Good day. And welcome to the Northern Trust Corporation Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would now like to turn the call over to the Director of Investor Relations, Mark Bette, for opening remarks and introductions. Please go ahead, sir.

Thank you, Paula. Good morning, everyone. And welcome to Northern Trust Corporation second quarter 2019 earnings conference call. Joining me on our call this morning are; Biff Bowman, our Chief Financial Officer; Lauren Allnutt, our Controller; and Kelly Lernihan from our Investor Relations team. Our second quarter earnings press release and financial trends report are both available on our Web site at northerntrust.com. Also on our Web site, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 24th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our Web site through August 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 and welcoming you to our second quarter 2019 earnings conference call. Starting on Page 2 of our quarterly earnings review presentation. This morning, we reported second quarter net income of $389.4 million. Earnings per share were $1.75, and our return on common equity was 15.9%. This quarter's results included $4.9 million of severance related and restructuring charges within expenses. This compares to $12.3 million in the prior quarter and $6.6 million one year ago. Before going through our results in detail, I would like to comment on some of macro factors impacting our business during the quarter. Equity markets performed well during the quarter, but were mixed on a year-over-year basis. Compared to the prior year, the S&P 500 ended the quarter up 8.2%, while the MSCI EAFE was down 0.10%. On a sequential basis, end of period markets were favorable with the S&P 500 and EAFE indices increasing 3.8% and 1.6% respectively. Recall that some of our fees are based on lag pricing, and those comparisons were favorable on a sequential basis, but mixed versus one year ago. On a month wide basis, the S&P 500 and EAFE were up sequentially 6.7% and 4.9% respectively. On a year-over-year basis, the S&P 500 was up 6.7% while EAFE was down 2.1%. On a quarter lag basis, the S&P 500 and EAFE were up sequentially 13.1% and 9.6% respectively. On a year-over-year basis, the quarter lag S&P 500 was up 7.3%, while EAFE was flat. U.S. short-term interest rates were lower during the quarter on average as seen by the sequential declines in average one-month and three-month LIBOR, up 6 and 18 basis points respectively. Currency rates influenced the translation of non-U.S. currencies to the U.S. dollar and therefore impact client assets and certain…

[Operator Instructions] We will take our first question from Brennan Hawken with UBS.

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

On the additional color on the deposits in the foreign office deposits, in addition to the lower leveraging amount that we highlighted, we've really had two individual clients that accumulated large deposits in the first quarter and they deployed them in the second quarter. We would consider that normal operating flow that we see from time-to-time and between quarters. So we can really identify that movement in the foreign office deposits, excluding those that were impacted by the lower leveraging in a handful of clients, in the case I just highlighted two clients really made that move. So not uncommon for us to see builds in certain periods, and then the deployment of that in other periods, so I'd say normal flow there. In terms of how should we think about the pricing of the deposits in the retail space or in our wealth -- from the closure, if you will, of our anchor-sweep product, we did offer our rates for those individuals at attractive rates for that, that allows us to maintain. That has a finite period, and when that rolls off then they will be at market rates on the competitive front.

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

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

It's still our view that the betas will be -- let me separate first retail and institutional deposits. It's our view certainly on institutional deposits, which make up the majority of our balance sheet that the betas will be pretty high. And almost like, say, almost symmetrical as they were on the way up is, it's the most recent betas were pretty high. We think that that same beta favourability would happen all the way down. So, perhaps not at a 100%, that depends on the competitive landscape but high on the way down. So that's what we see institutionally. On the retail space, I think it's really a function of the competitive landscape there. So they were -- they moved up fairly slowly. So we benefited from the early days of the rate hikes, and then that beta moved up overtime. I think you could probably also see some of the same symmetrical path down in betas on the retail space. But there is a much more transparent market to understand the pricing there, and we need to remain competitive in that landscape. So I guess, I'd summarize in end by saying I think we still believe that the overall betas would be pretty high on the way down and pretty fast. If you get closer and closer to a zero down for U.S. dollars that could create some compression as we get closer to that, but there's still a few hikes before we get there.

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

A quick one related to fee caps. Mark, it's obviously very strong year-to-date. I'm just curious how -- particularly in the U.S. -- curious how breakpoints, fee caps play a role and make it hard for us to look at any custody fee rate trends? And maybe you can throw in there comment about what kind of fee rate on the new assets coming in the door?

There is a lot that goes into that. So we don't specifically look at fee rates internally, because of really the mix of business can be quite different. So you could have a very large custody mandate with that that's where the fees might be small compared to a small assets under administration mandate, where the fees are larger. So as far as the trends go there, it's hard to pin down something there. I would say though that as we've highlighted before when we look at that line, about 40% of the fees are not asset value related. So, in general you would get the fees moving less than what you would get the assets, assuming that asset mix is coming out at the same rate, which it's not. I would say that some of the places where we're winning are in places that we do have and we talk about hedge fund services and areas like that that does usually generically would have higher beta or a higher fee rate than what say domestic custody would have for instance.

Glenn, I would just add second part of your question was the new assets coming on board, the fee rates. I think Mark's point is important there is the types of wins we're having where its growth in -- I think we mentioned Magnetar and Anchorage hedge funds. They're still good value added in fee base there and then there is other large, just pure asset servicing custody wins where the competitive landscape, the basis point yield might be a bit lower. So you've got to really look at the mix coming in. And we've got a pretty nice mix, both globally and product set mix. So we get a nice blend of rates coming in on the new business, it's not all just in lower margin company rates.

Maybe a one quick follow up to Brennan's question, I hear you loud and clear on the high betas on the way down on the institutional side. I'm curious, is there difference in client segments, by client segment in the retail side? I'm surprised to see such rate sensitivity. It's not what I think of when I think of Northern Trust Wealth Management.

I think what you have to look at there is you've got to look at the beta over a much longer period than just one quarter, because we could have been behind the market, slower to the market over periods of time. And you can see beta moves in certain period that larger than a data than you would expect, because we're catching up from some competitive landscape. And I will still say it is still competitive for even high network deposits. You've got sophisticated investors who are looking when yields get to some differential with the market that are seeking at least for the cash portion of their business balances, they're looking for market rates. And so we need to remain competitive. It may not be quite as competitive as those that are relying on retail deposits, but it remains credited.

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

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

So here, I would say the environment we're operating in its not lost on us. So a net interest income environment that looks like it'll become more difficult in terms of where the rates are moving. So we really want to continue to drive our organic revenue in our franchise. But we have to be mindful of the macro headwinds that we're facing. We can't just singularly focus on that. So that means I think the disciplines that you've seen in the first six months of this year and I think even longer term than that, they are vital to our profitability. They have to remain. So we are focused on certain disciplined capital deployment for projects, return seeking project, disciplined expense management around occupancy, procurement, business promotion, location strategies, automation driving it, organizational design, all things we talked about. Those are even more in focus. They have been in focus. You've seen the benefits of our focus of them. But they are even more in focus as we are recognizing the environment that we're entering. And I can tell you that I think some of the cultural behaviors that we've embedded as a part of value for spend, are now part of the disciplines that will help us we think continue to execute on that in the second half of this year and in the future. So, there is not a planned ramp in those expenses, because we are certainly cognizant of the environment we're operating in. And there is a strong focus on maintaining those. What I will say though and want to be clear is we think our organic growth rate is still a very important governor, if I could say that, on what is allowable for that expense growth rate. So we still want to grow our franchise organically. And there is some expense needed to fuel that organic growth. But as long as that's proportional and appropriate with enough spread in it, we think we can move it forward and move the profitability of the firm forward.

And then just as a follow up on NII. So you mentioned your expectations on deposit betas. And then just, if we go down the path of getting a fed cuts. Just anything from a positioning or duration, the balance sheet, anything change or do you expect anything? And just so I'm clear on deposits, you mentioned on the institutional side some of the activity that you saw on the non-U.S. You mentioned some of the things that you guys do on the leveraging. And then it sounds like on the retail side, you're seeing some money move on. When we just think about the start to jump off on, is that roughly unchanged, because you had the depression like of the institutional but you're having the retail come on board?

Let me break that into two parts. One, you're talking about the balance sheet jump off point from a size. And then the first is sort of I think more of an outlook on net interest income, and I think we will give a little color there. I would imagine people want to hear that. If you looked at our net interest income from the Q1 to Q2, when and we stripped out. There was some favorable impact from the lower FX swap activity, but we implemented BOLI, which we took our earning assets down. If you netted those out, our sequential decline was probably just under 3%. I know we reported 1% but those factors moved it around. If we look at the current implied curve and reassume two rate cuts in July and September, we would think in the third quarter that we would see about 2% to 3% decline in net interest income from this quarter's reported net interest income. And that includes the impact of BOLI and other things in there. So we would see somewhere around 2% to 3%. In the fourth quarter of this year, we would say flat to slightly down from there. And again that's relying on a whole series of factors, how do the betas play out, how does our balance sheet play out over that time in terms of volume and mix. There's a lot of factors. So based on our best modeling and our best forecast, at this point, relatively modest decline in the net interest income in Q3 and flat to slightly down in Q4 based on our current thinking in there. In terms of the balance sheet size, Mark, if you want to?

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

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

Good morning. A couple of follow ups to that, one, if your rate cuts were all in July, if you got your rate cuts in July. Is there a material change to the numbers you just described, or not really?

Not really. In fact, it might be very, very modestly better to get 50 basis points than 225s, 50 and a 25 we would probably have to get back to you what that is. But we know what it is but it might be a little bit more impactful. But a 50 is very modestly better. So I could say roughly for your projections probably about equal over two quarters.

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

As you know, we've embarked and what I will call a balance sheet optimization type program. And we've look at certain asset classes or certain yield opportunities on our balance sheet. We had no BOLI investments, which made us relatively unique in the marketplace. And in the current yield environment and particularly with the declining rate environment, the benefits of that actually were pretty powerful. As we sited, its $14 million of benefit in net income for franchise, it does take down NII -- on an annualized basis, it does take down our NII budget, it will flow through the other income line. And you saw some of the benefit of that in just one half of one quarter. We're always looking at optimization efforts. I can't say whether we would add more or less BOLI, for instance, in this transaction but this was our first pass at it.

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

There is several factors to that, A, limit a size. There is regulations as to how much is a percentage of capital that you can have. But remember, we have counterparty credit exposure then that we have to go out to with very high credit quality carriers that we know have this credit exposure to. And so our credit group also is providing input as to the sizing of the portfolio. And when we put all that together, it added up to a $1 billion for now.

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

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

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

Thanks for the NIR guidance, and I know you guys typically don't get into explicit guidance. But given where we're in the cycle, I think it was definitely appreciated. So thanks for that. Question for you guys around expenses, again. So given the fact that historically you've been sort of aiming to align expense growth with organic, fee growth, so call it, 4-ish, 5-ish percent, or something like that. In light of a tougher backdrop from NIR, and obviously it tends to be much higher margin type of business for you guys. Is there an emphasis to potentially bring that down below the organic fee growth levels? In other words, could we still anticipate some of the positive operating leverage or dynamic even with your current NIR outlook?

I think we are looking at that hard, Alex. Like you said, we can't ignore the backdrop we're in. And pressure on one of our important revenue lines, net interest income, may put additional pressure that we have to look at on our expense line to widen out that leverage that you're talking about. Some things will naturally happen there. I think it's important, for instance, I'll tell you. Certain cash based incentive plans. If net interest income goes down, they're going down. So that will give us some natural reduction in our expense lines, if that's the backdrop. But then the discretionary items I described, we may have to continue to push harder and harder on some of those levers to widen out, if you will, the organic leverage in our business to overcome, if you will, some of the pressures we see on net interest income, for instance.

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

So you're right. At the core, the core FX actually did pretty well, if you'd strip the swap impact out of that. I think there's a couple of factors in there. One, as we saw our share of FX transactions, so we got more client based increase from quarter-over-quarter. So we're communicating, marketing better products and capabilities to capture the higher percentage of share of trade even in a lower volatility environment we captured more share of trade. And we also saw a little bit higher volume in some of the emerging market currencies in the quarter from our client base, I don't know if that's true for everyone. But from our client base, back in and itself, also has a little wider spread. So the combination of those two, I think, actually drove a relatively good core FX performance quarter-over-quarter.

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

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

So the overall duration of the book, let me answer the second part is at 1.3 years. And we have been adding some duration, you're right. But duration that we've added has been somewhat muted as the longer rates have come down and obviously, creates a view of faster prepayments. And so that has the impact of shortening the duration. So we're lengthening it with our purchases but the actual come down of the rates in the long end of the curve mutes it. But we're still longer at 1.3 than we've been traditionally where we've run probably closer to 1, or 1.1 in terms of the duration. As far as the repricing goes, we've talked about before how our securities portfolio can be divided between a shorter or longer. The shorter book is probably a little bit less than half of the total securities book, and that's where you would get mostly when you think about one month LIBOR and three month LIBOR, that repricing would happen fairly quick, obviously, within a quarter. And then the other part of the book, the longer book, that's as you get securities rolling over, you put something on two years ago it rolls over and then you reinvest that. So that would happen on more of a staggered basis across a period of time.

And just one follow-up for me on some of the deposit growth commentary, and I think there is a big debate about how much of the rate headwinds can be offset with volume growth. And you noted that deposit betas should be elevated on the way down, but just given overall and more sophisticated client base. How are you guys thinking about the pace of organic deposit growth that you can generate within both retail and institutional? And just looking out to the forward curve, you gave some very helpful detail on '19. Just as we look out to 2020. Do you believe there is a path to generating sufficient NII or volume growth to offset some of those rate headwinds?

If we look out to 2020, I would say, we're going to start to become more reliant on an organic growth rate that we've talked to you before in our asset servicing business primarily to drive the custody growth and the deposit growth that you're talking about. We could be more aggressive in our pricing to try to attract deposits. But given the construct of our balance sheet, that type of funding need has to make good economic sense for us to want to do it, and we don't have a big loan portfolio on for instance. So I think the growth rate in our deposit is going to come from, at least most of that will come from just the organic growth we've seen in our fees. So if we've talked about 4 to 5, some portion of that would come with deposits, not all of it, because we do fund administration and other work, which may not come with custody deposits on the balance sheet. But much of it comes with custody deposits. So, I think that becomes more of the benchmark for the balance sheet growth. And to your point, depending on how rates move, it'd probably be difficult to make it up with volume, to your points. What I would say is, if we get more than two insurance type cuts that the fed may -- that we would project, but you put your own projection on it. If we get more than two and we start to get into something that looks like quantitative of easing. Historically, I think the custody banks have been the recipients of the liquidity that's pumped into the system. And so we could see deposit growth and balance sheet growth move at a much faster rate if this becomes more than a one or two rate cut cycle.

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

Hi, just two questions. First, maybe one last one on the deposits, and noninterest bearing actually was flat on a sequential basis. A lot of your peers were down and have been highlighting declines, going forward. I guess is that, that organic growth you're talking about. What's keeping your noninterest bearing flat and how do you think about that over the next, I guess, looking over the next couple of quarters?

Let me walk you through that again. So we had about $18 billion in average noninterest bearing deposits, I think, in the quarter. And if you look at those, about 85% of those are in dollar. So of the dollar deposits noninterest bearing, 25% are wealth management deposits. Those have been historically very sticky and they have remained sticky for a long time. Another 25% are our treasury cash management business. They are there for balances, to pay fees, et cetera. Those two have been fairly sticky. So I think you've got kind of the half of the dollar base noninterest bearing that have been and remain pretty sticky. That leaves the other 50% there, which are part of core institutional asset servicing. Many of those we think are just part of operational needs and been there. We talked about $3 billion to $4 billion being what I would say was perhaps yield seeking that was sitting there in non-interest bearing. And we've seen -- we have regular dialogues with those clients. We believe those are also there for the liquidity purposes. We certainly have seen run-off in noninterest bearing over the year, but more frequently we think most of that is sought -- the yield seeking piece had sought yield already. So we've seen a little bit more stability in noninterest bearing in the last two quarters.

And maybe just bigger picture, I know you guys have been talking about efforts to boost organic growth and wealth. Maybe you just can update us on what you've been doing there. Any evidence you had of that on accelerating that would be helpful. Thanks.

So you could see with our wealth management reported figures, they had a strong quarter, very strong quarter, very healthy margins and good fee growth rate year-over-year, some of that driven by markets but some of that driven by organic. And again, they continue to look at geographies where we have -- want to increase our market share. We don't always have to have a physical presence. As we've talked about in the past, there are certain cities and markets where we've got grown our market share without having to have a physical presence. And those are generally very attractive pieces of business with low physical overhead needed to get there. We can serve it out of Chicago, or Florida or New York, or wherever. And then I would say our product suite, particularly our holistic advice, our Goals Powered solutioning, has resonated and particularly resonated with people in an environment where we've seen a little bit more volatile. Certainly, interest rate uncertainty, markets are favorable. But you've got a lot of people looking at the landscape, the geopolitical landscape, and there some certainties on the horizon. And so we think our technology tools led to pretty increased strong organic growth in that business as well.

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

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

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

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

Well, I'll split this question with Mark. But the strategy for getting out of it is, Marty, the wholesale funding, the return on it, quite frankly, has gone to about zero. So from a return, even an incremental return, the cost of wholesale funding and the investment that we were putting it in was generating a very low to no return in this environment. So we took the decision to pull some of the leveraging off. And I think, Marty, the currency or where it sits on the balance sheet, these are euro-dollar deposits. So the wholesale deposits where we went to a money fund or something like that, it's a wholesale deposit. Mark I don't know -- a euro-dollar deposit…

So we're not crossing currencies with it. So we're keeping it in U.S. And it is -- you do see it certainly short term borrowings and other line where we do or we'll do of sprint bidding, some of our home loan bank borrowings. And then the wholesale deposits flow through the non-U.S. office line. So it's a combination of those two that we use for leveraging purposes. But it is on the liability side, U.S. dollars and then U.S. dollars on the asset side as well.

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

So Marty, over a year ago, we started talking about, here about the duration extension of the portfolio and have been executing on that. I know at 1.3 that still seems perhaps short in duration to be average. But for our portfolio, that's a fairly meaningful increase. And again, we take that duration. We don't do it for any credit additions. It's generally done through duration of treasuries and added. So we have been doing some of that over the periods. And there, obviously, are other hedges and swaps and other things that we can do into the portfolio to help look at that. So we've been -- I would say, we've been contemplating a rate move for at least a year from our outcome ALCO, and have been executing on some of that behind the scenes. So I think it's one of the reasons actually our net interest income and others has held up reasonably well. Obviously, we continue to look at that. And some of those decisions now, with the way the shape of the yield curve is right now, there is some NII give up in protecting against a long-term move down in rates as you might imagine based on where the very short end of the curve is now versus the long end. But we have taken some of those decisions. So, thanks.

Moving on, we will go to Ken Usdin with Jefferies.

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

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

And then my second question just on the cost side. So value for spend is expected to run rate by the end of this year. And it's been a 3 percentage point helper to the cost growth rate. So as we look out into past 2019 -- it's run rate by the next year. But you've gotten a good chunk of it already, so the magnitude of help. Does it stay the same as you go forward? Like are we going to expect 3 percentage points of help on an ongoing basis, or do you have to think about re-upping the plan at some point to maintain this right balance, any thoughts there? Thanks.

So your thinking is right. The 2% to 3% per annum benefit that you've talked about is what we're seeing. In terms of will we re-up value for spend. Let me frame it this way. The answer to that is, to meet the financial model that we've talked about, which is set an organic fee growth rate, we've talked 4% to 5%. Then we look at our expense base beneath that and we say we've got certain inflationary price expenses coming at us. We've got certain investments that we want to make and we've got certain expenses that we need to fuel that 4% to 5% growth rate. If we want to get leverage in that equation, I guarantee you, you need a productivity offset to make that math work. So if you've got 4% to 5% growth rate, you add in inflationary expenses, you add in investment needs, you add in the expenses needed to grow that 4% to 5%. You probably produce something higher than the 4% to 5% expense growth rate. What we're saying is that needs to be the productivity we need to get on an annual basis in our franchise to drive leverage into that business. And your magnitude is in the area code that we're thinking about, the 2% to 3% range every year. A good way we think about it is it's got to be at least as much to offset inflation. So if our expense improvements have to be at least enough to offset inflation, then you have your cost to drive the new business. And you've got some available for investment. And that's the way we think about, the more we driving productivity the more we share and profitability and investment opportunities for the firm.

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

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

I think, Gerard, the answer to that is, it's probably depends on how the steepness of the curve moves between the short and in the long end. So if the long end moves up and the short end moves up in parallel, it's a different impact than if the short ends stay where it is and the long end moves up when we get steepness in the curve. From a loan book perspective, we don't have nearly as much mortgage based credit that's going to be impacted by the type of move you're talking about in the long end of the curve. So I would say less impactful to us in that space. But the investment opportunities along with the curve and the spread they offer from the short end of the curve does matter to us. So I guess I would have to say it depends on how the rest of the curve shifts with that move in the long end.

Okay, because I was assuming your end drops with the long end steep, so you have so called bold steeper in the curve is what I was thinking, but thank you. And then second question, when you guys step back and you look at the challenges that companies always face and opportunities that you guys have. What are some of the -- aside from interest rates since we've talked about that. What are some of the challenges that you guys foresee that you have to overcome maybe in the next 12 or 18 months when you look out at the businesses?

I would say, if we look, there is always a significant demand for technological investment for our business. And we compete, particularly on the asset servicing side, in a highly technologically driven field. And so making sure we make the right investments in that technology to remain competitive. Along with the word competitive, I would say, we are in a competitive marketplace. And while I would say we have seen pretty similar type fee pressures that we've talked about in the past, compression of 1.5% to 2% in the marketplace, we're in a competitive environment with good competitors. And so we want to monitor the competitive nature there. So we got to remain vigilant to the competitive landscape on the horizon. And on the wealth space, I think it's one of opportunity. So what -- you asked what the challenges are. I think for that, it's what are the right pockets to grow in, where do we want new -- where do we have less market share than we would like and where we can get to, to that client base, because where we are established we do very well in those markets. And I think there is opportunity for us in certain markets where we're maybe under-represented.

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

Quick question on the expenses, the trust and investment fees came down again this quarter, it's been trending lower over the past couple of years. But given your pull back on expenses, are you still expecting that to trend lower from here, or is it just that it's more challenged environment and we should expect it to flatten out for a while?

So that question, I would say, we do hope that over long periods to evaluate that that we want to continue to drive more productivity in. So we've not achieved nirvana in terms of that rate. What I think we have to be cautious of is we have seasonality in our business. For instance, next quarter we have the Northern Trust open, which puts pressure on expenses in a quarter. And obviously, markets can do volatile and drive the fee line. And our expenses can't necessarily react in 90 day to a market that can move. But if you look over longer periods of time, the answer is there is continued focus on driving that down. And I would give you an example. If you do these calculations between our two businesses, they're quite different. And the mature wealth management business does drive that expense to fee ratio lower than the low of 500, for instance. And so I would say the answer is over long measurement periods, they're still absolutely focused inside the firm on continuing to improve that. You may see quarterly moves that go up or down just based on seasonality and/or market volatility.

And a separate question on the agency MBS portfolio are they going to see a drop off in yields like the other banks are seeing from premium amortization. What was the impact on premium amortization this quarter, or is there something of a lag effect for you?

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

And that does conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.