Q1 2022 Northern Trust Corp Earnings Call
Good day.
And welcome to the first quarter 2020 to Northern Trust Earnings Conference call Today's conference is being recorded.
At this time I'd like to turn the conference over to Mark Buddy Director of Investor Relations. Please go ahead Sir.
Thank you Jennifer good morning, everyone and welcome to Northern Trust Corporation's first quarter 2022 earnings Conference call. Joining me on our call. This morning are Michael Grady, our chairman and CEO , Jason Tyler, Our Chief Financial Officer, Lauren I'll, not our controller and Briar rose from our Investor Relations team.
Our first quarter earnings press release and financial trends report are both available on our website at northern Trust's 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 October 26th call is being webcast live on Northern Trust Dotcom the only authored.
Rebroadcast of this call is the replay that will be made available on our website through may 24th 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 11 of the accompanying presentation, which will apply to our common.
Terry 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 permits. Thank you again for joining US today, let me turn the call over to Mike O'grady.
Thank you Marc let me join in welcoming you to our first quarter 2022 earnings call I Hope you and your families are healthy and well.
Like so many around the world we at Northern Trust, our deeply concerned by the tragic events unfolding in Ukraine.
Our Hearts go out to the Ukrainian people Northern Trust has made contributions to humanitarian relief efforts and is match contributions from our employees to maximize our impact.
Well, we have minimal direct exposure the crisis brings unique challenges the broad use of economic sanctions and market restrictions. It means that we along with our peers and counterparties have been called upon to play a role in implementing the world's response.
The crisis has added to the uncertainty in the current environment, including volatile markets supply chain constraints and persistently high inflation.
But we are navigating this challenging backdrop, our performance in the quarter generated a 9% increase in revenue compared to the prior year and our return on average common equity of 14, 2%.
Revenue growth reflected organic growth across each of our businesses as well as the impact of rising interest rates.
Impaired to the prior year, our results generated approximately two points of positive fee operating leverage and one point of positive total operating leverage.
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.
In our wealth management business, we are growing across each of our regions and our global family Office business. We continue to see strong levels of engagement and new business with both new and existing clients. Later. This week, we will host our second annual virtual wealth planning symposium, which will bring together experts from across the country.
To share planning strategies and perspective to support the needs and interests of our clients.
<unk> of this year symposium wealth redefine builds on the northern Trust's Institute's 2022 wealth planning outlook, which examines how shifting values have given investors the resolve to pursue what matters most in a rapidly changing world.
Within asset management, we saw strong year over year organic growth across key strategic areas of focus, including our flex shares Etfs, which surpassed 22 billion in assets up 13% for the quarter.
We saw strong growth in funds that traditionally offer inflation protection, including our global natural resources Fund.
We've continued to expand our flex shares ESG and climate fund with the recent announcement of the launch of a fund with exposure to emerging markets.
Fun builds on our existing suite of climate Etfs, which currently includes U S large cap equities developed markets and to fixed income funds.
Our asset servicing business continues to drive organic growth across regions products and client segments.
Our client focus and flexible global operating model continue to support our strategy and our pipeline remains strong at the start of this year, we combined our corporate and institutional services team with our global services operational team, creating a single integrated business unit with operational expertise focused on serving the needs.
And providing solutions for institutional clients around the world.
With this change our corporate and institutional services reporting segment has been renamed asset servicing.
We recently released our 2021 philanthropic impact report, which highlights our commitment to our communities through charitable contributions and the many hours of volunteering from our staff.
Our employees the heart of Northern Trust are extraordinarily talented and Carey and I commend their efforts in serving our clients and our communities.
To close 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 first quarter 2022 earnings call.
Diving into the financial results of the quarter starting on page. Two this morning, we reported first quarter net income of $389 $3 million earnings per share were $1 77, and our return on average common equity was 14, 2%.
Results for the quarter included $18 $5 million and reclassification of certain fees that were previously recorded in other operating income or as a reduction to other operating expense that are now included in trust investment and other servicing fees.
Of that amount $6 9 million relates to fees previously reported in other operating income was $3 5 million now included in asset servicing trust fees within the other category and $3 4 million in wealth management Trust fees.
Additionally, $11 6 million that was previously recorded as a reduction to other operating expense is now included in asset servicing investment management fees.
Prior period adjustments have not been reclassified and these reclassifications resulted in no impact pre tax or net income.
Let's move to page three and review the financial highlights of the quarter year over year revenue was up 9% and expenses increased 8% net income was up 4% in the sequential comparison, both revenue and expenses were up 3%, while net income was down 4% the provision for <unk>.
Losses was $2 million in the current quarter.
On average common equity was 14, 2% for the quarter up from 13, 7% a year ago and down from 14, 5% in the prior quarter.
Let's look at the results in greater detail starting with revenue on page four.
Trust investment and other servicing fees, representing the largest component of our revenue totaled $1 $2 billion and were up 10% from last year and up 5% sequentially.
Foreign exchange trading income was $81 million in the quarter up 3% year over year and up 5% sequentially.
Both the year over year and sequential growth were driven by higher client volumes and market volatility.
The remaining components of noninterest income totaled $88 million in the quarter down 12% from one year ago and down 25% sequentially.
Within this security commissions and trading income was up 4% from the prior year and up 1% sequentially.
Other operating income totaled $41 million and was down 25% from one year ago and down 43% sequentially.
The increase the decrease compared to the prior year was primarily driven by the previously referenced $6 9 million accounting reclassification.
The sequential decrease was primarily due to gains from property sales in the prior quarter, the aforementioned accounting reclassification and lower distributions from investments in community development project.
Net interest income, which I will discuss in more detail later was $388 million and was up 12% from one year ago and up 5% sequentially.
Let's look at the components of our trust and investment fees on page five.
Our newly named asset servicing business.
These totaled $662 million and were up 7% year over year and up 6% sequentially.
Custody and fund administration fees were $453 million and up 2% year over year and down 1% sequentially.
The year over year growth was primarily driven by favorable markets and new business, partially offset by unfavorable currency translation and lower transaction volumes.
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 for asset servicing clients were $14 five trillion at quarter end up 5% year over year and down 4% sequentially.
The year over year growth was primarily driven by favorable markets and new business, partially offset by unfavorable currency translation.
The sequential decline, which was primarily attributable to unfavorable markets and currency translation.
Investment management fees in asset servicing of $147 million or up 27% year over year and up 30% sequentially.
They are year over year performance was primarily driven by new business. The previously mentioned $11 6 million accounting reclassification and favorable markets.
Sequentially. The increase was primarily due to lower money market mutual fund fee waivers and the accounting reclassification.
Fee waivers in asset servicing totaled $28 million in the first quarter compared to $51 million in the prior quarter and $28 million in the prior year quarter.
Assets under management for asset servicing clients were $1 one trillion dollars.
Flat year over year and down 8% sequentially.
The sequential decline was driven by market declines and client flows.
Securities lending fees were $19 million up 3% year over year and flat sequentially.
Average collateral levels were flat year over year and down 4% sequentially.
Other trust fees.
We're $44 million up 9% compared to the prior year and 24% sequentially.
Both the prior year and sequential increases were due to the previously referenced $3 $5 million in accounting reclassification.
The sequential performance was also driven by higher seasonal benefit payment services fees.
Moving to our wealth management business.
Trust investment and other servicing fees were $506 million and were up 14% compared to the prior year and up four 4% from the prior quarter <unk>.
Fee waivers in wealth management totaled $23 million in the quarter compared to $30 million in the prior quarter and $22 million in the prior year quarter.
Within the regions.
The year over year growth was driven by favorable markets and new business for.
For the sequential performance the growth within the regions was primarily driven by favorable markets lower fee waivers and new business.
Within global family office, the year over year performance was driven by new business and favorable markets.
The sequential increase was mainly related to new business and lower fee waivers for both the regions and global family office. The previously referenced $3 $4 million, an accounting reclassification also contributed to the year over year and sequential increases.
Assets under management for wealth management clients were $396 billion at quarter end up 11% year over year and down 5% on a sequential basis.
The year over year growth was driven by client flows and favorable markets. While the sequential decline was driven by client flows and lower markets.
Moving to page six net interest income was $388 million in the quarter and was up 12% from the prior year.
Turning assets averaged $150 billion in the quarter up 7% versus the prior year.
Average deposits were 139 billion and were up 10% versus the prior year, while loan balances averaged $40 billion and were up 16% compared to the prior year.
The net interest margin was 1.05% in the quarter.
And increased five basis points from a year ago, driven primarily by volumes and mix as well as higher higher interest rates.
On a sequential quarter basis net interest income grew 5% average, earning assets grew 1% and average deposits grew 2% while average loan balances were down 1%.
The net interest margin increased six basis points sequentially, driven by primarily higher average interest rates.
Turning to page seven expense.
<unk> expenses were $1 2 billion in the first quarter and were 8% higher than the prior year and up 3% from the prior quarter.
The current quarter's expenses included the impact of the $11 6 million accounting reclassification, which increased other operating expense.
The prior quarter included a $9 $5 million charge related to severance and a pension settlement.
Excluding these impacts expenses were up 7% versus the prior year and up 3% sequentially.
Excluding severance charges in the prior quarter compensation expense was up 9% compared to the prior year and was up 12% sequentially.
The year over year growth was primarily driven by higher incentives in salaries.
The sequential increase was primarily due to higher equity based incentives as well as higher salaries.
The current quarter's equity incentives included $49 million and expense associated with retirement eligible staff compared to $32 million in the prior year.
Employee benefits expense was up 1% compared to the prior year and was flat with the prior quarter, excluding last quarters, $3 4 million pension settlement charge.
Outside services expense was $213 million and was up 9% from a year ago and down 5% from the prior quarter.
Revenue in business volume expenses accounted for just over one half of the year over year growth the.
The remaining year over year growth reflected higher technical services and consulting expenses.
The sequential decline was primarily driven by lower technical services consulting legal and third party advisor cost.
Equipment and software expense of $194 million was up 10% from one year ago and down 1% sequentially. The.
The year over year growth was primarily driven by higher software support rental and amortization costs.
Occupancy expense of $51 million was up 1% from a year ago and down 1% sequentially.
Other operating expense of $80 million was up 11% from one year ago and up 1% sequentially. The year over year increase was driven by the accounting reclassification, partially offset by lower miscellaneous expenses.
The sequential performance was impacted by the accounting reclassification, partially offset by lower business promotion expense.
Okay.
Turning to page eight our capital ratios remained strong with our common equity tier ratio of 11, 4% under the standardized approach down from the prior quarter 11, 9%.
Our tier one leverage ratio was six 5% down from six 9% in the prior quarter and.
An increase in net unrealized losses on the available for sale Securities portfolio was a primary factor in this quarter's decline in capital ratios.
During the quarter, we purchased 295000 shares of common stock totaling $34 million and we declared cash dividends of <unk> 70 per share totaling $147 $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 from us.
Focus remains on balancing a variety of factors in the months ahead with the prospect of continued higher interest rates benefiting our net interest income and inflationary pressures impacting our expense base.
As our trust fees are impacted by both quarter lag and month lag markets. The negative markets in the first quarter will be more impactful for us in the second quarter.
We continue to be relentlessly focused on strengthening our competitive positioning within each of our businesses investing in our workforce and technology, all while delivering attractive returns.
You again for participating in northern Trust's first quarter earnings conference call today, Mike Mark Lauren and I are happy to answer your questions. Jennifer We please open the line.
Thank you if you'd like to ask a question. Please signal by pressing star one 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.
Please limit yourself to one question and one follow up question.
Again press Star one to ask a question.
And our first question today comes from Betsy <unk> with Morgan Stanley .
Hi, good morning, Hi.
Hi.
I guess I wanted to just unpack a little bit.
The outlook that we should be thinking about with regard to the 2020 to expenses I know that you have talked in the past about.
Pressures on the.
The business from inflation et cetera, but this quarter came in really nicely.
And it seemed like there was quite a bit of expense management going on so I just wanted to get a sense of how you're thinking through that.
Yeah.
Yeah, let me start with the biggest volatility maybe and I think we should give some comments on the compensation line and then if it is helpful to touch on one or two others I can.
So the biggest piece of the increase is obviously the retirement eligible equity incentives, which as you know Betsy. It's in first quarter that was just about $30 million last year, but it was around $50 million. This year. So that increase was driven by higher levels of grants, reflecting stronger relative 2021.
Performance, but also the changes in retirement eligibility of staff, we're actually receiving those grants that's an important distinction. So if you take out that $50 million seasonal increase that would imply that our comp run rate is flat from fourth quarter, but there are some important puts and takes in.
Sure. So first salaries were actually up $5 million to $10 million and that's combination of some of the strategic hiring and the plan that we described to address the labor environment through some targeted off cycle base pay adjustments.
Can lead that amount was offset by lower severance currency translation and some other small items that were favorable in this quarter. So if you look forward on the comp line.
I will make give you three nuggets. One is we know that annual base pay adjustments are going to be up $20 million that hits in second quarter. Instead of a more typical run rate for us which is about half that level.
Two we're still going to be doing some projected hiring and some other adjustments and that could cause an incremental $5 million to $10 million less next quarter.
And then lastly, just a reminder that is pre.
Pre tax income changes are underlying incentive levels are impacted and that's important to keep in mind, just because of the potential increase in rates and that could have any meaningful impact on pre tax and drive that loss.
So hopefully thats helpful on the on the on the comp line, which I think had the biggest volatility.
Got it okay.
No. That's great. Thank you and then just a follow up question on how we should be thinking about buybacks for the rest of the year.
We've got some market volatility, obviously impacting a OCI just thinking about whether or not.
As you as Youre planning through the rest of this year does the OCI matter you, obviously have still a very strong CET, one and TCE to Ta. So maybe the answer is no but given the backup in rates already Q to date. It looks like we're going to have another slug of this aoc I hit in <unk>. So how should we think through those dynamics.
Youre exactly right and even <unk>.
25 days or whatever end of the quarter end.
We're already close to.
<unk> $350 million plus in an impact to OCI for second quarter and so we've got it.
Obviously have to keep a line of sight on that now that said Youre also right.
First of all we absorbed the OCI hit in first quarter pretty well CET, one capital was down just about 6%.
CET one ratio stayed.
Well under the Elevens at 11, four and so we absorbed it well, but you know that we're going to keep an eye on what we look like relative to peers in terms of capital and what happens with OCI. Its a big lever in the quickest thing we can do to address that is is making.
Sure that we're prudent about how we think about buybacks.
And that's one of the big pillars, we look at as we think about capital actions.
Okay, and just to make sure. When you said you were $350 million plus are you, saying that if you had to close the books today. Your OCI hit would be $350 million more than it was last quarter is that what you mean or less than.
I'm sorry.
Thanks for clarifying.
Another 350, and its actually $367 million.
Okay great.
Hit to capital.
Obviously, yes.
Incrementals and what the yield curve as well.
That's right.
Based on what the yield curve has done just this just so far this year and Thats actually as of last Friday for what it's worth.
Got it okay. Thank you.
Sure. Thanks Betsy.
And our next question comes from Alex <unk> with Goldman Sachs.
Good morning, Alex.
Morning, Jason Hey, Mike how are you guys as well so obviously lots of discussions around the trajectory of balance sheets in this rapidly changing market backdrop with interest rates picking up in Q T relative to last cycle. It looks like northern is balance sheet has increased materially more.
And then it did in the last cycle and then lifecycle deposits overall have actually hung in relatively well compared to the rest of the industry. So maybe help us think through the latest thinking on both the mix of interest bearing to noninterest bearing deposits and kind of how thats going to evolve to your best kind of crystal ball capabilities.
And then ultimately the overall size of the balance sheet, how you expect that to evolve with Qt.
Sure.
Well on mix of the deposits and interest bearing non interest bearing I think the I think the more important factor there is.
Or do we hold on to the operational deposits and the.
In the wealth space, that's a big driver of value overall, the way, we think about it and.
And so far we have not seen.
Cash, we havent seen deposits moving off the balance sheet. However.
Have to anticipate that thats going to comment at some point given fed actions and and also just did a rising yield curve, where clients think about what their options are latter ring out taking some duration and so that's that's super important for us we're going to we want to maintain.
We want to maintain those high quality deposits Theres another group that's more on the.
The asset servicing or institutional side, even within there there are some very high quality core deposits, but some of the more sophisticated clients will will move those dollars around and so that's just unpredictable what we have seen so far that has created more movement. That's been meaningful is out of the money market funds.
And already we have seen and you can track this on our website and in the industry you've already seen clients in general in the industry moving out of money funds and whether they are moving into ultra short or other a little bit longer duration product or whether they are moving into more risk assets is difficult to tell.
So thats a little bit on mix on on size.
If you go back pre crisis, the balance sheet. The deposit level was like $80 $85 billion and you look where we're at is on average now much much higher and so I.
We will we have to predict it's going to come down some but but things are just different at this point and we anticipate that the balance sheet is going to hold in at closer to these levels and not give up dramatically what we what we saw pre crisis.
Got it.
Helpful. And then I guess following up on along the same lines.
Kind of reading between the lines your comments around wanting to hold onto some of these core deposits.
Any thoughts around deposit betas, and maybe how that may be similar or different versus what we saw in the last cycle.
Yeah.
You know for us.
Compared to last cycle, when everyone was anticipating a move at a time and no. One can really predict is it are we going to end it at 1% or one 5% every move seemed like you wanted to make sure you're handling beta is the right way.
Does it might be the last move in this instance, we know that we're going to get rates moving a lot and so I think thats something to think about differently strategically. We wanted we want to make sure again, we hold on to deposits with our good clients, particularly knowing that it's going to take a while.
Well before the fed is done with these actions and so already and you saw we had very good results in terms of raising net interest margin even given the fact that the fed didn't move until very late in the quarter that said our bias is going to be hold on to client activity and hold on decline.
Assets, particularly given the fact, we think it's going to take a long time before things level out in the yield curve is reflected all the fed actions that theyre contemplating.
Okay.
Great. Thanks.
Thanks Al.
And our next question will come from Ken Houston with Jefferies.
Good morning, Ken.
<unk>.
Good morning, guys to follow up on the NII discussion last quarter, you gave us a rule of thumb.
On how much each hike would give you both in terms of a gross basis and then how the deposit cost would act I was just wondering if you might be able to update us just given that so much has changed if thats still a net $35 million for each 25, and just any general thoughts on how you'd expect NII to traject from here given.
<unk>.
Alex's points and just the magnitude of hikes that are now expected.
Sure well let me.
Let me answer your question directly then I'll give you some broader thoughts.
<unk> four so first of all the $35 million. We we did say that was the first hike.
And on a run rate basis that that played through well.
The good news is that even with that that contemplated just the short end the very short end of the curve moving up but the overall yield curve has moved up it is not as helpful, but youll get more lift as we get more.
As we get benefit from reinvestment. So let me use that as a transition to your other question because youre right NII is certainly on a sharp trajectory. So the eventual outcome is likely very dependent on the pace of change and again, what the shape of the yield curve looks like so instead of giving an overall.
Rule of thumb, let me give you some of the key sensitivities. So you can sharpen your estimates as the key factors develop so three big buckets on earning assets one on cash key item remember is only 60% of those assets are in U S dollars, sometimes people forget that and I think that's important to remember too.
Securities portfolio.
The higher percentage or in U S dollars, but only 30% resets in 90 days or less.
So just over $1 billion of the long term securities are getting reinvested per quarter. We're currently experiencing about 85 basis points of reinvestment benefit on that reinvestment tranche that translates to just over a couple of million dollars in lift quarterly for the long term portfolio and then.
Third loans.
Virtually all of that is USD and about three quarters is tied to short term floating rate indices and so I gave you some comments on the liability side, but that breaks down earning assets in the three categories and so hopefully that's helpful.
<unk> thinking.
Through the math as different things happen across the yield curve.
Yes, very much so thank you and just a follow up in terms of asset mix and growth just on the prior questions about capital.
<unk> and <unk>.
Loans and Securities were both down is that is that just a function of the deposits or is the change in capital, causing you to change anything regards to where you want to see asset growth or securities portfolio duration et cetera.
Yeah, No headline is no change in philosophy and the <unk>.
The balance sheet works from once the deposits come in and size of the balance sheet.
First determination is where do we need to hold cash across different central banks for various activities.
Then the second is.
What is loan demand and the third is <unk>.
Therefore, what do we do with the securities portfolio and so the loan demand is what really drives effectively in this environment. The size of the securities portfolio. You did see in this quarter, what looks like a bigger move between cash in the securities portfolio, but it's not that's not strategic that some of the.
Investments, we make are more just classify it as more of a classification in that three category bucket between cash and securities, but theres nothing happening strategically there.
Okay. Thanks, a lot.
Sure.
And our next question comes from Brennan Hawken with UBS.
Good morning, Kevin Good morning. This is.
This is Adam Beatty in for Brennan Hi.
Yeah.
Just wanted to drill in a little bit as you're basically following on the discussion that we were just having around.
Central bank deposits and kind of a need.
Across different geographies too to have those in place.
Kind of what's been driving that and then what's the outlook, particularly on the non U S.
Front in terms of potential interest rate increases thank you.
Sure.
It's driven by largely just the activity in predominantly the asset servicing business and so as we bring in deposits that are non USD denominated, we we need to keep cash and liquidity on hand for matching purposes, and then we might even have agreements with different <unk>.
Banks to make sure that we've got funds on deposit in those institutions and so the headline is it's driven.
Vastly bye.
The mix of international business on the asset servicing side.
Does that change rapid can that sort of reverse in your experience.
Now it doesn't it doesn't have significant changes over time.
Great and then if I could I just wanted to drill into the phones and particularly the yield on the loans.
You kind of alluded to the rates.
Porting that I was wondering if there was any change in the mix of the loan book that also contributed to the increased yield. Thank you.
Sure no nothing.
Nothing note I mean, you have seen over time.
Some of the more of the residential portfolio coming down but.
But overall mixes relatively relatively stable over time, nothing that would have a meaningful impact on the net yield of the loan portfolio.
Got it thank you I appreciate that.
Sure.
Okay.
And our next question comes from Gerard Cassidy with RBC.
Good morning Gerard.
Jason can you give us kind of a rule of thumb, obviously your assets under management and custody are skewed to equities.
And can you share with US is it primarily domestic U S. Equities that is comprised in that number and second.
And is there any a 10% increase or decrease in equity values leads to an X percent or or X percent decrease or increase in revenues in asset servicing.
Sure.
Mark do you want to take.
It's mark.
So.
When youre looking at the investment management fees themselves Thats, probably a pretty good balance between both we look at <unk> local and S&P 500, just as guidelines.
If a local just because that removes the currency mix out of it when we do look at the the equity market sensitivity just based on the asset allocation.
A little bit more than a third of the asset servicing and investment management fees are equity market sensitive.
And those are.
Those do happen both on a quarter lag as well as a month lag.
And then if you move up to the asset servicing custody and fund administration category of fees.
We said before about 40% of those fees are not asset sensitive that are based on transaction volumes or fixed fees or fund level fees. The remaining 60%, though there is equity sensitivity there that to his quarter lag and month lag. If you looked at that line overall.
The custody and fund administration line that I think $453 million in fees about 27% of that would be equity sensitive.
Just based on how the current allocations are.
Very good. Thank you for those insights and then just as a follow up question.
Obviously with the short term interest rates moving higher you're.
Money market mutual fund fee waivers will eventually go away.
And if the fed raises rates in may and by 50 basis points will they be eliminated by the end of the second quarter or whats the schedule there.
Ironically, the we should split the waivers ended into two categories. At this 0.1 is what are waivers. It came as a result of interest rates, forcing yields below stated fees.
That first hike in mid March eliminated.
It absolutely eliminated those fees.
The waivers.
Conversely, the business has decided to keep some.
Waivers in place on some fee waivers in place for strategic reasons, and that's adding up they won't do that.
Perpetually, but at least for the time being they think that Thats important strategically again in the spirit of keep client assets and make sure that were attractive relative to our peers that currently is on a run rate of 10% to $15 million a quarter.
And that will persist, but again not perpetually.
Very good thank you.
Sure.
And we'll hear next from Jim Mitchell with Seaport Global.
Hey, good morning, Hey.
Okay.
Can you just maybe give us a sense of where you are.
Duration wise in the securities portfolio as well as the balance sheet overall did it change at all that to shorten up or just where we are on that front.
Sure So right now we're at.
207.
And we were I'd say at the upper end of our range that we feel comfortable in and.
So if there's any bias it might be a little bit down, but again the team looks very odd.
Opportunistically at what is what's available in the marketplace, and where we see where we see good value, but right now.
Ticked up to about $2 seven just under that and then.
Overall, the balance sheet is the overall asset duration is one one.
Great.
Okay. That's helpful and just maybe a follow up on the the custody and fund administration fees, how much on a quarter over quarter basis was the FX impact versus the volume impact because.
As you noted you got a little bit of lift from from the markets just trying to get a sense of those two other impacts in the magnitude.
And Youre looking on a sequential basis.
Yes sequentially.
Currency was <unk>.
Not a lot it was a drag of call it.
Little under half a point great alright.
So the transaction acts.
Activity, that's where there was more of a drag than from the currencies on a sequential basis Jim.
And is that just seasonal or do you think that that persists I mean, obviously a year ago was pretty pretty active.
Yes, we that we actually have seen sequentially for a few quarters now the transaction type of fees kind of declining so it's actually been something that we've seen for the last three quarters I believe.
So it's hard to say.
If that persists or not we'll have to see.
Certainly there has been some pickup in what you would think as market activity in the in the last month or so so off to see how that plays.
Okay, great. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from Mike Mayo with Wells Fargo Securities.
Alright, Mike if you could.
Hey, good morning, if you could talk more about this.
Turnover restructuring that form the new asset servicing segment.
Assume that to increase.
Wallet share and market share with your institutional clients. If you could verify that and also just by ZIP code. If you don't have the exact number what kind of share do you have with <unk>.
Institutional clients now in this restructuring.
Well kind of get you to what kind of targeted market share or something in the ballpark of 2% sure looking at 4% or 5% growing to 10%.
Premise correctly as to why you restructured.
So Mike it's Mike.
Primary reason for <unk>.
Integrating those two parts of our company or to be more aligned with the clients and being able to provide better service for them. So we really are trying to integrate everything from the front aspect of our business the client servicing part of it through operations.
And just the scale of our asset servicing business now is such that it made sense to to integrate those.
Those parts of the business. So that's the overall aspect of it or I should say objective is better client service I think that there are added benefits to it as well certainly from an efficiency perspective being more aligned and then to your point. If we are effective in doing that should it increase our wallet share.
Absolutely over time, but.
I would think about wallet share.
Little bit differently in the sense that that can vary based on the type of client that we have so just a little bit of context. There. If you think about asset owner clients maybe start with the corporation that has a defined benefit plan in the defined contribution plan, we may be the asset servicing provider to one.
Or hopefully both of those.
And so by providing better service if it's only one you're absolutely right. The objective is to to be able to do for both and we have examples of that in this recent quarter.
And then on the asset manager side.
Is there again, it's going to depend on the asset manager. If you think of the largest asset managers in the marketplace. We are a asset servicing provider to them to your point on wallet share it may be a minority.
The proportion of their overall business on that front, but given the magnitude of the size of the client.
It still can be a very attractive client for us and the reason why that works that way for those largest asset managers is one just the sheer magnitude of what theyre doing and the needs. They have they want to have diversification of providers, you've certainly seen that in the marketplace, but also they have many more different fund types, there and more geographies.
And so they look to have best in breed, if you will depending on the fund and the location and other factors.
Now that said as you look at other large asset managers that are not the largest but say $50 billion to $100 billion in.
And assets under management, there, we're looking to have I'm going to call it 100% market share, but essentially we're looking to do everything from them front office through Middle office.
And including back office our custody.
And so in those cases, it's critical since were there operational partner there that we're able to provide seamless service for them and this integration between.
The C&I business group that we had in global services into one unit enables us to do that better.
And a side benefit.
These savings are not or is it really about the cut for sure.
That definitely about the customer first.
I believe Mike is that we will get efficiencies over time, but just to be clear when we put these together and you can see in our results here. It did not involve a reduction enforce surcharge or anything like that.
That's because we're looking at it to make the business stronger and.
Provide better service not to try to cut parts of.
The operations out.
Thank you.
Sure.
And our next question comes from Rob <unk> with Autonomous research.
Good morning, guys are up.
I was wondering if you could stick with fee revenues, a little bit more and just talk about the organic growth trends both in the quarter and as you see them for the rest of the year in asset servicing and wealth.
Sure.
Let's let's start on asset servicing and.
First of all the.
Even though you saw the not as strong.
A lift relative to prior periods, we did have positive new business in the in the period and if I kind of do a further double click into what we talked about earlier new business was slightly positive I'm just talking sequentially market impact was a little bit of a lift and then to Mark Betty's point transaction volumes that was it.
That was a big drag as we look forward.
We do see good one not funded business and the pipeline there is strong and so it's above the average for the business and so the near term looks positive and then you look a little bit further out.
Not as clear, but the activity seems seems fine there as well.
As I switch down to wealth management yield youll see that the GFS business really stood out and.
I'll unpack that a little bit if it's helpful. We saw just again sequentially.
Meaningful increase there are about 10 or $11 million five of that was from waivers, but another five of that increase came from higher average balances in particularly in the money market mutual funds space and the reason that I call out the money market Mutual fund space is.
That's another area, we're coming at the end of the year balances were quite high and because they're in funds and those are daily charge fees, we got a benefit benefit of those funds sticking around the first couple of months of the quarter, but as we look into second quarter of the launch point.
As a little bit lower just a couple of million dollars, but but just something thats noteworthy, but overall you do see the family office business is doing well and it just underlying good client activity or some of our strongest largest clients choosing to do more with US and then if you look at the region.
<unk> is a similar story overall, just not not as large in terms of movements, but but positive from a net new business and flows perspective waivers help there a little bit and markets helped and then the accounting change shows up a little bit as well.
Part of what Youre seeing there in the region is not doing well.
Day Count had an impact in the regions of a few million dollars. So they had to offset that coming from fourth to first quarter, but again strong, particularly in the family office business.
Okay, and maybe just to follow up on that I think there's been some commentary and maybe.
An uptick in competitive intensity in the.
Ultra high net worth space. So maybe you could comment just broadly on the competitive intensity, you're seeing in wealth generally, but especially in that ultra high net worth or GSO type segment.
Mike do you want <unk> sure.
Youre, absolutely right I mean, it's.
A high level of competition.
Well.
We look to differentiate ourselves from.
And as you heard in some of my opening comments there, we really tried to differentiate based on the advice that we provide the expertise that we have and then certainly the services and the performance that go around that.
And candidly the numbers are demonstrating that that does make a difference.
If I step back a little bit and just look at the environment. We've been in for the last couple of years.
It's been a strong environment and healthy environment for wealth creation, and particularly for that segment of the market. So it's a time period, where you have seen a high level of <unk>.
Sales of family businesses.
Given the demand for that the high valuations.
Concerns over changes in tax laws, so high level of activity and then I think we're well positioned for that not only do we have relationships with families over time, but also we have very strong relationships with what we consider centers of influence so think about it attorneys and bankers investment bankers that work with.
These families.
That we've been working with for a long periods of time as well and a good portion of our new business comes from those relationships as well so it's been a good environment.
We've provided a differentiated proposition to those two.
To those clients and prospects and its a competitive environment, but one that again.
We think that we stand out favorably.
That's really helpful. Thank you both.
Sure.
And your next question comes from Vivek <unk> with Jpmorgan.
Hi, Thanks for taking my questions a couple firstly.
What's your expectation for deposit betas on operational versus non operational deposits as you look out over the.
First 100 basis points and then the next 100 basis points given the we may have a lot more rate hikes. This time.
So if you can parse that into the operational versus non operational.
I don't know if we'd wanted to try and cut it that finely and.
And as you can imagine there is some clients were portion of the deposits are crossover categories and so I think for US. It's just looking at what is the market gave us and we're not a price maker in the deposit side and this is very much working with clients.
And thinking about the relationship holistically or oftentimes large holistic relationships, where thinking about deposit pricing can be something that that's part of the overall narrative and pricing around the relationship and so difficult to make high level comments about what we what our expectations.
Are there.
Okay.
Yes.
Okay different topic.
You gave outlook for comp expenses any update on the non expense lines Jason.
On the non comp non comp expense lines do you mean vivek.
Right that's right Jason.
Yes, I can.
I can give a couple comments on that.
The big ones equipment software and outside services.
No on outside services.
That came in lower than it was in fourth quarter and big drivers, there consulting and legal but a lot of these consulting costs were lower.
<unk>.
Some of the some of those matters matured more quickly, but we may still get back to that fourth quarter run rate, but more like the end of the year, it's hard hard to say at this point, but the but we have been able to get some of those some of those more consulting related projects down and then also technologies <unk>.
<unk> costs were down despite the fact that market data costs are up because of good business activity. So I think thats notable.
And then on equipment and software.
It's relatively flat from fourth quarter and so if we look at that sequential period no significant headlines, it's more driven by the timing of some of our anticipated spending however.
I will say that over the remainder of the year, we can see depreciation.
Coming in and Thats going to start to that's going to start to hit and we can see that from what's now already in the pipeline and that could accelerate and it could be another $5 million a quarter starting in starting in second quarter for the remainder of the year.
Okay.
Alright, thank you.
Sure.
And our next question comes from Dean Stefan with Evercore ISI.
Good morning again.
Good morning. This is dean on for Glenn just had a quick question around T plus one.
It looks like the FCC is looking to implement T plus one by the end of next year. So I'm wondering if we could just get your thoughts on why this move might be harder versus first prior settlement reductions.
Any estimates around how much time and money no. It will cost you guys to get there and then I guess just broadly the positives and the negatives of shortening the settlement cycle. Thanks.
Sure.
Relatively technical question, there and we can follow up I'll say with with the experts on some aspects of it but what I would say is you know.
We have been moving and I think the industry.
As well for some time period to shorter and shorter settlement times.
And that has actually I think been very beneficial to the industry.
To our clients.
And I view this as a continuation of that now where it ultimately.
As far as settlement don't know exactly as you know that it cuts across different different markets and different types of <unk>.
Securities, but from a from a client service perspective, and what we offer.
We've tried for some time period to be able to provide real time information. So even if the settlement may occur at T plus one or T plus two.
We have the ability to do an audit settlement basis, but then also the ability to do it on a real time basis in some circumstances or at least a T plus zero basis and so that's been the move it for some time period Youre right.
Absolutely requires investment in technology changes in processes and controls to be able to do that but the direction of traffic has been that way for some time period, and we think that will continue.
Got it that's all for me thanks.
Thanks, Tim.
That does conclude our question and answer session and concludes today's call. Thank you for your participation you may now disconnect.
Okay.
Okay.
Yes.
Yes.
<unk>.
Yeah.
Sure.
Okay.
Yes.