Jul 22, 2015
Executives
Bev Fleming - IR Biff Bowman - CFO Jane Karpinski - Controller Allison Quaintance - IR Team
Analysts
Betsy Graseck - Morgan Stanley Alex Blostein - Goldman Sachs Brennan Hawken - UBS Ken Usdin - Jefferies Ashley Serrao - Credit Suisse Luke Montgomery - Bernstein Research Brian Bedell - Deutsche Bank Jeffrey Elliott - Autonomous Research Adam Beatty - Bank of America Merrill Lynch Jim Mitchell - Buckingham Research Gerard Cassidy - RBC Mike Mayo - CLSA Vivek Juneja - JP Morgan Brian Kleinhanzl - KBW
Operator
Good day everyone and welcome to the Northern Trust Corporation's Second Quarter 2015 Earnings Conference. Today’s conference is being recorded.
At this time, I would like to turn the conference over to the Director of Investor Relations, Bev Fleming for opening remarks and introductions. Please go ahead ma'am.
Bev Fleming
Thank you, Lisa, and good morning, everyone. Welcome to Northern Trust Corporation’s second quarter 2015 earnings conference call.
Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; Jane Karpinski, our Controller and Allison Quaintance from our Investor Relations team. For those of you who did not receive our second quarter earnings press release and financial trends report by e-mail this morning, they 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 22nd call is being webcast live on northerntrust.com, the only authorized rebroadcast of this call is a replay.
It will be available on our Web site through August 20th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.
Now for our Safe Harbor statement, what we say during today’s conference call may include forward looking statements which are Northern Trust’s current estimates and expectations of future events or future results. Actual results of course could differ materially from those expressed or implied by these statements because the realization of those [results] subject to many risks and uncertainties that are difficult to predict.
I urge you to read our 2014 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. So, thank you again for joining us today.
Let me turn the call over to Biff Bowman.
Biff Bowman
Thanks Bev. Good morning, everyone.
Let me join Bev in welcoming you to Northern Trust second quarter 2015 earnings conference call. Today I will review our results for the quarter after which Bev and I would be happy to answer your questions.
Starting on Page 2 of our quarterly earnings review presentation, this morning we reported second quarter net income of $269 million, earnings per share were $1.10 and our return on common equity was 12.8%. As outlined in our press release, our results in the second quarter included three items, which I would like to highlight for you today.
First we recorded a pre-tax gain of 99.9 million on the sale of 1 million Class B Visa shares. This gain is reflected on our income statement in the other operating income line.
The sale reduces our ownership position in Visa Class B shares to 5.23 million shares as of the end of the second quarter. At the current conversion rate, this is equivalent to 8.62 million Class A shares of Visa.
These shares are recorded on our balance sheet at the original cost basis of zero. Second we recorded a pre-tax charge of 45.8 million related to voluntary cash contributions to four constant dollar net asset value funds.
This charge is reflected our income statement and the other operating expense line. While the market base net asset values of the four funds were well above the prescribed threshold for transactions to occur at $1.
This voluntary action offsets legacy losses realized by the funds during the financial crisis. The market base NAV's now approximate one across all four funds.
Third, we recorded a 17.8 million impairment of the residual value of eight aircraft under leverage lease arrangements. This impairment charge is reflected on our income statement in net interest income.
Excluding these three items, second quarter net income was $247 million, earnings per share were $1.01 and our return on common equity was 11.8%. Recall that our results in the second quarter of 2014 included pre-tax charges and write-offs of 42.3 million excluding both the current quarter and prior year quarter's items that I just mentioned earnings per share increased a strong 16% year-over-year.
Let me also review environmental factors which impact our businesses and our clients. U.S.
equity markets were higher year-over-year with the S&P 500 up 5% yet international equities as measured by the MSCI EAFE Index were down 6.6% year-over-year impacted by stronger U.S. dollar.
In the sequential quarter comparison both U.S. and international equities were down modestly.
In bond market, the Barclays U.S. Aggregate Bond Index was lower by 1.5% year-over-year and 2.5% sequentially.
Currency market had mixed impacts in the quarter. Currency volatility as measured by the G7 index was 62% higher than the second quarter of last year yet was 3% lower the last quarter.
Currency volatility influences our foreign exchange trading income as does the level of client activity, currency rates which influence the translation of non U.S currencies to the U.S dollar impact client assets and our revenues and expenses. The dollar was stronger year-over-year which tempered custody asset growth and related fee growth, but benefited expense growth sequentially the dollar weakened particularly versus the sterling and euro.
U.S. short-term interest rates rose slightly yet remained at very low levels continuing to pressure our net interest margin and resulting in fee waivers on our money market mutual funds.
Three month LIBOR and the fed funds effective rate both increased 2 basis points sequentially to 28 and 13 basis points respectively and the overnight repo rate increased 3 basis points to 18 basis points. Let's move to Page 3 and review the financial highlights of the second quarter.
My comments are on an adjusted basis which excludes the prior year and currency quarter's item I mentioned in my opening comments. On an adjusted basis year-over-year revenue increased 8% with non-interest income up 8% and net interest income up 9%.
Expenses increased 5%. The provision for credit losses was a credit of 10 million in the quarter primarily reflecting ongoing improvement in credit quality.
Adjusted net income was 18% higher year-over-year. On an adjusted basis compared to last quarter, revenue increased 3% with non-interest income up 4% and net interest income up 3%.
Expenses increased 3%. Adjusted net income was 7% higher sequentially.
Client assets under custody of 6.2 trillion increased 3% year-over-year and 1% sequentially. In the year-over-year comparison strong new business was partially offset by the currency impact of a strong dollar as I mentioned earlier as well as lower bond markets.
In the sequential quarter comparison, the positive impact of new business and currency translation was partially offset by lower international equity markets and lower global bond markets. Assets under management were 946 billion, up 2% year-over-year and down 2% sequentially versus last year higher fixed income cash and securities lending collateral were partially offset by lower equity assets driven in part by the stronger dollar versus last quarter cash and securities lending collateral were both down modestly and decline in equity assets resulted from certain clients rebalancing out of equity index mandates.
Let's look at the results in greater detail starting with revenue on Page 4. Second quarter revenue on a fully taxable equivalent basis was approximately $1.3 billion, adjusted for the gain I mentioned earlier revenue was approximately 1.2 billion up 8% year-over-year and 3% sequentially.
Trust, investment and other servicing fees the largest component of revenue were 757 million up 7% year-over-year and 4% sequentially. Fees in our corporate and institutional services business increased 9% year-over-year and 6% sequentially while fees in our wealth management business grew 4% year-over-year and 1% sequentially.
New business and higher equity markets were drivers of growth but currency translation as I mentioned earlier detracted from overall fee growth in the year-over-year comparison by approximately 2 percentage points. Lower money market mutual fund waivers also contributed to growth this quarter.
Fee waivers were approximately 28 million in the second quarter down 2.5 million year-over-year and 5 million sequentially. I will go into further detail on trust and investment fees shortly.
Foreign exchange trading income was $75 million in the second quarter, up 41% year-over-year and 5% sequentially. Currency volatility and client trading volumes were higher versus last year but were muted versus last quarter.
Other non-interest income excluding the Visa gain was 73 million in the second quarter down 3% from last year and 2% sequentially. Within other non-interest income securities commission and trading income was $20 million up 12% year-over-year due to higher referral fees and income on interest rate protection products used by our personal clients.
Sequentially, security commissions and trading income increased 2% primarily due to higher referral fees. Excluding the Visa gain other operating income of 38 million in the quarter decreased 7% year-over-year and 3% sequentially, reflecting a number of miscellaneous income categories including for example lower loan and banking related fees and currency hedges.
Net interest income, which I will also discuss in more detail later, was 275 million in the second quarter when adjusted for the lease impairment increasing 9% year-over-year and 3% sequentially. Let’s look at the components of our fee revenues on Page 5.
For our corporate and institutional services business, fees totaled $432 million in the second quarter, up 9% year-over-year and 6% sequentially. Custody and fund administration fees, the largest component of C&IS fees were $294 million in the second quarter, up 12% year-over-year and 6% sequentially while assets under custody for C&IS clients were $5.7 trillion at quarter end, up 3% year-over-year and 2% sequentially.
In the year-over-year comparison strong growth primarily reflects new business and higher equity markets, partially offset by the impact of a stronger U.S. dollar.
In the sequential comparison, new business was again a primary driver of growth. Recall too that some custody and fund administration fees in C&IS are based on one quarter lag asset values.
Higher first quarter markets therefore helped second quarter fee growth while lower current period equity and bond markets negatively impacted client asset values. Investment management fees in C&IS of 81 million in the second quarter were up 4% year-over-year and 5% sequentially, primarily due to new business and lower fee waivers.
Money market mutual fund fee waivers in C&IS were 14 million, 8% lower year-over-year and 11% lower sequentially driven primarily by higher gross yields in the funds. Assets under management for C&IS clients were $714 billion, up 2% year-over-year and down 2% sequentially.
As I alluded to earlier, a small number of clients specifically sovereign wealth funds rebalanced their portfolios in the second quarter moving out of equity index mandates. Securities lending fees were 27 million in the second quarter, 11% lower than last year and 24% higher sequentially.
The year-over-year decrease reflects lower fee splits in spreads, partially offset by higher volumes. The sequential quarter increase primarily reflects the traditional second quarter impact of the international dividend season, which resulted in wider spreads.
Securities lending collateral was 120 billion at quarter end, up 3% year-over-year and down 2% sequentially. Other fees in C&IS were 31 million in the second quarter, up 16% year-over-year and down 4% sequentially.
The year-over-year increase reflects a number of items including higher fees from benefit payments and investment risk and analytical services. The sequential quarter decrease primarily reflects seasonally higher revenue for benefit payment services typically seen in the first quarter.
Moving to our wealth management business trust investment and other servicing fees were $325 million in the second quarter, up 4% year-over-year, reflecting higher equity markets and new business. Growth was relatively consistent across the regions and particularly strong in the global family office.
Wealth management fees increased 1% sequentially. Recall that wealth management fees are based primarily on month or quarter lag asset values.
Thus higher equity markets in the first quarter resulted in a favorable sequential fee comparison. In addition, weight, fees and money market mutual funds were lower.
Money market mutual fund fee waivers and wealth management totaled $15 million in the current quarter, down 8% year-over-year and 17% sequentially. Assets under management for wealth management clients were 232 billion at quarter end, up 4% year-over-year and down slightly sequentially.
Moving to Page 6, net interest income was 258 million in the second quarter, up 2% year-over-year and down 3% compared to the first quarter. Recall from my opening comments that the 17.8 million lease impairment is reflected in net interest income.
Excluding that item, net interest income was $275 million, up 9% year-over-year and 3% sequentially. A larger balance sheet was a primary driver of growth in net interest income.
Earning assets averaged 104 billion in the quarter, up 9% versus last year and 5% versus last quarter. Total deposits averaged 92 billion in the quarter, up 9% year-over-year and 7% sequentially with strong growth in non-interest bearing demand deposits.
We also saw solid loan growth this quarter particularly in private client and commercial real-estate lending. Loan balances averaged 33 billion in the second quarter up 10% year-over-year and 3% sequentially.
The net interest margin was 1.06% when adjusted for the lease impairment, flat compared to the prior year second quarter and down 4 basis points sequentially. The sequential decline in the net interest margin primarily reflects a lower yield on the loan portfolio as mix shifts to lower yielding products and a lower yield on the securities portfolio due to higher premium amortization in our mortgage-backed securities portfolio.
Premium amortization in the second quarter was 15 million compared to 10 million in the first quarter. Turning to Page 7, expenses were $855 million in the second quarter, up 5% year-over-year and 8% sequentially.
Adjusting for the second quarter items both this year and last year expenses were 5% higher year-over-year and 2% higher sequentially. Compensation expense adjusted for the prior year's charges increased 4% year-over-year primarily reflecting higher incentive comp.
The impact of annual merit increases and staff growth partially offset by the favorable impact of movements in currency rates. Staff levels increased approximately 4% year-over-year with more than 80% of the growth emanating from our global operating centers in Bangalore, Manila and Limerick.
On a sequential basis compensation expense increased 2% due primarily to annual merit increases and staff growth was 1%. Employee benefit expense increased 10% year-over-year when adjusted for prior year charges, primarily driven by higher pension and employee medical expense.
On a sequential quarter basis, employee benefit expense was essentially flat. Outside service expense was 3% higher year-over-year adjusted for prior year charges and 9% higher sequentially.
The year-over-year increase primarily reflects higher technical service expense. The sequential increase primarily reflects higher expenditures for consultants, sub-custodians and legal.
Equipment and software expense was up 7% year-over-year while adjusted for the prior year software right-offs and 4% sequentially reflecting ongoing support of client and regulatory technology initiatives. Other operating expense includes the $45.8 million charge associated with our voluntary cash contributions to four constant dollar NAV funds.
Excluding that item, other operating expense increased 11% year-over-year primarily driven by higher charitable donations and higher charges associated with account servicing activities. In the sequential comparison other operating expense decreased 6%, reflecting seasonally lower business promotion and marketing costs.
Turning to Page 8, we continue to make progress on our goal to improve core profitability and returns. We closely track the ratio of expenses to trust and investment fees and remain focused on driving that ratio lower.
As shown on Page 8, this important parameter of our progress improved to 107% in the second quarter on an adjusted basis excluding charges. This combined with the growth in other revenue categories produced meaningful operating leverage again this quarter, resulting in improvement in our adjusted pre-tax margin to 32% and in our adjusted return on equity to 11.8%.
Turning to Page 9, our capital ratios remained solid with common equity Tier 1 ratios up 12% and 10.7% respectively calculated on a transition basis for both advanced and standardized. On a fully phased-in basis our common equity Tier 1 capital ratio under the advanced approach would be approximately 11.7% and under the standardized approach will be approximately 10.4%.
All of these ratios are well above the fully phased-in requirement of 7%, which includes the capital conservation buffer. The supplementary leverage ratio at the corporation was 6.3% and at the bank was 5.6% both of which exceed the 3% requirement which will be applicable to Northern Trust in 2018.
With respect to the liquidity coverage ratio, Northern Trust is above the 80% minimum requirement effective as of January 1, 2015 and is also above the 100% minimum requirement that will become effective on January 1st, 2017. As Northern Trust progresses to fully phased-in Basel III implementation there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules.
In the second quarter, we repurchased 1.3 million shares at a cost of $97 million. Our 2015 capital plan provides for the repurchase of up to an additional 578 million of common stock through June of 2016.
In closing, Northern Trust continued to perform well this quarter. Disciplined execution around both growth and productivity priorities remain solid as evidenced by over strong operating leverage and our expense the trust and investment fee ratio of 107%.
As I mentioned earlier when adjusted for this quarter's items our pre-tax margin was 32% and our return on common equity was 11.8% both reaching 5 year highs. In our institutional business, C&IS continues to perform well with growth coming from both existing and new clients.
For example, we recently began providing global custodies at Queensland Investment Corporation, a client for whom we first began providing fund administration in 2011. The third and second Swedish National Pension Funds or AP3 and AP2 as they are known recently announced they have each appointed Northern Trust as the Global Custodian.
This is a reappointment from AP3 a long time client and the beginning of a new relationship with AP2. Other announced wins include RPMI Railpen in the United Kingdom and the University System of Maryland Foundation.
These wins signify the momentum in our institutional business as well as the diversity of new business globally across products and by client segments. In our personal business, wealth management remains well positioned in the affluent market offering comprehensive solutions to our clients.
For example, solid loan growth of 7% demonstrates the success of our customized lending strategy as we support client demand while maintaining excellent credit quality. Wealth management also continues to manage expenses very well, driving further growth and pre-tax profit margins which have consistently exceeded that of peers.
Our commitment to returning capital shareholders continues, as we increased our common dividend by 9% and returned a 182 million to common shareholders through dividends and stock repurchases. This was accomplished while continuing to maintain strong capital ratios that support our growing business.
Thank you again for participating in Northern Trust's second quarter earnings conference call today. Bev and I would be happy to answer your questions.
Lisa please open the lines.
Operator
Thank you, Sir. [Operator Instructions].
And we will take our first question from Betsy Graseck from Morgan Stanley.
Betsy Graseck
A couple of questions, just one -- kind of clean-up question, I know you mentioned the one-time charge for the NAVs -- stable NAV product. I guess I just wanted to understand -- make sure I understood why that was happening now?
Biff Bowman
Sure, Betsy. We constantly evaluate our liquidity products and suite of products that we provide to our clients.
And as you are well aware there is a lot of SEC reform and other items that have been appearing. So as we went through the evaluation process, we looked at some of the legacy issues that existed in four funds and make the determination as a management team that the right time to address the legacy issues losses and there it was -- was now.
I'll be clear, all four funds traded above the $0.995 NAV price that is required. These top-ups will bring them to $1.
Betsy Graseck
And is that all in preparation for the money market reform that’s going to be coming into effect next year in October?
Biff Bowman
That is a part of it, but it was also as we're looking at our array of liquidity products and offerings to our clients in conjunction with that reform. We felt that this was the right time.
Betsy Graseck
And then just separately on Omnium, I'm sure if you mentioned it too much during this conference call. But I just wanted to get a sense as to how important that platform is for some of the wins that you mentioned just now as well and the trajectory and accelerated ASD growth that you've been having?
Biff Bowman
It is very important to some of the wins that we've talked about. The platform and the capabilities there has first of all allowed us to have meaningful dialogues with significant hedge funds and other large asset managers.
Equally important is the capability is very attracted to very large for instance sovereign wealth funds, large foundations or endowments, particularly around its capabilities to handle complex and alternative investments instruments. So it's been powerful not only the hedge fund clients but to other more traditional type clients as well.
Betsy Graseck
And then its more product and services you'll be able to layer into that platform over time?
Biff Bowman
So we continually look at its applicability and its functionality to integrate into the broader Northern Trust offering and that's ongoing and something that we are clearly investing in right now.
Operator
And we'll take our next question from Alex Blostein from Goldman Sachs.
Alex Blostein
Question for your guys in operating leverage clearly really nice job so far in driving that ratio lower year-over-year basis. Two part question I guess A.
Bigger picture, how should we think about that heading into back half of the year. And I guess it's my follow-up was one that you guys could address a little bit more with some of the specific items that expanses a) outside services and equipment and software could be a little bit more elevated on this quarter, so I am not sure if you can give us a little more color on whether anything kind of one-off drove it in of course the quarter particularly maybe related to some the investments with regard to the business wins?
Biff Bowman
Sure. First we would say that the 8% revenue growth that you saw it requires some investment and some expense to grow with it, but as you pointed out maintaining that leverage as we grow is very important to us, so we're focused on that and continue as you saw drive the expense to trust fees ratio down and produce this quarter 300 points of operating leverage.
But specifically around some of the expense line items, let me talk about outside services. What I want to highlight here is that much of the sequential growth that was seen was really directly attributable to the revenue growth that you saw.
So for instance sequentially on our outside services line you saw that it grew about 19.7 million. More than half of that is directly attributable to growth for instance in lines like sub-custodian expense, depository expense those are directly related to the revenue growth that you see above.
I would also suggest that other lines in there are also attributable to growth for instance we produce consulting or legal spend to help that new products and capabilities. So much of that growth is directly attributable to the revenue lines you see above.
On the compensation line and expenses, much of that is supporting that growth that you see and as I highlighted in the prepared remarks we're able to do that in the appropriate type cost centers with over 80% of our hires being in Manila, Bangalore and Limerick, and we've also announced now a new operating center that we're starting in Tempe. So we're getting the cost to serve those in the right locations.
Alex Blostein
Just in equipment and software?
Biff Bowman
So the equipment and software line reflects the investment we've made, we have, we do need to and we do invest in technology and capital, it's an important part of our value proposition to our clients and that investment as we have previously said led to 7-ish or higher expense growth rate which is higher than the rest of the expense growth rate, but it reflects the investment in our platforms.
Operator
And we'll take our next question from Brennan Hawken from UBS.
Brennan Hawken
Quick one on FX, remarkably strong here quarter-over-quarter actually sort of a standout and being up sequentially versus some others who reported. Can you speak to what drove that strength and whether or not we should view that as sustainable?
Biff Bowman
I would highlight two items around that, the first is our trading results, they don’t always exactly align with the broader market trends as our business is focused on trustee clients and their needs and their unique trading patterns in the quarter. I would also say that we talked about in previous quarters our development and our utilization of FX e-commerce capabilities to provide excellent execution for those clients, but it also allowed us to enhance our efficiencies through more automation.
So we believe that led to some of the performance that you saw in the second quarter.
Brennan Hawken
Fee waivers came down here which certainly encouraging, I know you all have expressed some concerns about the ability to fully recapture fee waivers now that we're getting closer to the fed actually providing lift-off here on the short-term rates. Can you provide an update with your view on fee waivers and what you think about the potential risks to any recoveries there?
Biff Bowman
Sure there are several factors that way in recovery of fee waivers, first will be any pricing that goes on in that market and our competitive ability to match or the need to compete in that marketplace. The second is if you will is there a sharing with the clients that will go on or how will that unfold in terms of as the rates rise, how will we discuss that rise with the clients and share on the rate up.
Obviously the amount and the size of the balances in our accounts will also impact the fee waivers as we move forward. We're still waiting for some of that to unfold, I hope you're right that the rate rises on the horizon, but we're taking proactive actions to look at this, to model this out and as we've said we still think that we will be able to recruit a majority of those fee waivers in a rising rate environment.
Operator
And we'll now take a question from Ken Usdin from Jefferies.
Ken Usdin
Biff I was wondering, can you talk a little bit about the really big growth in the balance sheet especially on the -- led by the deposit side, non-interest bearing and then your non-U.S. offices.
Can you characterize the sources of that, whether it’s coming from other large institutions, or its client driven, and any color on geographic orientation?
Biff Bowman
It is client driven, and it’s large deposits held by what you consider to be large asset holders. So, our sovereign wealth funds, central banks -- type of pension client types.
It was meaningfully focused in Europe as you saw on the balance presented, some of their activities is as they went through the quarter and looking at they’re bouncing but it also reflects just growth in our core business where we’ve had tremendous success particularly…
Ken Usdin
So if you’re presuming that this is mostly client oriented and sticky, can you also then give us an update on reinvestment strategy, where you’ve taken duration to and what type of investment yields are you getting on new investments versus what’s still running off?
Biff Bowman
So Ken if you look at the balance sheet and other items, you can see that we moved some into interest bearing deposits with banks. So, a slightly longer duration has been an overnight if they’re shorter term CDs.
And those moneys in there that we felt weren’t operational deposits but were in effect some type of excess deposit we kept in very short type Bank of England or other type investments in the marketplace. So, we put it to work a little longer for those that we viewed was core operational deposits, what we just described in any of those others that we felt were shorter term in nature we’ve applied appropriately into more Central Bank type deposits.
Ken Usdin
And just within the securities portfolio, any changes in terms of your strategy, your reinvestment interest?
Biff Bowman
I would spare asset sensitivity did not change much sequentially and it remains the duration in the portfolio remains very short around one year, so hope that changes there.
Operator
And we’ll now take a question from Ashley Serrao from Credit Suisse.
Ashley Serrao
So, first question just on NII. Curious if you expect some of the drag from the premium amortization to abate in 3Q.
I am just trying to get a sense of any lags here that we should be mindful of?
Biff Bowman
As well as I will highlight here for you, we had about 2 basis point drag to the NIM in the second quarter. And traditionally in the third quarter we’ve seen that improve.
However it is really tied to the underlying mortgages and assets that we hold in that portfolio. It’s going to be much more impacted by where the rate environment moves in the quarter.
And right now last quarter we were in the third quarter as you would have seen in ours, it was flattish. We’ll have to see how that plays out.
I think there is other factors too, there is a housing market, there is seasonality and other items that we think about. The second quarter traditionally has a little bit more premium amortization and then others.
Ashley Serrao
And then just on FX, can you just give us some sort of sense of the penetration of your ecommerce FX capabilities. I am just trying to ultimately understand like how much of this year-over-year improvement is driven by greater penetration or was this some of your unique client trading behavior?
Biff Bowman
So we continue to try to capture more and more share by bringing the right products and services to our clients. So, whether those are electronic solutions or other automated solutions, and we have been successful in that.
It’s hard for me to attribute exactly how much of the FX performance you saw this quarter was due to that. We have continued to improve our market share with our clients and we think some of those products and capabilities we’re investing in are helping make that difference.
Operator
We’ll now take a question from Luke Montgomery from Bernstein Research.
Luke Montgomery
So, on the expense the core fees ratio that is down a little bit this quarter, you put a goal out there of 100% but I think you also recently said that progress gets harder we achieve from here. When you think about what inning you were in with various revenue expense initiatives you have in place, whether that’s location strategy driving down legal and consulting expense, or capturing more third party FX.
Do you have a strong sense of the pace and path to getting to that 100% target? And if you assume for example there is no change in the environment, could you do it in the year, two years?
Biff Bowman
So, I’ll start with this, we haven't put 100% target out there for number of reasons; first of all is if we get to a 100% that may not be enough with all of the investment that we’re making and all of the productivity that we’re trying to drive. So, we have not stated a public target of 100%.
But we’re in 107 today and we have said we want to continue to drive that down, so I’ll answer your question in that frame work. It does get a little more difficult and you need a balance of revenue growth and expense growth as you have seen with the leverage we've demonstrated here to help to achieve that.
That being said, we do think, there are number of initiatives that are ongoing and still in the side innings of the game, where we can make more progress. And while we talk about location strategy, there is still a lot of meaningful effort that the bank can do around looking at where it provides services, that's one example of where we can do that.
Consolidating platforms in systems using fewer pricing vendors, there are numerous examples of where we've made progress and that we think we can continue to drive that ratio down.
Luke Montgomery
And then it looks like in C&IS custody fees as a percentage of client assets that ticked up nicely this quarter, I calculated about 212 basis points that's the highest it's been in a long time. So I was wondering, if you could -- maybe if you could speak to whether that's business mix pricing anything unusual that I'm not considering and whether you think that could be sustained from here?
Biff Bowman
It reflects a few items. First it reflects very strong new business that we've talked about in previous calls and continues to come in.
It's both global and across segment that's helping drive the majority of that, you do have a full run rate of Bridgewater in this year, so that is a portion of that versus last year, where we would not have had a full run rate for Bridgewater in that. And I would largely just say it's the success of the new business momentum in across the globe.
Luke Montgomery
But it's a new business but it's coming on a higher fees as a percentage of assets or…
Biff Bowman
It's -- we've seen some of the pricing, while I won't say move far north, we've seen the pricing stabilized in across many of that, many of those clients and we think that's help drive some of the improvement that you see.
Bev Fleming
Luke, this is Bev, one thing to keep it in mind as well is the calculus there, which is custody and fund administration fees to asset under custody. So to the extent that we continue to be successful in growing our global fund services business which serve asset managers, be a traditional asset managers or hedge funds that will help to fee line and that has certainly been a significant contributor to the fee growth there, but it won't be reflected necessarily in the denominator and assets under custody because what's coming in, in some cases with the asset under administration.
Operator
And we'll take our next question from Brian Bedell from Deutsche Bank.
Brian Bedell
If you can maybe just talk a little bit about the lending strategy, you mentioned the loan growth was very strong, first of all, the charge I assume is coming out of the loan bucket on the average balance sheet, that the leasing aircraft resurge looks like the yield was fairly confident on a core basis, if you can verify that? And then secondarily, if we can talk a little bit about the leverage to higher rates in terms of loan pricing the lag of resets on your both your commercial and residential books to higher rates.
Biff Bowman
First, as you said the nor lease impairment charge the lease impairment charge was flow through the NII and as you likely said our loan yield actually was down 2 basis points driven by mix. So to the first question, the loan strategy there, we have shrunk the residential real-estate by approximately 6% quarter-over-quarter, but if you look at C&I, if you look at commercial real estate and you look at personal loans which we would typically be secured by the investment assets of our client, all of those had growth rate in the teens up to the mid 20s.
So across those portfolio we had very high growth, they produced slightly lower yields because of the secured nature and the credit quality which is strong in those. So that was 2 basis points of the NIM and I previously talked about the premium amortization that's pretty much your 4 basis points of NIM.
So, that's the loan growth strategy that we've seen as supplying that into largely our wealth management franchise. Your second question I think was around the leverage to rates and movements of rate, approximately two-thirds of the portfolio, entire portfolio is floating, and so we will have a positive reaction to that in that nature.
Because our residential real-estate is shrinking as you might expect that's tied probably closer to the 10 year or something 5 to 10 year type rate, that is declining so it makes it slightly less sensitive to those moves. I would just highlight that roughly two-thirds of the portfolio is floating in nature and likely to be sensitive to the rate moves, so.
Brian Bedell
And do you have a sense of the average lag -- after rates go up, in terms of the resets on the floating part?
Biff Bowman
I don't really have that available, I don't -- Bev if you have that.
Bev Fleming
I don't, Brain.
Brian Bedell
And then just a follow up to be back to the expenses and obviously very good traction there. If you talked a little bit about the technology investments, numerous investments that you're making in the platform.
Can you talk a little bit about to what extent you think over the long-term those enhancements are revenue producing versus just expense reduction?
Biff Bowman
Well, they're both -- there are clearly both many of these are investments for instance in technology that will allow our wealth partners to be able to deliver services and capabilities to our clients in a more effective, the holistic manner. Others are quite frankly investments in processing platforms that will allow us to be more efficient.
So it is a blend of those that we believe will generate ultimately revenue and those that generate operating efficiencies and it is not just an operating efficiency type investment for those technologies.
Brian Bedell
And that would -- dovetail the comments of getting at 107 continue to drive the 107 down even in the near-term?
Biff Bowman
Yes.
Operator
And we'll now take our question from Jeffrey Elliott from Autonomous Research.
Jeffrey Elliott
On the money market fee waivers, why are they down this quarter?
Biff Bowman
So, money market fee waivers were down for two reasons in the quarter. One was primarily because the yields are up and short term rates have risen if you look across overnight REPO rates in particular moving up so that's one factor and we've slightly lower cash balances in those funds available.
So the combination of those two were the drivers but I would highlight that rate -- the short end of the rate curve moving up does help produce a lower fee waivers.
Jeffrey Elliott
And does the -- in the fact that you've been able to get a bit of a benefit from a very small move and short-end of the curve. Does that give you more confidence on your ability to recapture a higher proportion of the fee waivers or is it still kind of too early to tell?
Biff Bowman
I would describe it is too early to tell, because I think we need to see probably a more pronounced move as oppose to the 1 to 2 to 3 basis point type moves, we've seen that likely will come with any kind of Central Bank action that may move rates up.
Operator
And we'll take our next question from Glenn Shor from Evercore ISI.
Glenn Shor
What caused the changes in the fee arrangements in Sec lending. How broad based was that?
Was that part of a broad change across the whole book just curious on how that unfolded?
Biff Bowman
The competitive nature in securities lending means that we revisit the securities lending fee splits with all of our clients on a regular basis. It remains competitive around fee splits and we negotiate those and have dialogues with our clients on those on a regular basis.
We have seen it move modestly against sort of a trend meaning more is returned to our clients than to ourselves and the fees splits that is relatively modest which is the competitive place.
Bev Fleming
And Glenn one thing that I would add to that is it, it's not just the fee splits on specific clients but it's also the proportion of revenue that we earned from different clients and to the extent that we have a mix shift in where we're with the clients than it could be that the overall fee split would come down. So, mix plays a roll on that as well.
Glenn Shor
And is that something that will take few quarters to annualize if you will meaning this quarter it shows up in your year-on-year number, next quarter we should look to see that flow through on a year-on-year number as well?
Biff Bowman
That's a reasonable assumption, I think Glenn.
Glenn Shor
And then just one other one was I'm curious the global family office has been growing at a much better pace than the regions. I don't know if that's a smaller base thing or if there are special things you're doing to put more resources at it, just curious if you could talk towards that?
Biff Bowman
I would say a couple of items I would highlight there is one, these are ultra high net worth of family offices and others and they tend to be chunkier in the nature of their growths so they have very big opportunities, they come in very large size. And we have a very strong market position in this space in particular we have strong position across all of our wealth management franchise, but in this area in particular, it leverages the technology that we talk about the institutional space significantly as many of these clients can and often look very similar to institutional investors and so is growing similar to what you saw on the corporate institutional side is probably not coincidental.
Operator
And we'll now take a question from Adam Beatty from Bank of America Merrill Lynch.
Adam Beatty
Just want to ask about some of the equity index rebalancing by sovereign, seems like a bit of theme this quarter. What's your sense of what types of products where that money went types of products either Northern Trust or other firms or whether it was a source of liquidity for your clients?
Biff Bowman
I don't want to speculate on all the places and when I think they were all rebalancing from asset classes and equity as you saw for perhaps different reasons, it could have been their own liquidity needs, it could have been that they felt that the equity market it had a very strong run and then third I would say is as you know passive management has outperformed active over the most recent periods and some maybe taking a view that in this next environment or perhaps we don't see same type of steady growth that active would begin to outperform passive. So I won't speculate any further on what their decision making process was, but I think those three items were probably in the decision process for many of our clients.
Adam Beatty
And I also wanted to ask about engineered equity solutions which you highlighted as an important and growing part of your business. What's the level of interest you're seeing currently there?
What kind of fee rates do you get around that business? And what's the growth outlook looking like right now?
Biff Bowman
We're having a great dialogues and great conversations, we had a significant win in Europe around that product and capability and we continue to have dialogues with both our wealth and our institutional clients in this space. The take up is very high and the market we feel is very intellectually curious about this product and capability right now.
The fee rate really ranges based on the complexity of the instrument we're talking about. I know this won't give you all the guidance you want and we don't give guidance, but it's certainly north of traditional passive management and somewhere less than what you would see in an active spread and then that depends on the complexity of the product where it is closer to equity type activity equity type pricing or more passive type pricing.
Operator
And we will take our next question from Jim Mitchell from Buckingham Research.
Jim Mitchell
Just another -- just a follow-up on the balance sheet, you guys obviously saw some strong deposit growth and I am just trying to get a sense or do you get a sense that you're kind of grabbing some share from more leverage constrained competitors who are trying of push deposits off the balance sheet and let me get you thought on that and if you view that as a long-term sort of market share opportunity to grab some of these deposits because you're much less leverage constrained?
Biff Bowman
Yes, so we certainly see clients that are approaching us because of discussions they have had elsewhere around the use of other's balance sheet. I would say that we're taking a transaction by transaction approach to that and looking at the overall breadth and nature of the relationship we attain with those deposits before we take and I am speaking a very large deposits here before we take those on.
So if it's an opportunity that say a hedge fund has a billion, we want to dialogue about what the other opportunities are with them other than what we would say as a very transactional oriented deposit or very rate sensitive deposit. And we're actively pursuing those in terms of deal-by-deal.
Excuse me when I said we're looking at those deal-by-deal.
Jim Mitchell
And then maybe just a follow-up on wealth management, just curious the central region saw revenues that were down when most others up so just was there something unusual in that line item?
Biff Bowman
There were in the first quarter there were certain tax related fees that were accrued in the central region. We adjusted those in the second quarter and allocated those out amongst the other regions so it created what would appear to be a negative growth rate for the central region sequentially.
Jim Mitchell
But the total numbers I guess fine which is just how it was allocated in the quarter?
Biff Bowman
Total number is fine.
Operator
And we'll now take a question from Gerard Cassidy from RBC.
Gerard Cassidy
Can you share as you've mentioned that you had some very good strong deposit growth in Europe, so the European deposits that had negative interest rates due to the central bank policies in certain countries over there were those new deposits brought on was the customers having to pay you guys to hold the deposits?
Biff Bowman
So the answer of that would depend on the currency in which those deposits came in the Swiss, Swedish, Danish and Euro market the answer to that would be yes, not in sterling but in the other currency the answer of that would be yes, we've moved to negative rates in the currencies I discussed.
Gerard Cassidy
So that the existing customers and the new ones that came in as well, correct?
Biff Bowman
It would be both.
Gerard Cassidy
And then second this is more longer term, it was decided that they were not going to include selected Chinese stocks in the MSCI World Indexes. Should that happen at some point in the future, is that an opportunity for you guys to see a bump in your the index funds and everybody having to move to buy those securities to match these MSCI World Indexes and to drive revenues for quarter or two as a even out to the new ratings?
Biff Bowman
We haven’t factored that in that would make intuitive sense that there could be a bump with the purchase of those securities in there. But I wouldn’t be able to give you any indication of what the magnitude of that impact would be for us?
Operator
And we’ll now take a question from Mike Mayo from CLSA.
Mike Mayo
Can you elaborate more on the increase in demand and other non-interest bearing deposits? What is that and why is it going up so much?
Biff Bowman
It’s generally just growth in the business and growth in our clients, both domestically and internationally. And some probably have some temporary nature to it but the majority of it is operating oriented deposits that’s reflective of our success across the regions.
Mike Mayo
Could you make it a little bit more concrete because these aren’t the interest bearing deposits that’s not savings in money market or that category and it’s a little bit further down and your liability and stockholders equity category. Just any one concrete example would be helpful, because it’s up one third year-over-year and up couple of billion just linked quarter.
Biff Bowman
I mean there is clients that are large fund clients or others that have put large balances with this because the nature of perhaps we have a GFS relationship or some other, where it will not be interest bearing they have just left the funds cash or some other portion of that cash no our balance sheet. And we’re trying to determine the interest rate sensitivity to those as we enter a rising rate environment.
But it’s probably large GFS or our asset manager type clients were that balance has grown.
Mike Mayo
And just preliminarily, how sticky do you think those deposits are, do those play with higher rates or what?
Biff Bowman
So the operational component clearly won’t Mike, but we think it will be reasonably rate sensitive as rates rise.
Mike Mayo
And redeploying those funds because they went up so much I guess you put a bit more into securities. Is that the main usage of these additional funds?
Biff Bowman
So most of it is in deposits with banks as you would see I don’t know that we put our securities portfolio has both long and short-term components to it and some could be in the very short-term components of the securities portfolio.
Operator
And we’ll now take a question from Vivek Juneja from JP Morgan.
Vivek Juneja
Just a follow up on the question that was asked earlier about deposits from being set by other banks. So did you actually see -- did any of the growth this quarter come from that?
Biff Bowman
Modest amount really came from what we would say were outflow from others, most of it was really either our existing clients increasing their balances with us or just growth in general from our franchise. So there probably some modest amount of that but most of it was just core growth.
Vivek Juneja
And one last thing just timing on when you’re planning to start disclosing Bev what you referred to earlier the assets under custody and administration.
Bev Fleming
Vivek that's something that we continue to work on and to make sure that we have everything aligned internally to get to the point where we wanted do public disclosure of that. So it’s something that we continue to work on.
Vivek Juneja
Why is it taking so long, since you’ve been talking about it for a while now?
Biff Bowman
I think we want to make sure that we have this right for not only reporting here but for SEC reporting and all the other documentation that’s important to go around it and we continue to invest in it and we’re moving forward when it’s ready to be moved forward.
Vivek Juneja
Because I am sure you track this yourself, so it’s a little surprising that you’ve been talking for so long and it’s not yet out?
Biff Bowman
Internal management reporting however is different than external when we’re ready to move it forward, we will.
Operator
And we’ll take a question now from Brian Kleinhanzl from KBW.
Brian Kleinhanzl
I just had a quick question on the your opening comments about the advanced purchase and the Fed checking the model, I was just curious as to why you kind of mention that and is there something eminent and then I know the Fed's always reviewing those models, so do you have had recent communication or something that would indicate that there is going to be changes coming soon?
Biff Bowman
No, that's a standard statement but as we evaluate our models under the advanced approaches any change in the parameters of the models themselves can produce changes in our advanced approaches ratio, so we cover that off with that statement to acknowledge that, particularly things around operational risk for instance could be changed with different parameters or different events being in database could change those numbers in any given quarter.
Bev Fleming
But just to emphasize our commentary this quarter was no different than it had been for the last several quarters.
Brian Kleinhanzl
And then just a follow-up question, on those remaining Visa shares, can you walk through the internal thought process on when you sell those? I mean it sounds like it represents about 8% of your tangible equity there.
Biff Bowman
So, the decision this quarter was clearly an investment decision that we took as an organization, we have not sold any visa shares any of our Class B shares held to date, but we've seen a meaningful increase in the visa's stock over that period of time and felt it was time to monetize if you will a portion of our gain. So, we do still have remaining post sale of about 5.23 million Class B shares and that today's conversion rate is about 8.6 million A shares.
At this point we make investment decisions on a regular basis and we will evaluate those on a regular basis.
Operator
And we have no more questions currently in the queue. I would like to turn the conference back over to today's moderators for any additional or closing remarks.
Bev Fleming
Well, thank you, Lisa and thank you all for joining us today. We look forward to speaking with you after we report third quarter results in the month of October, if not sooner.
Thank you so much. Have a good day.
Biff Bowman
Thanks.
Operator
And ladies and gentlemen, this does conclude today's conference. And we thank you for your participation.