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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, everyone. And welcome to the Northern Trust Corporation First Quarter 2019 Earnings Conference Call. Today’s call is being recorded.
At this time, I would now like to turn today's call over to Director of Investor Relations, Mark Bette, for opening remarks and introductions. Please go ahead, sir.
Thank you, Kerry. Good morning, everyone. And welcome to Northern Trust Corporation’s first quarter 2019 earnings conference call. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; Aileen Blake, our Controller; and Kelly Lernihan from our Investor Relations team.
Our first quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today’s conference call. This April 23rd call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through May 21st. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.
Now for our Safe Harbor statements. What we say during today’s conference call may include forward-looking statements, which are Northern Trust’s current estimates and expectations of future events or future results. Actual results of course could differ materially from those expressed or implied by these statements, because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2018 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results.
During today’s question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today.
Let me turn the call over to Biff Bowman.
Good morning, everyone. Let me join Mark in welcoming you to our first quarter 2019 earnings conference call.
Starting on page two of our quarterly earnings review presentation. This morning, we reported first quarter net income of $347.1 million, earnings per share were $1.48, and our return on common equity was 14%. As noted on the second page of our earnings release, this quarter’s results included $12.3 million of severance-related and restructuring charges within expenses.
Before going through our results in detail, I would like to comment on some macro factors impacting our business during the quarter. Equity markets rebounded during the quarter, following a challenging fourth quarter. Compared to the prior year, the S&P 500 ended the quarter, up 7.3%, while the MSCI EAFE was unchanged.
On a sequential basis, end-of-period markets were favorable, with the S&P 500 and the EAFE indices increasing 13.1% and 9.6%, respectively. Recall that some of our fees are based on lagged pricing, and those comparisons are challenging, both versus one year ago as well, sequentially. On a month lag basis, the S&P 500 and EAFE were down 2.6% and 9% on a year-over-year basis, and down 4.7% and 4.1% sequentially. On a quarter lag basis, the S&P 500 and EAFE were down 6.2% and 13.4% on a year-over-year basis, and down 14% and 12.5% sequentially.
U.S. short-term interest rates were modestly higher in the quarter on average, driven by the full quarter impact of the Federal Reserve’s December rate hike. On a sequential basis, average one-month and three-month LIBOR increased 15 basis points and 7 basis points respectively. Currency rates influenced the translation of non-U.S. currencies to the U.S. dollar and therefore impact client assets and certain revenues and expenses. The British pound and euro versus the U.S. dollar ended the quarter down 7% and 9%, respectively, compared to the prior year. The year-over-year declines favorably impacted expense, but had an unfavorable impact on revenue. On a sequential basis, the British pound ended the quarter up 2%, while the euro declined 2%.
Let’s move to page three and review the financial highlights of the first quarter. Year-over-year, revenue was flat with non-interest income down 3% and net interest income up 9%. Expenses increased 3% from last year. The provision for credit losses was zero in the current quarter compared to a credit of $3 million one year ago. Net income was 9% lower year-over-year.
In the sequential comparison, revenue declined 2% with non-interest income down 3% and net interest income flat. Expenses increased 1% compared to the prior year. Net income declined 15% sequentially. Return on average common equity was 14% for the quarter, down from 16% one year ago and 17% in the prior quarter.
Assets under custody and administration of $10.9 trillion, increased 1% compared to one year ago and were up 8% on a sequential basis. Assets under custody of $8.2 trillion were also up 1% compared to one year ago and up 8% sequentially. The year-over-year performance was primarily driven by favorable markets partially offset by the impact of unfavorable moves in currency exchange rates. The sequential performance was primarily driven by favorable markets and new business.
Assets under management were $1.2 trillion, flat on a year-over-year basis and up 9% on a sequential basis. The year-over-year performance reflected higher markets and new business, offset by lower period-ending and securities lending collateral. The sequential increase was driven by higher markets and new business.
Let's look at the results in greater detail starting with revenue on page four. First quarter revenue on a fully taxable equivalent basis was $1.5 billion, flat compared to last year and down 2% sequentially. Trust investment and other servicing fees represent the largest component of our revenue and were $929 million in the first quarter, down 1% from both last year and the prior quarter.
Foreign exchange trading income was $66 million in the first quarter, down 16% year-over-year and down 15% sequentially. Both the year-over-year and sequential declines were driven by lower volatility, as well as lower foreign-exchange swap activity in our treasury function. The sequential decline was also impacted by lower client volumes.
Other non-interest income was $64 million in the first quarter, down 16% compared to one year ago and down 15% sequentially. The year-over-year decline was primarily due to lower security commissions and trading income, higher Visa-related swap expense and lower miscellaneous income. The sequential decline was due to a leasing gain recognized in the prior quarter, as well as higher Visa-related swap expense.
Net interest income, which I will discuss in more detail later, was $430 million in the first quarter, increasing 9% year-over-year, and flat sequentially.
Let's look at the components of our trust and investment fees on page five. For our corporate and institutional services business, fees totaled $535 million in the first quarter and were down 2% year-over-year and flat on a sequential basis. The translation impact of changes in currency rates reduced year-over-year C&IS fee growth by approximately 2%.
Custody and fund administration fees, the largest component of C&IS fee, were $375 million, and essentially flat on both the year-over-year and sequential basis. The year-over-year performance was driven by new business, partially offset by both unfavorable markets and unfavorable currency translation. On a sequential basis, the impact of lower markets was mostly offset by new and favorable currency translation.
Assets under custody and administration for C&IS clients were $10.2 trillion at quarter end, up 1% year-over-year and up 8% sequentially. The year-over-year performance was primarily driven by favorable markets, partially offset by the impact of unfavorable moves in currency exchange rates. The sequential performance was primarily driven by favorable markets and new business. Recall that lagged market values factor into the quarter’s fees with both quarter lag and month lag markets impacting our C&IS custody and fund administration fees.
Investment management fees in C&IS of $104 million in the first quarter were down 5% year-over-year and down 1% sequentially. The year-over-year decline was primarily due to the impacts of unfavorable markets. On a sequential basis, the impact of lower markets was partially offset by new business.
Assets under management for C&IS clients were $868 billion, down 1% year-over-year, and up 10% sequentially. The year-over-year decline was driven by lower period-end securities lending collateral, mostly offset by favorable markets and new business. The sequential growth was driven by favorable markets, higher period-end securities lending collateral and new business. Securities lending fees were $23 million in the first quarter, down 13% year-over-year, but up 5% sequentially. The year-over-year decline was primarily driven by lower volumes, while the sequential performance reflected slightly higher spreads. Securities lending collateral was $165 billion at quarter-end and averaged $158 billion across the quarter. Average collateral levels declined 14% year-over-year and were flat sequentially.
Moving to our wealth management business. Trust, investment and other servicing fees were $394 million in the first quarter and were flat compared to the prior year and down 1% sequentially. The year-over-year performance reflected the impact of new business, offset by the impact of lower markets. On a sequential basis, the impact of lower markets was mostly offset by new business. Assets under management for wealth management clients were $294 billion at quarter end, up 2% year-over-year and up 6% sequentially.
Moving to page six. Net interest income was $430 million in the first quarter, up 9% year-over-year. Earning assets averaged $111 billion in the first quarter, down 4% from the prior year. Total deposits averaged $91 billion and were down 7% year-over-year. Interest-bearing deposits declined 3% from one year ago to $74 billion. Non-interest-bearing deposits, which averaged $18 billion during the quarter, were down 19% from year ago. Loan balances averaged $31 billion in the first quarter and were down 4% compared to one year ago. The net interest margin was 1.58% in the first quarter and was up 20 basis points from year ago. The improvement in the net interest margin compared to the prior year primarily reflects the impact of higher short-term interest rates and a balance sheet mixed shift.
On a sequential quarter basis, net interest income was flat. Average earning assets declined 1% on a sequential basis as deposit levels declined 2% from the prior quarter. On a sequential basis, the net interest margin increased 6 basis points due to the favorable impact of higher short-term rates.
As we have discussed in our most recent quarters, we did continue to see the opportunity for foreign-exchange swap activity within our treasury function. This activity has the impact of reducing our interest income relating to Central Bank deposits, as we swap out of U.S. dollars, but increase our level of foreign exchange trading income. For this quarter, we saw additional foreign exchange trading income of $13 million, offset by $10 million less in net interest income.
Looking at the currency mix of our balance sheet. For the first quarter, U.S. dollar deposits represented 69% of our total deposit. This is equal to one year ago and down from 70% in the current quarter.
Turning to page seven. Expenses were $1 billion in the first quarter and were 3% higher than the prior year and up 1% sequentially. As previously mentioned, the current quarter included $12.3 million in expense associated with severance and other charges. For comparison purposes, note that the prior year and prior quarter included 8.6 and $5.7 million in severance and other related charges, respectively. Excluding the called out charges, expense for the current quarter was up 3% from one year ago.
With respect to the remaining increase in year-over-year expense growth, the following items were key drivers within the categories. Compensation was higher, primarily driven by base pay adjustments within salaries, which were effective in April of 2018. The impact of staff growth on salaries was more than offset by staff actions and our ongoing location strategy efforts. Employee benefits were lower compared to last year, primarily due to lower medical expense as well as lower retirement plan costs. Outside service costs were higher, driven by increased technical services and higher levels of legal and consulting costs, partially offset by lower third-party advisor fees and lower sub custodian expense.
Equipment and software expense was up year-over-year, mainly due to higher software-related spend. Other operating expenses were up for the prior year due to higher staff-related business promotion and other miscellaneous expenses, partially offset by lower FDIC expense.
Shifting to the sequential expense view, including the expense charges in both the current and prior quarter, expenses were flat compared to the prior quarter.
Compensation expense increased, primarily reflecting the higher expenses related to long-term performance-based incentive comp -- compensation due to the vesting provisions associated with grants to retirement eligible employees in the current quarter. This quarter's compensation included $30 million in expense associated with retirement eligible staff. It is worth noting, due to changes in service requirements associated with performance share compensation, there will no longer be an additional component of the retirement eligible expense impacting the second quarter, as we have seen occur over the previous two years.
Employee benefits declined sequentially, primarily due to lower medical and retirement plan costs, partially offset by higher payroll tax withholding. Outside services declined sequentially due to lower third-party advisor fees and consulting costs. The sequential decline in equipment and software costs was primarily due to a prior quarter software related charge. Other operating expense declined $16 million from the prior period, driven by lower business promotional expense, as well as lower sequential costs associated with account servicing activities, and other miscellaneous expenses.
Staff levels increased approximately 5% year-over-year and 2% sequentially. With staff growth was all attributable to staffing increases in lower cost locations, which include India, Manila, Limerick, Ireland and Tempe, Arizona, partially offset by reductions within our higher cost locations.
Turning to page eight. As we have discussed on previous calls through our value for spend initiative, we are realigning our expense base with the goal of realizing $250 million in expense run rate savings by 2020. We continue to embed a sustainable expense management approach. We expect these efforts to slow our expense growth to be more closely aligned with our organic fee growth. Our first quarter results reflect approximately $45 million in expense savings, reducing the year-over-year expense growth rate by approximately 3 points. This would equate to just under $180 million on an annualized basis, against the $250 million goal. We continue to cultivate a healthy pipeline of opportunities.
Turning to page nine, a key focus has been on sustainably enhancing profitability and returns. This slide reflects the progress we have made in recent years to improve the expense to fee ratio, pretax margin and ultimately our return on equity. The ratio of expense to fees is particularly important measure of our progress as it addresses what we can most directly control. While this quarter's ratio of 111 does demonstrate the impact that macro environment, particularly lower equity markets can have, we remain focused on continuing to drive organic growth in our business and managing our expense to improve our efficiency and productivity. When we look at our results for this quarter, absent the market impacts, we would say that our expense to fee ratio was comparable to where we were tracking in the most recent quarters.
Turning to page 10. Our capital ratios remained strong with our common equity tier 1 ratio of 13.5% under the advanced approach and 13% under the standardized approach. The supplementary leverage ratio of the corporation was 7.2% and at the bank was 6.6%, both of which exceeded the 3% requirement that became applicable in Northern Trust effective at the start of 2018. With respect to the liquidity coverage ratio, Northern Trust is above the applicable 100% minimum requirement.
As Northern Trust progresses through fully phased in Basel III implementation, there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules.
During the quarter, we increased our quarterly dividend from $0.55 to $0.60, representing a 9% sequential increase and a 43% increase on a year-over-year basis. During the quarter, we also purchased -- repurchased more than 2.8 million shares of common stock at a cost of $257 million.
In closing, despite the challenging backdrop from the impact of lagged equity markets and flatter interest rates, our performance during the quarter was resilient, generating return on average common equity of 14%. Our balanced business model continued to generate organic growth with each of our client-facing reporting segments of C&IS and wealth management contributing approximately 50% of our earnings. We are confident in our competitive positioning within attractive markets and our ability to continue to generate organic growth. Our focus remains on providing our clients with exceptional services, improving our productivity and driving profitable growth.
Before I conclude, as is customary for our first quarter earnings call, we will need to end today's call a bit earlier than in other quarters to allow sufficient time for all of us to get to our annual meeting, which begins at 10.30 am Central Time this morning. Please accept our apologies in the event that we have to close off the question-and-answer period earlier than our normal practice.
Thank you again for participating in Northern Trust’s first quarter earnings conference call today. Mark and I would be happy to answer your questions. Kerry, please open the line.
[Operator Instructions] And our first question will come from Betsy Graseck from Morgan Stanley.
Hi. Good morning. Thanks so much for the updates. I just wanted to understand, as you are thinking through the operating leverage that you delivered on this quarter, was there anything unusual in the expense line? I know you called out a couple of items, but then, the follow-on is, as you're thinking through 2Q and 3Q, can we expect the same kind of run rate that you delivered in 1Q?
So, other than the charges that we called out in the expense lines, I would say, it was pretty much expenses as normal. So, pretty much core run rate in our expenses. We did have a higher retirement eligible impact in compensation of $30 million in the first quarter, but some of the other spend, like business promo is sometimes a little bit lower in the first quarter too, but pretty clean.
Yes. And we have the compensation expense in every first quarter, which you can see a flow through, but the rest of the other line items, I think, were pretty much as reported.
I know you don’t give guidance specifically, I'm not asking for that. I’m just wondering the run rate that you're exceeding in 1Q, do you think that that kind of pace is something you can continue with or is there any kind of investment spend that you’d be ramping up on the back of a slower 1Q?
We continue to focus on our value for spend initiatives and to try to drive our expense base as hard as we can, but we also are growing, as you could see and when you strip out the impacts of markets, it was pretty good underlying growth again in the quarter. So, there is some expense that comes with supporting that growth. But I would say, in general, we think that the trajectory you saw here is something that we're going to -- is a decent run rate and that we're going to continue to try to improve it with our value for spend initiatives, but I think it’s a pretty good run rate.
Thank you. Our next question will be from Alex Blostein from Goldman Sachs.
I know you guys don't give guidance obviously, but I was hoping we can talk through some of the NIR dynamics as a jumping off point from here. So, I guess, one, non-interest bearing deposits down a little bit over $1 billion. I think that you talked about in the past, you thought that kind of the excess number was sort of in that $1 billion range. So, should we be thinking of that being sort of down or do you guys think there's more to go. And broadly speaking, is there anything you guys can do from a firm-specific, idiosyncratic perspective to protect the level of NIR from here or is this pretty much peak NIR for you guys.
So, let me walk through without providing guidance, the way we're thinking about it. The first, Alex, is the volume of the balance sheet. And the thing we feel we can control most on the volume is through the continued organic growth in our custody business primarily, our AUC, which produces that growth in the balance sheet. And we’ve had pretty good results there, and we think we can continue to do that that the balance sheet should continue to grow with that inherent growth that we talk about in our custody business. As it relates to non-interest-bearing deposits that you talked about in this quarter, and we talked in the past about that pool of couple billion, I think we’ve used, is that of that runoff in non-interest-bearing deposits this quarter, half of it was from one client. So, we still do have some sizable, lumpy type deposits that could be yield-seeking. But, we think it's inside the bucket that we’ve told you in the past, the 1 billion to 2 billion in the noninterest bearing.
So, we can control the volume. The second part of the forward look, if you will, without guidance is the mix. What we’ve seen in the mix of the balance sheet is, we have seen interest-bearing deposits move from about 78% of the balance sheet to 80%. So, that’s a trend. I think that's a trend that we see in our industry amongst our competitors. And I think that’s a market dynamic. So, I'm not sure how much is controllable there, but we continue to look at that.
And then, the last piece that we still focus on is the spread or the yield that we can get from that. And I will break that a little bit apart on the asset side. Look, we’re still asset sensitive as a firm. And so, if rates sort of flatten out from here, there is still the ability to have assets reprice higher for us. So, that is a positive based on where we are. But then, the liability side, the deposit beta and the pricing in the market is something we have to watch from a competitive dynamic. And I think, we've been disciplined and we have a good process to watch that. And if we think it flattens out from here with no rate movements on the horizon, then there might still be the ability to grind up a little bit on the NIM over time. That's where we are. There's a lot of ifs in there but we’re -- if the pricing and the competitive landscape holds stead, we still think we could see a grind up on the NIM.
Got it. That’s helpful. Thanks. And then my second question around is just the core fees. I mean, it looks like custody and admin fees in particular came in quite strong relative to a challenging exit as of the end of last year. I know you guys highlighted new business, so maybe expand on that a little bit, was this a quarter of outsized new business wins that sort of drove fees where we ended up obviously being for the quarter, without obviously naming clients but maybe you can just help us kind of characterize where some of that business is coming from?
Yes. We continue to see a strong pipeline across both of our businesses, both C&IS and wealth, and both produced, particularly versus first quarter of the previous year, strong performances. In fact, our C&IS business produced a much -- a really strong year-over-year comparison to the first quarter of last year on the new business front. And we continue to see a broad range of wins, both geographically, product line client types in both sides. In fact, on the wealth side, our organic growth rate was at the higher end of the range as we talked about as well in the first quarter. So, pretty strong new business momentum and then obviously the markets and others in the first quarter came back and we have obviously some lagged impacts, but we also have some month lagged impacts and so we saw the benefit of rising markets.
Thank you. Our next question will be from Michael Carrier with Bank of America Merrill Lynch.
Biff, maybe just on the expenses. Given that you are already at the 180, the 250, how should we be thinking about timing? I think, you guys said through 2020, but are there any initiatives in place that we should see some steps along the way as we get into 2020?
Yes. So, we've said the 250, we’re continuing to push forward on that and making good progress, as you can see. What I would say is, is that we're trying to build in the DNA and the culture here is, is that ongoing expense savings has to be a part of our regular routine. So, while we've got a program defined its $250 million, we also know that we have to embed culturally the ability to go in there and create economic savings from an expense standpoint on a longer term basis than just 2020. We've got a program, we’ll define it by 2020. But that discipline of taking some of the inflationary pressures out of our business through strong expense initiatives is embedding and we can see it and it's becoming part of the culture. So, we will continue to attract to the 250 that we've told you about, but I think more importantly is embedding that discipline for forward-looking years beyond 2020.
Okay. And then, just on the follow-up on the last question in terms of the organic growth and even the fees, you tend to hold up or continue to hold up better than some of the peers out there. And maybe if you can just provide some color on -- some of the wins that you're seeing, maybe whether it's like asset mix, the client mix, just trying to get some color particularly on the C&IS, and how much from like a competitive fee standpoint are you seeing versus maybe the mix, the product that continues to maybe hold up better than the industry?
Yes. So, let me pull it apart a little bit on the C&IS side. I would say, first, let's take some regional. We've seen strong growth in our Australia market where we’ve moved up near the top portion of the league tables. I was just talking with Pete Cherecwich before I came in. So, we're near the top of the league charge there in our growth from a graphical perspective there. Luxembourg is another area with the UBS acquisition and other new business. Where we’ve seen outside geographic growth that’s organic, that's strong in the client type, I would say, let me highlight two. We continue to do very well with hedge funds. Our acquisition and hedge fund services has allowed us to grow. I think last year, we cited and continue to see wins in the hedge fund space. I think we had the largest hedge fund launch that was launched last year, is a Northern Trust client, we had a press release on that. But we’ve also been very well in the foundation and endowment space as another example. And we’ve got what I would say is a product and a capability there, front office solution for what I will say a large in-house pools of money, which is commonly or typically done in a foundation endowment.
So, that’s two examples of a client type and a geography where I think we’re seeing outsized growth. We’ve got more than those, we can highlight, but we just have a strong performance right now in the growth. In terms of the second part of your question and the competitive nature of the pricing, look, this is a competitive business. I’ve been at the bank 34 years, it’s been a competitive business for 34 years. I would say that we haven't seen it at least in our client mix, the outsized versus normal, which we would typically see somewhere 1.5% to 2% type of fee pressures, which we assume in our organic growth rate, we have to overcome that. We’ve still seen that. And I think that in our client mix, that’s what we’ve seen. I don't know that it's been higher than that right now but it’s also not lower and it’s pretty constant.
Your next question will be from Steven Chubak with Wolfe Research.
I just wanted to unpack some of the remarks around the NII commentary and recognizing it's not guidance. But I was hoping you could speak to your appetite to the extended duration of the balance sheet, given some concern as the next move could be a Fed easing cycle, and how we should think about against that backdrop, maybe what the deposit trajectory could look like over the coming quarters, if we're in a flat rate environment?
What we say typically here is, is that we have a process where we go through and look at our own internal projections for interest rates and then we make decisions on how to position the balance sheet. I think, it's fair to say that in the previous quarters, we’ve had some of the interest rate projections that I think are now being held more widely, and we have extended the duration in particularly the long-term portion of our securities portfolio. So, we have that thought process and we do take actions when we see that. So, that provides some protection against that down rate scenario.
What I would also say is that if it behaves as normal, the deposit betas on a down rate cycle are typically pretty fast and pretty high, and we would anticipate that being the case here too. So, depending on just how that rate curve move happens and shifts, we could protect some of that spread in margin in a down rate scenario, plus with some of the actions we've taken on our asset sensitivity by adding the duration. So, we have contemplated that. I think we've got a lot of news from our investment management firm and our own Chief Economist that have used on the rate trajectories. And we take those all in and then make decisions on the overall Alco asset liability policy.
And just switching gears to the capital side, you guys continue to run with best-in-class capital ratios. I know you try to avoid deviating from some of your peers and try to manage the similar capital targets through the cycle. Just given some commentary from some of your trust bank peers about increased confidence given some upcoming changes to our leverage ratio, as well as what appears to be maybe more a benign test in the coming exam, how you're thinking about your capital ask, and whether you have increased confidence in your ability to maybe raise your payout target a bit?
Yes. So, we’re pleased to enter this cycle that we just submitted here in April from a position of real strength, as you could see from our ratio, and the flexibility that that gives us entering that period of time. The SLR was not a binding constrain for us. So, that change in definition, while we will take regulatory definitions that end up easing the ratio for us in that case, it wasn’t a binding constraint. So, I pull back on that. What I would say is, in the quarter, I think we had a payout ratio of a 119% in the quarter that we cited. So, I think, in the environment we’re in, we don't feel constrained with what we want to ask other than our own constraints, which are, do we have enough capital to support the growth we foresee in the business, do we have enough capital to withstand our own idiosyncratic stresses, do we have enough capital to support our clients’ needs and wants? And I think the answer to that with where we are currently positioned is a pretty strong yes with the 13% CET1. So, again, we like the flexibility that gives us going into positive the review by our regulators.
Our next question will be from Brennan Hawken with UBS.
So, the C&IS fee rate was -- saw a bit of a bounce here this quarter, and I know this is an imperfect way to model your servicing revenues, but it's the best we've got. So, could you maybe help us -- I know that you've flagged new business wins this quarter. And so, I'm guessing that contributed to some of that servicing fee rate improvement. Is that right? And then, were there other factors? Can you just helps us sort of level set, given that this is the way most of us model your servicing revs and how to think about that line from here?
Hi, Brennan. It’s Mark. I would say, as we look at the asset servicing fees on a sequential basis, there was certainly the market drag mainly from both month lag and quarter lag. We’re probably looking at about 2 to 2.5% drag from markets. And then currencies were actually modestly better, but very little. So, really the new business that we saw on the fees side, would have been offsetting that because the fees were basically flat during the quarter. So, pretty strong on the new business side. I mean, it does become a function of business that we're adding. And I would say that we're going to look at the mix of business that we’re adding these days. We probably are from a fee bid rate perspective, that new business is probably coming on at a higher level than what a traditional custody would be, for instance. And some of the moves that we’ve seen, large moves on a year-over-year basis where there has been -- we talked about one transition last quarter would have been at a lower bid rate than what we're hitting segment, we’re bringing on new global fund servicing business. So, it kind of comes back to the mix of what’s coming on and then how the point in time assets look versus the fees that you kind of earned, kind of as you go through the quarter.
Okay. That makes a lot of sense, Mark. Thank you. And then the next one is on NII and some of the comments that you’ve made here so far. And this is sort of a cleanup, so I’m kind of dumping a couple of cleanups in here into one. When we think about -- I think you said that there was one large outflow with the noninterest bearing that you still think non-operating is one to two. So, was some of the outflow from the non-operating? And just so we can kind of think about that or was this more competitive pressure? And then, given the fact that you still think and NIM can grind higher and your deposit can grow, that seems to suggest that you guys feel pretty good about NII growth from 1Q as a starting point. Is that fair? Do we need to be concerned upward pressure on deposit costs?
Let me take the second question first on the upward pressure. That is a competitive dynamic. I think, we feel that we have stayed abreast of the market and that we have competitive pricing in the institutional space today. But, we have to observe the market, and I mean that -- as you know there is sort of very public -- our clients probably are aware of the market pricing from a relatively small number of competitors, and so that pricing is pretty transparent, particularly on the institutional side. So, we’ll remain competitive is all I can say. And there is not upward pressure from others than I think on the deposit pricing there. And the first question was on the...
On the decline in noninterest bearing. And on that it -- I mean, this was a situation where our client was seeking other yield enhancements on that money. But, I would also add that of the decline, so call that half the decline, there was also decline that we saw about a third of the decline was not in U.S dollar currencies, it was actually in non-major currency around the world. So, those were probably just more transactional frictions that those clients have moving through the system, not necessarily an indicator of future trend because that wasn’t part of some of what U.S. dollar looking for higher yield.
Next question will be from Brian Bedell from Deutsche Bank.
Maybe just go back to the -- to your organic growth trend, so just especially in the custody and fund admin business, it looks like we should have a decent tailwind coming into the second quarter, both on a markets basis, but also if you could just comment on the cadence of organic growth. It looks, like you said, very strong, if that came in during the quarter. So, we also have a little bit of a fee tailwind from that. And then, to add on to that, maybe if you can talk about your front to back office integration, the open architecture approach. I know it’s counter to State Street. I think you have the partnership with Bloomberg. I guess, how new is that effort and should be expect that to be something that can enhance your organic growth of return?
Sure. Let me do the organic growth part first. I’m going to split the businesses apart here if I could real quick. Yes, we saw -- we've talked as a firm of the range that we’re comfortable with from an organic growth perspective. In any given quarter we could be in that range, slightly lower or slightly higher. But then, our businesses themselves could have different trajectories as well. Our wealth business, as I said, actually I think saw organic trajectory at a higher end of its historical range, but that's lower than what we talked to you about target, it's a slightly lower organic growth business.
And our C&IS business, if you exclude securities lending, which is heavily capital markets influenced, also was in the range that we talked about for that business from an organic growth standpoint. It's hard to ignore the security lending and asset management businesses. But, when -- if you peel those out, we were in the organic kind of growth rate from a pure asset servicing business that we’ve seen. So, that was a strength there.
In terms of the value chain or the -- our positioning, what I would say is we don't believe we have to own every piece of the value chain. An example is an OMS, an Order Management System. I think it’s our goal is to allow our clients to access our technology and allow them to communicate and process their trades in an efficient manner. It's a competitive landscape in the OMS space and there are some very good providers out there. So, we think being able to partner and to integrate with those vendors is very important. We do have a relationship, as we highlighted in our press release at the end of March, with Bloomberg where we’re doing just that. But, that's an example of a very important vendor in the space that we've struck-up a strategic partnership with and can bring that to bear. So, I would say at the end of the day we believe very much that we don't have to bring every piece of that component of the value chain and own it all the way through that we can partner with some best-in-class providers in different spaces and they can work.
And then, just maybe just one on expense growth, looking at year-over-year basis. If I'm measuring this right, it looks like about 3% to 3.5%, which would be tracking below your organic -- I believe and correct me if I am wrong but maybe slightly below your organic growth rate on a year-over-year basis. So, is that mostly due to the value for spend program coming through, so you try to match that expense growth? I know it can't be every quarter, but generally sounds like you're tracking very well against that goal.
So, what I would say is, in all transparency and candor, that growth rate is a little higher than that on an organic basis because we had some currency benefits of, call it 4.5 type of a growth rate, which is in the range of where we talked about our organic fee growth rate. So, I think they’re reasonably well-aligned. We’d like to get that organic growth rate and the expenses down a little lower. So, we created leverage to what we talked about. But in fully transparency, the reported number has some currency benefit in it. Obviously, fees have some currency drag equal and offsetting to that. But we would have probably pinned it somewhere in the 4.5 type range from the quarter on an organic expense growth rate.
Next question will come from Jim Mitchell with Buckingham Research.
Maybe just a follow-up on wealth management. You noted that the high end of the organic growth range, I know you’ve been investing there to try to accelerate organic growth. Is that sort of early evidence that you’re getting access and maybe just talk a little bit more broadly about what you're doing to drive that organic growth there and what you think the traction is so far?
So, I would take a couple of components to that one. I think, the technology that, the Goals Powered Solutions and the approach to the holistic advice and the goals-driven wealth management has really resonated with our clients. We’ve really seen that we have differentiated in the market and we’ve been told that consistently by our clients and other centers of influence that influence the wealthy individuals that we have a differentiated technology to bring to bear for people. So, I think that's been really successful.
And the other thing I would say is -- we’ve done a good job of attracting clients in what I will call our virtual markets. As you know, we've got physical offices in about 60 locations in most of the wealth centers around the country. But, there are other cities where we don't have necessarily physical presence. And we’ve been able to create our call to virtual team type environment and really penetrate some, I don’t want to say secondary cities but cities that mark in the major metropolitan wealth centers but still have significant wealth, without having to put physical footprint in. It’s been a really successful strategy. That’s two examples of really strong growth that are I think pushing us up towards a pretty significant organic growth rate relative to the industry and wealth management.
That’s help and maybe one another question on deposit betas. It seems like this quarter, at least on aggregate level, your deposit beta was -- has actually slowed versus the last three or four quarters. I think some of your peers are mentioning accelerating deposit betas and high competitions. So just trying to get a sense of maybe the difference that you are seeing, are you seeing that competitive pressure on deposit rates? It doesn’t look like it. Just maybe talk to the deposit beta this quarter and where you think if anything should change going into 2Q.
Yes. I caution you to look at one quarter’s beta. We could be catching up, slowing down from previous moves that we’ve made. I think if you go back and look at our beta across the cycle, you can start with the rate cycles as the hikes and go back to 2016, if you want to go back, our beta will look much more like you would expect across a longer horizon. So, I think it's a little bit dangerous to only look at it for one quarter because like I said, we’re going to slow because we were comfortable with our positioning in a quarter or [technical difficulty] about 75ish probably percent beta and then lower than that obviously on the retail.
Thanks. I think my phone got cut out for half of your response. I’ll follow up later. Thanks.
Our next question will be from Ken Usdin with Jefferies.
Just a couple of quick follow-ups or clean-ups I guess. Biff, you mentioned earlier that the second quarter won't have the same stock-based compensation that the year ago quarter had. Can you just tell us then again what was the magnitude of that a year-ago, and so what -- how much will be absent this year relative to what was in last year?
I guess, Mark, we are having some audio difficulty on our end. And hopefully what we’re saying is coming through. But yes, you are right, the last couple of years, I remember there was extra expense that came through in the second quarter from a retirement eligible [technical difficulty]. Last year it was $11 million in the second quarter, so we had 32 in the first, 11 in the second just a year ago. This year, we had 30 in the first, but there will not be further retirement eligible stock expense that would impact the second quarter because of the changes in the service requirements were around the performance shares. So, $11 million was in the second quarter of last year but this year, we would not have that.
Got it. That's a nice year-over-year starting point helper. And then second one on the deposits. Biff, you mentioned that the customer-related deposits should be growing with the growth of the business but obviously the balance sheet has been net shrinking because again of that removal of liquidity. But, has the core deposits been growing underneath the surface and how can you help us like to understand the inflows versus outflows in terms of, trying to guess an estimate when that total earning asset base starts to bottom and turn the corner upwards?
So, the answer is, that’s a core and it's hard to see in any of the financials we put out there. But, I would say, as a general statement, at the core, we have seen that core operating balances sort of flat now. It's hard to see, like you said, all of the liquidity moving on and off the balance sheet. So, it can be difficult to see. The other things I would say too is when we say that the new business that we win comes with balances, some of the new business wins we’ve been having are administration in nature, and they don’t always come with balance. So, mix of business we win matters too. Over time we tend to win a broad-based mix of business, some which comes with custody balances, some which comes with administration. I would say, we had more wins in the -- large wins in the administrative side that may or may not come with balances. It’s one of the reasons you may see our AUC and AUCA a little bit flatter but revenue still going up and fees going up because the mix of that business is different that’ll probably help the balances. So, you got the dynamic of the win mix matters and then you got the dynamic of the underlying balance sheet that has some, what I will call, the liquid flows or the excess balances moving around, if you’ve seen that in [technical difficulty] core operating deposits continue to be pretty stable.
Thank you. Our next question will be from Brian Kleinhanzl and he is from [technical difficulty].
Couple of questions here. On the -- you mentioned you’re taking a while bit more duration on securities portfolio. Can you actually give what the security duration is now and still how much is tied direct repricing on 30-day basis?
So, the duration of the portfolio has historically been closer to 1, and it’s moved up by 30% or something like that. On the long end of the securities portfolio is longer than that, but the total portfolio has moved up by that 30 or so percent. And the second part of your question broke up. I apologize. Can you repeat that?
I think [technical difficulty] the exposure of the 30 days within [technical difficulty].
Yes, how much reprices in the next 30?
Yes. On the securities side, the short end of the -- I should say, [technical difficulty] little bit more than half of the shorter portfolio, and there we would say a lot of that would be driven by the one month, three months type of LIBOR moves with a little bit more weight toward the month side. So, it does -- that part of the security does reprice pretty quickly. When you get to the longer portfolio, obviously not all that is going roll over in one quarter or even one year. That’s kind of over the course of -- if for instance if you’re seeing on average two years security [technical difficulty] roll over every quarter. That’s not to think where we’re at. But, that’s just an example of what you would have and you’re sitting with a two-year book when you look at the longer portfolio. Does that help [technical difficulty].
It does. And then, just a second quick follow-up on the deposit runoff. I think, in the past you said that you’ve been able to captured as much as two-thirds of those deposits. Is that still -- is it now -- that’s still true or is it, a lot of that deposit run-off just running away from you in total?
I think we said we captured, about half of it could move into a money fund and then a half would go either to some other vehicle at Northern and investment vehicle somewhere else or would lead. I don’t know that I know if that’s changed dramatically from what we’ve seen. So, I think it is still -- we’ve seen growth in our cash funds as you can see, particularly on the institutional side but we saw growth in our cash funds. So, there is clearly some with this move in the cash funds from the [technical difficulty] and we will typically look on [technical difficulty] options for clients. And so, sometimes the balance sheet is a right fit, sometimes the cash. But, we’ve been able to capture [technical difficulty] within the Company.
I would now like to turn the call back to our presenters for closing remarks.
Thank you for joining us for the first quarter call. And we’ll look forward to talking to you again in July. Thank you.
Ladies and gentlemen, this conclude today's teleconference. You may now disconnect.