Northern Trust Corporation
Q3 2013 Earnings Call Transcript

Published: 16 Oct 2013

[Operator:]

Good day, everyone, and welcome to the Northern Trust Corporation Third Quarter 2013 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, Bev Fleming, for opening remarks and introductions. Please go ahead.

[Beverly J. Fleming:]

Thank you, Marquita. Good morning, everyone, and welcome to Northern Trust Corporation's Third Quarter 2013 Earnings Conference Call. Joining me on our call this morning are Mike O'Grady, Northern Trust's Chief Financial Officer; Jane Karpinski, our Controller; and Allison Quaintance from our Investor Relations team. For those of you who did not receive our third quarter earnings press release or financial trends report via e-mail 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 presentation -- earnings review presentation, which we will use to guide today's conference call. This October 16 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available through November 14. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our Safe Harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those indicated by these statements because the realization of those results is subject to many risks and uncertainties. I urge you to read our 2012 Annual Report and our periodic reports to the Securities and Exchange Commission for detailed information about factors that could affect actual results. [Operator Instructions] Thank you, again, for joining us today. Let me turn the call over to Mike O'Grady.

[Michael G. O'Grady:]

Thanks, Bev. Good morning, everyone, and welcome to Northern Trust's Third Quarter 2013 Earnings Conference Call. On today's call, I'll review our third quarter results, update you on our Driving Performance initiative and comment on our capital. Bev and I will then be glad to answer your questions. Before I review our results, I want to point out that our Board of Directors, at its meeting yesterday, approved the name change of 2 of our business units

[Operator:]

[Operator Instructions] We'll take our first question from Luke Montgomery with Sanford Bernstein.

[Luke Montgomery:]

In terms of foreign exchange, it's still a very depressed revenue line, but I think it was better than I expected anyway. Maybe some of that has to do with volumes being better than some of gauges indicated. But I know you've been taking steps to replace some of the revenues that were lost due to transparency and lower spreads. So I'm wondering if those steps had an impact this quarter. And if not, what is your expectation about when we might see some of the benefits? And I guess, you could review the steps as well.

[Michael G. O'Grady:]

Sure. So you're right. We have taken some steps in the foreign exchange area. And these go back about a year ago where we changed the -- a couple of the folks that are running that business. And as part of that, they did, I would say, 2 things primarily. The first is really taking a hard look at how we provide the service to our existing clients and looking to make sure that we are providing the best level of service and execution for them. Part of that is from a service personnel perspective, but part of it also is from a technology perspective. And as you heard me mention earlier, in the quarter, we've put into place a new front office trading platform for FX, which I think has enabled us to better serve our existing clients on the custody side, and as a result, see some improvement in our market share there. The other big step that we've taken is to look to grow the business outside of our custody clients, to do more third-party FX trading with some of our fund services clients. And on that front, we've made progress, but I would tell you from a financial perspective, we're only seeing a very modest impact in the third quarter and would expect that we'll see much more down the line.

[Luke Montgomery:]

Okay, great. That's helpful. And then my follow-up question, I know I've been harping on this a bit lately, but have you given more thought to increasing the disclosures around the components of net new business and organic growth? I mean, it seems like to me you have a good story to tell here, and since your organic growth is better than peers, and I think that gives you a good opportunity to set the disclosure bar for the industry. So I'd like to know what considerations you're mulling over and whether we could expect that?

[Michael G. O'Grady:]

Yes. We definitely take your considerations and others into account on that front. As you can imagine, the primary objective for us, first, would be to make sure that any information that we provide to you is accurate and reliable. And on that front, when it comes to looking at new business, we look at new business in a number of different ways, whether that's assets that are coming in the door, whether that's the associated revenues that come in the door with that. And we also carefully track business that can either be lost or where the revenue streams are decreasing. And what we don't want to do is paint a picture with the data on the front end saying, here's this new business we have, but not have that appropriately correlate with what you're seeing in our actual financial reporting. And so that's what we've been trying to make sure that is aligned as much as possible. The other part around that is making some advancements again on the technology front to be able to track, whether it's Assets Under Management, Assets Under Administration, Assets Under Custody at a very detailed level, all the inflows and outflows so that, that will help us be able to provide some of that information that you're looking for.

[Operator:]

And our next question comes from Alex Blostein with Goldman Sachs.

[Alexander Blostein:]

Mike, you've been loud and clear around the burden of some of the regulatory and compliance-related items on your expense base this year, and that's obviously coming through in the numbers. But as we try to think about 2014, it sounds like the incremental build might not be as onerous as it has been I guess this year. So when you think about the expense growth heading into 2014, should we, I guess, expect to see some easing at least from that bucket?

[Michael G. O'Grady:]

Sure. So one of the things with regard to new regulations, for example, whether that's CCAR, resolution planning, et cetera, we first of all want to make sure that we are building the capabilities in-house to be able to continue to comply with those requirements as they increase as well. But at the same time, at certain time periods, it's necessary and frankly even more financially appropriate to use outside resources to do that. And in 2013, with the higher level of either new regulations or new levels, so for example for us to go from CapPR to CCAR and also submitting our resolution plan for the first time, we have had to supplement the internal resources with more external resources. So that is what you've seen. Now going forward, what we don't know is both the increase in level of the existing regulations. So for example, with the CCAR and the capital planning, do they raise the bar even further going forward, which we think they will do. And also, you have other regulations, which were still frankly in the earlier days, so AIFMD in Europe is still in the early days and really we'll see more of that implementation in 2014. So at this point, we're hesitant to say that those external costs, if you will, are necessarily going to go down when we don't know exactly what the requirements will be next year. Having said that, Alex, it is something where you can imagine we are very keenly focused on trying to be as financially careful as possible in how we manage those costs through the process. I think it would be easier frankly to hire significantly more external resources just to get these various initiatives completed. We've tried to balance that with building the capabilities and doing it in a cost-effective way, and we'll certainly do that going forward too. So we would like to bring some of those down.

[Alexander Blostein:]

Got it. All right. I guess I was just trying to get to, if they don't go down, which I don't think many people are, I guess, too hopeful that they would, but if they don't go down and just given the fact that you had a big ramp this year, I guess the pace of that ramp might slow next year. Is that the way to think about it?

[Michael G. O'Grady:]

Yes, I think that's a fair expectation.

[Alexander Blostein:]

Great. And then my second question was just on securities lending business and I think this is something we haven't actually talked about in a while. But I guess if I look at the collateral balances for you guys this quarter, they're at the highest level we've seen in almost 2.5 years. And I know for the industry in general, it has obviously been a struggle with the lack of sort of demand from the end users. Are you starting to see, I guess, a shift in that or what would you attribute the growth in the balances to this quarter?

[Michael G. O'Grady:]

Yes. I would say that the shift in the balances has to do as much with just the mix of the demand, the type of securities, so areas where we've just had more demand than we have in previous periods. But I would not say that overall, we're seeing a significant shift in the demand for this. And as much as you do see that somewhat in volumes, you also really see it in spreads as well because if there's greater demand for particular types of securities, that's when our clients are able to get a greater spread on that. So at this point, I would say we're still in the pretty muted environment that we've been in for a while.

[Operator:]

We'll go next to Howard Chen with Credit Suisse.

[Howard Chen:]

With respect to the net interest margin, thanks for the disclosure on the premium amortization. But putting that aside for a minute, Mike, can you just talk about what you and the team are investing the portfolio in today, and what were the nature of those modest securities losses this quarter?

[Michael G. O'Grady:]

Sure. So just to hit the securities losses first. That's where we just sold one particular security, Howard, where we had a gain in the security. We happen to also have an offsetting position in a hedge. And so as a result, it had no net impact. it just showed up on 2 different line items. And it just had to do with the effectiveness of the hedge that we had in place, which was going to create further volatility going forward. So we decided easier just to sell that security essentially at no gain or loss. But to your bigger, broader question with regard to the portfolio. As you saw in the period, they're putting the premium amortization aside. I would say that the yield on the portfolio remains pretty consistent, and our strategy remains consistent there as well. Our average duration on the portfolio is still just a little bit over a year. And when we look to reinvest the proceeds that are rolling off of the portfolio, we're balancing it between a portion that's very short term for liquidity purposes, and then a portion that has to be extended in order to maintain that duration. But even with that extension, Howard, it's in the kind of 2- to 3-year duration. So we're definitely not looking to significantly extend the duration of the portfolio at this time. And I would say from a credit perspective, we continue to be very consistent with the credit profile that we're looking at, which as you know is very high quality.

[Howard Chen:]

Great. And then my follow-up, just over the next few years as the operating backdrop improves, we have higher short rates, better client engagement. Can you just refresh us about how you all think about the incremental margins on that essentially outsized revenue growth? And where would you all like to invest that you might be holding back on today?

[Michael G. O'Grady:]

Sure. We hope you're right about the environment improving in the near term here. And it's an important point, Howard, because the revenues that are related to the environment there. So, for example, with short-term interest rates, whether that's the spread that we can earn on the investment portfolio or the short-term investments that we make with bank deposits, or it's a reduction in the money market fund fee waivers, those are all relatively high margins, very high margins relative to the business overall. And so to the extent that happens, that will have a meaningful impact on our overall pretax margins. Now as you point out, we continue to make investments, but I would say with those investments we've been careful through the more difficult time period and making sure that the investments that we make whether that's in our Global Fund Services business, whether that's things like ETFs that we're doing, whether that's the technology investments that we're making, that these are really important, critical investments to our business that will produce the type of returns that we expect going forward. And so that standard, if you will, won't change. So we're not necessarily looking to make significantly more investments just because the environment is going to be better. And in fact, that's really the driver behind Driving Performance is to be able to create capacity to be able to invest through cycles are opposed to be more cyclical in the investments that we make.

[Howard Chen:]

So, Mike, if I put all of what you just said together, is that a 50% incremental margin? 75%? 90%? Is there a way that we can kind of more broadly think about that?

[Michael G. O'Grady:]

Yes. It's a little difficult to say exactly what the margin is on those, but it is going to be greater than 50%. Just taking one of them, for example, Howard, would be on the money markets fee waivers. As you can imagine, there are many costs that are up against waiving fees, so the vast majority of that should drop straight to the bottom line. That's not necessarily true of all of the other revenue streams that are impacted, but that gives you some idea.

[Operator:]

We'll go next to Ken Usdin with Jefferies.

[Kenneth M. Usdin:]

Mike, just a follow-up on expenses. You guys, earlier in the quarter, had gone out of your way just to make sure that people understood these -- some of these incremental step ups. And I just, given that we see the results now, and following on Alex's question earlier, have we gotten the right run rates as far as some of these incremental step ups? Understanding that there's still likely to be a growth rate from here, but have the items that you were specifically talking to with regards to outside services and equipment and software, net occupancy, have that -- have we caught up to that now, or is there still a build that really still has to happen in some of those areas from here?

[Michael G. O'Grady:]

Sure. Yes, it does depend a little bit on the line item that you're looking at. So for example, on outside services, we did see this I would call significant ramp in the time period. And where I talk about consulting expenses being 3x what they were a year ago in this quarter, that ramp aspect of it, we'd certainly like to think that we've seen the ramp. Certainly there can be growth, but that is not something that we would expect to continue at a very high growth rate. Whereas if you look at equipment and software, as we've talked about, the reason why that's growing at a higher growth rate is because we are making greater capital investments, capital expenditures, with a lot of that around software development. And that's something where we do expect to continue at a higher growth rate than our average growth rate overall. So overall, the expense growth rate so far for the first 9 months of the year is about 3%, whereas I would expect that with equipment and software, that will continue at a higher growth rate. So hopefully that helps.

[Kenneth M. Usdin:]

And the building in Miami, is that now in there on the occupancy side?

[Michael G. O'Grady:]

Yes, that is in there. And that's again another example where we're able to invest in the new office space in Miami. We're able to open up an office in Saudi Arabia. We're able to open a new office in Frankfurt. And yet as you've seen, our occupancy expenses have grown at a rate that's below that 3% that I mentioned. And that's because of the things that we've been done on the Driving Performance side to carefully rationalize our office footprint overall. And so as you've known, previously, we've had places where we reduced our footprint to make it more efficient, more aligned with the business at this point.

[Kenneth M. Usdin:]

Okay. And then, Mike, on the forward, we know you've also been spending to onboard these 2 very large clients that you publicly announced, Bridgewater and ATP. But is there any way you could help us as we get closer to '14, understand when these bigger contracts are online? And I know you're not going to be able to help us with the magnitude, but just trying to understand, Mike, is there an accelerating growth rate in the future in the C&IS side, just versus what's been happening this year on the cost side?

[Michael G. O'Grady:]

Sure. So just taking the 2 that you mentioned there. First, ATP, that's a client that will be onboarded here in the fourth quarter. So we'll begin to see that in our run rate in the current quarter and then going forward. Bridgewater, which as we've talked about, a much more complex onboarding, the one that we've been making additional investments into the technology and also being ready just to take on a fund manager of that size. That'll come on next year at this point, targeted for second quarter of next year. And at that point, we'll have the revenue impact and we'll also have the full expense impact of bringing Bridgewater on at that time. Because that is a long-term agreement, it's structured in a way such that some of the expenses that we have related to that onboarding, we're able to defer those until we begin recognizing the revenue as well, so that will happen at the same time.

[Kenneth M. Usdin:]

Okay. And then last quick one for me, just in PFS, x the fee waiver delta, it looked like that line dipped a little bit sequentially even with a good lagging mark. I'm just wondering if there was either an activity thing or some outflows that you can just talk us through on the Wealth Management and PFS side?

[Michael G. O'Grady:]

Sure. The biggest factor definitely was the money market fee waivers. So on a sequential basis, it accounts essentially for the decline that you saw sequentially. And I would say outside of that, you did have some modest pickup because of the markets, some of the equity markets. That was largely offset by the bond markets having a negative impact during the period. And then also I would say that there were certain PFS fees, a modest amount that in the second quarter were kind of one-time in nature that were not recurring in the third quarter. But that was a small amount. The driver definitely more is the money market fee waivers.

[Operator:]

We'll go next to Robert Lee with KBW.

[Robert Lee:]

Maybe a quick question on first on a kind of a capital and CCAR process. I mean, understanding that this is new to the CCAR process, clearly spending the money on it and we don't have the, I guess, the stress environment yet that the Feds will want you to look at. But given your prodigious capital build or a very strong capital position and build over time, I mean what's kind of your current thought process, unless you get thrown a curve ball in a stressed environment? Is it kind of thinking that, gee, you know, we feel pretty good about where we are? Do you get any perspective even though it's not finalized, supplemental leverage ratio, Basel III kind of pick your ratio that you may be thinking that it's coming up to a point where you get more comfortable asking to return larger proportions of cash generation?

[Michael G. O'Grady:]

Sure. So as you know, we're just going to be getting into the really heavy decision-making part of the capital plan going forward, and ultimately, it's the Board that will make those type of decisions on the ultimate capital actions that they'll ask for. Having said that, let me just walk you through the framework that we have as we approach that. The first is definitely our capital position going into the CCAR process and as you mentioned, but as you can see from the numbers here as well, we feel very good about our capital position going, really looking at any of the ratios. And we could talk through how they measure risks differently and can be impacted by different things happening going forward. But I would say, we feel good about our capital position across the board despite how you might measure it, regardless of how you measure it. The second thing that we'll look at is certainly the environment going into the process. And at this point, as we know, the economy continues to improve but very slowly. We are through a time period here where there is uncertainty in Washington, which can have an impact on the economy. We could certainly tell you right now that even the uncertainty we've had over the last several weeks has had an impact on our business. It just causes our clients to be more uncertain about their moves and slow down in some of the activities that they would have. So we would have to take into account whatever the exact current environment is at the time. The third piece as you mentioned is from a regulatory perspective and from our perspective, stress testing is a critical component of this. And while we're doing some of our own stress testing right now, we're obviously going to have to see the stress scenarios that are presented to us and see what the impact is by the time we run it through our process and our models. And then the fourth component is certainly looking at the robustness of our process, and making sure that we feel that we have all of the components in place that delivers a very reliable output. And one likewise that the regulators would agree with regard to the process that we've gone through and how we've documented that process for them. And I think when we take all that into account, that's where -- that'll guide us as to ultimately what will be recommended to the Board and what we'll decide on as far as capital returns.

[Robert Lee:]

Okay. And maybe as my follow-up. I'm just kind of curious, if I look back at your balance sheet over the last 1.5 years to 2 years, I mean you've had seems like pretty good new business trends, whether it's in the private client, whether it's in the C&IS. And I guess I would have thought that maybe I would have translated it into a little bit more, maybe not a lot, but a little bit more kind of natural growth in the balance sheet, whether it's just deposit taking, just kind of the flow from clients. And yet it's been pretty stagnant notwithstanding some modest increase this quarter. So maybe if you -- is there some type of mix taking place that you bring a new client on board, but it's -- whether it's in PFS, maybe it's not as deposit driven or the changing nature of their relationships, and maybe it's the type of business you're seeing with C&IS just as in those fewer deposits associated with it? Just kind of give a sense for maybe what's holding back a little bit of more balance sheet growth.

[Michael G. O'Grady:]

Sure. So there's -- you mentioned a number of the factors that are involved there, but I'm going to approach it from 2 different perspectives. The first is just with regard to the balance sheet overall and just deposits over time kind of longer term trends and how they can somewhat mask what may be going on underneath that. And that is the fact that we saw our deposits go up very significantly through the financial crisis. And they really hung in at that higher level until the TAG program was rolled off. And since then, we felt kind of a very immediate drop down in the first quarter and then we've seen some moderate decreases from that time period going forward. And while the balance sheet and earning assets have been really relatively stable, some of that is new clients putting deposits on, while other clients reducing the amount of deposits they have. The other thing I will say about that is when we go through a time period where we are right now, with the situation in D.C., we do see our clients again come back the opposite direction, so we have seen some inflow of deposits from very large institutional clients preferring to put more deposits on the balance sheet. So that can -- those types of trends can mask kind of the underlying growth that you may have with deposits. But then the other way that I would approach it, which is a little bit of where you were going is where we are primarily focused with the business. And that is on the C&IS side, it really is a balance between what I would consider some of the more traditional defined benefit-type clients that do have significant balances, particularly outside the U.S. But as you know, a lot of our growth is coming through our Funds Services business. And with the Global Fund Services business, it's not as deposit intensive, if you will. And so that changing nature, you can see a faster growth than in the assets under administration or custody than you will in balance sheet assets. And there's a little bit of that on the wealth side as well that you really have to look at the specific segments and the nature of their needs, if you will, where we look to focus upmarket that may involve less deposits than some of the just below that end of the market. And then at the same time Global Family Office, cash management is a significant need. However, they balance between what they do on our balance sheet with what they put into our funds, and that can move around a fair amount. So lots of trends over time, but I would say that you put it all together and we've been in this relatively stable level of deposits and for the time being, that's where we think we'll be.

[Operator:]

We'll go next to Mike Mayo with CLSA.

[Michael Mayo:]

I'm going to ask my expense question 2 different ways. One is a way which you can kind of brag about Northern and the other way is a bit more critical. So I'll start with the positive question, and that is, isn't it ironic that you have all of these extra compliance and regulatory costs when you've been one of the most safe banks in the industry? And in some ways, that might not seem so fair. So how do you think about that? All these new originations to make you safer, yet you should be an example for others if you're simply talking about safety.

[Michael G. O'Grady:]

Yes. Well, I guess it's not about fairness per se. It's about compliance. And from a regulatory perspective, as you know, they're focused on the entire system and have a single standard, I would say. Maybe that's not perfectly correct in the sense that they do differentiate by size, but once you're of size, if you will, their expectation is for our processes and our risk management infrastructure to be the same as the largest banks. And so on that front, we have to make the changes, make the investments in order to the get to that level. And so that's what we're doing.

[Michael Mayo:]

All right, that seems like you're penalized for being in that same grouping. But my other question relates to your delivery on expenses. And I'm looking at quarter-over-quarter, year-over-year, 3 years, 5 years, 10 years. I know that most of that predates you. But when I'm looking at total revenue growth versus expense growth, I'm seeing negative operating leverage almost over any time frame that I look at. And I know you said that the goal is to grow fees roughly in line with expenses. But I'm not sure about that as a target. I mean, shouldn't you evaluate the entire client relationship, which includes deposits and therefore net interest income? So I'm questioning the efficiency or expense target that you have and if it should be a little bit more clarified. I mean State Street, I'm not saying it's one size fits all, but State Street has a margin target. Other banks have more clearly identified efficiency targets. Other banks will include all the revenues in line with the expenses. So given the -- from my perspective, it looks like a poor efficiency record over many time frames. Shouldn't you revise your efficiency target? And also, now that you're on set to get delivering performance, what's the next step?

[Michael G. O'Grady:]

Sure. So the perspective on operating margin whether to look at the pretax margin or some other ratio, certainly at the end of the day, I would agree that it's about delivering the bottom line results. And by no means do we look at that differently. That is the final determination, and we think at the bottom of all that is return on equity, which takes into account the margins, as well as how well you manage your capital. The reason why we look at the expenses relative to fees is because the nature of the fee revenues is very different than the other revenues, net interest income, FX, et cetera. And as a result, we think it's most appropriate to look at how those expenses line up with those fees, particularly, I would say, on an incremental basis, right? So certainly, there are costs associated with generating net interest income or generating FX. It's just the fact that when interest rates change or FX change up or down, there's not that much we can do on the expense front that's directly related to that. Whereas with the fee revenues, they're very highly correlated. When we bring on a new client or lose a client, we do have more or less work to do. And so the reason why we focus on the metric we have is because that's where we think we have the most control over it. It doesn't mean that we ignore the others, it's just recognizing the fact that they have a different nature, a nature that is much higher margin as we talked about with one of the previous questions. And we think that over time, if we can focus on that, we're going to deliver better operating performance and better pretax margins over multiple cycles. We feel that if you look at just the pretax margin itself, that there's -- the risk on the upside, I'll say, to not be as disciplined around the expenses when you have revenue streams that are going up that really don't require more work. And it can take the eye off the ball, if you will, on trying to continue to be more productive. So that's how we look at it. Now with regard to Driving Performance going forward, as you point out, we're going to surpass our goal here through the end of the year. What's next? There's still a number of the more end-to-end type initiatives that we have that both require further work, but have greater opportunities going forward. So things like the client administration that we talked about, we're still in the earlier phases of that. We had some benefit, for example, in this period but there's more going forward. There's other things we do with regard to just serving clients and executing for them. So for example, how we strike NAV, how we value derivatives, things like that where there are opportunities for us to do that more efficiently. It's not easy to do but we can do it and generate savings from it. And then finally, I would say, as we look at our footprint, if you will, our operational footprint, there's still opportunity to continue to have a balance that is most effective to both serve our clients and be efficient for it. So there are more opportunities going forward, but they will continue to require more work.

[Operator:]

We'll take our next question from Glenn Schorr with ISI.

[Glenn Schorr:]

A quickie on just the way I look at both average balance sheet and period end, a little bit of a mix shift between long-term debt and senior notes coming down, short-term borrowings going up. I don't know if that's a point in time or if there's any specific actions you are taking, but curious if there's an explanation there?

[Michael G. O'Grady:]

Yes. It's more point in time. I would say, though, this, you will see some shift in that from period to period just depending on where rates are. And I say that in the sense that to the extent that it is very efficient for us, low cost for us to borrow in a short-term basis and we think that we can earn a reasonable very lower risk return on that and we have the capital to be able to do that, then we might do more of it in a particular time period. But it's always going to be within a certain range. I would just expect some fluctuation. And then as I mentioned, we did have a senior note that rolled off in the time period, that's going to change that. But at certain points, we'll also be issuing and that will change the level of senior debt that we have.

[Glenn Schorr:]

Okay, appreciate that. And then the other follow-up I have is, I heard your comments on CCAR. The one thing I'm curious about is if there's -- you're one of about, what, a dozen banks that are going through it for the first time, and I think it's consistent across the industry for those banks that are employing, whether it be Oliver Wyman or McKinsey or whoever to help guide through the process. I'm just curious, is there much of a specific back and forth with the regulators on how to, do they provide a CCAR for Dummies book, or are you just following the same path that banks before you have?

[Michael G. O'Grady:]

Yes. Certainly, every bank has its own direct dialogue with its regulators that's very specific to that institution, and we have that as well. But they did put out a paper a few months ago that essentially was both the criteria but I think importantly, now that we have as a system gone through this for a few years, what are best practices and weak practices. And it is a very helpful document, I think, both for institutions like ourself who are stepping up to the next level, because you do gain the benefit of what they view as favorable or unfavorable. But it's also frankly valuable to other folks that are trying to look at the results and understand how these are being evaluated and frankly why it's so much more than just the ratio that might be disclosed.

[Operator:]

We'll go next to Cynthia Mayer with Bank of America Merrill Lynch.

[Cynthia Mayer:]

My question's on the share repurchase. It looks like you picked up the pace a little bit in 3Q versus previous quarter, even though the average share price wasn't that different. So I'm just wondering what motivated you to do that? And also on previous quarter, you said you'd consider a few different forms of capital return, maybe even a special dividend, so I'm wondering if the resumed share repurchase makes that less likely in some way.

[Michael G. O'Grady:]

Sure. So our framework or philosophy around share repurchase is consistent with what we've talked about before, and again, has to start at the highest level of just what our capital position is, how we feel about that, the needs and opportunities we have to deploy it, then certainly looking at the capacity that we have, both from a Board prospective but also from our capital plan prospective. But I think more to your question, Cynthia, just around once you've cleared those first 2 hurdles, how do you think about it? And I think that the most important part to understand is that we want to have flexibility around our capital deployment, including share repurchases. And in this capital plan framework that we're in right now, there is limited capacity. In other words, you put a capital plan in the beginning of the year and you need to essentially stick to that plan throughout the year. And so as a result in buying shares back from any time period to another, we want to make sure we have a little flexibility because stock prices are volatile. And there are certainly time periods where going back over the last few years, we would have liked to be able to repurchase more shares and take advantage of where the stock price was, but frankly wasn't in a position just because of these limitations around it. And so at this point, we feel pretty good about the level of flexibility we have through the end of this capital plan period, which means we have this quarter and the next quarter to repurchase. And as much as our average repurchase price, what was very consistent between the last 2 quarters, we did have an opportunity to buy more in this quarter than we did in the previous quarter around that. So that's how we'll continue to think about it. And specifically around other alternatives besides share repurchase, a special dividend, for example, as I've said, is not specifically in our capital plan. So it's something we have to go back to our regulators to discuss. And I think you're right in the sense that the more that we repurchase, there's less of a rationale for necessarily having a special dividend because there just would be less the dividend because you've utilized that capacity otherwise.

[Cynthia Mayer:]

Okay. And then just briefly on the money market fee waivers. When you look at the current yields and maybe your outlook, which could be very different, how's it looking for the coming quarter in terms of waivers?

[Michael G. O'Grady:]

Yes, it's a little bit -- well, I'd say a little bit, it's very difficult to project because those fee waivers are mostly driven by the shortest end of the curve. And whether you look at -- you could look at LIBOR although that's not a great barometer. It's much more the overnight repo rates that are going to give you the best barometer. Because remember, the average life of these funds is counted in days, if you will, or weeks is a better way to characterize it. And so much of that is invested overnight in the portfolio. So if you look at the overnight repo rates, it jumps around quite a bit. And it was down, as we've seen the evidence of in the third quarter, the dynamic changes, it's been up and down so far this quarter already. But I really have no idea where it's going to be through the remainder of the fourth quarter. It's something frankly that any one can monitor as we go through the quarter and have some idea of what the expectation would be. But it's something I think that's impossible to project.

[Cynthia Mayer:]

Got it. It's currently -- it looks currently high, but basically you're saying you don't really have an outlook on it because it moves around so much.

[Michael G. O'Grady:]

Yes. I think that if you look back just a little bit, it was pretty low. So and I think there's a lot of dynamics around that beyond just rates per se. It also has to do with available collateral and things like that, just the dynamics of that marketplace for that rate.

[Operator:]

And we'll take our last question from Andrew Marquardt with Evercore.

[Andrew Marquardt:]

On expenses, I wanted to ask again, you had mentioned that based on, I guess, the way you look at it in terms of operating leverage, fee growth versus expense growth that you've achieved that so far this year, year-to-date, as well as last year. Is that still achievable going forward into kind of a still tough operating environment that you guys have laid out generally? I've got a follow-up.

[Michael G. O'Grady:]

Yes. So the growth rate for fees relative to expenses, we'd definitely love to continue to be able to achieve the improvement that we have achieved. So our fees have grown so far this year for the 9 months at 9% and our expense is closer as I said to 3%. So we expect that relationship to continue. It may not be the case in every single quarter on a sequential basis, such as we experienced in this quarter. And it's not to say that those can't be impacted by things like the equity markets. But that the underlying organic growth rate for that fee portion of our revenues is something that really is on us to grow those at the same time that we're focused on managing the expenses.

[Andrew Marquardt:]

Okay. And then in terms of Driving Performance, you had mentioned that you're well in your way to exceeding your ultimate goal there of 250. So you had mentioned in terms of the kind of full impact in terms of the operating margin lift, I believe you're referring to, right, of originally kind of laid out to be 500, 600 basis points potential benefit to operating margins when you first laid it out, that those were kind of part of that you don't really see because it's absorbed with other factors. So how do you think about it now in terms of kind of ultimate benefit? Do you still think you can get close to that kind of ultimate benefit into the low 30s without higher rates in terms of an all-in kind of a lift, or how should we think about it now?

[Michael G. O'Grady:]

Yes. At the time that we launched Driving Performance, we said all else equal because so many factors are out of our control or impossible to forecast. And so it's the same thing going forward here, which is all else equal, the answer to your question is yes. We certainly would look to continue to improve the margin overall. So putting aside even the metrics that I put out of expenses to fees, we're looking to improve the underlying margin as well. And frankly, you don't need to do that in order for our return on equity to be in our target range. And so that is our expectation. Now again, not knowing where the macro environment is going to be, that can have the same type of impact that it's had over the last 2 years. But without a doubt, we expect that, that demonstrates productivity both the way we talked about it, but also increased profitability in the sense of higher margins.

[Andrew Marquardt:]

So maybe said another way, is it still achievable kind of getting from, what is it, 27, 28 range now on an operating margin up to the low 30s without higher rates?

[Michael G. O'Grady:]

Yes.

[Andrew Marquardt:]

So it's in the 30s?

[Michael G. O'Grady:]

Yes, definitely into the 30s. And then where we are within that is really more driven by those other revenues, which as you point out, rates is big driver.

[Beverly J. Fleming:]

Thank you all for joining us for the call today. If you have any follow-up questions, you can contact me, Bev Fleming or Allison Quaintance, and we look forward to speaking with you in the middle of January when we report our first quarter -- our fourth quarter 2013 earnings.

[Michael G. O'Grady:]

Thank you,.

[Beverly J. Fleming:]

Thank you very much.

[Operator:]

That does conclude today's conference. We appreciate your participation. You may now disconnect.