Northern Trust NTRS Q2 2025 Earnings Transcript

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DATE

Wednesday, July 23, 2025 at 9 a.m. ET

CALL PARTICIPANTS

Chairman and Chief Executive Officer — Michael G. O’Grady

Chief Financial Officer — David W. Fox

Head of Investor Relations — Jennifer Childe

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RISKS

Chief Financial Officer Fox stated, The provision for credit losses increased to $16.5 million in Q2 2025, primarily due to higher reserves associated with a small number of nonperforming loans, and noted that more than two-thirds of the $16.5 million provision was allocated to the Wealth Management segment.

Chief Financial Officer Fox highlighted two large client losses in Asset Servicing in Q2 and Q3, indicating that, in house, they have not lapped that yet. We have not lapped that yet, and I would say about 0.5% of growth was impacted by that in Q2 and Q3.

Net interest income in Q2 2025 benefited from $10 million in one-time FX swap activity, which management said is not expected to persist.

TAKEAWAYS

Net Income: $421 million reported for Q2 2025.

Earnings Per Share (EPS): $2.13, representing a 20% increase excluding prior-year notables.

Return on Average Common Equity (ROE): 14.2% return on average common equity, with the company raising its target range to 13%-15% from the previous 10%-15%.

Total Revenue: Up 8% year over year, with currency movements favorably impacting revenue growth by approximately 90 basis points versus the prior year and 110 basis points versus the prior quarter.

Expenses: Up 4.8% year over year (excluding notable items); lowest expense growth rate in the past six quarters when excluding notables and adverse currency (up 3.8%).

Pretax Margin: Asset Servicing pretax margin increased over 10 points to 23.2%; Excluding $75 million in prior-year notables, the asset servicing pretax margin expanded by approximately 330 basis points.

Share Repurchases and Dividends: $486 million returned to shareholders, with a payout ratio of 117% and board approval for a 7% increase in the quarterly dividend.

Assets Under Custody/Administration (AUC/A): $16.9 trillion at quarter end for Asset Servicing clients, reflecting a 9% increase year over year.

Assets Under Management (AUM): $1.2 trillion for Asset Servicing clients (up 11%) and $469 billion for Wealth Management clients (up 12%) as of quarter end.

Trust, Investment, and Other Servicing Fees: $1.2 billion, up 1% sequentially and 6% year over year.

Net Interest Income (NII): A record $615 million, up 7% sequentially and 16% year over year; net interest margin steady at 1.69%.

Provision for Credit Losses: $16.5 million, with management expecting a return to more normalized levels ahead.

Average Deposits: $122 billion in average deposits, up 6% sequentially; Interest-bearing deposits up 7%, with noninterest-bearing deposits now 14% of the total.

Headcount in Operations: Down 7% from peak and declining for nine consecutive quarters, attributed to operational efficiencies.

Organic Growth in Alternatives: Approximately $2.5 billion in alternatives raised in the first half of 2025 across platforms, with an additional $1 billion in advisory; alternatives advisory assets under advisement are up 66% year over year.

Capital Markets Revenue: Up 15% in the first half of 2025, including more than 30% growth in both outsourced trading and currency.

ETF Product Pipeline: 11 new fixed income ETF launches are planned for Q3 2025 to meet client demand for scalable exposures.

Expense Guidance: Management reiterated that full-year operating expense growth is expected to remain below 5% (excluding notables), regardless of currency, for 2025.

Full-Year NII Outlook: A mid-single-digit increase is projected for full-year net interest income, assuming a slight Q3 deposit decline and stable mix.

SUMMARY

Northern Trust Corporation (NASDAQ:NTRS) reported accelerating organic growth and operating leverage in Q2 2025, marking the fourth consecutive period of positive results in both metrics. Management raised the return on equity target to a 13%-15% range and announced a 7% quarterly dividend increase following a 117% payout ratio. The company emphasized the integration and momentum of its "One Northern Trust" strategy, particularly in alternatives, noting a substantial year-over-year increase in fundraising and advisory mandates in the first half of 2025, and a tripling of its fund launch pipeline compared to prior years. Enhanced operational efficiencies, visible in repeated reductions in headcount and technology-driven cost management, supported margin gains while enabling reinvestment in growth levers. Executives reaffirmed Northern Trust's strategic independence and denied any engagement in potential sales discussions, stating unequivocally, "we have never entertained discussions regarding the sale of the company with any financial institution, nor do we intend to." Management attributed robust deposit growth in part to large, concentrated client flows and noted normalization trends heading into Q3 2025.

Chief Executive Officer O’Grady indicated that penetration of private market allocations among wealth clients is below 5%, highlighting significant headroom for further asset flows into alternatives.

Net interest income reached a record $615 million, but management disclosed that $10 million of this stemmed from nonrecurring FX swap activity, which is not expected to persist in future quarters.

Fox confirmed that two major client losses had a near-term dampening effect on Asset Servicing growth in Q2 and Q3, but clarified these impacts will be lapped after Q3 2025.

The company is investing in new talent and leadership within Wealth Management regions, aiming to strengthen client coverage and accelerate new business generation in under-penetrated markets.

Executives described expense-to-trust fee ratio progress, currently at 115, with a medium-term goal to reduce it toward a 105–110 range for increased profitability, as stated by management during the earnings call.

Northern Trust’s capital ratios remain significantly above regulatory minimums, with a common equity tier one ratio of 12.2% and a continued 2.5% stress capital buffer requirement.

The management team confirmed plans to centralize and automate core operational processes, including expanded use of AI and public blockchains, to improve both client experience and internal productivity.

Chief Executive Officer O’Grady provided a timeline suggesting the firm’s ambition to achieve a 30%-plus firmwide pretax margin by approximately 2027, assuming a normalized interest rate environment.

The board's fiduciary stance was detailed, with O’Grady saying, "They take their fiduciary duties extremely seriously."

INDUSTRY GLOSSARY

FiftySouth Capital: Northern Trust’s alternatives investment platform focused on fund-of-funds strategies and emerging managers.

GFO (Global Family Office): An end-to-end platform integrating Northern Trust’s asset servicing, custody, fiduciary, and investment solutions for sophisticated family offices.

Stress Capital Buffer (SCB): Regulatory capital requirement established under the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR), applied as a buffer over minimum capital ratios.

Assets Under Custody/Administration (AUC/A): The total market value of assets for which a financial institution provides either safekeeping (custody) or administrative services.

Full Conference Call Transcript

Mike O'Grady: Thank you, Jennifer. Let me join in welcoming you to our second quarter 2025 earnings call. We reported another quarter of improving results reflecting the consistent execution of our One Northern Trust strategy, which we introduced at the beginning of 2024. We delivered our fourth consecutive quarter of generating positive organic growth and operating leverage. Revenue grew 8%, and earnings per share increased 20%, excluding notables in the prior year period. And we returned more than 100% of our earnings to our shareholders through dividends and record share repurchases. As we pass the midpoint in the year, I'd like to share our progress on our multiyear transformational strategy, which is producing clear proof points that it's gaining traction.

Turning to slide two. Our One Northern Trust strategy is centered on our mission to be our client's most trusted financial partner and commitment to leverage the full breadth of the firm's capabilities to deliver seamless, high-impact solutions. We deliver a holistic client experience through the collaboration of our three businesses to serve the full spectrum of individual and institutional clients. A great example in the second quarter is our work with TimeLine, one of the UK's fastest-growing discretionary fund managers. As TimeLine evolved its business model to launch a proprietary fund-to-funds range, Northern Trust asset management and asset servicing partnered to deliver a fully integrated solution.

Together, we provided investment management, fund infrastructure, and operational support, enabling TimeLine to scale its offering with speed and confidence. This win reflects how Northern Trust brings together capabilities across the firm to support the growth of high-potential clients in dynamic markets. Turning to slide three. While we continue to deliver exceptional outcomes for clients, we're equally focused on delivering long-term value for all of our stakeholders. Our One Northern Trust strategy is anchored in three pillars: optimizing growth, driving productivity, and strengthening resiliency and managing risk. These overlapping pillars operate as a flywheel, each one amplifying the others.

Our organic growth is gaining momentum, fueled by numerous strategic initiatives launched over the past twelve to eighteen months that are now delivering results and are well-positioned to drive greater performance in the months and years ahead. In parallel, we're driving meaningful gains in productivity across the organization through a client-centric, capability-driven operating model. We're aligning resources more effectively to deliver value where it matters most. We're also accelerating the deployment of AI tools to streamline processes, reduce manual effort, enhance decision-making, and manage risk. Together, these efforts are bending the cost curve and freeing up resources to enable reinvestment in growth and innovation, all while delivering higher margins and a better experience for our clients and employees.

Finally, the investments we've been making in resiliency are paying off through an enhanced control environment. Over the past year, we've added new roles across our three lines of defense and built greater stability, security, and scalability into our technology infrastructure. These capabilities are increasingly embedded into how we operate, influencing decision-making, and enabling us to manage risk proactively and stay ahead of a rapidly evolving industry. Turning to slide four. As we execute on our One Northern Trust strategy, we're advancing several enterprise growth initiatives that are aligned with both evolving client needs and represent opportunities where we have differentiated capabilities across our businesses. One of these is clearly alternatives, which I'll spotlight today.

The rapid expansion of global private markets is undeniable and projected to continue at twice the pace of public markets over the next decade, with total assets expected to exceed $60 trillion. Our integrated model and expanding capabilities position us well to capitalize on this growth and deliver long-term value for clients and shareholders. We're leveraging this vast opportunity in several ways. First, FiftySouth Capital, the alternatives investment platform within our asset management business, which specializes in fund of funds primarily targeting emerging managers, is having a record fundraising year. They recently closed their largest secondaries fund with investors across wealth, family offices, intermediaries, and institutions. Second, in wealth management, we continue to build out our platform for third-party funds.

Several year-to-date raises have already exceeded initial targets, underscoring the strength of our offerings and the trust clients place in our platform. We're also unlocking incremental value for clients through collaboration with FiftySouth Capital's research team, which has cultivated relationships with over 270 managers to offer access to highly curated, hard-to-reach alternative investment funds. As a result, our fund launch pipeline has tripled compared to prior years, reflecting strong client demand. Third, for clients with significant alternatives portfolios, we also offer our alternatives advisory services, which provide consulting and customized solutions. Assets under advisement are up 66% year over year, reflecting demand from both institutional and wealth clients for differentiated high-conviction strategies.

Recent examples such as a $1.25 billion private credit mandate for a multinational corporate pension and one for a family office from the Middle East highlight our ability to deliver bespoke solutions at scale. And fourth, in asset servicing, we continue to expand our leadership position in particular, the semi-liquid fund market, where we now support six of the 12 long-term asset funds in the UK with seven more in the pipeline. We also support five European long-term investment funds. We're building real momentum in alternatives, and we're only just beginning to unlock the full potential. In parallel with these firm-wide priorities, each of our businesses is executing targeted growth strategies that reflect their unique client bases and market opportunities.

Turning to slide five. Starting with wealth management, our wealth management business continues to deliver on its unique value proposition and is making solid progress on the three core strategic priorities I outlined at the beginning of the year. First, our global family office franchise is a powerful example of our strategy in action. By integrating asset servicing, industry-leading custody platform and technology capabilities, wealth management's deep fiduciary and banking expertise, and asset management's innovative investment solutions, GFO delivers a seamless, end-to-end platform tailored to the world's most sophisticated family offices.

GFO continues to deliver strong organic growth with revenue growing 8% in the first half of 2025, including international revenue growing at over 20% and now accounting for nearly 15% of total GFO revenue. With the launch of family office solutions earlier this year, we're building on the proven success of our GFO playbook to bring a new offering to ultra-high-net-worth clients that do not have a dedicated family office structure but can benefit from institutional-grade capabilities and the personalized service Northern Trust delivers. The new offering leverages the same elite capabilities as the GFO combined with a dedicated family office solutions relationship adviser serving as a single point of contact to coordinate the client's entire financial life.

In just the first two quarters, this new approach has achieved a higher than 75% win rate, with a deep pipeline heading into the second half of the year. We're also making deliberate changes in investments to increase our market share in key geographic markets. We recently reorganized our core wealth management business from three to four regions and appointed new leadership in both the West and Northeast, bringing in experienced executives with strong market connectivity and a clear mandate to accelerate growth. We're also actively investing in revenue-generating talent across these regions to strengthen client coverage and drive new business. Turning to slide six. Northern Trust Asset Management continues to execute successfully against its strategic priorities.

In addition to scaling our alternatives platform through both FiftySouth Capital and our alternatives advisory capability, we're expanding into other key growth areas, particularly custom SMAs. As a leader in direct indexing and tax-advantaged equity strategies, we continue to build on strong inflows into our strategies by investing in technology and adviser tools to scale personalization, extend internationally, and deepen penetration across institutional and wealth channels. Another example of our success is a recent $1 billion equity mandate with the public investment fund in Saudi Arabia, one of the largest sovereign wealth funds in the world. We expect this mandate to expand to additional quant strategies, demonstrating our ability to serve the world's most sophisticated sovereign clients.

In ETFs, we're enhancing our platform with the planned upcoming launch of 11 new fixed income strategies in the third quarter. These products are designed to meet growing demand for efficient, transparent, and scalable exposures and will complement our existing index and liquidity offerings. Turning to slide seven. Our asset servicing business is executing on a disciplined strategy centered on scalability and client centricity to drive profitable growth. We serve a focused set of client segments where we have deep expertise and a differentiated value proposition, one that continues to drive strong win rates and high levels of client satisfaction and retention.

I already mentioned our strong position with alternative investment managers, where assets under administration are now approaching $1 trillion, underscoring the strength of our platform and the trust placed in us by leading institutional clients. We also have good momentum in the asset owner segment, one of our highest margin businesses, which now comprises 50% of our segment level revenue. Our success is driven in part by our upmarket strategy to serve larger, more complex institutions with tailored solutions and global reach.

Recent wins include the $89 billion University of Texas A&M investment management company, a $55 billion Canadian foundation, a top 20 US pension plan, Telstra, one of Australia's most significant superannuation funds, and a large sovereign wealth fund, our first front office solutions client in Saudi Arabia, where our technology was cited as a key differentiator. Our capital markets business continues to perform well. In the first half of the year, revenue was up 15%, including more than 30% growth in both outsourced trading and currency. These results reflect the strength of our capital-efficient model and our ability to deliver scalable, high-value solutions to institutional clients. This disciplined approach is delivering tangible results.

Organic growth is accelerating with new business tracking well and at above-average profitability, and overall margins improving significantly. Turning to slide eight. We've demonstrated our ability to bend the cost curve and remain firmly committed to continuing to do so while making necessary investments in critical infrastructure and growth initiatives. Through the first half of the year, expense growth was 4.8%, and we're on track to achieve our full-year goal of below 5%. Our progress is underpinned by a series of structural and operational advancements. We're modernizing our operating model and increasingly leveraging AI such as GitHub Copilot and document digitization to enhance employee productivity and increase automation across the enterprise.

For example, thoughtful reorganization of our global operations under our chief operating officer is unlocking efficiencies while preserving our world-class service. Headcount within asset servicing and operations has declined for nine consecutive quarters and is down 7% from its peak. Importantly, these gains are accreting the margin, and we've strengthened our governance and controls to ensure they are sustainable. We've also implemented centralized oversight of multiyear technology programs and introduced new tools to monitor hiring activity and workforce composition in real-time. These measures give us confidence in our ability to continue driving productivity and margin expansion while maintaining the flexibility to reinvest in areas that support growth.

And that reinvestment is underway focused on three levers: talent, product expertise, and technology. On the talent front, we're hiring revenue-generating professionals across wealth and asset management. From a product standpoint, we're ensuring we have the expertise to create innovative solutions and support the growth across the businesses which I described earlier. In the technology side, we're investing in capabilities that enhance the client experience and support scalable growth. These investments are enabling us to deliver more personalized, efficient, and high-impact solutions. Together, these efforts reflect our disciplined approach to cost management and our commitment to sustainable margin expansion while continuing to invest in the capabilities that will drive long-term value for clients and shareholders alike. Turning to Slide nine.

Our financial model is designed to deliver an attractive combination of growth and returns, and we're making tangible progress against these targets. Organic growth is steadily improving and should accelerate as our initiatives further develop and expand. We have a clear and credible pathway to generate higher margins, and at the core is our rock-solid balance sheet which provides flexibility for our clients and meaningful capital return optionality for our shareholders. Continued successful execution should translate into double-digit annual earnings per share growth, substantial capital return, including meaningful share repurchases and higher ROEs. Given our recent momentum and confidence in our trajectory, we're changing our ROE target from 10% to 15% to 13% to 15%. Turning to slide 10.

Jennifer Childe: To close,

Mike O'Grady: I want to reaffirm our commitment to remain independent. Contrary to recent speculation, during my tenure as CEO, we have never entertained discussions regarding the sale of the company with any financial institution, nor do we intend to. The board and management team remain confident that Northern Trust is well-positioned to continue driving long-term growth and value creation. As evidenced by our visibly improved performance and momentum in our One Northern Trust strategy. Our 135-year track record of stewardship of multigenerational personal and institutional wealth, unwavering fiduciary commitment, ingrained culture of integrity, and long-term perspective instill confidence in our clients that we will be here for them not just today, but for generations to come.

And with that, I'll turn it over to Dave to review our second quarter results. Dave?

Dave Fox: Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our second quarter 2025 earnings call. You may have noticed that we included a number of new disclosures in our earnings materials this quarter. They include additional segment level detail, including average loans, average deposits, pretax profit and margins, along with enhanced regulatory and capital metrics. These additional metrics aim to enhance the quality and transparency of our disclosures, ensuring we are responsive to shareholder feedback. Now let's discuss the financial results of the quarter starting on Page 12. This morning, we reported second quarter net income of $421 million, earnings per share of $2.13, and our return on average common equity was 14.2%.

As Mike mentioned, we delivered our fourth consecutive quarter of generating positive organic growth and positive operating leverage. It's also our fourth consecutive quarter of delivering positive trust fee operating leverage and improving our expense to trust fee ratio on a year-over-year basis excluding notables. These are clear signs that we're moving in the right direction, and our strategy is gaining momentum. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 100 basis points. Relative to the prior period, currency movements favorably impacted our revenue growth by approximately 110 basis points and unfavorably impacted our expense growth by approximately 130 basis points.

Trust investment and other servicing fees totaled $1.2 billion, a 1% sequential increase and a 6% increase compared to last year. Net interest income on an FTE base was a record $615 million, up 7% compared to the prior period and up 16% from a year ago. Excluding notables in the prior year, other noninterest income was down 4% year over year, largely reflecting weaker reported FX trading income, partially offset by strength in other capital markets activities. One reminder related to our FX trading income. We've seen steady growth in the underlying core business over time, it's often muted by the overnight swap activity conducted by our treasury department, which was more pronounced this quarter.

Core FX trading revenue, excluding the impact of our swap activity, was up 10% year over year. Our assets under custody and administration were up 7% sequentially, and up 9% compared to the prior year. Our assets under management were up 6% sequentially and up 11% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. The provision for credit losses increased to $16.5 million in the second quarter, largely reflecting an increase in reserves with a small number of nonperforming loans. We expect it to return to more normalized levels in subsequent quarters. Relative to the prior year period and excluding notable items, revenue was up 8%.

Expenses were up 4.8%. Our pretax was up 160 basis points. Earnings per share increased 20%, and our average shares outstanding decreased by 5%. Turning to our asset servicing results on page 13. Our Asset Servicing business performed well in the quarter. Transaction volumes were particularly strong, capital markets activities were up double digits over the prior year, and new business growth continues to be booked at attractive margins. Assets under custody administration for asset servicing clients were $16.9 trillion at quarter end, reflecting a 9% year-over-year increase. Asset servicing fees totaled $692 million, reflecting a 6% increase over the prior year.

Custody and fund administration fees were $469 million, up 5% year over year, largely reflecting the impact from strong underlying equity markets, favorable currency, robust transaction activity, and new business generation. Assets under management for asset servicing clients were $1.2 trillion, up 11% over the prior year. Investment management fees within asset servicing were $157 million, up 8% year over year due to favorable markets and new business activities. As you can see on the right side of the slide, average deposits grew 7% sequentially accounting for most of the total increase. Loan volume increased slightly, relative to the first quarter.

Asset servicing pretax profit nearly doubled over the prior year period, and the asset servicing pretax margin was up more than 10 points to 23.2%. Excluding $75 million in notables in the prior year, asset servicing pretax profit increased 29%, and the pretax margin expanded by approximately 330 basis points, reflecting the pivot in our new business approach. Our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline our operations. Moving to wealth management business on page 14. Wealth management also had a healthy quarter with continued strength in global family office. Assets under management for our wealth management clients were $469 billion at quarter end, up 12% year over year.

Trust investment and other servicing fees for wealth management clients were $539 million, up 5% year over year, primarily due to strong equity markets. As you can see on the right side of the slide, both average deposits and average loans were flattish relative to the first quarter. Wealth management's pretax profit increased 18% over the prior year period, and the pretax margin was flattish at 37.2%. Excluding approximately $33 million in notables in the prior year period, wealth management's pretax profit increased 5% year over year, while the pretax margin decreased 25 basis points. It's worth noting that more than two-thirds of the $16.5 million second quarter provision was allocated to the wealth segment.

Moving to page 15 in our balance sheet and net interest income trends. Our average earning assets were up 6% on a linked quarter basis, fueled by higher deposit levels, which drove an increase in cash held at the Fed and other central banks and a slight increase in securities. The duration of our securities portfolio decreased to 1.5 years. While we're opportunistically adding duration to protect against future rate cuts, we've also shifted the mix of the portfolio slightly so the fixed-floating breakdown is now 52% to 48%, including the impact of swaps. The duration of our total balance sheet remains under one year.

Net interest income on an FTE basis was a record $615 million, and our net interest margin held steady at 1.69%. NII outperformed our expectations largely due to higher than expected deposit levels. Average deposits were $122 billion, up 6% compared to the first quarter levels. Within this, interest-bearing deposits increased by 7%, while noninterest-bearing deposits decreased by 60 basis points, comprising 14% of the overall mix. The quarterly contribution from transactional and other one-time items was elevated in the second quarter, mostly due to the overnight FX swap activity conducted by our treasury team.

As we capitalized on FX volatility during the quarter, we estimate this added an incremental $10 million to second quarter NII that is not expected to persist. Turning to our expenses on page 16. Excluding notable items in the prior period as listed on the slide, expenses in the second quarter were up 4.8% year over year. Excluding notables and unfavorable currency movements, expenses were up just 3.8%, the lowest rate of growth in the past six quarters. Turning to page 17. Our capital levels and regulatory ratios remained strong in the quarter. We continue to operate at levels well above our required regulatory minimums.

Our common equity tier one ratio under the standardized approach decreased by 70 basis points on a linked quarter basis to 12.2%, with capital accretion more than offset by an increase in RWA. The RWA growth was driven largely by quarter-end lending coupled with higher capital market activities. Our tier one leverage ratio was 7.6%, down 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available for sale securities was $481 million. And we returned $486 million to common shareholders in the quarter through cash dividends of $146 million and common stock repurchases of $339 million, reflecting a payout ratio of 117%.

Finally, based on the 2025 CCAR results, we recently disclosed a requirement that our stress capital buffer will remain at the 2.5% minimum. And yesterday, our board approved a 5¢ or 7% increase to our quarterly dividend. Turning to our guidance. Starting with expenses, we continue to expect our total operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. Turning to NII. We now expect the full-year NII to increase by mid-single digits over the prior year.

This assumes a modest decline in third-quarter deposits in line with seasonal trends, mostly stable deposit mix, meaning that we wouldn't expect absolute levels of NIB to move materially from current levels, but the percentage of the overall mix could change. Market implied forward curves as of this week and slightly weaker institutional deposit betas with the next series of global rate cuts. And with that, operator, please open the line for questions.

Operator: And ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. And, again, that is star 1 to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. And our first question comes from Glenn Schorr with Evercore. Your line is open.

Glenn Schorr: Hi, thanks, and thanks for that definitive deck of independence. Put that to bed. I'm curious on these there's multiple initiatives across alternatives and the 11 new fixed income ETFs that you have scheduled for the second half. And I guess, a, I'd love any numbers that you could throw at it because you talk about the progress, but whether it be AUM, capital raising, AUC, revenue, anything.

But I'm also very interested in how much you define that as push, meaning you rolling out products and pushing them across the platform and playing a little catch up versus pull where you're seeing whether it be clients or adviser demands from these products and you're developing as a response to that? I appreciate it. Thanks.

Mike O'Grady: Sure. Thanks, Glenn. So on the alternatives front, as you heard, yes, a lot of effort on that front. And overall, I would definitely it as pull. And I say that because of just the changes in the marketplace that you're well aware of. Towards more, you know, private markets versus public markets. And we need to make sure for our clients that we're providing the right alternatives for them. So that's, I would say, the overriding factor that's driving it. On the other side of it, you know, we have to all say, internally to make sure that we have those alternatives for them. I and that's why across the front, you see everything from FiftySouth through the advisory.

Through our third-party platform. We're trying to do it in a number of different ways. So it's not just one thing, you know, pushing hard. To try to size it for you a little bit, excuse me, I would say, in the first half, we raised, across all of those, about $2.5 billion. That does not include the advisory, which was another approximately a billion dollars. On that front. When you think about just at a high level, kind of what the opportunity is, if you just look at our wealth franchise and our wealth client base, we're below our clients are below 5%. When it comes to allocation to private markets.

And so there's still plenty of room in their portfolios to get closer to what we would even see as the appropriate allocation. That's gonna depend on the client segment. You know, at the upper tiers, as you know, family offices can have as high as, you know, 40 plus percent allocation to alternatives. And then as you work your way through the tiers, you would be, you know, closer to maybe 10%. Or 15% that's still a lot of, I'll say, room for them to grow through that pull of what they want in their portfolios.

Glenn Schorr: Thanks. Maybe anything on the what's driving the 11 fixed income ETFs. You talked about efficient, scalable exposures. I'm just curious, what that might encompass that you didn't already have in the portfolio. Thank you.

Mike O'Grady: Sure. So on the ETFs that we're rolling out, I would say at this point our ETF complex has mostly indexed in other certain exposures. Whereas there's less on the fixed income front, particularly the type of fixed income characteristics that our client base is looking for. So this is another example of how asset management in the wealth management work together. To develop specific products that fit for the needs of our client base. So I won't go into all the detail because we're gonna be rolling that out very shortly.

But think about the needs across municipal securities, think about the need for fixed income ladders, all trying to put that in a very efficient vehicle for them to be able to invest in.

Glenn Schorr: Thanks for all that. Appreciate it. Sure.

Operator: And our next question comes from Betsy Graseck with Morgan Stanley. Your line is open.

Betsy Graseck: Hi, good morning.

Mike O'Grady: Good morning.

Betsy Graseck: I wanted to just dig in a little bit on the decision to tighten up the range for ROE. I think it's from 10 to 15 to 13 to 15. And within that, understand where the line of sight is that you have on the expense ratio with the operating leverage that you're delivering where do you anticipate you can take this expense ratio to? As you move forward over the next several years in the medium term?

Mike O'Grady: Sure. So, if we go back in time a little bit, when we first set the range at 10 to 15%, our ROE was below 10%. So a lot of the objective at that point was get into the range. Which we did, you know, some time ago. And then, frankly, we've just continued to move up in that range, and at times, have been at the top end. And even a little bit over. And it definitely depends on our I'll say, organic performance and execution, but, also, it's influenced by market conditions. And so that's why we over time, maintained it at 10 to 15%.

It took into account say, different interest rate cycles and significant changes in the equity market. And so we felt like that was the right broad range. Well, we've been producing returns now at that upper half for some time period. And with the momentum that we have here in the strategy, we think that's gonna continue to be the case. And I would also say that over time, there's been less clarity or certainty around the capital framework, the regulatory capital framework. And so it was also taking into account that there could be higher capital requirements.

As much as we can't predict where that goes and for how long, at this point, we believe there's a very, I'll say, constructive framework around capital. And so we just have greater comfort, I'll say, that the capital requirements are in the range that we're in right now. And so as long as we continue to execute and under, you know, say, somewhat normal level of market conditions, we think that range of 13 to 15% is appropriate. And then, Betsy, just to address the expense part of it, you know, from an expense to trust fee ratio perspective, we believe the right range as we put out there is 105 to 110. We're working our way towards that.

We're at 115 now. Know, that's down from where it was. And so we'll look to continue to grind it into that range. And that obviously then provides a higher level of profitability, which then translates into the ROEs in that range.

Betsy Graseck: Okay. Thank you.

Mike O'Grady: Sure.

Operator: Our next question comes from Ebrahim Poonawala from Bank of America. Your line is open.

Ebrahim Poonawala: Good morning.

Mike O'Grady: Morning. So I guess maybe Mike, thanks for kind of going through that on your in your prepared remarks in terms of strategy update, etcetera. I guess, as we think about independence or some version of mergers, I guess, is there any scenario in which you think M&A would make sense from a shareholder return perspective? Or do you think the uniqueness of the Northern franchise, the scale in the custody business, all of that kind of make just M&A unattractive strategically. Like, how should we think about it outside looking in as shareholders?

Mike O'Grady: Sure. So as you've heard from my comment, we are completely focused on executing on our strategy. And we believe that strategy of independence is what will produce the best returns for our shareholders ultimately. And the reason why that is a little bit to your point. We believe that provides a unique value proposition for our clients. And, you know, frankly, through this, you know, the last several weeks, heard from a lot of our clients. Who've made it clear that they have lots of alternatives for various, you know, providers or financial partners that they could have. Across and this is across families through, you know, very large institutions. Who have said, you know, we chose Northern Trust.

Because it's a different value proposition. It's one where you are focused on trying to provide a higher level of client service. Where you do have very targeted expertise, in just certain segments of the market where you compete. And so we believe that differentiated value proposition is the one that's gonna create the most value. Now over time, as you know, we have done acquisitions that enable us to either enter another market or to bolster our capabilities in a particular market and we'll continue to look at those over time if they make sense. We're an organic growth company. So it's not by any means that the primary driver.

But if at times, there's something that would be attractive for us on the inorganic front, to do to improve that value proposition. You know, we would consider doing it. Obviously, with very high standards.

Ebrahim Poonawala: Got it. And I guess maybe just sticking with capital deployment, is there how just give us remind us how you think about pace of buybacks relative to just given means the stocks obviously done well year to date. Is there a certain valuation, price to earnings, price to tangible book multiple where buybacks begin to look less attractive? Thank you.

Mike O'Grady: I'm gonna let Dave take that.

Dave Fox: Yeah. So when we look at buybacks, you know, it isn't just about the stock price. Right? We're looking at our regulatory capital, earnings power, ROE, loan growth. As you know, dividends. We like we like our balance sheet to be available for our clients. Right? So still like to run a little bit of a cushion, if you will, that we wanna have in the system. We've picked up our capital return shareholders significantly. When you think about the current pace that we're on, we will probably end up exceeding what we did all of last year, and last year had Visa in included in it.

So I think we're at a very healthy clip close to 500 obviously, this quarter. And so take all those factors into consideration, not just the stock price when we look at it. And we balance that against our capital requirements and other issues at the time.

Ebrahim Poonawala: Got it. Thank you.

Mike O'Grady: Sure.

Operator: And we'll take our next question from Mike Mayo with Wells Fargo. Your line is open.

Mike Mayo: Hey, I'm going to continue the line of discussions. Nick, been so much press, and it must be disruptive to your clients. And employees and perhaps annoying but it still comes up among investors. And I you know, I hear you. Commitment to independence, 135 years. Be around for generations to come. And you've mentioned the short term, four quarters of growth, and operating leverage, medium term, higher ROE targets, long term, one in Northern Trust, So I hear you loud and clear. And, Mike, you know, you're before Northern Trust. Certainly, you know about deal making. So that's all clear. But it doesn't stop. Others from saying, hey. Maybe we want we want to buy you.

You've been in that state for the last I'd say, three decades, so that's that's also nothing new. Having said that, under what circumstance would you consider ridding the custody business? Because you talked about scalability. The first word when you gave the update there. And perhaps that could use more scale or you know, the way I think about it, think of the crown jewel as the private bank and the asset management, and the asset servicing. You try to optimize more, but maybe strategically, you could do more there. Or, alternatively, maybe you could buy somebody else to get that scale.

Mike O'Grady: So thanks for the question, Mike. So when it comes to scale, I think it's important to start with the fact that size does not necessarily equal scale. We absolutely need scale, but we don't need size to get there. And our strategy is around that, but then you have to execute to demonstrate it. Right? Because scale is all about the ability to I'll say, grow the revenue side, at a pace that's faster than the cost side. Or increase your volume at lower unit cost, so to speak, as you go forward. And the reason why I say it's not about size is because there are different drivers of creating that scale.

So we try to focus on just certain sectors we believe we can build scale within the sector. And also differentiate ourselves. When you think about specific areas, on the institutional side, like US pension plans, UK pension plans, our business with hedge funds, in The US. Those specific segments where we say, our value proposition resonates, but now we also have to drive scale so that we can get, you know, the value proposition to a place attractive, and we can get the financial returns on that front. So that's the first piece. The second piece of that is a place that you do get scale is through technology.

And so how can we apply technology in such a way and leverage technology to create that? And, certainly, the direction of travel on that front is one that, once again, doesn't necessarily favor just being bigger. There's more complexity with being bigger, and the ability to not have to necessarily operate everything yourself meaning on prem and to do more through the cloud, is an equalizer, if you will, when it comes to scale. And then certainly with AI, the AI is a tool which we know creates tremendous leverage and scalability for both processes, but also for people. And we're in the early days of that.

And so we have to be able to deploy those technologies in a way that it creates scale. Within it. And then the third thing I would say is there are different parts of the value chain that create scale for you. And what we've tried to do and are in the midst of, I'll say, transforming it again, is to make sure that on the front end, dealing with the client, that we have that differentiation. But as you move back through the value chain, we find those areas where more centralization more standardization, you know, more automation is where you create that you create that scale.

And so more specifically, that's why we're moving to what we call our client-centric capability operating model. We're trying to take the common processes from across the businesses, but particularly within asset servicing, and focus them on capabilities as opposed to necessarily being in a particular region or for just a particular segment. So all of your capital markets capabilities, you know, specifically, cash, payments, that's the way we're organizing it underneath the COO, Pete Cherowich. And then, again, centralized, standardized, automate using technology to do that. We're seeing the early returns or benefits from that. We've gone down headcount consistently since we started, on that transformation of the operations.

And then the last thing I would say in areas where there is a benefit for size and scale, that's where we just are centralized across the entire company. So think about our core tech technology group and infrastructure. And we may not have the same, I'll say, buying power as the other large players on that front. But, frankly, that differential at that level is not enough to outweigh all the benefits up the chain that I talked about. So we need to continue to do it. We know we need to demonstrate it, so it has to flow through to the numbers. That's why the margins in our asset servicing business need to go up.

You know, we're in the low twenties right now. Those should be in the, you know, high twenties, and that's what we're moving towards with that. But that actually, at the end the day, that's what we'll demonstrate you know, are you getting scale Is that an attractive business? To the extent it not, it's not. To your point, you think about different ways that you can you know, potentially modify that or change it to ensure that you get it.

Dave Fox: And, Mike and I would only add to that, that, you look at the asset owner segment within asset servicing, it already turns the bar in terms of our margins, where we're trying to go. And so as that business gets bigger, and the asset management side of the equation gets smaller, you're gonna see the margins drift up as well. So that particular segment, we've identified is already there.

Mike Mayo: Got it. Thank you.

Mike O'Grady: Thank you.

Operator: And we'll take our next question from Alex Blostein Goldman Sachs. Your line is open.

Alex Blostein: Hi, good morning everybody. Thank you for the question. Appreciate all the extra segment disclosure on the margins profitability and obviously the target as well. That's all very helpful. I wanted to ask you guys around the timing to achieve some of these. So you had the 30% plus pretax margin. As a target out there for a little while. It's helpful to understand the pieces a little bit. But as you think about long it'll take you guys to get there and, ultimately, what interest environment does that contemplate? Because, obviously, there's a lot of profitability related to NII, and you're talking about profitability of the firm as a whole.

So here curious kinda how that plays into the rubric.

Mike O'Grady: Sure. So just as far as the backdrop on the market environment for it, it's one of, I would say, like, normalized. Meaning, a normal, yield curve, normal shape of the yield curve, and know, the pace at which you get there. What makes it difficult in managing for any, you know, financial institution is the speed of those changes. So we've gone through a time period, obviously, where rates were going up, but then they went down to zero. They went up very fast. And now know, it appears that we're at the beginning of a time period where they're going to go down, but at a more gradual pace.

That just allows for the transition of duration in the portfolio. Know, on the balance sheet. To be able to I'll say, leg into that, change in the in the shape of the yield curve. So that's the expectation. But, of course, we have to be positioned for know, different things happening, on that front. To the I'll say the more important part, Alex, which is just what's the time frame on that. Obviously, we're executing hard on that. You see the positive operating leverage that we achieved in a quarter like this where, as I say, it's kind of chunkier yards, if you will, and you need to pick those up while you can. But if you said, okay.

But, you know, there are certain, quarters or even, you know, multiple quarters where it's more difficult to get those chunkier yards and you're grinding more up. Know, that would infer that it's, you know, likely to be kind of 2027. You know, where we're achieving that 30 plus percent. We can get there sooner. Great. You know? And as I mentioned, like, the environment can help us. It can create a headwind as well. That's what we're looking to move towards.

Alex Blostein: Gotcha. Thanks, Frank. That's helpful. And just a follow-up on NII. Heard the guidance for the full year, obviously, implies something in the maybe $570 range per quarter, I guess, from here on. As you look at the balance sheet, I think I heard you say a little bit less than one year duration overall. With rate cuts, kinda how you're thinking about the trajectory from NII off of that jumping off point? Are there any things you're you could do today to mitigate the effects of potentially lower interest rates in The US?

Dave Fox: Yeah. So as I've said to you guys before, we have about a billion and a half of securities that roll off every quarter. And we can reinvest those at, I think, 100 basis points over the yield the runoff yield. So that's one area to do it. The second area obviously, is we've been very focused on our deposit pricing and things of that nature. We are not just in US dollars in deposits as well. So we took we take a look at opportunities across all the different currencies. And there are rate cuts that are gonna be, I think, realized with some of those currencies as well.

So from our perspective, it's really gonna be a question of know, the reinvestment going out a bit longer, when we have the opportunity. Not just to protect Q3 and Q4, but to protect know, '26 as well.

Operator: Great. Thank you. And up next is Ken Usdin with Autonomous Research. Your line is open.

Ken Usdin: Hi. Good morning. David, wanted to ask you to follow-up on your comments about the asset servicing fees. You mentioned that the transaction activity was really strong. I'm sure part of that's just the core business, but was part of that just in relation to the April dislocation? And I guess, how would you help us understand the push and pull between organic growth and markets help that you already have baked in for the third quarter versus some of the stuff that might have been like above trend just given the environment? Thanks.

Dave Fox: Yeah. So, yeah, it was because of I mean, transaction volume was higher than it was you know, would be traditionally if you look at the averages during that during the quarter, which wasn't surprising to anybody. You also have to take into consideration asset servicing, when you look at the growth side. And you guys know this, we had two large client losses in Q2 and Q3. One of those losses was just they took the business in house. We've not lapped that yet. And so I would say point five, you know, percent of the growth got nicked by that.

So as we get beyond those two client losses, you'll see some more realistic numbers in terms of year over year comparisons on that. So that's the way sort of the way to think about it.

Ken Usdin: And will those be out what you know when those will be lapped? Are they lapped in the third quarter or after the third quarter?

Dave Fox: So, yeah, after the third quarter, those have been lapped. Defensively. And so, you know, right now, go ahead. Yep.

Ken Usdin: No. Go ahead. You follow-up. Tim.

Dave Fox: Tim. No. So, I mean, basically, the quarter was client neutral. Mean, when you think about it. So from that perspective. And know, keep in mind, when you look at the asset servicing business, you know this, I'm sure. It's on a quarter lag basis. Right? So Yep. You gotta take that into consideration as well. That also affected the wealth business. Now wealth is on a obviously, on a month lag basis. And Q1, you know, if you look at the S and P, it was down 5%, Nasdaq down 10 and a half percent. So take all that into consideration as you're taking a look at those absolute levels.

Ken Usdin: Yep. And follow-up just on the wealth side. Just I like the layout that you gave in that Mike gave in the prepared remarks on the slides. Sarah, any change in just the organic growth rate in wealth? I know you have a lot of these initiatives going forward. But when do think we'll start to see a definitive, like, observable change in the organic growth rate there?

Mike O'Grady: Yeah. So as we talked about, we are seeing positive organic growth in the wealth business. But it is not at the level that we want and are targeting. And to your point, it's a it's a little bit more of a, you know, gradual increase in momentum. And the way we're going about it is a few different ways. You know, the first, and you heard this in my comments again, but is know, from a I'll call it a segmentation perspective. So we're trying to get more focused on certain segments so that we can increase the rate there. We've had that in GFO, so we're trying to essentially replicate that in the ultra-high-net-worth segment.

But it's early days on it, but the win rates are heavier or higher. And as a result, we've also added more talent on that front. To be able to continue to increase the growth rate of that segment. And then I would say, know, as you go down to the tiers below that, that's where we're really focused on particular markets, geographic markets. Where essentially, what we're trying to do is get our market penetration you know, more in line with the way it is in our more mature markets. We have very strong market share in Illinois, in Florida, as maybe you'd expect, you know, high success rate there.

We're trying to do the same thing in Northern California, Southern California, Texas, New York, where our market share is still, you know, low relative to the potential. And on that front, I would say you heard some of the you know, the organizational changes, adding some additional leaderships. Some from the outside. But, also, you know, we're gonna be hiring more revenue-generating roles in those markets to be able to drive that. But that your point, it takes some time to get, know, more people on board. Get them up to speed, and to get them that higher level of organic growth. But we're extremely focused on it.

Ken Usdin: Great. Thanks a lot, Mike.

Mike O'Grady: Sure.

Operator: And up next is David Smith with Truist. Your line is open.

David Smith: Thank you. Good morning. Color on what's driving the strength in deposits this quarter?

Dave Fox: Yeah. I mean, we talked about it last quarter a little bit. Obviously, there was a bit of a risk-off trade that we took advantage of during the period. So from that perspective, they are running a little bit higher. I will say in the current quarter, they're starting to normalize. And that's probably why I'm giving the guide where it is. And when I look at third and fourth quarter, third quarter tends to always be a little bit weaker just because of a seasonal pattern. Fourth quarter picks up a little bit, but they're beginning to normalize back to what I would say is a you know, a more predictable run rate.

We did have, in particular, and the swap activity was driven by this, we had a very extremely large euro deposit that came in. And this is why I always tell you folks that we wanna have a flexible balance sheet. We have very large clients that come to us not just for loans but for deposits as well. We did have some, you know, deposit activity that was concentrated among some very large clients in the quarter as well.

David Smith: Got it. So it's normalizing beyond typical seasonality so far in the third quarter?

Dave Fox: Yeah. I mean, it's back to what we thought it would be. I mean, the average is a 122. For this quarter. I think it's if you take a look at our last three quarters before the liberation day and the risk-off trade, it's back to those levels.

David Smith: I think you said that flows in asset servicing were relatively neutral in the second quarter. Any detail you can offer on segments where you're seeing stronger growth versus where more opportunity for catch up?

Mike O'Grady: Yeah. I would just go back to the upmarket of asset owners. You heard about some of the wins that I talked about there. Which are significant clients. At this point, relatively large clients as well. So that's where we're seeing particular strength on that front. The other thing I would just say is we often are impacted as well by the success of our clients. And the time period where for market reasons and others that some of the strategies of our asset management clients resulted in net outflows for them. We've seen that stabilize. So that's a positive for us as well on the asset manager side.

Dave Fox: Yeah. I'd also add that AUM flows, which obviously impact both businesses, positive, and liquidity was a real standout. And that is biased towards the institutional business. You know, $8 billion in the second quarter, $19 billion year to date on the liquidity side, which represents our tenth consecutive quarter of positive liquidity flows, and that's obviously great for our business.

David Smith: Thank you.

Operator: And our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell: Great. Thanks. Good morning, folks. For taking my question. Appreciate all the extra color on in the slides and your commentary today on the businesses. It's really great. Two questions. Maybe the first one they're both going to focus on wealth management, but the first one, going back to the efficiency initiatives within wealth management, particularly on the digital side and AI and automating some more of the services. Can you comment about, like, how that's enhancing the ability for, you know, for client delivery and relationship management and just thinking about some of your differentiating aspects as a wealth manager. The personal relationship side is a huge one.

Is there any risk of getting too automated or rather do you see it as really just enhancing and actually strengthening the relationship? And then, that vein, you've always you've gone sort of upmarket for, you know, really the last couple decades in terms of the services? Any interest in moving a little bit downmarket within the wealth spectrum to potentially improve that organic growth rate?

Mike O'Grady: Sure. So on the first one, what I would say is definitely those initiatives are focused on enhancing the client experience. And let me be more specific about what we're doing on that front. I would put it into three categories. The first being processes, second being what we would call partners or the employees, and then the third being with clients. On the processes side, if you just think about all of the documentation that is involved with client relationships. You know? And in this case, I'm speaking about wealth management. So think about trust documents and things like that.

The ability to use AI to digitize those documents definitely creates productivity for us, but also makes it easier for the employees to be able to utilize that information. So that's the type of thing we're doing to improve the client experience, as a part of that. Specifically on the partner side or our employee making them more efficient, giving them the tools to be able to do things, you know, more quickly. So on that front, you know, deep knowledge and I'll call it, you know, databases, if you will, of this deep knowledge. The Northern Trust Institute, etcetera.

The ability for our partners to be able to very efficiently and quickly tap into that data and that information to provide the advice to the clients is another unlock on that front to enable them to be not just more reactive quickly, but proactive. Right? To be able to prompt different discussions and conversations that should be had with the client. So enhancing in that way. And then also, certainly, the client itself. And I would say, that's where providing them additional capabilities that enable them to do things, I'll say, on their own, because of the technology. Is kind of the third aspect or wave of what we think we can do with the AI.

So all of that, you know, to answer your question, goes to the experience, but it also produces the efficiency and the productivity. And then with regard to the market you know, you're thinking about the direction of travel of our strategy correctly, you know, which is we're trying to say, how do we replicate for the different tiers such that we get higher organic growth overall? And so you heard me talk about, obviously, GFO, but then ultra-high-net-worth. And then absolutely, you know, below that level, so think kind of anywhere from $10 million to, you know, a $100 million segment.

We are further refining, you know, what is the value proposition specifically for those groups of clients and prospects and how can we then, as a result, increase the growth rate there. You know, to your point, we see stronger organic growth right now you know, in everything above kind of the $10 million segment. You know, versus below. And so the more we can differentiate what we're doing on those different tiers, we think it gives us stronger growth across all of them.

Brian Bedell: That's great color. And then on alternatives, you mentioned, I think, a 5% or less than 5% penetration across the franchise. But GFO, obviously, much more, you know, much higher, more in institutional based. If you can you can you strip out the allocation between those two segments? And I guess what I'm getting at is ex GFO, what do you really see as the current penetration and therefore the runway? And do you currently have all the right products available? And what I'm really getting at is, like, the access to the largest, even publicly traded, alternative managers or private market managers that have, you know, democratized product in the channel?

Do you do your clients have full access to those yet?

Mike O'Grady: Sure. So I'll comment on GFO a little bit, but Dave certainly add. But the way to think about GFO is really more thinking about the assets that we custody for them. And, you know, again, you know, very large dollar amount of it. The amount that then is invested with us through alternatives is relatively small so that the penetration level, if you will, is even lower than it would be in our core wealth. On that front. And a lot of it's because they're going direct to the largest managers on their own. But we have found that we have the ability to bring differentiated opportunities to them.

Some of them do utilize FiftySouth, but also often they're utilizing the, I'll call it, the research capability of FiftySouth. Where there will where he will then bring certain managers to them that they might not otherwise have access to. So that's how to think about the GFO side of it. And then, you know, more broadly or certainly with Core Wealth, I would say, it's less about, you know, providing access to things that they don't have or that we couldn't get access to. It's just providing more of it. So some of the largest managers we do have them on our WM Alts platform, our third-party funds platform. And so we'll continue to provide some of that.

But, frankly, our clients tend to be interested in things that are more bespoke or hard to get type managers. Where we do have the relationships, through FiftySouth. As a result, we can provide those types of funds then I would also say just with regard to vehicles, we expect that the vehicles will continue to evolve. You know, from what used to be the, you know, straightforward funds, you know, to then what will be, you know, interval funds to evergreen funds. So this whole idea of democratization of alternatives, that's gonna continue to evolve. We're gonna make sure that we have the right vehicle space.

Dave Fox: Yeah. I would just add to that particularly on the GFO front. I mean, access to top managers is not a problem. We have the client base. That all the top managers want. I think we are extremely discerning and have a very high bar in terms of what makes it onto our platform. And if it fits our client base accordingly. Other thing I would say is, we're doing a lot more on the alternative advisory front. A lot of our clients that got very heavy into all have not seen a lot of realizations, in the recent past.

Have come to us with a you know, with a bent towards what do I have and what should I do with this existing portfolio. And so we've been restructuring a lot of that stuff for them, giving them advice on that. To make sure they've got the right mix within their portfolio. So it's not just selling our own product. It's also taking a look at what they've done and giving advice on all that.

Brian Bedell: That's super great color. Thank you so much.

Mike O'Grady: Sure.

Operator: And up next, Gerard Cassidy with RBC. Your line is open.

Thomas Letty: Hi, good morning. This is Thomas Letty standing in for Gerard. Just given all the recent headlines, can you give us your latest thoughts on stablecoins and how broader adoption could impact both your businesses and then deposit levels?

Mike O'Grady: Sure. So we're excited by the direction of what I'll just call, you know, more broadly digital assets. You know, this is an area that you know, we've been embracing for some time and developing capabilities for some time, and we really do feel like we're on the you know, the precipice of the next stage of evolution, for digital assets. And, specifically, it is starting with stablecoins, and we think it'll evolve into tokenization of, you know, a number of different asset classes on that front. And so we've developed the capabilities, to be able to know, do both stable coins, but also, tokenize assets.

The key part of it is going to be we've done them on private blockchains. A lot of this now will move to public blockchains, so we need to have the capability to interact with the public blockchains on that front, and are planning to do that. We've already done a number of things with tokenization for carbon credits, in other areas. And so we just see this as the next stage, for this.

Thomas Letty: Thank you. That's helpful. And then just quick follow-up. So it appears expected regulatory relief for the industry will have a pretty big impact on at least the money center banks. You know, we saw the recent stress test results and then the resulting SEBs coming out of that. Can you just share your thoughts on the potential benefits for Northern Trust more specifically from expected relief?

Mike O'Grady: I'm sorry. I didn't quite hear your phone cut out there for just a minute. Can you repeat your question, please?

Thomas Letty: Yep. Of course. Sorry about that. So it appears the expected regulatory relief for the banking industry will have a pretty big impact on at least the money center banks. We saw the recent stress test results and the resulting SCBs. Can you just share your thoughts on the potential benefits more specifically for Northern from expected relief?

Mike O'Grady: Yeah. So we would say that the regulatory environment as we look out is very constructive, overall. There's a number of changes. I think they're trying to make. And from our perspective, whether it's across capital, liquidity, but also as they think about how they regulate operational risk. All of this is setting up for a constructive environment for us on that front. A lot of it is around predictability. And we do feel that we're in a time period here that allows us to ensure that we have the right risk management framework at the company, the right controls. We've made investments over the last number of quarters on that front.

We have more to do, but feel very good about the results that we're getting from that. And we think it aligns with the regulatory environment.

Thomas Letty: Okay. Great. Thank you for taking my question.

Mike O'Grady: Sure.

Operator: And our next question comes from Vivek Juneja from JPMorgan.

Vivek Juneja: Thank you. My question a follow-up on some of the questions that have come up on the call today. I hear you wanna increase your operating margin on the custody of the servicing business to the high twenties. Why is that good enough? I mean, given your mix, like, you know, you've got hedge funds that's an, you know, attractive margin business as your peers have talked about. Your peers are well above that. Some of your peers well above that. Today, above your high twenties.

So why would you not consider something much more value additive more quickly rather than over a multiyear period and think about, you know, alternatives like getting rid of, you know, spinning off or merging the custody part. If the wealth management is where your unique service ability is, why not split the two? Why is that not a consideration?

Mike O'Grady: Yeah. So the business model for Northern Trust is highly integrated. When you think about just the various segments, there's a number of ways why we have a One Northern Trust strategy is because of the interplay between the business. So we've talked a lot about the success and differentiation we have with GFO. The platform behind GFO is our asset servicing platform. And the technology, much of it is from our asset servicing business.

When you think about the financial aspects of the company, a lot of the deposits that we generate on the institutional side through asset services, and what we're doing for those clients get deployed through wealth management and our ability to offer credit to, you know, both our core wealth management clients, but importantly, to those GFO clients as well. And, you know, needless to say, you know, the integration of our asset management business with the other two is highly aligned. And it's not just I would say, distribution channels for asset management. It's the things that we talked about here. It's the cocreation of product to get better outcomes for our clients.

So you know, we believe the model is integrated. We know that we have to be able to demonstrate that profitability of all aspects of the business and the company overall. You know, to your point on those margins, you know, the only difference between, you know, saying that the target is, you know, in the thirties for that business and it's the high twenties, we have to get through the high twenties to get to the thirties. So, we certainly wouldn't stop when we get it into that range. It's just trying to say, know, how do we get there first, and then we'll move above that from there.

Dave Fox: And the high 20 is my sorry. Go ahead.

Mike O'Grady: No. I would just I would like to emphasize particularly for the family office business. That it isn't just about investments. Right? So it's about operating alpha. And at the end of the day, a lot of these family offices don't wanna be in the vendor management business. They would much rather go to a firm that has the scale and ability to help them operate the full infrastructure inside a family office. You know? And that's what we've got. And we have that scale through GFO. And by leveraging off our asset servicing business to do that.

So you know, when you think about a family office infrastructure, it almost looks and feels a lot like a very sophisticated investment office. And a lot of the tools, like front office solutions, are used by those sophisticated asset managers are also used by our family office clients. So that interlink is incredibly important.

Vivek Juneja: Okay. And, Dave, let me thank you, Joanne. That's the course of applauding you on that increase disclosures. It's taken us several years to get there, but thank you for doing that.

Dave Fox: Did it just for you.

Vivek Juneja: Yeah.

Operator: And our next question comes from Brennan Hawken with Bank of Montreal. Your line is open.

Brennan Hawken: Good morning. Thanks. For taking my question.

Mike O'Grady: Good morning.

Brennan Hawken: I recognize you've gotten a lot of questions on this, and I'd also appreciate that it's disruptive. I really do. But some of your shareholders have asked me to ask a fiduciary obligation question here. Mike, I'd like to explore your conviction that remaining an independent company is in shareholders' best interest? A couple of sub points. Like you said in your prepared remarks that you're well positioned to continue to create value, but you know, when I pull up the comp function for Northern and Bloomberg, which just shows the past five years, the stocks lagged, like, all of the relevant benchmarks and the close peers.

I appreciate that you're some of your customers want you to be independent, but know, the company isn't structured as a mutual. So it's owned by the shareholders, not the customers. So why be so categorically closed off to exploring those options when the independent path has resulted in the stock lagging.

Mike O'Grady: Sure. And Brendan, appreciate the question. Because it gives me the opportunity to kind of wrap up on this on this point. You know, first of all, we have an exceptional board. It's a board that, you know, we've built up and, you know, evolved over time. But it has a great combination of experience in different industries, including financial services, technology expertise, deep expertise, and experience on governance matters. And, you know, frankly, situations like this. So have an exceptional board. They take their fiduciary duties. Extremely seriously. And so they understand the duty that they owe to the shareholders. And that's how they operate. So that's the framework at which they look at everything.

And know, you heard where they stand, you know, with regard to the strategy. But they also understand that they have to always make sure that they're upholding those fiduciary duties. So that's the first one, and, hopefully, that's crystal clear. To your second point, you know, just stepping back a little bit on, I'll say, performance over time. I think you can divide it up into some different time periods. To just kind of understand the stage that we're in right now. You know, you use five years. We could use any number of different time periods. But there was a time period for a number of years where we were operating very much within our target financial model.

You know, frankly, going into COVID and coming out of COVID. The growth rates, you know, for revenue, both organic and overall, know, were within that target financial model. Our average pretax margin was about 32% over that time period. Earnings per share grew at double digits over that time period. And then as we've talked about, we then have gone into a period where we've made some investments, in the organization. A number of them across, enhancing and bolstering the resiliency of the company. Which, again, we've tried to detail and outline, with investors. And we've also invested in the businesses.

You know, we've built out a number of these capabilities that we talked about, so that we can have long-term organic growth. Sometimes you need to make those investments that, you know, can hit margin in the short term, but produce the opportunity to grow for a much longer time period over that and going forward. So as a result, know, whether you, you know, again, use four years or five years or three and a half years or whatever it is, you know, over that time period, our financial performance in that period you know, has lagged and has not met up with our long-term standards and expectations for performance.

And that's why you know, going to the beginning of 2024, we launched the One Northern Trust strategy because that was gonna take us forward for the next, you know, say, four-year time period over that. So we're, you know, call it a year and a half into that. Executing on it. And, hopefully, you and others heard today with our progress. You know, we've tried to be very objective and even clinical about how we look at our performance. And what we're trying to convey is you know, we have good momentum, but we're nowhere near finished with executing on our strategy. But given the proof points that we see, the strategy is working.

And it's a matter of staying focused on that strategy and executing it in order to see the performance you know, for all of our constituencies. So, yes, including clients and our partners that are working on this and others. But specifically for shareholders as well. Through improved financial performance. Will translate into improved stock price performance as well.

Brennan Hawken: Okay. My thank you for the for the CLEAR and thoughtful answer to what can be a very charged question. So I appreciate that. And the first time in I don't know how long, my follow-up actually is related. So great to see the ROE target come up. But like, if this is you guys are moving all in and staying independent and totally committed, why not reunderwrite some of these targets? You said you've been at the upper end of the new range. But you also said that recent performance has sort of lagged. So why not up the ante and make the ROE target range in its entirety, not just the lower end, but the upper end too.

Move higher and really press for some value creation.

Mike O'Grady: Yeah. So a little bit like my response on margins too. It's like, we're gonna work our way through this range, if you will, and then we'll reestablish, you know, a range above that to the extent that we'd likewise say, okay. Now we've been performing in that range. You know, maybe that's part of our I'll say, approach or style or culture. To make sure that we deliver on what we say we're gonna do. But that's the intention. And part of it as well, Brendan, as you know, is you know, the ROE is important. But it's not just the ROE. You know, as I talk about our financial objectives, it's growth and returns.

And so if it was a matter of just can you know, top tick on the highest ROE in a particular period of time, we don't think that creates the greatest value for shareholders. They want growth as well. That's why our strategy is also about organic growth. Because that's what generates more shareholder value over time is the combination of the two.

Brennan Hawken: That's great. Thanks so much, Mike.

Mike O'Grady: Okay. Thanks, Brandon. Appreciate it.

Operator: There are no further questions in queue at this time. I will now turn the conference back to Jennifer Childe for closing remarks.

Jennifer Childe: Thank you, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again in the future.

Operator: Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect, and thank you for participating.

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