Northern Trust Corporation

Good day and welcome to the Northern Trust Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mark Betty, Director of Investor Relations. Please go ahead.

Thank you, Stephanie. Good morning, everyone, and welcome to Northern Trust Corporation's Second Quarter 2021 Earnings Conference Call. Joining me on our call this morning are Michael Grady, our Chairman and CEO, Jason Tyler, our Chief Financial Officer, Warren Allmutt, our controller, and Briar Rose from our investor relations team. Our second 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 July 21st call will be in webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through August 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 everyone to our second quarter 2021 earnings call. During the second quarter, we continue to successfully execute on our growth strategies across each of our businesses. In our wealth management business, our goals-driven approach and last year's launch of the Northern Trust Institute continue to resonate with our clients, further increasing client satisfaction levels. Our digital Navigate the Now campaign, which we introduced last year, is successfully generating new contacts and leads, creating more opportunity. Uncertainty in tax law changes has also contributed to new business momentum, and earlier in the quarter, we announced the launch of our Tax Policy Resource Center, an extension of the Northern Trust Institute. Within asset management, we continue to see momentum in our liquidity products, as well as strong growth in our FlexShares ETF and ESG strategies. We continue to focus on expanding sustainable investment solutions, and earlier this month announced the launch of the Quality, Low Volatility, Low Carbon World Strategy, an actively managed strategy focusing on high quality, low volatility stocks while maintaining a low carbon footprint relative to the MSCI World Index. We also introduced the Northern Trust ESG Vector Score, which measures financially relevant ESG-related criteria that could impact the operating performance of publicly traded companies. Within our asset servicing business, we continue to see growth that was well diversified across regions, products, and client segments. Recent notable public wins include Fundsmith, Marks & Spencer Pension Trust, Martin Curie Investment Management, and Cold Pension Trustees Services Limited. We continue to invest and expand our asset servicing solutions, as evidenced by us finalizing our acquisition of Parallax Investment Technology, which underscores our commitment to the front office solutions business. The execution of our growth strategies, combined with favorable markets, resulted in 12% year-over-year growth in our trust fees, despite significant headwinds from money market fee waivers. Our expense growth of 8%, inclusive of a pension settlement charge, generated four points of positive fee operating leverage. The expense growth reflected new business, as well as investments in both technology and our staff. as we continue to build a diverse, engaged workforce with skills for the future. I also want to draw your attention to our latest Corporate Social Responsibility Report, which we published last week, marking a full decade of transparent, detailed CSR reporting about the company. The report details our progress towards creating long-term value for our clients, employees, shareholders, communities, and other key stakeholders. Moving into the second half of 2021 and beyond, we remain focused on continuing to effectively navigate the persistent low interest rate environment, focusing on driving greater efficiencies as well as continuing to grow organically in a scalable and profitable manner. With respect to the public health environment, we continue to operate in what we call resiliency mode, which means we're focused on providing our clients continuity of service while the majority of our employees worldwide are working remotely. However, during the third quarter, we expect to see more of our staff returning to their respective locations. Our return to office plans are being driven first by robust health and safety protocols specific to each location, and second, by business function needs and timelines. Finally, I want to express my sincere appreciation for our employees, whose commitment, expertise, and professionalism 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 second quarter 2021 earnings call. Let's dive into the financial results for the quarter starting on page two. This morning, we reported second quarter net income of $368.1 million. Earnings per share were $1.72, and our return on common equity was 13.7%. This quarter's results included a $17.6 million pension settlement charge within the employee benefits expense category. As 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 EFA 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 only modest declines. The U.S. dollar was weaker on a year-over-year basis, which had a favorable impact on our reported revenue, but is unfavorable to our expenses. Let's move to page three and review our financial highlights of the second quarter. Year-over-year, revenue is up 5%, with non-interest income up 10%, and net interest income down 9%. Expenses increased 8% while net income was up 18%. In the sequential comparison, revenue and expense were both flat, while net income, taking our credit provision and taxes into account, was down 2%. The provision for credit losses reflected a release of $27 million in reserves in the current quarter compared to a provision of $66 million in the prior year and a release of $30 million in the prior quarter. Return on average common equity was 13.7% for the quarter, up from 12.2% a year ago, and consistent with the prior quarter. Assets under custody and administration of $15.7 trillion grew 30% from a year ago and 6% sequentially. Assets under custody of $12.2 trillion grew 32% from a year ago and 6% sequentially. Assets under management were $1.5 trillion, up 22% from a year ago, and 6% sequentially. Now let's look at results in greater detail, starting with revenue on page four. Trust investment and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion, and we're up 12% from last year and up 1% sequentially. Foreign exchange trading income was $71 million in the quarter, down 1% year-over-year and down 10% sequentially. The sequential decline was driven by lower client volumes as well as lower volatility. The remaining components of non-interest income totaled $99 million in the quarter, down 3% from one year ago and down 2% sequentially. Within this, securities commissions and trading income was flat with the prior year and down 5% sequentially. The sequential performance was driven by lower trading within our core brokerage business, partially offset by higher transition management revenue. Other operating income totaled $54 million and was down 4% from one year ago and down 1% sequentially. Net interest income, which I'll discuss in more detail later, was $344 million in the second quarter, down 9% from one year ago and down 1% sequentially. Let's look at the components of our trust and investment fees on page five. For our corporate and institutional services business, fees totaled $612 million, and we're up 8% year-over-year and down 1% sequentially. Favorable currency translation benefited total CNIS fees on a year-over-year basis by approximately three points. Custody and fund administration fees were $455 million, and up 21% year-over-year and up 2% on a sequential basis. Both the year-over-year and sequential increases were driven by favorable markets and new business, with the year-over-year comparison also benefiting from currency translation. Assets under custody and administration for CNIS clients were $14.8 trillion at quarter end, up 30% year-over-year and up 6% sequentially. Both the year-over-year and sequential growth were driven by favorable markets and new business, with currency translation also a benefit in the year-over-year comparison. Invested management fees in CNIS of $101 million were down 22% year-over-year and down 13% sequentially. Higher money market fund fee waivers were the key driver of both declines. partially offset by favorable markets and new business. Fee waivers in CNIS totaled $50 million in the second quarter, compared to $28 million in the prior quarter. Assets under management for CNIS were $1.2 trillion, up 22% year-over-year and up 7% sequentially. The growth from the prior year was driven by favorable markets, client flows, and favorable currency translations. The sequential growth was driven by favorable markets and net flows. Securities lending fees were $19 million, down 29% year-over-year and up 7% sequentially. The year-over-year decline was primarily driven by lower spreads, partially offset by higher volumes, while the sequential performance was driven by higher spreads and volumes. Average collateral levels were up 19% year-over-year and up 3% sequentially. Moving to our wealth management business, trust investment and other servicing fees were $464 million and were up 17% compared to the prior year and up 5% from the prior quarter. Fee waivers in wealth management totaled $29.2 million in the current quarter compared to $22.2 million in the prior quarter. Across the regions, both the year-over-year and sequential growth were impacted by favorable markets and new business, partially offset by higher fee waivers. Within global family office, the favorable impact of markets and new business were offset by higher fee waivers. Assets under management for our wealth management clients were $371 billion at quarter end, up 22% year-over-year and up 4% sequentially. The year-over-year growth was driven by favorable markets and client flows, while the sequential performance primarily reflected favorable markets. Moving to page six, net interest income was $344 million in the quarter and was down 9% from the prior year. Earning assets averaged $142 billion in the quarter, up 13% versus the prior year. Average deposits were $128 billion and were up 15% versus the prior year, while loan balances averaged $36 billion and were up 2% compared to the prior year. The net interest margin was 0.97% in the quarter and was down 25 basis points from a year ago. The net interest margin decreased primarily due to lower average interest rates as well as mixed shift within the balance sheet. On a sequential quarter basis, net interest income declined 1%. Average earning assets and average deposits each increased 1% on a sequential basis, while average loan balances were up 6%. The net interest margin declined three basis points sequentially, primarily due to lower average rates. Turning to page seven, expenses were $1.1 billion in the second quarter and were 8% higher than the prior year and flat with the prior quarter. The current quarter included a $17.6 million pension settlement charge within the employee benefits category. This charge represented approximately one and a half points of year-over-year and sequential growth. The year-over-year comparison for expenses was also unfavorably impacted by currency translation by approximately two points of growth. Compensation expense totaled $486 million and was up 6% compared to the prior year and was down 6% sequentially. The year-over-year growth was primarily driven by higher cash-based incentive accruals as well as higher salaries. The growth in salaries was primarily attributable to unfavorable currency translation. The sequential decline was primarily due to the prior quarter's equity incentives, including $32 million in expense associated with retirement-eligible staff. Excluding the previously mentioned pension settlement charge, employee benefits expense was up 11% from one year ago and down 3% sequentially. The year-over-year increase was primarily related to higher medical expense while the sequential decline was due to lower payroll withholding, partially offset by higher medical expense. Outside services expense was $218 million and was up 24% from a year ago and up 11% from the prior quarter. Revenue and business volume expenses accounted for nearly two-thirds of the year-over-year growth and nearly half of the sequential growth. The remaining growth within the category included higher technical services, consulting and legal expense, reflecting investment in the business, as well as the timing of engagements. Equipment and software expense of $178 million was up 9% from one year ago and up 1% sequentially. The year-over-year growth reflected higher software support and amortization costs. Occupancy expense of $52 million were down 13% from a year ago and up 3% sequentially. The prior year included costs associated with our workplace real estate strategies. Other operating expense of $68 million was down 21% from one year ago and down 6% sequentially. The year-over-year decline was driven by lower miscellaneous expenses, including account servicing activities, mutual fund co-administration costs, and supplemental compensation plan expense. The sequential decline was due to lower miscellaneous expense partially offset by higher business promotion and staff-related costs. Turning to page 8, our capital ratios remain strong, with our common equity Tier 1 ratio of 12% under the standardized approach, flat with the prior quarter. Our Tier 1 leverage ratio is 7.1%, up slightly from 6.9% in the prior quarter. During the second quarter, we repurchased 252,000 shares of common stock at a cost of $30 million. We also declared cash dividends as $0.70 per share, totaling $148 million to common stockholders. 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 from us. Our competitive positioning across each of our businesses, wealth management, asset management, and asset servicing continues to resonate well in the marketplace. So thank you again for participating in Northern Trust's second quarter earnings conference call today. Mike, Mark, Lauren, and I would be happy to answer your questions. Stephanie, will you please open the line?

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question to allow time for all questioners. Again, you may press star 1 to ask a question. Our first question comes from Alex Blaski with Goldman Sachs.

Morning, Al. Hey, good morning, guys. Thanks for taking the question. So maybe I'll start with expenses. And I was hoping, Jason, you could unpack some of the trends both on the comp side and non-comp side of the equation. And I guess on the comp side, when we look at the sequential decline in compensation, almost all of that is really just kind of explained by the seasonal effects. So comp was pretty well controlled, especially in the context of, I guess, better revenue environment. So how should we think about that for the rest of the year? Are there things that would, you know, is there enough for you guys to kind of hold the line on the expenses for the second half? And then similarly on the non-comp side of things, you know, things were, I guess, a little bit higher than originally expected, and you previewed that at a conference a few weeks ago. But similar line of question, kind of how should we think about the jumping off points for the non-comp side of the equation?

Yeah. So let me take them in order. I think you hit the comp walking into this period well in that, You know, it was controlled. You look at headcount in particular, Alex, and that's flat for the second quarter in a row, which evidences how we've been managing through the announcements we made in January about what we were trying to do. And part of that is that we also look to reinvest some of that savings, which maybe plays into the second part of your question, which I'll come to in a second. But in terms of thinking forward for the rest of the year, Part of what we did was go through that expense savings exercise earlier in the year. We talked about $40 million to $50 million, somewhere in that range of savings. We've gotten through that and executed that pretty well. At this point, not saying that we're going to continue to see a downward trajectory. Now, I think, frankly, the business growth and some of the investments we're making in the business might cause that to start to have more of a traditional feel going forward. So then if I come to the non-comp side, and I think the area you're probably looking at, Alex, is probably outside services. I mean, there's a $20 million increase sequentially there, and we did talk about that. I did reference that that line item was going to be higher than anticipated. And so it probably makes sense for me to unpack that a little bit for the group. And the way we've been thinking about it is to separate that outside services line into two categories. First, there's a lot of business-related expenses that are in there. And so it's self-custody, third-party advisory, brokerage clearing, market data. And those are line items that are going to trend with the growth of the business. and about half of the growth that we see sequentially is related to that business growth. And you can kind of even litmus test that, you know, if that's half of the $20 million, say it's about $10 million, compare that to the fact that we saw about $40 million in trust fee growth, X waivers, And so that's not bad, and you should expect that when we've got that kind of lift on trust fees, you'd expect there to be some increase coming in these business-related growth exercises. And then the second big category, there's a lot of our technology cost is within that outside services line, and we've had a very consistent goal of strengthening the foundation of technology, improving data architecture and our client experience And since we're doing well on those headcount exercises and markets are up, we want to be deliberate and say we're going to reinvest some of that savings back into technology. And that accounts for about half of that increase. Now, to your question of how should we think about it going forward, you know, all that tech investment is not going to continue to grow at $10 million a quarter. The components of outside services change. that relate to technology should actually be flat over the next few quarters. And, you know, we've got some of the engagements we had with consulting firms and others kind of front load the activities there. And so at this point, we're thinking that component should be flat. The other component, you know, subcustody, third-party advisory, that's going to continue to trend with the business. And, you know, in hindsight, even thinking back to the charges we talked about in January, This is a good example of how we've deployed some of those savings in areas that we talked about to reinvest in technology broadly for the business.

Great. That's super helpful. Thanks for that. And then maybe I can squeeze another follow-up just around capital return dynamics. The buyback was a little bit light this quarter. Obviously, you guys continue to have very strong capital ratios, and we've seen your peers talk about the willingness to sort of go even a little bit below their internal sort of management targets because the balance sheets have ballooned as much as they did. How does that inform at all your appetite for share repurchases? I know you guys kind of think about yourselves relative to peers and that sort of construct as opposed to the absolute sort of vacuum. But, you know, given the backdrop for share repurchases for both StateShoot and DK, I'm curious how you're thinking about yourselves.

Yeah. No, it's just, you know, A lot of firms have talked about aggressive share repurchase. To us, share repurchase is tied to a lot of factors as we think about how to deploy earnings. And to keep capital levels roughly level, we've got to consider dividends, which if you consider those kind of predictable, then you're managing to two other factors. One, capital required to support RWA growth. And then lastly, share repurchase. So if you look at, you know, we actually looked at the last five years pre-pandemic, and dividends are interesting. They're consistently about a third of net income. And so think about the other two-thirds split between supporting RWA growth and share repurchase. Over that five years coming into the pandemic, RWA wasn't changing significantly. So the increase that we saw related to RWA growth was just about 15%. And that leaves about 50% of our earnings that were redeployed to share repurchase. Since the start of the health crisis, though, the relationship between repurchase and retention has actually flipped. And so dividends are still roughly a third, maybe a little higher. But the rise in loans and securities that you see on the balance sheet, that leads to an increase in RWA. So about half the earnings have been redeployed in the form of retention to maintain capital levels. And that left about 15% for repurchase. That's kind of the overall lens of how we've gotten to where we are. Now, that is not to say that we wouldn't change our capital levels or that the change in RWA is a long-term phenomenon. We could easily see lower RWA levels in a lot of different scenarios that we could predict. But that at least explains what happened in the five years pre-pandemic and the trends you saw there, and then how things have changed in the midst of the health crisis and how, at this point, our share repurchase are light relative to what you saw coming pre-pandemic.

Great. Thank you very much for taking the questions. Absolutely. Thanks, Alan.

Thank you. Our next question comes from Glenn Shore with Evercore ISI.

Hey, Glenn. Hello, thanks. Hello there. Good morning. So the question on just rate impact in general. Flat rates from here were better. Do we finally see the signs of NIM, NII, and fee waivers bottoming out? Or is there another level to think about as non-operating deposits might start declining? Just curious to get your thoughts on the cadence from here. Yeah.

High level, I think the band at this point is narrowed a lot. And so there's still runoff in the securities portfolio. We're 65, we're two-thirds of the way through the runoff there. And we're still losing about 40 basis points. But if we think about the impact of what that's doing, it's not as significant as it once was. And And then another component, people obviously, you've seen IOER up, and I think one thing to note there, people say we've got about $35 billion in cash, but we only have about $13, $14, $15 billion at the Fed, and so that translates to $1.5 million or $2 million a quarter. It's not that much in lift. LIBOR continues to be a big impact, and you actually saw LIBOR increase come down a little bit and went from, like, 12 basis points to 10 over the quarter. And so all those things together were, at least at this point, we're not talking about $5 and $10 and $15 million moves. We're talking about $1, $2, $3 million moves a quarter, and they're offsetting each other largely. So I think we're in a band where the volumes across the portfolio are going to be the driver of what happens in that interest income.

Okay, I appreciate that. I wonder if you could just expand or just comment on the fixed versus floating rate mix of both your debt and in the securities portfolio. I'm just curious if you're thinking about locking in either side as rates have moved yet again lower.

It wouldn't cause us – the recent moves wouldn't cause us to make a change. We're constantly looking out on the market and just thinking broadly about how we feel about it. And so we did have duration step out a little bit. It went from 2.5 to 2.6, and 2.6, maybe 2.7, somewhere in that range. But that's more reflective of the longer journey we've been on extending the securities portfolio. But we're conscious to not try and chase return by doing anything inconsistent with what we've talked about strategically. And the strategy we talk about at ALCO has been to get about where we are right now in duration and in mix. And so no significant changes that I would want to forecast coming up.

Okay. Appreciate it. Thank you. Thank you, Vaughn.

Thank you. Our next question comes from Gerard Cassidy with RBC.

Hi, Gerard. Good morning, Mike. Good morning, Jason. Hi, guys. Can I follow up on the money market mutual fund waiver fees? Now that – there's been a slight increase in rates in the reverse repo area, where many of the money market mutual funds are now engaged with the Federal Reserve. Do you sense that your money market mutual fund waiver fees could actually decline sequentially? Some of your peers have pointed that out.

Yeah, I think they will, unless we get a significant change in the short end of the yield curve. But what happened mid-June was helpful for waivers. And if you think about You just think about the math of it. Well, first of all, I'll tell you where we were. We peaked at a run rate of $80 million to $85 million a quarter, and that's where we were early June. And now, as we sit today, the run rate is more like $70 million a quarter. And that run rate changed pretty quickly there. after the Fed actions June 16th or whatever it was. Now, that said, there's not much – I don't think there's that much more that's going to come in terms of run rate. And I think it's at this point – because the money market mutual funds are so short and, you know, probably 40% of them on average – have 30 days or less in duration in the portfolio. So they've already turned over and reinvested. And so the run rate I gave you is largely reflective of the post-IOER and overnight repo facility changes. But, yes, there's a benefit that came from Fed actions in mid-June. Very good. Thank you.

And then as a follow-up, you talked a little bit about your reserves at the Fed. I think on your balance sheet, your total deposits at banks, all central banks, is around $54 billion, if that's the right number. Can you tell me, what's the more normal number? Once we get into maybe a more normal environment at some point in the future, what would be a lower number that you'd be comfortable with?

Well, I'm not sure it's lower. Interestingly, we talk a lot about this. If we layer in the overall deposits, on average deposits, or forget about just what's at the Fed, but just in general, what's driving the asset levels is the liability side. And if we're at $125, $130 billion, is that a post-pandemic normal? And it's just too hard to tell. And I think there's clients who are or right now they've held on to liquidity longer than what we would have anticipated. And that $15 billion in USD, the other $20 billion-ish that's in other currencies and other central banks, it's all driven by the deposit base. And it's held in there pretty flat for a while now on that kind of $120, $130 billion level. Thank you, Jason. Thank you.

Sure.

Thanks, Troy.

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

Good morning. Thanks for taking my question. Jason, curious about the loan growth. So that was pretty robust this quarter and actually the end of period higher than the average. So I certainly suggest it was steady through the quarter. Can you maybe give some color around what's driving the loan growth and also the decline in the loan yield, was that simply a functional LIBOR or was there some mix that was contributing to that as well?

Thanks. So the loan growth, I'd put it in two buckets. One is there's been an ongoing for the last several months. For this year and maybe even leading up to it, a an initiative, a desire, a deliberate level of activity with clients to explain to them, we like the types of loans that we do, but we're willing to do more of them with those clients. And I've talked about being... perceived as more of a reluctant lender. And so we've been talking to clients saying, we'll do more. And so that has been a continued lift to our loan portfolio, I think particularly relative to what we've seen in the rest of the industry. That said, there's also a chunk of it that's probably more episodic. And we've talked about the spikiness in the deposits that can come from particularly GFO clients or very large asset owners, and there's an element that's there that we would view as episodic and spiky, and that's leading to both a big part of the increase that you mentioned and also is a driver of the yield. But back to the fact that we did see LIBOR come down a couple basis points, that obviously is also going to have an impact on the loan portfolio as a whole.

Got it. Okay. Thanks for that. And then thinking about organic growth in the quarter, what you guys had signaled recently that things were starting to pick back up after being on hold with the pandemic and all of the disruption. So how did organic growth come in this quarter? And when you think about organic growth, particularly on the wealth management side, Do you all typically use metrics that are consistent for wealth management like net new assets in order to gauge that growth? And is there any chance that we'll be getting some disclosure, maybe some formal disclosure around those metrics at any point so we can have a better, more clear sense of how this business is growing?

Well, I feel like giving... We're giving revenue numbers by region and also splitting out the family office business. And so we can come back to the disclosure element if you'd like, but just maybe start sequentially with your questions. The organic growth across the company was good, and it was strong in CNIS for the quarter. We look at that very much year over year. It's very difficult to try and unpack that on a sequential basis, but the CNIS business has – has had strong new business growth, and that's coming to fruition. It's being onboarded, and we're seeing good organic lift in the business. And then wealth, as you can see, is benefiting a lot. It's more exposed to market growth, and so that's been more of a help, but there's also been good year-over-year growth in the wealth management business as well. I'll also call out, and looking at the numbers a little bit deeper here, that a portion of the growth sequentially in wealth came from what we think of as some non-recurring items. We have those items in CNIS, and we call those out, but we also have those in the wealth management business. And so that can be, you know, trust in estate settlements. It can be how we account for alternatives coming onto the income statement. Not a huge amount, but you call it $3 million, $4 million of the list that we had, non-recurring in nature. But overall, it was a good – we'd say very strong organic growth quarter for the enterprise.

Great. Thanks for that call, Jason.

You bet.

Thank you. Our next question comes from Mike Mayer with Wells Fargo Securities.

Hi. Mike, your opening comment, you mentioned the digital strategy and some changes that you made and how that's helping out right now. That's a very high-level comment, and it's appreciated, but can you connect that to some more concrete metrics on how it's actually impacting the results that we're seeing and maybe will impact the results ahead?

So I think with digital, Mike, there's a number of ways to look at it, but to start with the reference in my opening comments there, particularly in wealth management, a lot of this is, as I've talked previously, about switching from a new business generation model that has historically been primarily, I'll call it, either in person or on the phone, if you will, to being more digital. And so when I talked about the Navigate the Now campaign, that was essentially driven by an online digital campaign. And the key to it was how do we generate more opportunities from that, so leads from that? And so both with what was online, it was supported then with some more traditional media through advertisements. You know, that generated thousands of leads for us at a high level, which then have been worked through to get to, you know, the leads that fit our profile and then could be followed up, I'll call it, in a more traditional way in doing that. The other one I'll mention, Mike, that I referred to is the Tax Policy Resource Center, which is part of the Northern Trust Institute. And while we talk a lot about that is our knowledge base that we leverage for our clients, but it's also a significant new business generation asset. And the reason why that's also digital, specifically to your point, is when we launched that center, which essentially is online – then that has generated significant new leads. So just with that policy resource center, since it's been launched, we've had over 250,000, you know, views of that. And then from that, that gives us the, you know, the data, if you will, to then follow up with, you know, those that are going to the center. And, again, that doesn't mean that 250,000 of them will be, quote, unquote, good leads. But it's the funnel, which you then work those through down to ultimately being new clients. So that's when I mentioned digital, that was the reference on that front. And then to your point, you know, more broadly with what we're doing just with digitalizing our entire business, you know, that's much broader with regard to our technological capabilities that drive both, you know, new capabilities for clients but also efficiencies for our business model.

And on that last point, when you talk about efficiencies for the business model, is there any way you can size the potential, your aspirational targets, lowering unit costs, improving the fee-to-expense relationship, any kind of context you can put around that?

So as you know, and you highlighted it there, there's a number of financial metrics, but one that we've looked to, which is the expenses to trust fees. And we've continued to drive that down over time. And I do think at a high-level financial perspective, that's where you're going to see it come through. And just to try to make that more tangible, so one of our big investments in asset servicing is in our matrix platform. That first is focused on transfer agency. And so with that, yes, it will provide a much better experience for I'll call it for our clients' clients, right, because we're doing that on behalf of asset manager clients, but also that is going to yield significant efficiencies for us. You know, essentially that's the, you know, the first, I'll call it funding mechanism for the business plan to make that investment. And then the other, of course, is, you know, generating new business because of the capabilities.

All right. Thank you. Sure. Sure.

Thank you. Our next question comes from Steven Chewbeck with Wolf Research.

Hi, good morning.

Morning. With regards to the outlook, Jason, I was hoping you could speak to what's driving, you know, is this some of the increased loan appetite in the current environment? I know you talked about really strong growth and demand across our client base, but I was hoping you could provide just some context around how much was seasonality a factor that maybe drove this step up, given some of the tax seasonality, and just the implications for the NII trajectory in the back half, whether there's a sufficient offset to the securities yield headwind that you had cited earlier in your remarks.

There's not a lot of seasonality on the loan side for us at all. Some on the deposits, but not on the loans. And so what... What I was talking about earlier is there may be a layer there that's less about seasonality, but more about just the spikiness of how some of our very, very large clients will sometimes come to us and say, we want to borrow a very large dollar amount to either avoid selling a large asset, avoid the public sale of large assets, and we're happy. Those are extremely high-quality loans, and and they're meaningful to clients to help on their liquidity needs. But you can also imagine pricing on them isn't something that's driving incredible increase in NII either. And so I don't think that – I think it probably sticks out more in volume levels than it will in NII levels over time.

Got it. And just for my follow-up also on NII, I was hoping to get a sense as to how you're thinking about managing some of the excess liquidity that parked at the Fed. You saw a very healthy step up, not surprisingly, sequentially. And, you know, the securities growth has been relatively tepid as excess reserves have continued to expand. Want to get a sense as to whether you have sufficient excess liquidity or buffer to some of those incremental funds back into securities.

Yeah, we've got a lot of – we've got plenty of room right now if we wanted to move from whether it's HQLA to non-HQLA, whether we wanted to increase the balance sheet size if clients were the driver there and saying we wanted to do significant increases. Again, we haven't – we're not incredibly – receptive to the phone calls from organizations we don't work with saying, can we park $10 to $5 billion on the balance sheet? We've always talked about the balance sheet being there for our clients and being a strategic resource for us engaging with our clients. But at this point, we feel like we've got a lot of flexibility. I think you look at Tier 1 leverage of 7.1, and that gives an indication in and of itself of tens of billions of dollars of of room that we could have to bring on additional assets. And then in terms of how we would deploy it, there's also plenty of room we have to move between HQLA and non-HQLA based on what we see is attractive in the market and the risk profile that we're looking at across the different asset classes that we invest in.

Great, Tyler. Thanks for taking my questions.

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

Hi, good morning. Hi, Beth. I had a couple questions on some of the initiatives that you've announced recently, in particular the European ETF launch and the alternative asset servicing digitization initiative. Maybe you can give us a sense as to how we should be thinking about the rollout, the timing, the impact. Is it likely to come through earnings in the next, you know, couple of years, or is this client acquisition over time type of initiative?

I'd headline both as, you know, long-term strategically important, but short-term not needle moving from the income statement perspective. And, you know, take, for example, the European ETF, this We've got $160 billion in AUM in overall assets, mostly in Europe related to ESG. And we've got a nice business in Europe when it comes to dealing with ESG and fund launches. And so that's a good example of us thinking about what's important for our clients and working with the asset management business to determine what they can do to provide incremental resources for clients long term. You think about the size of a trillion and a half dollars in assets in AUM in the asset management business, and that's not something that we think is going to be a needle mover to that one and a half trillion dollars, but also strategically really important. I don't know, Mike, if you have anything you want to add.

Betsy, to address the other one, it fits into my comments on digitalization and the fact that, you know, the first driver often is the efficiencies that we get from it. So what we announced there on the alternative asset side is the ability to use machine learning in order to essentially capture all the data for alternative assets and and digitize them, if you will, so that then they can be much more efficiently processed through the entire process. And so it's something that will benefit us on the efficiency and productivity side.

Okay. And then just separately, obviously equity markets are up nicely. We're hearing about a lot of pension plans that are looking to get you know, frozen and put into the hands of OCIO providers. I know you're involved in that business. Could you give us a sense as to how you believe you're positioned for what seems like is a wave of opportunity here?

Yeah. Yeah, you're right. I mean, we're in that business and in a good way. And we, if you think about particularly North America pension plans, our OCIO business is, you know, and I'm a little stale on the numbers, but it was, you know, one point within the last few years, we were the leader in that space. And so it falls into our sweet spot well. We've got very good expertise, very sophisticated client base, particularly on the DB side of the OCIO market. Now, the flip side to it is you get a lot of clients who, as they de-risk and do other things with their portfolios, that can sometimes work against you. And so I don't think about it as a big wave that, again, is going to move the needle on $4 billion in fees, but that's a very strategically important business for us where we've done extremely well over time with high-quality clients and and a very talented team. And so when there's money in motion there for firms to be thinking about outsourcing their DB plans, I think we're very well positioned.

Yeah, I would just add, Betsy, because we do believe we're particularly well positioned for that trend, because in addition to what Jason said, if you think about our business model, you have the OCIO practice that Jason talked about, but also we have relationships through wealth management and through the family office part of that as well, where we have exposure and connections into a number of foundations that might not be as large as some of the biggest that you read about, but are going through the same decision-making of whether they want to just outsource the investment activity there. And we think that will continue, and we think, again, we cover it, I would say, as broadly as anybody.

Okay. All right, thanks. And then just one squeeze-in question on the dividend. I know we talked earlier about the buyback, but should we be expecting any changes to the dividend going forward?

Well, if you look over the last few years, particularly recently, pre-2020, which is kind of a goofy year, but our dividend is pretty consistently 30% to 50% of net income. And it's been very consistent. And if you look at where this quarter falls, it falls right in the middle of that 30% to 50% range. And so nothing there that would raise a flag up or down. We think it's very – it's very – attractive. And we also, interestingly, I think something people don't do a lot, we look at dividends relative to RWA, which is an interesting way to combine thinking about payout ratio with returns. And so as we look at our peers, and you can pick your own, but both in terms of the level of that payout ratio on a percent basis relative to earnings, the consistency of it, and Also, how it is relative to RWA, which, again, gets to both returns and payout, relative to the peers we look at, we score really well on those different lenses. Okay.

Thank you. Thank you. Our next question comes from Kim Easton with Jefferies.

Hi. Good morning. Just to follow up on that point on capital further, again, You know, I just want to make sure I'm clear that it seems like you're focusing as much on just maintaining capital ratios with that balancing act you mentioned on RWA versus the combined shareholder return. So, you know, I know you guys don't give us formal targets, but I think historically, I thought you might have lived relative to where the others are. Is this a little bit of difference? Maybe it's post-pandemic or maybe it's – We want to keep some aside for inorganic opportunities. Just wondering, like, just how we think about how Northern Trust thinks about your absolute capital in that regard. I understand the mix of uses has changed, but coming back to just, like, where you want to live on absolute levels. Thanks.

Sure. And, Ken, it's Mike. I think you hit on the key factors and how those do change over time. So to your point, you said... you know, well, the pandemic and how you may feel about that. That criteria is the operating environment. So we're always looking at that operating environment, determining where we think we need to be. You know, the second, I would say, is certainly from a regulatory perspective. And, again, feel very good about where we are there, but that's another, you know, lens to make sure that we think we're in the right place vis-a-vis all the ratios and, you know, the whole CCAR process and everything. And then third, as you mentioned, it's instead of called absolute, it's, you know, the relative capital ratios, which, you know, we know that that is, you know, a part of the considerations that clients have when they think about a financial partner, you know, a partner that they need to trust not just today to be around and be strong but be around for a very, very long time. I mean, that's part of the pitch, if you will, Ken, is that, you know, that Northern Trust has been around and will be around through all types of environments and that we have, you know, amongst all the capabilities, but we also have the financial strength and capitalization. So that's why that criteria is important. And to your point, that can change over time as our peers move their capital levels up and down.

Right. Okay. It just seems to me that you've got plenty of capacity on all of those factors, plus room for balance sheet growth, plus room for buybacks. But it just seems like the mix of the buyback has become a smaller proportion, obviously, as we saw this quarter.

Yeah, it did. But as Jason went through, we've just gone through in the last six quarters a meaningful increase in RWA growth. you know, largely intentional, if you will, as Jason talked about, where we saw the opportunity to really support clients and to get prospects that would not just be, you know, credit clients but broader relationships. And so we saw that as, you know, a better opportunity at that time to, you know, redeploy in the business. And RWA went up, you know, as he said, you know, more in the six quarters than it did in, you know, the five previous years, you know, in a meaningful way. Does that stay the same going forward? Obviously, we don't know. But, you know, generally speaking, these things tend to change over time. Very fair.

Thank you, Mike. And just one question on the deposit growth, which has remained stickier, as you guys have mentioned. Are you comfortable housing it all on balance sheet, you know, even though you're getting relatively low returns in the low-rate environment? Or do you contemplate trying to move some of it off into off-balance sheet vehicles?

We can start in that instance with what's best for clients. And we've got $280 billion in money market fund family. And the performance there is good. It's a very attractive set of money market mutual funds. At the same time, some clients really like the saying, you know, we want to be on the balance sheet. And some of it is geographic. Obviously, it's In the U.S., there's much more prevalence to use funds where some of our European clients like to use the balance sheet more. I think we're in a good position where we've got room on both sides, really good attractive offerings on both sides. Don't need to nudge clients one way or another for us. When, you know, that said, we sometimes look in different operating environments. We can We can think about pricing. We can think about the value proposition that we can offer clients in one platform versus another, and we can have conversations with them about that and do things, but not in a position at this point to have to nudge. Again, that's 7.1% in this environment where all bank balance sheets are inflated. It gives us a lot of room to be able to just lead with what makes the most sense for large, sophisticated depositors.

Got it. Okay. Thanks, guys. Sure.

Thank you. Our next question comes from Vivek Juna with J.P. Morgan.

Hi. Thanks for taking my questions. Just let me go back into the capital question since the buybacks and dividends have caught everybody's attention. Pulling up on your comment that you do do it with eWatch versus Peers, and that you're focused on the risk-weighted assets. So that would imply that you're focused on the CET1 ratio versus peers. Is it a gap? What is the gap that you're trying to maintain about peers? Is it 100 basis points? Is it 50? Can you give us some sense of sort of as we think about, you know, how to, you know, in the constructs of your balance sheet, whatever assumptions you make, what is it that we should be keeping in mind?

Yeah, and there's no gap in particular, and that's not even – I also wouldn't say that's the only ratio that we look at, CT1. You know, we're looking at – you know, we've talked about Tier 1 leverage a few times just this morning on this call, and there are other things that we look at as well in terms of the balance sheet strength and, you know, credit quality and other factors and how all that duration and what exposure is like to interest rate risk. And so there's a lot of ways to – to litmus test that. And then at the same time, we've also mentioned, and Mike just walked through the framework a few minutes ago, we're thinking not just about the relative, but at an absolute level where we want to be. We're thinking about what the regulatory environment's like. And then I always remind people that we're not just making this decision unilaterally internally. We have really good engaged conversations with our board around this topic as well and where we might want to be where we might want to take the balance sheet strategically. And so I know it's tempting to kind of look and say, okay, well, what's the floor and where are you going? But there's so many factors that we're looking at. And also, what's the reinvestment opportunity set look like? And if we've got opportunities to let RWA grow in ways that we think are building the future earnings, and that's what I think some people can miss is that the RWA growth isn't just a drag. You know, that theoretically should give you – should give a sense that there's potential future earnings that's expected. And, you know, we're still – we're trying to grow earnings. And so looking at dividends and share repurchase, I think can sometimes, you know, take – pull that narrative toward thinking about those things is the better way to redeploy earnings. But the RWA growth is reflective in some ways over the long run of the base of business that we have. Now, again, it's not to say that we think RWA is going to continue to increase. It could come down. Even mentioning the loan growth we've talked about is something that had a significant increase in RWA this period. If that goes away in a year, then the RWA would come down. And so there's so many factors that when we sit around the table and talk about where do we want to go with redeployment of earnings, We've got to try and predict not just where things are, but where things are going in each of these elements. But it's certainly broader than thinking about a specific gap on CET1. Okay. Okay, great.

And one more on, you know, as you look at your overall – You told us that, you know, the other operating expenses, what you expect the trajectory to be. Are you seeing any other impact from an inflationary standpoint, any, you know, any color on that given the, you know, big talk in the environment about inflation? What are you able to do to offset that?

I think we missed the operative word there. Are we looking to see any changes in what did you say to that?

From the rise in inflation, are you seeing any inflation-free impacting your expenses, Jason? And if so, how are you – either what are you being able to do to offset that?

Thanks for clarifying. And then just another component of the question, the comments we made earlier weren't on other expenses. It was on outside services, just to make sure everybody understands what we were talking about in detail there. Okay. The inflation is showing up in different areas. I mean, every firm is dealing with talent issues and the pressure is there. We certainly see that and experience it and talking at management levels about how to address it. And the inflation we see across the business in different areas as well. And some of it is unit cost, but some of it is just the increased cost of doing business. And, you know, we talked about the significant increase in technology-oriented expenses that we're having. In some ways, that's an inflation cost on the business. It's not just a unit price in inflation, but it's inflation in the overall cost of doing business. So it's showing up in different ways across the organization.

Yeah, I would just add to that, if you think about it in a manufacturing context, To Jason's point, we're seeing inflation on the cost side in a number of ways. In a manufacturing context, your question would be, are you able to pass that on to the end consumer? And that's not the way our operating model is set up. That said, if you think about generally how we're pricing what we do, a lot of it relates to the asset level. So to the extent that that inflation is going through to AUM, AUC levels, You know, you're capturing some of it there. And then also to the extent that you believe that there's inflation on the horizon as well, you would expect interest rates to go up as well. And we know where we are on rates and what the impact would be to the extent that those increase.

Great. Thank you both.

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

Great. Good morning, Brian. Good morning. Good morning. Most of my questions have been asked and answered, but maybe just to come back on the seasonal expenses in the second half, you gave us the color on the outside service expense. Typically, you see a seasonal bump in equipment and software expense that's been pretty reliable at least over the last three years. So, if you could just maybe comment on whether we expect to see that similar dynamic And then in other expenses, just I don't know if I missed it, but the Northern Trust open, is that going to be a factor for 3Q?

Thanks for bringing up the equipment and software. Probably should have referenced that earlier. Yeah, there's likely to be an increase there as we think about what's happening over the remainder of the year. And it's not one or two areas that I could point you to, but it's just, you're right, there's some dynamics where that tends to tick up some of the expenses that we, some of the capital expenses that we put in place, you start to see depreciation come up there, and it's in a lot of different line items that it's, you know, but there should be a tick up there, a normal-ish or maybe even slightly above that increase in equipment software. And then in terms of Golf, Mike, you want to take that? It will be in the third quarter. Yeah.

And, Brian, this is Mark. I mean, you could look at the business promotional line, even though that's not all the golf, but there's seasonality to it. And if you looked at it, you know, 2017 through 2019, there was about a 16 to 17 million step up from second to third quarter. So that's probably a decent way to think about it.

Okay.

Great.

That's helpful. And then last quarter. Yep. Yep. Go ahead.

Last year, as we came in, people wondered whether because of the pandemic, those numbers would be lower. And I think everybody should be thinking about it as more of a normal year. The numbers would mark throughout. It would be the one thing that's important for people to take away.

Right.

Right. Right. Okay. Yes, that makes sense. And then maybe just on ESG, just back to that. Two-part question. You mentioned, I think, Mike, you mentioned the ESG factor score. that you launched. I think that's for asset owners, if I'm not mistaken. I guess the question there is, is that something that you are charging for separately or more built into the overall service offering? And then on the wealth side, are you seeing demand from your wealth clients increasingly to invest in, you know, invest with social responsibility? And are you meeting that through your own investment management? or other open architecture managers on the platform?

Yes, we are seeing the demand, Brian, kind of across the fronts that you talked about. So let me just, you know, give a little more detail to it. First of all, with our asset servicing clients, to your point, as they invest more in ESG, they need the analytics and data and reporting to support that. And so we are providing that type of service to them. And one of the examples that I mentioned earlier, the Marks & Spencer mandate that we had in the quarter was for that service, just as an example. And then with wealth management, absolutely, you know, our client base is interested in ESG and increasing, you know, their investable assets in that area. And as much as we have an open architecture model, you know, with wealth management, much of it is serviced through NTAM. And so we've seen the benefit of that in NTAM. And NTAM on its own, or in addition, on the institutional side, is seeing that demand and fulfilling it as well. And so just to put some numbers on that, our ESG assets in NTAM, now we're at about $155 billion, which is up over 50% from a year ago. So, you know, healthy growth in that area, and it's an area of focus for us as a company.

Yeah, okay. That's great, Colin. Thank you.

Sure. Thanks.

Thank you. This concludes today's Q&A session. Thank you for joining the presentation. This concludes today's call. You may now disconnect.