Good day everyone and welcome to the Northern Trust Corporation Third Quarter 2018 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, Mark Bette for opening remarks and introductions. Please go ahead.

Thank you, Todd. Good morning everyone and welcome to Northern Trust Corporation’s third quarter 2018 earnings conference. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer and Kelly Lernihan from our Investor Relations team. For those of you who did not receive our third quarter earnings press release and financial trends report via e-mail this morning, they are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today’s conference call. This October 17 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call as the replay that will be available on our website through November 14. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our Safe Harbor Statement, what we say during today’s conference call may include forward-looking statements which are Northern Trust current estimates and expectations of future events or future results. Actual results of course could differ materially from those expressed or implied by these statements, because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2017 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results. During today’s question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Biff Bowman.

Good morning, everyone. Let me join Mark in welcoming you to our third quarter 2018 earnings conference call. Starting on Page 2 of our quarterly earnings review presentation, this morning, we reported third quarter net income of $374.5 million. Earnings per share were $1.58 and our return on common equity was 15.1%. As noted on the second page of our earnings release, this quarter’s results included $8.1 million community development investment impairment within other operating income, $2.7 million of severance-related and restructuring charges within expenses, a $5.5 million tax benefit relating to adjustments recorded in the current quarter associated with IRS guidance issued with respect to the Tax Cuts and Job Act. Before going through our results in detail, I would like to comment on some macro factors impacting our business during the quarter. Equity markets had a favorable impact on us during the quarter. End-of-period markets were favorable on a year-over-year basis with the S&P 500 and MSCI EAFE Indices increasing 15.7% and 2.3% respectively. On a sequential basis, both indices also increased with the S&P 500 up 7.2% and the EAFE up 1.8%. Also on a sequential basis, the average daily market value of the S&P 500 was up 5.4%, while the EAFE declined 0.2%. As you will recall, some of our fees are also based on lagged pricing and in the prior quarter, the S&P 500 was up 2.9%, while the EAFE was up 2.5%. Short-term interest rates continued to increase during the quarter driven by a rate hike from the Federal Reserve as well as for the Bank of England. 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 3%…

Thank you. [Operator Instructions] We have our first question from Michael Carrier with Bank of America.

Hi, Mike.

Good morning. Biff, first question, just on the C&IS, I guess the assets and then the fund administration and the investment management revenues, when I look sequentially just seems like when we look at the market trends, whether it’s end-of-period, average and lag, it still seems like the growth rates, there is something else that’s off and I understand the FX too, but when we look at the markets we usually include those in the market returns. So, I am just trying to understand on a sequential basis, was there anything else that was impacting the growth rates both in the custody and fund administration investment management because both came in lighter relative to sort of the market expectations?

Yes. So, let me walk you through that. There was a sequential decline as you pointed out and I will try to add color to that. If we look, we were down about $11 million sequentially. About half of that, about $6 million of that was securities lending fees, which have as you know some sequential between the second and third quarter, some seasonality. That was driven really by lower volumes, lower borrower demand, particularly in global equities and the spreads tightened as we saw versus LIBOR in that. Then you get to investment management fees. They were also down sequentially, about a little over $4 million. About half of that decline was driven by what I would say there were some outflows and modest re-pricing captured in that line. So, that drove some of that along with we had about half of that $4 million was from a net to gross true-up in the second quarter, so couple of million dollars from that, that we – when we lap it sequentially it could create some of the variance. And then you get to the custody and fund administration fees and the growth rate there or lack of growth rate there, there was some currency translation as you put out, but I think it’s important to remember the transaction volumes are also a factor in this line item and somewhere between 20% to 25% of our C&IS custody and fund administration fees are really driven by transaction volumes, they are not driven by market levels. So, that was an important driver in the decline there. As it relates to growth in the business or organic growth in the business, I would like to bring this point out. I think that when we look at organic growth in our businesses, we…

Okay, thanks. And then just as a follow-up, just on the net interest revenue, you mentioned the $17 million, I think that was included as a headwind given the swap activity. I guess just when we think about going forward anyway to think about how much of that activity will continue and then given the reduction that you saw on the deposit side, your comments on the growth organically, just any kind of outlook in terms of how we should be thinking about the balance sheet going forward?

Okay. So, couple of questions in there, right. I got a balance sheet question and then the FX trade. On the FX trade as we pointed out, it was $19 million of additional FX in the quarter, but with a $17 million net interest income give up in the quarter. One of the ways to look at this is the…

3-month cross currency U.S. dollar euro swap is one that you can look at, because euro is an area where we have been doing these trades during this quarter.

So, if you go on to Bloomberg, you can look at that and pull that up and if that spread narrows, that trade becomes with there is more NII give up and less FX spread over that. So, that’s one way on that line item. We will continue to look at that and determine if it’s in the best interest of our shareholders to leave that trade on or not and we just have to look at market trends and where we are so far in the quarter that trade particularly euros versus dollars is still profitable for our shareholders and that’s what you would see if you looked at it on the Bloomberg terminal.

And that’s something Mike that we will look to give an update on as we get later into the quarter and we have an opportunity.

In terms of the second part of your question, which is probably get into what others, let’s say around the balance sheet. What I would say on the balance sheet is this, we certainly continue to monitor the non-interest bearing deposit and have regular dialogs with our clients, you saw the $2 billion or so that came off of our balance sheet in non-interest bearing deposits. In the quarter, we provide them with a number of solutions for their liquidity needs whether that’s on balance sheet off balance sheet etcetera. As far as the declines we saw this quarter on that $2 billion. About 40% of that decline was within the category that we have discussed before here which represents mainly from our fund services business and these would be asset managers and hedge funds, etcetera. This is also the category that we saw the most declines in when you think back to the second quarter and third quarter of 2017. What we do believe is that most of what remains within that category is now just under $5 billion, which is now just under $5 billion is that there is – they are there for day-to-day operational needs that we are actually seeing the interest rate sensitivity in that bucket. Most of those clients we think the balances are that stay with us are there for operational needs. So i.e., we have seen much of the rundown in that buckets that we think we would see. If you look at the remainder of where that $2 billion went, the other part of the $2 billion was split really between two categories. The first was what I would say is our global institutional asset servicing business or kind of BAU custody business. And I think those deposits can ebb and flow from a quarter-to-quarter basis depending on our clients cash and capital deployments, that’s putting it to work as a part of their regular BAU business as usual dealings. We see this kind of fluctuation on a regular basis. And then the last portion of that $2 billion was really more around our treasury management, our commercial DDA type accounts. And it’s quite transactional in nature and so we can see that kind of volatility to that was a little bit more pronounced than we would normally see, but was a little bit more in the commercial DDA bucket. Thanks.

Thank you. We will take our next question from Ken Usdin with Jefferies.

Thanks. Hey Biff. Thanks for all that color you just gave. On the outflows, I guess the bigger question is, is that – it’s really tough to this game just the size of the balance sheet moving forward and I guess I wanted to ask you underneath all of that, do you still see or expect to see deposit growth from core customers as the business grows, are we still at the point where we are just going to be sun-setting the proportion the non-interest bearing directionally and we might not see the overall balance sheet grow that much from here, how do you guys think about that big picture?

Yes, we do. Ken we think we will still get that growth from the core custody business and we do a lot of modeling around that as we need to do understand for instance our liquidity coverage ratio and others. But there is significant correlation between our growth in AUC and other things that absolutely drive the balance sheet larger, but we got to continue to grow the core business. But we do believe that the balance sheet will grow from core asset servicing wins over time. There could be some bumpiness in that as we look at the balance sheet and it seeks certain yield. But I think over long periods of time if we continue to grow the franchise with the organic growth rates we have talked about here, we will see the balance sheet respond with that type of growth as well.

Okay. And then within the buckets, can you just talk about just deposit pricing, interesting we saw not unexpected faster deposit pricing we see in terms of the rates paid, sequentially even with some of the declines shown in the savings money and other, so can you just talk us about the trajectory there and split it across the businesses like you have done in the past when have you gotten to in terms of those betas and how are deposits continuing to act in that regard?

Yes. Sure. I will start off by saying I think we have a very disciplined process when it comes to our deposit pricing and – but we got to be competitive. So if I look at deposit betas that offer you some of the following color it’s a little difficult to just look at one quarter, but I am going to try to break this apart for you. I am sorry if we look at just one quarter we can have catch-ups and I think you need to look at the deposit betas over a longer period of time, perhaps looking at it on a couple of quarters or a year. So if you look our betas over the last couple of quarters, here is what I would say. For the U.S. dollar portion of our non-U.S. office deposits were probably between a 65% and a 75% beta. The vast majority of these deposits as you know are institutional type deposits. Roughly 55% of our non-U.S. deposits are U.S. dollar and there is also some wholesale deposits within that mix. If you look at the savings, money market and other line, I think of that as largely our wealth management deposits or a portion of them, we’re probably in the 50% to 60% range for betas over the last couple of quarters in aggregate. I think that line includes our retail wealth management deposits as I just said, which are a little bit below that range, but there’s also some institutional deposits in the savings, money market and other line, which are above that range, which brings the blend somewhere into that 50% to 60% range. And I’d just add that we continue to monitor what money funds and other alternatives bring in terms of the viability of those inside and the competitiveness of those as we think about the betas going forward. So hopefully that’s enough color. Mark?

And then Ken I think you had also asked about the decline that we saw in savings, money market and other, and within that bucket about 75% of that is wealth management deposits and that is where we saw declines during this quarter, was on the wealth management side, and we did see of that about half of that would have moved into off-balance sheet funds and then what’s left with kind of split between whether there was deployment from clients whether it was investments or debt pay-downs, and then there were some that we would have seen of that other bucket that would have just left our balance sheet or balances were pulled down by clients.

Thank you. We’ll take our next question from Brennan Hawken with UBS.

Hi, Brennan.

Hey good morning, guys. Actually I just – I want to follow up on that last comment. I believe Mark that you made about the proportion of the decline in the non-interest bearers rolling on to the balance sheet. Given those dynamics, does that result in a bit of a catch-up on the deposit cost when you see those wealth management clients roll into interest-bearing and can that put some temporary upward pressure on what would look like a single quarter beta, which I think Biff you referenced earlier?

Yes, one thing I would say Brennan, so the decline that we saw in wealth management deposits, the non-interest part of wealth management deposits was actually pretty stable in the quarter. The decline that we saw was in the interest-bearing side for the wealth management deposit.

That was already in there.

But Brennan to the larger point you brought up there that’s why I try to say in any given quarter, the beta is going to look large if there’s catch-up from either being slightly lagging markets and disciplined, and we really do try to look at them over a year or some longer period of time to understand how the beta has actually moved. In any given quarter there could be pricing catch-up, sometimes there can be pricing slowdown if we’ve gotten ahead in any quarters. This quarter would look like more like pricing catch-up in some of the lines.

Okay. That’s really helpful. Thank you. And then when we think about the transactional volumes which you referenced having an impact on the C&IS rate so to speak, the way kind of have to model it from the outside. Was that transactional weakness fairly consistent through the quarter or was September particularly weak and then I’m guessing when you think about fourth quarter given your comments about looking at the pipeline and your outlook and expectation of rebound that would suggest that fourth quarter volumes look like a return to a more normal pace. Is that fair?

Yes. They were slower in the early part of the quarter and certainly slowest in August with some pick up a little bit in September, particularly as we got near the end of September. And I don’t have the numbers through October, we’ll give you some color on that in December, but I would say the earlier quarter was the slower periods from transactions.

Okay Thanks for clarifying that.

Thank you. We’ll take our next question from Brian Bedell with Deutsche Bank.

Hi, Brian.

Hi, great, thanks – hi, good morning. Not to beat the dead horse on the deposit beta, but maybe just come out from one different angle on the non-interest-bearing side, just looking at the last tightening cycle in ‘04-’06, and I appreciate the company is structured a little bit different, but just looking at non-interest-bearing versus total deposits, I think that came down from something like 20% or 21% at the start of that cycle down to about 11% to 12% by the end of the cycle. This cycle so far you are starting in at around 28% and now you are down to about 21%, so just – and again that’s the non-interest bearing deposits divided by the total deposits. So just wanted to understand the nature of the structural difference and thinking about that bucket going forward from here? Sorry if I missed to breakout of the total balance between wealth management and CINF, but if you could bifurcate that just so we could understand maybe some of the risks to that on at least the wealth side and of course you mentioned money market products being another substitute, how do you view clients switching into those types of products?

Okay. Here is what I would say. I think we have a fairly significant different business mix between 2004 and 2006 when you look at the construct of the balance sheet. There are more institutional, large institutional asset management type clients that exist on the balance sheet for that period of time. So, that measure you had of it moving from 20 to let’s call it 12 over that period of time may not necessarily translate to now, because the mix of clients on the balance sheet could be fairly meaningfully different. We did our largest acquisition in the GFS space in 2005 and it’s moved to be a much different proportionality of our business. If I look at that mix though of the 19, the second part of your question was sort of how is that $19 billion mix today. First, let me start off about 90% of that is in dollars, just under 90% of it is in – about 87%, and then about 30% of that is in wealth management deposits, 20% is what I would say are in support of our treasury cash management business and then the remaining 50% is really attributable to what I just described the C&IS business, some core and some supporting asset managers in there. So, that’s kind of the breakdown of that $19 billion to $20 billion. But I wouldn’t want to pre-suppose that it moves back down to 11% or 12% as a percent of the balance sheet, because our mix is different. I don’t have that answer, but I don’t think that you can make that assumption correctly given the different specs for the company and that need to be passed to be there to support large asset managers’ activities.

Great. That’s super helpful. Thanks. And then just a follow-up, I guess just on the expense side is how should we think about your target on that expense to trust fee ratio and bringing that down? How should we think about that behaving if we get more pressure on the equity markets that would obviously reduce the denominator of that or do you feel that you can be responsive on the expense side to downturns in market-based fees or should we just think of that as sort of a natural outcome of any pressure in the market that that expense to trust fee ratio may drift back up?

So, I would say, let me give you a longer term view first is we absolutely think that we can continue to drive that lower with things like value for spend and a lot of initiatives that we have going on. In the short-term to be able to react to market volatility or down perhaps in the market in any given quarter that maybe difficult. Remember that some proportionality of our expenses, are going to move with that same market decline. So, they move directionally with that, so we get that benefit, but there are others that are more fixed or not directly tied to that market level and we are getting after those. We think though over quarters that we can have an expense discipline that’s more closely aligned with the revenue fees that we are seeing. That’s why I would just add that we talked on these calls a lot about continuing to do what we can to drive the organic fee leverage into our business, meaning the things that we can most control are how much fast we grow it organically and how much expense we need to support that growth. And as long as we get those in line with some leverage, the markets over long periods of time will likely be upward sloping and be our friend. So, hopefully that answers your question.

Thank you. We will take our next question from Alex Blostein with Goldman Sachs.

Hi, Alex.

Hi, guys. Good morning. So maybe just to wrap up the NII conversation, couple of things I wanted to follow up on. I guess one thing in the past, you talked about just the overall size of non-interest bearing deposit, would you guys consider sort of at-risk around off, I think was in about $5 billion to $6 billion range and now if you gave us budget, you can’t break it down by bucket now is helpful, but is the total 5 to 6 still the right number. So you kind of said look too left. So we are still dealing with like maybe 4ish or so at risk, is that sort of the right framework still or is the 5 to 6 maybe a higher number? That’s part one. And then I had a quick follow-up on the deposit beta. I’ll just ask that after.

Alex, I think that, that number is actually smaller than 5 to 6. Now, I think that where the rate moves we have seen with what eight hikes I think we have had now, we actually think that the rate sensitive money in there has probably already in our discussions with that pool, we think that the rate sensitive portions of that have started to move or have already moved, I should say have already moved. So, it’s smaller, it’s not zero, I should be clear, but I think it’s smaller than the 5 to 6 that we talked about. So I think we are seeing some of that rate sensitivity money already of taking action. So I would size that little smaller than that. I can’t give you the exact number, but I think we have seen a lot of that action. Some of what you saw in this quarter as I tried to describe earlier, there was some that moved from that bucket I think we said about 40%, so I think that part. The others, I would say, was more what I would say BAU kind of moves that we could see from normal transactional volume, they could leave and come in any given quarter of that. Hopefully that helps give a little more color.

Yes, that’s helpful. And then with respect to deposit betas, so I know you guys said I think like 55% or 60% deposit betas, I wasn’t sure what you are talking about kind of over the course of the year, because if I look at Q3, it seems a bit higher than that especially when you consider a portion of deposits outside the U.S. So was there any particular catch-up. I know you said occasionally there might be one or two over there and outsized catch-up in deposit pricing this quarter. So again kind of looking out into Q4 perhaps we are not going to see us making the move?

I think it would be fair to assume that the outsized or the larger beta that you saw in the quarter would have some competitive catch-up in it where we have to evaluate where we are and we may have had the benefit in Q2 and we have to assess where we are on the competitive landscape. We get some of that data at the end of quarters as you may know from others and it provides us with the opportunity to price competitively. So, that’s an assumption and let you go from there.

Yes. That’s what it sounded like. Alright, last one, promise. So you said that you guys made some pricing adjustments in C&IS on the investment management side, can you expand on that? I know it sounded like there was maybe a little bit of a drag on investment management fees and C&IS this quarter? And then just bigger picture, when you guys talking about 4% to 5% organic growth over time obviously not quarter-to-quarter, but kind of on an annual basis maybe you guys are thinking about in terms of organic fee growth correct, not organic asset growth was just sort of taken into account any sort of price degradation we might see?

So yes, it’s organic fee growth. It’s exactly right. And the first part of the question was around, sorry repeat…

The re-pricing within…

Re-pricing with within asset management was I would say it was along the lines of we have a large passive franchise inside of our C&IS business in particular and as you know the competitive nature of that is very much in the press and we are not immune to that either and we have important clients and we have dialogs with them on a regular basis around the pricing and we have some of that in the period. It has a negative impact on our fees.

Thank you. We will take our next question from Geoffrey Elliott with Autonomous Research.

Hi, Geoff.

Hi, good morning. Thank you for taking the question. Maybe more on the custody fund administration side, could you talk there about what you are seeing in terms of competition and fee pressure? It feels like all of the industry you are serving is under pressure, so how is that translating into pressure on the fee rates you can generate there?

Yes, it certainly continues to remain competitive in that space and it really has more nuance than just for me to just say that broad-brush. In certain markets, we could see very highly competitive pricing, parts of Asia or we could see it in other parts of the world. In other parts where we see what I would say is more measured and pragmatic pricing. So I’m hesitant to give you anything other than it’s a really competitive landscape for pricing. We feel pretty good about our ability to compete and still drive margins. We talked about the margins in our C&IS business continue to expand in the quarter, so they are able to win without margin erosion in that space. So we feel pretty good, but it is still a very competitive landscape in that space. I do think in the macro environment, we are able if you can bring value proposition, you can still get paid for it in this space, but you have to demonstrate the value you are creating for the marketplace in which we compete, particularly in the institutional side of the business, which is what I think you are referencing. I think on the wealth side we demonstrate that value proposition very effectively and we have seen really very strong growth on the fee side on the wealth management business.

Thank you. And just a quick one on the deposit side, what gives you confidence that those outflows you saw in DDAs and in the custody business are just kind of normal ebbs and flows, because I guess if we look across the banks that have been reporting has a pretty clear mixture of non-interest bearing deposits flowing out across the board. So what kind of gives you confidence that those might be back again in a quarter or two?

So, let me break them apart, because I think you said on the wealth side, I don’t know that….

On the casualty side and the commercial DDA…

Yes, well, we track the trends client by client over time. We do that and we have seen these types of things before. I guess I can’t guarantee that they come back, but we have seen these types of ebbs and flows in the past from those clients that we tracked at a client level that drove some of this in the quarter. I can’t guarantee that they come back, they could have excess cash, but we are tracking it at a client level and we have seen these types of moves before from those in which clients we had. So we will continue to track that and you are absolutely right, it could be something that was more permanent in nature, but that’s our current and most informed view.

Thank you. We will take our next question from Betsy Graseck with Morgan Stanley.

Hi, Betsy.

Hi, good morning. Couple of questions. One in the prepared remarks, Biff, I think you discussed a little bit about the risk and analytics services that we are adding to one of the fee rate lines and just wanted to dig in a little bit and understand some of the drivers there and opportunity set, I know also you put out press release recently about the integrated trading solutions product and wanted to see if that was at all driving the forward look on what risk and analytics services could do for you?

Yes. So, the two separate services, so I will go first to risk and analytics services, we have for a long time provided what I will call the analytics and analysis of particularly fund performance of pension fund or whatever. So when a pension fund board or a public fund board is evaluating how their assets have performed and their managers have performed, we provide very detailed analytics and it’s another way for us to use the data we have and work with them to provide what I call very high value-added services. They continue to do great work and have been able to grow that business and it’s been a very value-added part of the relationship. I will let Mark give you an update on ITS.

Hi, Betsy. Yes. So, really, the ITS is kind of a bit of an offshoot from in 2016 when we acquired Aviate Global to kind of strengthen our global brokerage business. So, really those – it’s a solutions for our asset owners and asset managers. It’s really that I would say is more in the security commissions and trading space than it would be within the trust fee categories and we have seen good growth in that area. I would say that for this quarter, the security commissions and trading performance was impacted by transition management activity being lower and as well as interest rate swap activity being lower and those do tend to be more volatile on a quarter-to-quarter basis, but when we look at the underlying like core brokerage trends, including ITS, we see some good growth there.

And this ITS announcement looked like it was aimed at Europe, is that accurate or is there something here to for U.S. as well?

Yes. I think it certainly is being primarily run through Europe right now, because that’s where the predominance of the Aviate acquisition was. And I think we will look to see if there is availability in the U.S. or applicability in the U.S. or Asia.

Okay, thanks for that.

Thank you. We will take our next question from Brian Kleinhanzl with KBW.

Great. Thanks. Good morning. So, just a quick question on the comp expense, I want to make sure that the third quarter is a good jumping off point when we think about where we are going in the fourth quarter. I think you mentioned that there were some impacts on incentive comps in the quarter from previous quarters. Was there an accrual reversal in the quarter or was this the number that you posted a clean number to think about for fourth quarter?

Brian, hi, it’s Mark. Yes, I would say that it’s a fairly clean number. I mean the decline that we would have had for the equity incentive compensation really relates to when we issue the grants in the first quarter for retirement eligible expense that gets recognized over the first two quarters, most of it in the first and then $11 million of it was in the second quarter. So that would have rolled off in the third quarter. So what’s left I would say is a pretty probably good solid starting point as far as compensation goes.

Okay. And then on the outside services it looks like it was about a year ago you mentioned that there was some ability to maybe manage that number down, but it seems that just keep going up, how do you think about that going forward, I mean is there an opportunity to manage those expenses lower in ‘19 or ‘20?

Yes. I would say when we look at the year-over-year growth in outside services we are looking at about 6% to 7%. There is probably about 3 points of that would have been from the acquisition. And then when you look at what’s left about 3% of growth. There is the impact of the higher third-party advisor fees for revenue recognition and net to gross accounting slightly offset by lower sub-advisor costs, but we would say that you are probably looking at when you adjust for those things a pretty modest amount of growth, really driven by technical services, which includes market data, but offset by we are seeing lower consulting and legal expense on a year-over-year basis. So, that’s outside services on a year-over-year basis.

Yes. And I will add one piece to that too there. There can be you have seen some improvement I think in the trajectory of the compensation line in some cases where we have chosen to outsource the outside service line picks up the expense, but the comp line should come down commensurately. So, we have some – we have talked about some of our managed services around their technology that we have done. That’s another underlying driver of that as well.

Thank you. We will take our next question from Glenn Schorr with Evercore ISI.

Hi, Glenn.

Hello, there. Two quick summary questions. One on you gave us pieces of revenue and expense ex-UBS, ex-FX ex-charges. Can I just pull it together just to show and make sure what the change – what you think the clear growth of revenue expense and operating leverage was ex all those pieces?

Sure, yes. That is the way we look at it. That’s good. I would say if you pull ex-currency, ex-acquisition, ex-charges, we would say that trust fees were probably up 5.5% or so and we would look at our expense to be in the 5% to 5.5% range excluding all of those items too. That’s not organic, that’s just sort of at the core if we pull all those things out. So that’s how we would look at fees and expenses and core revenue they would be about 8%. Core revenue ex all of the items that we talked about would be 8%.

Okay. And then that maybe the final one, just to title together on net interest income, I heard the whole thing about each of the pieces, but I am sure people looking at is balance sheet didn’t grow much, NIM was down 1 basis point sequentially, then we have a mix shift issues and the deposit beta issues. When you pull it altogether it sounds like net interest income would never grow, no matter what rates do and what customer balances do, but that doesn’t make sense meaning as your business grows as customers grows as you are – you win new business, the question I have is do you have a ballpark idea range of what you would think over a years period time, what if your organic growth is 4% or 5% what net interest income should accompany with it over time?

Yes. I won’t give that range, but I will say this. We absolutely think that the NIM can expand and the balance sheet can grow and the NIM can expand. As long as we continue to see the deposit betas move sort of at where we are seeing industry levels and again not just looking at one quarter, but looking at trends in the deposit betas we think it can expand and we think the balance sheet can get bigger with the organic growth trajectory that we have talked about before. This quarter had some movement in it. We had mix shift in the balance sheet. We had some runoff of the non-interest bearing deposits. But we absolutely think that it can expand particularly if you think rates are going to rise in that environment the value of the non-interest bearing deposits that exist on our balance sheet are even greater in terms of expansiveness of that NIM. So we do believe that it’s just this quarter it kind of flattened out. I think you need to look at the trajectory of our NIM and its migration more than just one quarter. I know that’s what you do, but we need to look at it over longer periods of times it may have some stair stepping to it over time.

And certainly the sequential LIBOR moves were muted this quarter versus what we saw in the first two quarters of the year, so on the asset side that would have translated with less upside sequentially for the assets…?

Yes. I mean we looked – we have a shorter duration balance sheet as you know I think the three months LIBOR averaged 2.34 for both the second and third quarters. So essentially no movement from what we saw in the second quarter. One month LIBOR did expand that was about 14 basis points, about half of what we saw in the previous quarter. One month LIBOR is our largest impactful and three months LIBOR is the second, so they both were muted relative to the rate move. I don’t know how long that – I don’t know what that trend will be in this quarter.

Got it. One last cleanup, on the other operating income line you gave us all the reasons on why it was lower, I guess my only question is what is the right jumping off point where we go forward, in other words it was 20 this quarter, is was 30 the quarter before, it was 40 a year ago, you had a bunch of things that impacted it, is 30 to 40 the right kind of hang out range?

I think if you look at this quarter, certainly in the other operating income we hope we won’t have any community investment breakdowns of 8 million. So I would certainly not consider that recurring investment. In our Visa derivative, Mark this quarter was $5 million higher than it was a year ago. So if you back those two out, let you then figure out a range and Mark I don’t know if you have any color you want to add. But I think those are two. The rest of those items in that bucket moved in somewhere around a more consistent pattern, but those two were somewhat extraordinary on the…

And the one thing that does get volatile within that category sometimes is the hedge. The hedge – the true up of the hedging, the net revenue hedging that we are doing which is off of a slight drag on a year-over-year basis. But that the overall impact of currency is kind of netted across the income statement and that’s where some of those impacts.

Thank you. We will take the next question from Jim Mitchell with Buckingham Research.

Hey good morning.

Hi Jim.

Hi, most of my questions have been asked and answered, but maybe quickly on deposits again just what have you seen I guess so far in October, have you seen kind of the typical runoff from period end, are you seeing any stickiness or a lack thereof, I guess just how we are thinking about what you have seen so far?

Yes. We will give you an update on that in December when we have had a chance to look at two months and give you some color on that. And as you see in our end of period balance sheet it can get quite large at the end of a period. And some of that can stick around for a week until it sort of gets displaced or put back into the market and so I would be uncomfortable giving you any view of that, because I don’t think it’s a better average and moving average by mid-December when we are in the public forum, we will be able to give you a much cleaner look.

Right. But overall, you feel like most of the hot money has mostly gone and we can hopefully start to see some growth from here.

Yes.

Okay. And then maybe on just the NIM, I have noticed LIBOR move too, I mean, if that is sustained, should be looking more at 1 month or 3 months for the balance sheet and all else equal, it seems like that should help into 4Q, right. Is there anything else if call out in terms of maybe in the securities portfolio you might have more turnover in the fourth quarter versus the third, how do we think about reinvestment yields there?

So the 1-month LIBOR spread movement and be an important item for you to track. So with 3 months but 1 month would be the primary in that. And then, you are right, as we look at assets maturing and the chance to reinvest in that, we do have a reasonable book of that business in the fourth quarter, slightly larger than a normal average, but I would focus more on the 1 month and 3 month LIBOR spreads in that space.

Thank you. We will take our next question from Mike Mayo with Wells Fargo Securities.

Hi, Mike.

Can you remind us on your financial targets, I will tell you what I think I have I am not sure it’s right. One is the ROE target of 10% to 15%, did you ever update that, will you update that? Two would be you are looking for organic fee growth in the 4% to 5% range as you said? Three, you look for organic fee growth to outpace core expense growth and then four you have value for spend looking for $250 million of savings by 2020 and also how much of that have you achieved?

So our one stated public external target, you are absolutely right is a 10% to 15% ROE. We have not updated that at this point. We have regular reviews to establish if that’s the right range and we look at that. I think we have that range to be something that goes through cycles. Obviously, tax reform was a secular change that we have to think about contemplate what its impact should be particularly if it looks like tax reform is actually going to flow through the financials and not be priced away and that’s why we have waited some period of time to assess just how the world would react to that. The other targets are items we talk about on the phone, they are not formal specifically given targets, but your thought process on all those is right, 250 for value for spend, trying to get to a positive organic tight view of fees to expenses and on organic growth rate over a longer period in the 4 to 5 range as we have talked about.

And your answer to Glenn’s question earlier, you said that ex all the noise charges, the deal currency you have had what 8% core revenue growth, 5.5% core trust fee growth and 5% to 5.5% core expense growth. Was that year-over-year third quarter?

Yes, that’s exactly right

And what are those same numbers?

I am sorry that was, that was the third quarter. Year-to-date, if you want it year-to-date, I would say our trust fees were 8%, our total revenue was 10% and our expense is 5% on a year-to-date. So a lot of leverage year-to-date. The quarter was a little bit tighter, but we are managing it more than just one quarter. So, that’s the year-to-date performance.

And what I think I hear you saying several times is judge Northern by the year is not by every quarter, is that what I should be hearing?

I think what you are hearing is that in any given quarter and in particular in our C&IS business, which has very lumpy sized wins, you can see that move a little bit in any given quarter and you can see that net interest income with some nuances, some beta catch-ups and others have some slight pressures to it. I hope that we are judged on those metrics in longer periods than just 90 days, but that’s where we are at.

Thank you. We will take our next question from Marty Mosby with Vining Sparks.

Hi, Marty.

Good morning. Well, if you will be patient with me. I have been putting a giant matrix together to look at all these different pieces and I think it’s pretty interesting. If you look at year-over-year like you said, revenues are growing, NII is up double-digits, fee income is up higher single-digits. So, it’s not the momentum you have had over the year, it’s just the sequential quarter. If you look at the sequential quarter, expenses are up, but I imagine the golf tournament refracts most of that increased expenses from second quarter to third quarter. Am I about right on that?

So, there certainly is a sequential impact from the Northern Trust Open. There is also an offset to that that partially offsets that is we have some equity incentives that run down, but we have I believe we called it out last quarter the impact of the Northern Trust Open sequentially in…

In business promo about $17 million sequential increase and you will see when the 10-Q is filed we are right in that range.

So you can understand that that’s more seasonal. If you look at the revenues and you get the NII going down in this particular quarter about $5 million, but am I hearing this correctly, $17 million impact from this FX swap income in NII. So, instead of a $5 million drop, do you take that $17 million and add it back that would be a $12 million increase in NII. Net-net, if you take out what’s happening in fee income?

Weather was also a drag in the prior quarter of $14 million, so there is a $3 million decline from the FX swap activity here, so you guys do apples-to-apples, Marty, I think it would have been down 1ish.

Okay. So that’s what I was trying to get out in the sense that you kept on about incremental really it’s about know $3 millionish between quarters. So NII was relatively flat this particular quarter. If you look at the fee income, yes, so if you take that impact out, NII was relatively flat, you then flip over and look at your fee income and look at the actual components of the fee income between second quarter and third quarter. You actually had above $4 million of pricing impacts, you had $6 million of seasonality and you had then growth in the core. So, if you look at the actual core business, it’s still up seasonality and then one pricing decision that you make is what basically brings your core down a couple of million dollars, but again that’s two different things that are very understandable. FX is actually down 7%, but that’s very noisy, it kind of comes in and out, so that’s a very kind of quarter-to-quarter, you just got to see where that ends up.

Also seasonal. The third quarter is seasonally slow. There is a lot of holiday in July and August in Europe, particularly where we drive a lot of that.

And then if we look at the $8 million in other decline, you start looking at that number it’s going to be the swap thing that’s going on with the Visa Class B already taken out the $8 million related to the unusual item and then you got some basically security commissions and training this down $4 million. So, I mean that’s driving that. So, in other words, we got an unusual sitting down here. We have got some noise and trading that’s from quarter-to-quarter. So if I back through this instead of seeing a decline of something like $25 million to $27 million in revenue, you really have core revenues that are up and then you have got seasonality hitting a couple of spots, you have got a price one pricing decision and you have got some noise and other. So when you start looking at it that way and say well, year-over-year we are still growing revenues 10% and in this particular quarter, it’s just got a litany of things once you start looking at it cause everything to kind of round to the for the negative, which is what I am hearing you in your conversation trying to say, but the noise really covers that up this particular quarter. So I just wanted to kind of make sure I was walking through all that correctly?

Well, I think all of your – I was following all of your mental calculations there. I think they are all accurate, but that’s what happens in a quarter, right, those are the kinds of moves that could happen, the sequential impacts that you talked about and others. I think you have accurately portrayed how they moved in the quarter and we continue to make decisions that are longer focused to that and we think are the right decisions and these things sort themselves out in more than 90 days sometimes. So we will continue to make those calls. And we believe that at a 15.1% ROE with all those things going your way, that’s still a pretty attractive return in terms of an ROE and I would say it’s also a pretty strong return when you consider that we are sitting on a 12.9% common equity Tier 1 ratio, so it’s a well-capitalized franchise that can still generate pretty strong returns.

Thank you. We will take our next question from Gerard Cassidy with RBC.

Thank you. Good morning.

Thank you. How are you, Gerard?

Good. Thank you. Biff, you just talked about that Visa differential in the quarter being $5 million greater this quarter, what was the total amount of the Visa mark in the other income this quarter?

It was. If we add all of the components together it was a little over $8.8 million in the quarter, so it was a large number, but again a year ago that was closer to 3.5 to 4. And that Visa mark is driven by a series of factors we look at the equity price of Visa, we look at our expected duration of the litigation, we look at the conversion ratio of our B shares to A shares. And that’s driven many cases by any contributions made to settlement funds. So, all of those kind of in any given quarter be valued and come out, the Visa stock price has moved. Our thinking around the duration of the litigation can change in any given period and all of those ended up being a quite significant move this quarter. You can calculate it. It’s in our queue. It’s in our Visa Class B shareholdings are somewhere in the $900 million to $1 billion range right now depending on the Visa stock price as we sit here today, I don’t know where it is, but somewhere in that range. So, it’s a substantial off balance sheet, it’s not off balance sheet, it’s on the balance sheet at zero. So, it’s on, but it is zero valuation.

Very good. Thank you for the color. Can you also share with us, I think you said that 20% to 25% of [C&IS] custody administration fees come from transaction volumes, what transaction volume should we monitor from the outside to see what type of activity may show up in a quarter in this area?

Yes, Gerard, it’s hard. I mean you could look at overall global market volumes of the driver. There is sometimes with through the sub-custodian network, there might be different timings of recoveries when those types of billings come through and then they come into the fees as well, but in general, I think looking at overall market volumes is a good way to probably try to judge that.

Thank you. We will take our next question from Vivek Juneja with JPMorgan. Hello, Vivek. Your line is live.

Can you hear me?

Yes, yes.

I am sorry. So, my question, thank you for taking it, your CET1 ratio, it’s grown pretty sharply in the quarter to 12.9%. Firstly, what drove that 50 basis point increase? And secondly what is your plan with that since you are – it’s so far above your targets, what do you – if especially with balance sheet growth being slower, do you accelerate your buybacks even more significantly over time?

Yes. So, the drivers of that in this quarter were really a decline in the risk weighted assets, because as we said earlier, our total payout ratio in the quarter was a little bit north of 100, so we didn’t really add anything to the equity portion, but we did have lower risk weighted assets in the quarter. The drivers of that lower risk weighted assets were lower foreign exchange exposures, lower securities lending exposures, lower what I will call other and we can have things like client settlement securities, client overdrafts and others. All of those quite frankly kind of win in our favor at period end and they helped drive the risk weighted asset out down, which drove CET1 up about 50 basis points. So that was the driver in the quarter. Those can have some end-of-period volatility to them. The second part of your question was, was really more around the how do we think about that. Look, we increased our dividend 31% starting in the third quarter and we bought or we were approved, we were not objected to by the Federal Reserve to buy up to $1 billion worth of stock in the quarter, we executed on that in this quarter as you can see from the buyback and we continue to look at that. We will look at that on our evaluation with our board and others in coming quarters and in the spirit of the next year’s CCAR and capital ask with the board to see what the right return levels of capital are, but it’s a strong position and we take all the factors you mentioned into consideration as we look at that capital return.

And how are you thinking about dividend payout in this because your payout ratio has been below where it used to be several years ago. You are now depending on quarter-to-quarter anywhere with this increase this quarter you are still only at about 34%, 35%. So, do you think about where do you see that going longer term?

Yes. We do think about that and we think about that how that dividend payout ratio would be able to sustain itself and stress, we take great consideration of and we want great deal of certainty around the ability to pay that dividend. And so when we do our stress testing, we want to make sure that we have a dividend payout ratio that can sustain itself in stress when the earnings and other things are in stress. We have I think publicly said that we think being in that 30% to 40% range from a dividend payout ratio is an area where we feel comfortable with that over time and we will continue to evaluate that, but I think that’s the reasonable range with the rest of our total payout ratio obviously being in the form of stock buyback, but we think that gives us the right mix and the right comfort around the importance of that dividend to our board and others.

Thank you. This concludes today’s questions. We thank you for joining today’s call. You may now disconnect and have a great day.