given some of the repositioning that you guys have been working on.

Yes, I'll start with the second which we have mentioned that we expect occupancy to be higher in the short run as we've gotten double leased double rent payments that we have effectively.

Those have been it's close to it we're we're going through a transition of very large number of sheets from a building we've been in for a long time in Chicago to a new Newbuilding. We're starting people in this month a lot of the mood is going to take place next month and so we're right in them.

To that and so you can imagine we're still obviously paying rent Neal facility.

And also if started a new facility Theres a lot of work that goes around making sure that move is taking place and there are other areas around the around the footprint overall real estate perspective, it's going to lead to a higher level of rent in the first.

Half of this year.

And then the second half of the year, we should get some benefit from that and so that's something that we'll we'll actually see come down will eventually grow into that run rate. We are expecting to actually see that line have come down second half of of the year, Mike anything you want to add to that yes, just to the first part of your your question there.

About the year and again it is a year but.

Part of the trend there and so what came out of that one much broader perspective pulling back from it is if you look at our expense base overall.

By the technology expenses. So this is the expenses for.