Good day and welcome to the First Quarter 2022 Northern Trust Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mark Bette, Director of Investor Relations. Please go ahead, sir.

Thank you, Jennifer. Good morning, everyone and welcome to Northern Trust Corporation's first quarter 2022 earnings conference call. Joining me on our call this morning are Michael O’Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Briar Rose from our Investor Relations team. Our first quarter earnings press release and financial trends report are both available on our website at 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 26 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 24. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements on Page 11 of the accompanying presentation which will apply to our commentary on this call. During today's question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Michael Grady. Michael O’Grady: Thank you, Mark. Let me join in welcoming you to our first quarter 2022 earnings call. I hope you and your families are healthy and well. Like so many around the world, we at Northern Trust are deeply concerned by the tragic events unfolding in Ukraine. Our hearts go out to the Ukrainian people. Northern Trust has made contributions to humanitarian relief efforts and has match contributions from our employees to maximize their impact. While we have minimal direct exposure the…

Thank you, Mike. Let me join Mark and Mike in welcoming you to our first quarter 2022 earnings call. Let's dive into the financial results of the quarter, starting on Page 2. This morning, we reported first quarter net income of $389.3 million. Earnings per share were $1.77 and our return on average common equity was 14.2%. Results for the quarter included $18.5 million in reclassification of certain fees that were previously recorded in other operating income, or as a reduction to other operating expense that are now included in trust, investment and other servicing fees. Of that amount, $6.9 million relates to fees previously recorded in other operating income, with $3.5 million now included in Asset Servicing trust fees within the other category and $3.4 million in Wealth Management trust fees. Additionally, $11.6 million that was previously recorded as a reduction to other operating expense is now included in asset servicing investment management fees. Prior period adjustments have not been reclassified and these reclassifications resulted in no impact, pretax or net income. Let's move to Page three and review the financial highlights of the quarter. Year-over-year, revenue was up 9% and expenses increased 8%. Net income was up 4%. In the sequential comparison, both revenue and expenses were up 3%, while net income was down 4%. The provision for credit losses was $2 million in the current quarter. Return on average common equity was 14.2% for the quarter, up from 13.7% a year ago and down from 14.5% in the prior quarter. Let's look at the results in greater detail, starting with revenue on Page 4. Trust, Investment and Other Servicing fees, representing the largest component of our revenue, totaled $1.2 billion and were up 10% from last year and up 5% sequentially. Foreign exchange trading income was $81…

And our first question today comes from Betsy Graseck with Morgan Stanley.

Hi, good morning. I guess I wanted to just unpack a little bit the outlook that we should be thinking about with regard to the 2022 expenses? I know that you have talked in the past about pressures on the business from inflation, et cetera. But this quarter came in really nicely. And it seems like there was quite a bit of expense management going on. So I just wanted to get a sense of how you're thinking through that.

Yes. Let me start with the biggest volatility, maybe. And I think we should give some comments on the compensation line. And then if it's helpful to touch on one or two others, I can. So the biggest piece of the increase is obviously the Retirement Eligible Equity incentives which as you know, Betsy, hits in first quarter. That was just about $30 million last year but it was around $50 million this year. So that increase is driven by higher levels of grants, reflecting stronger relative 2021 performance but also the changes in retirement eligibility of staff actually receiving those grants. That's an important distinction. So if you take out that $50 million seasonal increase, that would imply that our comp run rate is flat from fourth quarter but there are some important puts and takes in there. So first, salaries were actually up $5 million to $10 million. And that's combination of some of the strategic hiring and the plan that we described to address the labor environment through some targeted off-cycle base pay adjustments. Secondly, that amount was offset by lower severance currency translation and some other small items that were favorable in this quarter. So if you look forward on the comp line, I'll make -- give you three nuggets. One is we know that annual base pay adjustments are going to be up $20 million that hits in the second quarter instead of a more typical run rate for us which is about half that level. Two, we're still going to be doing some projected hiring and some other adjustments and that could cause an incremental $5 million to $10 million lift next quarter. And then lastly, just a reminder that as pretax income changes, our underlying incentive levels are impacted. And that's important to keep in mind, just because of the potential increase in rates and that could have a meaningful impact on pretax to drive that line. So hopefully, that's helpful on the comp line which I think had the biggest volatility.

Got it. Okay. No, that's great. And then just a follow-up question on how we should be thinking about buybacks for the rest of the year. We've got some market volatility obviously impacting AOCI. Just thinking about whether or not as you're planning through the rest of this year, does AOCI matter? You obviously have still a very strong CET1 and TCE to TA, so maybe the answer is no. But given the back up in rates already Q-to-date, it looks like we're going to have another slug of this AOCI hit in 2Q. So how should we think through those dynamics?

You're exactly right. And even -- we're 25 days or whatever into the quarter and we're already close to -- we're $350 million plus in the impact to AOCI for second quarter. And so we've got it -- we obviously have to keep line of sight on that. Now that said, you're also right. We -- first of all, we absorbed the AOCI hit in first quarter pretty well. CET1 capital was down just about 6%. The CET1 ratio stayed well into the 11s, it's 11.4% and so we absorbed it well. But you know that we're going to keep an eye on what we look like relative to peers in terms of capital and what happens with AOCI. It's a big lever. And the quickest thing we can do to address that is making sure that we're prudent about how we think about buybacks and that's one of the big pillars we look at as we think about capital actions.

Okay. And just to make sure, when you said you were $350 million plus, are you saying that if you had to close the books today, your AOCI hit would be $350 million more than it was last quarter, is that what you mean? Or it's less than?

I'm sorry. Thanks for clarifying. Another 350 -- and it's actually like $367 million hit to capital. Just you've seen obviously -- yes, incremental and what the yield services -- that's right. That's what -- based on what the yield curve has done just so far this year, and that's as of last Friday for what it's worth.

Got it. Okay, thank you.

Sure. Thanks, Betsy.

And our next question comes from Alex Blostein with Goldman Sachs.

Good morning, Jason. Hey, Mike. So obviously, lots of discussions around the trajectory of balance sheet in this rapidly changing market backdrop with interest rates picking up in QT. Relative to last cycle, it looks like Northern's balance sheet has increased materially more than it did in the last cycle. And in the last cycle, deposits overall have actually hung in relatively well compared to the rest of the industry. So maybe help us think through the latest thinking on both the mix of interest-bearing to noninterest-bearing deposits and kind of how that's going to evolve to your best, kind of, crystal ball capabilities? And then ultimately, the overall size of the balance sheet, how you expect that to evolve with QT?

Well, on mix of the deposits and interest-bearing, noninterest bearing. I think what's -- I think the more important factor there is do we hold on to the operational deposits in the Wealth space. That's a big driver of value overall, the way we think about it. And -- and so far, we have not seen cash -- we haven't seen deposits moving off the balance sheet. However, have to anticipate that, that's going to come at some point given Fed actions and also just a rising yield curve where clients think about what their options are laddering out, taking some duration. And so that's super important for us. We're going to -- we want to maintain those high-quality deposits. There's another group that's more on the Asset Servicing or Institutional side. Even within there, there's some very high-quality core deposits but some of the more sophisticated clients will move those dollars around. And so that's just unpredictable. What we have seen so far that has created more movement that's been meaningful is out of the money market funds. And already, we've seen -- and you can track this on our website and in the industry. You've already seen clients in general in the industry moving out of money funds. And whether they're moving into ultrashort or other a little bit longer duration product, or whether they're moving into more risk assets is difficult to tell. Then on -- so that's a little bit on mix. On size, if you go back precrisis, the balance sheet, the deposit level was like 80 -- $85 billion and you look where it is on average now, much, much higher. And so I think we will -- we have to predict it's going to come down some but things are just different at this point and we anticipate that the balance sheet is going to hold in at closer to these levels and not give up dramatically what we saw precrisis.

Got it. That's helpful. And then I guess, following up along the same lines, kind of reading between the lines, your comments around wanting to hold on to some of these core deposits. Any thoughts around deposit betas and maybe how they may be similar or different versus what we saw in the last cycle?

Yes. For us, compared to last cycle when everyone was anticipating a move at a time and no one could really predict are we going to end it at 1% or 1.5%, every move seemed like you wanted to make sure you're handling betas the right way because it might be the last move. In this instance, we know that we're going to get rates moving a lot. And so I think that's something to think about differently strategically. We want to make sure -- again, we hold on to deposits with our good clients, particularly knowing that it's going to take a while before the Fed is done with these actions. And so already -- and you saw we had very good results in terms of raising net interest margin even given the fact that the Fed didn't move until very late in the quarter. That said, our bias is going to be hold on to client activity and hold on to client assets, particularly given the fact we think it's going to take a long time before things level out and the yield curve has reflected all the Fed actions that they're contemplating.

Great, thanks.

Thanks, Alex.

And our next question will come from Kenneth Usdin with Jefferies.

Good morning, guys. So follow-up on the NII discussion. Last quarter, you gave us a rule of thumb on how much each hike would give you both in terms of a gross basis and then how the deposit costs would act. I was just wondering if you might be able to update us just given that so much has changed, if that's still a net $35 million for each $25 million. And -- just any general thoughts on how you'd expect NII to traject from here, given Alex's points and just the magnitude of hikes that are now expected.

Sure. Well, let me answer your question directly and then I'll give you some broader thoughts that you asked for. So first of all, the $35 million, we did say that was the first hike. And on a run rate basis that played through well. The good news is that even with that, that contemplated just the short end, the very short end of the curve moving up. But the overall yield curve has moved up. It's not as helpful but you'll get more lift as we get more -- as we get benefit from reinvestment. So let me use that as a transition to your other question, because you're right, NII is certainly on a sharp trajectory. So the eventual outcome is likely very dependent on the pace of change and again, what the shape of the yield curve looks like. So instead of giving an overall rule of thumb, let me give you some of the key sensitivities so you can sharpen your estimates as the key factors develop. So three big buckets on earning assets. One, on cash, the key item to remember is only 60% of those assets are in the U.S. dollars. Sometimes people forget that and I think that's important to remember. Two, securities portfolio. A higher percentage are in U.S. dollars but only 30% resets in 90 days or less. So just over $1 billion of the long-term securities are getting reinvested per quarter. We're currently experiencing about 85 basis points of reinvestment benefit on that reinvestment tranche. That translates to just over a couple of million dollars in lift quarterly for the long-term portfolio. And then third, loans, virtually all of that is USD and about 3/4 is tied to short-term floating rate indices. And so I gave you some comments on the liability side but that breaks down earning assets in the three categories. And so hopefully, that's helpful in thinking through the math as different things happen across the yield curve.

Yes, very much so. And just a follow-up in terms of asset mix and growth, just on the prior questions about capital. The period end loans and securities are both down. Is that just a function of the deposits? Or is the change in capital causing you to change anything in regards to where you want to see asset growth or securities portfolio duration, et cetera?

No, the headline is no change in philosophy. And the way the balance sheet works from -- once the deposits come in and size the balance sheet, the first determination is where do we need to hold cash across different central banks for various activities. And then the second is, what is loan demand? And the third is, therefore, what do we do with the securities portfolio? And so the loan demand is what really drives effectively in this environment the size of the securities portfolio. You did see in this quarter what looks like a bigger move between cash and the securities portfolio. But it's not -- that's not strategic. Some of the investments we make are more -- just classified, it's more of the classification in that three category bucket between cash and securities but there's nothing happening strategically there.

Okay. Thanks a lot.

Sure.

And our next question comes from Brennan Hawken with UBS.

Good morning. This is Adam Beatty in for Brennan. Just wanted to draw in a little bit, basically following on the discussion that we were just having around Central Bank deposits and kind of a need across different geographies to have those in place. And kind of what's been driving that? And then what's the outlook, particularly on the non-U.S. front in terms of potential interest rate increases.

Sure. It's driven by, well, largely just the activity and predominantly the Asset Servicing business. And so as we bring in deposits that are non-USD denominated, we need to keep cash and liquidity on hand for matching purposes and then we might even have agreements with different central banks to make sure that we've got funds on deposit in those institutions. And so the headline is it's driven vastly by the mix of international business on the Asset Servicing side.

Does that change ?

No, it does not have significant changes over time.

Yes, great. And then if I could, I'd just like to drill into the loans and particularly the yield on the loans. You kind of alluded to the rates supporting that. I was wondering if there was any change in the mix of the loan book that also contributed to the increased yield.

No nothing of note. I mean you have seen over time some of the -- more of the residential portfolio coming down. But -- but overall, mix is relatively stable over time. Nothing that would have a meaningful impact on the net yield of the loan portfolio.

Got it. Thank you. Appreciate it.

Sure.

And our next question comes from Gerard Cassidy with RBC.

Good morning, Gerard.

Hi Jason, can you give us kind of a rule of thumb? Obviously, your assets under management and custody are skewed to equities. And can you share with us, is it primarily domestic U.S. equities that is comprised in that number? And second, -- is there any a 10% increase or decrease in equity values leads to X percent, or X percent decrease or increase in revenues in Asset Servicing?

Sure. Mark, do you want to -- you want to take that?

Gerard, it's Mark. So when you're looking at the investment management fees themselves, it's probably a pretty good balance between both. We look at EFA Local and S&P 500 just as guidelines. EFA local, just because that removes the currency mix out of it. When we do look at the equity market sensitivity, just based on the asset allocation, a little bit more than 1/3 of the Asset Servicing investment management fees are equity-market sensitive. And those are -- those do happen both on a quarter lag as well as a month lag. And then if you move up to the Asset Servicing custody and fund administration category of fees, we said before about 40% of those fees are not asset sensitive. They're based on transaction volumes or fixed fees or fund level fees. The remaining 60% though, there is equity sensitivity there. That too is quarter lag and month lag. If you looked at that line overall, the custody and fund administration line, I think, $453 million in fees, about 27% of that would be equity sensitive just based on how the current allocations are.

Very good. Thank you for those insights. And then just as a follow-up question. Obviously, with the short-term interest rates moving higher, your money market mutual fund fee waivers will eventually go away. Should they -- and if the Fed raises rates in May by 50 basis points, will they be eliminated by the end of the second quarter? Or what's the schedule there?

Ironically, we should split the waivers into two categories at this point. One is what are waivers that came as a result of interest rates forcing yields below stated fees. That first hike in mid-March eliminated -- it absolutely eliminated those fees, the waivers. Conversely, the business has decided to keep some waivers in place on -- some fee waivers in place for strategic reasons. And that's adding up -- they won't do that perpetually. But at least for the time being, they think that, that's important strategically. Again, in the spirit of keep client assets and make sure that we're attractive relative to our peers that currently is on a run rate of $10 million to $15 million a quarter. And that will persist but again, not perpetually.

Very good. Thank you.

Sure.

And we'll hear next from James Mitchell with Seaport Global.

Hey, good morning. Can you just maybe give us a sense of where you are duration-wise in the securities portfolio as well as the balance sheet overall? Did it change at all? Did it shorten up? Or just where we are on that front..

Sure. So right now, we're at about 2.7 . And we were -- I'd say, at the upper end of a range that we feel comfortable in. And -- so if there's any bias, it might be a little bit down. But again, we're -- the team looks very opportunistically at what's available in the marketplace and where we see good value. But right now, ticked up to about 2.7 , just under that. And then overall, the balance sheet is -- the overall asset duration is .

Right. Okay, that's helpful. And just maybe a follow-up on the custody and fund administration fees. How much on a quarter-over-quarter basis was the FX impact versus the volume impact? Because as you noted, you got a little bit of lift from the markets. Just trying to get a sense of those two other impacts in the magnitude.

And you're looking on a sequential basis?

Yes, sequentially.

Currency was not a lot. It was a drag of, call it, a little under 0.5 point. Right. And as you saw the transaction activity, that's where there was more of a drag than from the currencies on a sequential basis, Jim.

And is that just seasonal? Or do you think that, that persists? I mean obviously, a year ago was pretty active.

Yes, we actually have seen sequentially for a few quarters now, the transaction type of fees kind of declining. So it's actually been something that we've seen for the last three quarters, I believe. So it's hard to say if that persists or not, we'll have to see. Certainly, there's been some pickup in at least what you would think is market activity in the last month or so. So we'll have to see how that plays out right through.

Okay, great. Thanks for taking my questions.

And our next question comes from Mike Mayo with Wells Fargo Securities.

Hey, good morning. If you could talk more about this internal restructuring that formed the new Asset Servicing segment. I assume that to increase wallet share and market share with your institutional clients, if you could verify that. And also, just by ZIP code, if you don't have the exact number, what kind of share do you have with these institutional clients now and this restructuring will kind of get you to what kind of targeted market share or something in the ballpark. Do you have 2% share, looking to 4% or 5% going to 10%? And if my premise is correct, as to why you restructured. Michael O’Grady: So Mike, it's Mike. The primary reason for integrating those two parts of our company are to be more aligned with the clients and being able to provide better service for them. So we really are trying to integrate everything from the front aspect of our business, the client servicing part of it through operations. And just the scale of our Asset Servicing business now is such that it made sense to integrate those parts of the business. So that's the overall aspect of it, or I should say, objective is better client service. I think that there are added benefits to it as well certainly from an efficiency perspective being more aligned. And then to your point, if we are effective in doing that, should it increase our wallet share? Absolutely over time. But I would think about wallet share a little bit differently in the sense that, that can vary based on the type of client that we have. So just a little bit of context there. If you think about asset-owner clients, maybe start with the corporation that has a defined benefit plan and the defined contribution plan.…

And benefit efficiency savings or not? Or is it really about just the customer ? Michael O’Grady: Definitely about the customer. First, my belief, Mike, is that we will get efficiencies over time. But just to be clear, when we put these together and you can see in our results here, it did not involve a reduction in force or a charge or anything like that. And that's because we're looking at it to make the business stronger and provide better service, not to try to cut parts of the operations out.

Thank you.

And our next question comes from Rob Wildhack with Autonomous Research.

Good morning, guys. Wondering if you could stick with fee revenues a little bit more and just talk about the organic growth trends both in the quarter and as you see for the rest of the year in Asset Servicing and in Wealth?

Sure. Let's start on Asset Servicing. And first of all, even though you saw the not as strong of a lift relative to prior periods, we did have positive new business in the period. And if I kind of do a further double-click into what we talked about earlier, new business was slightly positive. I'm just talking sequentially, market impact was a little bit of a lift. And then to Mark Bette's point, transaction volumes, that was a big drag. As we look forward, we do see good funded business and the pipeline there is strong. And so it's above average for the business. And so the near term looks positive. And then you look a little bit further out, it's not as clear but the activity seems fine there as well. If I switch down to Wealth Management, you'll see that the GFO business really stood out. And I'll unpack that a little bit, if it's helpful. We saw just again sequentially a meaningful increase there of about $10 million or $11 million. $5 million of that was from waivers but another $5 million of that increase came from higher average balances in -- particularly in the money market mutual fund space. And the reason that I call out the money market mutual fund space is that's another area we're coming -- at the end of the year, balances were quite high. And because they're in funds and those are daily charged fees, we got a benefit of those funds sticking around the first couple of months of the quarter. But as we look into second quarter, the launch point is a little bit lower, just a couple of million dollars but it's just something that's noteworthy. But overall, you do see the family office business is doing well and it's just underlying good client activity -- or some of our strongest, largest clients choosing to do more with us. And then if you look at the regions, a similar story overall, just not as large in terms of movements but positive from a net new business and flows perspective. Waivers helped there a little bit and markets helped and then the accounting change shows up a little bit as well. And part of what you're seeing there and the region is not doing well, day count had an impact in the regions of a few million dollars, so they had to offset that coming from fourth to first quarter. But again strong particularly in the family office business.

Okay. And maybe just to follow up on that. I think there's been some commentary and maybe an uptick in competitive intensity in the ultra-high net worth space. So maybe you could comment just broadly on the competitive intensity you're seeing in Wealth generally but especially in that ultra-high net worth or GFO-type segment.

Mike, do you want to start? Michael O’Grady: Sure, so you're absolutely right. I mean it's a high level of competition. But that's -- we look to differentiate ourselves from. And as you heard in some of my opening comments there, we really try to differentiate based on the advice that we provide the expertise that we have and then certainly the services and the performance that go around that. And candidly, the numbers are demonstrating that, that does make a difference. If I step back a little bit and just look at the environment we've been in for the last couple of years, it's been a strong environment, a healthy environment for wealth creation and particularly for that segment of the market. So it's a time period where you've seen a high level of sales of family businesses, given the demand for that, the high valuations, concerns over changes in tax law. So high level of activity. And then I think we're well positioned for that. Not only do we have relationships with families over time but also we have very strong relationships with what we consider centers of influence. So think about it, attorneys and bankers, investment bankers that work with these families that we've been working with for long periods of time as well. And a good portion of our new business comes from those relationships as well. So it's been a good environment. We think we provide a differentiated proposition to those clients and prospects. And it's a competitive environment but one that, again, we think that would stand out favorably.

That’s really helpful. Thank you, both.

Sure.

And our next question comes from Vivek Juneja with JPMorgan.

Hi, thanks for taking my questions. A couple. Firstly, what's your expectation for deposit betas on operational versus nonoperational deposits as you look out over the first 100 basis points and then the next 100 basis points, given that we may have lot more rate hike system? So if you can parse that into the operational versus nonoperational.

I don't know if we want to try and cut it that finally. And as you can imagine, there are some clients where a portion of the deposits are crossover categories and -- so I think for us, it's just looking at what does the market give us. And we're not a price maker in the deposit side. And this is very much working with clients and thinking about the relationship holistically. There are, oftentimes, with large holistic relationships where thinking about deposit pricing can be something that's part of the overall narrative in pricing around the relationship. And so difficult to make high-level comments about what our expectations are there.

Okay, different topic. You gave outlook for comp expenses. Any update on the non-expense lines, Jason?

On the non-comp expense lines, do you mean, Vivek?

That's right. That's right, Jason.

Yes. I can give a couple of comments on -- I think, the big ones, equipment, software and outside services. So on outside services, that came in lower than it was in fourth quarter. And big drivers there, consulting and legal but a lot of the consulting costs were lower. And some of those matters matured more quickly but we may still get back to that fourth quarter run rate but more like the end of the year. It's hard to say at this point. But we have been able to get some of those more consulting-related projects down. And then, also technology services costs were down despite the fact that market data costs were up, because of good business activity. So I think that's notable. And then on equipment and software, that's relatively flat from fourth quarter. And so if we look at that sequential period, no significant headlines. It's more driven by the timing of some of our anticipated spending. However, I will say that over the remainder of the year, we can see depreciation coming in and that's going to start to hit. And we can see that from what's now already in the pipeline. And that could accelerate and it could be another $5 million a quarter starting in second quarter for the remainder of the year.

All right. Thank you.

Sure.

And our next question comes from Dean with Evercore ISI.

Hey guys, this is Dean on for Glenn. Just had a quick question around T+1. It looks like the SEC is looking to implement T+1 by the end of next year. So wondering if we could just get your thoughts on why this move might be harder versus prior settlement reductions? Any estimates around how much time and money it will cost you guys to get there? And then I guess, just broadly the positives and the negatives of shortening the settlement cycle. Michael O’Grady: Sure. A relatively technical question there and we can follow up, I'll say, with the experts on some aspects of it. But what I would say is we've been moving and I think the industry as well for some time period to shorter and shorter settlement times. And that has -- actually, I think, been very beneficial to the industry to our clients. And I view this as a continuation of that. Now where it ultimately ends as far as settlement, I don't know exactly. And as you know, that it cuts across different markets and different types of securities. But from a client service perspective and what we offer, we've tried for some time period to be able to provide real-time information. So even if the settlement may occur at T+1 or T+2, we have the ability to do it on a settlement basis but then also the ability to do it on a real-time basis in some circumstances or at least a T+0 basis. And so that's been the movement for some time period. You're right, it absolutely requires investment in technology, changes in processes and controls to be able to do that. But the direction of traffic has been that way for some time period and we think that will continue.

Got it. That’s all for me.

Thank you.

That does conclude our question-and-answer session and concludes today's call. Thank you for your participation. You may now disconnect.