Northern Trust Corp (NTRS) — Q1 2021 Earnings Call Transcript

Thank you, Olivia. Good morning, everyone. And welcome to Northern Trust Corporation’s first quarter 2021 earnings conference call. Joining me on our call this morning are Mike O'Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Kelly Lernihan from our Investor Relations team. Our first 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 which we will use to guide today’s conference call. This April 20th 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 May 18th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our Safe Harbor statement. What we say during today’s conference call may include forward-looking statements which are Northern Trust’s current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those expressed or implied by these statements, because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2020 annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results. During today’s question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Mark. Let me join in welcoming you to our first quarter 2021 earnings call. Amid the ongoing public health crisis, I hope you and your families are healthy and well. At Northern Trust, we continue to operate in what we call resiliency mode, which means we are focused on providing our clients continuity of service, while the majority of our employees worldwide are working remotely. Before turning the call over to Jason to walk through the financials in detail, I wanted to offer some brief comments on our performance for the quarter. Our results for the quarter resulted in earnings per share growth of 9% versus the prior year and a return on average common equity of 13.7%. Revenue was consistent with the prior year, as declines in net interest income and trading-related revenue were offset by 6% growth in trust fees. The persistent low interest rate environment has pressured our net interest income, as well as our trust fees as reflected by money market fee waivers. While overall year-over-year operating leverage was negative, the 6% growth in trust fees did produce 1 point of positive fee operating leverage, despite the impact of fee waivers, which reduced our trust fee growth versus the prior year by 5 percentage points. The current quarter’s results also benefited from an improved economic outlook, which drove a $30 million release of reserves for credit losses. Throughout the past year, our strong capital base and liquidity profile enabled us to support the needs of our clients and this was demonstrated further during the first quarter, as we saw 10% sequential growth in average total deposits and 3% sequential growth in average loan balances. Throughout this challenging environment, we have effectively executed on initiatives to continue to drive organic growth within each of our businesses, one of our key strategic initiatives. Within Wealth Management, our digital marketing efforts and Northern Trust Institute have driven more conversations and engagement, and we’ve experienced an increase in client engagement during the quarter. Within Asset Management, we have continued to see success and growth within ESG mandates, with assets under management of $139 billion at quarter end and our quant active strategies have experienced strong relative performance, providing us good momentum. In our Asset Servicing business, we continue to see organic growth during the quarter, with the success being well diversified across regions, products, and client segments. Moving forward, we remain focused on continuing to effectively navigate through the persistent low interest rate environment, focusing on driving greater efficiencies, as well as continuing to grow organically in a scalable and profitable manner. Finally, I want to express my sincere appreciation for our employees whose commitment, expertise and professionalism throughout these extraordinary times continues to be exceptional. Now, let me turn the call to Jason to review our financial results in greater detail for the quarter.

Thank you, Mike. Let me join Mark and Mike in welcoming you to our first quarter 2021 earnings call. Let’s dive into the financial results of the quarter starting on page two. This morning we reported first quarter net income of $375.1 million, earnings per share were $1.70 and our return on average common equity was 13.7%. You can see on the bottom of page two, equity markets performed well during the quarter. Recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels in both the S&P 500 and EAFE local had strong sequential performance based on those calculations. As shown on this page, average one-month and three-month LIBOR rates were stable during the quarter with modest declines. Move to page three and review the financial highlights of the first quarter. Year-over-year revenue is flat with non-interest income up 5% and net interest income down 17%. Expenses increased 5%, while net income was up 4%. In the sequential comparison, revenue grew 4% with non-interest income up 5% and net interest income up slightly. Expenses declined 3%. Net income increased 56%. Recall that the prior quarter included $66.9 million in expenses relating to severance and occupancy charges. Excluding those charges, expenses were up 3% on a sequential basis. The provision for credit losses reflected a release of $30 million in reserves in the quarter, compared to a provision of $61 million in the prior year and a release of $2.5 million in the prior quarter. The release in the quarter was driven by continued improvement in the projected economic conditions and portfolio credit quality relative to the prior quarter. Return on average common equity was 13.7% for the quarter, up from 13.4% a year ago and 8.8% in the prior quarter. Assets under custody and administration of $14.8 trillion grew 36% from a year ago and increased 2% on a sequential basis. Assets under custody of $11.5 trillion grew 40% from a year ago and increased 2% on a sequential basis. Assets under management were $1.4 trillion, up 29% from a year ago and up 3% on a sequential basis. Let’s look at the results in greater detail starting with revenue on page four. First quarter revenue on a fully taxable equivalent basis was $1.6 billion, flat with the prior year and up 4% sequentially. Trust, investment, and other servicing fees representing the largest component of our revenue totaled $1.1 billion and were up 6% from last year and 4% sequentially. Foreign exchange trading income was $79 million in the quarter, down 12% year-over-year and up 15% sequentially. The decline compared to a year ago is driven by lower volume and lower volatility, while the sequential performance was driven by higher volumes. The remaining components of non-interest income totaled $101 million in the quarter, up 16% compared to a year ago and up 9% sequentially. Within this, securities commissions and trading income declined 17% compared to a year ago, but it was up 8% sequentially. The year-over-year decline reflected lower interest rate swap and transition management activity. The sequential performance was driven by strong growth within our core brokerage business, which includes our integrated trading solutions product. Other operating income totaled $55 million and was up 60% from one year ago and up 11% sequentially. The year-over-year growth was impacted by higher income and the supplemental compensation plans and a prior year market value adjustment for seed capital investment, partially offset by higher expense relating to visa swap agreements. The growth through the supplemental compensation plans had a related increase within our other operating expense. The sequential increase was primarily associated with lower expense relating to visa swap agreements. Net interest income, which I’ll discuss in more detail later was $347 million in the first quarter, down 17% from a year ago and up slightly on a sequential basis. Let’s look at the components of our trust and investment fees on page five. For corporate and institutional services business, fees totaled $621 million in the first quarter and were up 8% year-over-year and up 4% sequentially. Custody and fund administration fees were $446 million and up 13% year-over-year, and up 6% on a sequential basis. The year-over-year performance is driven by new business, favorable currency translation, and higher transaction volumes. The sequential increase was primarily driven by favorable markets, new business, and favorable currency translation. Assets under custody administration for C&IS clients were $13.9 trillion at quarter end, up 36% year-over-year and up 2% sequentially. The year-over-year growth was driven by favorable markets, new business and favorable currency translation. The sequential performance is driven by favorable markets and new business, partially offset by unfavorable currency translation. Investment management fees in C&IS of $116 million were down 4% year-over-year and down 7% sequentially. Both comparisons were impacted by higher money market fee waivers, partially offset by new business and favorable markets. Fee waivers in C&IS totaled $28 million in the first quarter, compared to $11.4 million in the prior quarter. Assets under management for C&IS clients were $1.1 trillion, up 30% year-over-year and up 3% sequentially. The growth from the prior year was driven by favorable markets, client flows, and favorable currency translation. The sequential growth was driven by favorable markets and net flow. Securities lending fees were $18 million in the quarter, down 22% year-over-year and up 4% sequentially. The year-over-year decline was driven by lower spreads, while the sequential performance was driven by higher volumes, partially offset by lower spreads. Average collateral levels were up 13% year-over-year and up 11% sequentially. Moving to our wealth management business, trust, investment and other servicing fees were $443 million and were up 3% compared to both the prior year and prior quarter. Fee waivers and wealth management totaled $22 million in the first quarter, compared to $12 million in the prior quarter. Across the regions both on a year-over-year and sequential basis growth was impacted by favorable markets, partially offset by higher fee waivers. Within global family office, fees were lower year-over-year and sequentially and primarily reflected higher fee waivers, partially offset by favorable market. Assets under management for our wealth management clients were $355 billion at quarter end, up 28% year-over-year and up 2% sequentially. The year-over-year growth was driven by favorable markets and client flows, while the sequential performance reflected favorable markets, partially offset by net outflows. Moving to page six, net interest income was $347 million in the quarter and was down 17% from the prior year. Earning assets averaged $141 billion in the quarter, up 27% versus the prior year. Average deposits were $126 billion and were up 33% versus the prior year. While loan balances averaged $34.2 billion and were up 6% compared to the prior year. The net interest margin was 1% in the quarter and was down 51 basis points from a year ago. The net interest margin declined primarily due to lower interest rates, as well as makeshift within the balance sheet. On a sequential quarter basis, net interest income increased slightly. Average earning assets increased 7% on a sequential basis, while average deposits were up 10%. The net interest margin declined 5 basis points sequentially partially due to the balance sheet mix shift and lower rates. Turning to page seven, expenses were $1.1 billion in the first quarter or 5% higher than the prior year and 3% lower sequentially. The prior quarter included a $55 million severance charge related to a reduction enforced and an $11.9 million expense associated with an early lease exit arising from our workplace real estate strategy. Excluding these items expenses were up 3% sequentially. Compensation expense totaled $519 million and was up 4% compared to the prior year and was down 1% sequentially. The year-over-year growth was driven by higher salary expense due to staff growth, prior year base pay adjustments, higher incentive expense, and unfavorable currency translation. Excluding the charge in the prior period, compensation was up 10% sequentially, primarily driven by higher equity and cash-based incentives. This quarter’s equity incentives included $32 million in expense associated with retirement-eligible staff, compared to $34 million in the prior year. Employee benefits expense of $103 million was up 60% from one year ago and up 1% sequentially. The year-over-year increase was primarily related to higher retirement, medical and payroll withholding costs. The sequential increase was primarily driven by higher payroll withholding, partially offset by lower medical expense. Outside services expense was $196 million and was up 2% from a year ago and down 6% from the prior quarter. The year-over-year growth was driven by higher sub-custody, third-party advisor and market data costs, partially offset by lower data processing and consulting costs. The prior quarter included a $2.5 million charge. Excluding the charge costs were down 4% primarily due to lower legal, consulting, and technical services related costs. Equipment and software expense of $177 million was up 9% from one year ago and flat sequentially. The year-over-year growth reflected higher software support and amortization costs. Occupancy expense of $51 million were down 1% from a year ago and down 24% on a sequential basis. The prior quarter included an $11.9 million charge relating to an early lease exit. Excluding that charge, the category was down 8% on a sequential basis driven by lower building operation costs and lower rent expenses. Other operating expense of $72 million was up 16% from a year ago and relatively flat sequentially. The year-over-year increase was primarily driven by higher supplemental compensation plan expenses and other miscellaneous expenses, partially offset by lower business promotion and staff related costs. Turn to page eight, our capital ratios remained strong with our common equity Tier 1 ratio of 12% under the standardized approach and 12.8% under the advanced approach. Our Tier 1 leverage ratio was 6.9% under both the standardized and advanced approaches. During the first quarter, we repurchased 1.4 million shares of common stock at a cost of $136 million. We also declared cash dividends of $0.70 per share, totaling $151 million to common shareholders. The current environment continues to demonstrate the importance of a strong capital base and liquidity profile to support our clients' needs. We continue to provide our clients with the exceptional service and solution expertise they’ve come to expect. Our competitive positioning across each of our businesses, Wealth Management, Asset Management and Asset Servicing continues to resonate well in the marketplace.

Good morning, Glenn.

Good morning. Thanks very much. I guess my question is on organic growth. I heard a lot of commentary throughout your 18 minutes of prepared remarks. Thank you very much. On positive net flows across most parts of the business, I think in your prepared remarks, I heard you talk about ESG mandates within Asset Management, but maybe you can cover whether you quantify or qualify, I’ll take either one, where you’re seeing new business, what kind of business you’re winning in Asset Servicing and has there been any pandemic-related pause that is now freeing up a lot of them. So any color on that would be great? Thanks.

Yeah. Mike, do you want to start on it?

Sure. So, Glenn, as you described there, we are seeing strong organic growth across the company and specifically in Asset Servicing. And I would say, the first place I would start the foundation of our growth strategy is retaining existing clients. And as you would imagine, going through the pandemic, being able to support clients has been extremely important. But also, I think, I earned us the right if you will to continue to serve our clients, many of them our largest clients. So that’s been a big positive. Second, I would say is that, we have seen, I would say, a full return to marketplace activity. So our clients, both asset owners and asset managers are actively looking at their own operating models and looking for opportunities either to become more effective in how they invest on behalf of their beneficiaries or improving the efficiency of the way they do that. So, consolidating operations or providers, utilizing new technology and that has played very well into our strategies in Asset Servicing that we’ve had underway for years. So thinking about things like front office solutions, which is an investment book of record for clients that have high levels of alternative assets, the ability to look at across their portfolio in order to manage their business and then thinking about our asset manager clients, our whole office strategy is definitely resonating as well, where we can provide services across front, middle and back office. So high level of activity and then, I would say, success with strategies we’ve had in place for some time period.

Appreciate that. Maybe just the last follow-up on net interest income, the NIM was down 5, but deposits were up a ton, do you feel net interest income has now finally bottomed and maybe some backup of your thoughts behind that in terms of redeployment opportunities? Thank you. Appreciate it.

Sure. I don’t want to call a bottom on it. I mean, if you unpack the quarter effectively, we saw loan growth that was strong and up $1 billion and that has a few million dollar impact, if you take our average return on those assets. If you think anywhere from 175 basis points to 200 basis points on that $1 billion, you’re going to get $4 million or $5 million in lift for the quarter. And then you also had, obviously, lift from the deposits overall. But that’s offset by something that’s more predictable going forward, which is we’re still going to have reinvestment in -- as the security book continues to mature and that’s still got some maturation to do. And so it’s easier to predict what’s going to happen on the reinvestment side, then what’s going to happen on the loan side, but obviously, if we continue to see strong loan demand then that’s more important than what we’re seeing on the other components of volume.

Hi.

Hi, Mike.

I see at your Annual Meeting today a 2021 priority is productivity. So I was wondering if you could put some metrics around what you’d like to achieve. And on the positive side, I see the headcounts down 1% quarter-over-quarter, the pretax margin the first quarter is back to the 30s, where it was not last year at all. But on the negative side, I have to imagine the fee waivers will continue and might actually increase. So where does it all end up and where would you like to get to this year?

Yeah. Let me take that in a few different buckets. You’re right. The productivity is extraordinarily important. And we go and we scratch and claw and do everything we can to earn new business. That’s hard to do. It’s not overly predictable. But what we can do is exhibit extreme discipline on the productivity side. And so we haven’t put external metrics to that, but we’re looking at it a lot of different ways internally. We look at operating leverage, which we talked about earlier. We look at fee operating leverage and then internally we’re able to look at organic trust fee operating leverage. And so from our perspective, we want to see -- we want to -- we don’t want to just call expenses up or down, because a lot of our business relates -- a lot of our expenses relates to the amount of new business that’s coming in. And if we continue to show growth in the different areas of the business, we’re going to see lift in those expenses, we just want to make sure it’s related in the proper way to the organic growth that’s coming in. Now, you’re right, headcount was down and that comes back to the initiatives that we talked about in January and so you see -- it’s a meaningful reduction for us of about 300 headcount and that played through in lower salary expense for the company. And so that’s -- those are meaningful movements and I think reflective of the discipline that and the commitment we have around expense management. Then on fee waivers, you’re right, it’s a -- that is a -- it’s a very, very difficult dynamic that we’re facing. And I also think people need to realize we’ve talked about the fact that the $50 million we have this quarter, we’re still seeing lower rates on the short end of the curve. As much as we’ve seen the one year, five-year, and 10-year up, we’ve seen overnight repo at zero and one and that’s very difficult for a $275 billion pool of money market funds. And that’s why we’ve tried to give consistent information, not guidance, but a consistent run rate on how those fee waivers are going. And as we sit right now that number looks more like $65 million to $70 million on a quarterly run rate basis. Now, hopefully, as the Fed balance sheet changes, we see some improvement there. But that’s where we sit today and so it’s something we have to monitor and obviously it has a big impact on the pretax margin you identified.

And then the one tailwind you have I guess the higher asset values, can you remind us of the relationship between every change in the stock market and your fees?

Sure. It’s going to vary by the areas of business that we’re talking about. In general 60% in C&IS, 60% -- about 60% are based on asset values in some ways and then in wealth, you can split it even more. Mark, you might have those numbers close to the top of your head, but it’s…

Right. Yeah. The 60% in C&IS is really the asset values, which would be all asset values, equity mark -- equity assets, as well as fixed income or cash. And then as we look across in wealth management, there is more of a relationship there to the assets, but the equity sensitivity if that’s what you are looking at is a little different. And the regions' equity sensitivity is probably 50% to 55%, whereas when you get to the global family office, there the equity sensitivity is probably closer to a third…

Yeah.

...just because of the way the client’s assets are allocated.

Good morning. Thanks for taking my questions. So, first on the loan -- on the balance sheet growth here, quite robust deposit growth. It was a pretty significant inflection from how things were trending in the back half of last year and so I am curious about your thoughts there? How much of this do you view as excess? It seems as though a lot of the Central Bank deposits on the asset side went up, which would imply that you might think this is -- these are short duration deposits. So if you could give maybe some color on what your expectations are for the sustainability of this growth in deposits and how you might be thinking about redeploying those deposits over time and how much time do you need in order to do that?

Sure. So you’re right, I mean total interest-related deposits up, interest-bearing deposits up and I think the good news is that interestingly we were able to hold on to the margin. You saw a decline in LIBOR and even in that book we also saw a decline in cost. And despite the fact that part of the book is below zero and I think that’s meaningful. To get to your question about volume levels and the net -- the nature of the deposits, there’s no doubt a lot of those deposits are non-operational and so we need to let them season before we would do much beyond putting those at Central Banks. That said, there are other things we can do, because we’ve got capacity in the balance sheet. But obviously, the nature of how we run the treasury book is to let those types of deposits, the ones that are more institutional and might be more trans -- more transitional season before we would take longer term exposure on those.

Okay. All right. Thanks. Appreciate that. And then when we think about, I think, you would had commented, Jason, in the -- in response to Glenn’s question about, really, when you think about NII, it’s a footrace in between loan growth and reinvestment rates. I think your loan growth picked up a bit here this quarter versus the trend of the back half of last year, but period end, not necessarily all that higher than the average. So how should we think about loan growth from here? What are you seeing as far as demand for loans amongst your clients? And is the rate for that loan book still -- are we still better off looking at the one month and three-month LIBORs to think about those rates? Thank you.

Sure. So, first of all, the loan growth has come almost exclusively or the vast, vast majority has come from the Wealth Management side of the business. And even though in dollars, it’s not as big as the deposits, the impact is much more meaningful. And having $1 billion in higher average deposits, it -- that’s quite meaningful for NII and we’ve talked very consistently about the fact that the deposit levels are, interesting they’re chunky, but don’t really do too much on NII. It is difficult to predict what the loan demand will be. However, what we’ve experienced isn’t simply, I’d say, random. We’ve talked about the fact that we have been communicating with clients more aggressively and this is over the last year and a half, two years, about our desire to be with them and be a liquidity provider for them. Our liquidity engagement with clients is it’s a big part of our business and that shows up not just in what we do with the balance sheet on the -- on deposits but also money market funds, where, again, $275 billion in AUM there and also on the lending side, particularly on the Wealth Management clients. And so it’s more -- this has been, I think, more of a strategic lift and so that’s not predictive that it’s going to hold on or continue to accelerate. But we don’t see it as something that we’re dismissing as potentially random either.

Good morning, Alex.

Great. Good morning, guys. Hey. Good morning. Thanks for taking the question. I want to shift gears a little bit, maybe talk about capital a little bit and obviously continue to be in very strong position across all the key ratios. Can you guys remind us or kind of how you think about the binding constraints for Northern Trust, obviously, relative to regulatory minimums. That’s not kind of how you set the bar, you typically look at your peers. So given some of the changes that they have made and kind of how they’re thinking about setting the minimum levels they’re willing to run with? How does that inform your view of access capital at Northern Trust and then, ultimately, how does that translate into your appetite for increased buybacks from here?

Sure. So, you’re right, that it’s less of a process, it’s less of an algebraic calculation and more where we want to be on a relative basis at this point. We -- I’ve -- you guys have heard us talk consistently about thinking about our engagement with the Board where we’re totally aligned, but we want to make sure that that conversation continues to take place, where are we on an absolute basis, how we think about things on a relative basis and how we think about things from a regulatory perspective. And right now I’d say just keeping an eye on what the industry is doing is important. So the absolute levels less so. We’ve got plenty of room obviously from a CET1 perspective sitting at 12 given where the regulatory minimum are. And so if you think about Tier 1 leverage, even though the industry has talked about coming down significantly, we’re -- we’ve still printed well into the 6s and that’s $125 billion average deposit base. So I’m not going to -- I’m not giving you our buffers here, but just take a 5% number just to get your question out about what our capacity would look like. If you came all the way down to 5%, that would translate to a balance sheet of about $200 billion and you could have $170 billion in deposits, all else equal on the balance sheet today. And so you’re talking about easily $40 billion on a base of $125 billion currently and so that’s a lot of room. And I think, also, importantly, it’s not like we use the balance sheet for clients that for organizations we don’t know. We’re really dealing from a candidate pool of depositors that are existing clients. And so, at this point, we feel good about the capacity we have, but it’s obviously something that we’re watching, given how dramatically things can change, given set actions and where deposits were 15 months ago.

Right. I guess I was trying to get more to the capital return framework of kind of how you guys think about the opportunity for share repurchases from here, given the access capital that you’ve outlined.

Thanks for clarifying. Let me tackle that directly. It’s interesting because this quarter is a great example of how we don’t just think about do we buy back stock or not, there are different ways we can invest capital and that return -- that 10% to 15% return target, it comes up in everything we do from a capital perspective, including using the balance sheet to help clients. And so this quarter, you saw the capital levels come down, not because there was a meaningful decline in CET1, but because there’s more activity in from a client perspective and that showed up with an increase in RWA on the denominator. And we saw higher sec lending activity, we saw higher lending activity and we saw higher treasury activity in the form of more bond buying, muni purchases. In each of those areas, we’re thinking about what’s the best way to use our balance sheet in the long run and what’s the best way to think about return. And for us we can think about the returns of buying back $1 stock. We’re looking at the -- we’re looking at everything from what we think our returns are going to be there. What’s -- what are we getting in terms of price-to-book. We’re also looking at the desire to be there with clients and what those returns will look like. And when we have the ability to think about lending or expanding C&IS relationships with the other things I mentioned, those things come up as very attractive ways for us to use capital. It turns into better -- it turns into good growth for us in the long run and good use of capital.

Got it. Great. That makes sense. Thanks for that. And then just a quick follow-up around NIR again, so I think again in the past, I think, we talked a little bit about some sensitivities to sort of the re-pricing dynamics in the securities portfolio. Maybe refresh us where that sort of stands today. So securities portfolio yield, I think is about, 120 or so. If you look at rates where they are today, I want to say most of the securities portfolio has already re-priced lower, but holding current rates constant sort of how much more of a drag on the securities yield do you guys expect to see over the next couple of quarters?

Yeah. Well, to give you a sense of what’s re-priced at this point, obviously just take if you look at $150 billion in earning assets, obviously, all of the money market assets have re-priced, 85% of the loan book has re-priced, $60 -- and it’s $60 billion of the security, so about 63% of the securities book has re-priced at this point. And so that’s where we sit at this point. And then it’s interesting, if you think about what’s the impact of that, I’ll tell you in this quarter alone, the -- it was a significant impact. We actually had -- if you -- just from the securities portfolio, the NIR was down $10 million and so that was the drain on it. But that’s not -- I don’t want you to think about that as a pure run rate, because we’re thinking there about what’s happening with the loan book and so there are other factors to play in as we’re reinvesting those securities. But I want to at least start with giving you the numbers that you asked for, in terms of how much is re-priced and then also what the implications are. But the runoff coming through at this point and also the fact that the one year, two-year, three-year, five-year, where we tend to be reinvesting has come up, that is brought down the influence on a quarter-over-quarter basis as well.

Hi, Brian.

Hi. Great. Hey. Good morning. How are you? If I can start off with maybe one on the loan book, Jason just that comment you made on the 85% of the loan book has re-priced, looks like that you’ll have at least for the last couple quarters now bottomed and is starting to move back up. So my question would be around of the 15% that’s re-pricing sort of what are the dynamics on that versus maybe what are some of those new loans that you’re bringing on that’s helping improve that yield. And then longer-term, most of that is tied to LIBOR, maybe just talk about the plan of whether some of those loans are going to use a new reference rate given the planned transition of LIBOR and how you’re thinking about that?

Sure. So the longer dated loans are, often it’s going to be in the mortgage book and so that’s what’s going to take longer effectively just you know. The loans that have come on, disproportionately the growth has come again within wealth, but within personal loans and within some of our more corporate-based organizations, we do have a lot of corporate there’s small and midsize business activity in that book and that’s where a lot of the growth has been. And then in terms of the LIBOR transition. Yeah, as you know and I’m sure you’re covering really closely, Brian, there’ll be a transition and most of the industry seems to be looking to move from LIBOR to SOFR as a reference rate and so watching that and the implications of it.

Is that transition to SOFR, I mean, I guess, it’s too early at this stage, because there’s not an effective term rate. But I mean, is there any - or you said any implication on the yield of the loan book by that transition or is it simply too early?

Well, it’s early, but we and I think the industry is hoping that they’ll be -- once we get to those transition dates, there’ll be more of a reset and we’ll have the, not just the reference rate changes, but the spread changes and to reflect -- because obviously, SOFR is different. There’s not credit. There’s not duration in it and so it’s a different rate. And the relationship between LIBOR and SOFR is a lot different today than what it was even a year ago. And so I think the industry has got some work to do to work on what the conversations are going to be like at the point where we actually make that hard switch.

Steve.

Hi. Good morning. So I had a couple of ticky tack modeling questions. The first is just on the non-asset sensitive fees within custody and fund administration. We’ve had two pretty meaningful sequential increases these past two quarters. That line item exited the quarter at about $178 million versus what historically had been a pretty consistent range of $150 million to $160 million. Just curious what’s driving the recent strength in that line item? And maybe just as we think about from a modeling perspective, what’s the right jumping off point we should be thinking about as we look ahead to 2Q?

Yeah. Just to make sure I’m tracking totally. So you’re talking about other non-interest income at $180 million on the income statement.

It’s actually the $178 million within custody and fund administration. But it’s the non-asset sensitivity portion. So that’s the part that will presumably move around with that statement.

Yeah. So this is Mark. So you’re referring to, when we talk about the sensitivity of the -- of those fees that about 60% to 65% are asset sensitive and then the rest are kind of either their mix quite frankly, there’s transaction volumes within those. There are some flat fees or fixed fees or even account level fees. So you could maybe say roughly half of it is transaction volume related. So -- and we did see a pickup this quarter in those transaction volumes that created some of the sequential lift that we saw or percent or 1% or so of the sequential lift that we saw. So I hope that is answering your question.

Yeah. Yeah. That’s sufficient. So -- but we should be expecting some normalization of that, presumably, it could be higher than the $150 million to $160 million, but it sounds like the $178 million may have been a bit elevated and we could see some rebasing there, is that fair?

Yeah. That’s probably fair. I don’t necessarily have the numbers that you’re doing, because we don’t -- I don’t have it broken down specifically like that. That’s kind of a directional guide that moves around each quarter that split. But yeah, I mean, we did -- we certainly saw heavier transaction activity during this most recent quarter, that would have benefited those fees by a bit.

Okay. No. That’s helpful color. Just for my follow up on the NII, actually you are bit more focused on the liability side, the beat was held by continued grind down in those interest-bearing deposit costs. It’s the second consecutive quarter where we’ve actually seen that come down. Just curious if you see any additional room to cut deposit costs further, if the rate backdrop holds or has that level have been largely exhausted at this point.

I felt decent about coming down a couple basis points in that book and I think it’s reflective that a lot of that book is international. It’s in currencies that are already used to having negative rates. And so that dynamic that we’ve talked about that once zero is broken, there’s an expectation that the beta will continue at that point seems to be playing through there. And so wouldn’t necessarily and we’ve talked to clients a lot about where rates are there, because it’s obviously can be a sensitive topic. But I think the win there is. We’ve got good dialogue with clients that indicate we’re all looking at things like the year same way and tracking deposit costs. So we don’t have further deterioration as the asset side compresses more.

Good morning, Mike.

Hi. Good morning. Good morning. Thanks for taking the question. Just a question on organic growth, Mike, you provided some good color on Asset Servicing Glenn’s book question, just in investment management in particularly in wealth, where you are starting to see improvement as COVID conditions improved versus last year? And how is the competitive backdrop change, given that it seems like everybody has been focused on that part of the business?

So, in wealth, I -- we’ve continued to grow. But you’re right, the marketplace is extremely competitive, which is why it’s so important that we stay focused on both the parts of the market where we think we compete most effectively and on providing for the clients in that segment. So where we’re seeing our strongest growth has been in the upper part of the market there. So think about clients with assets above $20 million and particularly during this time period, where equity values are going up, there’s obviously been an increase in wealth. So that drives growth. But then also with the change in administration and potential changes in taxes and things like that, it increases the need for planning. So a high level of activity, both with our existing clients, but also opportunities with prospects. I want to express my sincere appreciation for our employees whose commitment, expertise and professionalism throughout these extraordinary times continues to be exceptional.

Hey. Good morning.

Hi, Jim.

Maybe just a question on the Wealth Management business, it seems to be a quite a bit of disparity in the outcomes even though market appreciation whether it’s lag basis or month lag or full quarter lag was pretty similar. So is it just -- there’s a lot more fee waivers in the global family office? How do we think about that sort of difference?

Yeah. You hit it right. It’s -- there is a distinction in the lag in that business there. But that’s not what drove it frankly. It was -- it’s the waivers hit hard. And we’ve talked about the fact that people shouldn’t see waivers as linear. This is a good example. Where the waivers and that the GFO business, obviously, much more institutional and so...

Okay.

...the waivers hit later and we’re now starting to see it come in, whereas the regions have more traditional closer to but not retail pricing and so those waivers just hit earlier. Second dynamic though is GFO is spiking and we have clients there that will move billions of dollars. And so you can have one, two, three clients that if they’re all have significant movements, then you’ll -- you can see big movements on a sequential basis. If you look year-over-year, the organic growth -- the growth rate overall for GFO is actually slightly higher than the regions. But obviously the sequential look was impacted by those two things, one waivers and two, some spiky very large client movement.

Okay. And so the incremental hit to fee waivers, is that also going to be in 2Q more in global family office and maybe C&IS or how we think about the geography of that?

I think we’re -- I think from here, it’s somewhat -- it’s going to be more linear. I mean, that -- the funds are more -- they’re all there at this point in waiver mode. And so I don’t think we’re going to see as big of a disparity going forward, but people should just realize it’s not a linear relationship. And I think there was overall $20 billion to $23 billion in wealth and $9 billion of that was in -- $9 billion almost $10 billion was in GFO and so that’s a year-over-year look, that’s just aggregate effectively, but the one quarter look, it was $5 million in GFO alone and so big. That was the increase quarter over quarter.

Hey, Jeff.

Hey. Good morning, guys. To circle back a bit to the buyback, I mean, it’s good to see you guys out there buying $135 million in stock. Historically it feels like the actual buyback comes in kind of below what at least our estimated capacity is. So can you help kind of differentiate the buyback? The difference in your thinking between just being conservative versus the expectation that risk-weighted assets could actually continue ramping up like they did in the first quarter?

Yeah. It’s completely related and it comes back to that theme of wanting to think about returns. And so, for us it’s not like we’re making a decision of do we buy back stock or just park money at the Fed at 10 basis points. For us it’s -- but it’s nice to be able to see that client activity is driving the alternative to share buybacks. So that’s certainly not to say that we’re doing zero or very little, it’s just to say, those are the different options we think about. And we saw sec lending activity up significantly, just the loan demand being up $1 billion, that’s going to cause $1 billion in higher RWA, just in and of itself. And then you see the deposits coming in, which is -- it’s nice for us to be able to answer a client need, but that comes with RWA as we redeploy it on the asset side. And so the best thing we can do is have the balance sheet used for good return on equity activity that’s client related, building relationships in the long run. But at the same time, we did do $150 million-ish in share repurchase over the timeframe. So it’s not like we were absent in the market. But you can imagine here at 12% we’re going to be looking at what is OCI look like, what does client activity look like and balancing all those things together.

...with those two in the end.

Okay. Thanks for clarifying. That really helps to provide context around the rationale. So just to touch on kind of the fee growth, I guess, growth across the relative businesses. It seems like C&IS outgrowing Wealth Management really stopped pacing it for a while now. I mean, is that the right way that we should think about those two business trajectories going forward growth wise or is there a reason to think that kind of Wealth Management could start kind of catching up with C&IS. Couple of things, one, what -- every time over long periods of time, we think one of the businesses is growing faster than we think, oh, this is going to be the case for the future, you get an inflection. The businesses have acted as good hedges to each other and it’s always difficult to predict those inflection points and what’s going to grow faster. For sure, if you look over the last couple or few years, you’d see C&IS having grown faster. But in general wealth has good exposure to equity markets. And so -- and you also think over the long run, there’s a good title growth, particularly at the top end of the wealth market and so those things should help as well. And so we wouldn’t call a prediction necessarily on one of the businesses over the long run in the future growing faster.

And I would just add to Jason’s comments. That’s why we really like the combination of the three businesses. Not only is it complimentary from a client perspective, but also from a financial perspective, they have different dynamics. So the Asset Servicing business, which Pete Cherecwich has done a great job leading and growing at a high rate. It also requires resources to do that, as we’ve talked about that and has different levels of volatility in the business. Whereas in Wealth Management, very steady and at a high level of profitability and scalable. And then with Asset Management, again, very high level of operating leverage in the business and as has been positioned over the last couple years, for example, when you can get positioned in the right products, for example, in liquidity and the markets go up or the liquidity goes up, very strong increase in profitability for that and focus on other areas where we can have that same dynamic with ESG and quants. So, we like all the businesses, I would say from a client competitive perspective, but also from a financial perspective.

Good morning, guys. Question from me on organic growth, I think a year ago the prospects for organic growth were probably more uncertain and fast forward to today your comments have been really positive. Coming out of 2020, do you see any new or different sources of organic growth that can maybe increase the long-term sustainable rate you think you’re capable of achieving?

I will start and Mike I’m sure has some comments on this as well. Let’s take those -- let’s take the different businesses. In C&IS, the -- we had it even early today, the integrated trading solutions is something we’ve talked about a little bit over the last few months, that’s come through. That’s part of the reason I think there’s been that that lift in brokerage commission income, done strategic things in foreign exchange. And those aren’t -- so it’s not accidental I think that we’ve had lift in those areas. And then front office solutions is another area where we’re trying to go to client -- to sophisticated clients and show the breadth of what we can do. In Wealth Management, the engagement there is around expanding and continuing to invest in goals driven Wealth Management and the growth we’ve had particularly in the upper end, that product gets to -- we’ve talked so much about what $50 million, 100 million and hundreds of millions of dollar clients need in order to enter to interact in a good holistic way Thing were set up while there. And then in Asset Management, $215 billion, I remember about a year and a half ago, where we were on the liquidity perspective to now $275 million, and yeah, there’s been great growth, but -- in the industry. But they did a lot of hard things to get cut off times done well to get to open a Northern Trust portal. There’s so many different to invest in the talent we have in that group. And then you think about our ESG and quant capabilities, ESG assets are over $130 billion now, great engagement in across the Nordics with a very strong client base there and doing a lot with our ETF platform, including launching new products in Europe there. And so in each of these -- the areas, I think there’s good is good opportunity for us to leverage the work that’s been done to lead to stronger organic growth.

That’s great. Thank you.

Sure.

Hi. Thanks for taking my questions. I guess just a follow up on the integrated trading solutions. Can you explain that a little bit how it actually works? Are you -- is it an electronic thing or is it people that you’re providing, instead of your Asset Management clients having them and how does that work, if it’s five of your clients want to buy one particular stock? How are you separating all of that? Can you give a little more color on how this actually works?

Sure. At $25,000 fee, you can think about it is almost out -- trading, outsourcing, investment trading outsourcing. And where a lot of clients realize, a lot of our Asset Management clients realize that their core competencies around security selection and research, and not necessarily the having the trading operations, the back office that comes with that, trade order entry. And so our ability to say, you can work with us and we can be your effective outsourced trading partner, it appeals to a lot of Asset Management clients.

Okay. So they don’t have to have a trader anymore and/or you’re just providing the back office for trading?

No. It starts with trading. They can -- we can have portfolio managers and their middle office send us model accounts, send us trades and we can provide that service for them and be more of a full outsource operation from them from middle office through trade execution and trade management.

Hey. Good morning.

Hi, Jim.

My question is more about the Wealth Management business, it seems to be a quite a bit of disparity in the outcomes even though market appreciation whether it’s lag basis or month lag or full quarter lag was pretty similar. So is it just -- there’s a lot more fee waivers in the global family office? How do we think about that sort of difference?

Yeah. You hit it right. It’s -- there is a distinction in the lag in that business there. But that’s not what drove it frankly. It was -- it’s the waivers hit hard. And we’ve talked about the fact that people shouldn’t see waivers as linear. This is a good example.