Northern Trust Corporation

everyone. Welcome to Northern Trust Corporation's fourth quarter 2025 earnings conference call. Joining me on our call this morning is Michael Grady, our chairman and CEO, Dave Fox, our chief financial officer, John Landers, our controller, and Trace Stegeman from our investor relations team.

Our fourth quarter earnings press release

please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2025 earnings call. Turning to slide four, in 2025, we made significant progress executing on our One Northern Trust strategy. delivering strong and improving financial performance and providing solid momentum going into 2026. In the fourth quarter, compared to the prior year, trust fees grew 7%, net interest income increased 14%, and revenue was up 9%, excluding notables. For the sixth consecutive quarter, we delivered positive trust fee and total operating leverage while continuing to invest meaningfully in the business. Excluding notables, pre-tax margin expanded to 33% and EPS grew 19%. For the full year, revenue rose 7% and expenses grew 5%, delivering over two points of operating leverage and a 30% pre-tax margin, 14.8% return on equity, and 17% EPS growth, all excluding notables. We returned $1.9 billion to shareholders in 2025. including a record 1.3 billion of share repurchases, which reduced share count by 5%. These results reflect strong market conditions and demonstrate the strength of our One Northern Trust strategy, which serves as our roadmap to becoming a consistently high-performing company that delivers meaningful value for clients, partners, and shareholders. Turning to slide five, we've made significant strides across each of our strategic pillars, Starting with optimized growth, we advanced several initiatives at both the enterprise and business unit levels, resulting in deepened client relationships and expanded market share in key areas. We broadened our private markets footprint across the enterprise and further enhanced our capital markets and banking penetration, which now contributes more than one-third of enterprise revenue. These firm-wide efforts improve collaboration across our businesses, allowing us to bring the full capabilities of Northern Trust to our clients while accelerating the pace of product development and innovation. Turning to productivity, we initiated significant changes to enhance and scale our operations. Our client-centric capability operating model provides a unified and consistent way of working across the company, standardizing core processes, increasing spans of control, reducing organizational layers, and empowering the broad adoption of AI-driven automation inclusive of our AI platform, NT Byron. For example, The Chief Operating Officer's organization, which encompasses more than half of our workforce, increased managerial spans of control by over 35%, while reducing management layers by over 20%. This is improving speed, accountability, and efficiency across the firm, creating a leaner, more agile operating structure, and fostering enhanced collaboration. Our accelerated deployment of AI across high-volume activities such as digitizing documents and automating manual tasks is driving efficiency gains while improving quality and consistency across key workflows. Overall, we increased productivity savings last year, representing more than 4% of our expense base. We strategically reinvested these savings into growth and resiliency initiatives, fueling our future performance. For 2026, we plan to raise our productivity target by 10%, supported by maturing initiatives, further structural and workforce improvements, and broader AI deployment. On resiliency, we strengthened the firm's risk technology and operational foundations. We advanced cybersecurity, upgraded our data environment, expanded cloud adoption, modernized key software platforms, and enhanced core risk and control processes. These initiatives help future-proof the company. Turning to our business unit performance, starting with wealth management on slide six, we delivered strong momentum in the fourth quarter, particularly in our upper-tier segments, continuing to deepen our leadership position in global family office and the ultra-high net worth market. GFO achieved record new business in 2025, surpassing last year's high watermark with strong contributions from both domestic and international markets, the latter up 15%. Last year, we launched Family Office Solutions, extending our world-class GFO platform to families with more than $100 million in net worth to serve as their outsourced family office. FOS exceeded its goals for clients and assets last year, and we're scaling this proven model across all markets. Together, GFO and FOS position us exceptionally well to meet the needs of the most complex segment of the market. Another area of focus is talent. In 2025, we unified sales across GFO and the regions, strengthened coverage models, and enhanced pipeline rigor and win rate expectations. we will continue to invest in high-performing, growth-oriented front office talent, while sharpening incentives around new client acquisition and organic growth. The third area of focus is expanding our suite of investment solutions. Alternatives remained a key priority in 2025, as we more than doubled the number of funds launched on the platform and tripled assets raised, broadening client choice across strategies. We also made the fund launch and distribution process more scalable, which will support a faster cadence in 2026, including our first evergreen fund. Finally, we will enhance our client acquisition strategies across segments, geographies, and channels, including deeper engagement with centers of influence and intensified digital engagement initiatives to generate more high-quality leads. Across each of these areas, we are simplifying processes, upgrading platforms, and applying AI to reduce friction in service delivery. These steps will enhance both the client and partner experience and strengthen wealth management growth. Turning to asset servicing on slide seven. Overall, we ended the year with improved organic growth and profitability, driven by our strategic focus on scalable growth in core product areas. Capital markets performed particularly well in 2025, ending the year with robust FX trading and integrated trading solutions activity in the fourth quarter. Private markets were another highlight, with wind-related revenue of 18% over prior year, further solidifying our leading position with global hedge fund managers and UK LTAS. We will build on the success in 2026 by further scaling core fund administration and depository services while increasing cross-sell of capital markets activities. Led by our industry-leading front office solutions offering, which continues to be a key differentiator, we will further expand our global asset owner franchise, building on the over 100 new mandates in 2025. Finally, We will sharpen our focus on selectively enhancing the products and services we offer, such as growing ETF servicing in the U.S., expanding European transactional banking, and building out our digital asset capabilities. Asset servicing enters the year with solid tailwinds and a clear path to accelerate profitable growth. Turning to asset management on slide eight, NTAM delivered another solid year and is well positioned to continue executing on its growth initiatives. Liquidity was particularly strong, with the fourth quarter marking the 12th consecutive quarter of positive flows, and liquidity AUM reaching nearly $340 billion. We continue to broaden our successful liquidity franchise by leveraging digital capabilities, including introducing a tokenized share class of one of our money market funds, building on last year's strong alternatives fundraising, we will continue to expand our product capabilities and strengthen distribution across wealth and institutional channels. On the product innovation front, we maintained a high velocity cadence last year, doubling product launches year over year, including 11 new ETFs, meaningful expansion of our SMA fixed income suite, and the rollout of multiple custom solutions across alternatives. NTAM will maintain an elevated new product base and work closely with Northern Trust Wealth Management to co-develop tailored solutions, building on the first of their kind distributing ladder ETFs introduced in 2025. Direct indexing and customized SMAs remain areas of strong client demand, supported by $5 billion of net organic flows in our tax-advantaged equity suite in 2025. We will extend this momentum through the launch of a long-short tax-advantaged equity strategy and expanded customized fixed-income SMAs, reinforcing our position as a top-three industry provider. Together, these priorities strengthen our growth trajectory, deepen our client engagement, and expand our ability to deliver differentiated high-demand investment solutions. Turning to slide nine, the execution of our One Northern Trust strategy over the last two years is translating into improved financial performance. Productivity and expense discipline are driving positive operating leverage, reducing our expense to trust fee ratio and improving pre-tax margin levels. While ROE has been at the high end of our target range and EPS has grown at a double digit pace for the past two years. Turning to slide 10, As we move forward, we're doing so with a clear vision, good momentum, and a resolute commitment to consistently deliver on our strategic pillars, producing financial performance that rewards shareholders. With the goal of generating attractive returns on capital and double-digit EPS growth through cycles, we have the conviction to boost two of our medium-term financial targets. In addition to targeting expense-to-trust fees below 110%, We're now targeting a pre-tax margin of 33% and return on equity in the mid-teens. To wrap up, this progress is only possible as a result of the exceptional efforts of my fellow Northern Trust colleagues. I want to thank them for their commitment to delivering for our stakeholders. With that, Dave will take you through our fourth quarter and full-year financial results.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2025 earnings call. Let's discuss the financial results of the quarter, starting on slide 12. This morning, we reported fourth quarter net income of $466 million, earnings per share of $2.42, and our return on average common equity was 15.4%. Our fourth quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 140 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth. Trust, investment, and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 7% increase compared to last year. Net interest income on an FTE basis was up 10% sequentially to $654 million, a new record, and up 14% from a year ago. Our assets under custody and administration were up 3% sequentially and up 11% compared to the prior year. Our assets under management were up 2% sequentially and up 12% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded an $8 million release of the credit reserve in the fourth quarter, largely reflecting refinements to factors used to estimate losses for the CNI portfolio. Our effective tax rate was 26.5% in the fourth quarter, up 310 basis points over the prior year's rate, largely as a result of higher tax impacts from international operations. We expect the effective tax rate in 2026 to be approximately 26 to 26.5%. Our results included $69 million in net unfavorable notable items, including $19 million in expenses associated with our visa swaps, recognized within other operating income, $59 million in severance-related expense, primarily recognized within compensation expense, and a $10 million release of our FDIC Special Assessment Reserve recognized within our other operating expense. Relative to the prior year period and excluding notable items, revenue was up 9%, expenses were up 5%, our pre-tax margin was up 250 basis points to 33.2%, we generated over four points of positive operating leverage, earnings per share increased 19%, and our average shares outstanding decreased by 5 percent. Turning to our wealth management business on slide 13, wealth management had a good quarter with strength in both GFO and the regions. GFO won three of its largest wins of the year in the quarter. Priority markets delivered their best overall quarter of the year, and the regions posted their best quarter for flows. Assets under management for our wealth management clients were $507 billion at quarter end, up 13% year over year. We saw healthy incremental flows late in the quarter, including $5 billion within GFO. Trust, investment, and other servicing fees for wealth management clients were $578 million, up 6% year over year, primarily due to strong equity markets as the favorable flows occurred late in the quarter. Trust fees within the regions were up 5% year-over-year in the quarter and were up 6% for the full year, with strength mostly attributable to favorable equity markets, as strong advisory fee growth was mostly offset by continued product pressure. Within GFO, trust fees were up 6% in the fourth quarter relative to the prior year, showing healthy improvement from the third quarter's more muted performance. They were up 5% for the full year. Wealth management average deposits were up 5% sequentially, reflecting year-end portfolio repositioning coupled with new business momentum. Average loans were down 4%, reflecting the repayment of a large GFO loan. Including severance charges of $15.2 million, wealth management's pre-tax profit decreased 3% over the prior year period's record levels, and the pre-tax margin contracted by 300 basis points to 38.9%. Excluding these charges, the pre-tax margin was down 120 basis points. Moving to asset servicing results on slide 14. Our asset servicing business also had a very strong finish to the year. Transaction volumes accelerated. Capital markets activities were robust, while new business generation continued to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17.4 trillion at quarter end, reflecting an 11% year-over-year increase. Asset servicing fees totaled $730 million, reflecting an 8% increase over the prior year. Custody and fund administration fees were $496 million, up 9% year-over-year, reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 12% over the prior year. Investment management fees within asset servicing were $166 million, up 6% year over year, largely due to favorable markets. Asset servicing average deposits increased 3% sequentially, reflecting normal seasonal patterns, and were up 6% year over year. Loan volume increased 6% from third-quarter levels but remained down 8% year-over-year, albeit off a small base. Asset servicing pre-tax profit grew 23% over the prior year or 40%, excluding severance charges. The pre-tax margin expanded 210 basis points year-over-year to 25.5% and increased 550 basis points, excluding severance. The segment-level margin, benefited from the NII associated with the seasonally strong deposit levels, the pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, which translated to a pre-tax margin on our new business that was above 30%, as well as our efforts to streamline our operations. Moving to slide 15 and our balance sheet and net interest income trends. Average earning assets were up 3% on a link quarter basis as higher deposits drove an increase in cash held at the Fed and other central banks and in our securities portfolio. We issued $1.25 billion in new debt in November, $500 million in senior and $750 million in sub-debt. The debt was swapped to floating and proceeds were invested in floating rate securities at a positive carry. As a result, the fixed percentage of the securities portfolio dropped to 52% from 54% in the third quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to 1.48 at the end of the quarter, and the duration of our total balance sheet continued to be under one year. Average deposits were $119.8 billion, up 3% compared to third quarter levels, reflecting normal seasonality. Deposits performed largely as expected throughout the quarter, but we saw a higher-than-usual surge in the last two weeks. We expect deposit levels to normalize in the first quarter. Within the deposit base, interest-bearing deposits increased 2% sequentially, and non-interest-bearing deposits increased by 10%, climbing to 15% of the overall mix. Net interest income on an FTE basis was $654 million, up 10% sequentially and up 14% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, a greater proportion of non-interest-bearing deposits, and the ongoing impact from deposit pricing actions we've taken outside of rate cuts. Our net interest margin increased sequentially to 1.81%. reflecting the favorable deposit pricing actions taken, coupled with the more favorable deposit mix shift. Turning to our expenses on slide 16, expenses increased 9% year-over-year in the fourth quarter, but excluding the notables listed on the slide, they were up 5% over the prior year. Excluding both notables and unfavorable currency movements, expenses were up just 3.8% in the quarter and 4.3% for the full year. This translated to an expense-to-trust fee ratio of 110.8%, excluding notables, and our sixth consecutive quarter of year-over-year improvement. Turning to slide 17 and our full-year results, including notable items listed on the slide, full-year revenue decreased 2%, and EPS declined by 11%. Our ROE was 14.4%, and we returned 111% of our earnings to shareholders. Relative to 2024, Currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 60 basis points. Our full year results included 69 million in net unfavorable notable items, all reported in the fourth quarter. 2024 results included 536 million in net favorable notables recorded in quarters one through three, including an $878 million gain related to the Visa B-Share monetization. Excluding notable items in both periods, 2025 revenue was up 7%, expenses were up 4.9%, or 4.3%, excluding unfavorable currency impacts. Our pre-tax margin was up 160 basis points to 30%. We delivered over 200 basis points of positive operating leverage. and earnings per share increased 17%. Turning to slide 18, our capital levels and regulatory ratios remain strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.6%, driven by capital accretion and a decrease in RWA. Our Tier 1 leverage ratio was 7.8%, down 20 basis points from the prior quarter, driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available-for-sale securities was $401 million. For the fourth quarter, we returned $522 million to common shareholders through cash dividends of $152 million and stock repurchases of $370 million. For the full year, we returned $1.9 billion, including a record $1.3 billion in share repurchases. This reflected a 113% payout ratio in the fourth quarter and 111% for the full year. Turning to our guidance on slide 19. As I've been signaling, we're moving away from an expense growth target and instead focusing on positive operating leverage, which is our North Star. We want to maintain the flexibility to opportunistically invest in growth initiatives when top-line growth is more favorable and dampen expense growth when the market environment is more muted. But generally speaking, I can assure you that the direction of travel for expense growth will be down. As shown on the slide, we now expect full-year 2026 NII to grow by low to mid-single digits over the prior year, which is up from our previous guidance. This assumes current market implied forward curves and relatively stable deposit mix. We expect to generate more than 100 basis points of positive operating leverage, and we expect to return more than 100% of our earnings to shareholders. And with that, operator, please open the line for questions.

Thank you. If you're dialed in via the telephone and would like to ask a question, please signal by pressing star one 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 in order to allow everyone an opportunity to ask a question. Again, press star one to ask a question. And our first question is going to come from Brennan Hawkins from BMO Capital Markets.

Good morning. Thank you for taking my questions. Good morning. You know, hi. Hi, Mike. Really encouraging to see the targets moved higher on the medium term and actually what looks like really some encouraging ambition in the targets. Can you speak to your conviction in driving change across the organization and like when you think the timing of some of this traction could start to come through in the financial results?

So I would say, Brennan, that we have a high level of conviction that we're seeing the change transmit through the entire company. I talked about in my comments there just the fact that this is a an effort on the part of all of our employees, all of our partners to do this. And I think you're seeing what I think I'll call the early days of the results from a financial perspective. And that to the extent we continue to maintain that conviction and execute on the strategy, we'll continue to see consistently high performance like we did this quarter. And that's why we had the confidence to to move the targets up in the medium term, which we look at as kind of a three to five year timeframe. And if you just think about what Dave has said, even for the year that we're in right now, trying to generate more positive operating leverage, that will take us in the direction towards those targets.

Right. Okay. Thank you for the timing around that. And definitely really encouraging to see it. It was great. maybe one on the balance sheet. So the deposit cost trends were encouraging here in the quarter. Can you speak to what drove the lower costs on the IB side? We saw the NIBs, the non-interest bearing balances, move higher, but sometimes that's seasonal. So you spoke to, I think, stable deposits in the outlook for the NII. Does that mean that, does that include maybe the IB composition normalizing and how sustainable is the ability to drive down the interest-bearing deposit costs? Thanks.

Yeah. So there's a lot to unpack in that question. I would say generally speaking the fourth quarter growth in NIB particularly I think had a lot of factors. Definitely seasonal, but also keep in mind that the government was closed for 43 days during the quarter, and I do think there was some cash stockpiling during that period because of a lack of economic data. So I think it may have been a little inflated because of that. Going forward into Q1, you should expect the seasonality of that to fall. Too soon to say when and how. Usually it happens sort of after audit season when the fund admin companies decide that they've spent all their money for that particular quarter. So it will normalize at some point during Q1. So I would just say that Q4 is definitely not a jumping off point for NII going forward into Q1. Q1 will definitely be lower in terms of total NII. In terms of the deposit pricing, You know, we continue to spend a lot of time through our liquidity solutions efforts to look at our deposit pricing, and we still have a lot of tools in our tool shed to continue to lower that going forward. We also had in the quarter, though, some expensive wholesale funding that rolled off, and we did need to replace it. And so because of that, more stability there, we're able to bring down our deposit cost accordingly.

Okay. Thanks for that call, Dave. Sure.

And our next question is going to come from Ibrahim Poonawalla from Bank of America.

Hey, good morning. Good morning. I guess maybe if you could just start on the fee growth side.

And just talk to us. I mean, I appreciate you don't want to sort of pin down a guidance, but if we assume a relatively sort of steady state macro backdrop, One, what does that imply for fee growth this year? And then just talk to us in terms of like one or two areas you think drives trends. You talked about GFO ending 25 on a strong note. We'd love to get some color around sort of the two or three drivers of growth that you are seeing on the fee side for 2026. Thank you.

Yeah. So, you know, the way we look at 26 and we just finished our planning period, is if the market conditions as the way you described, we would think that we would be around mid-single digits in revenue growth. And trust fee and revenue growth, maybe revenue growth a bit higher, but around mid-single digits. And that would also give you an implication in terms of where we want to solve for our expense growth for the year as well. So that's sort of how we're thinking about it going into 26. In terms of the fee growth, as you know, in GFO, The business there can be very lumpy. And when you win, you usually win very large amounts. And so the traction and win rate in GFO really picked up in Q3. And because of the quarter lag, you saw a lot of it in Q4. But we even had additional inflows in GFO of another $5 billion in Q4, which you're going to see primarily in Q1. So that's driving a lot of the growth. The other thing I would say, and Mike can comment on this as well, is the traction we're getting in the ultra-high net worth segment. around the family office solutions, which really we're finding our win rate and our traction and our backlog in that particular area of the 100 million plus that don't have a family office has really picked up considerably.

I would just add beyond wealth management that in the asset servicing business, again, with our strategy focused on moving up market, just meaning some of the larger, more complex asset owners, where we had the success in the wins in 2025. Some of those are being onboarded now, so you'll see some of the strength in the fee growth in 26. And that's both in the Americas, but also UK and more broadly. And on the asset management front, we've, as you've heard, continued to have strong flows in liquidity. And in many respects, that's been offset from a flow perspective by outflows on the index side. To the extent that that slows down, that that drag goes away, and we still have the strength and liquidity, that'll add a boost on the asset management front.

Got it. I guess maybe just sticking with asset management, so you You know, this leadership changes 18 months ago. We've seen the results in terms of the targets. When we think about, on a go-forward basis, the capital position that you have where the stock's fading, are there opportunities in asset management to bolster that business organically via tuck-in deals or something larger? Just give us a sense of kind of how you're thinking about that business over the next year or two. Thank you.

Sure. Yeah. So, and as you heard in my opening comments there, the strategy is pretty focused in asset management. And so, you know, looking to continue to execute on that from an organic perspective. And to the extent that we can accelerate it with inorganic opportunities, whether that's acquisitions or partnerships, we're certainly open and looking to do that. If you think about where those might be on the capability side, you know, you've heard about the success we've had in alternatives, but it is an area that continues to grow. And so that's an area that we certainly look at ways to increase our exposure there. And then on the other side, opportunities to expand our distribution. You know, the majority of NTAM product is distributed through the partners in the business, through wealth management and through the asset servicing side and quite well. But anything we can do to expand to, you know, third-party intermediary, which we do, but it's right now a smaller portion than we'd like to see long-term.

And our next question is going to come from Mike Mayo from Wells Fargo.

Hi. What is it about now that gives you the confidence to increase your pre-tax return targets? And three to five years, I guess that would be what, somewhere between 2029 and 2031, if I'm reading that correctly?

Yeah. And, Mike, I would say it's a few things, and they're aligned with the strategy and with what we're seeing. So from the first perspective is we've talked about optimized growth, and we've talked about it now for a few years here, and the whole point on that was focusing on scalable growth, focusing on profitable growth. And that has a couple dynamics to it. One is just the mix overall for the company. So the emphasis on growing the wealth management business faster and asset management. And those two businesses have higher margins. So just the mix shift that we'd like to see as we grow those businesses. And then even within asset servicing, focusing on, again, scalable opportunities, and where we've built out our capabilities in those specialized areas or segments where we have the scale to not only compete effectively, but do so in a profitable way. So we're seeing that work. So that's the first thing I'll say that gives us confidence as we go forward. The second is around productivity. Again, you heard me mention our productivity for 2025 was about 4% of our expense base. And this year, we've bumped that up. It's going to be you know, closer to 5%. And a lot of that is because of the impact we're seeing of AI. It lends itself to a lot of our activities across the company, but I would say particularly in asset servicing and in the COO organization. So that makes the business more scalable is what we're seeing. A long way to go, but that's why, you know, I'll say that three to five year timeframe makes sense to see that. And then the third is on returns. we have a strong capital position. We always want to have a strong capital position. So we feel good about the level that we're at. And as you saw, we repurchased more than 100% of our net income this year. Dave mentioned we'll be somewhere in that neighborhood next year, or excuse me, 2026. So that is a demonstration of just the level of capital we think we need in the business. But also I would say, the clarity and stability on the capital regime and regulations around that also gives us more confidence in that level. So you put that together and also just trying to raise the bar to make sure that we're doing everything we can to meet the financial expectations of our shareholders.

And there's still the lingering question about would Northern combine with another bank? I assume your board saw these revised targets, approved them. So I guess that puts a fork in the idea of you doing anything other than this organic growth, you know, through the medium term. But if you can confirm that, but also as far as you pursuing acquisitions, I mean, seeing some of your peers do some smaller deals. Thank you.

Sure. So as we've said consistently, we have to earn our independence. And so, yes, that involves having strong financial performance like that. And so that is absolutely our strategy and our intention. And as always, the board also takes its fiduciary duties very seriously and has to always consider what would be best for our stakeholders and for our shareholders. So that is absolutely the plan. And yes, to your point, we'll look at acquisitions. We do look at acquisitions. But we're primarily focused on organic growth and generating these types of results. If we see opportunities that we think can help in those areas that I mentioned along the strategy, that's when we would look to deploy capital where we think we can get an attractive return on it that will help us further meet those targets.

And our next question is going to come from Steven Chabak from Wolf Research.

Hi, good morning, and thanks for taking my questions.

Sure, good morning.

So maybe to start just on the expense to trust fee ratio, when we think about the improvement in margins that are contemplated in the medium term guidance, given some of the enhanced focus on improved profitability, at what expense to trust ratio are you underwriting new business today? And does the mid single digit revenue growth that's contemplated in the guide for earnings this coming year assume any revenue attrition from shedding less profitable business? Just trying to gauge how the enhanced focus on profitability might impact some of that through the cycle revenue growth.

So the answer to the first part of your question is yes, when we price new business, we absolutely look at that expense to trust fee ratio. But that's at a high level. just meaning that it really depends on the nature of the business as to what the right expense to trust fee ratio is. So you can just imagine certain relationships, the fee portion of that relationship is going to be higher or lower relative to other businesses, other relationships that you're looking to price. So that's one important factor. Second is it gets broken down even further as to the types of expenses as a percentage of those fees. So it's very much, you know, the expense of trust we use as the broader metric, it breaks down much further by business, by product, and by client type on that front. And I would just say that to the second part of your question, yes, we continually look at client profitability. That's something that we view is a part of good relationship management. It's something where we don't want to have relationships that are not value generating for both partners, meaning ourselves and our clients. And we look to address those relationships in a way that we can get improved profitability as opposed to just necessarily exiting relationships. But from time to time, if it's not aligned, that's when we have to take those types of actions. I wouldn't say there's anything dramatic in there, but it is just something we do on a continual basis.

That's great. And for my follow-up, just on the NII and maybe the NIM outlook more specifically, NIM in the quarter reached a post-GFC high. You guys have been very focused on optimizing the balance sheet. I was hoping you could unpack, as we think about the glide path towards a 33% margin, how much of that is a function of continued benefit from rate tailwinds versus volume? Just trying to gauge how you're thinking about sustainable NII growth over the next couple of years, so beyond 2026.

Yeah, so a couple of things. The NIM in the quarter, of course, was artificially boosted by about three points because of the FTE true-up that we did. So think more high 170s than 181. The second thing would be that as we go forward, we have a lot of levers we can pull both on the asset and the liability side. And we don't see a lot of compression in the NIM until we get to much lower interest rates. And so from our perspective, we think during the course at least of 26, I would never want to do an estimate of 27 at this point, but in 26, we think we can keep the NIM pretty stable during the course of the year in the 170s. And that's how we're looking at it going forward. So obviously deposit growth is something that we're looking at quite carefully, and in particular in the wealth management business. There is an effort going on to get our loan to deposit ratio higher within that business. And so from that perspective, we're trying to drive more deposit growth. But we're also looking at both sides, asset and liability side, to make sure we have offsetting measures. And we really feel like we have a lot we can still do. I would also tell you to keep in mind that a lot of deposit pricing actions that we took, we took in the middle to the end of last year. And so we haven't lapped those yet. So as we go into the first and second quarters, it gives us more confidence around our NAI guide and our ability to continue to kind of grow that line going forward.

And our next question is going to come from Betsy Gracek from Morgan Stanley.

Thank you. Just one follow-up on the Deposit question here. I know you indicated there was a bit of a boost in the quarter with the government shutdown. And when I look at the balance sheet, it looks like most of that boost came from non-U.S. offices and interest bearing. Should I just anticipate that the QQ increase that we got there around $7 billion comes out over the course of the quarter? As you've been discussing, it's going to take some time to flow out. Is that the level of about that you see as being unusually high from the government shutdown?

No, I mean, I think the increase in the non-interest bearing was around $3 billion. I do think there was a lot of new business as well. We grow with new business, but I think there was also some cash hoarding, as I mentioned previously, because of the lack of economic data. So I wouldn't take out the entire $7 billion. A lot of that was just normal growth that we would have in the quarter.

Okay, perfect. And then follow-up question here is on the buyback, you indicate over 100% payout ratio. And I just wanted to understand, what's the governor on the buyback? Which capital ratios are you thinking about with regard to how high and how long you let that over 100% ride? Thank you.

Yeah, it's a good question. And, you know, the variables, the number of variables in that decision are many. It's regulatory capital, it's earnings power, it's ROE, loan growth, dividends, M&A. You go through the entire menu of what you're looking at. And then share price obviously has a role. But at the end of the day, if we feel there's an opportunity to reinvest in the business, that's also compelling. But right now we feel as if we'll have that ability going forward into 2026 in sort of the same way we did in 2027. That's how we're looking at it.

And our next question is going to come from Glenn Shore from Evercore.

Hi, thanks. Let's start with an easy one. FX trading was strong, better than peers. In the text, you talk about lower returns. FX swap activity on your part. Can we just break down what's you-driven versus client-driven, and just so we can get our expectations going forward? Thanks.

Yeah, so obviously volatility and volumes will help us quite a bit in the quarter, but we also added quite a few new clients. And one of the things we don't talk about a lot as it relates to foreign exchange flows is is the integrated trading solutions business or the outsourced business we have in both FX and brokerage. And we've seen a much greater adoption as clients start to realize that they can offload middle and back office functions on an agency basis to us. And as a result of that, we get more flows because of it. So the growth in that ITS business has really been strong and continues to be strong. So I would say it's a combination of volume, But I'd also say it's also a lot to do with the traction we've gotten in our integrated solutions business and outsourcing going forward.

And just to add to that, Glenn, that level of activity that Dave's talking about is more consistent than what comes through the FX line there because of that swap activity. And so this quarter, just the nature of the swap activity resulted in more of that showing up in the FX line and less in NII. even though the actual level of activity was not that much greater than the previous quarters.

Okay. I don't want to put words in your mouth, but does that mean this quarter is as good as we got as a jumping off point? Obviously, volume depended on the markets.

Yeah. I mean, volatility is going to play a huge role there, but I do think it's going to steadily tick up because of the additional clients we're bringing in. So I would just say that in that business generally, there is more traction than just waiting around for clients to make a decision around their hedging. There's proactive sourcing of new business going on as well.

And our next question is going to come from Ken Uston from Autonomous Research.

Hi, good morning, guys. This is Melchizedek.

My name is Ken.

I heard you guys talking about growing the wealth and asset management businesses, which helps the PTM. How do you guys just think about the split between the two businesses? Do you still envision high 20s for the asset servicing while wealth grows at current PTM margins?

Yeah, so I would say that with the asset servicing business, it had a good quarter from a margin perspective, but there's still more work that needs to be done in order to get it consistently at the level of margins that we expect for that business in the high 20s. And with the wealth management business, it already has very attractive margins. We're looking to grow that business faster. And to the extent that that came at some margin dilution, if you will, that would be okay if we were getting the growth that's creating more value on that side. So it's you know, in the right range, but not something where we operate that business in order to just maintain high margins. Got it.

And just in terms of just organic growth trends within each business, what was the organic growth rate for this quarter and how do you envision that to pick up over the next few years? Any color on that would be great.

Sure. Within the wealth management business, the organic growth rate was somewhere for the year, which was also consistent with the quarter, kind of the 1% to 2% range. As Dave talked about earlier, there are different parts of the business that are growing faster or slower within that. So a GFO, for example, is at a higher organic growth rate. The ultra-high net worth, so think about families with net worth above $10 million. growing faster. And then also the advisory component of what we do has a higher organic growth rate right now, whereas the product portion of the fee has been flat. And so as we go forward, we expect that combination to increase. And that's why the strategies that I talked about are focused on that. And asset servicing, it had strong organic growth rate in the fourth quarter. you know, closer to kind of 2%, 3%. And as we've talked about before, very focused on making sure that that's scalable, profitable growth for us. So it's at an attractive level for us at this point.

And our next question is going to come from David Smith from Truist Securities.

Good morning. Good morning. I was wondering if you'd help us frame out how the degree of operating leverage might move depending on the revenue backdrop. I think this past year, for example, you did about 7% revenue growth and got closer to 200 points of operating leverage. If the revenue environment ends up being similar next year, is that 200 basis points plus or minus a decent way to think about how how you might keep the expense growth moving. And on the flip side, how painful would the revenue environment have to be for you to feel like you would be better served going below a point of operating leverage in order to keep all the investments that you still want to make for the longer-term health of the business?

Yeah, I think the way I would have you guys this year focus on the expense line in particular and on the operating leverage that comes out of that is the fact that our planning process this year is a little bit different than it was last year, in that we start with productivity. We don't start with, I got this much last year in expenses, and I'm going to increase it by X or Y. We start with productivity, and then we look at that number relative to the investments we want to make during the course of the year, and that implies an expense growth rate. And you kind of go back and forth on that until you sort of land where you think you should land. And so from our perspective, keeping that 1% is critical in any environment. And the idea is, from my perspective, not to be attached to a particular expense growth number, but to know that we have the discipline built in and the muscle memory developed within the company to flex up or flex down if we need to. We don't want to starve our businesses of growth opportunities. And right now we're seeing a lot of really interesting growth opportunities organically within the company. And so to the extent that the environment lets us do that, we want to maintain the one point of operating leverage, but at the same time be able to invest in those businesses. So we don't solve for one, two, three, four. We solve for greater than one, right? And then we look at every quarter and in terms of the relative investments we want to make, and we balance that against what we're seeing in the following quarter as well.

Okay. I mean, just in your base case, though, if you're doing about five points of efficiency and net expenses are growing something like 4% of those

nine percent of like gross expense growth approximately could you break it down for us how much of that would be volume and revenue related versus new investments to grow the bank well and obviously a large part of our expense base is compensation right and then it's going to be our technology spending and if you look at equipment and software as an example of that you know depreciation is two-thirds of that So when you think a little bit about the additional investment we're going to be making in the course of the year, a lot of that is going to be growth investment, right, from the business perspective. So that's really what I'm talking about is the growth investment. So if we're able to free anything up during the course of the year, it's going to go towards the business growth, not towards the operate the bank growth, for example. We feel like we've got a very good handle on on our tech expenses, on our modernization expenses at this point. So that additional dollar flow would go into those growth levers.

And our next question is going to come from Gerard Cassidy from RBC Capital Markets.

Thank you. Hi, Mike. Hi, Dave. Morning. At the risk of being called a curmudgeon again like I was on one of your peer calls earlier in the week, can you guys – the setup for yourselves, your peers, the banking industry is very positive going into 2026. And we always are looking at both the positives and risks. Can you share with us, aside from the geopolitical environment that we're all dealing with, When you look around corners, what are you guys watching for is that, you know, you've got to make sure we don't get surprised by as 2026 unfolds.

Sure. So, as you know, Gerard, that can be either incredibly complex or relatively simple. And I would say we look around all the corners as best we can. We worry about everything. But if you boil your question down to, okay, what can have a very negative impact on the environment, which to your point right now is very positive, certainly on one front, if interest rates change dramatically, that is more difficult for us and for other financial institutions to adjust. We've seen that in the past. When interest rates go up 500 basis points in a year, that is a challenge to the financial models of financial institutions. So that can be up, certainly one direction it creates big issues, and also down. When you think about the impact on, you know, zero rates, when you have waivers on money market funds, things like that. So that's where like big impact. The second obviously is the market. You know, much of what we do is priced on AUM levels, AUC levels, AUA levels that are based on the market. And a lot of our growth that we've had this year is based on those strong market levels. So anything that obviously causes the markets to go down, almost like regardless of what it is, is concerning and will have a big financial impact to us. And then the last thing I would just say is when you have challenging operational environments, just given the nature of our business, the pandemic is certainly an example of that. where it's extreme and how you have to be able to operate the business to continue to provide the services to your clients. And once again, hard to predict those. We try to do a lot to prepare for them, to anticipate them. And you've seen in the last few years, invest to be able to deal with those types of environments as well. So trying to do everything we can, can't predict it, but hope for the best.

No, very helpful. I appreciate the insights, Mike.

Thank you. Sure.

And there are no further questions in the queue at this time. I'd like to turn the conference back to Jennifer Child for any additional or closing remarks.

Thanks for joining us. We look forward to speaking with you again soon.

And this concludes today's Call we appreciate your participation. You may now disconnect.