Good day, everyone. And welcome to the Northern Trust Corporation Second Quarter 2014 Earnings Conference Call. Please note, today’s call is being recorded. At this time, I would like to turn the call over to Director of Investor Relations, Ms. Bev Fleming, for opening remarks and introductions. Please go ahead, ma’am.

Thank you, Joshua. Good morning, everyone. And welcome to Northern Trust Corporation’s second quarter 2014 earnings conference call. Joining me on our call this morning are Rick Waddell, Northern Trust’s Chairman and Chief Executive Officer; Michael O'Grady, 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 or financial trends reported via email this morning, they are both available on our website at northerntrust.com. In addition and also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 16th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through August 13th. 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 is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2013 annual report 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 allow as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael O'Grady.

Good morning, everyone. And let me join Bev and welcome you to Northern Trust second quarter 2014 earnings conference call. As usual, I will review our result for the quarter, after which Bev and I would be happy to answer your question. Starting on page two. This morning we reported second quarter net income of $182 million and earnings per share of $0.75. Our reported return on equity was 9.2% in the quarter. As outlined in our earnings press release issued this morning, we remain focused on sustainably improving our financial performance and return. To that end, we recorded charges and write-offs in the second quarter of $42 million. Excluding these items, our earnings per share would have been $0.87 and our return on equity would have been 10.6%. I will discuss the charges in more detail later in today’s call. Environmental factors which impact our businesses and our clients were mix in the second quarter, a theme which has been ongoing for some time. Equity and bond markets were higher at the end of the second quarter both year-over-year and sequentially. In the U.S., the S&P 500 was up 22% and 5% versus last year and last quarter, respectively. International equity as measured by the EAFE Index were up 15% and 2%, respectively. With market trending up as the quarter progressed, average daily market were also higher, although lag the end of period comparison by about 4 percentage points year-over-year and 1 percentage point, sequentially. In bond market, the Barclays US Aggregate Bond Index was up 1% both year-over-year and sequential. Client assets under custody ended the quarter at $6 trillion, up 20% over last year and assets under management ended at $924 billion, up 15%. On a sequential basis, client custody and managed assets were up 4% and…

Thank you Mike and let me extend my thanks to everyone listening to Northern Trust earnings conference call today. We appreciate your interest and continued support. Yesterday, we announced several leadership changes that will become effective on September 1st. These changes have two key objectives, first, to sharpen our focus on profitable growth and second, to further develop our leaders by exposing them to different roles. Jana Schreuder will assume the role of Chief Operating Officer with operations, technology and enterprise change reporting to her. Jana and her teams will be focused on enabling accelerated growth by making Northern Trust more efficient and nimble. Bill Morrison, our President since 2011, will continue to lead our wealth management, asset management and corporate and institutional services businesses as well as our corporate marketing and strategy efforts. We are very excited about the strategic and competitive positioning of Northern Trust across the markets and segments we serve. Bill and the leaders reporting to him will be focused on maximizing our strong positioning and significant marketplace opportunities to accelerate growth. The leverage and further develop our leaders, Steve Fradkin will become Head of Wealth Management and replace Mike O'Grady will become Head of Corporate and Institutional Services. Biff Bowman formally was Head of C&IS in both North America and in EMEA and most recently Head of our Human Resources Group will become Chief Financial Officer. These changes are a testament to the deep end -- to the depth and breadth of our leadership team at Northern Trust and will further our efforts to accelerate profitable growth. Thank you again for participating in Northern Trust second quarter earnings conference call today. Mike and I would be happy to answer your questions. Joshua, would you please open the line.

Yes, sir. (Operator Instructions) We’ll take our first question from Alex Blostein with Goldman Sachs.

Great. Thanks. Good morning everyone. And Mike, congrats on the new role and new responsibilities. First question, I guess, around the expense program that I guess, you guys announced. I just want to make sure that I got the numbers right. So the savings that you expect to get are about $25 million on an annualized run rate basis. Do you guys think of that as a gross number or net number meaning that do you think that actually as an expense reduction, or just a way for you guys to reinvest in other areas of the firm?

Two parts to that, Alex. The first part will be that we think about that number as a net number. So we will be reducing compensation related to the positions that we talked about, which is in excess of the $25 million. However, there are certain areas that we're reorganizing where we’ll need to reinvest in people to take on some of those responsibilities. So that’s a net number if you will. More broadly speaking, as we've been doing with driving performance, all of the savings that we generate and pretax benefit that we generate from the various initiatives are used first to improve our profitability but then also to allow us to continue to invest in the business. So even with the over $250 million, if you recall that we generated on a run rate basis through 2013, a portion of that was redeployed back into growing the business and improving technology as well.

Got it. Thanks. And then my follow-up question was around trends in foreign exchange during the quarter. As you pointed out, I mean, we think we’ve all observed pain throughout the course of quarter volatility been quite well and volumes across many asset classes been low as well. So a little surprise to see, I guess, sequential growth in expense -- sorry in FX trading for you guys. And I know you spend some time trying to develop some new capabilities. So do you think it’s more of a function of you getting new business from clients that just haven’t traded with you in the past or something else that’s driving the sequential increase in those revenues?

Alex, it is a combination of factors, certainly, the broader market volatility level. Those certainly impact the broader market volume. And then more specifically as you know most of our activity is with our custody clients and those custody clients may or may not have consistent transaction and volume activity that the rest of the market does. The dynamic that we saw in the second quarter is that our client base, if you will, was more active. And so the volumes that we saw through our custody clients were higher on a sequential basis in contrast to market volumes overall which were lower. So that’s one. Two, as you mentioned, we have had a number of initiatives in the foreign exchange area particularly looking to transact with the broader group of clients and more third party FX that we call the non-custody clients. As I mentioned in previous calls, we've begun to see the benefit of that. I would say that we’re seeing much more volume related to that activity and more recently, including in this quarter we’ve seen the benefit of increased revenue from that as well. But it’s still early days in the financial impact from that.

Got it. Great. Thanks for the color.

And we’ll take our next question from Ashley Serrao with Credit Suisse.

Good morning. Within the wealth management divisions, the eastern region saw great growth this quarter. Is this really a function of New York gaining traction? And then if you step away and from a high level, how would you categorize the revenue potential here oh here both here and in Houston, what innings are we in?

Sure. So the growth of the wealth management business has continued to be relatively broad based within the U.S. and across all three regions. And from quarter to quarter, as you would expect one region may do better than another. And interestingly where we’ve even seen the central region for example, which as you would expect we have higher market shares if you will. It continued to grow at a nice rate. At the same, we’ve talked about increasing the investments that we make into certain markets where we have lower penetration or market share. And we’re in the early innings of those strategies, if you will. You mentioned that couple of the markets, Ashley, there is certainly in the Texas market more broadly and Houston specifically. We’re looking to expand the business more quickly but I would say that that’s still in the early stages of that. And likewise in New York which clearly is the largest marketplace, as you’ve identified, we’ve had nice success but I would say it’s still very early relative to the strategy that we have there.

Okay. And then on other expenses, this is the second quarter in a row where numbers look good. And do you feel that you’re in a spot where you somehow structurally lower these account servicing charges to process improvement because it feels like you are run rating a fair bit below last year's levels. Any color there would be appreciated?

Sure. In the other categories, as you highlighted, there are a number of different items that fall into that category. And they can vary by quarter from quarter to quarter. We have had, I would say, very good experience in the last two quarters with regard to charges related to client activities there. That’s not something that we’re able to predict going forward. There's no question that we are focused on not only serving our clients very well but minimizing any type of errors that we may have that require financial renumeration that you would see there. But all the same, I can't by any means say that we can expect that we’ll see these low levels going forward.

All right. Thanks for taking my questions.

Sure.

And we’ll take our next from Brennan Hawken with UBS.

Hi. Good afternoon. Good question on the timing of these savings. How should we think about that growing into results. Can you give us a sense about how these are going to phase-in?

Some of the actions that we talked about today, we’ve already begun to take. And so there will be some impact from that in the third quarter. But it will be very small. And even in the fourth quarter, we would expect the run rate to be very low as we begin to work through the plans that are related to the charges. For 2015, we would expect to see the majority of the $25 million that we talked about and beyond that 2016, we would be fully implemented.

Okay. And then and so with the majority, we’re talking about 20 of the 25 there by the time we get through and as you go through 15, would it continue to phase-in over the year. Is there any sort of additional sense you can give on, on that?

Sure. It will phase-in over the year. Because the activities here are not in one particular area of the bank but across the company where we think we have opportunities to reorganize and become more efficient and how we execute in those areas. And so the implementation of that, takes time because the timelines are different for each of those areas. So the actual activities themselves will roll out over the next few quarters and as a result, the savings will phase in along with those. And when I say majority, it’s certainly over half, well over half but beyond what the amount is. There is not a specific number that I would get.

Okay. That helps. Thanks. And then I guess question on capital. Can you -- do you, is it your sense that wealth management clients believe the capital strengths is an important differentiator for you. I’m just trying to sort of get my head around why not return more capital, get closer to your regulatory capital minimums. Is it that you feel as though your compared with maybe some of the other trust banks and those firms are held to a higher standard. Therefore you have to be up at that level as well. Just can you maybe walk us through if there's a competitive factor coming in to play here?

Sure. Capital strength is critical to our business and that through both with wealth management as well as our corporate institutional clients as well. We believe that our clients definitely take comfort in the fact that Northern currently is and has been very well capitalized whether that's on a standalone basis or in comparison to other competitors that they may be considering doing business with. So that will continue to be a factor for us as we look at our capital level going forward. As to exactly where we are relative to a competitor, we don't necessarily determine our capital level based on anyone or even a small group of competitors. They are just relative data point that we take into account along with a number of other data point from our own internal analysis related to our own risk and certainly with regard to be a regulatory required level. So that’s a framework that we used. It’s a broader framework of factors and the commercial aspect and competitive aspects are part of that. So last thing, I would say is certainly we’re very focused on returning capital to our shareholders, which we've done an increasing amount over the last few years and yet that’s also obviously an exercise that we go through with our regulators that have a clear say in the amount of capital that we can return.

Okay. Thanks for the color.

And we’ll move next to Glenn Schorr with ISI.

Hi. Thanks. Maybe start with a quickie on capital ratios. I agree you got a ton of it. Just curious on how come it went down in the quarter and barely up on the year on a ratio basis. You’re making a lot of money not buying back too much positive OCI benefit which is just logic?

Yeah. I would say that for the most part, Glenn, we have returned this year basically what our net income has been. So we’re much higher in the first quarter and a little bit lower in the second quarter with regard to share repurchase. Between the two quarters there plus the dividend, it largely offset the net income impact from that. And then I would say beyond that we’re into a time period where the capital ratios depending on the methodology approach are being transitioned in. So there is a number of factors that happen on a transition basis that I’ll hit just a couple. But from a numerator perspective, we have trust preferreds for example. The equity credit for those are being phased out over a time period here. So, that’s going to reduce our capital level. And then on the denominator side, there's a transition period, essentially what our Basel I risk weight to the Basel III standardized risk weight. So you will see that impact on the ratios. And then certainly with the advanced methodologies, those are always subject to updated modeling and assumptions that go into that. That can affect either operational risk capital or credit risk capital or any other of the capital category.

Okay. That’s definitely helpful. And then on the -- I guess these questions on both expenses and net interest income merged together in this where you mentioned most of the deposit, higher deposit funding was invested at the Fed. By the way I have the same problem, I don’t know what to do with cash either. So I’m just curious if that's a comment about what you think the duration of those deposits might be or an interest in not taking on too much credit risk, not expanding more on the duration side?

Sure. Well, we would be glad to help you out with your problem if you would like to be a client of ours. So, we will talk about that separately. You're right that we have seen the balance sheet expand significantly more so over the last year and somewhat over the last quarter. And as you’ve seen, we have increased the size of the securities portfolio. So, that is a way for us when to extend out the duration and get a higher yield on those investments. I would say that we look very closely at the nature of the deposits that are coming in. As much as we would consider all of these client-related deposits as you know with the extreme amount of liquidity that’s just in the system. What we don't know exactly is what the impact of behavior will be to the extent that interest rate head in the different direction. So we have to be careful just on how much duration we add to the portfolio. We’ve been relatively constant on that front. And then the last thing I would say is, as you saw in the quarter here, we actually had about $1 billion of growth in the loan portfolio. That's certainly a positive development. One, it indicates just the fact that in our view the economy is improving and our clients are positioned where they are taking on additional loans to expand their business or do other things, but that is an ideal way for us to deploy those assets because we’re deploying them in client needs or for client needs.

I think that’s all completely reasonable. And to your point, when you -- you’re clearly managing expenses a little bit more or getting us to focus more on fees to core revenues versus the ancillary revenues. If and when we ever live to see the higher rates, does that just imply the higher incremental margins as super high on NII?

Very, very high, yeah.

Awesome. Thank you.

And we will take our next question from Betsy Graseck with Morgan Stanley.

Hi. Thanks. I just had a follow-up on the last question where you’re talking about what happen with NII increased. The one of the concerns that people had is that as interest rates have come down and soft dollar benefit has declined, you’ve been able to -- the industry has been able to move more towards hard dollar as a percentage of total. As interest rates go up, does that cap ability to continue to grow the hard dollar fee side of the business as much? Will investors in a turnaround say I am giving you more soft dollar now so I can peel back hard dollar?

I think Betsy that it’s a very interesting question in the sense of that’s very tactically close to the business. And we -- as you point out, we’ve gone through a time period here where whether you want to characterize certain revenue streams as hard dollar or soft dollar, that’s not the terminology we use. But so let me say it the way we would which would be the fee component of our service offerings versus some of the other services that we provide where the revenues come in the form of whether it’s spread income, foreign exchange, securities lending, things like that. And so we've been on the downside, if you will, of those revenue stream coming down. I think that has had some impact on the fee side in the sense that just for the entire marketplace. If the ancillary side is lower, then that there's firmer pricing if you will. To your point then the question is. To the extent rate turnaround, do we lose that? Hard to say, it all depends on the competitive dynamic. But my expectation is that some of that discipline that we've seen will be maintained in the marketplace as rates go up at least for some extended time period.

Okay. And the disclosures that you put up around benefit from rising rate environment into revenue stream, earnings stream in the Q. Are you anticipating that similar behavior of client as in past rate rise cycles? Are you assuming like a static balance sheet analysis? So I guess the basic question is, is that Q disclosure more of a minimum as opposed to in a dynamic environment, what you think you got?

So it is a static balance sheet analysis. It is, as you point out, difficult at this point to have a very high level of confidence in all the assumptions that go into that analysis given that we haven't had this type of rate environment for this time period. And so predicting the behavior as rate increases particularly difficult and be more specific, particularly difficult on the deposit side of that calculation. And so what we’ve had to do is look at both the nature of the deposit. So whether we think that those deposits are core if you will or are operational. But then also our ability to maintain the level that we’re paying on those deposit as rate increase and as we see the benefit on the asset side of the equation. And so we try to incorporate the fact that we’re in a unusual interest rate environment, but it is just that, it’s a set of assumptions that we put in there and we’ll obviously have to see how it plays out to the extent rates move up.

Right. And then again as rates do move up there will clearly be a benefit. The question is, how much do you and you have some room there to determine how much you’re going to allow to fall to the bottomline or not, I would expect that at least some of that improvement in NII would be able to fall to the bottomline, is that fair?

Absolutely.

Okay. All right. Thank you.

And we will take our next question from Luke Montgomery from Sanford Bernstein.

Hey, guys. Thanks. So just maybe some more thoughts on the management reshuffle. I know you've done this a lot over the last few years and I get that it’s part of your management philosophy and maybe there is some succession planning here. But at the same time, I think Mike was only in the seat for a short time, he is a good communicator, and I do believe that investors value some consistency in the CFO seat. So maybe you could comment what the catalyst was here and why the objectives you listed are more importantly that maybe providing some continuity in the dialogue with the investment community?

Well, Luke, it’s Rick and I appreciate the question. I would point out that Mike has been in the role for three years. So this is not what I would call just a quick change and I would also note that Mike is not leaving the company. He is still a very valuable member of our management team. The CFO role has quite frankly historically been one at Northern where we put high potential talented individuals who get to see the company with the different lens but across the corporation. And if you go back to Steve Fradkin and Bill Morrison, I would highlight two individuals who were in that role and have moved on into other role. So that really is the context with Mike, with Biff you are going to get an individual who has -- his entire career has been with Northern. He started at audit. He has been on the commercial banking side. He was part of our acquisition strategy in 2005. In Europe, he’s ran Europe. He’s run North America. And so he is a very seasoned talented leader with the terrific financial background. So I think I would say personally I have been spoiled by Mike. But Mike has a unique background. But I don’t think investment community externally nor do I think internally from a financial leadership perspective that we are going to miss a beat when we’ll make these changes.

Okay. Fair enough. I guess I have got someone new to try to pester into enhancing the organic growth disclosures?

Well, that’s your job.

Maybe an update on what you’re seeing in terms of regulatory expense trends. Are you comfortable maintaining the view that it’s going to be in line with 2013, but with the mix shift that you stated way from outside services and towards permanent or maintenance spending? And was there anything that was pulled into Q2 or pushed out that might affect the run rate over the next two quarters?

So on that front, Luke, I would say that so far this year it’s been consistent with what our expectations were in the sense that we -- you’ve seen for example that our comp and expenses have gone up. That’s one of the areas where it’s gone up. But we think that that’s the most economical way for us to address the improvements that we’re making within our control functions. And at the same time as you’ve seen in outside services, it’s not as much that you can see the detail per se that as you probably noted. I didn’t talk about consulting expenses been higher either year-over-year or sequentially, and that’s because we haven’t successful in doing more or so and having less on the outside. Now the trend from quarter-to-quarter can certainly. There does tend to be more activity on the regulatory front as we get into the back half of the year as there are number of items that we are trying to clear whether that’s for the CCAR process or any one of the other, any number of regulatory initiatives that we do have. So it’s not to say that we’ve locked into a low level, it’s just that it’s been consistent with what our expectations were. The other thing I would say is that one of the areas that has been our focus for us this year has been AIFMD over in Europe. So we’ve incurred the cost and the investment to build that capability out in the first half of the year, that’s all you’ve had. It’s just the cost and expense related to that. We will continue to have both some implementation costs and ongoing costs related to providing that service, but we will also have revenues in the latter part of the year as clients are using that service and compensating us for that. So that won’t show up in the expense line as much, but it will show up on the revenue side.

Okay. Thanks. Very helpful.

And our next question will come from Ken Usdin with Jefferies. Ken, your line is open. Go ahead, sir.

Hell, sorry about that. Hey, Mike, can you actually talk through about the net new business wins and the growth rates of the C&IS and FPS ex fee waivers have been at a pretty consistent rate both in upper single digit last year. So I was wondering if you could talk about the pace of new business wins and if either the size or constitution of what buckets that are coming from has changed at all?

Sure. On the C&IS front, the business continues to have quite a bit of momentum. So, it’s very positive and I would say it’s also relatively broad-based. So both from a geographic perspective. Again there are certain areas where you might think the business is more mature and that’s going to grow at lower rates in North America for example, but it continues to be very successful and both getting new additional business or revenue opportunities from existing clients but also winning new clients. And then within GFS, success not only in North America but very much so in Europe. And that’s after going through a time period when Europe had more difficult and we did see the new business levels go down in Europe. Now we’ve had a number of quarters of very positive net new business in EMEA for us. And then you’ve heard us talk about certainly our success in the APAC region broadly speaking and specifically in Australia. And I would say that that momentum continues as well. So all very good and we would expect that that continues in the sense that we’re still very active in pursuing opportunities in all those regions in those businesses. On the wealth management front, I talked about it a little bit previously just about the different regions. And I would say there that we’re at a time period in the market where I sense that or I should say our wealth management professionals and experts see a certainly level of nervousness if you will on the part of clients given the high equity market levels. That can always cause fits and starts with moving business to new providers. We continue as you would expect at very high retention levels and are very focused on trying to increase the level of new business that comes into the company. And so at this point, I would characterize that as steady not as high as we’ve seen in other time periods where there is just more activity in the marketplace.

And Mike just on an on-boarding question, is Bridgewater still on track for coming on this quarter and presumably even again without the related AUC so we’ll see that in the capture rate as well?

Correct. So we are on track for Bridgewater to be online in the third quarter and their assets will be assets under administration.

Okay. And just Mike one question on that fees, that expenses, that fees number. If we presume that rates really don’t change, how much more progress do you think you guys can make on that just from an organic growth and expense control relative to the 115 that you’re at this quarter?

Can we still think we have significant opportunity to improve that ratio and with the changes that Rick has talked about today, that’s all an indication of our effort to try to do what it takes in order to continue to improve that ratio. This particular set of action happens to be around the structure of the organization. In my mind, it’s a way for us to structure in a way that we think we’ll create new opportunity to deliver efficiency. But that’s on top of things that we've been doing for the last 2.5 years, which we will continue to do because we think it's important to our long-term success to be able to continue to drive that ratio down.

Okay. Thanks a lot Mike.

And we’ll move on to Brian Bedell with Deutsche Bank.

Great. Thanks for taking my question. Maybe question for both Rick and Mike. As you think about the business realignment and the leadership changes and really trying to drive profitable growth over the longer term. Aside from the expense components of that, can you talk about profitable growth in the business mix perspective within the businesses? So what I’m trying to get at is due to what extend would you prefer to invest in higher margin area within CI&S servicing such as hedge fund administration, alternative administration. And then similarly on the wealth management side, would you view as the more profitable components in the wealth management, higher end versus the medium area?

Brian, its Rick. I mean, our businesses fortunately present tremendous opportunities to grow. So as Mike has indicated and we’ve been saying for sometime, we continue to invest in a variety of initiative to take advantage of growth opportunity. So for example, in Australia, that business continues to grow. We’re adding headcount. We’re putting more capabilities in there. Asia we’re at large, we opened an office in Kuala Lumpur earlier this year. There is just a number of markets on the institutional side where we’re seeing strong client demand and therefore we need to invest in those market in order to grow them. On the well side, we talked about our mega market strategy. We’re in the east coast, specifically North New York, our business in Texas and specifically in Houston. Those are markets were we are allocating more resources because growth opportunities, the margin, the revenues and the profitability are there. We’re also expanding in capability so our EPS strategy where we’re north of $8 million and continue to add product, broaden our product, mix leveraging our mutual fund and pass of capability. That’s an investment that we’re making. So it’s fairly broad based, it’s in both businesses, each of them have different dynamic granted, but we’re seeing very, very good investment opportunities to grow our businesses in geographies and in markets throughout our business.

And I guess, Brian, the only thing I would add but Rick laid out there is to your question around the profitability of the service offering that we have for our client where we're doing and have been doing quite a bit of analysis as you would imagine around those product and services to determine where are the best opportunities for us to move that mix. And so you marry that up with the businesses and the growth opportunities we have to determine the best way to allocate capital and resources.

And then just a follow-on for that, maybe your view of the alternative servicing business, though I’m thinking really of the Omnium, the legacy Omnium businesses and we’re bringing Bridgewater on. To what extent do you think you can leverage that to much stronger growth in that area? And do you view that as the more longer term profitable area than the legacy core pension custody assets and investment management businesses?

So, we continue to think that area presents tremendous opportunity for us. And when we think about resource allocation, we would say that that’s an area where we have invested in dedicated resources to over the last few years and that’s because we do believe that it not only presents growth but presents attractive return to the extent that we grow that business out. And it’s a situation where I would say at this point that we have had success there certainly adding large clients like Bridgewater, which will be onboard shortly here, changes the dynamic forces well as to the economic of the business, the ability to continue to invest in the business as well. So that is clearly one of the areas of opportunity.

Very clear. Thanks very much.

And we’ll move on to Cynthia Mayer with Bank of America Merrill Lynch.

Hi. Thanks a lot. Most of my questions have been gone over, but just maybe circling back to the asset growth, it seem like this quarter there was a real disparity between the wealth management AUM up 3% and the corporate institutional, which was basically flat. So I think you mentioned that was a matter of cash outflows on the institutional side. I’m just wondering if there was any other dynamic and put another way, whether it’s focusing on the asset under management, what the pipeline is looking like?

Sure. On the asset under management, I think, Cynthia, just to clarify, you said on a sequential basis?

Yeah.

Yeah. Sure. So on a sequential basis, part of it is that cash certainly does factor in from quarter-to-quarter and given the nature of our client base and what they look to us to provide, that is one of the key areas, which is liquidity and liquidity management and so that going to affect the numbers on assets under management. The other part of it is that we do have some very large asset management client. And they do make allocation decisions from quarter-to-quarter. And on a sequential basis, we did have two very large clients who made reallocation decisions in the quarter. And so they allocated out of the product if you will that which was on the equity side into other categories and that was a drag if you will on the AUM growth on a sequential basis.

Okay. And looking forward any color?

Difficult, other than just I would say, consistent with my broader commentary on the opportunities being relatively broad based in that business as well across both industry group as well as geography.

Okay. And then maybe just a quick specific follow-up, the lack of provision this quarter. How do you think about that going forward, given that where the trends are?

The trends continue to be very positive. We did see a nice decline, if you will, over 10% in our nonperforming loan. From quarter-to-quarter, we’ll have to continue to see if we’ll have to see if that continues going forward. And as you know, we’re obviously resize the reserve to what the appropriate level is in the provision falls out of that. So you don’t have a view as to where that would be necessarily, but we certainly do hope that we continue to see the positive credit quality trend.

Okay. Thank you.

Sure.

And we’ll move on to Marty Mosby with Guggenheim Partners.

I want to ask specific question on the write-off that you had in the securities portfolio with faster prepayment speeds, when the refi market has been flowing not accelerating us to have such a large adjustment this quarter, I just was curious what the catalyst for that was?

Sure, Marty. And on the premium amortization, it is something where it’s difficult likewise to predict exactly what is going to happen in the portfolio because it is a collection of a number of these mortgage-backed securities. And admittedly we've done analysis on our own looking to be able to better predict our forecast, what the adjustments will be from quarter-to-quarter. And there isn’t a single index if you will, whether that’s the MVA purchase index or refi index or necessarily even interest rate level where the tenure is that will give you a clean read on what to expect as far as prepayment because there are just a number of drivers as to what can drive it in a particular MBS pool. So hard to necessarily give you a view on what to expect on that going forward other than the fact that the adjustment will move from quarter-to-quarter, but all the same our view is that on balance of course, it just a matter of ultimately amortizing all of the premium that is booked at the time of purchase. That doesn't change the ultimate return we’ll receive on the security.

Got you. And going to non-interest expense from some of the charges you had this quarter, the write-off that you had in the software, was that related to a system that was being replaced or is it an outdated system or was it a new system that just wasn’t getting to the point where I can fulfill the -- what you thought the objective was?

Sure. It’s some collection of -- I don’t say all of the things that you mentioned but a number of things that you mentioned there. So this was not one large system where we had a write-off that totals 9.5 million. It’s a combination of a number of application that fits the profile that you talked about here where we no longer are using that or expect that we’re going to sunset it in a short time period and therefore not appropriate to continue to amortize it over a longer time period. Certainly, we have been and we will continue to be very focused on the IT capital investments we’re making going forward and at time that does present, I call important financial decision to make because we may still have asset value on the book. And we have to determine whether it make sense to continue use that particular application or platform or to replace it write it off as we have on certain things here and then move forward with the new investment.

Thanks.

And we’ll move on to Mike Mayo with CLSA.

Hi. This management change is that a lot of change at one time. What was the catalyst for that? I guess you said to improve profitable growth, but was there any extra reason why it’s now? And when you say to improve profitable growth to what sort of EPS growth –ROE, efficiency pretax margin ratio are you seeking?

Mike, its Rick. Reason why now is lot of inputs into the decision, people's careers where they are and lengthen job and time to get them exposed, so lot of this is continuing to build out our leadership team and give people new roles. But really the impetus was as result of all the work that we've done over the last 2.5 plus years, beginning with our driving performance efforts and to leverage that, that [learning] that I call the muscle memory that we build up around in this environment, which we don’t expect to dramatically improve to continue to drive efficiency, drive productivity, drive nimbleness throughout our organization in order to continue to grow profitably our businesses, which are well positioned, client franchise very, very strong brand, financial strength et cetera. So it really is to take the last 2.5 years and what we’ve done around driving performance and the strategy review we put in place for the Board last year around our businesses and what we felt if take in order to grow profitably -- in order to reach those are -- we've been -- we have said probably to get to the second part of your question. We’ve said we want a 10% to 15% ROE return and we have been inching our way along and doing all the right thing, but I think we’ve got an opportunity to accelerate that and not just to get into the 10%, the lower end of that range, which we did in the second quarter, but get to the upper end of that range in the near-term. And if we are going to do that, I feel we need a different organizational structure that brings the focus and the expertise and the talent that we have to bare on what Mike referred to is the things to enable this growth to grow -- these businesses to grow profitably. And that was really [incident] and it is a good time. We had a Board meeting yesterday and I've been working with the Board and working with the management team over the last several months to put this in place and I’d say everybody including me is extremely excited about their new roles and the opportunities that we have. Again, to leverage what we've been doing the last couple of years in order to accelerate the profitable growth for the company.

Is there a new name for the new program?

Stay tuned.

Okay. I just have a follow up. Tell me, if I hear you correctly, you think you can get to the high-end of the ROE in the near-term without higher interest rates or is that a little too aggressive?

Certainly, we wouldn't have a target range out there if we didn’t think that we could ultimately get to it. And as Rick said, all the plans around this are to try to drive not only into the range and well under the range but ultimately get to that top end of the range and trying to do so without the assumptions that the microenvironment gets much better and that takes us there. As far as the timing to you get there, very difficult, even the Chairman of the Fed had difficult time giving timeframe for things. I think it’s difficult to say when that will be. It’s more that we just need to make sure that we are on the path for getting there.

Let me ask it one way differently, the pre-tax margin was 28% this quarter, pre-crisis it was 35%? Can you get back to that pre-tax margin pre-crisis of 35% without higher interest rates?

Yes. I would say, Mike, that, first of all, that framework and looking at the margin is a good framework to look at and some thing that we do as well. So we know that we need to get that pre-tax margin into the 30s in order to achieve the returns that we are targeting, whether it's exactly 34, 35, whatever it may be, it’s -- there's more to the calculation than that, but that is what we are driving toward is to get to those types of margins absence just looking for the interest rate environment or the FX currency volatility environment to be down.

Actually, my last question, when should we get additional update on these initiatives that you're taking, I guess, you have several new people and new seats, and how long will it take to get their planned out to the investment community?

I would say, at this point, Mike, there's no grand plan if you will or rollout of something, as Rick said, the businesses are extremely well-positioned, this is not a change in strategy, he is not looking to change the course of the strategy, this is an acceleration of what we have been doing. Having said that, as far as, the checkups in the monitoring along the way, every quarter we’ll certainly be back like we are now to talk about the progress we are making toward those financial goals.

All right. Thank you. .

And we will take our final question from Geoffrey Elliott with Autonomous Research.

Hi. And the 20% year-on-year growth in assets under custody, if we strip out the market performance from that, is that kind of a sustainable pace of organic growth would be say, but there are some lumpy wins in there and obviously, the market performance is what it is, but if you take that out, all those is not making for these kind of on an underlying basis sustainable or was it written by lumpiness that will be difficult to maintain that?

Yes. Geoff, if I understood the question correctly, that growth rate if you will in AUC year-over-year so 20%. Definitely a high rate if you will in the sense that it’s been driven by very strong market. And so markets are driving that more than half of that growth at least as best we can attribute the growth. You also had a favorable foreign exchange impact to that, meaning just from a currency perspective, assets under custody that are denominated in pound, for example, were up significantly on a year-over-year basis, so that helps it. And then the differential if you will is more towards the organic growth and I would say the organic growth once you peel those other factors back is consistent with both historical levels and also what we’ve been talking about.

And then one quick, second question, the ECB move to negative deposit rate, have you started challenging the deposits in Europe, have you seen any of your competitors doing that?

Yes. I can’t speak to exactly what all the competitors are doing. From our perspective we are not charging client if you build for deposits. It is certainly something that we are monitoring very closely, given the fact that the ECB is at negative 10 basis point rate and that does certainly have an impact on the spreads that we can earn on euro deposits that we have, because to the extent we are at zero. We have to reinvest those in someway and as market rates come down, it squeezes the spread on those deposits. So we will continue to not only monitor the marketplace closely, but we've been in close communication with our client as well.

Great. Thanks very much.

Yeah.

And that conclude today’s question-and-answer session. At this time, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Well, we like to thank everybody for joining us today, any follow-up questions, please contact myself, Bev Fleming or Allison Quaintance, otherwise we will look forward to updating you on our third quarter performance in October. Thank you very much. Have a nice day.

This concludes today’s conference. We thank you for participation.