Q2 2026 Northern Trust Corp Earnings Call

Speaker #1: Please stand by. Good day, and welcome to the NORTHERN TRUST Corporation second quarter 2026 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Steve, Carol, Head of Investor Relations.

Speaker #1: Please go ahead.

Speaker #2: Thank you, operator. Good morning, everyone, and welcome to NORTHERN TRUST Corporation's second quarter 2026 earnings conference call. Joining me on our call this morning is Michael OGrady, our Chairman and CEO, Dave Fox, our Chief Financial Officer, John Landers, our Controller, and Trace Dedgman from our Investor Relations team.

Speaker #2: Our second quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation.

Speaker #2: Which we will use to guide today's conference call. This July 22nd call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through August 22nd.

Speaker #2: 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 in the back of the accompanying presentation, which will apply to our commentary on this call.

Speaker #2: During today's Q&A session, please limit your initial query to one question and one related follow-up. This will allow us to move through the Q and enable as many people as possible the opportunity to ask questions as time permits.

Speaker #2: Thank you again for joining us today. Let me turn the call over to Michael OGrady.

Speaker #3: Thank you, Steve. And good morning, everyone. Let me join and welcome you to our second quarter 2026 earnings call. Our results this quarter reflect strong execution of our One NORTHERN Trust strategy and a very constructive market environment.

Speaker #3: We delivered an eight consecutive quarter of positive organic fee growth and generated significant positive operating leverage. Underscoring both the strength of our diversified business model and the discipline with which we are managing the firm.

Speaker #3: As we've discussed, our strategy is centered on driving sustainable, organic growth.

Speaker #2: For example, revenues from our outsourced capital markets solutions, such as Complete FX and integrated trading solutions, were up almost 50% year over year. Momentum in these scalable businesses deepened client relationships beyond core custody and fund administration.

Speaker #2: Finally, we continue to progress our digital assets capabilities as institutional clients look for trusted providers to support the evolution of tokenized markets. Our approach remains targeted and disciplined, focused on areas where Northern Trust can bring institutional standards of control, servicing, and risk management to both traditional and digital markets.

Speaker #2: Overall, asset servicing's performance reflects the continued execution of a focused strategy, deepening relationships with sophisticated clients, scaling high-value capabilities, and investing in the areas where clients' needs are evolving.

Speaker #2: Turning to Asset Management: NTAM continued to build momentum in the second quarter. With diversified asset gathering across several priority areas—starting with ETFs—we had another strong quarter, marking our fifth consecutive quarter of positive flows.

Speaker #2: Quarterly asset flows were particularly strong in U.S. quality large cap, U.S. equity factor tilt, and tax-efficient fixed income strategies, reflecting the investments we've made in the ETF platform and the benefits of a One Northern Trust approach.

Speaker #2: Particularly, our collaboration across asset management and wealth management to address specific client needs. Liquidity was also a standout area. We had a record quarter for liquidity flows, extending our streak to 14 consecutive quarters of positive organic liquidity flows.

Speaker #2: While continuing to gain market share across both the US and EMEA. As a top 10 money market fund manager in the US, we continue to benefit from the breadth of our global liquidity platform and clients' confidence in our risk discipline and service model.

Speaker #2: Tax Alpha remains another important growth area. We continue to build on our position as a top 3 direct indexer, and our growing are long, short Tax Alpha strategies.

Speaker #2: Expanding the range of solutions we can offer larger, taxable clients seeking more sophisticated after-tax outcomes. Finally, our alternatives platform continues to progress, with ongoing fundraising momentum and continued demand for custom alternative solutions.

Speaker #2: Over the past several quarters, the conversation around AI has moved from experimentation to execution. Across the industry, firms are positioning AI around many of the same benefits, productivity, scale, and efficiency.

Speaker #2: Those are important but they will not be enough on their own. At the same time, clients are asking a more fundamental question: how will AI change the relationship they have with the institutions they trust?

Speaker #2: They do not want judgment, accountability, or personal service handed over to a machine. They want AI to sharpen and elevate the people, advice, and standards they already rely on.

Speaker #2: That is how we're organizing our approach at Northern businesses, we're aiming AI not simply at baseline improvements, but at the qualities that have always made Northern Trust uniquely valuable to our clients, our service, expertise, and integrity.

Speaker #2: These principles have defined Northern Trust for more than 135 years and remain core to our One Northern Trust strategy. We view AI as augmented intelligence—a force multiplier that can help us deliver on those commitments with greater speed, insight, and consistency.

Speaker #2: While keeping our people and clients at the center, service is becoming hyper-personalized, more predictive, and adaptive, creating experiences built around each client's unique needs at scale.

Speaker #2: One clear proof point is the use of client action plan agents, that help relationship managers quickly synthesize data to drive more meaningful client engagement.

Speaker #2: Expertise is being amplified, delivering knowledge, insights, and advice with greater speed, precision, and impact. In our asset management business, for example, we're using AI to enhance our investment research and idea generation, uncovering signals that may be overlooked by traditional industry approaches.

Speaker #2: These capabilities are embedded most directly in our adaptive equity quant strategies. And integrity is extending beyond individual judgment and is being embedded into our data practices, models, and controls to strengthen the rigor and resiliency of how we operate.

Speaker #2: A tangible example of this is Horizon Scanning Agents, which enhance our vulnerability detection and strengthen cybersecurity capabilities. This technological rigor is built on a foundation of human oversight and accountability.

Speaker #2: We're especially pleased with how quickly our partners have embraced AI in their daily work. That momentum is helping us turn AI from a set of tools into a true force multiplier.

Speaker #2: Strengthening our service, expertise, and integrity in ways that create lasting value for our stakeholders. More broadly, we also launched Invest It As One, a new employee ownership initiative that provides eligible employees with Northern Trust shares.

Speaker #2: Together with our Employee Stock Purchase Plan, it strengthens employee ownership and reinforces our culture of shared accountability for performance and long-term value creation. Looking ahead, the macro environment remains dynamic.

Speaker #2: But we remain confident in our ability to deliver consistent performance as our strategy is designed to perform across a range of conditions. We remain focused on execution, driving organic growth, maintaining disciplined expense management, and continuing to invest in the capabilities that strengthen our competitive position.

Speaker #2: With that, let me turn it over to Dave to take you through the financial results in more detail.

Speaker #1: Thanks, Mike. Let me join Steve and Mike in welcoming you to our second quarter 2026 earnings call. Let's discuss the financial results for the quarter.

Speaker #1: This morning, we reported second quarter net income of $792.2 million, earnings per share of $4.23, and return on average common equity of 25.9%. Pre-tax income was $1.1 billion, and our pre-tax margin was 39.6%.

Speaker #1: Our results reflect strong underlying momentum across the franchise, including continued organic fee growth, disciplined expense management, and meaningful operating leverage. Our reported results included a $525 million pre-tax gain in other operating income related to our participation in the second Visa Inc. exchange offer.

Speaker #1: That gain was partially offset by a $74 million pre-tax loss and other non-interest income, associated with the strategic repositioning of the available-for-sale securities portfolio.

Speaker #1: The repositioning improved the portfolio's earnings profile while maintaining a relatively short duration, a neutral liquidity position, and the flexibility to adapt as the rate environment evolves.

Speaker #1: Additionally, expense in the quarter included a $62 million pre-tax charge, related to software dispositions, a $51 million pre-tax severance charge associated with a reduction in force, and a $33 million pre-tax compensation expense related to a one-time equity grant.

Speaker #1: In aggregate, these notable items had an approximately $306 million favorable pre-tax income impact, and an approximately $232 million favorable impact to net income in the quarter.

Speaker #1: Similar to our approach to the first Visa Inc. monetization, the exchange offer provided an opportunity to realize value from a long-held asset, while the offsetting actions we took this quarter support future positioning of the business.

Speaker #1: Excluding notable items in all periods, total revenue was up 2% sequentially and up 13% year over year. Total expenses were down 1% sequentially and up 5% year over year, and we delivered over 700 basis points of operating leverage.

Speaker #1: Currency movements were immaterial to revenue and expense growth in both the sequential and prior-year comparisons. Trust, investment, and other servicing fees totaled $1.3 billion, up 1% sequentially and up 10% compared to the prior year, as favorable markets benefited fees and we delivered our eighth consecutive quarter of positive organic fee growth.

Speaker #1: Excluding notable items, other non-interest income was up 42% year over year, with elevated client activity and higher value trading flows, particularly in Asia Pacific, driving strong FX trading and securities commission and trading income.

Speaker #1: Our assets under custody and administration were $20 trillion, up 8% sequentially and up 11% year over year. Our assets under management were $2 trillion, up 10% sequentially and up 16% year over year.

Speaker #1: Overall, our credit quality remains very strong. In the quarter, we recorded a $5 million reserve release, reflecting improved portfolio quality, primarily in the commercial and institutional book, and an improving macroeconomic outlook.

Speaker #1: Our effective tax rate was 25.6%, up 60 basis points from the prior quarter and up 20 basis points from the prior year. We continue to expect the full-year effective tax rate to be approximately 26% to 26.5%.

Speaker #1: Turning to our wealth management business on page eight. Wealth management delivered another solid quarter. We're success with ultra-high net worth clients and an expanding capability set drove double-digit fee growth.

Speaker #1: Trust, investment, and other servicing fees for wealth management clients were $592 million, up 10% from the prior year quarter. Assets under management for our wealth management clients were $534 billion at quarter end, up 7% sequentially and 14% year over year.

Speaker #1: Average deposits within Wealth Management were $26.7 billion, up 1% sequentially, while average loans were $35.8 billion, also up 1%. Pre-tax income was $334 million, generating a pre-tax margin of 37%.

Speaker #1: As discussed in the second quarter of 2025, we reorganized Wealth Management to better drive growth and client coverage. Our financial disclosures continued to reflect the legacy structure. As of the second quarter of 2026, we have updated our disclosures to align with how we operate the business today, consolidating the regions into Private Wealth.

Speaker #1: This creates consistency with how we manage the business and the rest of our disclosures for Wealth Management, including assets under management. Moving to our Asset Servicing results, on page nine.

Speaker #1: Asset servicing also performed well in the quarter, driven by adding scalable new business, executing our enterprise liquidity strategy, and continued strength in capital markets-related activity.

Speaker #1: Assets under custody and administration for asset servicing clients were $18.6 trillion at quarter end, up 10% from the prior year quarter. Asset servicing fees totaled $757 million, up 9% from a year ago, custody and fund administration fees were $512 million, up 9% year over year.

Speaker #1: Assets under management for asset servicing clients were $1.4 trillion, up 17% year over year. Investment management fees were $172 million, up 10% from the prior-year quarter, driven largely by favorable markets and growth in liquidity solutions, partially offset by price compression in select index mandates.

Speaker #1: Securities lending income was $29 million, up 46% year over year, driven by elevated demand for US equities robust borrowing of Asia Pacific and IPO-related securities, among other factors.

Speaker #1: Average deposits were $101 billion, down 1% sequentially, while average loans were $5.8 billion, up 3% sequentially. Pre-tax income was $323 million, generating a pre-tax margin of 24%.

Speaker #1: Excluding notables, asset servicing's 8-point margin expansion year over year reflects the disciplined execution across new business economics, deepening relationships with existing clients, and a favorable macro environment backdrop.

Speaker #1: Turning to our balance sheet and net interest income trends on page ten. Our average earning assets were $151 billion, down 2% sequentially, as lower deposits drove a decrease in money market assets.

Speaker #1: The fixed percentage of the securities portfolio was 52%, consistent with the prior quarter, including the impact of swaps. The duration of the securities portfolio was 1.4 years, and the duration of our total balance sheet remained under one year.

Speaker #1: Average deposits were $128 billion, down 1% sequentially, reflecting slight normalization following elevated short-term institutional deposits in the first quarter. Within the deposit base, interest-bearing deposits decreased 2% sequentially, while non-interest-bearing deposits increased 4%, representing 15% of the overall mix.

Speaker #1: Net interest income on an FTE basis was $683 million, up 3% sequentially and up 11% from a year ago. Sequentially, NII was favorably impacted by an improved deposit mix, higher yields from securities repositioning mentioned earlier, and one additional day in the quarter.

Speaker #1: Our net interest margin on an FTE basis was 1.81%, up six basis points sequentially, reflecting a favorable deposit mix in the second quarter. The sequential comparison also benefited from reversal of NIM compression in the first quarter, due to the impact of elevated short-term institutional deposits.

Speaker #1: Turning to our expenses on page 11. Non-interest expense was $1.6 billion, up 9% sequentially and up 16% year over year. Excluding notables, non-interest expense was down 1% sequentially and up 5% year over year.

Speaker #1: The year-over-year increase was driven primarily by compensation and benefits, reflecting higher incentive compensation tied to improved financial performance, while outside services spend was muted.

Speaker #1: Excluding notables, our expense-to-trust fee ratio improved to less than $111%, compared to $115% in the prior year quarter. Turning to capital on page 12.

Speaker #1: Our capital position remained strong in the second quarter. And we continue to operate at levels well above our required regulatory minimums. Our common equity tier-one ratio under the standardized approach was 12.2%, up 20 basis points from the prior quarter.

Speaker #1: The Visa transaction, partially offset by notable expense items and higher RWA, was the primary driver of the improvement. Our tier-one leverage ratio was 7.6%, up 30 basis points from the prior quarter.

Speaker #1: At quarter end, our unrealized after-tax loss on available-for-sale securities was $373 million. We returned $499 million to common shareholders in the quarter, through common stock dividends declared of $148.8 million, and common stock repurchases of $350.6 million.

Speaker #1: This represented a 63% payout ratio on a reported basis. Excluding notable items, the payout ratio was approximately 90%, consistent with our ongoing commitment to disciplined capital return, while preserving flexibility to support clients, invest in growth, and manage through a range of environments.

Speaker #1: Finally, based on the 2026 CECAR results, our stressed capital buffer remains at the $2.5% minimum requirement. The board also approved an $0.08, or 10%, increase to our quarterly common dividend, reflecting our strong capital position, the durability of our business model, and our continued confidence in the firm's earnings power.

Speaker #1: Turning to our guidance. For the full year, assuming a relatively stable market environment and interest rate backdrop, we now expect net interest income to be up 9 to 10 percent year over year.

Speaker #1: This is an increase from our previous guide—up mid to high single digits. We now expect total revenue to grow by 9% to 10% year over year, which is an increase from our previous guide of up mid single digits.

Speaker #1: Excluding notable items, we now expect to deliver approximately 400 basis points of operating leverage for the full year. And with that, operator, please open the line for questions.

Speaker #2: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment.

Speaker #2: In the interest of time, we ask that you please limit yourself to one question and one follow-up. Again, press star 1 to ask a question.

Speaker #2: We'll pause for just a moment to assemble the queue. We will take our first question from Glenn Schorr with Evercore.

Speaker #3: Hi, thanks very much. Where you left off, the 400 basis points for positive operating leverage is great. You were a lot better than that in the first half.

Speaker #3: Maybe you could help with the right perspective on the jumping-off point for expenses, because there were some moving parts this quarter. And what are the right things we should be considering on the top-line side that bring down the operating leverage?

Speaker #3: There’s seasonality — FX trading was really high. Just maybe square that circle for us in terms of the right perspective on the second half operating leverage.

Speaker #3: Thanks.

Speaker #1: Sure. You kind of gave part of my answer for me there. It's more revenue-driven than expense-driven. At the end of the day, from our perspective, the year-over-year comparisons get a bit tougher.

Speaker #1: In the second half of the year, the S&P really had a pretty good run from Q2 to Q4 in '25—was up 20%. But as we get into Q3 and Q4, it's going to be a tougher year-over-year comparison.

Speaker #1: It still implies solid growth and positive operating leverage in our business going forward. It's just that we do feel, as you mentioned, there will be some normalization of foreign exchange, capital markets, and SEC lending—particularly the elevated flows that we had in the quarter.

Speaker #1: We also had some very large deposits that came in Q1, and actually also came in Q2, which was unexpected. And those deposits are not expected to last into the third quarter.

Speaker #1: Which tends to be our weakest quarter in terms of overall average deposits. And so, from that perspective, those are sort of the issues we looked at.

Speaker #1: We're assuming a flat market as well. We're not assuming any additional uplift from the market, and we're assuming stable interest rates in all of that.

Speaker #1: So, if you do all the math, it's roughly a 5 to 7 percent increase in total revenues during that period. And we feel like the operating leverage number is manageable at around 400.

Speaker #1: We need to do all the math.

Speaker #3: I appreciate that. That's very good. One tiny little follow-up: within the one-time items, there is the software write-down. And I appreciate taking advantage of the Visa gain—very cool with it.

Speaker #3: I'm just curious, what software you took a look at? You wrote down how that decision would be made, and then what you would replace it with?

Speaker #3: Are you building something on your own? I'm just curious, for obvious reasons. Thanks.

Speaker #1: Yeah. Well, first of all, I would say it's not necessarily timed with anything in particular. It was a periodic review that we do as part of our capital planning and investment planning during the course of the year.

Speaker #1: And as you probably know, the pace of change that's going on today with AI, and project lengths have gotten extremely shortened. And so some of our longer-term projects, we have to take a look at.

Speaker #1: We just don't keep funding them ad infinitum. And this, in particular, was a subset of an existing fund administration project that we had going on.

Speaker #1: And when we looked at our operating model and infrastructure, we just decided that it didn't hit the appropriate ROI compared to other opportunities that we had to invest in.

Speaker #1: And so we just took advantage of that opportunity to sort of declassify, or take a certain amount of work in progress and say, "We're not going to complete that portion of it." So it really was not a wholesale part of it.

Speaker #1: It was just a certain portion of that particular fund administration infrastructure that we decided to change, and we're not expecting to do that again any time soon.

Speaker #3: I appreciate it. You had not exactly vibe-coded a whole new infrastructure. I appreciate that. Thanks.

Speaker #1: Right. Right.

Speaker #2: We will take our next question from Ken Euston with Autonomous Research.

Speaker #4: Hi. Good morning.

Speaker #1: Good morning.

Speaker #4: I just wanted to follow up on the deposit point, Dave, and the NII. I mean, it makes sense that the implied new guide would be for a little bit lower run rate than the second quarter.

Speaker #4: But these deposits are proving stickier, I guess. Can you just walk through what you see happening in the environment with regards to deposit generation and that related activity that you cited?

Speaker #4: And why wouldn't these deposits, outside of seasonality, prove to be more sticky in terms of a run rate? Thanks.

Speaker #1: Well, listen, I mean, average deposits are higher, which is why we have growth in NII for the year. We have some very institutional clients that, in the first and second quarters, decided to put substantial amounts on our balance sheet.

Speaker #1: And we don't view those as being permanent. And so, as I guided you last quarter, we were about $4 billion above what we normally would have been.

Speaker #1: I guided you down, but obviously, we had a second quarter event related to a different client, but a different situation. And in that case, it was at better economics as well.

Speaker #1: But that also arrived during the second quarter, and those are idiosyncratic. You can't really predict those. And so we try to really distinguish between what we consider to be operational deposits—sticky deposits—and ones that are more one-time.

Speaker #1: And in this particular case, in Q2, it had to do with a particular fund that was liquidating. And so they had to, as part of that transition, put that cash on our balance sheet for a certain period of time.

Speaker #4: Okay, second question, just on the Wealth Management business. Obviously, we knew about the lag from the first quarter's slight market decline, so Wealth Management fees were down a little bit.

Speaker #4: That obviously should pick up with the big, thin lag we have for the third quarter. Just wanted to ask, outside of the markets, was there anything else that pulled down wealth management fees a little bit sequentially, in terms of either activity or flows?

Speaker #4: Or should we just expect a better trajectory from here? Thanks.

Speaker #1: Sure. So, I just would like to say at the top end that the fundamental business activity is strong. Pipeline is strong. Flows are good. We have these quarterly aberrations, as I would call them, and having run the family office business for a long time, I usually had to explain quarter over quarter what was going on because a lot of the sequential distortion comes from GFO.

Speaker #1: And when you think a little bit about there's 70% of their fees being on a lag basis, and the fact that the S&P went up 1,000 points during the quarter, you do get a disconnect between AUM growth, which was up, and fee growth, which was moderately down.

Speaker #1: The other thing I would say, particularly as it relates to GFO, is the billing in GFO is different than Core Wealth. Core Wealth is pretty straightforward.

Speaker #1: You've got advisory fees and product fees. GFO is a potpourri of different types of services that we provide to clients, so the fee structures we have are much more customized.

Speaker #1: And sometimes they take longer and/or have true-ups. They also have a much higher allocation to alternatives. When you think about alternatives, those are valued much less frequently and often done manually.

Speaker #1: And so you're going to have situations there where you're going to have some inconsistencies between quarters. And so I tend to look at the wealth management business more on a run rate basis and six months is a better indicator of where we're going.

Speaker #1: So I would take your last sentence and say that's absolutely true. What you're going to see is better sequential results from Wealth in the third quarter.

Speaker #1: You also have things like one-time fees, such as estate settlement, as well. And we have seen a little bit of price compression as it relates to some of our liquidity products.

Speaker #1: And then we had some seasonal, tax-related outflows, which we typically have. So when you add all that together, it does create some distortion in the numbers and a disconnect between the assets going up and the fees going down.

Speaker #4: Thanks for all that, Dave.

Speaker #2: We will take our next question from Mike Mayo with Wells Fargo Securities.

Speaker #3: Hey, just another question on Wealth. If you could, please give an update in terms of extending the GFO approach to a wider swath of your higher-end net worth clients.

Speaker #3: And also, to what degree are you at a competitive disadvantage because you don't have IPOs that you offer to your high net worth clients?

Speaker #3: Or maybe you do, and I don't know about it, but some talk about net new assets really getting a lift from some of the IPOs that they've done.

Speaker #3: Thanks.

Speaker #1: Sure. So, I'll take both of those to your point. One of our areas of focus is taking that set of GFO capabilities to the ultra-high-net-worth segment of the market.

Speaker #1: And that's what we call family office solutions. I would say that's going very well, in the sense that the offering is resonating extremely well with new clients where we're pitching on new business and prospects.

Speaker #1: But also, with some existing clients where we're moving them into that offering. So it's going very well. And if anything, it's just a matter of our ability to scale that offering up and be able to make sure that we have the teams to be able to and talent to be able to provide that offering.

Speaker #1: So, very encouraged by the market reception to that and the progress we're making—just want to do it faster. On your second point, you're right.

Speaker #1: I mean, we're set up differently than the wealth management firms that are attached to an investment bank. And so, when you have very robust IPO markets and capital markets activity like that, we're not going to have the same type of referral opportunities that are going to come from that.

Speaker #1: That said, that doesn't mean that we don't work with clients and don't prospect for that type of wealth. And, frankly, we try to get out in front of it.

Speaker #1: So even with some of the recent offerings—the notable recent offerings—we've benefited from those because we were working with some of the executives over five years ago on how they can manage their wealth.

Speaker #1: And once again, being a holistic provider, there were things that we could do with them when it came to banking. That was valuable to them at that point.

Speaker #1: They're now clients, and then we benefit as their company goes public and some of that wealth gets monetized. So it's still a positive for us.

Speaker #1: But we are positioned definitely differently than the investment banks.

Speaker #3: And maybe a related question to that: when we talk about the top of the funnel and your new client growth, what are your main key areas for that driver?

Speaker #1: Yeah, so it's a combination of things. But you're exactly right—we're trying to drive more at the top of the funnel and then, of course, higher conversion as well.

Speaker #1: But at the top of the funnel, one driver is certainly just talent overall. We talk about both revenue-generating roles, but also specifically producer roles.

Speaker #1: And so, we are trying to hire more people that would enable us to prospect more and put more through the top of the funnel on that front.

Speaker #1: It's a competitive market for talent. We think we have an attractive value proposition for that talent, but it takes time to build that out.

Speaker #1: So that's one. Two is, we work very closely with centers of influence. So think about estate planning attorneys and accountants and those type of service providers that are working with high net worth, but more ultra-high net worth clients with family offices.

Speaker #1: And so they're almost like a client base to us. And the focus that we have on them—because often they're going to get the first call or they've been working with the family or the prospect—in wealth management.

Speaker #1: And then third is around marketing, and specifically digital marketing. I made a couple of comments in the opening remarks about really trying to ramp that up further. The key there is not only utilizing the latest technology and AI to be able to more aggressively determine where there are prospects that meet our profile, or potential prospects on that front, but then trying to get them converted and do so at an attractive cost per lead.

Speaker #1: So a lot of effort on that, both, I'll say, internal team, but then the data sources that we're using and the technology to be able to increase the number of leads that we get, and then, likewise, increase the conversion rate.

Speaker #3: Thank you.

Speaker #1: Sure.

Speaker #2: We will take our next question from Brendan Hawkin with BMO Capital Markets.

Speaker #5: Good morning. Thanks for taking my questions. Visa gains this quarter were pretty substantial. I don't believe you touched on this—apologies if you did.

Speaker #5: But could you give us your updated thoughts on how you plan to use these proceeds? Should we be thinking about reinvestment in the business or return of capital? What's the best way to think about this?

Speaker #1: So Brendan, the answer is yes, in the sense of how we think about it. So it's a capital gain for you. For us, as Dave went through, there are certain areas where we can, I'll say, invest it immediately.

Speaker #1: So, repositioning the investment portfolio gives us the ability to do that and take advantage of the shape of the yield curve right now, as one example.

Speaker #1: Second, though, is to your point—if we can deploy that capital in the business through the deployment of RWA, then we would look to do that.

Speaker #1: If we were to do something inorganic, it gives us the capital to be able to deploy it that way. And then, finally, it strengthened our capital ratios now.

Speaker #1: That just puts us in a position to be able to buy back more stock. And if you recall, a couple of years ago when we had the Visa gain, similarly, we had an increase in our capital ratio—or CET1 ratio.

Speaker #1: And then, over time, we brought it back down into our target range of 11 to 12 percent. So it gives us that flexibility in how we want to be able to deploy it best.

Speaker #5: Okay, great. Thank you. And I assume the order that you went through those is significant, but if that's wrong, you might just let me know.

Speaker #5: Is that fair?

Speaker #1: That's fair.

Speaker #5: Great, thank you. Follow-up: Asset Servicing had a 24% pre-tax margin here in the quarter. It's down a bit from late 2025, although it had some good year-over-year revenue growth.

Speaker #5: Previously, you talked about maybe letting some of the lower-margin business roll off to help drive the servicing margins into the high 20s. Could you provide maybe some color on the pacing of that, how that’s going?

Speaker #5: Is that presenting a headwind to fee revenue in that business, and how should we think about the pre-tax margins in servicing going forward? Thank you.

Speaker #1: Sure. I'll start, and Dave may want to add to this, but this has been the strategy for that business: scalable growth, profitable growth, and increasing the margin in the business.

Speaker #1: And very favorable environment, without a doubt, but also we're seeing progress on that. So we have been, I'll say, very selective in the new business that we're taking on, ensuring that it will provide not only profitable business for us, but quicker to the levels of profitability that we like to have for those businesses.

Speaker #1: And we've seen success with our asset owners business in the Americas. Similarly, in Europe, there have been meaningful wins, many of which are just coming on board or are being transitioned in right now.

Speaker #1: So that's very positive. And then I would also say with our asset manager clients, it's trying to not only work with those clients where we already have a strong existing relationship, but doing more with them.

Speaker #1: And doing it in ways that make that relationship more profitable. A great example of that is our integrated trading solution—so, outsource trading.

Speaker #1: And there's more and more examples, but we would consider one Northern Trust example where we're now providing that service to the asset manager, among other things.

Speaker #1: Currency management for them as well. And those are higher-margin services for us. And so you're seeing the strategy come together with a favorable environment.

Speaker #1: And as a result, the margin is going up.

Speaker #5: Yeah, I think that, Brendan, the pre-tax margin you quoted actually includes the notables. So if you take those notable items out, the pre-tax margin is much higher, closer to 30%.

Speaker #5: So we continue to see, given what's going on in the capital markets side of the business too, which is growing double digits, that the asset servicing margins are continuing to go up.

Speaker #5: So you just need to take that notable item and put it to the side. Great, thanks for clarifying.

Speaker #1: Sure.

Speaker #2: We will take our next question from Steven Cheubak with Wolf Research.

Speaker #6: Hi, good morning. This is actually Sharon Long filling in for Steven. We saw some really encouraging deposit remixing trends in interest-bearing versus non-interest-bearing.

Speaker #6: It looks like you guys have focused more on managing the deposit costs and maintaining very disciplined pricing. I heard what you said about expecting some of the recent deposit strength to kind of reverse in the third quarter.

Speaker #6: But I was wondering if you could talk about your outlook for the deposit mix, and if we do see some rate hikes from the Fed, what are you anticipating in terms of deposit beta?

Speaker #5: Yeah, so let's talk a little bit about what we benefited from in the quarter. And you're right—our NIB, our non-interest-bearing deposits, did go up.

Speaker #5: Substantially. And we did, obviously, take advantage of the fact that we did some deposit repricing last year, and we still haven't wrapped all that up.

Speaker #5: So, we have the lag benefit of that. We had lower wholesale funding costs as well, so that obviously helped. And then we had some fixed asset repricing, which, obviously, we do almost every quarter.

Speaker #5: From that perspective. And so, when you think about the NIM going forward, the NIM was negatively impacted in Q1 by some of those very large deposits.

Speaker #5: And so it kind of normalized back up in this quarter to what I think is going to be a more sustainable NIM level. If anything, as rates go up, that's good for us.

Speaker #5: And so, when you think about the betas, two-thirds of our deposits are in U.S. dollars, right? And so, if it's a Fed increase, that's one thing.

Speaker #5: That will have a bigger impact. And so, beta, we like to say, is a combination of the wealth. Beta is much lower than the institutional beta.

Speaker #5: So, we rounded out to about 80% in total on dollars. Other currencies are a little bit different, but they’re much less a percentage of the overall picture.

Speaker #6: Okay, perfect. And then, just staying on the topic of the balance sheet, can you talk about how much of a benefit you're anticipating from the balance sheet restructuring and redeploying some of those proceeds at higher rates?

Speaker #5: Yeah. So, it should add about $30 million-plus to NII annually, the repositioning that we just did.

Speaker #6: Okay, perfect. Thank you so much.

Speaker #2: We will take our next question from Manon Goscelia with Morgan Stanley.

Speaker #7: Hi, good morning. My question is about the wealth pre-tax margin. We're already at 37%, and you're saying you should have a better quarter in wealth next quarter.

Speaker #7: But as we go through this, some of the investment spend on the Wealth side—how do you expect the Wealth margins to trend from here?

Speaker #1: Yeah. So, as you heard from my discussion of the strategy there, we are definitely investing in the Wealth business for growth. And right now, it has an attractive pre-tax margin to it.

Speaker #1: And so, really, I believe we're in the right range for that business, meaning that it can go up a little bit depending on the conditions, but it also can go down as a result of the investments we're making.

Speaker #1: And so, bracket it by a few hundred basis points on both sides is kind of the range that I would expect as we go forward.

Speaker #7: Got it. And then, maybe just on the hiring and talent side—I know you said that you’re seeing some momentum there—can you talk about, I guess, how much success you’ve had on the hiring front, and also any competitive dynamics you’re seeing in the upper tier of wealth?

Speaker #1: Yeah, so it is a very competitive market, as I mentioned, for talent. And I would say that we've seen good progress in our goals for the year on the hiring front.

Speaker #1: But it's something where we're going to have to continue to keep pace in order to achieve those goals. As I mentioned, I think we offer a proposition to advisors and other roles that's different from others in the market.

Speaker #1: So, that's the good news. But it also means that it takes time to be able to recruit the right people into that model, because it is different than most other models, I would say, out in the marketplace.

Speaker #1: So you're doing more very targeted hiring, as opposed to just broadly anybody who's in the wealth management business. That doesn't fit our overall profile.

Speaker #1: So, it takes time to build that up.

Speaker #7: Great. Thank you.

Speaker #1: Sure.

Speaker #2: We will take our next question from David Smith with Truist Securities.

Speaker #5: Hey. Good morning. Good morning.

Speaker #7: I'm Capital. You're running around a 95% payout ratio on an adjusted basis for the first half of this year. Is 100% still the right benchmark we should be thinking about for the full year, adjusting out these notable items?

Speaker #5: Yeah, so the 100% number isn't sort of a 'hell or high water.' For us, it's sort of that when we started planning at the beginning of the year, obviously, we're ahead of pace in terms of how much we've returned for the first half.

Speaker #5: Because we're making more money, obviously, and have more capacity to do that. And as Mike mentioned earlier, while we still have aspirations to continue to have very, very healthy return of capital, at the same token, we want to have that flexibility to be able to obviously cover the dividend, etc.

Speaker #5: But we have inorganic. We've got balance sheet issues and things of that nature. And you've heard me talk about our balance sheet being open to our clients and being a liability-driven institution.

Speaker #5: So, we don't like to commit specifically—it's really hard to land on the head of a pin as it relates to payout. I would say it's consistent with what we were trying to do at the beginning of the year.

Speaker #5: And we take a look at it on a very dynamic basis. Absolute capital levels matter. Stakeholder issues matter. Clients matter, as you look at that.

Speaker #5: And so I would just say that we're squarely within the range we wanted to be in. And we're actually ahead of ourselves in terms of what would have been 100% when we started the year.

Speaker #5: And then on the inorganic front, are you looking mostly at smaller, tuck-in type acquisitions, or would you consider something larger too if the opportunity set was right?

Speaker #1: Yeah. So we're looking

Speaker #5: ...for opportunities that can accelerate the organic strategy that we have. So, if you just go along the lines of what we've talked about as to where we're focused and what we're trying to achieve, if there are ways that we can accelerate that inorganically, then we would consider that.

Speaker #5: And it would obviously have to meet all the other parameters—both cultural fit and business fit, as well as the financial profile. So that's how we consider inorganic opportunities.

Speaker #5: Thank you.

Speaker #1: Sure.

Speaker #5: True as of yesterday. That's no longer the case, effective today.

Speaker #2: We will take our next question from Gerard Cassidy with RBC Capital Markets.

Speaker #5: Hi, Mike. Hi, Dave.

Speaker #1: Hey, Gerard.

Speaker #5: How are you doing?

Speaker #3: Can you guys share with us—Mike, I think you touched on this—about IPOs, and I believe, David, that in your prepared comments you mentioned that stock loan benefited partially from the IPO securities lending area.

Speaker #3: But besides the wealth management and in the stock loan, with this robust IPO market, are there other parts of the business that are benefiting from the IPOs—whether it's any of the servicing areas or the custody areas?

Speaker #1: Absolutely. With that activity, Gerard, you're right. Even aside from wealth management, we see the impacts and the benefits from that. So we've talked about liquidity.

Speaker #1: Broadly speaking, when there is greater capital raising, those dollars need to go somewhere initially. And so we've seen the specific benefits of that flowing into whether it's the balance sheet, but also into our money market funds.

Speaker #1: And then also, as far as the capital markets activity, once these stocks are out there and they're trading, and the ability to potentially short the stocks or any other hedging activity, that's something where we see it in the lending part of the business.

Speaker #1: And you saw that we had significantly higher volumes, but also, it's the nature of the loans and the collateral for that—just meaning, if you have certain equities, you get a higher spread on those equities.

Speaker #1: So it's something that we've seen, I'll say, cut across the businesses.

Speaker #3: Very good. And then, as a follow-up, I think, Dave, you talked about some price compression on select index mandates. Can you give us any more detail on that?

Speaker #3: And how does that compare historically? You and your peers in the custody business have talked about pricing pressures. Is this something different than what you've seen in the past, or no, this is just a continuation of a trend that's been around a fair amount?

Speaker #5: Yeah, I was next, Gerard. I was referring specifically to the liquidity product, not the index. And retail liquidity product—going into the wealth space. Competition around that.

Speaker #5: Shorter-term strategies. Not our long-term strategies, and not specifically custody.

Speaker #3: And is the competition from other—I'm sorry, go ahead, Mike.

Speaker #5: No, I'm just saying I wasn't relating it to custody and other broader fees.

Speaker #3: Got it. Okay. Thank you.

Speaker #2: There are no further questions at this time. I will now turn the conference back to Mr. Carroll for any additional or closing remarks.

Speaker #1: Thank you for joining us, and we look forward to speaking with you again soon.