Q1 2021 Northern Trust Corp Earnings Call

a results for the quarter

Earnings per share growth of 9% versus the prior-year and a return on average common Equity of 13.7% Revenue was consistent with the prior-year as declines that interest income and trading related Revenue were offset by 6% growth entrust fees the persistent low interest rate environment has pressured are net interest income as well. As our trust fees waved. Goodbye money market fee waivers while overall year-over-year operating leverage was negative the 6% growth and trustees did produce one point of positive fee operating leverage, despite the impact of waivers, which reduced our trust fee growth versus the prior-year by five percentage points. The current quarter's results also benefited from an improved economic Outlook, which drove a 30 million dollar release reserves for credit losses.

Throughout the past year are strong capital and liquidity profile enabled us to support the needs of our client. And this was demonstrated further during the first quarter as we saw 10% sequential growth in average total deposits and 3% sequential growth in average loan balances.

Throughout this challenging environment. We have effectively executed on initiatives to continue to drive organic growth within each of our businesses. One of our key strategic initiatives within wealth management our digital marketing efforts and Northern Trust Institute have driven more conversations and engagement and we've experienced an increase in client engagement during the quarter within Asset Management wage continued to see success and growth within ESG mandates with assets under management of $139 billion at quarter-end and are active strategies have experienced strong relative performance providing us good momentum in our asset servicing business. We continue to see organic growth during the quarter with the success being. Well Diversified across regions products and clients segment moving forward. We remain focused on continuing to effectively navigate through the persistent low interest rate environment focusing on driving greater efficiencies as well as continuing to grow organically.

In a scalable and profitable manner finally. I want to express my sincere appreciation for employees whose commitment expertise and professionalism throughout these extraordinary times continues to be exceptional now, let me turn the call to Jason to review our financial results in Greater detail for the quarter.

Thank you, Mike. Let me join Mark and Mike and welcoming you to our first quarter 2021 earnings call. Let's dive into the financial results of the quarter starting on page two this morning. We reported first-quarter income of 375.1 million dollars earnings per share were a dollar seventy and our return on average common Equity was 13.7% You can see on the bottom of page to page markets performed. Well during the quarter recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels in both the S&P 500 and if a local had strong Performance Based on those calculations as shown on this page average 1-month and 3-month Libor rates were stable during the quarter with modest declines.

move to page three and review the

Financial highlights of the first quarter year-over-year revenue is flat with non interest income up 5% and that interest income down 17% expenses increased 5% while I was up 4%

in the sequential comparison Revenue grew 4% with non-interest income up 5% and that interest income up slightly expenses declined 3% and that net income increased 56% recall that the prior-year the prior quarter included 66.9 million dollars in expenses relating to Severance and occupancy charges, excluding those charges expunged up 3% on a on a sequential basis.

The provision for credit losses reflected a release of thirty million dollars in reserves in the quarter compared to a provision of $61 million in the prior year and a release of two point five million dollars in the prior quarter release in the quarter was driven by continued Improvement in the projected economic conditions and portfolio credit quality relative to the prior quarter return on average common Equity was 13.7% for the quarter up from 13.4% a year ago and 8.8% in the prior quarter.

Asset under custody and administration of 14.8 trillion dollars grew 36% from a year ago and increased 2% on a sequential basis.

Asset under custody if 11.5 trillion group 40% from a year ago and increased 2% on a sequential basis.

Asset under management where one point four trillion dollars up 29% from a year ago and up 3% on a sequential basis. Let's look at the results in Greater detail starting with revenue on page four first-quarter revenue on a fully taxable-equivalent basis is 1.6 billion dollars flat with the prior year and up 4% sequentially trust investment other servicing fees representing the largest component of our Revenue totaled one point 1 billion dollars an hour up 6% from last year and 4% sequentially.

Foreign exchange trading income was $79 in the quarter down 12% year-over-year end up 15% Sequentially, the decline compared to a year ago is driven by lower volume, lower volatility while the sequential performance was driven by higher volumes.

Remaining components of non-interest income totaled $101 in the quarter up 16% compared to a year ago end up 9% sequentially within this security commissions and trading income declined 17% compared to a year ago, but was up 8% Sequentially the year-over-year decline reflected lower interest rate swap in transition management activities with the sequential performance is driven by strong growth within our core brokerage business which includes our integrated trading Solutions product.

Other operating income totaled $55 million dollars and was up 60% from one year ago and up 11% Sequentially. The year-over-year growth was impacted by higher-income and the supplemental Compensation Plan change and a prior-year market value adjustment for seed capital investment partially offset by higher expense relating to be to swap agreements.

Go through the supplemental compensation plans had a related increase within our other operating expense. The sequential increase is primarily associated with lower expense relating to be to swap agreement.

Net interest income which I'll discuss in more detail later was $347 in the first quarter down 17% from a year ago and up slightly on a sequential basis.

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

Corporate institutional Services business fees totaled $621 in the first quarter and we're up 8% year-over-year and up 4% sequentially.

Custody and fund Administration fees were $446 and up 13% year-over-year and up 6% on a sequential basis. The year-over-year performance is driven by new business favorable agency translation and higher transaction volumes. The sequential increase was primarily driven by favorable markets new business and favorable currency translation.

Asset under custody Administration for its clients were thirteen point nine trillion dollars at quarter end up 36% year-over-year and up 2% sequentially. So your your growth was drinking favorable markets new business unfavorable currency translation the sequential performance which everybody favorable markets and new business partially offset by unfavorable currency translation.

Custom management fees and see and I asked $116. We're down 4% year-over-year and down 7% sequentially. Both comparisons were impacted by higher money market fee waivers Park upset by new business and favorable markets.

Fee waivers and total 28 million dollars in the first quarter compared to eleven point four million dollars in the prior quarter.

Asset under management for CNAs clients or 1.1 trillion dollars up 30% year-over-year and up 3% Sequentially 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 Netflix.

Security lending fees or $18 in the quarter down 22% year-over-year and up 4% Sequentially the year-over-year decline reserved by lower spreads while the page or performance is driven by higher volumes partially offset by lower spreads.

Average collateral levels were up 13% year-over-year and up 11% sequentially moving to our wealth management business trust investment and other servicing fees were paid $543 and were up 3% compared to both the prior year and prior quarter fee waivers and wealth management totaled twenty two million dollars in the first quarter compared to twelve million in the prior.

Across the regions both on a year-over-year and sequential basis growth or impacted by favorable markets partially offset by higher fee waivers within Global family office. These were lower than a year and sequentially and primarily reflected higher fee waivers partially offset by favorable markets.

It's under management for our wealth management clients or $355 billion dollars at quarter end up 28% year-over-year and up 2% Sequentially. The year-over-year growth was driven by favorable market and client flows while the sequential performance reflected favorable markets partially offset by net outflows.

Moving to page six net interest income was $347 in the quarter and was down 17% from the prior-year earning assets average $241 billion dollars and a quarter up 27% versus the prior year average deposits were $126 billion and were up 33% versus the prior-year while loan balance is average thirty four point two billion dollars and we're up 6% compared to the prior-year the net interest margin was 1% in the quarter and was down 51 basis points from a year ago. The net interest margin declined due to lower interest rates as well as makeshift within the balance sheet.

On a sequential quarter basis that interest income increased slightly average earning assets increased 7% on a sequential basis while average deposits are up 10% the net interest margin declined by basis points sequentially partially due to the balance sheet mix shift and lower rates.

Turning to page 7 expenses were 1.1 billion dollars in the first quarter were 5% higher than the prior year and 3% lower sequentially.

The prior quarter included a $55 million dollar Severance charge related to a reduction in force and an eleven point nine million dollar expense associated with an early lease exit arising from our workplace real estate strategy excluding these items expenses are up 3% sequentially.

Compensation expense total $519 and was up 4% compared to the prior year and was down 1% sequentially. So your your growth was driven by higher salary expense due to staff birth prior your base pay adjustments higher incentive X-Men's and unfavorable currency translation, excluding the charge in the prior. Compensation was up 10% sequentially wage primarily driven by higher equity and cash based incentives.

This quarter's Equity incentives included thirty two million dollars in expenses associated with retirement-eligible staff compared to thirty four million dollars in the prior-year.

Employee benefits expensive hundred three million dollars is up 60% from one year ago and up 1% Sequentially. The year-over-year increase is primarily related to higher retirement income and payroll withholding costs. The sequential increase was primarily driven by higher payroll withholding partially offset by lower medical expenses.

Outside Services expenses $196 and it was up 2% from a year ago and down 6% from the prior quarter.

The year-over-year growth was driven by higher sub custody third-party advisor and Market data costs partially offset by lower data processing and Consulting costs.

Quarter included a 2.5 million dollar charge excluding the charge costs were down 4% primarily due to lower legal Consulting and Technical Services related costs.

Equipment and software expensive $177 million dollars was up 9% from one year ago and flat sequentially the year-over-year growth reflected higher software support and Amur costs.

I couldn't see expensive fifty 1 million dollars were down 1% from a year ago and down 24% on a sequential basis the prior quarter included in 11.9 million dollar charge relating to an early lease exit excluding that charge the category was down 8% on a sequential basis driven by lower building operation costs and lower rent expense.

Other operating expense of seventy-two million dollars is up 16% from a year ago and relatively flat sequentially. The year-over-year increase is primarily driven by higher wage supplemental Compensation Plan expense and the other miscellaneous expenses partially offset by lower business promotion and staff related costs.

Turn to page eight or Capital ratios remain strong with our common Equity Tier 1 ratio of 12% under the standardized approach and 12.8% under the advanced approach. Our tier 100 is 6.9% under both the standardized and advanced approaches.

During the first quarter, we repurchased 1.4 million shares of common stock at a cost of 136 million dollars. We also declared cash dividends is 70 cents per share totaling 151 million to Common shareholders.

The current environment continues to demonstrate the importance of a strong Capital base and liquidity profile to support our clients needs. We continue to provide our clients with the exceptional service and solution expertise. They've come to expect our competitive position across each of our businesses wealth management asset management and asset servicing continues to resonate well in the marketplace.

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

Mike Mark Lauren, and I would be happy to answer your questions olivium. Please open the line app on your telephone keypad. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We ask that each questioner limit themselves to one question and one relevant follow-up question. You may re-enter the queue for additional questions as time allows again, press * 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal.

Our first question is coming from Glenn schorr with evercore, please go ahead.

Morning Glen. Good morning. Thanks very much is my question is on organic growth. I heard a lot of commentary throughout your 18 minutes of prepared remarks Nike much on on positive. Net flows across most parts of the business. I I think in your prepared remarks. I heard you talk about ESG mandates within asset management, but maybe cover whether you quantify or qualify. I'll take either one where you're seeing new business what kind of business you're winning in asset servicing and has there been any pandemic rejected pause that is now freeing up allowed to so any color on that would be great. Thanks.

Yeah, Mike you want to start on it? Sure. So Glenn as you described there, we are seeing strong organic growth across the company and and specific life in asset servicing and I would say, you know the first place I would start and it's you know, the foundation of our growth strategy is retaining existing clients. And as you would imagine going through the pandemic being able to support clients has been extremely important, but also I think earned us the right if you will to continue to to serve our clients many of them are large as clients long that's been a big positive second. I would say is that we have seen I would say a full return to Marketplace activity. So our clients both asset Owners Club managers are actively looking at their own operating models and looking for opportunities either to become more effective in how they invest on behalf of their benefits. Yep.

Or you know improving the efficiency of the way they do that. So, you know consolidating operations or providers, you know, utilizing new technology and that has played very well into our strategies and asset servicing that we've had underway for years. So I thinking about things like front office Solutions, which is a investment book of record for clients that have high levels of alternative assets the ability to look at across their portfolio in order to manage manage their business and then thinking about 5 or asset manager clients. Our whole office strategy is definitely resonating as well where we can provide services across front middle and back-office so high level of activity and then I would suggest, you know success with strategies we've had in place for some time.

Appreciate that maybe just the last follow up on on the name was down 5 but the bar up a ton. Do you feel that interest income has now I'm finally bottomed and and maybe some backup of your your thoughts behind that in terms of redeployment opportunities. Thank you. Appreciate it. I am to call batam on it. I mean if you if you unpack the the quarter effectively we saw loan growth that was strong and up a million dollars and that that has a a few million dollar impact. If you take our average return on those assets if you think you know anywhere from $175 to two hundred basis points on a billion dollars, you're going to get four or five million dollars and left for the quarter and then you also had obviously lift from the deposits overall, but that's offset by month.

Something that's more predictable going.

Which is we're still going to have reinvestment in as the security book continues to mature and that's still got some maturation to do and so it's easier to predict what's going to happen on the reinvestment side. Then what's going to happen on the loan side, but obviously if we continue to see strong loan demand then that's more important than what we're seeing on on the other components of volume.

Thank you. Our next question comes from I see it your annual meeting today 2021 priority is productivity. So I was wondering if you could put some metrics around what you'd like to achieve and on the positive side. I see the head counts down 1% quarter-over-quarter the pretax. Margin. The first quarter is back to the 30s where it was not last year at all. But on the negative side, I have to imagine the the fee waivers would continue in my actually increase. So where does it all end up and where would you like to get to this year?

Yeah, let me take that in a in a few different buckets. You're right, you know, the productivity is extraordinarily important and we you know, we could go and we scratch and Claw and do everything we can to earn new business that's hard to do. It's it's not overly predictable. But what we can do is exhibit extreme discipline on the productivity side. And so we we haven't put external metrics to that but we're looking at it a lot of different ways internally. We look at operating leverage you talked about earlier. We look at the operating leverage and in internally, we're able to look at organic trustee operating leverage. And so from our perspective, we want to see we want we don't need just call expenses up or down because a lot of our business relates a lot of our expenses relates to the amount of new business that's coming in and if we continue to show growth in the different areas of the business worth

SEC left in those expenses. We just want to make sure it's it's related in the proper way to the to the organic growth that's coming in. Now, you're right head count was down and that comes back to the the the initiatives that we talked about in January. And so you see it, you know, it's a meaningful reduction for us of about 300 headcount and that played through in lower salary expense for the company. And so that's those are those are meaningful movements and I think reflective of the discipline that and the commitment we have around expense management and then when fee waivers, you're right, it's a that is a it's a very very difficult Dynamic that we're facing and you know, I also think people need to realize we've we've talked about the fact that you know, the fifty million dollars we have this quarter. We're still seeing lower rates on the short end of the curve as much. Yep.

We've seen the one year.

IDR 10-year up. We've seen overnight repo at zero and one and that's very difficult for a $275 billion dollar pool of money market funds and that's why we've tried to give consistent information not guidance, but a consistent run rate on how those fee waivers are going and and as of as we sit right now that phone number looks more like 65 to 70 million dollars on a quarterly run-rate basis, you know, hopefully as the FED balance sheet changes, we see some improvement they're dead, but that's where we sit today. And so it's something we have to monitor and obviously it has a big impact on the pretax. Margin you you identified

And then the one tail when you have I guess the higher asset values. Can you remind us that the relationship between every change and the stock market and your your fees?

Sure, it's going to it varies by bears by the by the area of the business that we're talking about in general 60% off about 60% or based on or based on asset values in some ways and then in well, you can split it even more marked you might have phone numbers closer top of your head, but it's right. Yeah, the the 60% is really an asset values which would be all asset values Equity Market, you know Equity GSS as well as fixed income or cash. And then as we look across and wealth management, there is more of a relationship there to the assets, but the equity sensitivity that what you were looking at is is a little different in the regions. The equity sensitivity is probably 50 to 55% Whereas when you get to the global family office there the equity sensitivity is is probably dead.

Through to a third just because of the way the client's assets are allocated.

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

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

Right. I mean total interest related deposits up interest bearing deposits up and I think the good news is that interestingly we were able to hold on to the margin, you know, you saw a decline and in Libor and even in that that book we also saw a decline in in cost and despite the fact that part of the book is zero and I think that's meaningful to get to your question about volume levels and and the the nature of the deposits. There's no doubt a lot of those deposits or non-operational and so we need to let them season before we would do much Beyond putting those at central banks that said there are other things we can do cuz we've got capacity in the balance sheet, but obviously the nature of how we run the treasury book is to let those types of deposits the ones that are more institutional and might be more trans dead.

More transitional she's in before we would take longer term exposure on those.

Okay. All right. Thanks. I appreciate that. And then when we think about I think you would had commented Jason and in response to Glenn's question about really when you think about Iraq. It's a it's a foot race in between bone growth and reinvestment rates from you know, your your loan growth picked up a bit here this quarter versus the trend of of the back half of last year, but you know. End not not necessarily all that higher than the average. So, how should we think about loan growth from here? What do you seeing as far as demand for loans among your clients? And uh is the is the rate for that loan book still are we still better off looking at the 1-month and 3-month Libor to think about those Rings life?

Sure. So first of all, the long the the loan growth is calm almost exclusively or the vast vast majority has come from the wealth management side business and even though in dollars, it's not as big as as the deposits. The impact is much more meaningful and having a billion dollars and higher average deposits. It it that's that's quite meaningful or for nii and we've talked very consistently about the fact that the deposit levels are, you know, interesting. They're they're chunky but don't really do too much on nii. It is difficult to predict what the loan demand will be. However, what we've experienced isn't simply I'd say you're random we've talked about the fact that we have been communicating with clients more aggressively and this is over the last year and half two years about our desire to be with them.

Be a liquidity provider for them are liquidity engagement with clients is it's a big part of our business and that shows up not just in what we do with the back seat on the on deposits, but also money market funds where again, you know, two hundred seventy five billion dollars in there and also on the lending side particularly on the wealth management clients and say that it's more this has been I think more of a strategic lift. And so that's not predictive that it's going to hold on or continue to accelerate but we don't see it as something that that we're dismissing is potentially random either.

Thank you. We will now go to Alex with Goldman Sachs, please. Go ahead. Good morning. Hey, good morning. Thanks for taking the question. Um, I want to shift gears a little bit maybe talk about capital a little bit and obviously in continue to be in very strong position across all the key ratios. Can you guys remind us are kind of how you think about the bio transfer Northern Trust obviously relative to you know, regulatory minimums, that's not kind of how you said the bar. You typically look at your peers. So given some of the changes that they have made and kind of how they're thinking about Soderbergh minimum levels. They're willing to run with how does that inform your view of excess Capital at Northern Trust and then ultimately, how does that translate into your appetite for increased BuyBacks from here? I'm sure so you're right that that it's less of a process. It's less of an algebraic calculation and more where we want to be, you know on a relative basis.

At this point we I've you know, you guys have heard us talk consistently about thinking about our engagement with the board. We're we're we're totally aligned but we want to make sure that that that conversation a specific place where we on an absolute basis how we think about things on a relative basis and how we think about things from a regulatory perspective. And right now I'd say just keeping an eye on what the industry doing is doing is important. So the the absolute levels less. So we've got plenty of room obviously from a CT one perspective sitting at 12 given where the regulatory Minima are dead. And so if you if you think about Tier 1 leverage, even though the industry's talked about coming down significantly we're we've still printed well into the sixes and that's that's on $125 billion dollar average deposit base. So I'm not going to I'm not giving you are buffers here, but just take a 5% number just to get it your question Alex birth.

What our capacity would look like if you came all the way down to 5 that would translate to a balance sheet of about $200 billion dollars and you could have a hundred and seventy billion dollars in deposits all else equal on the balance sheet today. And so you're talking about you know, easily forty billion dollars on a base of 125 currently. And so that's a lot of room and I think also importantly it's not like we use the balance sheet for clients that for for organizations. We don't know we're really dealing from a a a candidate pool of depositors that our existing clients. And so this point we feel good about the capacity we have but it's obviously something that we're watching given off dramatically things can change given fed actions and we're deposits were fifteen months ago.

Right, I guess it was trying to get more to the capital return framework of kind of how you guys thinking about the opportunity for share repurchases from here, you know, given the axis Capital value of light bulbs. Thanks for thanks for clarifying. Let me let me tap with that. Let me tackle that directly, you know, it's interesting because this quarter is a great example of how long just think about do we buy back stock or not. There are different ways. We can invest capital and that that tend to 15% return Target. It comes up in everything. We do from a capital perspective including using the balance sheet to help clients. And so this quarter you saw the capital levels come down not because there was a meaningful decline in CT wage because there was more activity in from a client perspective and that showed up with an increase in rwa on on the denominator and we saw higher SEC lending activity wage.

higher lending activity

And we saw higher treasury activity in the form of more, you know more bond-buying Muni purchases in each of those areas. We're we're thinking about what's the best way to use our balance sheet in the long run. And what's the best way to think about return and for us we can think about the returns of buying back a dollar a stock we're looking at the we're looking at everything from what we think God turns are going to be there. What's what are we getting in terms of price-to-book? We're also looking at the desire to be there with clients. And with what those returns will look like and when we have the ability to suck think about lending or expanding see and I asked relationships with the other things. I mentioned those things come up is very attractive ways for us to use Capital. It turns into better. It turns into good game for us in the long run and and good use of capital.

Got it. Great. That makes sense. Thanks to that and then just a quick follow-up around nir again. So I think in the past I think we talked a little bit about some sensitivities to sort of the repricing dining in the Securities portfolio. Maybe maybe Refreshers where that sort of stance today. So Securities portfolio yield I think is about you know, one one twenty or so. If you look at rates where they are today, I want to say most of the Securities portfolios already repriced lower but you know holding current rates constant sort of how much more of a drag on the security field. Do you guys expect to see over the next couple of quarters?

Yeah, well to give you a sense of what's repriced at this point, obviously just take if you if you look at a hundred fifty billion dollars earning assets, obviously all of the money market assets priced 85% of the loan book is repriced.

60 and it's $60 billion of the a security. So about 63% of the Securities book has repriced at this point and that's that's where that's where we sit at this point. And then it's interesting. If you if you think of what's the impact of that. I'll tell you in this quarter alone the it was dead, you know, it was a significant impact. We actually had if you just from Securities portfolio nir was down ten million dollars. And so that was the drain on it, but that's not I I don't want you to think about that as a pure run rate because we're thinking there about what's happening with the loan book. And and so there are other factors to play in as we're reinvesting those Securities, but I want to at least start with giving you the numbers that you asked for in terms of how much is repriced. And then also what the what the implications are, but the the runoff coming Thursday.

At this point and and also the fact that the you know, one two three five year where we tend to be reinvesting has come up that that is brought down the the fluence on a quarter-over-quarter basis as well.

Thank you. We will now go to Brian Bedell with Deutsche Bank, please go ahead. Hey Brian great. Hey, good morning. How are you? If I could start off with a with maybe one of them real quick updates and just that comment made on the 85% of the loan book has repriced. It looks like that you'll have at least for the last couple of quarters now bottomed and it's starting to come back up. So my question would be around the 15% that's repricing sort of what are the Dynamics on that versus maybe what is some of the fact that you're bringing on that's helping improve that yield and and then and then longer-term most of that is tied to Libor. Maybe just talk about the plan of God from whether some of those limits are going to use the new reference rate given the the plan compensation of Libor and how how you're thinking about that.

Sure. So the longer-dated loans are often. It's going to be in the in the mortgage book. And so that's what's going to take longer effectively. Just you know, the loans that have come on dis reportedly the growth Has Come Again within wealth, but within personal loans and within some of our more corporate based organizations, we do have a lot of corporate there's you know, small and midsize business activity in that book. And that's where a lot of the growth has been and then in terms of the month the Libor transition, yeah, as you know what I'm sure you're covering really closely Brian, they'll be a transition in most the industry seems to be looking to move from Libor to Soffer down as a reference rate and so watching that and the implications of it.

Is that is that transition to Super? I mean, it's really at this stage cuz there's not a effective term rate. But I mean, is there any even sending any implication on the hill of the loan book by by that transition or does it simply too early?

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

Thank you. Our next question comes from Steve.

Hi, good morning. So had a couple of dogs to eat tax modeling questions. The first is just on the non asset-sensitive fees with in custody and fund Administration and wage too pretty meaningful sequential increases these past two quarters that line item exited the courtyard about $178 million versus what historically has been a pretty consistent range of a hundred fifty to a hundred sixty million or just curious what you're driving the recent strength in that line item and maybe just as we think about from a male perspective. What's the right jumping off point we should be thinking about as we look ahead to two Q. Yep, and just to make sure I'm tracking totally specific you're talking about other non-interest income at 180 on the income statement. It's actually the 178 with in custody and fund Administration Boston on assets into this equation. So that's the part that will presumably move around with that. Yeah, so, this is Mark. So you're you're referring to when we talk about

Sensitivity of the of those fees that are about sixty to 65% our assets sensitive and then the the rest are kind of either they're they're they're mixed quite frankly. There's transaction volumes within those there are some flat fees or fixed fees or even account level fees. So, you know, you could maybe say roughly half of it as transaction volume related wage. So and we did see a pick up this quarter in those transaction volumes that that created some of the sequential list that we saw, you know, the scientist or 1% or so of a sequential list that we saw so I hope that is answering your question.

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

Yeah, that's probably fair. Right? I don't necessarily have the numbers that you're doing cuz we don't I don't have a broken down specifically like that. That's kind of a directional guy that moves around each quarter of that split. But but yeah, I mean we did we certainly saw have your transaction activity during during this most recent quarter that would have benefited those fees by a bit.

Okay. No that's helpful color this for my follow-up and then actually bit more focused on the liability side. The beat was helped by continued grind down in those interfering deposit cause it's the second consecutive quarter where we've actually seen that come down. Just curious. If you see any additional room to cut deposit costs further, you know, if the rate backdrop holds or has that lever been largely exhausted this month.

Yeah, I I felt you know decent about you know coming down a couple of basis points in that book and you know, and and I think it's reflected that a lot of that book is international. It's in currencies that are often used to having negative rates. And so that Dynamic that we've talked about that one zero is broken. There's an expectation that the beta will continue at that point, you know seems to be playing through there. And so Thursday, we we've talked to clients a lot about where rates are there cuz it's obviously can be a sensitive topic but I think the the win there is we've got good good dialogue with clients that indicate we're all looking at at things like the Euro the same way and and tracking deposit costs. So we don't have further deterioration as the asset side is more.

Thank you. We will now go to my carrier with Bank of America, please. Go ahead morning Mike. Good morning. Good morning. Thanks. You suck on organic growth. You provided some good color on asset servicing these questions, which is an investment management in particularly in well that are you starting to see Improvement as COVID-19 conditions home versus last year and how is the competitive backdrop? You know change is given that it seems like, you know, everybody, you know has been focused on on that part of business.

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

Okay, great. And then just in terms of the expense of you realize you guys trying to focus on you know lining that you mean the lower than you know, the organic growth, you know levels, you know the firm over time but as we transition from say the the low short rates, you know as headwinds to nii and and waiver you have a eventually stage diving and then a short rate, you know rides and events. It becomes Talent like any necessary like investment areas ahead or like new efficiency areas postcode like real estate that we should be thinking about I'll start and then I'm sure Jason can I detail to it but you know, it's on the expense side. It's a very, you know dynamic situation right now what I mean by that is where I sleep, you know still in this resiliency mode that we talked about which has certain, you know say cost to it. But also there are certain expenses that were not incurring at this point. So obviously, you know dead

Travel and business promotion is lower than it was pre pandemic, you know with not operating with you know, as many people in our facilities, you know, the cost of operating those facilities is lower. So you do have some, you know lower costs on that front that to the extent, you know that we transition out of that you would expect that those would increase the wage thing I would say is with regard to the organic growth that we've talked about. It does require investment that can be, you know, supporting large new clients and it also means I can come in the form of, you know, bringing on new talent to continue this growth. I mean as you bring on new Talent you want to make sure that you're providing the right level of service across all of our businesses and that means making sure that we have the people that go along with this and then the third piece I would just say is around our digitalization efforts, which name

Again have accelerated in the last year.

And I think we're seeing the benefit of that but it it it does require investment in technology as well to to ensure that yes, we're adding those capabilities, but we're doing it in the right, you know safe secure stable way. So that that that backdrop does say okay. We're going to continue to grow but it's going to require investment and that's why it's Jason talked about earlier. We also have to be focused on efficiency and we did see as a part of, you know, the remote working environment. There are some efficiencies in that as well. And so how can we for example, look at our real estate footprint and see if there are opportunities to you know, shrink the footprint and use that to support some of the investment that I talked about.

Thank you. We will now go to Betsy graseck with Morgan Stanley, please go ahead.

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

So if the way we've tackled kind of the virtual engagement through with clients and the well side is the continued use of our goals during wealth management approach life. And so we were able very quickly to take those discussions and and have virtual conversations. But with that same very what we think is a very differentiated platform wage clients through through COVID-19. It was very good engagements were very very strong and it's led the business to feel that there's strong momentum from from an overall climb a judgment perspective. So that's gone. Well, and it's one of the continued large investments in wealth management and Mike just talked about our investment in digitizing the business. That's a nice area where we can use that as a core platform, but add Journeys to it adds specific areas to become more and more detailed and specific with how with match.

Cup with with our clients are going through very strong investment for us and it's been extremely positive. Our net promoter scores is Steve Frank and runs a business or just talking about how strong those are and so naturally that investment has been paying off with good client engagement.

Okay, and then just separately I know you've been in the Press recently with regard to some of the crypto custody activities that you are working on. Not sure when it's going to be launched off. I think you've got a partnership going on with no charge to move. Maybe you can give us some color on that and and and part of the question too is it doesn't just end with custody or can you foresee it opportune? I need to enable, you know to offer crypto to your clients. You know, when I think about European investors, well, not just investors but you know the the services that you service was off the managers that you work with over there are dealing with negative rates. You know, what I hear is that there's a decent demand for going into crypto because at least it's not negative interest rate. So so how far is it until you or how long is it until you offer? You know crypto is one of your liquidity tools just kind of thinking thinking out loud?

so Betsy as you know, the

Till markets are constantly, you know innovating and evolving, you know have for some time. And in the business, we're in we absolutely have to keep Pace with that took it in a way that again, you know, it allows us to provide the Safety and Security for you know for the clients and managing their assets and crypto and digital assets more brought a lease is right now, you know clearly one of the areas that evolving the fastest and so on that front to your point with regard to custody of cryptic assets or cryptocurrencies, you know, we've partnered with Standard Chartered an adventure called zodia which will provide that crypto custody and and I think what's important than what we're trying to accomplish is leverage the traditional custody expertise that we have that Standard Chartered has as well, but do it in a fintech way. So it that's why it's a a cell phone number.

Independent entities that again can develop and evolve at that pace and at this point we still expect at some point in 2021 that page that will be you know approved for client use. So again, it's going to be done not only our own I'll call approvals but also from a regulatory perspective and then I think more broadly to your point. Absolutely. We see many different potential opportunities in this space where clients will look at digital assets and potentially cryptocurrencies in order to address, you know, various either challenges they have or you know ways to earn better returns and that's why we've not only done what I talked about in cryptocurrency, but more broadly with the digital assets whether it's tokenization, which we've done with Banda value, whether it's developing a capability on blockchain, which we've done with broadridge dead.

There's a number of different areas where we've experimented either on our own or with Partners in order to be able to you know, be a part of that innovation.

Thank you. We will now move to our next question that is coming from Jim Mitchell with Seaport Global Securities, please go ahead. Hey, good morning. Hey, maybe just a question on the wealth management business. It seemed to be quite a bit of disparity in the outcomes, even though the market appreciation whether it's lag basis or month lag or full quarter lag was pretty similar. So is it just there's a lot more fee waivers in the global global family office. How do we think about that sort of difference?

Yeah, you've hit it. Right. It's there is a distinction in the lag in that business there but that's not what drove it frankly. It was it's that waiver said and and we've talked about the fact that people shouldn't see waivers as linear. This is a good example where the waivers and that the gfo business obviously much money institutional and so their waivers their waivers hit later and we're now starting to see it come in. Whereas the the regions have more traditional closer to God but not retail pricing. And so those waivers just hit earlier second Dynamic though is gfo is spiky and we have clients there that will move billions of dollars. And so you can have one two, three clients that if they're all have significant movements then you'll you can see big movements on a sequential basis if you look your birth

Per year the organic growth that.

The growth rate overall for gfo is actually slightly higher than the regions. But obviously this sequential look was impacted by those two things one waivers and talk to some spiky very large client movement. Okay, and so the incremental hit the fee waivers is that also going to be in 2 q more in global family office and maybe see an is or how long have you think about the geography of that? I think we're I I think from here, it's it's it's somewhat it's going to be more linear. I mean the the funds are more, you know, they're dead. They're all they're at this point in waiver mode. And so I don't think we're going to see as big of a disparity going forward. But but you know, people must realize it's not a linear relationship and I think there was you know, overall it was twenty-two twenty-three billion dollars in in well and nine of birth.

I was in nine almost ten was in gfo. And so that's a year-over-year. Look that's just aggregate effectively, but the 1/4 look it was five million in gfo alone. And so big that that was the increase quarter-over-quarter, right? Okay. Thank you you bet.

Thank you. Next we will move to Jeff Harper with Piper Sandler, please. Go ahead. Hey Jeff. Hey, good morning guys, just circle back a bit to the buyback. I mean, it's good you guys out there buying hundred thirty-five million stock historically, it feels like the actual buyback comes in kind of below what least our estimated capacity is somewhat regularly. I think first quarter May giving us a partial with risk-weighted asset growth, but can you help kind of differentiate on kind of the buy back the difference in your thinking between just being conservative versus the expectation that risk-weighted assets could actually continue ramping up like they did in in the first quarter.

Yeah, it's completely related and it comes back to that that this that theme of wanting to think about returns. And so in fact, it's not like we're making a decision of do we buy back stock or just park money at the FED at 10 basis points, you know for us we it's it's but it's nice to be able to see that client activity is not driving the alternative to share BuyBacks. So that's certainly not to say that we're we're doing zero or very little it's just to say those are the the different options we think about and you saw a sec lending activity up significantly it just the just the loan Demand Being up a billion dollars that's going to cause a billion dollars and higher rwa to age of itself. And then you see the the deposits coming in which is it's nice for us to be able to answer a client need but that comes with that comes with rwa as well.

we deploy it on the asset side and

So the the the best thing we can do is have the balance sheet used for good return on Equity activity that's client related office building relationships in the long run. But at the same time we did do you know a hundred and fifty million dollars ish in in share repurchase over the over the time frame so it's not like we were absent in the market, but you can imagine here at you know at 12% we're going to be looking at what is AOC. I look like what is client activity look like in balancing all of those things together.

Okay. Thanks and just to touch on kind of the fee growth or I guess growth across the relative businesses. It seems like seeing is and outgrowing wealth management at least outpacing it for a while. Now. I mean is that the right way that we should think about those two business trajectories going forward growth wise or or is there a reason to think that kind of wealth management could start kind of catching up with cni cni? Yes.

Couple things one. If every time over a long period of time we think one of the businesses is growing faster and we think oh this is going to be the case for the for the future you get it an inflection. The businesses have acted is good Hedges to each other and and it's always difficult to predict those inflection points and what's going to grow faster for sure. If you look over the last couple or few years you'd see us having grown faster, but in general wealth is got good exposure to em Equity markets. And so and you also, you know think over the long run, you know, there's a good good title growth particularly at the top end of the wealth market and so those things should not be as well. And so we wouldn't call a prediction necessarily on one of the businesses over the long run in the future growing faster, and I I would just add to to Jason

Thomas said that that's why we really like the combination of the three businesses. Not only is it complimentary from a a client perspective but also from a financial perspective they have different Dynamics. So Thursday the asset servicing business which P chair which is has done a great job leading and growing at a high rate. It also requires resources to do that as we've talked about that and has different lengths the volatility in the business. Whereas in wealth management very steady and at a high level of profitability and scalable and then with Asset Management again, been a high level of operating leverage in the business and as has been positioned over the last couple of years, for example, when you can get positioned in the right products for example in liquidity and the markets go up the liquidity goes up, you know, very strong increase in profitability for that and you know, focus on other areas where we can have that same Dynamic with ESG and and Quant. So yep.

We we like all the businesses. I would say from a a client competitive perspective, but

and also from a financial perspective

Thank you. We will now go to Rob wildhack with autonomous research, please go ahead Rob morning guys question wrong me on organic growth, you know, I think a year ago the prospects were organic throats were probably more uncertain and fast-forward to today and your comments have been you know, really positive coming out of a 2020. Do you see any new or different sources of organic growth that could maybe increase the long-term sustainable rate you think you're capable of achieving?

Star but Mike I'm sure has some comments on this as well. You know, let's take those. Let's take the different businesses in and see us. We hit it off early today. The integrated trading Solutions is something we talked about a little bit or you know over the last few months that's come through that's part of the reason. I think there's there's been that that lift in in brokerage commission income done strategic things in foreign exchange. And those those aren't so it's not accidental. I think that we've had left in those areas and then front office Solutions is another area where we're trying to go to to sophisticated clients and show the breadth of what we can do in wealth management the engagement there is around expanding and continuing to invest in gold ribbon well management and the growth we've had particular in the upper end that product gets to we we thought so much about what fifty million hundred million and you know hundreds of birth.

Millions of dollar clients need in order to to interact in a good holistic way and think we're set up while there and then in Asset Management, you know, $215. I remember about a year-and-half ago where we were on the liquidity perspective too now $275 and yeah, there's been great growth but in the industry, but they did a m a hard thing to get cut off times done well to get to open a Northern Trust portal. There's so many different to invest in the the talent we have in that group and then you think our capabilities or over a hundred and thirty billion dollars now grade engagement in in, you know across the nordics with very strong climber there and in doing a lot with with our ETF platform including launching new products in Europe there and so in each of these the areas, I think there's good wage.

Good opportunity for us to leverage the work that's been done to to lead to Stronger organic growth.

That's great. Thank you. Sure.

Thank you. Our next question comes from.

Hi, thanks for taking my questions. I guess just to follow up on the integrated trading Solutions. Can you explain that a little bit how it actually works. Are you home? Is it an electronic thing or is it people that you're providing instead of your your ass advanced Appliance having them and how does that work? If it's you know 5,000 it's want to buy one particular stock. How are you separating all of that, you know, can you give a little more color on how this actually works?

Sure.

At 25,000 feet you can think about it is almost you know out, you know trading Outsourcing and investment trading Outsourcing and we're a lot of clients realize a lot of our asses off and clients realize that their core competencies around security selection and research and not necessarily the having the the the trading operations the back office comes with that and you know trade order entry and so our ability to say you can work with us and we can be your effective, you know Outsource trading partner. It appears to a lot of asset management clients.

Okay, so they don't have to have a trailer anymore and or you just providing the back office for trading it starts with trading they can we can have portfolio management and and their middle office send us model accounts and US trades and we can we can provide that service for them and be more of a a full outsourced operation from them from middle office through through trade execution and trade management.

All right, I'll follow up maybe a little more offline going back to the capital question Jason Mi. So I hear you you want to obviously you're thinking of client needs and and all of that stuff. But you know, even if we factor that in as we think about it, what level are you, you know sort of comfortable running off of your various Capital ratios out whether it's still one leveraged or whether it's 81, you know, is it a 10 or is it an eleven percent whatever the form it gets through Thursday. It's through loan growth, you know Securities lending growth and our buyback, you know, what is sort of that cut off point below which you don't want to go.

From from my you know from our perspective. I think it it it still is going to depend on where the industry, you know, where where our peers and and our regular or Regulators. Just asking us to hold onto Capital to not buy back stock at that time. I don't we don't call an absolute level we haven't talked about our buffers externally. Obviously, we're running significantly above any regulatory minimum, but we haven't and so we've got buffers that we use internally to manage that not something we've talked about externally, but when we engage with clients, we want to be able to continue he's telling them that they've got the there are interacting with the balance sheet that's strong on an absolute and relative basis and that doesn't have its part of our strategic off the strength when we talked to clients and a lot of Institutions you think about not just Pension funds but even Sovereign wealth funds if they're investing if they're depositing five hundred million a billion to Thursday.

Billions of dollars. They're not really depositing their lending to their Banks.

At that point and they want to be operating with institutions that are strong. And so we're always going to be looking and seeing where the tides are in the industry to make sure we we reflect strong Capital levels.

Thank you. Our next question is coming from Gerard Cassidy, please go ahead and I Jason I'm Mike. How are you? Can you can you share with us? I know you're not a prime broker. But there was that trading mishap in March with supposedly a large family office, which probably was a hedge fund. But can you just give us any color because we've never seen any risk in your you know, Global family Office business at all. Can you reassure us that still the case and just maybe some color around how long how you manage that business and manage those risks?

Sure, well, you know a couple of things and you're right. We're we're not a prime broker and so we're not providing, you know, the type of trading leveraged Tu org or alongside clients and taking positions is we're dealing with either our hedge fund clients or our family office clients in the family Office business. We have some bounds but those are much more the loans that we see in the traditional wealth business which are loans against Investments that you know, that clients will have and long-term clients. They're not taking that type of exposure and so the and the the the services that we provide for our hedge fund clients and our energy of clients. It's much more about asset servicing berth ministration investment reporting. That's how we're going to Market to deal with those types of clients. And so just to put anybody's Minds at rest Thursday.

Didn't have any exposure to to the to the hedge fund slash family office and you're talking about and don't see that type of exposure in our in our portfolios speaking of asset servicing in reporting that you just did. Is there an opportunity to capitalize then if the SEC requires more disclosure from the family office or organizations as a possibility as a result of what happened. Would that be an opportunity for you guys to you know, do more work for your customers and therefore maybe more revenues

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

Thank you. We will take our final question from Brian kleinhanzl, please go ahead Brian. Good morning. Great. Thanks guys, two questions one first one on the expenses. I heard that the thirty million of comp was retirement-eligible. And then did you also say that you absorb Merit increases you over a year. So those are getting paid out in the first quarter now, I thought those getting paid out in the second quarter historically. I'm just trying to think of the two cute of one cute Trend here for calm know the dog will come through second quarter. What I did mention earlier was that this may have been what what you what got your mind going is we the reduction in overall ft and headcount for the company did lead to a lower salary level in in the in the quarter.

But that won't but that's not you know that's distinct from the Merit increases and and just to clarify. This is marked the base pay adjustment the year-over-year increase its still reflecting of any base pay adjustments that happened in the previous year. We're still lapping that so if if that's what you were referring to Brian in the release or in some of the comments made that that would have been what that was referring to not this year's.

Got it. Thanks, and then you also just talk about the trends in Investment Management. I think he's if you adjust for the waivers looking at the first quarter relative to the third quarter, you're not seeing much in terms of Revenue growth dispatch to change in market levels over that time. Just maybe touch on the flows in that segment. Thanks.

yeah, Mark may want to touch on Flows In general, but

Yeah, so when the Sienna is line, I think that's what you're looking at the investment management fees, you know on a sequential basis X waivers. I think we were up about 6 % you know, probably, you know, three quarters of that two-thirds of three-quarters of that came from a market Swift. So there was some sequential organic growth there, but I don't know if that's what specifically if you were looking at.

For the fee waivers. So I mean it sounds like slow Trends in there more positive.

Yeah, there were some flow activity that we saw there like Mike had mentioned. We've been seen good growth and ESG some of the Quan active products as well. But but the waivers there on a sequential basis certainly kind of overwhelmed. You know what we saw from both favorable markets as well as business flows.

Thank you that will conclude today's question-and-answer session Mister Betty at this time. I will turn the conference to you for any final remarks.

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

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

amk

Kathy