Q4 2021 Northern Trust Corp Earnings Call

January 20, 2022

Please standby we're about to begin.

Good day and welcome to the Northern Trust.

It's Gordon.

2021 earnings conference call today's conference is being recorded.

This time I would like to turn the conference over to you Doug.

You have investor relations.

Mark Bette. Please go ahead.

Thank you Ali.

Hello, everyone and welcome to Northern Trust Corporation's fourth quarter 2021 earnings Conference call. Joining me on our call. This morning are Michael <unk>, our chairman and CEO , Jason Tyler, Our Chief Financial Officer, and Lauren I'll note, our controller, our fourth quarter 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 today's conference call. This January 20th call is being webcast live on Northern Trust Dot com. The only authorized rebroadcast of this call is the replay that will be available on our website through February 17th Northern Trust's disk.

Claims any continuing accuracy of the information provided in this call. After today. Please refer to our safe Harbor statement regarding forward looking statements on page 13 of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session. Please limit your initial query to one question.

And one related follow up this will allow us to move through the queue and enable as many people as possible the opportunity to ask questions. As time is going to ask questions as time permits. Thank you again for joining US today, let me turn the call over to Mike O'grady. Thank.

Thank you Marc let me join in welcoming you to our fourth quarter 2021 earnings call I Hope you and your families are healthy and well our performance in the fourth quarter generated a 9% increase in revenue compared to the prior year and our return on average common equity of 14, 5% revenue growth reflected strong organic growth.

Across each of our businesses, which also contributed to full year earnings growth and a return on average common equity of 13, 9%.

Throughout 2021, we continue to have success executing on our growth strategies across each of our businesses.

Enhancing our foundational strength through advancements in our data and digital efforts.

In our wealth management business, we have driven growth across each of our regions and our global family Office business. We continue to see improved levels and gave of engagement and new business activities with both existing and new clients and we ended the year with a continuation of the strong growth in loans and deposits that we have seen throughout 2021.

<unk>.

During the quarter, we began executing on our plans to expand our Florida footprint into Jacksonville, one of the fastest growing northeast.

Regions within Florida.

We were honored to be recognized by the financial times group as the best private bank in the U S for the 11th time in the past 13 years. We were also named the best private bank in the U S for family offices, recognizing our global family Office group for its commitment to families of significant wealth private foundations.

<unk> and the family offices that serve them with.

Within asset management, we continued to see strong organic growth across key strategic areas of focus highlighted by our money funds, surpassing 330 billion in AUM during the quarter, our flex shares Etfs, reaching $20 billion in assets and ESG strategies growing to more than $165 billion in assets.

During the year, we also benefited from growth in our multi manager strategies and our outsourced Chief investment Officer services.

Our asset servicing business continues to experience growth that is well diversified across regions products and client segments.

Highlight of our new business success is the recent announcement of the expansion of our relationship with Pandal group across Australia, The UK, Ireland and the U S.

Northern Trust has provided fund administration global custody and transfer agency services dependable since establishing its first mutual fund offering in the U S. In 2009.

This mandate will now be extended to include fund accounting regulatory reporting collateral management foreign exchange and Middle office services across all of <unk> businesses.

This is an excellent example of how we grow our asset servicing business by targeting a premier asset management firm developing a relationship providing exceptional service growing along with their success in increasing their assets under management and then expanding the relationship by consolidating their activities and providing a broader set of capabilities.

I want to commend the efforts of our employees around the world around the world, whose commitment expertise and professionalism is serving our clients and communities and continues to be extraordinary.

As we enter 2022, we remain focused on our long term priorities and investing wisely for future profitable growth to deliver long term value to our various stakeholders now let me turn the call to Jason to review our financial results in greater detail.

Thank you, Mike, Let me join Mark and Mike and welcoming you to our fourth quarter 2021 earnings call, let's dive into the financial results of the quarter starting on page. Two this morning, we reported fourth quarter net income of $406 4 million earnings per share were $1 91, and our return on average common equity was 14.

5%.

Results for the quarter included a severance charge of $6 $1 million, a pension settlement charge of $3 4 million or $13 million gain within other operating income relating to property sales and net onetime tax benefits of $13 $9 million primarily relating to <unk>.

Lower net tax impact from international operations.

Move to page three and review the financial highlights of the quarter.

Year over year revenue was up 9% and expenses increased 2% net income was up 69% in the sequential comparison revenue was up 2% expenses were up 4%, while net income was up 3%.

The provision for credit losses reflected a release of $11 $5 million in reserves in the current quarter compared to a release of $13 million in the prior quarter and $2 5 million in the prior year.

Return on average common equity was 14, 5% for the quarter up from eight 8% a year ago and up from 13, 7% in the prior quarter.

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

Trust investment and other servicing fees, representing the largest component of our revenue totaled $1 1 billion and were up 8% from last year and flat sequentially.

Foreign exchange trading income was $77 million in the quarter up 12% year over year and up 16% sequentially.

The year over year growth was driven by higher volumes, partially offset by lower volatility while the sequential increase was due to higher volumes as well as higher volatility.

The remaining components of noninterest income totaled $119 million in the quarter up 28% from one year ago and up 8% sequentially.

Within this security commissions and trading income was up 11% from the prior year and down 1% sequentially. The.

The year over year growth was driven by higher core brokerage revenue.

Other operating income totaled $72 million and was up 46% from one year ago and up 16% sequentially.

The increase compared to the prior year was primarily driven by the previously referenced $13 million and gains from property sales distributions from investments in community development projects and higher banking and credit related service charges, partially offset by lower miscellaneous income.

The sequential increase was primarily due to the gains on property sales.

Also partially offset by lower miscellaneous income.

Net interest income, which I will discuss in more detail later was $371 million and was up 7% from one year ago and up 4% sequentially.

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

For our corporate and institutional services business fees totaled $625 million and were up 5% year over year and down 1% sequentially.

Custody and fund administration fees were $458 million and up 9% year over year and down 1% sequentially.

The year over year growth was primarily driven by favorable markets and new business, partially offset by lower transaction based fees.

The sequential decline was driven by lower transaction based fees and unfavorable currency translation, partially offset by favorable markets and new business.

Assets under custody and administration and administration for C&I as clients were $15 two trillion at quarter end up 11% year over year and up 3% sequentially.

Year over year growth was primarily driven by favorable markets and new business. The sequential performance was primarily attributable to favorable markets.

Investment management fees in C&I as a $113 million were down 9% year over year and were flat sequentially.

The year over year performance was driven by higher money market fund fee waivers, partially offset by new business and favorable markets.

Fee waivers in C&I asked totaled $59 million in the fourth quarter compared to $49 9 million in the prior quarter and $11 4 million in the prior year quarter.

Assets under management for C&I ask clients were one two trillion.

Up 13% year over year and up 3% sequentially.

The growth from the prior year was driven by favorable markets and client flows.

The sequential increase was primarily driven by favorable markets.

Securities lending fees were $19 million up 8% year over year and down 6% sequentially.

Average collateral levels were up 16% year over year and down 1% sequentially.

Moving to our wealth management business Trust investment and other servicing fees were $486 million and were up 13% compared to the prior year and up 1% from the prior quarter.

Fee waivers in wealth management totaled $32 million in the current quarter compared to $26 7 million in the prior quarter and $12 2 million in the prior year quarter.

Within the regions the year over year growth was driven by favorable markets and new business, partially offset by higher fee waivers.

For the sequential performance the growth within the regions was primarily driven by new business with.

Within global family Office, a year over year performance was driven by favorable markets and new business being more than offset by higher fee waivers.

The sequential decline was mainly related to higher fee waivers.

Assets under management for our wealth management clients were $416 billion at quarter end up 20% year over year and up 12% on a sequential basis.

Both the year over year and sequential increases were driven by client flows and favorable market.

Moving to page six net interest income was $371 million in the quarter and was up 7% from the prior year.

Turning assets averaged $149 billion in the quarter up 13% versus the prior year.

Average deposits were 136 billion and were up 18% versus the prior year, while loan balances averaged $40 billion and were up 20% compared to the prior year.

On a sequential quarter basis net interest income grew 4%.

Average, earning assets grew 3% and average deposits grew 5% while average loan balances were up 4%.

The net interest margin increased one basis point sequentially.

Turning to page seven expenses were $1 2 billion in the fourth quarter and were 2% higher than the prior year and up 4% from the prior quarter.

As mentioned earlier, the current quarter included $9 $5 million in charges related to severance and pension settlement, while the prior quarter included a $6 $9 million pension settlement charge also recall that last year's results included a severance charge of $55 million and an occupancy charge of $11 nine.

Yeah.

Excluding these items expenses were up 7% versus the prior year and up 3% sequentially.

Excluding severance charges compensation expense was up 7% compared to the prior quarter and was up 2% sequentially. The.

The year over year growth was primarily driven by higher cash based incentive accruals as well as higher salaries.

The sequential increase was primarily due to higher salaries, partially offset by lower equity based incentives.

Excluding the previously the previously mentioned pension settlement charges employee benefits expense was up 3% from one year ago and up 10% sequentially. Both increases were impacted by higher medical costs and lower payroll withholding.

Outside services expense was $224 million and was up 8% from a year ago and up 6% from the prior quarter.

Revenue in business volume expenses accounted for just over a third of the year over year growth.

The remaining year over year growth as well as the sequential growth within the category.

Higher technical services consulting and data processing related costs, reflecting investment in the business as well as the timing of engagements.

Higher legal services costs also contributed to the sequential increase but were down compared to the prior year.

Equipment software expense of $196 million was up 11% from one year ago and up 6% sequentially.

Both the year over year, and sequential increases reflected higher software support and amortization costs.

Excluding the prior year charge occupancy expense of $52 million was down 6% from a year ago and down 4% sequentially.

Other operating expense of $79 million was up 9% from one year ago and down 3% sequentially.

The year over year increase was driven by higher business promotion expense, partially offset by lower miscellaneous expenses.

The sequential decline was impacted by higher costs associated with the Northern Trust sponsored PGA golf tournament in the prior quarter, partially offset by increases within other businesses business promotion spend and miscellaneous expenses within the category.

Turning to the full year our results in 2021 are summarized on page eight net income was $1 5 billion up 28% compared to 2020 and earnings per share were $7 14.

Up 31% from the prior year.

On the right margin of this page, we outline the nonrecurring impact that we called out for both years.

We achieved a return on equity for the year of 13, 9% compared to 11, 2% in 2020.

The full year revenue and expense trends are outlined on page nine.

Trust investment and other servicing fees grew 9% in 2021.

The growth during the year was primarily driven by new business and favorable markets, partially offset by the impact of money market fee waivers.

Net interest income declined 4% average, earning assets during during the year increased by 16%, while the net interest margin declined 20 basis points driven by lower average interest rates.

The net result was revenue growth of 6% in 2021 compared to 2020.

On a reported basis expenses were up 4% from the prior year adjusting for the expense items noted in both years expenses were up 6% from 2020.

Turning to page 10, our capital ratios remained strong with our common equity tier one ratio of 12, 1% under the standardized approach up slightly from the prior quarter, our tier one leverage ratio was six 9% down slightly from the prior quarter.

We declared cash dividends of <unk> 70 per share totaling $146 8 million to common stockholders.

The current environment continues to demonstrate the importance of a strong capital base and liquid balance sheet profile to support our clients' needs and we continue to provide our clients with exceptional service and solution expertise they've come to expect as.

As we began 2022 our focus is on balancing a variety of factor in the months ahead with the prospect of higher interest rates benefiting our revenue, but conversely, the higher levels of inflation and the competitive labor market impacting expenses.

We are relentlessly focused on strengthening our competitive position within each of our businesses investing in our workforce and technology, all while delivering attractive returns.

You again for participating in northern Trust's fourth quarter earnings conference call today, Mike Mark Lauren and I'd be happy to answer your question Ali will you. Please open the line.

Thank you.

I'd like to ask a question. Please signal by pressing star one on your telephone.

Okay.

Speaker phone. Please make sure your mute function is turned off.

To reach our equipment.

As a reminder, please ask one question and one follow up question.

I'll go first.

Excellent.

Hi, Evercore. Please go ahead.

Good morning, Glenn.

Good morning.

How are you.

So quick question for you on that last comment you made about focusing all of those things you are not alone there.

So.

So you had you had nice fee operating leverage for the year.

The.

<unk> expense ratio came up a little bit obviously, because it was a super low number in the third quarter. So.

As you balance all of those things as we look out into 'twenty two.

Is that cannot be the same key focus that it has been in the past as you balance all those things, meaning we will get the benefit of rates over time, but the cost inflation is here now so should we should we be prepared for.

'twenty, two being a tougher year for that metric.

Yes.

Should Glenn.

You're hitting on an important point, which is that we all are seeing the prospects of rates and we are extremely leveraged to the front end of the rate curve. Both in NII and also in waivers obviously, but the inflation is that's hitting faster and we saw it all we saw it in third.

<unk> as we were looking at incentive comp accruals, we saw it in fourth quarter as we as we made some off cycle adjustments, which we can talk about in salaries, but the that inflationary.

Generic component and by the way, it's not just in compensation. It shows up in other areas of the income statement, it's going to hit first and but at the same time the leverage we have to the front end of the yield curve means that when rates do go up.

Extremely beneficial to us and we've been talking about that for two years, obviously, how much net interest margin and also waivers in the money market products have been impacted.

Okay.

I appreciate all of that I'll, let one of my peers asked on the NII question I did want to ask a quick question on organic growth and the follow up you mentioned that you spoke to it is clearly bad because you can see it in your asset growth, but can you talk about whether it be new business wins in asset servicing and asset management or one.

But not yet funded pipeline. Thank you.

Sure. Thanks, Glenn both of the businesses and as you know when we talk about the organic growth we tend to talk about it year over year not on a linked quarter basis, and Thats, a really important distinction that said.

Touched on it both asset servicing and wealth management had good lift from an organic perspective year over year, and frankly in the quarter as well and so you saw we've been talking about increased momentum in the wealth management business, you're starting to see that come through with higher fees on a quarter over quarter basis Thats drew.

Given by that's driven by new business and we get the same effect coming in asset servicing the pipeline in both of the businesses.

In the short run it looks it looks strong the pipeline for the businesses has different timing, but in both instances there reflecting good activity in new business and I think in the CNS in particular day.

See good activity overall in the front end it might be it might be a little bit different as the back end is a little bit harder to tell.

Okay. Thanks.

Sure. Thanks Glenn.

And we will move onto our next question from Steven.

Okay.

Go ahead.

Steve Thanks, Scott Good morning, everyone. So wanted to start with just a question on capital management.

As you noted capital ratios continue to be quite strong I believe Jason on the last call you had talked to or spoken to the fact that the <unk> inflation in the loan growth was consuming a lot of the capital build that you guys are generating this quarter that wasn't the case, we didn't really see any <unk> growth.

Yeah, you tempered the buyback and I was hoping you can give some perspective as to what inform that decision and how should we be thinking about the pace of buyback from here, especially if the pace of <unk> growth as we begin to moderate.

Sure will come.

A couple of thoughts there one just for the quarter.

<unk> growth is one dynamic but of course.

It's capital and that's another dynamic we have to manage as well, which is why we were flattish quarter over quarter that said as we think about the overall I know lot of people are wondering what we're what our game plan is from a buyback perspective, and if you just say it's a good time to just take a look back.

At the year and we generated one 5 billion in capital last year from from earnings and so you take a step back and just say, we're just the math, you're doing where did the $1 $5 billion go.

Well, we did return $600 million to shareholders in the form of dividends over the course of the year, but we very intentionally grew the loan book, we saw high quality opportunities on the horizon and we wanted to be there for clients and so you look year over year and loans are up $7 billion and even within this quarter.

They are up 1 billion, one of one or $2 billion.

And so and if you think about where our capital ratios are that $7 billion increase in loans that drives.

That takes another $900 million and the capital that we that we generated and so you look at dividends and what happened with loans. That's right. There that's 100% of the capital we generated now even so we did buybacks in the year of about $250 million and so that.

That's why you saw.

<unk> drift down a little bit but the next important question is is the loan growth good and it was very good its good strategically for us because we supported clients, but it's also a good economically if you think about the ROE of loans.

Very attractive, particularly in a low interest rate environment and so we feel really good with what we did in 2020 21 and 2020. The door was closed last year. We think we did the right thing for clients and shareholders by growing relationships and earnings, but as Youre trying to predict what we're going to do in 2022, it's very <unk>.

Different we don't see the same loan growth on the horizon and we've even talked about the fact that some of the loan growth. We've had is in some of the areas of our business, where it can be very spiky and just as our clients put on they can put on one or two or $3 billion in and a deposit they can do this.

<unk> thing in lending and so we could see lending be spiky, both up and down but don't see that same type of $7 billion growth year over year.

Yeah.

Thanks for that color, Jason and just for my follow up.

Wanted to ask sorry about that on.

On the expense side.

You did give that perspective, noting that the John on an adjusted basis. The expenses grew 6% to 7%. This past year, obviously, we had some nice market tailwind, which will drive some impact on the variable expense lines as we think about some of the inflationary pressures that started to manifest late last year and are going.

To continue into this year versus that up 6% to 7% that you had talked about in 2021 should we expect the expense growth to be similar or even above that given the inflationary pressures that you spoke to.

Well, let me hit the big the Big three.

Maybe I'll hit comp and then I'll hit technology, which.

Gets it outside services and <unk>.

Equipment and software expense, if you look at the comp line.

We've already seen some inflation hit that line this year and you see it was just.

The increase in comp this quarter linked quarter $13 million of that alone came from salaries and.

The impact of what we've done in these off cycle adjustments not done yet and so we're just from the actions we've already taken we're going to see another $3 million lift in the in the comp line just from those salary adjustments.

Secondly.

There is what are we going to do with our normal base pay adjustments, which as you know that starts in second quarter, but that's going to be higher and it's reflective of inflation. It's usually we see that be an $8 million to $10 million a quarter impact this year, it's going to be more like $20 million a quarter.

<unk> and <unk>.

So.

Those salary actions combined are going to give just in and of itself that will lift the total comp line, 5% year over year for the year.

And.

And on top of it. We then have to think about what hiring or are we going to do and what other adjustments might we have to take but that at least gives you a lens of what we can see at this point now let me now let me switch to attack and that's the other area, where all financial services companies are spending a lot of time and a lot of <unk>.

<unk> that hits us all across the P&L, but mostly in outside services and equipment and software.

And you saw a big sequential increases of about 6% in both of those categories. This quarter, but as we look forward very different impacts of what we think is going to be existing in 2022.

And outside services.

Tech services within that category a lot of project work that we're doing we got a lot of that done in fourth quarter don't six we do not see significant impact and significant lift in 2022 and outside services. In fact, the number you see now for fourth quarter. That's a good.

Starting point for <unk>.

For 2022, and any any motion from there is going to be driven more by.

Business activity, and obviously theres a lot of business related activity in that line item that could drive it but the tech component largely largely done and from an increase perspective.

Shipment and software very different.

We are on a ramp there against 6% increase there we ended that year ROE with the category was up 9% year over year over 2020, we're going to see that same type of lift in that category in 2022, maybe slightly higher.

So what are we doing there it's really four factors one depreciation and that alone as we know we can see as we sit today, that's going to be up 45% or $50 million. So just depreciation which is kind of in the bank. At this point, we know is going to grow equipment and software by <unk>.

By about 7% alone.

We know that there are some other increases increases coming.

To inflation of the underlying caution that hits in different ways. Three we're continuing to invest in technology to get stronger and maintain a very strong foundation and then lastly business growth, including digital so a lot of investment going on there in our hand.

Full of different categories, but that's those are the three big categories of expenses to give you a sense of what we know at this point.

No very helpful breakdown. Thanks, so much for taking my questions.

Yes.

Thanks.

We'll take our next question from Matt <unk>.

Then from Jefferies. Please go ahead.

Hey, Thanks, good morning.

Jason You mentioned earlier that the company has meaningfully asset sensitive and I wanted to ask you about your disclosures in the 10-Q and K give you unexpected change over our base forecast, but I wonder if you could give us a more simple way of thinking about this cycle, what each 25 basis points of rates would give you in terms of NII.

Yeah.

Sure.

First of all.

And you know this really well, it's not linear and so let me let me give you the first one.

I wish that the fourth and fifth were the same but.

The first alone is at a high level. If you think about we've got about $70 billion in floating rate, earning assets and we think we will get about a $40 million lift on a quarterly basis alone on the asset side, we will give up maybe five.

That and higher borrowing costs. So that's net 35 before we before we really talk about significant data, but we think that first lift is probably in that $35 million a quarter range now that the first lift it also gets to wave.

<unk> Ken.

And we've talked about the fact that our our money.

Money market mutual fund family.

Is it price much more institutionally and so it only takes one lift to work fully through the duration of the portfolio.

The vast if not all of the waiver is off the table as well and as you know this past quarter, we waived $80 million run rate on that is lower now, but so I think it's important to think about both of those go back to NII as we as we get those.

Second third fourth rate hikes, then that's when we.

We start to give up some of the gain coming from.

From the from deposit costs.

Yeah, Yeah, perfect and then just second one quickly on C&I.

You mentioned lower transaction activity that line was flattish can you just kind of give us a help on.

Magnitude on more type of hold back that might've been in maybe just talk through FX translation headwinds as well.

Sure.

It's interesting as we talk about transaction costs transaction volume and I think people look to FX in <unk> and.

They look to security submissions training, even within the custody and fund administration fees or there are transaction related fees that that.

Feed into that line and so that's what we're referencing when we're saying that some of those that those costs were lower in the quarter and so.

And you'll note in FX for example, good quarter, and so transaction volumes and FX and other areas where high but within.

We really dug into why what happened within the custody and fund admin lines within C&I within CNS. It was more of the transaction component the non asset.

The AUC non AUM based fees that were light that were light in the quarter.

Okay.

I guess it was that meaningful and was FX translation, a meaningful headwind this quarter to sequentially yes.

Yes.

Mark Widmar, yes, Ken its Marc combined you're looking at about 2% there.

With the <unk>.

Transaction based fees being more than half of that.

No.

The two were.

I would say.

A fairly significant drag when you look at custody and fund administration on a sequential basis.

Okay got it thank you.

Thanks, Ken.

We will take our next question from Mike Olson from Goldman Sachs. Please go ahead.

Great.

Hey, guys good morning Andre.

So couple of questions around the rate dynamics, I guess as we speak.

About your deposit betas and I appreciate nobody has a crystal ball, but as you think about the current cycle versus the prior cycle has the nature of the deposit base change.

March for us to sort of contemplate as we think about deposit betas over the next several quarters right. So or do you think the experience you guys saw in the last cycle is a pretty good one.

It set a benchmark for where demand.

This time around.

Yes.

We talk about it a lot.

<unk> thrown out to our team as it is it similar to last time and it's just it's hard to tell what I can give you some facts that.

And it's led to the deposit beta but more to the overall.

Asset sensitivity of the securities portfolio on the balance sheet the duration in the.

The duration has come down from last quarter was two seven and now it's at two six.

Ironically, though if you look at the that the duration of the overall asset side of the balance sheet cumulatively, it's much higher than what it was in the prior cycle and so I can.

You can actually tell you this.

As it sits right now it's about 1.16.

You go back to the last.

Tightening cycle 2015, it was 0.7 and so it's that's meaningfully different than how we have to see how the deposits.

Specifically react but is that at least gives you a sense of what the exposure of the overall balance sheet is like but Mark I don't know if you have anything to add the other thing that we've heard as well from our team to keep in mind. Alex is the the trajectory of the rate. So I think last time the rate hikes started much slower than what it appears.

That might happen. This time, so you might go through those.

Rising betas.

<unk> way because of that so we'll have to see how that plays out as well.

Got it thanks for that and then my follow up is around I guess expenses again.

Jason I appreciate you guys, giving a different pieces and thats helpful and obviously acknowledging that you guys don't give.

Put out guidance in terms of expense growth.

I do like the way you talk about expenses to fees as a ratio that got to some of the glass points as well, but if you guys are at around 104 by our math in terms of expense to fees in 2021, you've talked about inflationary pressures, but also youre getting money market fees back likely in 'twenty two which.

I would've thought would come in at a really high kind of incremental market. So when you blend it altogether.

Net net we're seeing kind of in this 131415 range for 'twenty, two and beyond as we kind of think about that ratio as a guidepost sort of think between the revenues and expenses.

Alex It's Mike.

Your framework is correct or at least I would say aligned with the way that we're looking at it as well.

Of course, we don't know what the market levels are going to be and how quickly the fee waivers come back.

Obviously, we're managing through the expense side of that but to your point of kind of being in a range of I'll call. It efficiency there.

Or in that range.

And particularly in a inflationary environment.

That can be challenging to try to get that that ratio to go down.

And as Jason alluded to earlier.

Where you really see the other side of the coin. If you will is on interest rates and therefore, NII that then drops down to operating leverage.

And so in the same way, we're saying okay stay in that expense to trust fee ratio as far as efficiency, but then look to pick up through NII. So that you have positive operating leverage and that your pre tax margin.

Is in that range that you want to get the right returns.

Yes that makes sense.

Kind of how we are thinking okay awesome. Thank you.

Yep.

Thanks, Alex.

We'll go ahead and take our next question from Brennan Hawken from UBS. Please go ahead.

Hi, Brennan.

Hey, Thanks for taking my questions.

I just wanted to follow up circle back a little bit on capital.

And pull together a couple of the comments that you made on that Jason.

It seemed like.

What you said was that in the current quarter there was some aoc.

Consumption of capital and while you had a 1 billion and a half some odd based on loan growth the outlook for the loan growth is.

Yes.

<unk> and not really there so number one does that mean that.

Your your consumption further consumption of capital on the loan growth side may slow of course, it could be a handoff to OCI and then number two when you talked about the $7 billion versus the $900 million. It seems like that suggests at a pretty high risk weight density in the loan book can you can you talk about.

The risk weight that you have in that loan book and what kind of loans are driving that growth. Thanks.

Sure well, let me, let me start with the end, but don't don't let me forget the first part of it.

The.

The loans that we have are.

You can see it in our reporting.

First of all the first cut is it's weighted more heavily toward wealth management, obviously and within that it's a blend of.

Of personal commercial real estate.

Corporate commercial and the risk rates on those don't vary dramatically from.

Risk weight allocation perspective, and so.

At a really high level you can just you look at what our Outstandings are and it's not going to vary within those categories significantly. Now then there is also some some off balance sheet commitments that aren't that aren't reflected there, but that gives you a general sense and we've talked about and I could now if you'd like if it's helpful to give you more of a breakdown.

One of the loans and what they look like by category.

But the growth has actually been relatively relatively consistent if you think about the increase just for example, if youre trying to do the math there if I look at the increase in loans from third quarter to fourth quarter commercial has been about is up about 1 billion and a half dollars commercial about 650 and personal.

Loans about 350 commercial real estate $2 50, and then some other stuff with the remainder and so you can tell it's relatively consistent to our overall volumes and the $40 billion.

<unk> portfolio.

If I.

If I come back to your first yes.

Go ahead, you that's what I was going to I was just to remind you about the first part that's all.

Thanks Jay.

Okay.

Yes, I am notoriously bad at multiple part question because you got to remind me.

Yes.

We just don't we don't see the same outlook on loan growth and I think you couple that with.

Again, we had a bit we generated a 1 billion $5 in capital.

And we're starting in and if we do get what we walked through earlier, if we get multiple rate hikes and we start to we start to have improve.

Improvement from a net interest margin perspective, we start waiver start to go away then.

The math becomes different and we can think about different different ways to return that that capital generated to shareholders and we obviously we go through the same framework that we always have we think about the dividend <unk> to make sure that that's something we're comfortable with and it's within the range we've talked about.

And then we start to look at the outlook for the size of the balance sheet to stay where.

Within a range that we feel is appropriate given all the dynamics we've talked about historically.

Excellent.

That was very thorough and helpful and you touched on the size of the balance sheet. There. So maybe I'd like to ask follow up when you think about.

Posit.

Runoff.

You typically with the business model you tend to see deposit growth.

<unk> is expanding its balance sheet runoff on it's shrinking but last cycle. The runoff for northern for you guys was less than it was for some of the other custody bank peers.

So when you think about what's driven the deposit growth of different types of businesses that have driven the deposit growth. The past two years is it largely does it look similar to how it looked last cycle.

Or has the composition of deposit growth shifted which might suggest we should think about deposit run off in a different way.

Yes.

I look at it a little bit differently. One is I think we have to look at just what's happened with asset values and if you go back to the end of 2009 2019 pre health crisis and you look at what's happened with the S&P 500 from then to the <unk> to now.

The S&P is up something like it's something like 48%.

And if you look at our deposits on average we went from averaging 85% to $90 billion up to 135 to 150 billion. It's a very similar increase.

And then the second thing to look at is.

Whats operational versus non operational and did we have similar growth that all of the growth come in non operational deposits and the answer is absolutely not.

A lot of.

More of our growth is common operational deposits.

And then the third dynamic which you got add is there is just this overwhelming dynamic of the fed having put trillions of dollars of liquidity into the market and whatever our little tiny.

Tiny $150 billion balance sheet looks like there is still going to be impacted by what the fed does and so you put all those things together and you just I don't think there is reason to believe at this point from what we see just from that data that theres, some massive unwinding coming now it could.

But those data points tell you that not necessarily.

Alright Thats helpful. Thanks, Jason.

Sure.

We will go ahead and take the next question from Brian Bedell from Deutsche Bank. Please go ahead.

Hey, Bryan good morning.

Good morning.

Jason Thanks for all that color on the <unk>.

Okay.

Yeah.

Great granularity.

One follow up.

More areas in that.

They have been I think yes.

Obviously youre not doing that this year, but I think you can.

In the past.

We're doing a marketing campaign.

And then maybe just any commentary around the.

Travel potentially higher travel expenses.

We're all back office.

Hopefully recede.

Yeah, So maybe I'll, maybe I'll touch on travel and business profile and then maybe Mike can talk about golf tournament.

No.

We're seeing business problem will pick up again, it was up in fourth quarter, and so and no one's cringing at that I mean, it means that we're in front of clients more.

And so.

Is it going to get back to the levels. We saw before boy, that's highly highly unlikely, but already partially in the run rate in <unk>.

In fourth quarter, and and other expenses and we do expect that to continue to come.

Not that's not adding $10 million a quarter in expenses, but it is adding to the to the expense run rate.

Mike you want to touch on your end.

The golf tournament has been a very successful.

Marketing effort and client entertainment effort for us.

Particularly around branding and as much as we've.

Ended that relationship at this point.

We still need to continue to invest in the brand and so some of the proceeds that are are the funds that are deployed for that brand building through the golf tournament are being redeployed in other areas.

At this point, Brian it's not going to be at the same levels as what we are spending on the golf tournament.

Okay. That's helpful and then maybe just.

On expenses overall, I mean, it is actually a pretty good playbook over the last 10 years.

Terms of your expenses.

Or are they pretty reliable middle single digit.

Right.

And each year, which kind of I think tank.

I think we lost you Brian .

Maybe.

Maybe Brian maybe you could re queue and we could we could take that.

Otherwise, we've got I think one more Ali do you want to.

Can you hear us your next in queue.

I can hear you guys are now competing lives.

Yes.

We can hear you so go for it.

Oh, great sorry.

So thanks for taking the follow up here so.

So loud and clear on the deposit trajectory in terms of the sizing of the balance sheet I'm curious how that could play out with money market funds because.

That industry has obviously seen tremendous amount of inflows as well if you go to the last cycle, it's really not clear there was a huge amount of decline in money market fund balances at the fed started to unwind their their policies and QE.

How are you guys thinking about the system the ability of all the market share gains you've seen in the Martin market fund space, because that will obviously inform the amount of money market fee waivers that's going to come back so.

$8 million kind of what you are waiting today per quarter.

All of it is presumably going to come back with the first hike, but that obviously some of the balances stand assemblies.

Yes, so I think the similar math that we went through earlier on the deposits. I mean, we were we were at something like $215 billion.

Pre crisis and then we ended $2022 72, we ended 2021 at $3 33, and I can tell you is.

As we sit.

The day before yesterday were 324, so came down a little but we have gained market share by any measure that we look at and and Thats not we don't think it's accidental we did a lot of things related to cut off times and the investment performance.

<unk> has been exceptional in those funds and so we think we've earned higher market share there and I think it's tough to tell theres not just what happens as clients unwind, but theres also the prospect of regulation and the $2 seven fund industry and as you know.

In Europe , there is much more of a demand for large institutional clients to use balance sheets as opposed to funds and we will see what happens here. If there is a shift and it's one of the reasons why we've done other things to try to launch new products to help our clients on liquidity to be able to provide other other.

Services and to be a third party repo provider into and to launch new funds that are more appealing with better cutoff times and so we will see what we will see what comes there, but the best defense. We can have in the short run is having good luck is having a good liquid balance sheet and have availability to bring on <unk>.

Positive our clients want to which is one of the reasons, we always leave room to try and to bring more onto the balance sheet, that's why our tier.

Our leverage ratios have tended to be strong.

Got it alright awesome, thanks for the follow up.

Okay.

And we will go ahead and move back to Brian . Please go ahead.

Oh, great. Thanks, sorry about that back in there can you hear me now.

Youre good Brian Okay.

Okay, great. Thank you sorry about that.

Yes, just as a follow up was with also on expenses and I don't know.

Her needs to start the question. It was really about your expense growth on an annual basis and pretty reliable over the last decade annually.

Mid single digit area.

What's exactly 5% on an annualized basis, which I know you try to target some natural organic revenue organic revenue growth.

However, in the last tightening cycle in 2017 2018, it was more elevated naturally in that 8% 9% area.

Given obviously the leverage come from rates.

I just wanted to get a sense of that.

But as we think about sort of a trajectory is that a reliable type of.

Indicator versus sort of the average over the last 10 years.

Couple of thoughts and then Mike may jump in as well one I don't in this cycle things are driven less by what is the fed doing a controlled growth what is the fed doing a control inflation and inflation is correlated to our cost.

Base, and so we're going to feel that and thats going to be different and walking through the expenses earlier just in the comp line, having a 5% growth there and then equipment and software having a growth at or above the 9%. We had year over year you can tell we're intermodal were.

Sealing expense growth over time, it's just got upward pressure on it now the good thing is that the growth in the business is good and the benefit coming from rates, which is it's not distinct it's correlated to the inflation when inflation exists we are getting a benefit partially coming from.

The fact that the fed is fighting that inflation with higher rates and Luckily we have good leverage in that and then we walked through earlier on this call that the impact to NII in the impact to fees and so it's good but I don't think that historical 5% is necessarily something we'd look at it and say.

Is that the right target given the given the environment we're in today Mike.

Just to add.

Just to add on that Brian is.

The reality is to serve our clients, but equally important to compete and win in the marketplace. We need the best people and we need digital capabilities and so yes that is.

As Jason is saying if you're in an inflationary environment, that's something you have to deal with because.

Need that expertise you need the people to develop the technology as well you need the people who service those clients.

The price or cost of that is different than.

And the same thing with developing.

The technological capabilities to be able to compete as well so hard to pick a number on that but as far as the dynamics that youre going through I think it's a combination of what Jason said, there and then just what's happening in the competitive marketplace.

Alright.

I'm thinking the growth would be closer to the 2017 to 2018 level.

9%, rather than the historical 5% given given everything you've been saying.

That makes sense.

Yes.

Okay.

Okay, great great.

Helpful. Thank you.

Thanks, Brian .

Okay, and then move on to our next question from Gerard Cassidy from RBC.

Go ahead.

Hi, Gerard.

How are you Jason.

You brought up a good point about the appreciation in the markets.

Correlating with the fed's balance sheet growing so dramatically.

In your slides you gave us the total revenue for the full year the.

Trust investment and other services fees were up 9% I think you also showed us that the S&P.

Fourth quarter was up.

25% or thereabouts, how much of the 9% growth would you attribute.

Mark, it's going higher versus where customers bringing in business.

It's pretty close yes, you want me to.

Sure. So Gerard this is mark Youre looking at the 9% full year.

Fee growth.

So let's see if we can get there directionally for you.

Because we did have obviously the significant waiver drag as well.

So waivers if you did the math I think we're about <unk>.

6% to seven point drag so that kind of brings you up to about a 16% growth.

Without the waivers and.

More than half of that was market with the rest of it being organic.

But fairly close I mean call it nine or 10% or so of that 16 would've been from markets.

And then there is other some other impacts like.

Currencies and things like that but the market that would give you a good proxy for the markets.

No. That's very helpful. And then Jason following up you mentioned a couple of times.

Do you expect your loan growth in 2022, which was up I think 20% in 2021 to be that strong.

Can you maybe give us some color on.

You're expecting to kind of pull it back or just not to be as aggressive in 22 versus <unk> 21.

Yes, it's not a pullback it's more we felt a couple of years ago, our bankers felt.

Duration, which was I think we were seen as a reluctant lender with our with our clients and our clients were doing things.

Took pride in having large assets for us to manage and advise but they didn't they thought we might not want to be a lender to them and we.

We wanted to deliberately go back and explain to those clients that if they wanted to buy a third home if they were going to buy another business. If they were involved in private equity and needed warehouse lines were there for them to do that and were and were excellent in doing the underwriting and working.

<unk> on the pricing and we didn't want to go out and do new types of lending with new types of clients. We wanted to do the same types of lending with the clients, we knew and so we've gotten through a lot of that and we will so from here I think our lending opportunities will.

Be more what is the market provide but that go back to those clients and explain to them how much we want to be supportive of them. A lot of that has played through and then the second dynamic and I've talked about it before is in this type of volatile environment some of our ultra ultra high.

Net worth clients, they will do very large loans and so that's driven some of the growth as well and it's just unpredictable weather that will stay on the books for a long time.

Okay.

And I know Jason.

To give you a forecast on loan growth but.

Revert back to pre 19 levels in terms of that kind of growth.

As we look forward.

That's interesting.

Yes.

I think that's it's less easy to predict.

Do think at this point, we've the messages out that were there for our clients and so the answer is probably somewhere in between but the spiking This which could go up and could go down is just something that I.

Our portfolio size wise isn't as granular on a percentage basis.

So I just always try to remind people of that is they are doing calculations quarter to quarter and year to year.

Great I appreciate all the color. Thank you.

Yes, thanks sure.

And with that that does conclude our question and answer session.

Like to turn it back over to our presenters for any additional or closing remarks.

Thank you thanks for joining us and we'll talk to you in April for our first quarter earnings.

And with that that does conclude today's call. Thank you for your participation you may now disconnect.

Yes.

Yeah.

[music].

Good day, and welcome to Northern Trust fourth quarter.

2021 earnings conference call. Today's conference is being recorded at this time I'd like to turn the conference over to the director of Investor Relations Mark Bette. Please go ahead.

Thank you Ali.

Northern Trust Dot com.

The only authorized rebroadcast of this call is the replay that will be available on our website through February 17th Northern Trust disclaims any continuing accuracy of the information provided in this call. After today. Please refer to our safe Harbor statement regarding forward looking statements on page 13 of the accompanying presentation, which were.

We'll apply to our commentary on this call during today's question and answer session. Please limit your initial query to one question and one related follow up this will allow us to move through the queue and enable as many people as possible the opportunity to ask question as time is going to ask questions as time permits. Thank you again for <unk>.

Joining us today, let me turn the call over to Mike O'grady.

Across each of our businesses, which also contributed to full year earnings growth and a return on average common equity of 13, 9%.

Throughout 2021, we continue to have success executing on our growth strategies across each of our businesses, while enhancing our foundational strength through advancements in our data and digital efforts and.

In our wealth management business, we have driven growth across each of our regions and our global family Office business. We continue to see improved levels and gave the engagement and new business activities with both existing and new clients and we ended the year with a continuation of the strong growth in loans and deposits that we have seen throughout 2021.

During the quarter, we began executing on our plans to expand our Florida footprint into Jacksonville, one of the fastest growing northeast.

Regions within Florida, we were honored to be recognized by the financial Times group as the best private bank in the U S for the 11th time in the past 13 years. We were also named the best private bank in the U S for family offices, recognizing our global family Office group for its commitment to families of significant wealth private foundation.

<unk> and the family offices that serve them.

During the year, we also benefited from growth in our multi manager strategies and our outsourced Chief investment Officer services.

Our asset servicing business continues to experience growth that is well diversified across regions products and client segments.

Highlights of our new business success is the recent announcement of the expansion of our relationship with Pandal group across Australia, The UK, Ireland and the U S.

Northern Trust has provided fund administration global custody and transfer agency services dependable since establishing its first mutual fund offering in the U S. In 2009.

This mandate will now be extended to include fund accounting regulatory reporting collateral management foreign exchange and Middle office services across all of <unk> businesses.

5%.

Results for the quarter included a severance charge of $6 $1 million, a pension settlement charge of $3 4 million.

$13 million gain within other operating income relating to property sales and net onetime tax benefits of $13 $9 million, primarily relating to a lower net tax impact from international operations.