Q3 2020 Northern Trust Corp Earnings Call

Good day, everyone and thanks for standing by welcome to todays Northern Trust third quarter 2020.

Lets say its program.

At this time I'd like to turn the floor to Mr. Mark.

Director of Investor Relations. Please go ahead Sir.

Thank you Greg Good morning, everyone and welcome to Northern Trust corporations third quarter 2020 earnings Conference call. Joining me on our call. This morning are Michael Grady, our chairman and CEO Tracy Tyler, our Chief Financial Officer, Lorne, all not our controller and Kelly weren't a hand from our Investor Relations team our third.

Core earnings press release and financial trends report are both available on our website at Northern Trust Dot Com also on our website you will find our quarterly earnings review presentation, which we will use to guide todays conference call.

This October 21st call is being webcast live on Northern Trust Dot com.

The only authorized rebroadcast of this call. The replay that will be made available on our website through November 18.

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 todays conference call May include forward looking statements, which are northern trusts 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 2019 annual report on form 10-K, and other reports filed with the Securities and Exchange Commission for detailed information about factors that could.

Actual results Don.

During todays 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.

Thank you again for joining US today, let me turn the call over to Michael Brady.

Thank you Mark let me join in welcoming you to our third quarter 2020 earnings call amid the ongoing public health crisis, I Hope you and your families are healthy and well and Northern Trust, we continue to operate and what we call resiliency mode, which means we're focused on providing our clients continuity of service well over 90%.

None of our employees worldwide, who are working remotely and this is.

In this environment, we have adapted to a new normal as to how we serve and communicate with our clients.

Challenging the transition across each of our businesses has been affected.

Within wealth management earlier this year, we introduced the Northern Trust Institute the embodiment of the intellectual capital of our wealth management business drawn from our experience serving the most affluent individuals and families in the world. It combines and integrate the best thinking of our firm across 34 practices, including areas such.

These investments fiduciary banking planning family business plans to be in governance. We've also published a number of insights and research pieces covering timely topics in the current environment, including family governance philanthropy commercial real estate investing and the upcoming U.S. election, Lastly, we've been very incur.

It's about a client and prospect participation in our digital navigate the now campaign, which is driving more engagement.

Our asset management business it seemed considerable market share gains during 2020 within our liquidity products, which has strategically been positioned overtime.

Also experienced recent success in our active and index fixed income in tax advantage equity products, we manage nearly 100 billion in assets globally under U.S.G. mandates, where strong capabilities position us for future growth in this space.

With that asset servicing as we've mentioned previously we did see a deferral and implementation activity from the end of the first quarter and into the most recent quarter. However, the pipeline is strong and opportunities have increased its clients or prospects of adapted and become more comfortable operating the current virtual environment research.

Recent notable public wins include Driehaus capital management, and Federated Mutual insurance company in the U.S. marks and Spencer pension Trust in the UK Hannover re European based insurer and <unk> as he move limited for its funds in the middle East which is.

We continually develop our solution based services to support the needs of our clients with two recent examples being enhancements to our E. S. G analytics capabilities to support our clients oversight risks and exposures and the launch of dynamic valuation to reporting tools for asset owners using our innovative front office solutions product.

We also continue to build our positioning in the outsourcing space, most notably in health source foreign exchange and trade execution finally.

Finally, we just recently published our latest corporate social responsibility report detailing our progress toward reducing our greenhouse gas emissions enhancing our diversity equity and inclusion strategy at launch and client focused E.S.G. tools and investment vehicles as I previously mentioned.

As we move forward in the current persistent low interest rate environment, we will accelerate our focus in two areas first we will continue to drive greater efficiencies with a focus on technology solutions to drive productivity gauge second from a growth perspective, we're focused on doing more with our existing client base. It also but.

You know new clients to allow us to continue to grow organically and a scalable profitable manner.

Finally, I want to express my sincere appreciation for our staff, whose commitment expertise and professionalism throughout these extraordinary times has been exceptional now.

Now, let me turn the call to Jason to review, our financial results for the quarter.

Thank you Mike Let me join Mark in like in welcoming you to our third quarter 2020 earnings call before I start I would also like to take a brief moment to recognize all those affected by this ongoing crisis, especially those working on the front lines. Our thoughts are with you. We hope you and your loved ones remains.

If it healthy.

Now, let's dive into the financial results for the quarter starting on page two.

Morning reported third quarter net income of $294.5 million earnings per share were $1.32 a share at our return on average common equity was 10.5%.

The quarter included a $43.4 million pre tax charge related to a corporate action processing error the issue.

The issues identified internally by our corporate actions team and to put the impacted client in the same position as they would have been if they're not occurred we.

You did open market transactions, which resulted in a loss.

You can see on the bottom of page to equity markets, particularly domestic U.S. markets performed well during the quarter we call.

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 eat the local had strong sequential performance based on those calculations.

It's worth noting that on a year over year basis. The Evoque local index remains negative, which creates an unfavorable impact to our fees compared to the prior year.

As shown on this page average one month and three month LIBOR rates continue to decline during the quarter.

Let's move on to page three and review the financial highlights of the third quarter Yeah.

Year over year revenue was down 3% noninterest income up 3% and net interest income down 21%.

<unk> expenses increased 6%.

The provision for credit losses was $500000 in the current quarter net income was down 23%.

The sequential comparison revenue declined 1% with noninterest income up 2% and net interest income down 11.4%.

Expenses increased 6% net income declined 6%.

Return on average common equity was 10.5% for the quarter down from 14.9% a year ago and 12.2% in the prior quarter.

Assets under custody and administration at 13.1 trillion dollars grew 13% from a year ago and increased 8% on a sequential basis.

Assets under custody of 10.1 trillion grew 16% from a year ago and increased 9% on a sequential basis.

Assets under management were 1.3 trillion dollars up 9% from a year ago and up 4%.

Yes.

Let's look at the results in greater detail starting with revenue on page four.

Third quarter revenue on a fully taxable equivalent basis was $1.5 billion down 3% compared to last year and down 1% sequentially.

Trust investment and other servicing fees represented the largest component of our revenue total.

Totaled $1 billion and were up 3% from last year and 4% sequentially.

Foreign exchange trading income was $62 million in the quarter up 3% year over year and down 14% sequentially.

The increase compared to a year ago is primarily driven by higher volatility while the sequential decline was impacted by lower volumes and lower volatility.

The remaining components of noninterest income totaled $91 million in the quarter up 7% compared to one year ago and down 10% sequentially.

Securities commissions, and trading income decreased 10% compared to a year ago and down 22% sequentially.

Both year over year and sequential declines were primarily due to lower interest rate swap activity and referral fees.

Other operating income increased 19% compared to the prior year and is down 5% sequentially the increase.

The increase compared to the prior year was driven by higher income related to a bank on life insurance programs as well as higher miscellaneous income primarily associated with a market value increase in the supplemental compensation plan.

This higher income resulted in a related increase within the other operating expenses.

The sequential performance was impacted by a lower market value adjustment for seed capital investment.

Relative to the prior quarter, partially offset by lower Beasley swap.

Net interest income, which I'll discuss in more detail later was $336 million in the third quarter down 21% from a year ago and down 11.4% sequentially.

Let's look at components of our trust and investment fees on page five.

For our corporate institutional services business fees totaled $585 million in third quarter and were up 4% year over year and up 3% sequentially.

Custody and fund administration fees, the largest component of CNS fees for $395 million and.

And up 1% year over year and up 5% on a sequential basis.

Year over year performance was primarily driven by favorable currency translation and new business, partially offset by unfavorable market.

The sequential increase was primarily driven by favorable currency translation as well as favorable markets.

Assets under custody and administration for CNS clients were 12.3 trillion at quarter end up 13% year over year and up 8% sequentially.

Both the year over year and sequential increases were attributable to new business favorable markets and favorable currency translation.

Investment management fees and can I ask you to $137 million in the third quarter were up 19% year over year and up 7% sequentially.

The year over year growth was primarily driven by strong flows within our money market funds. The sequential increase was primarily driven by the impact of favorable markets.

This quarter's results included zero point $9 million in money market fund fee waivers within our scene I asked investor management fees.

Assets that are minutes assets under management for CNS were $993 billion up 10% year over year and up 4% sequentially Big.

The growth from the prior year was driven by favorable market client flows and favorable currency translation.

The sequential growth was driven by favorable markets and currency translation.

Securities lending fees were $20 million in the quarter down 2% year over year and down 28% sequentially.

The year over year decline was primarily driven by lower spreads and lower volumes while the.

While the sequential decline was primarily driven by lower spreads.

Average collateral levels declined 5% year over year or up 1% sequentially.

Moving to our wealth management business Trust investment and other servicing fees were $419 million in the third quarter and were up 1% compared to the prior year and up 6% sequentially.

Well the year over year and sequential performance were impacted by favorable markets, partially offset by money market fund fee waivers within our wealth management business fee waivers totaled $4.4 million in the quarter.

Assets under management for wealth management clients were $319 billion at quarter end up 6% year over year and up 5% sequentially the Europe.

The year over year growth was driven by favorable markets and net flows while the sequential increase was primarily driven by favorable market.

Moving to page six.

Net interest income was $336 million in the third quarter and was down 21% from the prior year.

Earning assets averaged 129 billion in the quarter up 23% versus the prior year.

Average deposits were 113 billion.

And were up 27% versus the prior year.

The net interest margin was 1.03% in the quarter and it was down 58 basis points from a year ago.

The net interest margin decreased primarily due to lower short term interest rates as well as mix shift within the balance sheet.

On a sequential quarter basis net interest income was down 11.4%.

Average, earning assets increased 3% on a sequential basis, while average deposits were up 2%.

The net interest margin declined 19 basis points, primarily due to declining asset deals that securities and loans repriced lower interest rates.

Turning to page seven expenses were $1.1 billion in the third quarter and were 6% higher than both the prior year and prior quarter.

Expense during the quarter included the previously mentioned $43.4 million charge, excluding the charge expenses were up 1% on both a year over year and sequential basis.

Compensation expense totaled $462 million and was up 1% compared to one year ago and flat sequentially. The.

The year over year growth was driven by higher salary expense due to staff growth base pay adjustments and unfavorable currency translation, partially offset by lower incentive.

On a sequential basis higher salaries, driven by unfavorable currency translation and staff growth were mostly offset by lower incentive.

Employee benefits of 997 million was up 11% from one year ago and up 8% sequentially.

The year over year increase was primarily related to higher pension expenses.

The sequential increase was primarily driven by higher medical costs.

Outside services expense of 186 million was down 4% on a year over year basis and up 5% sequentially. The.

The year over year decline was driven by lower cost across a number of categories, including technical services consulting third party advisory fees and data processing, partially offset by higher sub custodian expense and brokerage clearing cost.

The sequential increase was due to higher technical service costs third party advisory fees consulting and sub custody related costs.

Equipment and software expenses 171 million was up 13% from a year ago and up 4% sequentially there.

The year over year growth reflected higher depreciation and amortization as well as software support costs.

The sequential increase was driven by increases in software support and equipment maintenance cost.

Occupancy expenses $52 million decrease 2% one year ago was down 14% sequentially, both declines related to lower costs associated with executing workplace real estate strategies.

Other operating expenses of 127 million was up 38% from one year ago and up 48% sequentially.

Results for the quarter included the previously mentioned $43.4 million charge.

Even the charge the category declined 9% compared to one year ago and was down 3% sequentially.

The year over year comparison was impacted by lower expense related to business travel, partially offset by higher mutual fund co administration fees as well as higher costs associated with supplemental compensation plan expense.

Within staff related expenses.

The sequential comparison is impacted by higher cost associated with the Northern Trust sponsored golf tournament offset by lower other miscellaneous expenses within the category.

Turning to page eight our capital ratios remain strong with our common equity tier one ratio of 13.4% under the standardized approach and 13.9% under the advanced approach both unchanged from the prior quarter.

Our tier one leverage ratio was 7.7% under both the standardized and advanced approaches during.

During the third quarter, we declared cash dividends of 70 cents per share totaling $148 million to common stockholders.

At times like these that show the importance of a strong capital base and liquidity profile to support our clients activities and we continue to provide our clients with exceptional service and solution expertise they've come to expect.

Our competitive positioning in wealth management asset management and asset servicing continues to resonate well in the marketplace.

Thank you again for participating in Northern Trust third quarter earnings conference call today.

Mike Mark Lord and I'd be happy to answer your question.

Operator, please open the line.

Ladies and gentlemen, if you do have any questions. Please.

Star one on your telephone keypad.

You just make sure you have your mute function turned off that signal. We also ask that you limit yourselves to one question unrelated follow up once.

Once again folks that is star one for any questions at this time.

And first from Jefferies, We have Ken system.

Okay. Thanks, guys, Hey, Thanks, Good morning, guys I just want to follow up on the whole side of of rate. So good news that and I was down and better than the original guide and I was just wondering if you can update us on what your thoughts are as far as the outlook for anti and at what point do you expect.

Hi to get close to just flattening out you know is that sometime.

Sometime early in 2000.

2021, or how can you help us think through that thank you.

Yeah, that's it.

First of all I think it's important for people to realize that there's there are components to the securities portfolio that are are longer dated and their securities. We bought in 17, 18, 19 that aren't going to mature for another 234 or five years and so it's going to take a long time to get this whole.

Portfolio Reprice that said at this point, 75% of overall, earning assets have been repriced on the new yield curve and if you break it down even a little bit farther from that you can look and see that you know effectively all of the floating rate assets had been reached.

Price, 80% of the loan book has been it's been repriced and about 50% of the Securities book has been repriced and so I think the best way to think about it from what you can see it from here about 1% to 2% of the overall, earning.

Asset base is going to reprice every quarter and so.

We've gotten through most of it if you think about how aggressively we had to get through going from the first quarter, where everything was on the prior book to then into second quarter and now this third quarter movement. We got the vast majority of it done that's why we think the flattening we're at that point now it's just.

Nichols from here, but it's not going to be 100% flat for a long time as those longer dated securities play through.

Okay, and I guess just relative to your prior comments just want to give you the opportunity just level set us on what your expectation would be you know for Fourq <unk> versus third Q.

Yeah I appreciate that I do think that well first of all and I'll answer the question <unk>. The way we look at it now and it comes back to that dynamic of about 2% repricing you could say, it's going to be down 2% give or take a point and I think that's what you should you should expect from.

The math at this point that said now that we're at the point, where so much of the book has been Reprised the movement and Eni from here is going to be driven more by what happens in the business and more by what happens in loans and what happens in the deposit book and and how that stays on and frankly.

Our confidence level in reinvesting that into not just cash at central banks going into higher yielding assets and so from here, it's going to be much more business drove it.

Okay. Thanks, Jason.

Thanks [laughter].

Glenn Schorr with Evercore.

Hi, Glenn.

Hi, there thanks.

Definitely not the norm for you guys, but I.

I think everyone has a little bit higher sensitivity to issues like that they are going to ask Scott just it for a little more color on the corporate action item was this a manual.

Issue what have you done correctly <unk> have there been MRV is outstanding related to that I think that some but.

She made back and forth pre call was like about that is that fair to reach the traffic. Thanks.

Sure I appreciate one so.

First of all I, just want to provide a little bit of context on this group for people that don't know it well and how an item like this occurs then.

I think it's important that you understand it with 13 trillion dollars in assets under custody or administration. The security services group is processing literally millions of transactions a year Weve got errors in the group on a consistent basis and they total somewhere between $5 million to $10 million a quarter.

On average that's typically what we experience there and they're accounted for all consistently in the other operating expense line on the income statement that you see and so.

The event itself is not unusual it's the dollar amount and if we focus on that a little bit we think over the last 10 years.

We've actually never had a loss.

Cumulatively in a quarter to even get to 29.

And if you look back.

Even on the years, we've never had a full year that amounts to this level of loss and interestingly this quarter and in of itself from a volume perspective of losses, It was light and.

And even the other items added up to a less than normal level.

It was at the bottom end of that kind of $5 million to $10 million range and so then if you as you know what have we done you can imagine the first thing we do is unpack that situation. Once we're confident that there's been a mistake. We did everything we needed to do in order to make our clients hole, we did that and.

Then at that point, we look at the processes identify ways to improve even a process. We felt strongly about but we we identified ways to strengthen it we put those in place and at this point, we'll move on from an M&A perspective, you know we wouldn't be able to talk about that at this point.

If it were even if that had even been surface.

And obviously, we you know we took this very seriously. This is not I think it's important to know this isn't this is not out of the normal course of servicing 13 trillion dollars and assets in terms of the event. It was really the fact that we had a very large exposure within it that was unusual.

Okay Cool maybe go to a follow up on.

The balance sheet.

Hi, Jason.

The other security blinded is up 30% year on year and almost the biggest part of earning assets now the footnote talked about community development and investment, but could you just expand a little bit more on that because such a larger part and it's growing more what benefit you get from that kind of yield pick up and should we expect to see more of that.

Hi, Thanks, so much.

Sure just before you before you go on mute Glenn I want to make sure. We answer your question was for sort of as you're trying to the increase in the securities portfolio to a 50 $658 billion is that where you're looking.

I think most of that growth came on that others tire. These lines, if we address it.

Yes, the growth and securities year over year, I think that'll yeah. So so in general group.

Right, where you're going to add a clarification fired.

No no you got it the other other underlying securities line Bouncy think Oh, so the in general the the Treasury group is always looking for opportunities to to lean out a little bit from off from just cash when we feel confident and Dolby Dolby types of.

Investments that are short term, where it's not cash, but it's but their items, where we pick up a little bit of yield and so it could be short term jgbs. It could be other short term instruments, where we pick up a little bit of cash a little bit of a yield without taking too much incremental exposure.

And so they've been looking at that in different ways and part of it I think we talked last time about the fact that part of this Eni, Germany is going to be not just the size of the balance sheet, but when we felt confident that we could step out of central banks and so as the treasure groups looking to do that they're looking for not just these traditional.

What are we going to do with two year three year, four year securities or mortgage backs, but other items that can stay short, but still pick up a little bit and all in yield and so that's not necessarily something you should see as a longer term trend, it's something that as we did this initial step out we saw opportunity.

Oh, great. Thanks, so much appreciate it.

Yeah.

Next question will come from Alex Blostein with.

Goldman Sachs.

Uh huh.

Hey, guys. Thanks, good morning, so maybe.

Maybe just a quick clarification and I are first so you don't hear you on the kind of wants a 2% decline in an eye off from here as the Securities book Repriced does that include any mitigation efforts to offset the go roll off roll on dynamics or or that's really kind of like a gross number and then there are things you.

Could do to help mitigate the remaining pressure, albeit it's obviously somewhat small which could get you to more of a kind of flattish IR from here.

Well the answer is it is very much just looking organically at the amount of that's in the book. So that doesn't include any other strategic items that system now of whats rolling off from here that said I do want to caution people, even though net interest income is down significantly obviously.

We're not going to be looking to to have dramatic changes in our strategy or our risk profile to think about quote unquote offsetting the decline in rates and so we're constantly thinking about optimizing the <unk>. The the investment book and we continue to do that no.

Change in our risk appetite at all but the 1% to 2% a quarter. It's very much just the math of what exists in the in the book right now absent any other things that we would be so you shouldn't be thinking that's exactly what's going to happen over time. There are other things we're thinking about in terms.

The in terms of the securities portfolio. Other things you can do the balance sheet, but those were things we were contemplating before rates came down frankly.

Got it thats very clear thanks for that.

My bigger picture question kind of revolves around fees and this has obviously been a pretty volatile year with respect both markets and new business and volumes et cetera.

Maybe help us level set what has been the organic fee growth in the business, maybe kind of over the last 12 months.

Given your comments around strong pipeline and sort of building momentum and seen I ask maybe help frame what that kinda organic fee growth could look like over the next 12 months and then specifically I was hoping you guys could also hit on the multi on on the global family office business that that revenue has been kind of flattish for the last four quarters. Despite.

We had a pretty significant growth in assets I know, there's a little bit a lag there, but still feels like the fees are lagging a lag into the asset base. So so I kind of bigger picture question, but as you guys get had an old how they'll be awesome. Thanks.

Sure So let's start on slide if I.

I start on C. and I asked I think that.

Separate into two different buckets. There interestingly one is that there has been significant growth is on in the investment management fee line and that's come from very good collaboration between the asset management business and she and I asked and a lot of work. We did in the last couple of years setting up the liquidity business to be able to take on.

Assets, so I'm going to do this at the at the corporate level, but a lot of these assets apply to see and I asked but if you go back to last year attribute to the beginning of this year the liquidity business had $215 billion and AOL and now were close were 285 290 billion very significant growth.

Bigger than what's happened in the industry and so that's led to good organic growth in the business as a result of good collaboration again, not 100% of that is in the CNS business, but the vast majority of it is.

The other aspects of C. and I ask as you just get to the traditional custody and and other asset servicing type activities that the interestingly the the organic growth. This quarter was but it was not great. It was positive but it wasn't great. They do feel stronger about the pipeline that they have the.

One not funded business and part of that as a result of the fact that there are a lot of prospects that we won that delayed implementation, partially because of coated but still very high confidence level, that's going to be onboarded in fourth quarter or first quarter and so we we see good.

Opportunity set to bring on that business in the next couple of quarters that said the growth in the.

The money market mutual fund business, it's been it's been great, but it has flattened out.

At this point and so it's good diversification in the business to sometimes get growth coming from the investment management side.

And sometimes from the others.

[laughter] is that this is Mike I'm going to pick up for Jay somebody gets a chance to get a sip of water [laughter], Alex. So I think importantly longer term I that again, we continue to see the opportunity to grow at a higher organic growth rate, having said that as we've always said, it's critical that that's probably.

Notable growth for us and so that we're doing it in a way that I, it's coming with operating leverage and fee operating leverage now with the change in the rate environment that dramatically impact your ability in the short term.

To get the operating leverage.

And so as a result, you know it makes it.

Focus is on ensuring that that growth does not come with the requirement for significant resources. So looking at the expense side of the equation and just making sure that I that we keep those in line in this type of environment by and that the growth is high quality.

He scalable growth for us. So so that's on the asset servicing side and Jason mentioned asset management, just to close off on on wealth management.

You know again as you mentioned this has been an unusual.

An unusual year and so we've had to shift our sales in new business strategy as a result, I and I would say that I'm very optimistic on the long term prospects for that but it has in this interim period has caused some additional volatility in that the normal sales.

Pattern that we would have on so.

Long term you know very positive but to your point you know there's some bumpiness that we've had this year that we haven't had in previous years.

Alex This is Marc and I could comment on the G.S., though asset growth I think you're seeing the growth the step up in the quarter.

It's going to get into a lot of specifics there but.

That type of client that that type of segment for us.

Those clients can move pretty large concentrated asset holdings onto our custody platform and that's what the majority of the increase was in the second quarter, there's not necessarily a corresponding noticeable increase in fees with that I'm, just because of the nature of the holding a single holding but that we might be.

Or that we might be having on our platform.

Those clients.

Great. Thanks, everybody for tackling all that thanks [laughter]. Thanks, Alex.

Your next step from Morgan Stanley we have Betsy.

Hi, good morning.

I had a couple of questions you know on the capital ratios I know you Phenotypically said with a pretty nice cushion above your regulatory minimums and above you know what.

What's your management buffer as mine added to it obviously in this period, where smell buybacks at some capital ratios improving even further could you give us a sense as to how you're thinking about a utilizing that excess capital you know in the event that.

There is a session on buybacks continuous is there any anything that you might want to discuss about how you can be using that capital outside of.

Outside of five actually never seen some acquisitions in the space recently on the asset management side wanted to get your sense on that there is anything to do there.

That's the first part of question. Thanks.

All right I'm going to I'll try it and see if I got my voice back. So the good news is it might can I talk about there is a lots of I don't think he's going to we'll we'll definitely be on the same page on it so.

You know it.

I'm not going to start with and Youve heard me, if I was a little bit better, but I think there's there's four components Sal how firms. It's at least how we think about how we deploy capital and how we what capital levels, we maintain the fair.

The first is we we have very good genuine discussions with our board about it and that's not to say that there's there's any tension there there's not at all we're completely aligned but we also want to make sure.

We're not being presumptuous and.

And saying, where we want capital levels to be without having good conversations with them. So that it really does truthfully you start with that discussion and then secondly, we think about capital on an absolute basis, we want to have good cushion relative to where we need to be from a regulatory perspective the third.

The third is we look very closely frankly out the side view mirror and we look at things on a relative basis, when we talk to clients and prospects.

They they care and we want to be able to reflect its part of our overall value proposition that we've got strong capital levels and we have to be able to evidence that on a relative basis and the fourth maybe most instructive lead given the fact that the stock price has come down is thinking about things on a returns basis.

And so we think about that deployment of capital not just do we do we take capital up or down but what types of returns are we getting for it and there we have to compare.

What returns are we getting by investing in our own stock effectively and that has to do a lot with where we think things are from a price to book perspective, and how its trading and what we think and secondly, what opportunities do we have to reinvest organically in the business and then third we're looking at what examples.

There are where we can invest for non organically outside and so we've talked about the fact, we're very open and I'd say, particularly in the wealth management space, where it is difficult to have organic growth, we feel very strong about the franchise and we feel like our ability to me.

Maintaining a high quality client base is very strong if we were to bring that in.

So when you're talking about wealth management, you're talking about teams firms portfolios is there any new.

Any nuance to that.

Yeah. The teams I think is harder I think those tend to be first of all your culturally it's not super consistent for us to to do something like that for various reasons I'm happy to talk about it a little bit more I think firms, where you've got more of a a sense of scale that that.

Then there, but there maybe not at the scale that we are and we can bring that in and we think about our different groups almost as as large teams and we think about the offices, we have the $320 billion in assets you split that between the offices, we have and you have a a team of.

123 billion, so something of that size or 10, but you know up to $8 billion is kind of a a couple of teens from our lens, but extracting a team out of another farm is not something that we have tended to do and so thinking about and organization.

And in established organization with a client base, but with a leadership that hasn't it.

Hasn't been able to develop a succession plan in place are they think it just might be better to go to the infrastructure of a larger organization and you think about the scale. We represented that asset level. We can be a good solution for firms that don't have that succession planning in place.

Okay, and what I'm hearing in your answer is a wealth management over asset management is that fair.

Oh, there is there to the extent there asset there are opportunities in asset management, and it's a little bit more nuanced, we've gotten some things there quietly more small that has been extremely consistent with our strategic desire to do more intermediary distribution and so we look.

So we look we look closely at those as well I think the the distinction might be probably a little bit of a higher bar right now to do something in size at the asset servicing side of the business.

Got it and then what if the fed does lessen restrictions on buybacks, maybe you can give us a sense as to how you're thinking about yeah.

You know how you would manage the capital in that scenario in terms of.

The pace that you might.

Start buybacks backup that and how quickly you want to get back down to you know the capital ratios that you think are most especially for your business model.

Yes.

Betsy I think Jason laid out the framework so I.

So I won't go into that but that is the framework that we would apply I should the fed lifts the restrictions I and you know, we'll see but prior to the pandemic. You know we were repurchasing our shares I and so you know it depends on that your broader environment that we would lay over with the regular.

Lottery constraints and so you know I I would hope that to the extent that the fed removes the restrictions. That's also an indication that the environment is relatively favorable which will put us back in a position similar to at the beginning of the year, we were waiting for both able to and were repurchasing our stock.

Okay got it thank you.

Sure.

Our next question will come from my carrier with Bank of America.

Mike I think hi, good morning. Thanks.

Good morning, Thanks for taking the questions on first you guys have been focused on both investing in the business that also going to be job.

The law.

The longer we're operating in this work from home backdrop I'm. Just curious if you found additional areas of potential efficiencies what is an area real estate or other areas that could drive that longer term.

We is that you know this environment has been very obviously made everybody take a step back and think about that Oh, we have frankly, there are things that we're accelerating the business I mentioned super quickly in the opening comments that were.

We're on a.

A real state strategy journey right now, we we look deeply at that just a couple of months ago kind of in the in the midst of this to say how does the health care crisis influence that strategy.

And there are elements of it that it accelerates and there are consolidations, you're thinking about that frankly, we're saying we can do that faster and then there are other things that we were not considering before that this endeavor makes us consider and.

You know I I tell people kinda jokingly a year ago.

A year ago I did not know how many square feet, we had off the top of my head and net now I do and I know I know, where they are and I know how much we're paying for a button. So we're talking about that at all and then a lot to try and think about what is real estate look like in the future not just domestically but international.

And there are a lot of creative things, we can do to try and be more efficient and try and leverage the technology that we've invested in into our partners in order to decrease reliance on on square footage frankly, and that also leads to areas of saying how do we become more.

And how do we think about resiliency with our workforce overall and we've had to make them more technologically equipped in order to be resilient and that adds flexibility as well obviously in very creative other ways. The way, we think about resiliency centers and other things like that.

Okay. That's helpful and then Jason you mentioned in the past.

Loan demand will be a key driver.

Forward and we've seen fairly divergent trends across the industry is still.

Still fairly weak loan demand, but pockets of strength within the welfare yet so just wanted to get it.

So just wanted to get an update on your fine in terms of the demand that you're seeing across.

Yeah, you can't it's interesting you can't see it saw on the financial statements, but loan loans are actually a tick off within September Steven and and that surprised us and we'd go back 90 days ago. We I think everyone felt like we were going to see balance sheets come down.

Got liquidity, we thought Kashi is going to come down deposits are going to come down we thought laundry and come down but.

Our balance sheet on average was up in the quarter and even even there south it should clients are holding more deposits, but loans or were held in and so I. It does seem like there are some of the loan demand. We have is coming from clients that are saying they want to be ready to do things if.

To be more more active if they see opportunities come up it's unclear, whether or not that will actually happen, whether or not the opportunity come or whether or not they'll actually pull the trigger on it but that.

That's certainly been the case that they've held in in terms of loan of loan volume and and we've been talking recently about the fact that liquidity in general is a big component of what we do with our clients and so if you think about liquidity more broadly as clients wanting to find safe.

Hi quality places to park.

Their cash and short term assets debut our balance sheet is strong and we've talked about the fact that our money market mutual funds very strong investment performance there at size, our treasury funds or $80 billion to $90 billion and so very appealing places even for very large institutional investors.

In Bath and then on the other side clients know that as they've worked with US we understand their their asset composition, well and so we can be a thoughtful lender in terms of how to structure things in the most efficient way for that.

Great. Thanks, a lot.

Sure.

Moving on from Deutsche Bank, we have Brian but now.

Great probably notch hi, good morning.

A couple of quick questions just because of the way just.

If you could comment on the typical seasonality that we see in before.

Took in expenses that we typically see in the fourth quarter in conjunction with the.

With the Gulf or been which which which added some expenses in threeq you.

And and also the exit rate for money market fee waivers are tempered just to get a sense of sort of where we're running into for fourq you on that.

[noise] liking it.

Yeah. So.

So the first was on the seasonality in the in the Northern Trust just in General I think Oh no in expenses.

Fourth quarter <unk>, Yeah sure. So yes, there are components of of expenses in fourth quarter that are that we should actually carve out because I think third quarter in some ways is not an ideal run rate for some of them and so maybe just walk through it a little bit first of all you know take.

Take benefits for example.

There you see the trend that took place, but you know the part of it is the fact that medical is gone and it's not an enormous line, but it had an enormous jump from second quarter and so the medical in second quarter or was something like 17, and a half million dollars went up to 26.

Million dollars in third quarter that closer to a typical run rate, but could still see some tweak up from there and so so I think that that's just something to keep in mind that as our partners exited effectively doing normal things in their own health care maintenance that.

It's coming back online and it's had a surprisingly large bought low level of volatility from my perspective, frankly and then.

Outside services and is another one where we believe we could see is the similar step up in fourth quarter to what we saw in third quarter. There's a lot of business volume related costs within that category that are likely to increase and we're still running at relatively low levels of cost when you think about things like consult.

Thing legal technical services, the dial down and we're doing everything we can to tap those down but that could come back off and then the quick equipment and software on a year over on a year to date base equipment software costs are up 11%.

Yes, that's likely close to where we're going to land for the full year 2020, the category, where the expenses are are they expected to have high levels of higher levels of growth. This year as a fact in fact, we've we've invested in the business, we've got higher depreciation and amortization costs, we called that out DNA is something like.

Two thirds of that line in general and so that's that's kinda in the soup, it's hard to tamp that down as aggressively and then I'll talk about occupancy yeah, I've mentioned, it a little bit there's going to be volatility. There we were going to make some investments frankly in in.

In occupancy to try and get our longer term run rate down a little bit and so you're going to see that line item bounce around a little bit and so in general I'd say, it's less about seasonality of run rate and in expenses and it's more about two things one is what how do we get back.

The on doing the Cove it related influences on expenses and second what are the investments, we're going to make to try and decrease our run rate in the law.

Yes.

That's a tough on the money market fee waiver trajectory.

End of <unk>.

Yeah. Thanks, So let me I'll do a couple of.

I'll do a couple of comments there. One is you know as we you can pick it up from new opening comments were right at $5 million only in the third quarter.

Now the reality is there's the you know the $300 billion in money market Mutual fund assets, we have oh.

That is relatively stable at this point, but rates are moving around a lot. So so you got to assume that rates and volumes stay the same but third quarter was 5 million as we sit today the run rate on a quarterly basis is about 11 and a half million dollars as we sit today.

The team thinks we could have waivers in the fourth quarter $20 million to $25 million.

And.

Exiting the year, so as a launch point coming into 2021 could be $25 million to $35 million and.

And just to give you a sense of you know what does that mean I think it's super important to remember.

The the fact that if if you go back to the beginning of this year. When we were at $215 billion in assets you know the the overall revenue run rate was much lower than what it is right now and so now you you go up to <unk>.

Now you go up to $290 billion and they run rates over $400 million in revenue and so we're talking about the fact that we're gonna have a decent amount of waiver, but from a much higher revenue base and so the story there is kind of mixed in some ways.

That's that's super helpful. And then Mike maybe on just U.S.G., you mentioned bad a at the outset.

The U.S.G. analytic service or that you have.

That's sort of maybe if you could just talk about where you are on the growth half of that and are you really.

Are you rolled out to all of your asset servicing clients and have to take up and then also on the wealth management side are you seeing more demand from your wealth clients for investing in yes, you kind of get you have answered the organic growth that markets in the investment management side, Yes, you metrics.

Right So Brian.

The reason why I didn't mention it upfront is because he is GE does run across the company and each of our businesses.

And you started to highlighted there, but let me go back through a little bit on first of all just from an investing perspective to your point, we are seeing more and more demand from our clients.

You know both institutional but to your point on the wealth side.

Including our G. AFFO clients I M E S T a investment product and investment strategies. So as a result, I. We've as you would expect with our business model, we've looked to fulfill those demands with E.S.G. product from our asset management group.

I see and as I mentioned over $100 billion at this point, but I would say still in the early days of that trended up the growth opportunity for US there and then I you know more broadly in thinking about our institutional clients, particularly in asset owner clients.

I, you know, they're being held to a higher standard as well as to how they're investing and I guess from an E. S. She perspective and as a result, they need the analytics around that so I talked about the capabilities that we rolled out and and to your point I would say you know early days on that because I think this is a very.

Long term trend.

Great that's super helpful. Thank you.

Sure.

And next we have the effect from JP Morgan.

That.

Hi, Mike Hi.

Some.

<unk>.

Well I just want to follow up on the.

The operating or I know, you'll have those whole was.

Hang on I recognize it's one item, but large amounts do that a lot of a pencil.

I'm sure a lot of what's happened to another towards doing something wrong with them a much larger sum it up the wall business, we'd like to highlight close one way or another.

I remember what do you plan to do to automate multiples processes Syrups you have less of these are simply hold me to talk about right.

All I can do stuff, but.

The one with less stuff on so the oil shock loss settle so Mike we won't be able to do to stop to sort of one off too.

Rules on what you know or something like this doesn't go live until the allows all amounts in the future.

Sure for back.

So Jason mentioned again this is the nature of our businesses you know in that.

And that part of the business is processing transactions for our clients broadly speaking and there are certain aspects of that that have been automated anywhere automated you know year.

Years ago, I, and and that's what you'd expect is find the areas that lend themselves to automation you get the benefit of both efficiency, but also you know dramatic reduction in risk some incurring heres I and so that's that's the longer term path that you know we've been on for and.

I'd say the industry as well for some time period, and then you have other aspects of what we do that don't lend themselves as much to automation because of the you know get iOS in chronic nature of that particular trends.

The particular transaction. So in this case, you know corporate actions, where a young certain aspects of corporate actions are very straightforward and so you know they've already been automated or or portions of them had been automated but other parts, where it's still difficult because of the the last.

The lack of a home.

Homogeneous need home agenda of the of the transactions themselves.

With that said you know we have this area, even though it's primarily manual you know with some level of automation I. It's an area that gets a lot of attention from procedures in control perspective, I and frankly as much as there are there have been errors you know in the past.

It's been very well controlled so think about it as you know higher inherent risk as we see it but with procedures and controls that weve been able to manage and mitigate the risk that comes with that.

That's not to say that we havent been on a path of trying to add any additional work flow tools and automate additional things that we can on we've been investing broadly speaking in our security services areas significantly for years to modernize the technology in there and that area. So it's.

So on a path and then you have a situation like.

Situation like this that occurs.

That certainly brings more attention to it but it wasn't attention that we felt as though you know boy we've ignored this area, rather weed control that and we've tried to improve it but it requires.

No additional procedures and controls and as we go forward a more modernization and died automation as well.

On the so thanks, a quote unquote salt taste and that takes a minor one just sort of a CR squeeze in on someone's learn more benefit from FX translation could you give us some on the Ocs offset stossel's.

2%.

2% growth Oxxos ups of someone says well I mean, just just to clarify the this is mark the on the custody and fund services line, that's where most of the other currency impact would be and that impact was about a 2%.

Benefit on a year over year basis.

Okay. So that means and then line.

I should also add even though you didn't ask that is the area that we saw the YFA local is down on a year over year basis. So so that was actually a drag for that line markets were because that line as we've talked about before is probably.

Two to one more based on if a local than I would say what domestic into.

Indices are doing.

Okay great.

Well a lot of good nervous every month, so what mockups were born at London, which once again on the cost side, but is that how youre highlighting left because of the way that's higher on that because I don't think it's I was.

Over 50% of your revenues.

No no just to try and give you a sense of the importance as you try and predict asset levels and trying to just to appreciate the influences people local we're going to see and I asked Trust trust fee base as opposed to well, it's much more exclusively driven by.

Hi, just domestic domestic indices.

Sorry.

I will clarify that the programs and some of them are also well.

Thanks.

Moving on we have Brennan hawken with CBS.

Hey.

Good morning, Thanks for taking my questions just to actually sort of following up on that line of questioning from Ah the vac.

Right when we look at the trends and in and you see a gross and see an I.S. versus revenue it looks like at least the way all of US you know knuckle heads from the outside model you.

There was some fee rate pressure I know that it it doesn't always translate that way to to how you run the business and how you strike you know deals and the contracts and the way all the pricing works, but.

Maybe provide some color in helping us understand Oh, you know what.

What might have caused some of those dynamics are those sustainable.

What was behind that just to just to help us inform as we sit there and think about our modeling and where it goes from here.

Yeah understood that I think more and more frankly, there's there's going to be less conductivity between the asset level and revenue levels and a lot of the the negotiations that take place. We're we're thinking about trying to include a more holistic approach to the relationship.

Which might be what we're doing with the firm with investment management, what we're doing with integrated trading solutions, what we might be doing from in I O perspective, how we're handling cashing suite.

And so I know, it's I know, it's super frustrating to not be able to just use that ROE on a model to predict the revenue, but more and more are there. The reality is it's just it's disconnected in terms of the way that business actually prices. These relationships Mark spent a lot of time thinking.

About this too Mark you add your thoughts.

Right I mean part of it I would also say is fee structure.

And as we've talked about before 35% to 40% of those asset servicing fees and see an IRS are not directly linked assets. So in a environment where assets are rising.

That factor alone would probably put the fees at a lower growth rate and then.

And then more.

More importantly, and it gets a little bit to what Jason was saying is as the mix of business and even even within the actual asset servicing fee category, a very large domestic us custody mandate large assets, maybe not large fee.

A fund administration mandate could come with much less assets and the fees are significantly higher. So there is a mix of it that's at play too. Besides the time in which we've talked about before end of period versus you know, earning over over a quarter, but hope.

Hopefully that helps it's a it's a tough one to unpack we understand to the point that Jason mentioned.

Okay. So just that.

That's all fair and I totally appreciate that but.

But.

So to the point of care.

Can you can you give some color to the point of the third quarter as a jumping off point then like were trends that you saw in the quarter. Then you know reasonably stable was there some sort of noise that might have caused that divergence to look a little wider just to help us kind of any any help you can give on that front as we can.

Got it.

Yeah, well and that a couple of thoughts one is that it.

In in the spirit of the business does have some compression just to get to your specific point earlier as you ask a question I want to make sure we come back to an address that specifically and those those peak impressions are going to be honored whether an hour and a cold environment or not.

I actually think though that doesn't have as much of an influence on the dynamic that you're that you're realizing wishes that there seems to be that there's a disconnect between the growth in asset levels and the growth trust fees in the short run you can have flows into and out of the business that are going to be reported on the assets you're going to be reported on where they.

At the end of the period and the revenue is going to be reported based on where they were you know a prior period, but period before that maybe average and so it's very it's very misleading to try and do the math on short term to try and get a sense of what the fee realization rates looked.

Like on a business on an incremental basis and even the business. It's being added if it's being if it's a very large pieces of business they could be extremely low fee rates and but if it's more middle market activity could be could be much higher so the big business mix. It's itself will have an influence there but my.

It's less than that on the ultimate profitability.

Okay.

Hi, Thanks for your patience with that one.

My second one second question is around just trying to get at the processing error again, and I think Mike you might have.

Made some comment about this but I just wanted to kind of the score I think you said that.

You all are continuing to review those processes see opportunities for automation, you know control and process review, which is of course is ongoing but maybe.

You know an event or lost like this might sharpened pencils so to speak.

Well they have some kind of impact do you think on investment in the near term with some of the expense lines as you guys look to maybe shifts.

Or invest in some automation hired some.

Hired some additional staffs.

Staffs for that effort or what have you or is it more operational focus rather than the potential for investment.

So Brendan I would say, it's some of both so certainly there are the operational aspects, which I talked about and just to be clear you know we've done the full scrub. The on this incident already and have changed the procedures already and change of controls already I in that area and.

From a resource perspective, it was not a question of a you know.

Insufficient resources in the area that resulted in in the air all the same I you know, we're trying to ensure that that isn't the case at any point going forward as well so whatever resources, but that's not something that would result in a change in our financials. If you will.

Ore expense run rate and then on investments to your point there I you know that it will the incident in of itself I. It doesn't change our investment plan, but.

But the broader environment without a doubt you're always we're always impacted by the situation that we're in it and as a result prioritizing our investments. So there's the opportunities we have to invest you know far outstretch, what we would I deploy on a go.

Even year and as a result, you have to determine okay. How do you prioritize those and do you focus on productivity investments for productivity investments for risk management investments for innovation and growth and so that's a process. We go through every year and ongoing.

And I would say in the environment that we're in now we have to ensure that yes, we have the operational resiliency and levels of automation to ensure that.

To ensure that going forward and then second I would say productivity, we have to make sure that we're investing the technology dollars in a way to get a the productivity improvements we think we need in this environment.

To be able to drive scalable growth.

Great. Thank you.

Sure.

And next from Seaport Global we have Jim Mitchell.

Hi, Jim.

Jim you might be on mute.

Mm Hmm.

Can you hear me.

Yes, we can hear you know can you hear me.

Okay, sorry about that.

So maybe just a follow up on deposits. It seems like a non interest bearing deposits for you guys grew pretty nicely. Both on an average and period end basis, where your peers saw declines that seems like that helped you I guess outperform on and I a little bit. So just was there anything unusual in the in the noninterest bearing side.

Is that something you were trying to to grow or is that just episodic puts and takes.

Oh, I mean, maybe yeah, I'd put it a little bit in between I mean.

First of all I actually.

I think it's good for people to realize the reason, we did better than we anticipated with an eye.

Frankly, a little bit less around the size of deposits that certainly played a factor, but I come back to the fact that we were able to turn on non cash and loans held in better.

And but then to your specific question about the growth in that category hard for us to comment on what the industry is experiencing but weve back to the theme that we talk about liquidity a lot with our clients and debut they tend to comment to us that they view our balance sheet is very.

The strong we try to position it that way and so we're we're happy to be a liquidity partner for our clients there and I do think that has an influence on on on where they tend to park their short term assets.

Okay. That's fair and then maybe for Mike you met.

You mentioned that upfront that you're trying to do more with current clients. What any examples you can give us in terms of what you see as the biggest opportunity set to do more with your credit cards.

So first of all I'd say within the businesses, there's definitely the opportunity and one we're pursuing.

To do more particularly I would say with with asset managers and so just thinking about you know our approach to the market.

From a whole office perspective, it's not just a you know back office or Middle office, but also what we can do on the front office. So I mentioned for example, integrated trading solutions or essentially outsource trading for.

For those institutions, that's doing more with those clients.

So its using you know really our position of strength.

Which is in the back in the Middle office to be able to do more in the front office for them. So that's on that side and I could use I'll say other examples within the businesses, but also I want to add though and highlight it's also across the businesses and so.

And so it's a concerted effort to say you know if we have a buy let's say at administration client funding ministration clients are we providing wealth management to the executives of that from iron ore. If we have a corporate client where we are the asset servicer for their pension plans.

Can we provide a wealth management solution or program, what we would call firm to firm for their executive group and so it's those types of cross business opportunities that historically, we've done very well with these but I would say, it's more because of the culture.

And the way that we operate and we're trying to be more purposeful and disciplined about how we do that.

Okay, great. Thank so far.

Sure.

All right well move on to Steven Chubak with Wolfe Research.

Yeah.

Hi, good morning.

So wanted to start off with a question on just some of the comments.

And specifically I was hoping you could help us think about the incremental capacity that you have currently to remix some of those excess reserves into securities and just as we think about modeling the securities yields where you're gonna reinvesting today versus the 130 basis points on the back book.

You know the the capacity is is the is a tricky one because it depends on.

How quickly the deposits come in and if we and sometimes we have to let deposits season in order to get proper treatment for those to and get it and get the confidence level, they're going to be if they're going to stick around so that we know we can we can.

Take more duration risk with those and so the reality is the size of the deposit base doesn't necessarily correlate exactly to what we can think about in terms of noncash reinvestment opportunities in terms of.

The opportunities on where we are investing at the time there is more of a distinction there frankly, we we did step away from just central bank deposits. Once we started to feel that the that the balance sheet was more stable and in and frankly, I mean is it something people.

Or missed part of the reason that that I think all banks were.

Or even go into the to the point of why did why were share repurchases suspended banks wanted to be there for their clients in case, there was significant loan demand and in case, there's very significant demand to place deposits where in one to make make sure that regulatory ratios were were going to be.

Adequate and given the fact that we've got such a large custody days, we wanted to make sure that if those assets started to come for the balance sheet, we were going to feel good about it and so we were we were patient on that and but the more we realize that there is stability from a client perspective, the other components of the right.

Tori environment, we're there and more stable, we could take a step away and what we did in third quarter was was it was really incremental in in size and an asset class, but if you think about eventually the things that we can start to move more toward longer dated securities.

We can start to move more toward close more toward MBS now the unfortunately in a typical environment you might see more of a 50 to 70 basis point differential between the non HQ, all a portfolio and the HQ all a portfolio that's compressed and it's more.

More like a 30 basis point differential at this point.

And there are other things that we can that we can do and explore based on what the opportunity set is given the risk in return framework of the different securities and we feel comfortable and but that should at least give you a little bit of a friend of a framework on how we think about it and a little bit of the dynamics from a quantitative perspective as well.

Got it okay. That's that's helpful color and then just thinking about the expense outlook looking out to 2021 that I just wanted to better understand how we should be thinking about the expense growth trajectory and I is expected to decline about low double digits, you know assuming versus the current run rate things are relatively stable.

Now, let's see income grows potentially growing mid single digits.

Signed organic basis, and just wondering is there room to do better on costs, where expense growth actually lagged some of the organic fee growth to help dampen some of those pressures or how you're thinking about it in terms of the general internal philosophy.

Well, we we still consider ourselves as a growth from and we're investing for growth and new things you know things even like the the growth in the money market mutual funds. It takes investment upfront to get the to get the cut off times right and.

Get investments done with portal. It take also expense growth on an incremental basis. When you think about the administration fees that we pay to some of the.

On some of the processing side and so I think.

I think that's a good example, just thinking we think about things more from an operating leverage perspective and to the extent that we have good operating leverage in the business. Then we're going to feel okay about the expense growth otherwise we have to be extraordinarily disciplined about it and so let me just break it down into three different lever.

Sales of how into your question, how do we think about it three different levels. One is <unk> total operating leverage to try.

Trust fee operating leverage and three organic trust fee operating leverage now on the first with total operating leverage that's including a varied declining component of revenue, which is in AI and so it's going to be very differ.

Called and I don't think its a very pure tests right now given the unpredictability in the disconnect of that line item from the rest of the business to think about that as the one we want to focus on the.

The other end of the spectrum is organic trustee leverage. Unfortunately, there that's not a GAAP number and so we can give you some components of how we think about it but we cant really ask you to track that and just trust us that it's it's going to what we're expecting and so let's focus on the metal on trust three leverage and there I.

I think that's probably the best from what you can see and from what we think about that's probably the way to to to to focus our discussion and track how we're how we're doing.

But those three elements and certainly trust fee operating leverage a very big one for us to as we think about the expense trajectory next year.

Hey, it's.

Doubly front of mind for US again, we went through the entire we plan we did the Replan on expenses, we did it on capital we did it on strategy and so as we go into 2021 trustee leverage is going to be a key item to make sure. We're doing in exhibiting the discipline, we should given the deed to net interest income.

The environment that we're in we're giving up 300 million you know if you take if you extrapolate what we're you know what we've done so far this year.

And put that kind of on a run rate and you try with hundreds of millions of dollars that we've given up and in <unk> and we're not going to ignore that we're going to be.

Got to be.

Disciplined and have a high sense of urgency about doing what we can to get the expenses as lean as possible given the environment. We're in.

Oh, thanks for that contacts and just two quick modeling questions. If I may one is just how we should be thinking about the jumping off point for other income.

And there's a lot of noise in the quarter as we just look out in Fourq, you and heading into 2021 and then.

And then just on the fee waivers or just to clarify quickly five.

$5 million the impact this quarter, but it still sounds like your expectation is somewhere in the range of 25 to 35 million per quarter headwind that exiting this year is that right.

Yes, yes, that's right Yeah again, this is United and I thought about mentioning earlier, but I want to make sure. We're giving you guys everything we can.

The.

If you think about call. It you know hopefully call. It 300 billion dollar base of business and say you know say 200 billion of it is somewhere in flow for.

For waivers and the different funds jump into wave remote at different levels, but if you look at where.

The overnight repo for example is right now and if you look at it Nick Treasury educated to Treasury products and those are the biggest products we have and.

And this is dissolved that you got to imagine that over 50% of the assets are 30 days or less and so and at $90 billion, roughly you're talking about $9 million per basis point.

And so I.

I I cringe, giving you guys numbers that have such volatility and then but just think about how much of a dynamic that is if that fund that with that strategy comes down literally a single basis point it influences run rate by almost $10 million a year and so the numbers you quoted are right but.

I think it's important for everybody to to track the overnight repo market track 30 days treasuries track six month track 12 month to get a better sense intra quarter of what that number might be looking like.

On the other operating income this is mark.

It certainly has volatility so I can appreciate the difficulty modeling it if you looked at averages over the last year and.

Year, and a half or so you're probably looking at something in the mid to upper 40 range. This quarter. We did have some benefit from the supplemental compensation plans.

Plans is that within that line.

Now that we're a little bit outsized versus what they have normally been so you're.

You're probably a little high this quarter and if you looked at the average like I said mid to upper Fortys.

Perfect. Thanks for clarifying that appreciate you taking my questions.

Thanks.

Moving on we have Mike Mayo with Wells Fargo Securities.

Hi, I'm sorry.

So it looks like your best in class fee growth led by best in class wealth and asset management gross.

But I still need help on the disconnect between the growth in assets under custody Northrop twice.

Twice the pace appear year over year up 16%.

And the cuts the P line, which only happens.

The only half as much.

And then you said timing is part of it but if you look at the last 12 months last when their customers up twice as much and your.

We made it the reserve that in line. So it just seems like outside agency growth relative to the food and I know you said some will come of age she's not tied to fees, that's fine, but it still doesn't seem to explain.

Everything that's going on there sorry, there was something else in there or you're really fighting based on price or I'm, just missing something thanks.

So let me.

Let me, let me address the that business.

Most the vast vast majority of eight you see in well is GE.

His GFL.

And.

Reason for that is.

We're.

That's where we'll be outsized portion of clients that might not manage here, but that want to use us as a custodian, it's kind of a hybrid business between the wealth business and the institutional business and so.

And so when you look at the AC the A.C. number their vast vast majority CFO that client base.

He is very very.

It's very very spiky and so you get very high number of do get up a small number of clients that can literally [laughter] have billions or tens of billions of dollars of assets coming in from an agency perspective and well.

That's not going to influence how we think about the pricing on the overall relationship we think about the relationship very holistically and if the client has a it could be mega Mega liquidity events from a small number of clients that will move that line item that you see number dramatically without influencing fees.

Yes.

And what's happening there.

Super High net worth customers, then what are they doing and what have you seen recently.

Yeah. So a lot of times they'll have a large sale it could be you know life event. It could be you know.

Business sale.

Stock single stock exposure that there that they're dealing with they'll ask us to custody those assets for a period of time until they decide where to put those funds to work and so and you know our goal is to work first of all be that provider. So that we can be a better.

In class custodian for them and then introduce the other advisers managers to do what we can to also be a manager and a sooner.

Financial advisor, we might do manager selection for them, we might become a no CIO provider they might put some of those assets into that might move those assets from where they are into our liquidity funds. They might ask us to do tax advantaged equity investing we're we're very tax conscious.

They might do a more aggressive BSG mandate, but the cost of being in that business, especially if its a mandated that size is going to obviously significantly change the denominator, but in the short run it's not going to change the numerator, which is the fees were getting off of those assets.

Okay, and then one just one follow up I guess just behind the question was pricing competition in the well.

On the servicing business that we are getting worse better how do you think about competing I mean, sometimes it might make sense to take lower prices because of the scalability.

Yeah. The as you know in general the conversations or you know have been or hopefully starting to be more about what is your capability set.

What is resiliency look like how did you handle the crisis. What are you able to do that to help us from either in investment operations outsourcing, Mike hinted earlier, it integrated trading solutions and so all those things in the long run should be helpful. In moving away and just just like the asset manager.

Business moving away from just talking about investment performance here moving away from just talking about pricing the more value added in the short run there were concessions that we agreed to as we do every year and those played through early in the year.

And so but in the longer run we're hoping that these conversations more about capabilities and about service quality are going to reduce those.

The frequency of severity of the price.

Pricing discussions, but we're always good I have.

Hi, good word confection, werent concessions kind of sticks out in my mind.

Is there a magnitude of the confession, they come back or how does that.

How does that work.

Yeah, I think it's still comes back to the 1.5% to 2% a year of kind of price compression.

So I don't know.

<unk>.

You know the word concession maybe is a little different but repricing and that's just the kind of thing that we've seen pretty consistently and I don't know Jason that the business is talking about that picking up are accelerating and Mike I would just add so you where you have large relationships that are good but those client relationships.

We have grown meaning the assets have grown just like we talked about when their fees are try tied to you a bet on those assets that were either cut seating administrating whatever it may be you know they tend to then go up over time and then the client looks at it and said Hey, you know what I'd like to take a look at the pricing on this because.

Is your fees have gone up because our assets have gone up on and yet you know from a work perspective, you may be doing more but not as much as our asset growth and so that's that's the exercise if you're not able to come to an agreement. Then you know a client can say, we're going to take it out for rebid and then that process.

Then as a result, they're likely to get a more aggressive pricing on it now again, we try to minimize when it has to go through that whole process, but I think thats the nature for.

The nature for very large I instead.

Institutions like that I would also say on new business just to be clear.

Price is a factor of course, and we lose business on pricing at times and so it's not as though we priced to win.

You know we price to win at a profitable margin for us and you know and have models to be able to determine what are the resources required and therefore, where can we price it and if we can't get there you know with either where we think it is you know or you just find out through a process you lost and the reason why you losses your pricing.

It was not aggressive enough relative to who they ultimately picked.

Thank you.

Sure.

And next we have to our Cassidy with RBC.

I think are good.

Moving on.

I got a big picture question Yeah.

Be able to answer, but we're going to try to.

Your balance sheet and the Teligent James.

Jason You mentioned I think earlier.

<unk> question anyone with some.

<unk>.

<unk>.

So it's probably.

So.

What do you think normal is.

More the size and power base, you mentioned customers.

No that would be today, because im sorry.

And well move.

No.

Oh <unk> $17.

What do you think your normal size would be do you have any well maybe we are at and then we'll stay at these levels.

In the <unk> to get there is it 22 23 NEPA.

Gerard its Mike why don't I, just first just clarify your question is around you know as you started it bigger picture question, but with all these factors going on what what is your expectation for a normal the normal size I'll call. It for the balance sheet is that what you're getting at yes, yeah. That's cool.

Okay. Let me make one comment and then I think since you you led in with Big picture that allows me to answer it without all the details that the Jason can provide but I you know I would say as much as you might say boy, there's been a lot of monetary policy across the globe and that has elevated the size of your balance sheet.

And so would you expect that to kind of come out of the system and see your balance sheet go back down. So do you have you know critical excess deposits right now my perspective on it is you know we're into a very long term period for this type of monetary policy.

So yeah, I don't know how to define normal but as far as the liquidity that our clients have right now and what they're doing with it be it on our balance sheet in the fund I think there's going to be a lot of liquidity in the marketplace for some time period.

Now it ebbs and flows you know as far as our client and our balance sheet and funds, but just in general I think the water level is higher and I think it will remain higher you know for some time period.

Jason I don't know if you want to add.

The only thing just maybe book ended is.

Yes.

Yeah. If you go back a year ago deposits were kind of mid Eightys built and if you think about you that deposits are today in one teens and so I would use those as the book ends, but I think Mike's comments reflect its probably near the higher end.

Of that book.

Very good and then just come back to the processing error that you've been very good at explaining what happened.

You mentioned.

Processing errors occur over time, and millions of processing in process and sort of the year of course.

When's the actual.

Some of the execution.

With the Upsized execution rolled into your normal processing services caused an outsized cost and then second we'll just call it.

Once the season have since a couple of days to figure it out.

It's too Gerald again, <unk>, just because your your lines cutting in and out a little bit, but I think I have the question I guess the first one you are trying to get your arms around the size of the loss and the two things I would say one is that you know it was a large corporate action.

So size wise in the marketplace. It was a large corporate action and our clients were active in that particular corporate action. So that was one aspect of the size. It was large for the market. It wasn't necessarily any larger for us vis-a-vis anybody else. It just happened to be a large corporate action and then second.

And as far as you know a timing perspective, the air just to be clear was identified within minutes of having being made on it and so it's not and then it was ultimately remediated on as soon as we can practically do it. So we did not carry a risk position all costs.

All it for an extended time period that just got worse, because we thought markets were going to change or anything like that you know is that obviously.

Unfortunate situation, we're very disappointed about it but we'd look to mitigate.

Mitigate the potential cost as soon as practical and we were able to do that.

Moving my thank you.

Yes.

And moving on we have Rob will back with autonomous research.

Oh.

Good morning, guys, Mike you sort of touched on it a little bit in the last day, assuming the call here in the past you've emphasized scalability and your upcoming remarks today you emphasized tech solutions. So I was hoping you could give us an update on the progress you've made here on these priorities and where you think are the best opportunities to increase scalability.

[noise] up your tech solutions going forward.

So I think that I brought the expectation would be that I would say, it's all in our asset servicing business and that the processes and operations around that which is certainly from a dollar perspective, that's the largest opportunity on and its one as you mentioned.

You know we've been pursuing that I and the point here is will only continue to do it and if you did say you know within 2020 and everything that's happened you know has that affected the pace I would say it has on and some of it is I you know I would say the fortunate.

Circumstances have seen the model operate differently and seeing new opportunities for scalability.

Within the business model. So you don't more remote work I is definitely.

Part of that and you know frankly, managing the processes is different in a remote environment than it is in a facilities in person based model and so we've had to adapt and as we've acknowledged you know there have been changes in risks that come with that but also I'm, saying, there's also some opportunity.

Where we see fit to get more scalability, but then the other aspect of my response was going to be that in areas where.

It's already relatively scalable. So for example in wealth management as that business becomes more digital I that becomes even more scalable as well.

The point being that and again, we've seen an acceleration of that in this environment as well because as much as we will always offer the highest level of service for our clients and that's our that's our market positioning.

That's a differentiator for it you know the nature of that has changed over time that has only accelerated it'll be more specific clients need to and want to be able to do more things on their own you know through mobile or other digital devices.

And that's great you know so instead of necessarily calling someone here to get something done you know they can just go to their phone and get it done well that changes the scalability of that activity.

Because they can you know we didn't have as much volume of that as you can imagine, but it doesn't increase the resources or certainly at the same rate. So we see it.

We see it as I say kind of across the company and its just a matter of continuing to execute.

Okay, that's great. Thanks, Mike.

Sure.

Yeah.

And moving on we'll take our final question from Brian Kleinhanzl with KBW.

Hi, Thanks, guys I just have one quick question I don't know at this point when you think about the pipeline I know, it's a mix of different clients that are in there and the room service or on boarding but when you think about the onboarding process underneath the operating environment you have to work with today, how much longer is the onboarding process system could figure out how to lag.

These revenues then.

In this current environment versus what it had been previously thanks.

Sure. So as Jason mentioned, we did have a deferral and the transitions, particularly in the second quarter and then it picks back up transitions picked back up in the third quarter, particularly towards the end of the quarter and yet He's also said.

We have a high level of business that has been one that needs to be transition and you you've identified one of the aspects of how that has changed the cadence or sequencing of those transitions because some of them are much easier to do in a virtual environment. So far.

You think about I'll call it that.

You know custody type mandates I there is a lot of activity that's required but that happens or can happen a lot of it frankly it was already you know call it very digital or could be done virtually whereas if you think about broader.

And I are low I, you know investment office outsourcing mandate those are more difficult to do they involve more people I and so when those people are you know remote whether there that the clients or hours or are there. Some you know requirement for us to be hiring people to be able to take on that business.

That that that does take longer to implement and to get transitioned and then there is all types of mandates I would say that are in between there and we're moving on them. You know so so you heard some of the funding ministration wins that we've had in the 40 Act space, which has been great, but it does take a little bit longer.

Sure I, given the nature of that activity that you're taking on.

[laughter].

Operator any other questions.

So that was the final question that does conclude our Q and a session. So I'll turn the floor back to you for any additional for closing remarks.

Thanks, everyone for joining us and we will talk to you in 90 days.

All right and everyone that does conclude our call again for today, we do thank you for joining US you may now disconnect.

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