Northern Trust Corp (NASDAQ: NTRS) Q4 2019 Earnings Call Transcript

Northern Trust Corp (NTRS) Q4 2019 earnings call dated Jan. 22, 2020

Corporate Participants:

Mark Bette — Director of Investor Relations

Michael O’Grady — Chairman & Chief Executive Officer

Jason Tyler — Chief Financial Officer

Analysts:

Alex Blostein — Goldman Sachs — Analyst

Jim Mitchell — Buckingham Research — Analyst

Betsy Graseck — Morgan Stanley — Analyst

Brian Bedell — Deutsche Bank — Analyst

Ken Usdin — Jefferies — Analyst

Steven Chubak — Wolfe Research — Analyst

Brennan Hawken — UBS — Analyst

Michael Carrier — Bank of America. — Analyst

Rob Wildhack — Autonomous Research. — Analyst

Vivek Juneja — JPMorgan — Analyst

Jeffery Harte — Piper Sandler. — Analyst

Brian Kleinhanzl — KBW — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, everyone, and welcome to the Northern Trust Corporation Fourth Quarter 2019 Earnings Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to the Director of Investor Relations, Mr. Mark Bette, for opening remarks and introductions. Please go ahead, sir.

Mark Bette — Director of Investor Relations

Thank you, David. Good morning, everyone, and welcome to Northern Trust Corporation’s fourth quarter 2019 earnings conference call. Joining me on our call this morning are Mike O’Grady, our Chairman and Chief Executive Officer; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Kelly Lernihan from our Investor Relations team. Our fourth quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today’s conference call. This,January 22, call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through February 19th. 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 2018 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect the actual results.

During today’s question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible, the opportunity to ask questions as time permits.

Thank you again for joining us today. Let me turn the call over to Mike O’Grady.

Michael O’Grady — Chairman & Chief Executive Officer

Thank you, Mark. Good morning, everyone. As you know, Jason Tyler became our CFO, as of January 1st, as Biff Bowman will be retiring after 35 years at Northern Trust. We’re grateful to Biff, for his many contributions as a trusted colleague and thoughtful leader throughout his time, and especially for his significant contributions as CFO for the previous 5 years. I welcome Jason to the CFO role. He brings deep financial expertise and leadership experience, and I’m confident he will be very successful in the role.

Before Jason goes through our results in detail, I’d like to comment on some of the trends we’re seeing in our businesses. Our performance for 2019, continued to exhibit foundational strength, as we executed on a number of growth strategies, while continuing to advance our digital efforts and improve our productivity. Our results for the year generated a return on average common equity of 14.9%. We also returned a record $1.7 billion to our common shareholders through dividends and the repurchase of 11.8 million shares.

In our Wealth Management business, our capabilities and positioning continue to resonate in the marketplace. On a year-over-year basis, assets under management grew 13% to $314 billion, and assets under custody grew 18% to $736 billion. On the capability front, spurring some of this growth, we continue to invest in our data, digital and analytics capabilities, as well as in innovation around the delivery of goals driven holistic advice.

We also closed out the year with the opening of a new office in Philadelphia. And we were named the Best Private Bank by the Financial Times Group for the ninth time out of the last 11 years. In sum, for Wealth Management, it was a very solid year of performance and momentum.

Our Corporate & Institutional Services business remains focused on executing its growth strategies, digitalizing the business and innovating for the future to enable scalable growth. Assets under custody and administration ended the year at $11.3 trillion, up 19% from the prior year. We continue to achieve healthy organic growth in our core asset servicing fees within both the asset manager and asset owner segments, driven by our strong positioning.

We’re also making targeted investments that are expected to continue to fuel growth in areas like front and middle-office outsourcing, and capital markets. For example, we launched new capabilities in front office solutions, integrated trading solutions and currency management in 2019.

Finally, C&IS is executing a multi-year strategy to digitize the business to drive more profitable, scalable and sustainable growth into the future. In asset management, we ended the year with $1.2 trillion in assets under management, an increase of 15% from the prior year. As the industry transitions through key secular shift, we are delivering long-term value to stakeholders through: First, strengthening our areas of competitive advantage, such as portfolio construction, quantitative research and liquidity management. Second, prioritizing investment in growth markets and growth segments, such as financial intermediaries and family offices. And third, shifting our business mix to higher value-add products such as quant active, ETF, ESG and multi-asset.

As we enter 2020, we’re excited about the competitive positioning within each of our businesses. We remain focused on providing our clients with exceptional service and expertise, driving efficiencies into our business and driving profitable growth.

Let me turn the call over to Jason, to walk you through the details of our performance.

Jason Tyler — Chief Financial Officer

Thank you, Mike. Good morning, everyone. Let me join Mike and Mark in welcoming you to our fourth quarter 2019 earnings conference call. Starting on Page 2 of our quarterly earnings review presentation, this morning we reported fourth quarter net income of $371.1 million. Earnings per share were $1.70 and our return on common equity was 14.8%.

The current quarter’s results included a $20.8 million charge recorded in other operating income, related to the decision to sell substantially all of the lease portfolio, and a $6.8 million software disposition charge recorded within equipment and software expense. As you can see on the bottom of page 2, the macroeconomic environment was mixed. While equity markets were strong, short-term interest rates in the U.S. declined, both on a sequential, as well as year-over-year basis.

Let’s move to Page 3, and review the financial highlights of the fourth quarter. Year-over-year revenue increased 3%, with non-interest income up 4% from one year ago, and net interest income flat. Expenses increased 5% from last year. The provision for credit losses was a credit of $1 million in the current quarter compared to a credit of $4 million one year ago. Net income was down 9% year-over-year.

In a sequential comparison, revenue increased 1% with both non-interest income and net interest income up 1%. Expenses increased 3% compared to the prior quarter. Net income declined 3% sequentially. Return on average common equity was 14.8% for the quarter, down from 17% one year ago and 14.9% in the prior quarter.

Assets under custody/administration of $12.1 trillion increased 19% compared to one year ago and were up 4% on a sequential basis. Assets under custody of $9.2 trillion were up 22% compared to one year ago and up 5% sequentially. Assets under management were $1.2 trillion, up 15% on a year-over-year basis and up 2% on a sequential basis.

Let’s look at results in greater detail starting with revenue on Page 4. Fourth quarter revenue on a fully taxable equivalent basis was $1.6 billion, up 3% compared to last year and up 1% sequentially. Trust, investment and other servicing fees represent the largest component of our revenue and were $992 million in the fourth quarter, up 6% from last year and up 2% sequentially. Foreign exchange trading income was $65 million in the fourth quarter, down 17% year-over-year and up 8% sequentially. The year-over-year decline was primarily related to lower foreign exchange swap activity in our treasury function.

Other non-interest income was $70 million in the fourth quarter, down 6% compared to one year ago and down 17% sequentially. Other operating income included the aforementioned $20.8 million loss relating to the lease portfolio. Excluding the lease related loss, the year-over-year growth was driven by implementation of a bank-owned life insurance program during 2019 and strong security commissions and trading income. The sequential growth excluding the lease portfolio loss was primarily driven by favorability in the Visa related swap.

Net interest income, which I’ll discuss in more detail later, was $430 million in the fourth quarter, flat with the other period — flat with the prior period, and up 1% sequentially.

Now, let’s look at the components of our trust and investment fees on Page 5. For our Corporate & Institutional Services business, fees totaled $567 million in the fourth quarter and were up 6% year-over-year and up 1% on a sequential basis. Custody and fund administration fees, the largest component of C&IS fees, were $397 million and up 6% year-over-year and up 1% on a sequential basis. The year-over-year performance was primarily driven by new business and favorable equity markets. Performance on a sequential basis was primarily driven by favorable currency translation and favorable markets.

Assets under custody/administration for C&IS clients were $11.3 trillion at quarter-end, up 19% year-over-year and up 4% sequentially. Both the year-over-year and sequential performance was primarily driven by higher markets, new business, and favorable currency translation. Recall that lagged market values factor into the quarter’s fees with both quarter lag and month lag markets impacting our C&IS custody and fund administration fees.

Investment management fees in C&IS of $116 million in the fourth quarter were up 10% year-over-year and up 1% sequentially. The year-over-year performance was driven by new business and favorable markets. The sequential performance was primarily due to favorable markets.

Assets under management for C&IS were $917 billion, up 16% year-over-year and up 2% sequentially. The year-over-year increase was driven by favorable markets and new business, as well as an increase in end-of-period securities lending collateral levels. We’ve had strong success within our liquidity products with significant growth in our institutional cash funds. The sequential increase was primarily driven by markets, partially offset by a decline in period-end securities lending collateral levels.

Securities lending fees were $23 million in the fourth quarter, up 4% year-over-year and up 12% sequentially. The year-over-year increase is primarily driven by higher volumes, while the sequential increase is primarily driven by higher spreads. Securities lending collateral was $153 billion at quarter-end and averaged $164 billion across the quarter. Average collateral levels increased 4% year-over-year and were down 7% sequentially.

Moving to our Wealth Management business, trust, investment and other servicing fees were $425 million in the fourth quarter, were up 7% compared to the prior quarter and up 2% sequentially. Both the year-over-year and sequential increases were driven by favorable markets and new business. Assets under management were $314 billion at quarter-end, up 13% year-over-year and up 4% sequentially. The increases were primarily driven by favorable markets.

Moving on to Page 6, net interest income was $430 million in the fourth quarter and flat compared to the prior year. Earning assets averaged $107 billion in the quarter, down 4% from the prior year. Total deposits averaged $89 billion and were down 4% versus the prior year.

The net interest margin was 1.59% in the fourth quarter and was up 7 basis points from a year ago. The improvement in the net interest margin compared to the prior year primarily reflects a balance sheet mix shift and the impact of lower foreign exchange swap volume, particularly — partially offset by lower short-term interest rates versus one year ago. On a sequential quarter basis, net interest income was up 1%. Average earning assets increased 2% on a sequential basis, while the net interest margin declined 2 basis points.

It’s worth noting that net interest income result for the quarter did include approximately $6 million in various one-time non-repeating items.

During the quarter, we also added to our bank-owned life insurance program that was first put in place during the second quarter. Compared to the prior quarter, this quarter’s net interest income declined by approximately $900,000 as a result of the additional BOLI, while other operating income benefited by $1.5 million. The full quarterly run rate will be reached in the first quarter of 2020, with an additional net interest income decline of approximately $2.3 million and other operating income increase of $2.7 million on a sequential basis.

Looking at the currency mix of our balance sheet for the fourth quarter, U.S. dollar deposits represented 68% of our total deposits. This is down from 70% one year ago and 69% in the prior quarter.

Turning to Page 7, expenses were $1.1 billion in the fourth quarter and were 5% higher than the prior year and 3% higher versus the prior quarter. Compensation expense totaled $463 million and was up 4% compared to one year ago. The year-over-year growth was primarily related to higher salaries driven by base pay adjustments and staff growth, partially offset by lower incentive expense.

On a sequential basis, compensation was up 1%. The sequential increase was partially due to higher salary expense, driven by staff growth and unfavorable currency translation, partially offset by lower cash-based incentive pools. Employee benefit expense of $93 million was up 2% from one year ago and was up 6% sequentially. The year-over-year growth was primarily driven by higher payroll taxes, while the sequential growth was primarily due to increased medical costs.

As it pertains to our benefits expense in 2020, due to changes in underlying assumptions, we expect to see an increase in full-year pension expense of just over $30 million, which represents a 0.7% increase in our overall total 2019 expense base.

Outside services cost of $206 million were up 5% on a year-over-year basis and up 6% sequentially. The year-over-year growth was primarily driven by higher technical services, consulting, and legal expense. The sequential increase was primarily due to higher legal and consulting services, as well as costs related to increased business volumes, including brokerage clearing, market data, sub-custody and third-party adviser fees.

Equipment and software expense of $165 million was up 8% from one year ago and up 9% sequentially. Both the year-over-year and sequential growth were impacted by the previously mentioned software disposition charge of $6.8 million. The year-over-year growth also reflects higher depreciation and amortization, while higher software amortization costs contributed to the sequential increase. Occupancy expense of $57 million was up 15% from one year ago and up 8% sequentially. Both the year-over-year and sequential increases were driven by higher rents and building operation costs related to our workplace real estate strategies.

Other operating expense of $88 million was down 1% from one year ago and down 4% sequentially. The sequential decrease was driven primarily by the Northern Trust sponsored golf tournament in the prior quarter, partially offset by increases in advertising, staff-related, and other operating expense categories.

As we’ve discussed on previous calls, through our Value-for-Spend initiative, which – that we started in 2017, we’ve been realigning our expense base with the goal of realizing $250 million in expense run rate savings by 2020. Our current quarter results reflect approximately $60 million in expense savings or $240 million in annualized run rate savings.

Our efforts around Value-for-Spend and productivity more broadly will not cease as we further embed a culture of sustainable expense management across the company. Expense management is a core emphasis and we continue to focus on striking the right balance between productivity, growth and investing in the business.

Now, turning to full year, our results in 2019 are summarized on Page 8. Net income was $1.5 billion, down 4% compared with 2018, and earnings per share were $6.63, flat with the prior year. On the right margin of this page, we outline the non-recurring impact that were called out for both years. We achieved a return on equity for the year of 14.9% compared to 16.2% in 2018.

The full year revenue expense trends are outlined on Page 9. Trust, investment and other servicing fees grew 3% in 2019. The growth during the year was primarily driven by new business and favorable markets, partially offset by the impact of unfavorable currency translation.

Foreign exchange trading income declined 18%, driven by a decrease in foreign exchange swap activity within our treasury function, as well as decreases in market volatility and lower client volumes. Net interest income increased 3%. Average earning assets during the year declined by 6% while net interest margin increased 14 basis points. The net result was 2% growth in overall revenue on a reported basis in 2019. On a reported basis, expenses were up 3% from the prior year. Adjusting for the expense charges in both 2018 and 2019 that are on the prior page, expenses were also up 3% from 2018.

Now, turning to Page 10, our capital ratios remain strong, with our common equity Tier 1 ratio of 12.7% under the standardized approach and 13.3% under the advanced approach. The supplementary leverage ratio at the corporation was 7.6% and at the bank was 6.4%, both of which achieved 3% minimum requirement.

During the fourth quarter, we declared cash dividends totaling $150 million to common stockholders and repurchased 2.6 million shares of common stock at a cost of $264 million. These two factors combined represent a payout ratio of approximately 113% for the quarter.

Also during the fourth quarter, Northern Trust issued $400 million in perpetual preferred stock at a fixed-for-life dividend rate of 4.7%, callable in five years. Fixed rate dividends through this new issuance are expected to be paid on a quarterly basis with the first dividend declared at our Board of Directors meeting earlier this week and to be paid April 1st of 2020.

Given the November issuance, the initial preferred dividend payment will cover approximately five months and therefore is expected to equal $7.6 million in the first quarter of 2020. Going forward, these fixed rate dividends are expected to be $4.7 million a quarter. The proceeds of this issuance were used to redeem all outstanding shares of Series C preferred stock on January 2nd of 2020. First quarter 2020 results will include $11.5 million and accelerated Series C related costs.

Now, let me turn the call back over to Mike for closing comments.

Michael O’Grady — Chairman & Chief Executive Officer

Before we open up the call for Q&A, I wanted to close by talking about our key financial objectives and our performance against these in 2019. Our primary financial target is to achieve a return on average common equity of between 10% to 15%. For 2019, our ROE of 14.9% was at the high end of that range. This was the sixth consecutive year we have achieved our targeted ROE.

We’re also focused on driving profitable growth and have objectives to achieve both fee operating leverage and positive operating leverage. Although we have achieved positive fee operating leverage in 8 of the last 10 years, and positive operating leverage in 7 of the last 10 years, we did not achieve those for 2019.

As we entered 2020, we are continuing to rapidly evolve the company by providing differentiated services and experiences to our clients and investing in innovative capabilities to do more for our existing clients and gain new clients. We combine this with our intense focus on improving our productivity to profitably grow the company and create value for our stakeholders.

This concludes our prepared remarks. Thank you again for participating in Northern Trust’s fourth quarter earnings conference call today. Jason, Mark and I would be happy to answer your questions. David, could you please open the line?

Questions and Answers:

Operator

Absolutely. [Operator Instructions] And our first question will come from Alex Blostein with Goldman Sachs.

Alex Blostein — Goldman Sachs — Analyst

Hey, guys. Good morning, everybody. Mike, picking up on the last point, I guess when you talk about operating leverage, I guess over the last few quarters, you guys talked about getting organic expense growth to be in line with organic fee growth, not just total fee growth. I guess, question number one there, is the organic fee growth still in the 3% to 4% kind of range as you look out into 2020?

And then secondly, should we expect you to achieve this level of expense growth for the full year sort of despite the fact that markets are starting off on a very strong point and that should naturally create more kind of pressure or more tailwinds rather to fees? And I’m just wondering whether or not the sort of level of expense growth could be sustainable into 2020?

Michael O’Grady — Chairman & Chief Executive Officer

So Alex, I think you’re thinking about the framework the right way, which is, as I mentioned earlier, we are focused on the objective of generating positive fee operating leverage. And underneath that is the goal to achieve that on an organic basis as well, knowing that that is a higher bar, if you will. But the reason why we focus on an organic basis is because, just as you indicated, when markets are stronger, we expect that we’ll get more positive fee operating leverage from that.

It’s more challenging to achieve that in, I’ll call it, lower growth environments than when we do have the tailwinds, but that’s why it’s important to have that primary objective around organic. In 2019, we did not achieve the organic fee operating leverage. And that’s something that, certainly as far as what we’re shooting for, we’re trying to get that so that if we would have achieved it, we would had positive fee operating leverage here for the year. And going into 2020, it’s the same objective.

Now, as Jason talked about and can go into more detail, there are certain aspects of the expense base that roll in. In this case, pension, as he mentioned, for example, $30 million increase for the year. We still look to cover that, if you will, and try to just focus on the productivity objectives to try to overcome things like that as well. So, the goals haven’t changed from year-to-year. We can have different challenges to achieve it. But as far as what we’re trying to achieve, it’s the same objective.

Alex Blostein — Goldman Sachs — Analyst

Got it. Thanks for that. And then Jason, one cleanup for you for an IR. It sounded like there were $6 million of one-time, I believe it was a benefit in Q4. Can you flesh that out a little bit to what are those benefits and maybe help us bridge the kind of the right jumping-off point for Q1 ’20 in IR as we zone anything out on the quarter here? Thanks.

Jason Tyler — Chief Financial Officer

Yes. You’ve got the headline number right. It’s about $6 million. It’s a combination of a couple of different items. There’s some premium amount. And then one thing we didn’t headline much, but we did have a pay-off of a non — of a loan that was on non-accrual, we picked up another $2 million in interest on that. And then the FTE adjustment was a little — was a couple of million dollars higher. So, you add those factors together and you get to the $6 million.

Operator

Thank you. Our next question will come from Jim Mitchell with Buckingham Research.

Jim Mitchell — Buckingham Research — Analyst

Hey, good morning, guys. Can we just talk a little bit about the period-end balance sheet? It really kind of spiked. Is that — should we take that as a sort of transitory? Because if you look at average balances, they weren’t up that much. Or is there something that’s continuing into 1Q that we should maybe up our assumptions around deposit growth given Fed actions etc.?

Jason Tyler — Chief Financial Officer

Yes, you’re right. It was high. I actually looked back to see if this was a record high. It wasn’t, but it was close. But more importantly, it did come — it has come back down. There, obviously, as you know, the balance sheet tends to spike at the end of the quarters and particularly the end of the years. This was higher than normal, not a record, but already we’ve seen more normalization as some of the large clients have put money back to work into the market in different ways.

Jim Mitchell — Buckingham Research — Analyst

Okay, thanks. And then maybe just a follow-up on the comp line and expenses going forward. Just on the — you had a headcount growth of 5%. So how do you — how do we think about that kind of upward pressure from headcount growth versus your desire to kind of the scalable digitization, trying to keep core expense growth below organic growth, but we’re kind of starting off with much higher employee base. How do we think about the comp line specifically?

Jason Tyler — Chief Financial Officer

Well, a couple of things. There may be — you might be looking at Page 7 of the press release and you get the comp line there, and I look at it more on Q4 ’18 versus Q4 ’19 and you’ve got a 4% growth rate there. So, the first thing from my lens is to say, what was the revenue growth, what was really trust fee growth over that time frame? And it was about 6.25%.

So, first of all, on that comp line, even though it’s a tiny bit higher than we’d like to see, we did get leverage in that, which is good. And we’re — in a year where we’ve got revenue up, a lot of our expenses are going to bring — a lot of our revenue growth is going to bring with it expense growth, and it’s going to hit in just about every one of the key expense line items including comp.

The second thing for us to think about is that, in general, we’ve got the technology investment that we’re making. And so that — part of the reason that number maybe a little higher is that some of the tech investments that we’re making in the business are coming through in that comp line.

And third, just so you guys are thinking about it the right way coming into the next year, we’re always going to have effectively, call it, $30 million to $40 million base pay adjustments for the comp line. And so, you think about that on the base of business that we have here, that’s going to lead to almost a point in and of itself in the growth.

So, those are just a couple of ways, different lenses to think about that line item.

Jim Mitchell — Buckingham Research — Analyst

Okay. Thanks a lot, that’s helpful.

Operator

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley.

Betsy Graseck — Morgan Stanley — Analyst

Hi, good morning. Hi, I just wanted to follow-up a little bit on that regarding just technology in general. I know in the past you’ve given some insight on what your tech budget is. Maybe you could give us a little sense as to how you see that trajecting over time. I know you don’t give guidance, but just understand, do you think that trajectory is accelerating, decelerating? And then, how you see that shifting over time comp versus non-comp as it relates to tech? Thanks.

Jason Tyler — Chief Financial Officer

Yes. So, it’s — obviously, we’ve got a high sense of urgency as we think about expenses in general. And tech is where it is outsized relative to the other areas. And so you’re right to hone in on it.

A couple of data points as you think about next year. One is, as I take a step back, we thought about what we wanted to convey that we know about. We don’t want to give guidance on expenses, but we do want to tell you what we know at this point. And there are some things that we have high degree of certainty of, as we said, at this point coming into 2020.

So, I’m going to deal with those in three buckets, just to put those out. One, I hinted to a couple of minutes ago and that comes down to the compensation line. We know that we’re going to see, in general, about — somewhere between $35 million, $40 million just in base pay adjustments based on the business that we have.

Secondly, we talked about pension being a little over $30 million higher. And then third, is we have a sense right now of what IT depreciation is going to look like, and that’s about $40 million higher for the year in 2020 than it was — than it will be as we look back on 2019.

Now, some of that is reflected in the fourth quarter. And so, we can — it’s hard for us to develop much of it, but we do know that on a year-over [Technical Issues]. So, those are three key items that I think everybody — we want to make sure everybody is aware of, that we’ve got clear line of sight on at this point.

Now, second, more broadly as we think about how do we depict the IT budget and the IT increase, it is actually hitting in a lot of different line items. So just we were talking about Page 7 on the press release a minute ago, stay there for a second. And if you look at these different line items, I actually went back and pulled out IT from each of the different components that you can see externally to get a sense of how much they’re impacting those growth areas. Because I do look at, not just comp, which we were talking about a second ago, but all of those line items to try and get a sense of whether we’re getting leverage there.

And obviously the biggest — it hits very heavily in equipment and software, which is why you’ll see that line item be pretty elevated, but there’s also smaller, but still meaningful impact that will hit in, obviously, compensation, employee benefits and outside services.

Betsy Graseck — Morgan Stanley — Analyst

And is it still around $1 billion that you’re thinking the tech budget was in 2019? I recall that was the estimate that was given most recently.

Mark Bette — Director of Investor Relations

Yes. Betsy, this is Mark. Yes, about a — we look at it kind of in a three-year rolling average, so 2019, 2020, 2021; a little bit over $1 billion per year and that includes both operating expense as well as capital investments.

Betsy Graseck — Morgan Stanley — Analyst

Got it. Okay, thank you.

Operator

Thank you. Our next question comes from Brian Bedell with Deutsche Bank.

Brian Bedell — Deutsche Bank — Analyst

Hi, great. Thanks very much. Maybe just a question on NII. Is there any impact on future net interest income from the sale of the leasing portfolio? And if so, if you can quantify that? And then also, if you can talk about what you’re seeing for deposit trends into 1Q so far?

Jason Tyler — Chief Financial Officer

So, on — I just want to write down deposit trends. On the impact of Norlease on NIM, very de minimis increase, nothing to really think about, that pretty clean accounting perspective on how that was hit.

And then secondly, on deposit trends coming in more broadly, I know that it’s — first of all, it’s a strategic focus for us across the business on both the Wealth side and on the C&IS side. And we’ve talked about, on the Wealth side in particular, we’ve told you about some strategic initiatives we had there to bring — that brought some money out of the 2a7 funds on to the balance sheet. That’s held in pretty well.

And then I’d say on the institutional side of the business, it’s more volatile. And there’s no — the initiatives that we have there aren’t as aggressive as what we’ve been thinking about on the Wealth side, but we’re still doing everything we can to make sure we’re getting a good share of our deposits — of the deposits coming in from clients as the custody book grows and as we’re talking to clients across the globe.

Brian Bedell — Deutsche Bank — Analyst

Just doing an averaging basis, is that — you’re expecting growth in 1Q based on those initiatives? I know the end-of-period was elevated, of course, but if we think about it average to average.

Jason Tyler — Chief Financial Officer

No, I think there was — if you think about the asset side and then the funding side, if you think about NIM, the only other item there of note, there was a little bit, a couple of billion dollars higher on that. But that didn’t really come more from the deposit side. It came more from trading related activity. And so, there’s nothing I’d call out at this point that would lead you to say that deposits would be moderately or significantly different.

Brian Bedell — Deutsche Bank — Analyst

Okay. And then on organic growth, I think you commented on Wealth Management, AUM being up mostly from the markets. Just wanted to get a sense, that’s been a strong driver of organic growth for you guys for a while. I just wanted to get a sense of the cadence of the organic growth trends in Wealth Management versus the asset servicing business.

And as you think about expenses, are we still thinking about a comparable growth rate in expense growth? Even with those headwinds that you’ve mentioned on the comp pension and the IT side, is that still reasonable to think of a rate of growth that would be similar to the organic growth, if that’s still like trending towards the mid-single digits?

Jason Tyler — Chief Financial Officer

Well, let me hit the top side first on the growth side and the trends within the Wealth business. The business is continuing to do well. And Mike touched on it earlier this year, and some really nice differentiated approaches that that business has. The market with goals driven Wealth Management resonates very well. And the trend there that continues to be seen and come through on the financials and you guys are able to see this actually is that, that we’re doing well at the very top end of the market.

And so, the family office business is growing faster. We can see that in the numbers we report on both a sequential basis and a year-over-year basis. That trend has been going on for a while and it’s attractive.

And then the second component is how we’ll see the expenses align differently between the business. I’m going to separate it in a couple of ways. One is that the tech-related expenses apply a little bit more towards the C&IS side of the business. As we think about things like metrics and our strategic operating model, those things are going to be allocated a little bit more for the C&IS side of the business.

That said, the Wealth side of the business is also investing in different ways. And they’re working hard on digitizing the business. Mike talked about that earlier that we’re probably a little ahead in our investments there on the C&IS side. Wealth is starting to think more about how to reflect the digital transformations that we’ve seen across the marketplace and how we can take our position with things like goals-driven Wealth Management, make it even more accessible to clients, have even better interactions and have better foundational technology.

Brian Bedell — Deutsche Bank — Analyst

And we’re still thinking about organic growth in that sort of mid-single digit area on a go-forward basis, low to mid single digit?

Michael O’Grady — Chairman & Chief Executive Officer

Brian, just to confirm, are you talking about Wealth or the corporation as a whole?

Brian Bedell — Deutsche Bank — Analyst

The company as a whole.

Michael O’Grady — Chairman & Chief Executive Officer

Yes. So maybe just to address that, Brian, kind of across the businesses, so Jason talked about Wealth Management. We continue to see, as you mentioned, healthy solid growth in that business. That’s the nature of it. And again, our strategic imperative in that business is to increase or accelerate that growth even more.

We’re still seeing a higher growth rate in our asset servicing business. And so that continues. It’s at the lower end of its range, but it continues to grow at a healthy rate. And the strategic imperative for that business is, yes, to continue that growth, but we want to see that growth be more scalable.

And then I would just also add, with our asset management business, we’re all well aware of the secular trends in the industry there. And I would say that’s certainly impacted our asset management business, although comparatively the business is performing well. And so, it’s experiencing positive organic growth, just meaning they’re able to increase the flows, but also then change the mix in such a way that is offsetting the fee compression that you’re seeing across the industry. So, it’s positive.

Having said that, it is at a lower rate than the other two businesses. So, you put that all together, to your point, we’ve talked about the organic growth rate for our fees at the company level kind of being mid-single digits. That’s still the case. We’re at the lower end of that right now.

So, what does that mean? Well, that’s why we’re focused on our growth strategies and executing on those, but that’s why one of our other key priorities for the company is on continually improving our productivity.

And when we are at the lower end of the growth side, we have to work just that much harder on the expense side to get more savings, if you will, on the expense side. So, that’s the strategy, if you will. And again, focused on trying to execute that so that we can deliver the positive fee operating leverage.

Operator

Thank you. Our next question comes from Ken Usdin with Jefferies.

Ken Usdin — Jefferies — Analyst

Thanks a lot. Jason, could you expand a little bit more on — underneath the fact that you said that some of the balances might have gone off the balance sheet, can you help us understand either how much you saw as like over-growth in the earning assets this quarter?

And then secondarily, if rates stay stable from here, can you talk us through the dynamics of NIM in terms of how much asset repricing has to come through and how much deposit repricing you could still see happen now that we’ve gone to a more stable level? Thanks.

Jason Tyler — Chief Financial Officer

Sure. So, on the first, I think it’s — as these spikes happen late in the quarter, it’s frankly relatively short period of time that these spikes are on the balance sheet. And so, it comes in late and it leaves pretty early. And so — and we’re not doing anything fancy when those dollars come in, and so it frankly just doesn’t impact the overall NIM very much.

It does spike — we’re obviously looking at the balance sheet on a daily basis. It spikes it and — but it doesn’t — I don’t think it really drives NIM that much at the end of the day.

And then as we look out into next quarter, I don’t think that spike should necessarily be reflected in your thought process as you think about. So that’s more from a volume perspective. As you think about — although I did hint earlier that, kind of that $2 billion increase in the securities portfolio, I do think that’s likely to come down. And that had more to do with, I think more idiosyncratic trading that was happening at the time, nothing abnormal. We just were trading some more longer-dated securities and the security settlement process led to higher securities being on. That’s really what led to that little bit of an average increase, and I think that will abate.

As we think about the rates going forward into first quarter, the thing that we can all see that will have maybe more of an impact than what people realize is that fed funds to LIBOR spread. And that did have an impact in fourth quarter. And when we talked to everyone at the conference we attended and then on the last call, we were looking at a spread there that is more probably 13 or 14 basis points, and we thought that was going to go away. It actually held in. It even expanded a little bit. But now that compression that we anticipated has actually come to fruition.

And if you look at that delta right now, it’s more on the 9, 10 basis point land. And so that is the factor that, if that holds in, that would have an impact on what we would think about for NIM for next quarter.

Ken Usdin — Jefferies — Analyst

Okay. And then do you have the ability to reprice much on the right side of the balance sheet? If you could just talk us about customer dynamics outside of just your market index type of deposits? Like, how is the discussion going with clients and what opportunities do you still have to reduce rate?

Jason Tyler — Chief Financial Officer

Yes. It’s just so incredibly different between the businesses. And so, on the institutional side, first of all, the deposits there are driven a lot more by our EMEA clients. And then in that book, those clients are shopping in real time. And so, we’re making very tight decisions on those and we can only — we’re going to get what the market gives us frankly. And so — and we’re not in a position to be a price leader there.

And on the other side of the business, the wealth business, very different dynamics. And there we talked again about the fact that we sunsetted an anchor suite product and we brought assets from the 2a7 funds out of the balance sheet. We’re looking much more there and can think about what we want to be strategically in the marketplace.

And to give you some headlines on how we talk about it, we do want to — we want to be very attractive for large depositors. And so that’s where we’re going to be much more competitive. And for more of the retail client base, we’re going to be less competitive. And — but at the top end of the market there, we’re always trying to figure out how to attract and be extremely aggressive about retaining our top depositors.

Operator

Thank you. Our next question comes from Steven Chubak with Wolfe Research.

Steven Chubak — Wolfe Research — Analyst

Hi, good morning. So, just wanted to start off with a question on capital. I know that in the past, you’ve discussed the business need to manage to higher ratios to ensure you don’t deviate meaningfully at least from some of your G-SIB peers are running closer to 12% plus, given that you’re competing with some of these firms for RFPs. And could you — I was hoping you can maybe just unpack or speak to some of the competitive considerations such as RFPs versus regulatory constraints.

It looks like the regulatory changes are swinging in the right way in terms of SLR relief, potential for the elimination of leverage constraints and CCAR. I’m just wondering if some of those changes come through, how that informs your willingness or appetite to manage to a lower target over time.

Michael O’Grady — Chairman & Chief Executive Officer

It’s Mike. Why don’t I start off? So, first of all, as you would expect, we feel very good about our capital levels and our flexibility with regards to capital. As you’ve highlighted, we are always cognizant and focused on what the implications would be on the business for our capital levels and that can play into formalized RFP processes where, yes, we want to compare favourably to some of our competitors, but also just more broadly, and I’ll say even subjectively, with our Wealth Management business, dealing with large family offices, they are looking for safety and security, conservative strong balance sheet. And so, it’s a part of the business strategy for us.

Having said that, like any resource, it needs to be balanced. And so, we’re comfortable with where we are. To your point, we’re cognizant of where our competitor capital levels are. And to the extent that those move, that gives us more flexibility on that front.

And then the last thing I would add is from a regulatory lens. As you’ve talked about, there are changes on the regulatory front. Having said that, they’ve also recently re-categorized banks. We’re a Category 2 bank. We happen to be the only Category 2 bank, which we take as a compliment, reflecting the unique nature of our business model. But it also does mean, once again, we have to work our way through whatever changes that may mean as far as capital management for us. We’re not concerned about anything per se, but there just is some uncertainty until they fully roll out the implications of Category 2 on capital management expectations.

Steven Chubak — Wolfe Research — Analyst

No, very helpful color. And just one follow-up from me. Just a cleanup question on the other income line. Even when we adjust for the one-timers in the quarter, it looks like that was a source of revenue strength, and I was hoping to gauge the sustainability of some of that strength versus the $50 million core level in 4Q. And just given some of the guidance on BOLI related impacts, how we should think about what could be a reasonable or appropriate run rate for that line in 2020, recognizing there’s always mark-to-market and other noise?

Mark Bette — Director of Investor Relations

Steven, hi, it’s Mark. As you said, if you adjust for the lease, we would have been at closer to the $50 million mark. There was — the BOLI benefit came into that line that will continue to have a little bit of a bump up in the first quarter, like Jason said.

I would say that the mark-to-market adjustment on the Visa was favorable this quarter, about a $5 million sequential benefit, which — there was more of a negative drag on that last quarter for some of the adjustments that we made there. This quarter, when you take that into account as well as the BOLI, we did have a little bit higher miscellaneous income and credit and bank related fees, probably higher than normal.

One way that I would say that you can look at that line because it does move around is if you do strip out some of the non-recurring items that we’ve had in that line, you’re probably looking at an average of about $35 million over the last several quarters. And then in theory you can layer BOLI on top of that. Now, that would be one way to look at it.

Steven Chubak — Wolfe Research — Analyst

All right. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Brennan Hawken with UBS.

Brennan Hawken — UBS — Analyst

Hey, good morning. Thanks for taking my questions. I just had a follow-up from a few of the questions that have been asked so far, and just wanted to try and frame it in the best way to think about 1Q NII. And Jason, I know — welcome to the circus, our quarterly circus here with your conference call.

I know your predecessor had started to help us think about one quarter out NII. I know that was a departure from Northern’s normal course of business. I don’t know what your plan is going forward. But it does seem like there’s a lot of noise. So, if you could help us frame how to think about 1Q, you guys sold some of the lease portfolio. So, I’m guessing we need to shrink that average earning asset bucket a bit. We’ve got an over-earning of about $6 million. You’ve got the tighter fed fund to LIBOR. How should we think about how all this will weigh on NII as we go into 1Q based on what you’ve seen so far?

Jason Tyler — Chief Financial Officer

Well, I think you — Brennan, I think you got all the pieces. The way I think about leading into it, another couple of items. One, you talked about the one-timers, those — it’s really $5 million, $6 million.

Secondly, I mentioned the LIBOR-fed fund spread. I think that’s a very important one, as you think about how to model this out. And then you mentioned BOLI, which, having that in place now for a full quarter, because remember, we didn’t have it in place last year. The benefit of that, even if you just assume the same type of economics that we experienced this time, should be a positive $5 million.

And then lastly, we haven’t talked about day count. It is going to work against us, if you’re thinking about it on a sequential basis. We’ll go from 92, not to 90, but to 91 with leap year. And so those are the — in my mind, those are the big four buckets to use as a starting point.

Brennan Hawken — UBS — Analyst

Okay. Thanks for that. And then when we think about the average balance sheet, it looked like there was a big — a bit of a jump in the other liabilities this quarter. And it’s at the highest level that it’s been in a couple of years by about $1 billion. Should we — is that temporary? Obviously, it was enough to skew the average balance for the fourth quarter. So, is there something unusual happening that will prove sustainable or should we just expect that to wind down in 1Q?

Jason Tyler — Chief Financial Officer

No, as I was hinting at earlier that had to do with more of the nature of the securities that we’re trading that had more time and we’re in settlement mode for longer. And so that’s what I think will drive, bring that, the securities portfolio, down to a more normalized level.

Brennan Hawken — UBS — Analyst

Okay. Like, TBAs or something?

Jason Tyler — Chief Financial Officer

Mortgage — yes, maybe [Indecipherable] TBA mortgages, just some — nothing that we don’t normally do. Just a little higher mix of those items that led to higher level of security sitting. And obviously we’re not getting the yield on those as they’re sitting and settling up. The other thing I just mentioned, I think it’s — you’re right, there is kind of a lot of question about where NIM is going, and we had gotten in a mode of talking about what we expect in effectively providing guidance.

And I’ll say at this point, we do think NIM will be down 2% to 4% — NII will be down 2% to 4%. And so, it’s not to say that every quarter we’re going to give that. But I do think — we gave you guys a handful of different items that you had to square off to get a good launch point. And so, I think putting it out there this quarter is fair.

Brennan Hawken — UBS — Analyst

Okay, it’s terrific. And that’s off the reported number in 4Q, right? The 107, what we should base that minus 2% to 4%?

Jason Tyler — Chief Financial Officer

The — off of the reported net interest income of $430 million.

Brennan Hawken — UBS — Analyst

Sorry. Yes. Thank you.

Jason Tyler — Chief Financial Officer

And so that’s not indicating — just to be super-fair, it’s not indicating the 159 is going to be down 2% to 4%. Just the 430 million in dollars, we’d expect to be down about 2% to 4% based on the items I walked through.

Brennan Hawken — UBS — Analyst

Got it. NII, not NIM?

Jason Tyler — Chief Financial Officer

Right,

Brennan Hawken — UBS — Analyst

Thank you.

Operator

Thank you. Our next question comes from Michael Carrier with Bank of America.

Michael Carrier — Bank of America. — Analyst

Good morning. Hi, thanks for taking the question. I don’t want to focus too much on one year, but when you look at the — like, not hitting the op leverage target, was that more of a function of higher necessary investments that came up during the year or was it lighter organic growth than maybe expected? And since you mentioned some of the expense items heading into 2020 on comp, pension and tech, are there any areas like maybe real estate that you could see some savings, given some of the repositioning that you guys have been working on?

Michael O’Grady — Chairman & Chief Executive Officer

Yes. I’ll start with the second, which we have mentioned that we expect occupancy to be higher in the short run as we’ve got some double rent payments that we have effectively. In short, those have been close to it where we’re going through a transition of a very large number of sheets from a building we’ve been in for a long time in Chicago to a new building.

We’re starting to move people in this month. A lot of the move is going to take place next month. And so, we’re right in the midst of that. And so, you can imagine we’re still obviously paying rent in the old facility and also we’ve started the new facility. There is a lot of work that goes around, making sure that move is taking place. And there are other areas around the footprint overall from a real estate perspective that’s going to lead to a higher level of rent in the first half of this year.

Now, in the second half of the year, we should get some benefit from that. And so, that’s something that we’ll actually see come down. We’ll eventually grow into that run rate, but we’re expecting to actually see that line item come down second half of the year.

Mike, anything you want to add to that?

Jason Tyler — Chief Financial Officer

Yes, just to the first part of your question there about the year, and again, it is a year, but part of the trend there and so what came out of that. One, much broader perspective pulling back from it is if you look at our expense base overall, the — I mean, the com technology expenses, so this is the expenses for our technology group and the IT depreciation and amortization, represents about 20% of our cost base and that grew at 8%.

If you look at the other 80% of our cost base, it grew at about 2%. And so I would say across that 80%, for the most part, we hit on the costs related to the business, to bringing on new clients, and importantly, hitting on our Value-for-Spend initiatives and the objectives there. So, it’s not that we didn’t achieve those.

And then you say, well, on the technology side, what happened there? And there, if you think about technology or as I think about technology, there’s three primary things that we’re trying to achieve there. One is security; two is stability, and three is scalability within our technology.

And if you look at the costs that were related to that in the year, there were costs that we had on the safety and stability part, which ended up being higher than we would have expected going into the year, but I think that you absolutely do in order to make sure that you are being able to provide the value proposition, if you will, for your clients.

And then likewise on the scalability, there are certain aspects of that where the greater demand for, I’ll call it, just computing power, if you will, on the part of our large asset manager clients on some of the asset owner clients, we’re just in an environment where there’s greater activity and we didn’t achieve the level of, I would say, scalability on our platform that we need to be able to achieve.

So, with each of those three, not only are we trying to ensure we have a strong, safe, stable, secure platform, but we want to increase the scalability on that.

So, a lot of the focus of our technology strategy beyond kind of digitizing the business and providing new capabilities for our clients is also saying, how do we also get greater productivity out of that platform?

Michael Carrier — Bank of America. — Analyst

Okay. That’s helpful. And just a quick follow-up. Tax rate was a little bit lower. You guys mentioned some of the drivers. Jason, I just — any, like, change in terms of the range that you guys typically expect when we think about going forward?

Jason Tyler — Chief Financial Officer

I’ll start. This quarter had some impact even from Norlease, some other small items, none of which in and of themselves worth calling out. But I don’t think you should expect us to be at the 22% level. And we talked — I think Biff mentioned last time on the call, something in the 24%. I do think 24% is a better longer-term assumption at this point.

Michael Carrier — Bank of America. — Analyst

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Rob Wildhack with Autonomous Research.

Rob Wildhack — Autonomous Research. — Analyst

Morning guys. On the C&IS business, can you give us an update on what you’re seeing in the competitive landscape and on the pricing front? And then maybe more broadly, when you think about the conversations you’re having with clients, have those discussions changed in tone or content at all recently? And how would you expect them to evolve going forward?

Michael O’Grady — Chairman & Chief Executive Officer

Sure, I’d be glad to talk about it. So, there is a tremendous amount of activity in C&IS broadly, and specifically, I would say, asset servicing. And I would say a lot of these changes, well, certainly they create challenges. We’re very optimistic about the growth opportunities that are out there. So, if you just give me a minute to run across, I think I can address some of these trends that you’re looking for.

So, if we think about asset owners, even in the parts of the asset owner space that you might think about as being more stable in just their operating models, they have greater needs. And greater needs certainly lead to more opportunities for us.

So, if you think about the not-for-profit sector, healthcare is an area that continues to grow and presents opportunities for us to manage the assets of large healthcare organizations. Universities, where you have endowments. And also, the foundation space, they’ve increased the mix on the investment side to greater use of alternatives. And as a result, they have greater needs for how they manage those portfolios and those managers. And that’s why we’ve invested in and are rolling out what we call front-office solutions, because that gives them the capability to do that.

If you look in Australia, for example, some of the large superannuation funds, not only has that been a great growth opportunity for us over the last decade, but likewise, you’re seeing consolidation within the superannuation complex, which again presents changes in the marketplace and opportunities for us.

And the last thing I would say in the asset owner space is, more of the very large sophisticated clients, so if you think about the sovereign wealth fund, are actually in-sourcing some of the asset management as opposed to allocating a lot to asset managers. What that requires is then they need to have the capabilities to operate as asset managers. So, they have greater data needs and the nature and timing of what they need is greater. And so that provides opportunities for us. That drives a lot of the investments that you hear about because it’s now putting them in a different position.

And then if I shift to the asset management space, we talk a lot about the pressure of the secular trends. And we feel that in our asset management business as well, but it does create opportunities for us on the asset servicing side because it causes these asset managers to look at every aspect of their business, including the operations side. And so that presents opportunities for us where they’re looking to outsource more activities.

Now, historically, as you know, that’s meant mostly middle-office and what we do in IOO. We are seeing more of those types of opportunities in the marketplace, but there are also some new activities that previously were just largely done in-house by everybody that they’re now saying: Why should they do those and it should be a part of their outsourcing solutions.

So, if you think about the trading side where we have integrated trading solutions, that’s really an outsource trading service that we would provide to them, that enables them to essentially move something that’s not core to them and that we can do it better and more efficiently for them, and there are other opportunities like that.

I would also just continue with the asset managers to the alternative space where, for years, the hedge fund space has presented growth opportunities for us. Our hedge fund services business continues to grow nicely, win large mandates, as you saw this last year.

But then also, for us, in the other parts of the alternative space, so thinking private equity, infrastructure, real estate, those are areas where we’ve had less of a market share or market position there, but it presents larger growth opportunities for us going forward.

So overall, a high level of activity and that’s why when we talk about the growth, we’re optimistic about the growth and we just want to make sure that we’re able to bring that on in a scalable way so that we get very profitable growth in the business.

Operator

Thank you. Our next question comes from Vivek Juneja with JPMorgan.

Vivek Juneja — JPMorgan — Analyst

Hi, thanks. A couple of questions. Mike, just following up on that last question, so you talk comprehensively about a lot of the volume related opportunities. How about pricing? What are you seeing as you continue to expand into all of these new areas?

Michael O’Grady — Chairman & Chief Executive Officer

Sure. Good point. And there is no doubt clients want more for less, and that cuts across all parts of that sector there. So, we look at the fee pressure in the asset servicing business as just ongoing. So, we don’t necessarily see, I would say, a repricing cycle per se that starts and then ends and then we don’t do anything. It’s ongoing for us, and that’s part of the organic growth equation.

So, we’re always netting out the — not only if we lose a client or they drop of service, but also if there is repricing that happens in order to maintain the client.

Now, the other aspect of that, which is just a dynamic with that business is, because large portions of it are based on the asset levels, the pricing is based on the asset levels. And so, as you see greater appreciation in the markets, then that does mean, yes, we get the benefit where the fees go up, but that’s then when you see greater fee pressure.

So, it’s terrific for us that the markets are going up. It does then create more focus on the parts of the client base to look at their fees. And that’s why overall what we’re trying to do is balance that, but also broaden these relationships, do more for them, so that they’re still very profitable relationships overall.

Vivek Juneja — JPMorgan — Analyst

As you’re trying to build all of these areas, and as you said, you need the tech capabilities for that; is there room to bend the growth rate of that tech spend a little bit or not quite yet?

Michael O’Grady — Chairman & Chief Executive Officer

We believe that there is. Mark talked earlier about, when we think about our tech spends, you have the expense side of it, which we focus a lot on here, we talk a lot, and Jason has mentioned the increased amortization cost that comes through.

Well, the other piece of that is that capex piece that Mark mentioned, which is the capitalization of those costs happen now, they manifest themselves in expenses later. And that’s an area where, not only we’ve been focused, but I think there is much more opportunity when you think about how technology has developed these days, to be able to do it in a more cost-efficient way. I think you’re all familiar with agile and other methodologies.

Well, we’re deploying those, but it’s still in the earlier stages. That, in my mind, will produce savings that first hits through more efficient capital spend, and then later over time, it results in lower amortization.

Vivek Juneja — JPMorgan — Analyst

One more if I may on the funding side. Your non-interest bearing deposits did pretty well. They actually turned around and grew again in the fourth quarter. And conversely, your short-term borrowings have been shrinking over the course of 2019. So, can you comment on both those? Is — have non-interest bearing deposits basically turned and should be growing or what’s your outlook of that and what do you plan to do with short-term borrowings?

Jason Tyler — Chief Financial Officer

You want to start, Mark?

Mark Bette — Director of Investor Relations

Yes. On the demand deposits, we did see an increase sequentially, Vivek. I don’t think that we’re calling this an inflection point. We’ve talked before over the last several quarters, we do have, especially I would say on the institutional side, fluctuations that occur quarter-to-quarter with clients either positioning their assets on or off balance sheet depending on what they might be doing with their own capital investing.

So, I don’t know that we would call out a specific new trend on demand deposits here, starting with what we just saw in the fourth quarter. We’ll have to see how that plays out over several quarters. And on the short-term borrowing side, I would say there that is a — if you look back a year ago, three, four, five quarters ago, I would say that some of the discretionary leveraging that we are doing within the treasury area was running at a higher level. And now, at this point, over the last couple of quarters, we’ve kind of had that down to a lower level. And that manifests itself both in wholesale deposits on the non-US office line, but also on those short-term borrowings.

So that — it’s really just a function of the leveraging opportunity to kind of gross up the balance sheet. The trade there isn’t at the tripping point where we would actually go through with that. So, we’ve kind of reduced some of that discretionary leveraging that we do.

Jason Tyler — Chief Financial Officer

It’s not to say we wouldn’t do it again. Just the rate environment today just isn’t providing that trade for us.

Operator

Thank you. Our next question comes from Jeff Harte with Piper Sandler. Mr. Harte?

Jeffery Harte — Piper Sandler. — Analyst

Sorry about that. Can you hear me now?

Jason Tyler — Chief Financial Officer

Yes.

Jeffery Harte — Piper Sandler. — Analyst

So, let’s talk about expenses, but kind of with the growth you guys can deliver on the top line, I tend to think a little more of kind of margins. In 2019, ex-items saw kind of our first pre-tax margin compression in what’s been a number of years.

Looking to 2020 and given that you need to keep investing and the current rate environment and with kind of organic fee growth that’s near the bottom end of the kind of range, should we expect a return to margin expansion in 2020 even with those kind of things facing us?

Michael O’Grady — Chairman & Chief Executive Officer

Yes. I’ll start. Before we get to pre-tax margin, we’re looking at our expenses relative to our fees. And the reason why we do that is just the nature of the expenses and how they’re lined up against the different revenue streams. And so, there’s no question we’re focused on positive fee operating leverage. That’s because we’re saying we want to bring down that ratio first. And on that front, again, it’s affected by markets and other things, but that’s why we focus on the organic part because we want to be able to drive that down.

Then if you go to the pre-tax margin, yes, some of that flows through, but as you know then, it gets much more impacted by what’s happening with the other revenues; to some extent, things like FX and the other income lines, but mostly net interest income.

And we’re trying to provide what we see in the marketplace as far as deposits and deposits pricing and things like that and quarter-by-quarter, but that gives you some indication of, as we know, from not only last year, but every year, it’s really hard to project interest rate and that’s a big factor that drives in it and it’s also tough at times to predict client deposit activity, and that drives in it.

So, that’s just saying, it’s not that we aren’t focused on positive operating leverage as well. It’s just there are more factors that frankly are out of our control and it is difficult to forecast, to be able to answer a question of, like, well, then, are your – is your pre-tax margin going to go up or down. We certainly are aiming for it to go up, but there are things that are out of our control.

Jeffery Harte — Piper Sandler. — Analyst

So, when you think of kind of the interest rate environment holding stable and some of that market stuff like FX trading that’s really declining, this pre-tax margin kind of expansion should — is potentially attainable?

Michael O’Grady — Chairman & Chief Executive Officer

Yes, it — depending on the environment, you’re right. It can make it more difficult or it can give us a tailwind.

Jeffery Harte — Piper Sandler. — Analyst

Okay. And secondly, with the preferred issuance and redemption, can you just review what kind of we should be thinking about the net impact on preferred dividends next year? I know there’s some weird stuff in the first quarter, but then even after that, what kind of run rate we should be looking at?

Mark Bette — Director of Investor Relations

Jeff, it’s Mark. Yeah. So, when you look at — if you look back at what our prepared remarks were, the new Series E will have essentially, call it, a five-month dividend in the first quarter, which would be $7.6 million. There’s also some costs from Series C that we would also need to recognize upon redeeming it in the first quarter. So, that’s $11.5 million. And then we have the Series D, which you see, in the first and third quarter of each year.

So, if you take all that into consideration, at this point, our expectation is, you’re probably looking at a preferred dividend right around $30 million, $30.5 million in the first quarter. And then in the second quarter, you come down to the normal new dividend for Series E, which is $4.7 million. And that would be the new run rate in the quarter where we don’t have the Series C. Hopefully that helps. We could talk through it offline, if you’d like.

Jeffery Harte — Piper Sandler. — Analyst

Okay. That’ great. Thank you.

Operator

Thank you. Our next question comes from Brian Kleinhanzl with KBW.

Brian Kleinhanzl — KBW — Analyst

Just a quick question on all these expenses. I mean, you have a normal expense investment that you’re doing. Was the three items that you laid out, the pension expense, the base pay adjustment, the IT depreciation included in that growth rate already? Are you saying that you’re investing and then you have to still consider these three additional items that are going to be on top of it?

Jason Tyler — Chief Financial Officer

Portion of it. So, the base pay adjustments are always — that’s always factored into how we think about our expectations for expense growth. The pension is obviously anomalous, and that’s one that — it’s not forecast, and Mike mentioned earlier, we’re not ignoring it. We’re still – we still want to do everything we can to get leverage in that.

And then the depreciation increase, we’ve known that we’re going to be leaning into more IT spend in the short run at least. And so, I’d say the base pay adjustments fully factored into our long-term assumptions. The pension not, but we’re still working hard to try to even cover that. And then the third element of IT depreciation, part of that’s already in the run rate.

And so that’s the key element there, but the increase itself is one we have to own it. And we’ve got it — there’s is a high sense of urgency about making sure we get leverage across each of the key expense items including equipment and software. At some point that’s going to be difficult to do in the near term, given we’re trying to do it strategically, but certainly the BPA and a portion of the depreciation reflected in our long-term expectations.

Brian Kleinhanzl — KBW — Analyst

Okay. And then separately, in the asset management, I hear again that the organic growth not kind of where you want it to be. I mean, at what point do you need to do something bigger with regards to restructuring the unit or taking more strategic actions there? Thanks.

Michael O’Grady — Chairman & Chief Executive Officer

I think within the asset management sector that our asset management business is performing very well. We talk about the environment a lot just because it is going through a secular change, but if you just looked at the competitive positioning, if you looked at the growth relative to others and then you look at the profitability, it’s performing well. And I would say, strategically, we feel very good about how the business is repositioning itself.

And what I mean by that is, we’ve been strong and had scale in certain areas like liquidity, like index for a long time. And what we’ve been doing though over the last few years is repositioning towards some of the higher growth, but also more value-added areas, which I talked about. So, quant, ESG, things like that. And so, those areas, although they represent a smaller portion of the pie, if you will, they are growing, they are resonating/ But like any longer-term strategy, it takes time before you see the impact of that from a financial perspective.

But as far as thinking bigger, if you will, I would say we are – and I just talked about, I’ll call it, the product side of that. We’re also looking – not looking at, but have been executing on our strategy on the distribution side as well, and it’s going well, I would say, on the institutional side. You saw that not only in the fourth quarter, but the second half of the year where that’s gone well.

But then you also saw last year that we acquired a business that is very small, but — Emotomy, which is essentially a technology platform, which we are utilizing in the intermediary space. And we think, again, that’s the type of capability that will enable us to accelerate the growth rate that we already have within there. So, yes, secular change, but we feel very good about our strategic positioning there.

Operator

[Operator Closing Remarks]