Northern Trust Corporation

Good day, and welcome to Northern Trust's first quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Mark Betty, Director of Investor Relations. Please go ahead.

Thank you, Olivia. Good morning, everyone, and welcome to Northern Trust Corporation's first quarter 2021 earnings conference call. Joining me on our call this morning are Michael Grady, our Chairman and CEO of Jason Tyler, our Chief Financial Officer, Lauren Allnutt, our Controller, and Kelly Lernahan from our Investor Relations Team. Our first 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 April 20th 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 May 18th. 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 2020 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results. During today's question and answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael Grady.

Thank you, Mark. Let me join in welcoming you to our first quarter 2021 earnings call. Amid the ongoing public health crisis, I hope you and your families are healthy and well. At Northern Trust, we continue to operate in what we call resiliency mode. which means we are focused on providing our clients continuity of service while the majority of our employees worldwide are working remotely. Before turning the call over to Jason to walk through the financials in detail, I wanted to offer some brief comments on our performance for the quarter. Our results for the quarter resulted in earnings per share growth of 9% versus the prior year and a return on average common equity of 13.7%. Revenue was consistent with the prior year as declines in net interest income and trading-related revenue were offset by 6% growth in trust fees. The persistent low interest rate environment has pressured our net interest income as well as our trust fees as reflected by money market fee waivers. While overall year-over-year operating leverage was negative, the 6% growth in trust fees did produce one point of positive fee operating leverage despite the impact of fee waivers which reduced our trust fee growth versus the prior year by five percentage points. The current quarter's results also benefited from an improved economic outlook, which drove a $30 million release of reserves for credit losses. Throughout the past year, our strong capital base and liquidity profile enabled us to support the needs of our clients, and this was demonstrated further during the first quarter, as we saw 10% sequential growth in average total deposits and 3% sequential growth in average loan balances. Throughout this challenging environment, we have effectively executed on initiatives to continue to drive organic growth within each of our businesses, one of our key strategic initiatives. Within wealth management, our digital marketing efforts and Northern Trust Institute have driven more conversations and engagement, and we've experienced an increase in client engagement during the quarter. Within asset management, We have continued to see success and growth within ESG mandates, with assets under management of $139 billion at quarter end, and our quant-active strategies have experienced strong relative performance, providing us good momentum. In our asset servicing business, we continued to see organic growth during the quarter, with the success being well diversified across regions, products, and client segments. Moving forward, We remain focused on continuing to effectively navigate through the persistent low interest rate environment, focusing on driving greater efficiencies, as well as continuing to grow organically in a scalable and profitable manner. Finally, I want to express my sincere appreciation for our employees, whose commitment, expertise, and professionalism throughout these extraordinary times continues to be exceptional. Now, let me turn the call to Jason to review our financial results in greater detail for the quarter.

Thank you, Mike. Let me join Mark and Mike in welcoming you to our first quarter 2021 earnings call. Let's dive into the financial results of the quarter starting on page two. This morning, we reported first quarter net income of $375.1 million. Earnings per share were $1.70, and our return on average common equity was 13.7%. You can see on the bottom of page two, equity markets performed well during the quarter. Recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels, and both the S&P 500 and IFA Local had strong sequential performance based on those calculations. As shown on this page, average one-month and three-month LIBOR rates were stable during the quarter with modest declines. Let's move to page three and review the financial highlights of the first quarter. Year over year, revenue is flat with non-interest income up 5% and net interest income down 17%. Expenses increased 5% while net income was up 4%. In the sequential comparison, revenue grew 4% with non-interest income up 5% and net interest income up slightly. Expenses declined 3% and net income increased 56%. Recall that the prior quarter included $66.9 million in expense relating to severance and occupancy charges. Excluding those charges, expenses were up 3% on a sequential basis. The provision for credit losses reflected a release of $30 million in reserves in the quarter, compared to a provision of $61 million in the prior year and a release of $2.5 million in the prior quarter. The release in the quarter was driven by continued improvement in the projected economic conditions and portfolio credit quality relative to the prior quarter. Return on average common equity was 13.7% for the quarter, up from 13.4% a year ago and 8.8% in the prior quarter. Assets under custody and administration of $14.8 trillion grew 36% from a year ago and increased 2% on a sequential basis. Assets under custody of $11.5 trillion grew 40% from a year ago and increased 2% on a sequential basis. Assets under management were $1.4 trillion, up 29% from a year ago and up 3% on a sequential basis. Let's look at the results in greater detail, starting with revenue on page 4. First quarter revenue on a fully taxable equivalent basis is $1.6 billion, flat with the prior year and up 4% sequentially. Trusts, investment, and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion and were up 6% from last year and 4% sequentially. Foreign exchange trading income was $79 million in the quarter, down 12% year over year and up 15% sequentially. The decline compared to a year ago was driven by lower volume and lower volatility, while the sequential performance was driven by higher volumes. The remaining components of non-interest income totaled $101 million in the quarter, up 16% compared to a year ago, and up 9% sequentially. Within this, securities commissions and trading income declined 17% compared to a year ago, but was up 8% sequentially. The year-over-year decline reflected lower interest rates swap and transition management activity. The sequential performance was driven by strong growth within our core brokerage business, which includes our integrated trading solutions product. Other operating income totaled $55 million and was up 60% from one year ago and up 11% sequentially. The year-over-year growth was impacted by higher income and the supplemental compensation plans. and a prior year market value adjustment for seed capital investment, partially offset by higher expense relating to visa swap agreements. The growth due to the supplemental compensation plans had a related increase with other operating expense. The sequential increase is primarily associated with lower expense relating to visa swap agreements. That interest income, which I'll discuss in more detail later, was $347 million in the first quarter, down 17% from a year ago, and up slightly on a sequential basis. Let's look at the components of our trust and investment fees on page five. For our corporate and institutional services business, fees totaled $621 million in the first quarter and were up 8% year over year and up 4% sequentially. Custody and fund administration fees were $446 million and up 13% year over year and up 6% on a sequential basis. The year-over-year performance was driven by new business, favorable currency translation, and higher transaction volumes. The sequential increase was primarily driven by favorable markets, new business, and favorable currency translation. Assets under custody and administration for CNIS clients were $13.9 trillion at quarter end, up 36% year-over-year, and up 2% sequentially. The year-over-year growth was driven by favorable markets, new business, and favorable currency translation. The sequential performance was driven by favorable markets and new business, partially offset by unfavorable currency translation. Investment management fees in CNIS of $116 million were down 4% year-over-year and down 7% sequentially. Both comparisons were impacted by higher money market fee waivers, partially offset by new business and favorable markets. Fee waivers in CNIS total $28 million in the first quarter compared to $11.4 million in the prior quarter. Assets under management for CNIS clients are $1.1 trillion, up 30% year-over-year and up 3% sequentially. The growth from the prior year was driven by favorable markets, client flows, and favorable currency translation. The sequential growth was driven by favorable markets and net flows. Securities lending fees were $18 million in the quarter, down 22% year-over-year and up 4% sequentially. The year-over-year decline was driven by lower spreads, while the sequential performance was driven by higher volumes, partially offset by lower spreads. Average collateral levels were up 13% year-over-year and up 11% sequentially. Moving to our wealth management business, trust, investment, and other servicing fees were $443 million and were up 3% compared to both the prior year and prior quarter. Fee waivers and wealth management totaled $22 million in the first quarter compared to $12 million in the prior quarter. Across the regions, both on a year-over-year and sequential basis, growth were impacted by favorable markets partially offset by higher fee waivers. Within global family office, fees were lower year-over-year and sequentially and primarily reflected higher fee waivers, partially offset by favorable markets. Assets under management for our wealth management clients were $355 billion at quarter end, up 28% year-over-year and up 2% sequentially. The year-over-year growth was driven by favorable markets and client flows, while the sequential performance reflected favorable markets, partially offset by net outflows. Moving to page six, net interest income was $347 million in the quarter and was down 17% from the prior year. Earning assets averaged $141 billion in the quarter, up 27% versus the prior year. Average deposits were $126 billion and were up 33% versus the prior year, while loan balances averaged $34.2 billion and were up 6% compared to the prior year. The net interest margin was 1% in the quarter and was down 51 basis points from a year ago. The net interest margin declined primarily due to lower interest rates as well as mixed shift within the balance sheet. On a sequential quarter basis, net interest income increased slightly. Average earning assets increased 7% on a sequential basis, while average deposits were up 10%. The net interest margin declined by basis points sequentially partially due to the balance sheet mixed shift and lower rates. Turning to page 7, expenses were $1.1 billion in the first quarter and were 5% higher than the prior year and 3% lower sequentially. The prior quarter included a $55 million severance charge related to a reduction in force and an $11.9 million expense associated with an early lease exit arising from our workplace real estate strategy. Excluding these items, expenses were up 3% sequentially. Compensation expense totaled $519 million and was up 4% compared to the prior year and was down 1% sequentially. The year-of-year growth was driven by higher salary expense due to staff growth, prior year base pay adjustments, higher incentive expense, and unfavorable currency translation. Excluding the charge in the prior period, compensation was up 10% sequentially, primarily driven by higher equity and cash-based incentives. This quarter's equity incentives included $32 million in expense associated with retirement-eligible staff compared to $34 million in the prior year. Employee benefits expense of $103 million was up 6% from one year ago and up 1% sequentially. The year-over-year increase is primarily related to higher retirement, medical, and payroll withholding costs. The sequential increase was primarily driven by higher payroll withholding, partially offset by lower medical expense. Outside services expense was $196 million and was up 2% from a year ago and down 6% from the prior quarter. The year-over-year growth was driven by higher subcustody, third-party advisor, and market data costs, partially offset by lower data processing and consulting costs. The prior quarter included a $2.5 million charge. Excluding the charge, costs were down 4%, primarily due to lower legal, consulting, and technical services-related costs. Equipment and software expense of $177 million was up 9% from one year ago and flat sequentially. The year-over-year growth reflected higher software support and amortization costs. Occupancy expense of $51 million were down 1% from a year ago and down 24% on a sequential basis. The prior quarter included an $11.9 million charge relating to an early lease exit. Excluding that charge, the category was down 8% on a sequential basis, driven by lower building operation costs and lower rent expense. Other operating expense of $72 million was up 16% from a year ago, and relatively flat sequentially. The year-over-year increase is primarily driven by higher supplemental compensation plan expense and other miscellaneous expenses, partially offset by lower business promotion and staff-related costs. Turn to page 8. Our capital ratios remain strong, with our common equity Tier 1 ratio of 12% under the standardized approach and 12.8% under the advanced approach. Our Tier 1 leverage ratio was 6.9% under both the standardized and advanced approaches. During the first quarter, we repurchased 1.4 million shares of common stock at a cost of $136 million. We also declared cash dividends of 70 cents per share, totaling $151 million to common shareholders. The current environment continues to demonstrate the importance of a strong capital base, and liquidity profile to support our clients' needs. We continue to provide our clients with the exceptional service and solution expertise they've come to expect. Our competitive positioning across each of our businesses, wealth management, asset management, and asset servicing continues to resonate well in the marketplace. Thank you again for participating in Northern Trust's first quarter earnings conference call today. Mike, Mark, Lauren, and I would be happy to answer your questions. Olivia, please open the line.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that each questioner limit themselves to one question and one relevant follow-up question. You may re-enter the queue for additional questions as time allows. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal. Our first question is coming from Glenn Shore with Evercore. Please go ahead.

Morning, Glenn. Hello. Good morning. Thanks very much. My question is on organic growth. I heard a lot of commentary throughout your 18 minutes of prepared remarks. Thank you very much. On positive net flows across most parts of the business, I think in your prepared remarks, I heard you talk about ESG mandates within asset management, but maybe you could cover whether you quantify or qualify, I'll take either one, where you're seeing new business, what kind of business you're winning in asset servicing, and has there been any pandemic-related pause that is now freeing up a lot of gems? So any color on that would be great. Thanks.

Yeah, Mike, do you want to start on it?

Sure.

So, Glenn, as you described there, we are seeing strong organic growth across the company and specifically in asset servicing. And I would say, you know, the first place I would start is, you know, the foundation of our growth strategy is retaining existing clients. And as you would imagine, going through the pandemic, being able to support clients has been extremely important, but also I think earned us the right, if you will, to continue to serve our clients, many of them our largest clients. So that's been a big positive. Second, I would say is that we have seen, I would say, a full – return to marketplace activity. So our clients, both asset owners and asset managers, are actively looking at their own operating models and looking for opportunities either to become more effective in how they invest on behalf of their beneficiaries or improving the efficiency of the way they do that. So consolidating operations or providers, utilizing new technology, And that has played very well into our strategies in asset servicing that we've had underway for years. So thinking about things like front office solutions, which is an investment book of record for clients that have high levels of alternative assets, the ability to look across their portfolio in order to manage their business. And then thinking about our asset manager clients, Our whole office strategy is definitely resonating as well, where we can provide services across front, middle, and back office. So high level of activity, and then I would say, you know, success with strategies we've had in place for some time period.

Appreciate that.

Maybe just the last follow-up on net interest income. The NIM was down five, but deposits were up a ton today. Do you feel net interest income has now finally bottomed, and maybe some backup of your thoughts behind that in terms of redeployment opportunities? Thank you. I appreciate it.

Sure. I don't want to call a bottom on it. I mean, if you unpack the quarter effectively, we saw loan growth that – was strong and up a billion dollars and that that has a few million dollar impact if you take our average return on those assets if you think you know anywhere from 175 to 200 basis points on that billion dollars you're going to get four or five million dollars in lift for the quarter and then you also had obviously lift from the deposits overall but that's offset by something that's more predictable going forward, which is we're still going to have reinvestment as the security book continues to mature. And that's still got some maturation to do. And so it's easier to predict what's going to happen on the reinvestment side than what's going to happen on the loan side. But obviously, if we continue to see strong loan demand, then that's more important than what we're seeing on the other components of volume.

Thank you. Our next question comes from Mike Nao with Wells Fargo. Please go ahead. Hi, Mike.

I see at your annual meeting today a 2021 priority is productivity. So I was wondering if you could put some metrics around what you'd like to achieve. And on the positive side, I see the headcount's down 1% quarter over quarter. The pre-tax margin in the first quarter is back to the 30s, where it was not last year at all. But on the negative side, I have to imagine the fee waivers will continue and might actually increase. So where does it all end up, and where would you like to get to this year?

Yeah, let me take that in a few different buckets. You're right. The productivity is extraordinarily important, and we – we go and we scratch and claw and do everything we can to earn new business, that's hard to do. It's not overly predictable. But what we can do is exhibit extreme discipline on the productivity side. And so we haven't put external metrics to that, but we're looking at it a lot of different ways internally. We look at operating leverage, which we talked about earlier. We look at fee operating leverage. And internally, we're able to look at organic trust fee operating leverage. And so from our perspective, we want to see – we don't want to just call expenses up or down because a lot of our business relates – a lot of our expenses relates to the amount of new business that's coming in. And if we continue to show growth in the different areas of the business – we're going to see lift in those expenses. We just want to make sure it's related in the proper way to the organic growth that's coming in. Now, you're right, headcount was down. And that comes back to the initiatives that we talked about in January. And so you see it's a meaningful reduction for us of about 300 headcount And that played through in lower salary expense for the company. And so those are meaningful movements, and I think reflective of the discipline and the commitment we have around expense management. And then fee waivers, you're right. It's a very, very difficult dynamic that we're facing. And I also think people need to realize we've talked about the fact that the $50 million we have this quarter, we're still seeing lower rates on the short end of the curve. As much as we've seen the one-year, five-year, ten-year up, we've seen overnight repo at zero and one, and that's very difficult for a $275 billion pool of money market funds. And that's why we've tried to give consistent information, not guidance, but a consistent run rate on how those fee waivers are going. And as we sit right now, that number looks more like $65 to $70 million on a quarterly run rate basis. Now, hopefully, as the Fed balance sheet changes, we see some improvement there, but that's where we sit today. And so it's something we have to monitor. And obviously, it has a big impact on the pre-tax margin you identified.

And then the one... tailwind you have, I guess, would be higher asset values. Can you remind us of the relationship between every change in the stock market and your fees?

Sure. It varies by the area of the business that we're talking about. In general, 60% in CNIS, about 60% are based on asset values in some ways. And then in wealth, you can split it even more. Mark, you might have those numbers closer to the top of your head, but it's... Right.

Yeah, the 60% in CNIS is related to asset values, which would be all asset values, equity assets as well as fixed income or cash. And then as we look across in wealth management, there is more of a relationship there to the assets, but the equity sensitivity, if that's what you were looking at, is is a little different. In the regions, the equity sensitivity is probably 50 to 55%, whereas when you get to the global family office, there the equity sensitivity is probably closer to a third just because of the way the client's assets are allocated.

Thank you. We will now go to Brennan Hawken with UBS. Please go ahead.

Good morning. Thanks for taking my questions. So first on the balance sheet growth here, quite robust deposit growth. It was a pretty significant inflection from how things were trending in the back half of last year. And so curious about your thoughts there. How much of this do you view as excess? It seems as though a lot of the central bank deposits on the asset side went up, which would imply that you might think these are short-duration deposits. So if you could give maybe some color on what your expectations are for the sustainability of this growth in deposits and how you might be thinking about redeploying those deposits over time and how much time do you need in order to do that?

Sure. So you're right. I'm in total interest. related deposits up, interest-bearing deposits up. And I think the good news is that, interestingly, we were able to hold on to the margin. You saw a decline in LIBOR, and even in that book, we also saw a decline in cost, despite the fact that part of the book is below zero. And I think that's meaningful. To get to your question about volume levels and the nature of the deposits, There's no doubt a lot of those deposits are non-operational. And so we need to let them season before we would do much beyond putting those at central banks. That said, there are other things we can do because we've got capacity in the balance sheet. But obviously, the nature of how we run the Treasury book is to let those types of deposits, the ones that are more institutional and might be more transitional, before we would take longer-term exposure on those.

Okay. All right. Thanks. Appreciate that. And then when we think about, I think you had commented, Jason, in response to Glenn's question about really when you think about NII, it's a foot race in between loan growth and reinvestment rates. You know, your loan growth picked up a bit. here this quarter versus the trend of the back half of last year. But, you know, period end, not necessarily all that higher than the average. So how should we think about loan growth from here? What are you seeing as far as demand for loans amongst your clients? And is the rate for that loan book still, are we still better off looking at the one-month and three-month LIBORs to think about those rates? Thank you. Sure.

So, first of all, the loan growth has come almost exclusively, or the vast, vast majority has come from the wealth management side of the business. And even though in dollars it's not as big as the deposits, the impact is much more meaningful. And having a billion dollars in higher average deposits, that's quite meaningful for NII. And we've talked very consistently about the fact that the deposit levels are interesting, they're chunky, but don't really do too much on NII. It is difficult to predict what the loan demand will be. However, what we've experienced isn't simply, I'd say, random. We've talked about the fact that we have been communicating with clients more aggressively. And this is over the last year and a half, two years. about our desire to be with them and be a liquidity provider for them. Our liquidity engagement with clients is a big part of our business, and that shows up not just in what we do with the balance sheet on deposits, but also money market funds where, again, $275 billion in AUM there, and also on the lending side, particularly on the wealth management clients. This has been, I think, more of a strategic lift, and so that's not predictive that it's going to hold on or continue to accelerate, but we don't see it as something that we're dismissing as potentially random either.

Thank you. We will now go to Alex Bolstein with Goldman Sachs. Please go ahead.

Hey, good morning. Thanks for taking the question. I want to shift gears a little bit, maybe talk about capital a little bit and obviously continue to be in very strong position across all the key ratios. Can you guys remind us kind of how you think about the binding constraints for Northern Trust, obviously relative to regulatory minimums? That's not kind of how you set the bar. You typically look at your peers. So given some of the changes that they have made and kind of how they're thinking about sort of the minimum levels they're willing to run with, how does that inform your view of excess capital at Northern Trust? And then ultimately, how does that translate into your appetite for increased buybacks from here?

Sure. So you're right that it's less of a, for us, it's less of an algebraic calculation and more where we want to be on a relative basis at this point. You guys have heard us talk consistently about thinking about our engagement with the board, where we're totally aligned, but we want to make sure that that conversation continues to take place, where we are on an absolute basis, how we think about things on a relative basis, and how we think about things from a regulatory perspective. And right now, I'd say just keeping an eye on what the industry is doing is important. So the absolute level is less so. We've got plenty of room, obviously, from a CET1 perspective, sitting at 12, given where the regulatory minima are. And so if you think about Tier 1 leverage, even though the industry has talked about coming down significantly, we've still printed well into the sixes, and that's on a $125 billion average deposit base. So I'm not giving you our buffers here, but just take a 5% number just to get at your question, Alex, about what our capacity would look like. If you came all the way down to 5%, that would translate to a balance sheet of about $200 billion. And you could have $170 billion in deposits, all else equal on the balance sheet today. And so you're talking about easily $40 billion on a base of 125 currently. And so that's a lot of room. And I think also importantly, it's not like we use the balance sheet for clients that for organizations we don't know. We're really dealing from a candidate pool of depositors that are existing clients. And so at this point, we feel good about the capacity we have, but it's obviously something that we're watching given how dramatically things can change given Fed actions and where deposits were 15 months ago.

Right. I guess I was trying to get more to the capital return framework of kind of how you guys think about the opportunity for share repurchases from here, you know, given the access capital that you've outlined.

Thanks for clarifying. Let me tackle that directly. It's interesting because this quarter is a great example of how We don't just think about do we buy back stock or not. There are different ways we can invest capital. And that 10% to 15% return target, it comes up in everything we do from a capital perspective, including using the balance sheet to help clients. And so this quarter, you saw the capital levels come down, not because there was a meaningful decline in CET1, but because there was more activity there. from a client perspective, and that showed up with an increase in RWA on the denominator. And we saw higher SEC lending activity, we saw higher lending activity, and we saw higher Treasury activity in the form of more bond buying, muni purchases. In each of those areas, we're thinking about what's the best way to use our balance sheet in the long run, and what's the best way to think about return. For us, we can think about the returns of buying back a dollar stock. We're looking at everything from what we think our returns are going to be there, what are we getting in terms of price to book. We're also looking at the desire to be there with clients and what those returns will look like. And when we have the ability to think about lending or expanding CNIS relationships and with the other things I mentioned, those things come up as very attractive ways for us to use capital. It turns into good growth for us in the long run and good use of capital.

Got it. Great. That makes sense. Thanks for that. And then just a quick follow-up around NIR again. So I think, Jason, in the past, I think we talked a little bit about some sensitivities to sort of the repricing dynamics in the securities portfolio. Maybe refresh us where that sort of stands today. So securities portfolio yield, I think, is about 120 or so. If you look at rates where they are today, I want to say most of the securities portfolio is already repriced lower. But holding current rates constant, sort of how much more of a drag on the securities yield do you guys expect to see over the next couple of quarters?

Yeah. Well, to give you a sense of what's repriced at this point, obviously, if you look at the $150 billion in earning assets, obviously all of the money market assets have repriced. Eighty-five percent of the loan book has repriced. And it's $60 billion of the securities, so about 63 percent of the securities book has repriced at this point. Okay. So that's where we sit at this point. And then it's interesting, if you think about what's the impact of that, I'll tell you, in this quarter alone, it was a significant impact. We actually had, just from securities portfolio, the NIR was down $10 million. And so that was the drain on it. But that's not... I don't want you to think about that as a pure run rate because we're thinking there about what's happening with the loan book. And so there are other factors to play in as we're reinvesting those securities. But I want to at least start with giving you the numbers that you asked for in terms of how much is repriced and then also what the implications are. But the runoff's coming through at this point. And also the fact that the one, two, three, five-year where we tend to be reinvesting has come up, that has brought down the influence on a quarter-over-quarter basis as well.

Thank you. We will now go to Brian Bedell with Deutsche Bank. Please go ahead. Hi, Brian.

Great. Hey, good morning. How are you? If I can start off with maybe one of the loan book dates and just that comment you made on the 85% of the loan book has repriced. It looks like that yield has, at least for the last couple quarters now, bottomed and is starting to move back up. So my question would be around of the 15% that's repricing, sort of what are the dynamics on that versus maybe what are some of the new loans that you're bringing on that's helping improve that yield? And then longer term, most of that is tied to LIBOR. Maybe just talk about the plan of whether some of those loans are going to use a new reference rate given the planned cessation of LIBOR and how you're thinking about that. Sure.

So the longer dated loans are often it's going to be in the mortgage book. And so that's what's going to take longer effectively, just so you know. The loans that have come on, disproportionately the growth has come, again, within wealth, but within personal loans and within some of our more corporate-based organizations. We do have a lot of corporate, there's small and mid-sized business activity in that book, and that's where a lot of the growth has been. And Then in terms of the LIBOR transition, yeah, as you know, and I'm sure you're covering really closely, Brian, there'll be a transition, and most of the industry seems to be looking to move from LIBOR to SOFR as a reference rate, and so watching that and the implications of it.

And is that transition to SOFR? I mean, I guess it's too early at this stage because there's not an effective term rate, but, I mean, is there any – Are you sensing any implication on the yields of the loan book by that transition, or is it just simply too early?

Well, it's early, and I think the industry is hoping that once we get to those transition dates, there'll be more of a reset, and we'll have not just the reference rate changes, but the spread changes. And to reflect, because obviously SOFR is different. There's not credit, there's not duration in it, and so it's a different rate. And the relationship between LIBOR and SOFR is a lot different today than what it was even a year ago. And so I think the industry's got some work to do to work on what the conversations are going to be like at the point where we actually make that hard switch.

Thank you. Our next question comes from Steven Chubak with Wolf Research. Please go ahead.

Hi, good morning. So I had a couple of ticky tack modeling questions. The first is just on the non-asset sensitive fees within custody and fund administration. And we've had two pretty meaningful sequential increases these past two quarters. That line item exited the quarter at about $178 million. versus what historically had been a pretty consistent range of 150 to 160 million. I'm just curious what's driving the recent strength in that line item. And maybe just as we think about from a modeling perspective, what's the right jumping off point we should be thinking about as we look ahead to 2Q?

Yeah, just to make sure I'm tracking totally specific, you're talking about other non-interest income at 180 on the income statement?

It's actually the 178 within custody and fund administration, but it's a non-asset sensitive fee portion. So that's the part that we'll presumably move around with that committee.

Yeah, so this is Mark. So you're referring to when we talk about the sensitivity of those fees that about 60 to 65% are asset sensitive, and then the rest are kind of either They're mixed, quite frankly. There's transaction volumes within those. There are some flat fees or fixed fees or even account level fees. So, you know, you could maybe say roughly half of it is transaction volume related. And we did see a pickup this quarter in those transaction volumes that created some of the sequential lists that we saw, you know, or 1% or so. of the sequential list that we saw. So, I hope that is answering your question.

Yeah, yeah, that's sufficient. So, but we should be expecting some normalization of that. Presumably, it could be higher than the 150 to 160 million, but it sounds like the 178 may have been a bit elevated, and we could see some rebasing there. Is that fair?

Yeah, that's probably fair. I don't necessarily have the numbers that you're doing because I don't have it broken down specifically like that. That's kind of a directional guide that moves around each quarter of that split. But, yes, I mean, we certainly saw heavier transaction activity during this most recent quarter that would have benefited those fees by a bit. Okay.

That's helpful, Colin. This is for my follow-up on NII. Actually, a bit more focused on the liability side. The beat was helped by continued grind down in those interest-bearing deposit costs. It's the second consecutive quarter where we've actually seen that come down. Just curious if you see any additional room to cut deposit costs further, you know, if the rate backdrop holds or has that lever been largely exhausted at this point?

You know, I felt, you know, decent about, you know, coming down a couple basis points in that book and, you know, And I think it's reflective that a lot of that book is international. It's in currencies that are already used to having negative rates. And so that dynamic that we've talked about, that once zero is broken, there's an expectation that the beta will continue at that point, you know, seems to be playing through there. And so wouldn't necessarily, and we've talked to clients a lot about where rates are there, because it's obviously can be a sensitive topic. But I think the win there is we've got good dialogue with clients that indicate we're all looking at things like the euro the same way and tracking deposit costs so we don't have further deterioration as the asset side compresses more.

Thank you. We will now go to Mike Carrier with Bank of America. Please go ahead.

Good morning, Mike. Good morning. Good morning. Thanks for taking the questions. Just a question on organic growth trends. You provided some good color on asset servicing, the Glenn's question. But just in investment management, and particularly in wealth, are you starting to see improvement as COVID conditions improve versus last year? And how has the competitive backdrop, you know, changed, just given that it seems like, you know, everybody has been focused on that part of the business?

So, in wealth, we've continued to grow. But you're right, the marketplace is extremely competitive, which is why it's so important that we stay focused on both the parts of the market where we think we compete most effectively and on providing for the clients in that segment. So where we're seeing our strongest growth has been in the upper part of the market there. So think about clients with assets above $20 million. And particularly during this time period where equity values are going up, there's obviously been an increase in wealth, so that drives growth. But then also with the change in administration and potential changes in taxes and things like that, it increases the need for planning. So a high level of activity both with our existing clients but also opportunities with prospects.

Okay, great. And then... Just in terms of the expense outlook, I realize you guys try to focus on aligning that slightly lower than the organic growth levels that firm over time. But as we transition from, say, the low short rates as headwinds to NII and waiver, headwinds eventually stabilizing, and then as short rates rise and eventually become tillings, like any necessary, like, investment areas ahead or, like, new efficiency areas post-COVID, like real estate, that we should be thinking about?

I'll start, and then I'm sure Jason can add detail to it. But, you know, on the expense side, it's a very, you know, dynamic situation right now. What I mean by that is we're obviously, you know, still in this resiliency mode that we talked about, which has certain, you know, say, costs to it. But also, there are certain expenses that were not incurring at this point. So obviously, you know, travel and business promotion is lower than it was pre-pandemic. You know, with not operating with, you know, as many people in our facilities, you know, the cost of operating those facilities is lower. So you do have some, you know, lower costs on that front that to the extent, you know, that we transition out of that, you would expect that those would increase. The second thing I would say is with regard to the organic growth that we've talked about, it does require investment. That can be supporting large new clients, and it also can come in the form of bringing on new talent to continue this growth. I mean, as you bring on new talent, you want to make sure that you're providing the right level of service across all of our businesses, and that means making sure that we have the people that go along with this. And then the third piece I would just say is around our digitalization efforts, which, again, have accelerated in the last year. And I think we're seeing the benefit of that, but it does require investment in technology as well to ensure that, yes, we're adding those capabilities, but we're doing it in the right, you know, safe, secure, stable way. So that backdrop does say, okay, we're going to continue to grow, but it's going to require investments. And that's why, as Jason talked about earlier, we also have to be focused on efficiency. And we did see as a part of, you know, the remote working environment, there are some efficiencies in that as well. And so how can we, for example, look at our real estate footprint and see if there are opportunities to, you know, shrink the footprint and use that to support some of the investment that I talked about?

Thank you. We will now go to Betsy Grafick with Morgan Stanley. Please go ahead.

Morning, Betsy. Hi, good morning. Okay, a couple other themes that we haven't touched on yet. One is around the wealth management business, sorry, and the virtual advising strategy. I know that's been well underway for a while. I just wanted to get a sense as to if the demand for that is, you know, more run rate at this stage, or are you still seeing acceleration of demand for that strategy that you've got there?

So the way we've tackled kind of the virtual engagement through with clients and the wealth side is the continued use of our goals-driven wealth management approach. And So we were able very quickly to take those discussions and have virtual conversations, but with that same very, what we think is a very differentiated platform with clients through COVID, it was very good. Engagements were very, very strong. And it's led the business to feel that there's strong momentum from an overall client engagement perspective. So that's gone well, and it's one of the continued large investments in wealth management. And Mike just talked about our investment in digitizing the business. That's an area where we can use that as a core platform but add journeys to it, add specific areas to become more and more detailed and specific with matching up with what our clients are going through. It's a very strong investment for us, and it's been – extremely positive. Our net promoter scores, Steve Fradkin, who runs that business, is just talking about how strong those are. And so clearly that investment has been paying off with good client engagement.

Okay. And then just separately, I know you've been in the press recently with regard to some of the crypto custody activities that you are working on. Not sure when it's going to be launched. I think you've got a partnership going on with Standard Chartered Smooths. Maybe you can give us some color on that. And part of the question, too, is it doesn't just end with custody, or can you foresee an opportunity to enable, you know, to offer crypto to your clients? You know, when I think about European investors, well, not just investors, but, you know, the servicers, the managers that you work with over there dealing with negative rates, you know, what I hear is that there's a decent demand for going into crypto because at least it's not negative interest rate. So how far is it until you, or how long is it until you offer crypto as one of your liquidity tools? Just kind of thinking out loud.

So Betsy, as you know, the financial markets are constantly innovating and evolving, have for some time period. In the business we're in, we absolutely have to keep pace with that and do it in a way that, again, it allows us to provide the safety and security for the clients in managing their assets and crypto and digital assets more broadly. is right now, you know, clearly one of the areas that's evolving the fastest. And so on that front, to your point, with regard to custody of crypto assets or cryptocurrencies, you know, we've partnered with Standard Chartered in a venture called Zodia, which will provide that crypto custody. And I think what's important there, what we're trying to accomplish is leverage the traditional custody approach expertise that we have, that Standard Chartered has as well, but do it in a fintech way. So that's why it's a separate independent entity that, again, can develop and evolve at that pace. And at this point, we still expect at some point in 2021, that that will be approved for client use. So again, it's going to be done not only our own, I'll call it approvals, but also from a regulatory perspective. And then I think more broadly to your point, absolutely, we see many different potential opportunities in this space where clients will look at digital assets and potentially cryptocurrencies in order to address various either challenges they have or ways to earn better returns. And that's why we've not only done what I talked about in cryptocurrencies, but more broadly with the digital assets, whether it's tokenization, which we've done with Bondi Value, whether it's developing a PE capability on blockchain, which we've done with Broadridge. There's a number of different areas where we've experimented either on our own or with partners

in order to be able to be a part of that innovation.

Thank you. We will now move to our next question that is coming from Jim Mitchell with Seaport Global Securities. Please go ahead.

Hey, good morning. Hey, maybe just a question on the wealth management business. It seemed to be quite a bit of disparity in the outcomes, even though market appreciation, whether it's lag basis or month lag or full quarter lag was pretty similar. So is it just there's a lot more fee waivers in the global family office? How do we think about that sort of difference?

Yeah, you hit it right. There is a distinction in the lag in that business, but that's not what drove it, frankly. It's the waivers hit hard. And we've talked about the fact that people shouldn't see waivers as linear. This is a good example. where the GFO business is obviously much more institutional, and so their waivers hit later, and we're now starting to see it come in, whereas the regions have more traditional closer-to-but-not-retail pricing, and so those waivers just hit earlier. Second dynamic, though, is GFO is spiky. And we have clients there that will move billions of dollars. And so you can have one, two, three clients that if they all have significant movements, then you can see big movements on a sequential basis. If you look year over year, the growth rate overall for GFO is actually slightly higher than the region's. But obviously the sequential look was impacted by those two things, one, waivers, and two, some spiky, very large client movement.

Okay. And so the incremental hit to fee waivers, is that also going to be in 2Q more in global family office and maybe CNIS? Or how do we think about the geography of that?

I think from here it's going to be more linear. I mean, the funds are more, you know, they're – They're all there at this point in waiver mode. And so I don't think we're going to see as big of a disparity going forward, but people should just realize it's not a linear relationship. And I think there was, you know, overall it was $22, $23 billion in wealth, and nine of that was in – nine, almost ten, was in GFOs. And so that's a year-over-year look. That's just aggregate, effectively. But the one-quarter look, it was $5 million in GFO alone. And so that was the increase quarter-over-quarter. Right.

Okay, thank you. You bet.

Thank you. Next, we'll move to Jeff Hart with Piper Sandler. Please go ahead. Hey, Jeff.

Hey, good morning, guys. To circle back a bit to the buyback, I mean, it's good to see you guys out there buying 135 million in stock. Historically, it feels like the actual buyback comes in kind of below what at least our estimated capacity is somewhat regularly. I think first quarter might have given us a partial inch with risk-rated asset growth, but can you help kind of differentiate kind of the buyback, the difference in your thinking between just being conservative and versus the expectation that risk-weighted assets could actually continue ramping up like they did in the first quarter?

Yeah, it's completely related. And it comes back to that theme of wanting to think about returns. And so for us, it's not like we're making a decision of do we buy back stock or just park money at the Fed at 10 basis points. For us, but it's nice to be able to see that client activity is driving the alternative to share buybacks. So that's certainly not to say that we're doing zero or very little. It's just to say those are the different options we think about. And you saw SEC lending activity up significantly. Just the loan demand being up a billion dollars, that's going to cause a billion dollars in higher RWA just in and of itself. And then you see the the deposits coming in, which it's nice for us to be able to answer a client need, but that comes with RWA as we redeploy it on the asset side. And so the best thing we can do is have the balance sheet used for good return on equity activity that's client-related, building relationships in the long run. But at the same time, we did do you know, $150 million-ish in share repurchase over the time frame. So it's not like we were absent in the market, but you can imagine here at, you know, at 12%, we're going to be looking at what does AOCI look like, what does client activity look like, and balancing all of those things together.

Okay, thanks. And just to touch on kind of the fee growth, or I guess growth across the realm of businesses, it seems like CNIS has been outgrowing wealth management, or at least outpacing it for a while now. I mean, is that the right way that we should think about those two business trajectories going forward growth-wise, or is there a reason to think that kind of wealth management could start kind of catching up with CNIS?

A couple things. One, you know, look you know every time over long periods of time we think one of the businesses is growing faster uh and we think oh this is going to be the case for the for the future you get an inflection the businesses have acted as good hedges to each other and and it's always difficult to predict those inflection points and what's going to grow faster for sure if you look over the last couple or a few years you'd see cnis having grown faster But in general, wealth has got good exposure to equity markets. And you also think over the long run, there's a good title growth, particularly at the top end of the wealth market. And so those things should help as well. And so we wouldn't call a a prediction necessarily on one of the businesses over the long run in the future growing faster.

And I would just add to Jason's comments. That's why we really like the combination of the three businesses. Not only is it complementary from a client perspective, but also from a financial perspective, they have different dynamics. So the asset servicing business, which Pete Cherowich has done a great job leading and growing at a high rate, It also requires resources to do that, as we've talked about that, and has different levels of volatility in the business, whereas in wealth management, very steady and at a high level of profitability and scalable. And then with asset management, again, very high level of operating leverage in the business. and has been positioned over the last couple years, for example, when you can get positioned in the right products, for example, in liquidity, and the markets go up or the liquidity goes up, you know, very strong increase in profitability for that and, you know, focus on other areas where we can have that same dynamic with ESG and quant. So, you know, we like all the businesses, I would say, from a client competitive perspective, but also from a financial perspective.

Thank you. We will now go to Rob Wildhack with Autonomous Research. Please go ahead.

Hi, Rob. Hi, Rob. Morning, guys. Question from me on organic growth. You know, I think a year ago the prospects for organic growth were probably more uncertain. And fast forward to today and your comments have been, you know, really positive. Coming out of 2020, do you see any new or different sources of organic growth that could maybe increase the long-term sustainable rate you think you're capable of achieving?

I'll start, but Mike, I'm sure, has some comments on this as well. Let's take the different businesses. In CNIS, we hinted even early today, the integrated trading solutions is something we talked about a little bit over the last few months. That's come through. That's part of the reason I think there's been that lift in brokerage commission income, done strategic things in foreign exchange. So it's not accidental, I think, that we've had lift in those areas. And then front office solutions is another area where we're trying to go to sophisticated clients and show the breadth of what we can do. In wealth management, the engagement there is around expanding and continuing to invest in goals-driven wealth management. And the growth we've had, particularly in the upper end, that product gets to – we've thought so much about what $50 million, $100 million – and hundreds of millions of dollar clients need in order to interact in a good, holistic way and think we're set up well there. And then in asset management, $215 billion, I remember about a year and a half ago where we were on the liquidity perspective to now $275 billion. And yeah, there's been great growth, but in the industry, but they did a lot of hard things to get cutoff times done well, to open a Northern Trust portal. There's so many different, to invest in the talent we have in that group. And then you think about our ESG and quant capabilities, ESG assets are over $130 billion now. Great engagement across the Nordics with very strong client base there. and doing a lot with our ETF platform, including launching new products in Europe there. And so in each of the areas, I think there's good opportunity for us to leverage the work that's been done to lead to stronger organic growth.

That's great. Thank you. Sure.

Thank you. Our next question comes from Vivek Ganesha, with JP Morgan. Please go ahead.

Hi. Thanks for taking my questions. I guess just to follow up on the integrated trading solutions, can you explain that a little bit, how it actually works? Is it an electronic thing, or is it people that you're providing instead of your asset management clients having them? And How does that work if it's five of your clients want to buy one particular stock? How are you separating all of that? Can you give a little more color on how this actually works?

Sure. At 25,000 feet, you can think about it as almost trading outsourcing, investment trading outsourcing, where a lot of clients realize, a lot of our asset management clients realize that, Their core competency is around security selection and research and not necessarily having the trading operations, the back office that comes with that, trade order entry. And so our ability to say you can work with us and we can be your effective outsource trading partner, it appeals to a lot of asset management clients.

Okay, so they don't have to have a trader anymore, or you're just providing the back office for trading?

No, it starts with trading. We can have portfolio managers and their middle office send us model accounts, send us trades, and we can provide that service for them and be more of a full outsource operation from them from middle office through trade execution and trade management.

Okay. All right. I'll follow up maybe a little more offline. Going back to the capital question, Jason, Mike. So I hear you. You want to obviously, you're thinking about client needs and all of that stuff. But even if we factor that in as we think about it, what level are you comfortable running your various capital ratios at, whether it's tier one leverage or whether it's ET1 leverage? you know, is it a 10 or is it an 11%? Whatever the form it gets through, whether it's through loan growth, you know, securities lending growth and or buybacks, you know, what is sort of that cutoff point below which you don't want to go?

From our perspective, I think it still is going to depend on where the industry, you know, where are our peers and and our regulators asking us to hold on to capital to not buy back stock at that time. We don't call an absolute level. We haven't talked about our buffers externally. Obviously, we're running significantly above any regulatory minima, but we haven't. And so we've got buffers that we use internally to manage that, not something we've talked about externally. But when we engage with clients, we want to be able to continue to telling them that they're interacting with a balance sheet that's strong on an absolute and a relative basis. It's part of our strategic strength when we talk to clients. A lot of institutions you think about, not just pension funds, but even sovereign wealth funds, if they're investing If they're depositing $500 million, $1 billion, $2 billion, $3 billion, they're not really depositing. They're lending to their banks at that point, and they want to be operating with institutions that are strong. And so we're always going to be looking and seeing where the tides are in the industry to make sure we reflect strong capital levels.

Thank you. Our next question is coming from Gerard Cassidy with RBC. Please go ahead. Hey, Gerard.

Hi, Jason. Hi, Mike. How are you? Can you guys share with us – I know you're not a prime broker, but there was that trading mishap in March with supposedly a large family office, which probably was a hedge fund. But can you just give us any color? Because we've never seen any risk in your global family office business at all. Can you reassure us that's still the case and just maybe some color around how you manage that business and manage those risks?

Sure. Well, a couple things. You're right. We're not a prime broker, and so we're not providing the type of trading leverage to or alongside clients in taking positions is we're dealing with either our hedge fund clients or our family office clients. In the family office business, we have some loans, but those are much more the loans that we see in the traditional wealth business, which are loans against investments that clients will have and long-term clients, they're not taking that type of exposure. And so the services that we provide for our hedge fund clients and our GFO clients, it's much more about asset servicing, asset administration, investment reporting, That's how we're going to market to deal with those types of clients. And so just to put anybody's minds at rest, we didn't have any exposure to the hedge fund slash family office that you're talking about and don't see that type of exposure in our portfolios.

Speaking of asset servicing and reporting that you just did, Is there an opportunity to capitalize then if the SEC requires more disclosure from the family office organizations as a possibility as a result of what happened? Would that be an opportunity for you guys to do more work for your customers and therefore maybe more revenues?

Yeah, it's an interesting nuance because a lot of our clients, on the head space, they actually are SEC registered. And so we're used to dealing with them and helping those types of institutions on doing the reporting and administration that they need to do for their SEC registration material and engagement. And so that would be, I don't think it's monumental opportunity for us. We haven't talked about it that way. but certainly we have that capability set and would be seen as a strong provider for hedge funds that we're looking to have more of a traditional investment reporting and an overall fund administration engagement with their service providers.

Thank you. We will take our final question from Brian Kleinhansel with KPW. Please go ahead.

Brian. Hey, morning. Great. Thanks, guys. Two quick questions. One, first one on the comp expenses. I heard that the $32 million of comp was retirement eligible. And then did you also say that you absorbed the merit increases year over year, so those are getting paid out in the first quarter now? I thought those were getting paid out in the second quarter historically. I'm just trying to think of the 2Q to 1Q trend here for comp.

Yeah, no, the merit will come through second quarter. What I did mention earlier was that this may have been what got your mind going is the reduction in overall FTE and headcount for the company did lead to a lower salary level in the quarter. But that's distinct from the merit increases.

And just to clarify, this is Mark. The base pay adjustment, the year-over-year increase, is still reflecting of any base pay adjustments that happened in the previous year. We're still lapping that. So if that's what you were referring to, Brian, in the release or in some of the comments we made, that would have been what that was referring to, not this year's.

Got it. Thanks. And then can you also just talk about the trends in investment management? I think either of you adjusts. For the fee waivers, looking at the first quarter relative to the third quarter, you're not seeing much in terms of revenue growth despite the change in market levels over that time period. Could you just maybe touch on the flows in that segment?

Thanks.

Mark may want to touch on flows in general, but... Yeah, so in the CNIS line, I think that's what you're looking at, the investment management fees. You know, on a sequential basis, X waivers, I think we were up about 6%. You know, probably, you know, three-quarters of that, two-thirds to three-quarters of that came from market lift. So there was some sequential organic growth there. But I don't know if that's what specifically if you were looking at

for the fee waivers. So, I mean, it sounds like flow trends in there are more positive.

Yeah, there were some flow activity that we saw there. Like Mike had mentioned, we've been seeing good growth in ESG, some of the quantitative products as well. But the waivers there on a sequential basis certainly kind of overwhelmed what we saw from both favorable markets as well as business flows.

Thank you.

That will conclude today's question and answer session. Mr. Betty, at this time, I will turn the conference to you for any final remarks.

Thanks for joining us today, and we'll look forward to seeing you in July for our second quarter update.

Thank you. And thank you all for your participation. This concludes today's conference. You may now disconnect.