Q2 2023 Northern Trust Corp Earnings Call
At this time I would like to turn the conference over to Jennifer Childe Director of Investor Relations. Please go ahead ma'am.
Thank you Jenny and good morning, everyone and welcome to Northern Trust Corporation's second quarter 2023 earnings Conference call. Joining me on our call. This morning is Mike O'grady, our chairman and CEO , Jason Tyler, Our Chief Financial Officer, Lauren I'll, let our controller and great chickens from our Investor Relations team, our second quarter earnings per.
Yes 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 July 19th call is being webcast live on Northern Trust Dot com. The only authorized rebroadcast of this call is the replay that will be made available on our website through August 19th.
And 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 12 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 permits. Thank you again for joining US today, let me turn the call over to Mike O'grady.
Thank you Jennifer let me join in welcoming you to our second quarter 2023 earnings call. Our results for the second quarter reflect solid sequential performance trust fees and assets under custody and management increase sequentially, which included positive organic growth in each business net interest income was down modestly on a.
Linked quarter basis, reflecting higher funding costs associated with the highly competitive deposit backdrop expenses, excluding unusual items were well controlled reflecting the rigor of our cost discipline as well as the impact of various productivity initiatives, we reported $64 million in charges in the second quarter.
With these steps.
Our wealth management business modestly grew assets under custody and management and trust fees on a sequential basis, we continue to see strength in the higher wealth tears and within our global family Office segment were recaptured several marquee wins.
Our industry leadership position also sit out in the quarter, we held our third annual Northern Trust wealth planning symposium, bringing together legal and financial experts to share innovative strategies and insights to shape the future of wealth management.
Sessions averaged more than 1000 participants it included attendees from North and South America, Europe , Asia Africa, and the Middle East.
We also released the second family Office trends report coauthored with the Wharton School, notably we received a utility patent for cloud based goals driven wealth management technology during the quarter and we were named best digital innovator of the year and best private bank for digital wealth planning by the financial Times group.
In asset management, we saw strong flows into our institutional money market platform and every captured share. We also won a number of key mandates across products, including outsourced investment solutions tax advantaged equity and quant active our new product launches in the quarter focused on alternatives.
Within asset servicing we continue to have good momentum in core custody and fund administration, particularly with asset managers in Europe , and our pipeline remains robust.
In the U K, we were reappointed by bright well for Middle Office services Bright well is the primary service provider to the British Telecom pension scheme, which has more than $50 billion in assets under management.
Among asset owners, we clench several key multimillion dollars takeaway wins in North America, where our front office solutions, which provides a comprehensive view across public and private assets was cited as a key differentiator.
As a testament to our capabilities were recently awarded three prestigious industry awards, including best Global custodian for asset owners by Asian Investor.
In the second quarter, we launched a suite our content community and collaboration hub for global asset owners.
Within the first few weeks of launch we've seen significant client engagement going forward. We expect this new communications channels to create relationships with key target audiences and further showcase our expertise in the market.
In closing our balance sheet continues to be very strong with ample capital and liquidity.
Our new business momentum is gathering steam and our pipeline remains robust.
While there is still more work to be done, we're making solid progress following the trajectory of our expense growth.
Rationalizing our cost base remains a top priority and a governance and control mechanisms, we're putting in place today should drive sustainable improvements for both the near term and for years to come.
We head into the second half of the year, well positioned to support our clients and generate value for all of our stakeholders.
I'll now turn the call over to Jason.
Thank you, Mike and let me join Jennifer and Mike and welcoming you to our second quarter 2023 earnings call.
Moving to the financial results for the quarter starting on page four this morning, we reported second quarter net income of $332 million earnings per share of $1 56, and a return on average common equity was 12, 4%.
Currency movements had an immaterial impact on our revenue and expense growth in both periods are.
Our second quarter results were impacted by two notable items.
We recognized a $38 $7 million pre tax severance charge impacting both our compensation and outside services line items.
We recorded a $25 $6 million pre tax charge associated with the write off of an investment in a client capability <unk>.
Notable items from previous periods are listed on the slide.
Excluding notable items in all periods revenue was up 1% on a sequential quarter basis and down 1% over the prior year.
Expenses were down 1% on a sequential quarter basis and up 5% over the prior year. This reflects an expense to trust fee ratio of 116% down from 120% in the first quarter and 122% in the fourth quarter of last year.
Pretax income was up 13% sequentially, but down 9% over the prior year.
Trust investment and other servicing fees, representing the largest component of our revenue totaled $1 1 billion.
Which reflected a 3% sequential increase but a 4% decrease as compared to last year.
All other noninterest income was flat sequentially, but down 10% over the prior year.
Net interest income on an FTE basis, which I will discuss in more detail in a few moments was $525 million down 4% sequentially, but up 12% from a year ago.
We had a $15 million credit reserve release in the second quarter due to improved credit quality on a small number of larger loans, which was offset in part by expectations for higher future economic stress in the commercial real estate market.
Turning to our asset servicing results on page five.
Assets under custody and administration for asset servicing clients were $13 five trillion at quarter end up 2% sequentially and up 5% year over year.
Asset servicing fees totaled $621 million, which were up 3% sequentially, but down 3% year over year.
And fund administration fees, the largest component of fees in the business were $427 million.
Up 3% sequentially, but down 1% year over year.
Custody and fund administration fees increased on a linked quarter basis for the second consecutive quarter due to solid new business activity higher transaction activity and favorable markets.
The decrease from the prior year quarter, primarily due to unfavorable markets.
Assets under management for asset servicing clients were $990 billion up 3% sequentially and up 4% year over year investment management fees with an asset servicing or to $134 million.
Up 6% sequentially, but down 10% year over year.
Investment management fees increased sequentially, primarily due to asset inflows and favorable markets.
Decreased from the prior year quarter, primarily due to asset outflows and unfavorable markets.
Moving to our wealth management business on page six.
Assets under management for our wealth management clients were $376 billion at quarter end up 2% sequentially and up 7% year over year.
Trust investment and other servicing fees were $475 million up 3% sequentially, but down 5% compared to the prior year.
Sequentially the increase in fees in the regions was driven primarily by favorable markets.
<unk> the increase in <unk> was driven by net inflows.
Relative to the prior year the decrease in fees in the regions was primarily due to unfavorable market and product related asset outflows.
Within <unk> the decrease in fees was due largely to unfavorable markets.
Moving to page seven and our balance sheet and NII trends.
Our average balance sheet decreased 1% on a linked quarter basis, primarily due to lower client deposits, partially offset by higher leveraging activity.
Earning assets averaged $134 billion in the quarter down, 1% sequentially and down 4% versus the prior year.
The market assets, primarily absorbed the decrease.
Client liquidity continued to grow during the second quarter, while we saw a decline in average deposits was more than offset by increases in other categories relative to the first quarter, our money market funds were up $8 billion or 6% and our Cds were up 29%.
Average deposits were $106 billion.
Down $6 6 billion or 6% sequentially, but remained consistent with late April levels.
Okay.
We experienced a $2 $6 billion sequential decline in noninterest bearing deposits, mostly within the institutional channel as clients continue to shift to higher yielding alternatives. This reduced the mix of noninterest bearing deposits to 17%.
At quarter end operational deposits comprised approximately two thirds of institutional deposits.
These tend to be the stickiest deposits as clients use them to operate their businesses.
Approximately three quarters of our average deposits are institutional with the remainder related to wealth clients, including GSO.
Shifting to the asset side of the balance sheet.
Average securities were down 2% sequentially, reflecting the natural runoff, which we've seen to reinvest at the short end of the curve.
Our $50 billion investment portfolio consists largely of highly liquid U S. Treasury agency and sovereign wealth fund bonds and is split approximately evenly between available for sale and held to maturity.
The duration of the securities portfolio continued to edge down in the second quarter to two one years. The total balance sheet duration is now less than a year.
Loan balances averaged $42 billion and were up 1% sequentially.
Our loan portfolio is well diversified across geographies and operating segments and loan types approximately 75% of the portfolio is floating and the overall duration is less than one year.
Our liquidity remains strong with cash held at the fed and other central banks up 9% to $43 billion.
More than 45% of our overall balance sheet is comprised of cash money market assets and available for sale Securities. This translates to <unk> $73 billion of immediately available liquidity of more than 60% of the total deposit base.
Net interest income on an FTE basis was $525 million for the quarter down 4% sequentially, but up 12% from the prior year.
NII reflected the impact of several dynamics.
We saw continued client migration out of deposits and into higher yielding alternatives non.
Noninterest bearing deposits as a percentage of total deposits slid to 17%.
And deposit cost increase with our interest bearing deposit beta during the quarter, reaching 88% and our cumulative beta for the cycle at 68%.
The net interest margin on an FTE basis was $1 five 7% for the quarter down five basis points sequentially, but up 22 basis points from a year ago the sequential.
The decline reflects the impact of higher funding costs, partially offset by higher short term market rates.
Our NII in the third quarter will continue to be driven by client behavior, which has been less predictable given the speed and velocity of this cycle as rate hikes.
Our average client deposits, thus far in the quarter or approximately $106 billion.
Deposit outflows are expected to continue in part due to seasonality as August is typically our low point in the year as European activity slows materially to.
The pace of the outflows is expected to moderate.
Turning to page eight.
As reported noninterest expenses were $1 3 billion in the second quarter, 4% higher sequentially and 9% higher than the prior year.
Excluding charges in both periods as noted on the slide expenses in the second quarter were down 1% sequentially, but up 5% year over year.
I'll hit on just a few highlights.
Compensation and technology expense continued to be the areas of highest spend.
Compensation expense, excluding severance charges was down 5% sequentially, but up 4% compared to the prior year was.
It was down sequentially due to the payment of our annual retirement eligible incentives in the first quarter. This was partially offset by the impact of this year's base pay adjustments, which are granted in the second quarter.
The year over year growth in compensation expense largely reflects the impact from inflationary wage pressures and last year's employee expansion, partially offset by lower incentives.
Excluding charges non compensation expense was up 3% sequentially.
Primary driver of the increase was growth in the outside services line, which is up 9% sequentially. The increase was largely due to timing as we reported a sequential decline in outside services of 9% in the first quarter due to delays in technical services projects.
With our heightened focus on expense control, we expect our operating expenses to grow more modestly in <unk>.
Vince to trust fee ratio to show further improvement.
Okay.
Okay.
Turning to page nine our capital ratios remained strong in the quarter continued to be well above our required regulatory minimums, our common equity tier one ratio under the standardized approach was flat to the prior quarter at 11, 3%. Despite continued common stock repurchases. This reflects a 430 basis point buffer.
Above regulatory requirements.
Our tier one leverage ratio was seven 4% up slightly from the prior quarter.
We returned $257 million to common shareholders in the quarter through cash dividends of $158 million and common stock repurchases of $99 million.
And with that Jenny Please open the line for questions.
Okay.
Thank you.
Next question.
Please stand by pressing star one on your telephone keypad, if you're using a speaker phone please make sure mute.
Function is turned off to allow your signal to reach our equipment again star one to ask a question. Please ask one question per ton and we'll pause for just a moment.
And I do have a question from Stephen Ju.
Sir Please go ahead.
Hey, Good morning, this is actually Sharon Leung for Steven.
Just a question on deposit beta or comment a little bit better than expected. This quarter can you help us understand how to think about the incremental data from here.
Sure so.
Yeah.
Betas have continued to increase and from here I think we still have to separate the institutional client base from the wealth client base. We noted that were cumulatively across the platform within this quarter in the high 80% range the institutional channel.
Is likely going to be at 100 at this point.
The wealth channel still provides some benefit there as the betas there are a lot lower but at this point, we're seeing about a 100% in the institutional channel and still much less than that and well and that seems to those both of those trends seem to be continuing as we've seen early signs.
In the quarter.
Great and then as a follow up.
At about seven coworkers from noninterest bearing deposits.
Thank you.
No.
Cool.
Sure.
Where that goes from here.
Got it.
Normalized AUC NII exiting the year.
Sure we will like you, we look back a lot it where its trough.
The data we have shown at a little higher than the 15, and you mentioned I think 16%.
But I don't think about that as a floor. There is nothing structural in the base to consider that a floor now that that said it has been moderating significantly and we don't see we havent seen much movement at this point, obviously, there is a step down this quarter of another percentage point.
But it seems to be leveling off at this point.
Great. Thank you.
Thank you.
Next question comes from Alex <unk> from Goldman Sachs. Please go ahead.
Good morning, good morning good.
Good morning, Hello, everybody.
So a couple of questions around expense trends I guess, one a little bit more near term.
Announce some action, obviously, though over the course of the quarter Theres, a severance charge. So maybe help us quantify what it means in terms of savings and Youre just updated views on the overall sort of firm wide expense growth for the year I guess, excluding the charges occurred in the second quarter I think last time, you talked about bringing that down to below 7%, but.
And maybe an update there would be helpful. And then bigger picture question you guys are running at a kind of high 20 ish percent pre.
Pre tax margin.
That used to be north of 30, so as you kind of think about the fee environment getting a little bit better with the market, but NII is clearly peaked as we've talked about before.
Is there an opportunity to get back to that 30% plus and how do you see sort of achieving that if that's the goal and what's the timeline timeframe around that.
Sure.
So let me tackle the expense the compensation related.
First first.
I'm sure people are curious where is the base from here.
So let me just provide some background on kind of first quarter to second quarter second quarter to third quarter.
I think from here, we'd say.
Flat to down from second quarter ex the severance charge in the compensation line. So if I go back to last quarter. We explained that the significant movements per second quarter would be the $40 million seasonal decline in equity awards and then the $20 million increase in the base pay coming online that would have.
Put comp at about $5 75 for the quarter, and obviously X the charge we ended up.
About $8 million better than that including currency. So two two factors led to that first when we pulled a lot of levers in the quarter to flattened compensation, including accelerating and close to completing the actions that we launched in fourth quarter of last year. So in January we communicated.
The projected reduction by late 'twenty, three would be about 300 roles and about $5 million to $7 million in quarterly comp benefit net of Reinvestments. So we guide a portion of that work done in the first quarter and we mostly finished it in second quarter and that was a big part of the <unk>.
It put us ahead of schedule.
Second as we saw the timing of that first program.
Accelerating in coming to completion.
We launched a new effort during the second quarter, specifically related to what you've referenced Alex and the severance charge that we announced this morning.
We've already gotten some benefit of that within the quarter and Thats reflected in the results. So overall this new program to your question should impact about an incremental 600 roles.
Many of that will be back filled based on a lens of skills or geography, but same same goal, we should be able to get $5 million to $7 million a quarter.
In run rate savings and a portion of that got embedded in the second quarter. So we got to remember that we did pull the lever hard this quarter. So there were some hiring thats in the queue.
We also pushed a fair amount back and so that's why with various puts and starts it's good to think about a flat to down from the comp levels you see in the second quarter ex charges going into third quarter. So that's hopefully helpful background there.
Or to get to your questions on.
On for the rest of the year, where do we see expenses.
Yeah.
At a high level, we've taken about a point out of the curve for the year based on the trajectory that we're on if you take out to your point if you take out the notable items.
This year on.
Each quarter has been under six.
We think we've taken that point out of the curve at this point and that should continue through the rest of the year.
To margins.
Youre right that we and we've been in the thirties.
And now in the Twenty's or target has us one of our key performance indicators is for us to be in the thirties and no way have we lost sight on that that is where we're trying to get.
That gets impacted largely by what's going to happen in our minds, we can control the expense side and obviously, we're doing a lot of work there.
And we're also getting good benefit because we saw good organic growth in the quarter and so both levers are working in the right way, but we have definitely not changed our target of being in the <unk> from a margin perspective.
Got it thanks Super comprehensive.
Just a quick follow up around deposit. So good news you guys were kind of in line with what you updated us on around 105. It sounds like deposits are fairly stable. I think you said 106, right now with a kind of similar in noninterest bearing mixes we saw over the course of the quarter.
Can you help just frame the <unk>.
<unk> deposit outflows and any other kind of client conversations you're hearing that could give us a sense of where deposits could all ultimately trough in the cycle. It sounds like theres, a little bit more to go but just curious to hear what the endpoint might be.
Yes.
You heard right it held in quite well so far.
In July and we didn't.
June you see the end of the quarter and there was a spike there, but in general June and July have been at about this level and have been holding in well our client activity is good we've taken action here to make sure we're talking to clients aggressively and telling them. We want to continue providing good liquidity services for them whether it's it.
Lending or holding on to their deposits, but we have got.
We talked last quarter about the fact that we think about liquidity broadly it's about client liquidity and it was good to see money market funds up this quarter that adds to margins really well too and even as we think about what clients are holding in brokerage and so all of the client liquidity seems to be holding in well on the seasonality.
<unk> August is a low point, but it's not it doesn't go down dramatically we've look back several years.
So we're feeling that deposits.
These levels seem to be seem to be holding in okay. So I can even give a little bit of thought.
From our perspective at this point based on our outlook I think it's prudent to think about it another decline even though the deposits are holding in.
Pretty well, but we see the competition and so we think it's prudent to think about another NII decline of about 5% for the quarter.
Again June and July volumes have held in at about $100 billion to $110 billion, but we just have to be conscious of the competitive environment and what the summer tends to hold in terms of volume pressure.
Understood great. Thanks, so much.
You bet. Thanks, Alex.
And our next question is going to come from Brian Bedell from Deutsche Bank.
Great Good morning, Brian .
Good morning, good morning.
Maybe just to go back to expenses I appreciate the color you gave Jason.
Normally start to talk about the seasonal lift that you typically get in the second half and things like equipment and software and outside services I was wondering if you want to comment.
On any projection there.
Sure.
It's good to call it out I think in equipment and software in particular.
We were better than what we thought we were going to be but that was really two factors led to that one we did have some delays in projects coming from with into being depreciated. Those will come online. So that's more timing and then secondly, we've been working very aggressively as further productivity office.
To just negotiate on and then try and push inflation down and we had some some some good results there bringing costs down and so from here, we think third quarter up $5 million to $10 million in that line item fourth quarter, we can even tell because some of it's baked in additional five to 10.
Lift from that perspective, and an outside services not not not no update to make there.
Okay great.
And then Mike you started up.
Okay.
Call talking about some of the new.
New business wins in asset servicing and wealth management.
I guess, how should we think about that contributing to organic revenue growth.
Just broadly if we're in a say a flat flattish market situation would you expect this to have a positive impact in the next couple of quarters and going to 'twenty four on revenue.
Yeah, Brian So the answer is yes and to your point, we only consider it organic growth once it's transitioned and in and yet we know the pipeline of business or mandates that we've won.
That have not transitioned in yen and in each of the businesses. It's a little bit different there is more of a I'll call. It forward forward pipeline with asset servicing.
But the pipeline looks very good based on recent activity that I mentioned there.
In wealth management.
Theres not as much of a forward pipeline, if you will but similarly, there I would say very steady.
Steady activity and as much as anything with wealth management keeping in.
Mind that.
I'll say a company, but also that business has been built on doing what's right for the client and sometimes.
That results in different financial implications for the company, but over time is best for the company and the shareholders and my point being the discussion around deposits and money market funds and.
Treasuries and managing things like that they all have different implications for us, but the client activity has been very good and we're I would say optimistic about how some of the shifts with rates will have implications on where those funds.
Get redeployed.
So again positive on the wealth management front in a steady fashion and then asset management as Jason mentioned, we've seen strong flows into the money market.
Platform there, but also in some other areas as well and likewise I would like to see those get redeployed in other ways over time.
So good across the board.
Is it fair to say the revenue growth on the fee side is definitely better than the.
NII side for the organic growth equation at least not yet.
That's right, Brian and I view, it as you're kind of implying there on the on the fee side it tends to kind of grind up more gradually.
Subject to the markets and NII can be more volatile and the only other area I would just highlight is around our capital markets activity FX and.
Brokerage and trading there, which has been relatively subdued during this time period with lower Volatilities lower activity.
Which that can also change and that has different implications too just meaning those can be more profitable.
Okay, great. Thanks, Thanks for all the color.
Sure.
Okay.
I'm, Robert <unk> from Wells Fargo.
Yeah.
Hey, good morning, Thanks for taking my question.
I guess the first question is on fee growth kind of more broadly.
You've sort of indicated that you're.
5% expense growth rate.
Does that go down, but do the fees, where do you see fees growing.
To get up to that expense level. So that you can grow fees faster than expenses.
All right.
In the short run I think we're still I don't think we're still absorbing an inflationary environment from an expense perspective, and so we'd like to be able to do better even than what we're doing right now in the long run from an expense growth perspective on the revenue side.
As you know the lift the financial model enables us to have lift from two different areas. One is the market lift and that's tended to provide low single digit growth rates, but it's a very strong component of the financial model and then <unk>.
Secondly, the organic growth and if we can have low single digit growth in wealth management organically and then mid single digit growth in <unk>.
Asset servicing that provides a good model for us to get well above the expense rates that we think we can lead to in the long run and provide good operating leverage.
Okay, and if I could follow up on wealth.
Yeah.
Improved growth there as well.
Are there any differences in the competitive dynamic among the top end and the low end are you having more success you said, you're having more success in the global family office.
Can you talk about the funnel of new clients sort of in the middle tier.
And what youre doing to grow that.
Yes, its interesting its actually not just the family office, but the very top end of wealth advisory and those clients can be similar size. They just happen to not have a family office.
We are leaning more toward us for wealth advice as opposed to the broader set of more.
Operational and reporting services that the global family Office provides we are doing better at the top end and looking at the new business.
Came on board and at the pipeline.
Accounts above $20 million, just that was where there was more velocity and that's been consistent for a while in that business and so.
There is something to that dynamic we seem to be doing better at the at the top end.
We're a disproportionate percentage of the growth has come from.
Okay. Thank you.
You bet.
And our next question will come from Brennan Hawken from UBS. Please go ahead.
Good morning, Brian .
Hey, How're you doing.
Just a quick clarification point, Jason you referenced.
A point of expense benefit is it right to interpret that as coming off of your prior 7% or better expectation or was that meant in a different way.
Yeah.
It is correct to interpret that as saying we.
We don't see seven at this point, we said seven or better and at this point, we should be doing six or better.
Done that first half and we see a path to that in the second half as well.
Perfect. Thank you for clarifying that.
Thank you.
Sure you guys had a write off of a client capability.
I don't remember seeing that in the past just a little confusing to me. So maybe if you can help me understand it.
When did you build that capability and then what happened that caused you to write it off.
Yes, I can give you some thoughts on it.
From a timing perspective, it has been in the works for.
For.
Many many quarters, but one of the pillars of the productivity office is to look at.
What we refer to as internal investments to ensure that they are on track to meet our hurdle rates of returns and margins.
The charge was a project to build out a new client capability in asset servicing and specifically in the asset owners channel. So after working and eventually discussing with different stakeholders, we didn't reach commercial agreement.
On terms that would meet our hurdles and so we halted the project.
I think it is.
Importantly, I would presume you to ask are there others like this in inventory absolutely not.
This is a.
A large project endeavor that we've been working on and.
And didn't reach resolution that got to our hurdle rates and so stop the project.
Okay.
Did something happen in the sort of like revenue opportunity that diminished at versus where you plan to because I'm sure you guys went through the process before you broke ground so to speak.
At least metaphorically.
Or was it that it was.
Really pricey.
Turned out to be more expensive to build was at the expense side that that hurt you.
Thank you.
Outlook versus plan or was it the revenue opportunity.
Yes, it will.
It is more costly to build than we thought and the revenue dynamics were not at that point going to get to our hurdle rate and this it really is reflective of us taking an extremely disciplined approach on on items like this where we're not going to devote resources.
As two areas, where we're not going to achieve our hurdle rate and so well before we talked about this even internally one of the pillars that we've talked about for the productivity office was looking at our internal investments and this fits squarely in one of those areas, we define that as areas.
We're allocating resources, whether it's capital or expense dollars.
And we're not in our hurdle rate and so this is one where we were disciplined in saying we're going to stop now halted.
<unk> not.
Not invest more into this.
Yeah. Thanks for explaining that Jason is actually a lot more encouraging than that I interpreted it on paper. So thanks for the color Tom.
No. Thanks for thanks for asking.
Probably if it is helpful to you to clarify its helpful to others. So thank you.
Okay.
Our next question comes from Rob.
Economists research go ahead please.
Good morning, Ralph Good morning, guys.
Good morning, just a bigger picture question on expenses.
Where do you want or what's your target I guess for that.
Expense to trust ratio over the long run and then what are the sort of necessary ingredients to get there.
Yes, if we can if we can be in the 110 two.
110 range.
Then that's 105 to 110, then we feel like we're in good shape to do well.
And we're grinding to get down there, we got down there before we've been well above it we got down into that range and in fact, even slightly below it for a quarter or two.
And now all the factors, we've talked about higher inflation markets coming down.
The effects of NII going up not helping that metric were outside that range, but it is an important part of our financial model to be in that range and so we're it's the first thing first thing I look at is where are we and it's good to see us getting back towards the number that we.
The range that we've articulated is another one of the key performance indicators that we talk about internally.
Got it thanks, and just one follow up on the positive organic growth commentary this morning.
You saw a big.
A big acceleration in organic growth or a sustained period of strong organic growth.
Multiple quarters, even several years, how do you think that would impact expense growth if at all.
Yes, so rob.
Two questions relate to each other which is the primary way.
That we can drive that ratio to the range that Jason talked about is through organic.
Growth on the fee side and tie and then controlling organic expenses alright.
And to your point, if you have higher organic growth.
That is going to require more resources.
And to the extent that you don't achieve that then you have to make sure that you're reducing the organic growth on the expense side to get there, but those are the two areas that we control. The most and then you say, okay, but beyond that as Jason mentioned on the fee side, it's going to have the impact of markets and sometimes currency and on the.
Syed I youre going to have the impact from inflation.
And to some extent currency and so you try to focus on what you can control. The most which are those two items organic growth on fees and organic growth on expenses to ultimately drive it to the target range.
Okay. Thank you both.
Sure.
And Betsy <unk> from Morgan Stanley . Please go ahead.
Good morning, Hi, good morning.
This is actually <unk> filling in for Betsy.
How are you.
Good how are you. So just one question a little bit nuanced on the credit portfolio seemingly.
It seems like a little bit of an outlier I know, it's small but on the reserve release. It seems like an outlier that theres an improved outlook on your CRE book.
Can you just explain what's going on there and where you see this line item.
From here.
Yes, so actually the the.
Just to clarify there was the release the release as a result of some improvement in <unk>.
Small number of borrowers in that book, but.
That more than offset and actually worsening outlook that we have overall for CRE and so.
So it's.
And it's not dramatic but.
The our outlook on on that portion of the book actually would have caused an increase in the reserve.
Got it okay that makes more sense.
I guess one other question on the investment portfolio, you mentioned the duration still sub one year.
And they are mostly in cash.
<unk>.
Just given the context of potential future rate hikes, where do you see like.
Mr Asian heading.
In the coming months and how are you planning to.
Mix shift this book in that context.
Sure.
Yes.
Yeah, absolutely so the duration of the Securities book is at two one the duration of the balance sheet is just under one.
But youre absolutely right to call out that this is.
It is an interesting time in what we think of as the evolution of the of the yield curve and so we've we've been allowing the.
Maturity securities to go to become more liquid as we reinvest them that's brought down duration at this point with the yield curve, we are talking about where to go from here and thats not indicating it's going to go up but it's not on.
At this point, we are thinking about where is the yield curve where is it going and how does that influence what we want to do as the large securities book continues to mature.
A mature and provide opportunity for reinvestment.
Okay, and then I guess, one follow up on that same topic, how should we be thinking about.
Earning asset growth in the context of.
Deposit outflows potentially should should those cloud on one to one basis or will you maintain certain balance sheet.
Or.
Yes.
As the deposits come down.
The securities.
Connect is a obviously a funding mechanism it doesn't that doesn't move very quickly and so the deposit size is always there is always going to influence the earning asset size and so we have to then think about the constraining factor at that point becomes what does leverage look like and we've got a lot of room from.
<unk>, a leverage perspective, and so that towards sometimes will lead us to think about discretionary leveraging just to make sure that we're not missing opportunities to pick up some NII, even if it's at very thin NIM based on where the size of the balance sheet is because it doesn't flex super quickly.
Got it okay. That's helpful.
Hi.
Thanks, a lot. Thank you sure.
And our next question is going to come from Mike Brown from K B W. Please go ahead.
Good morning, Mike Thank you.
Maybe just actually following up on that.
Question there.
We noticed that the complexion of your balance sheet has been shifting on the funding side.
Naturally that's been that makes sense, but your deposits declined by 6%.
But we saw that the higher cost fed funds purchased balance actually jumped meaningfully quarter over quarter, it's been growing.
This year I guess why not just let the balance sheet.
Klein more like what what's kind of going on there in terms of the mix and how could that.
From here should if the deposits continue to.
To trend down as you talked about will that balance.
Fed funds purchased balanced continue to grow as an offset.
On the assets.
Yeah and part of it is in this the deposits have just been so volatile and so you don't want to commit to significant movement in.
In shrinking the balance sheet, and we want to be there for our clients. We've got plenty of capital we've got plenty of room from a leverage perspective, and so just not anxious to quickly do any any significant moves and so to that extent as deposits come down.
Have the opportunity to to then say well, maybe we want to use some discretionary leveraging again.
Printed a seven for tier one leverage which is.
So.
Leaves you a lot of room and so if we hadn't done leveraging that that incremental leveraging would be even higher in the sevens and at a point you just have to say it is prudent to make sure you are taking advantage of the opportunities that exist.
Okay, great. Thanks for the color there and then I guess, maybe just following up on that point there on the capital side.
You guys increased the share buyback you bought back about $100 million or so of stock this quarter any expectation on how that could progress.
From here, what should we think about in terms of your capital return.
Sure.
Alright, yes.
The overall theme of what you saw in this quarter makes sense in the near term or CSP and the market for.
For share repurchase.
The.
Thing that worked against us the Aoc I actually worked slightly against US. This quarter are usually in a neutral rate environment. The pull to par will give us some lift there.
But it did in this quarter and Thats fine, but even so the $100 million. We did is about what it is that's the model we're thinking about in the short run Big caveat is that the FDIC special assessment coming online, presumably in third quarter that would be a similar dollar.
Mt is what we did from a repurchase perspective this quarter and so.
You could see us, saying hold off for a quarter get that payment done and then get back to your your game plan.
Okay. Thank you for the color.
Sure.
Next question comes from Gerard Cassidy from RBC. Please go ahead.
Good morning Gerard.
Jason how are you.
Very well.
Jason can you share with US I think you gave us.
Cumulative beta through the cycle of 68% and then the incremental incremental Bader of course is higher.
Much on it this quarter and may be 100%.
Is this how is the bane are behaving relative to past tightening cycles I don't know if 2016 to 18 is.
That really is that comparable maybe you'll have to go back a little further and then second how quickly if the fed does start cutting rates.
Gives me cutting fed fund rates in 2024.
Time, how quickly can you guys reduced your deposit costs.
Sure on the first just to just to make sure.
Said it right earlier.
100% going forward would be for the institutional side of the business not for the overall deposit base.
Got it.
Yes and to the to the question of how does.
How does that compare historically.
This is higher than it has been historically.
There's different dynamics that you and I could talk about I think that are driving that but there is there are some very strong competition for deposits right now and for various reasons and and so we want to make sure that we're there for our clients and we still got the ability to do that and so were we.
Want to make sure that we're holding onto our fair share and providing that liquidity capability for clients.
If you think about reductions.
The reductions can they can come quickly and our the way we price the way we.
The way our agreements work, we get we get fast movement on the way down.
And so we should be able to to get deposit cost down quickly as rates come down.
Very good and then as a follow up you also touched on the volatility of deposits.
Is it more based.
Based on your guys' experience in northern <unk> are you finding that this periods of volatility is even greater than past periods.
Is it because of quantitative tightening or fed actions that is causing greater volatility in your guys' estimate.
Well it is more volatile and not just over the long run and we went from 90 to $1 38 down to 106, and but even within the within the quarters a lot of volatility, but I think that's driven by some of the macro factors and what we saw in early March spooked a lot.
Sort of depositors, obviously, and then another trend of debt ceiling, and then leading to another trend of deposit com.
Competition all of those things are having are driving significant <unk>.
Different preferences that clients have not just between which bank to go to but whether to use banks versus money market funds versus treasuries I think all of those factors are what's leading to the heightened volatility we are seeing.
Got it okay. Thank you.
Sure.
And next question comes from Vivek.
Jos from Jpmorgan. Please go ahead.
Hi, Good morning. Thanks, Good morning, a couple of questions of noninterest bearing deposits. The big outflow you saw in the second quarter.
Which segment did that come more out of and where what are you seeing in that trend.
Sorry, if I'm repeating a question that's been overlapping calls estimated.
I hope I'm not doing that.
The.
The significant movements are almost always going to come well almost all of it in this case came from asset servicing.
Okay.
The stabilization.
Where are you seeing more of that.
Which segment.
The.
The asset servicing segment is actually overall been relatively stable, we will see big chunky movements in and out but the overall level has been has been about the same.
The wealth segment is more granular the <unk> client base has as much chunkier, but you just think about that.
The amount of clients.
The and the wealth segment and it just makes it more granular.
Okay.
And on the wealth management segment in the low single digit expense growth.
Is that because thats, where you've done a lot of the head count cutting that at all.
<unk> talked about and what are the implications for service there.
Service has been great and we.
We didn't provide detail on the in the <unk>.
Expense allocation between the business units, but just in general you will note that the head count is down but no impact to service levels whatsoever.
The low single digit growth I reference was related to organic growth within wealth management.
Okay.
Alright. Thanks.
Okay.
The next question comes from Robert Brookdale from will Wells Fargo.
Hi, just a quick follow up.
You mentioned that equipment in software you had some projects being delayed does that mean that non comp expense you will see some upward pressure in the second half of the year.
Yes in certain categories, it will and so and equipment and software we will see.
That line item in particular will see upward pressure $5 million to $10 million third and fourth quarter.
But okay not.
Not I didn't I didn't reference other.
Other line items.
We mentioned outside services relatively flat.
So that's that's really the only forward looking information, we provided except for the comp number which you referenced.
Great. Thank you.
Youre welcome.
And Brian Bedell from Deutsche Bank. Please go ahead.
Great. Thanks for taking my follow up just wanted to clarify on the FDIC Special assessment is that included.
In that.
<unk> expense guide of 6% or better and I don't know if youre able to frame the size of the.
The special assessment yet.
It's not included in the 6%.
And.
And we we we haven't talked publicly about what the number is.
Okay fair enough. Thank you.
Sure.
Okay.
Okay. Thank you very much for joining us today, we look forward to speaking with you again soon.
Okay.