Northern Trust Stock

Great. For those that weren't in the morning session -- the breakfast session, I'm Jason Goldberg. I cover the U.S. large-cap bank stocks here at Barclays. Thank you for coming for our 24th Annual Global Financial Services Conference. We've got a very strong lineup of banks basically running all day in this room and very pleased to kick it off with Northern Trust. We have both Dave Fox, Chief Financial Officer; and Jason Tyler, President of Wealth Management. Gentlemen, thanks for making the trip.

Thanks, Jason. All right. So I also heard record number of people at this conference, 24th year. Congratulations. That's a big deal.

Thank you. It is. Thank you, I appreciate that.

It's going exactly 2 years actually at this conference when Northern announced a leadership realignment with Dave succeeding Jason as CFO and Jason becoming President of Wealth Management, which includes Global Family Office business that Dave previously led. So maybe just looking back, what do each of you view as the most meaningful change in Northern Trust trajectory since then? How has this cross-pollination influenced the firm, how the firm allocates capital, evaluates opportunities? And perhaps can you just discuss the One Northern Trust strategy from both a corporate financial perspective and a business unit growth perspective.

Before we dig in, I'll let Dave should kick off and do the corporate side. I'll just say it was really funny. 2 years ago, we were here, and we did meetings all day, and we had the press release lined up to be distributed as we came off stage. And the timing was really funny because if we had started this right after the market closed, then I think it was 20 minutes. We could have -- we actually were thinking about announcing it so that we could talk about it on stage. But I promise, at least to my knowledge, there is no press release about org change teed up for this afternoon.

Yes. No, I mean, I think from the corporate end, the idea behind One Northern was really to take a lot of the concepts we developed for Global Family Office, which sort of, sits at the center of the Venn diagram of all our businesses and take that, sort of, DNA and knowledge and push it out so that a lot of our clients could benefit from the same kind of synergy across all the businesses.

And ironically, Jason and I actually put together a large part of that when he was running distribution within asset management. So it's been a really iterative process, but I think it's been great for the firm overall. So I think that's one of the biggest changes.

The second big change really has been how we allocate capital and how we look at productivity and expense. And I think all credit to the entire management team at Northern for, kind of, getting on board with this, but it's really a focus of figuring out productivity first. And once you've got that, sort of, bucket nailed down, then you can inform how much you can invest in a given year, and then that will inform how much expense growth you're going to get. And so a lot of that discipline has been driven over the last couple of years, which is why I think you've seen that we've been pretty good at keeping our expenses, sort of, where we want them to be.

And then we won't both answer every question, but since you asked specifically on this one, I think people have heard us talk about One Northern. And so we're at least trying to illustrate for investors, what does that really mean practically for the business. And so a few things. One is, I think, even as you think about our alternatives business, our clients were telling us they wanted to be doing more in alternatives. And we had capabilities there, but they wanted us to accelerate. We didn't have to go to the market and establish new partnerships. Our internal proprietary 50 South business is one of the industry leaders in alts, largely in fund of funds, but also very strong in doing alternatives advisory for the very upper end of our client base, including GFO business, which Dave ran for 9 years.

And so that's a good example of how we've come together. And we've had really successful launches coming out of that with their partnerships with managers being able to leverage the fact that they've got such a strong captive client base internally. And so that's been really helpful. And then even in marketing. And so we work really hard on the upper end of the market, but we do a lot of digital marketing as well.

There are a lot of people that are selling their business and they're thinking about what to do once that liquidity takes place. They may not know a list of 2 or 3 or 4 firms or who's the best and so been working internally with our marketing team to aggressively go after that space.

So people are able to find us when they're doing research, and it's changed a lot. It's not just doing URL searches anymore. Now LLMs are so much more important. And so that's been a key component of what we've been doing. And then even in our other corporate groups, HR, we've been ramping up very aggressively how we're thinking about recruiting and even retaining talent.

I guess maybe a follow-up, Jason, right, you're 2 years into this new role. Maybe just talk about your confidence to continue to grow this business.

Yes. So maybe I'll answer that in one way more qualitatively and then in another more quantitatively. Qualitatively, what's jumped out at me in the last 2 years is that both clients and -- clients and also potential partners, they want to be part of Northern Trust. And so last week, I was on the phone with a client, very sophisticated, very large client who runs a financial services company. I called them to give them a really small update on something that he and I have been talking about. What I thought was going to be a 30-second conversation. He said, "Look, while I have you, I want to run something by you." He's been thinking about changing the dynamics of the business to bring somebody else in. It turns into a 40-minute conversation and me introducing him to a couple of subject matter experts in the company.

He calls me 2 days later and says, this is the expertise that I want and also the discretion that I want to have. And I didn't want to tell this to investment banks, but because I know they'd be following up aggressively to try and get me to do a transaction, this is exactly what I was looking for. And I have those conversations a lot. It's been really pleasantly -- I shouldn't say surprising, but it's just every week, I have something like that, that gives me appreciation for the strength of the brand.

And then even from a talent perspective, I spend a lot of time talking to people that are thinking about coming to Northern. And I was talking to 2 people last week, and they're saying we thought about a lot of places that we want to work together, but we both came to the conclusion that there's one firm in the industry that we want to work for, and it's Northern. And so that's just -- when you're not competing against 10 firms, but you're competing against 2 or 1 or in some instances, 0, that's -- I just think that's really powerful.

And then secondly, if I think about it more quantitatively, some of the things that we do that have given me more confidence. One is FOS, which Jason, I know you're going to want to talk about more, but it has been -- it is a real differentiator for us in the market. And that gives -- the acceleration of that and how we're utilizing it and the way we're training, it just gives me really strong optimism about what we're going to be able to do.

And then even from a training perspective. And then secondly, just the partnership. I mean, Dave -- it's one of the advantages of having somebody like Dave in the CFO role. He's run businesses and everybody on our management team is committed to growing wealth. And so I think we're at the point now where we've worked on the strategy. We feel like we've aligned around a handful of really important initiatives, early results from some of those and now is the time for us to be investing much more aggressively in them.

I guess at the start of the year, Mike highlighted 4 growth priorities for Wealth Management. And maybe just quickly, run through each. And the first one you touched on, leveraging leading capabilities in the upper tier wealth market. And you have this new FOS initiative. If those not familiar with it, it's Family Office Solutions, which basically extends what you're doing at the ultra, ultra-high net worth gamut here. Just maybe talk through how you're scaling this model and the opportunity you see.

Yes. And thanks for doing an accurate short depiction of it. I'll double-click just a little bit because I should have explained it more. So at the upper, upper end of the market, a lot of times the family say, okay, I'm ready to have a family office. I don't want to do bill pay. I need to do sleeve accounting. I have to have investment reporting that's more customized. I need to think about security for my family. I need to think about how we're investing in alternatives. And so I have to have a family office to do all those things. Well, we -- that's our -- that's basically the core of what our business is in the Family Office business is capturing those assets, but helping clients do all those things. And we realize we can take that and we can help others that don't want a family office still get those services.

And so a lot of times, families will say, well, I don't want to do all of those things. I don't want to have another 10 employees, but I want to save time in my life and be more accurate with how I'm doing those things. And so FOS is all about taking that breadth of services and being able to allocate it to clients. And so it's effectively a -- it's an outsourced family office. It's a multifamily office. That's the way you should think about it.

Our clients then say, well, some say, yes, I do have a family office, it's Northern Trust, or some say, I don't have a family office, but I outsource all the services I want to Northern Trust. Either way, it's the same thing. They're selecting among the 50, 60 services that a family office will traditionally do, and they're saying, we're going to have Northern do that for us and it's been very successful. We've started at the very top end of our client base, frankly, clients that have $100 million, $200 million, $500 million to a client. I'm very close to that's got $700 million in assets, and he says, I absolutely don't want a family office.

Well, this service is perfect for somebody like that. And so we've been taking it and also a key component of it is we're training the advisers that are in that group on all of those different 50, 60 services and on everything that's happening in the market. And so they're able to go to their clients and act not as a subject matter expert for investing or banking or trust and fiduciary, but they're able to effectively be a CEO of multiple family offices using all the services that Northern has to bear. And it's -- when we're bringing that approach to clients, prospects, we're winning at an incredibly high rate in pitches. And it's gotten to the point where now we're converting a lot of our existing clients into that. And so the big thing, Jason, at this point is how do we scale it fast enough and make sure we maintain the quality of the training, the quality of the advisers. But at the same time, the need there is obviously very, very heavy.

Got it. And then the second priority was investing in high-performing talent and last year unified the sales across Global Family Office and the regional markets. It also like you stepped up hiring, kind of, reading about more hiring last month in New York were a couple. So maybe just talk to what's changed there, the competitive dynamic and kind of what differentiates Northern?

Yes. It's -- it's a talent battle. I don't want to use the word war because it's not fair to service members, but the battle is just brutal. I mean -- and everybody wants to hire somebody from Northern Trust. I feel like it's a nice story to tell inside any organization to say that you hired somebody. So we have to play defense really well. And at the same time, we also -- we've got to play offense. We can't win by keeping our retention or turnover very low and recruiting just a little bit above that. We've got to be able to win by also aggressively hiring, again, highest quality talent in the marketplace. And so one of the things we did to help illustrate our strategy for organic growth was to separate our initiatives to categorize them into 3 different buckets.

The first is retain. We've got to retain clients. And frankly, we don't have a retention problem. But the first thing is you know our culture well enough to know we've got to maintain our clients. It's got to be primary focused. Two is we've got to acquire. We've got acquiring clients at a higher -- so many of our initiatives are around finding clients at the high level.

And then the third is expanding what we're doing with those clients. That comes to things like alternatives. It comes to things like what we're doing in FOS for our existing client base. And you can take that same framework of retain, acquire, expand and you can do the same thing with partners and with talent. And that's what we've done. We've taken our -- we've said we want to have aggressive initiatives in how we retain talent, how we acquire it and what we're doing to develop it.

And so in each one of those effectively 6 categories, clients, partners, retain, acquire, expand, there's a list of initiatives. And in talent, some of the big ones from an acquisition perspective, we're being much more aggressive initiating conversations with folks externally that you mentioned. Historically, we haven't looked to go get teams of individuals to come to Northern.

We said it's probably just not going to -- it's probably not -- it's riskier from a culture perspective. But we feel like we're at a point now, our culture is strong enough. We can do that. We can bring on small groups of people and certainly individuals. And we also created a new role because we realized a lot of the market is contained of individuals that they want to stay close to their clients. And we frankly did not have a role where somebody could come to Northern and be part of our overall infrastructure, our company, our culture and hang on to those clients.

We would tend to say, if you bring them in, that's great, but we're going to transition them to a team. We've created this role of a director role. There's a level in FOS and a level in the rest of private wealth. And so you tell there's a lot of different initiatives across those 6 different categories, all geared toward helping the wealth business grow faster.

And I guess the third priority was expand the investment solutions suite. You touched on alternatives. Obviously, a big focus across the industry. Maybe just describe some of the products and distribution enhancements you made, just how you're competing in that space.

Yes. So I mean, channels is important. And frankly, it's where we don't have as many client acquisition channels as our peers. We do not have an investment bank. We do not have a mortgage company. We don't have employee benefits management. We don't have a commercial bank. There are so many different channels that our peers are now. And you hear them in their earnings calls talking about how they're successfully moving clients there. So we do have -- we've got the ability, again, to be very good from a digital perspective.

But to match our brand, it really comes down to what the industry refers to as centers of influence. These are -- for us, they're trust and estate attorneys. They're the very highest quality tax consultants. And as they're dealing with their clients, even if they're going through a liquidity -- if their client is going through a liquidity event, we often get a phone call late in the process saying, our clients being pitched by this other group, but we've told them they should really meet with you. And so we're focusing a lot on that effort around those centers of influence. We should be best at that.

Given our model, we should be better than everyone else in the industry. So -- and we can't just hope. We hired someone to run that effort who's former CEO of a company that operates in the upper-end wealth space and she's built that -- she's building out a team. She's building out an effort.

We're having a large conference in Chicago for our top COIs, not in 2028, it's tomorrow, and it's Wednesday. These are the things -- so we're going much faster, much more aggressively on things like this to make sure that those COIs realize that we appreciate what they're doing. We want to make sure that we're also, in turn, giving back to them. And so we're not going to have 15 channels, but the handful that we do have, we're going to be very aggressive about it. And even events, that's a way for clients are a channel for us to get new clients. That's where one of our biggest referral networks is our clients. And so we've got to treat them and show our appreciation of them and what they're doing. We've had very high-quality new events all over the country in the last 2 years. And we're investing in those from a quality perspective and bring clients together so they can hear about what's happening in the industry and also feel the appreciation that we have for them and what they're doing.

Got it. I guess as we approach the halfway point, Dave, we are going to get you involved in some of the financial stuff. Maybe start with deposits, obviously, have a lot of attention lately. For Northern in both 1Q and 2Q, you talked about higher-than-expected institutional deposits. I know 3Q has been historically seasonally the weakest quarter. Just maybe against that backdrop, how is the current quarter shaping up in terms of balance mix, cost?

Yes. So it's interesting. We do these conferences and we reported earnings not that long ago. So not that much has really changed in terms of the outlook. and S&P has barely moved. And the outlook has, kind of, tracked exactly where we thought it would track. And our jumping off point was artificially high at $128 million, I think $1 billion was the average. And so we expect a seasonal downturn during this quarter, and that's tracked exactly the way we thought it would track, and we'll see how it bounces back towards the remainder of the year. But I would just say that it's generally in line with what I thought it was going to do.

Got it. And that's balances, I guess anything in terms of mix or cost or anything you'd flag? I know the rates are going to change maybe tomorrow, maybe...

Yes. And that certainly wouldn't affect us the next quarter as much as it depends when and how much, right? So if you think about our -- the rate environment and the rule of thumb for us is every 25 basis point increase in the U.S. translates into about $3 million to $4 million a quarter of NII benefit for us. So think of it that way, if it's 25 basis points of all currencies, it's more like $5 million to $6 million. So think about it that way, but it needs to be in place, right? So it isn't in place yet. So we haven't felt any of that.

Got it. I guess on NII, you increased your net interest income outlook to 9% to 10% year-over-year in the July call. It was mid-single digits prior. And that outlook assumes a relatively stable interest rate environment. I guess you talked about, kind of, what current rate moves will be. But I guess as you think about the trajectory into next year, maybe talk to some of the puts and takes around NII.

Yes. Well, we obviously did the securities repositioning, which will obviously have an impact, and you guys can do the math around that. We still have a fair amount of repricing to do on our back book. So that's going to come out again. We have lapped some of our deposit pricing, although we still continue to be very disciplined around that. And then the deposits tend to grow with the business, right? And we're not seeing any pressure on institutional deposits, and we're getting a lot of questions around as rates go up, is that going to change, et cetera.

A lot of our clients are very sticky operational deposits. And so from that perspective, when we have these, sort of, jumps in a given quarter, that's usually episodic. It's one particular large institutional client putting money with us. So we think that's going to continue to be the case in the sense that our clients are going to need to have those operational deposits there and our business pipeline is good. So I think the year-over-year comparisons get tougher as you get into next year because we had such an amazing first half of this year. But ultimately, there should still be growth in the portfolio on NII. Just at this point, it's really difficult to say -- the extent to which it will be there.

So you still feel good about up to 9% to 10% this year and then additional growth into '27?

Yes. Yes.

For sure. I know you guys don't manage the net interest margin, but I do get asked about it all the time. Yours kind of been bouncing around like up 11 basis points in the fourth quarter last year, then down 6 in the first quarter, and up 9 in the second quarter. Maybe just talk to how we should think about it from here, particularly in the context of an ever-changing forward curve.

Yes. Well, there was a -- it went down in that quarter because we had an extremely large institutional deposit that was very aggressively priced. And I say large, I mean large. And so we had another one come in, too. But I think generally speaking, somewhere between the 2 quarters would probably be the way to think about it. So I think we've gotten close to a normalized level. But 175 to 180 kind of range, depending again on NIB, right? That's, sort of, the big swing factor as well, and that popped up a bit. So -- but generally speaking, it's those idiosyncratic large deposits from the institutional side that come for like 2, 3 weeks that you can't really budget for, they definitely impact the NIM during that period of time.

I guess maybe looking out against the backdrop of the Fed potentially tightening, just how do you think about deposit betas? I think a lot of the institutional even wealth stuff is indexed. But just is it -- should it be similar to what we saw on the down cycle? And just how are you thinking about that?

Higher rates are good, generally speaking. And then I think if you do a blended beta for us, it's going to be around 80%, right? Wealth is obviously lower than institutional. Institutional tends to go up pretty quickly. Assets are going to reprice faster than liabilities. So I think on the whole, that's a good environment for us. So -- and I'm not too worried about a down rate environment right now and maybe you are, but I don't think we're going to be doing that anytime soon.

Maybe a while.

Yes.

I guess maybe shifting gears to fee income. If we do some math, effectively increased the fee income outlook to 9% to 10% year-over-year growth, up from mid-single digits previously on the July call. That assumed a relatively stable market environment. Obviously, the puts and takes so far this quarter. We've seen volumes and volatility in market levels. Just maybe talk to, kind of, maybe your near-term outlook as well as where you see the greatest organic growth opportunities.

Yes. So on the fee front, it's funny. I've been trying to guide everybody more to total revenue as opposed to fees because operating leverage is our North Star, right? So at the end of the day, operating leverage takes total revenue into impact. And you'll get puts and takes. Like, for example, I mentioned earlier, the securities repricing, which was a benefit. But on the other end, we had a repricing of our money market funds for our wealth clients, which took out some revenue, right? So that probably is -- the 2 almost offset each other to a certain extent. So you got to look at total revenue. And from that perspective, I'm very consistent with what I've told everybody in the past. We think about organic growth, I mean, Jason and I have talked about this a lot in terms of how to get you guys thinking about wealth in particular.

Wealth gets paid in 2 different ways. There's advisory fees, there's product fees, right? So you've got to really look at the advisory side of the business and that -- and the advisory side of the business has grown really well. And the organic growth has been solid over a 5-year period. It's continuing to build on itself. And so from that perspective, you can't really influence what happens in the market in terms of what assets are in favor or not in favor on the product end. All our product revenues flow through wealth and asset servicing. So for example, if you've got a multi-manager or index or things that, kind of, go out of favor, that does flow through those results. So we think of it more as the advisory revenues that come through. Now you don't see those, but they're all part of the P&L, but I would just tell you those are very healthy.

Got it. Maybe, Jason, in terms of, like, wealth management fee income, I think AUM and Wealth Management was up 14% year-over-year last quarter, trust fees up 10%. But if you look at sequentially, there looks to be some softness in the quarter. I think obviously, there's some lag pricing. You talked about time and alternative asset billing. Maybe just unpack those dynamics a bit more? And just how should investors think about the fee revenue run rate entering third quarter and beyond?

Well, first of all, the lag impact was probably -- it was more than people modeled last quarter. And GFO -- it hits GFO more than any of the other businesses because that business has -- it works off of more of a quarter end lag. And if you look at where the markets had really troughed in March, and so we printed July numbers based on that March low. And so the first half of the year in general, I feel was pretty good. And I think about it more, I can unpack. Just look at the base of business more than anything else, and I looked at ex markets, ex lag, what's -- where is AUM and how is that trending? And even there's some transaction fees that -- and that's why Dave is saying total revenue because even outside the fees, you get to some other just normal transactional activity. But if you just look at the base of business and what our pipeline looked like, I felt pretty good about first half of the year. And so coming into the second half, we feel good.

But it's -- at the same time, you can look back over the last few years, and this dynamic that Dave is talking about, I think, is actually important for people to understand. If you look just at the advisory fee nature of the business in wealth, over the last 5 years, it's been a couple of hundred basis points annualized growth. And so we look so much at peers and we see their growth higher, but so much of that is coming from often either acquisitions or using the balance sheet to buy revenue and bring it on.

And so I think you have to couple the margin that we have and really get down to what's happening underlying with clients, and that's been a better story. And it's particularly good at the higher end. And as I look at how are we doing the $10 million in up space, the $25 million, the $50 million in up space, family office, the growth rates in those areas are higher, each tier you go up. And so it just gives a sense of where our capabilities and our advice resonate most with clients, it's at the real upper end.

And we're not -- we've got to be good at each one of them, but we're not fighting that and saying we want to become a mass affluent shop. We're much rather do even better and separate ourselves even more from the competition at the upper end of the market. That area is growing well. We have a right to win there. And so I think that's where we can succeed.

Got it. And maybe as a follow-up, Dave, second quarter results, very strong FX trading, security commission revenues, client activity across the -- you and your peers was strong, particularly in Asia. Just as we kind of third quarter, any normalization of those trends that we should be aware of?

Yes. I mean, as I told you guys, I didn't think the second quarter was a run rate going forward, particularly on the FX side. And there were some things in the market at that time that was driving probably a higher number. I would say that somewhere between a normalized FX and where we are today, there has been a lot of volatility still in the marketplace, as you've seen recently. And so I think from that perspective, it's tracking right about where I thought it would, but certainly not at the same level as it was in the second quarter.

Makes sense. And you wanted to focus us on operating leverage, so here's an operating leverage question. But you guided for the year, I think, roughly 400 basis points for the year. You did 700 in the first half, which is obviously fairly strong. Quanta would get us to about 5.5% expense growth for the full year if we take your revenue growth as being accurate. Is that the way you're thinking about 2026? And then just as you, kind of, start thinking about 2027 and putting together the budget, just how are you thinking about expense growth and operating leverage?

Yes. So -- and I've said this before, the comparisons year-over-year get tougher because we've done -- did very well in the fourth quarter. So when I think about third quarter and fourth quarter, I think fourth quarter is really when the markets picked back up again, and we had some very good growth in those quarters. And so year-over-year tends to be tougher going into the fourth quarter and also into next year. And obviously, the overarching goal is to keep the operating leverage where we need it to be and get our margins where we need them to be at the end of the day.

And so I just think it's -- when you do very well, that's a good thing. But on the other hand, on the year-over-year, you're going to have to live with that. So too soon to say about '27. Clearly, organic growth will become a bigger determinant in terms of the growth profile in '27. And I think that's on a good track to do just fine. So...

Maybe frame it this way. You talked about the 105% to 110% expenses to custody ratio for a while. You're getting there. I guess what needs to happen -- need to happen for you to get there? I know you did some restructuring in the second quarter on the heels of the Visa gain. Is that the right number? And I guess what do you need to do to get to it?

Yes. I mean I think business mix plays a big role there. I mean, take into consideration that our Wealth Management business is probably -- some businesses are at the target or better than the target and some are above the target. And the ones that are above the target are primarily going to be on the Asset Servicing side. And so when you think about Asset Servicing, we're not taking on some of the more cost-intensive deals that we used to take on, where we have this giant J curve of a lot of upfront cost and then eventually it pays off. And so I think as you see the business mix changing, you're going to see the margins continue to, kind of, edge up and up and up. And I also think the capital markets side of the business has been a great story, and that's growing at a strong double-digit rate. And so that gets added to it. So all those things contribute to the numerator. And from that perspective, I think that's what I'd be more focused on than anything else is that.

And maybe, Jason, for you, you've been, kind of, running this 38% pretax margin in Wealth Management. Just how do you balance, right, these investments you need to make? Obviously, you want to continue to grow against that margin?

It's the right number to call out, actually, and we talk about it a lot. If anything, if we had confidence that we -- that the growth would come quickly and directly, we certainly are tolerant for that margin to come down. And we certainly have to be willing to bring it down a little bit to get the growth that we want. And so that said, it's -- we take pride in the fact that it is a highly profitable business, and we don't want to just take margin down to do it. We want to make sure that we're thinking about it in thoughtful ways.

Another dynamic, though, is that some of the investment we'll make should be in capital. We are going through a transformation, and it's -- digital is a very big component of that. And so a lot of the expenses that we're going to be investing there are going to come on to the balance sheet first before they come through the income statement. And so I think investors should be asking both. What are we doing from an OpEx side and a CapEx side to invest in the business. But you're right, there's certainly room to -- you listen to our peers and they're operating at much, much lower margins in order to -- partially in order to get the growth that they're targeting.

All right. Before I ask the next question, we have 8 minutes left and I have 5 questions I want to get through, but I want to make sure we touch on AI. And Jason, just maybe talk about how you're leveraging AI in the wealth business and obviously, Dave, maybe more broadly at Northern.

So I'll try and do it fast, but double-click, if you want, because I know you want to get through a lot. So one is always start what are we doing for clients. And the clients want to invest in it. And so we're helping them do that. Even something as anecdotal as just the SpaceX that IPO'ed last year, it comes down to our clients' desire to invest more in technology. But inside the business, and so we facilitated that for clients, they were very happy about it to their ability to invest in. We had hundreds of families make that investment at its IPO. But inside the business, we're using a lot -- the focus on the adviser. And so a lot of people think, well, how are you -- is it going to be about reporting? Adviser -- if we can have the advisers able to use AI well, they will have better conversations with clients. They will get to clients faster with better information. And so that's where we're focusing a lot of the effort right now is helping them think about what's their next best action.

Yes. I mean, first and foremost, given all the more recent news, too, when you think about AI is we need to make sure that we protect our clients and protect the bank. And so -- and that's of paramount importance to a lot of our large wealth clients, as you can imagine. So to make sure that we're on a cutting edge of any vulnerabilities that we might have, which other banks are also dealing with. We want to make sure we've got that completely nailed down and that we're totally on top of it. I mean, because AI cuts both ways, right? And so we're doing that as a priority, whether it's cyber, controls, risk, et cetera.

I mean the second thing is around productivity. And I would say that we've got more -- and I said this before, we have more use cases for AI than we have time and money to do. And the trick is going to be picking the right ones, right? And so we've got a very new governance process around that to make sure the ones we do pick and we do invest in are going to drive the most productivity and also be sustainable. And one of the things you think about with AI is can you really rely on it? Before you go and replace a whole bunch of employees with agents, you need to make sure they're going to do the right thing at all times, right? And so I think tons of use cases, tons of ways to use it, already using it in things like coding and taking manual processes out and things like that. So it's a productivity and a security would be the corporate way I would look at...

I guess, Dave, on the second quarter earnings call, both you and Mike referenced inorganic growth opportunities. Maybe just what appears most attractive from an acquisition standpoint? And what are financial and strategic hurdles you need to apply when evaluating potential transactions?

Yes. I think some folks may have gotten a little bit too excited about our comments there. But I think we wanted to make sure that people knew that we didn't have our head in the sand as it relates to opportunities that come to us. And obviously, the bar is extremely, extremely high. And of course, we've got a CEO who was a big banker, investment banker. So you know he knows how to assess deals. And from that perspective, we are open-minded. But for Northern, we're a terrible investment banking client, right, because we don't buy a lot of stuff. And so -- and we're not going to change our culture. And we have a very unique culture and a unique way of doing business. And so anything we would do would have to fit naturally into that.

So we've talked a bit about asset management being if there was a distribution capability there, that would be helpful. That might be kind of interesting. And on the wealth side, Jason and I have talked a bit about that. But I mean, ultimately, that's not our model to go out and sort of -- to be aggressively buying teams and throwing them on. That being said, people that want to come into our model, and there's quite a bit of them, say, I want to come to Northern for these 4 or 5 reasons, we would certainly take a hard look at that. But the bar is very high. The valuations are very high. PE firms that are doing roll-ups are paying, I think, very high multiples. And so the message there is open-minded, but extremely disciplined.

Got it. And then on capital, you ended the quarter at 12.2% CET1 above your, kind of, 11%, 12% operating target. I know you had, kind of, the excess Visa gains. Just how do we think about kind of the capital getting deployed? Buyback has actually been elevated relative to prior years recently. Does that continue?

Yes. We're not solving so much for percentage anymore because when you start making this kind of money, it's hard to land on the head of a pin. We have a program in place, and I would just say that, that program has been consistent throughout the year, and we're executing on that. And so I think from that perspective, it's more -- the aggregate number that we're trying to do is in line as opposed to the percentage. The percentage is hard to land exactly. We've done 95% year-to-date. That's pretty darn good, but it still remains -- it's a priority, too, as well. So I wouldn't expect any huge changes there. We're on track to do, sort of, what we said we were going to do.

I think usually with Northern credit quality, it's not something we worry about, but we always have to ask. Anything you're paying particularly close attention to, anything in the economy that gives you pause?

Yes. Well, the line I always like to use is we lend money to people who don't need it. But at the end of the day, we're there to support our clients in every way, shape or form, and we haven't changed our philosophy there either. So we haven't really seen any particular pressure on our loan portfolio right now. We're not -- we don't do a lot of those private credit. We don't -- we've gone through all that. And so we do some PE stuff, but it's usually subscription facilities and things of that nature where the risk isn't really in the fund itself. And so haven't changed any of that. We're not reaching out to do anything more than we've done in the past. We like loans, but we like the ones that pay us back.

Sounds good. And then just coincidentally this morning in this room, we got you guys [ beat ] BNY and State Street. At the beginning of the year, you kind of raised some of your medium-term targets, mid-teens ROTCE, 33% pretax margin. Both those companies have also, kind of, rolled out targets a little bit above yours. Just as you think about Northern over the next few years, what is the right way for investors to benchmark success? Is there something structurally different about your business mix or priorities that leads you to set targets differently? Or do you ultimately think there's room to, kind of, exceed those targets over time?

Yes. Well, a couple of things to take into consideration if you compare us to peers is that we don't have a lot of intangibles, right? So when you -- if you look at a different measurement, they're actually not as good as we are in that particular category. So there's that. And we're also not in all the same businesses, right? And as Jason mentioned earlier, I think we've reached a point now where we want to get our margins to a point where we can really focus almost primarily on growth, right?

And so for us, it's going to be -- we're not going to put our head in the sand and manage to an artificially low expense number if we see opportunities to invest in the business as well. And so we think the targets we just put out are reasonable over that medium-term time frame. We don't expect to change, we just did them. So we don't expect to change them anytime soon. But you've got to also make sure it's apples-to-apples when you look at us. They don't really have much of a wealth business. We have a big wealth business. So it is different and we think those targets are appropriate.

Great. On that note, please join me in thanking Dave and Jason for their time today.

Good day, and welcome to the Northern Trust Corporation Second Quarter 2026 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Steve Carroll, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Northern Trust Corporation's Second Quarter 2026 earnings conference call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team. Our second quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through August 22.

Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements in the back of the accompanying presentation which will apply to our commentary on this call. During today's question-and-answer session, please limit your initial query to 1 question and 1 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, Steve, and good morning, everyone. Let me join in welcoming you to our second quarter 2026 earnings call. Our results this quarter reflect strong execution of our One Northern Trust strategy and a very constructive market environment. We delivered an eighth consecutive quarter of positive organic fee growth and generated significant positive operating leverage, underscoring both the strength of our diversified business model and the discipline with which we are managing the firm. As we've discussed, our strategy is centered on driving sustainable organic growth, improving productivity and strengthening resiliency. Across each of these priorities, we continue to see clear proof points and are demonstrating our ability to perform consistently across a range of market environments.

In the quarter, we participated in the second tranche of the Visa Class B common stock exchange offer, positioning us to recognize a pretax gain of nearly $525 million. Reported results also include approximately $220 million in restructuring charges and other notable items, which Dave will discuss in more detail. Earnings per share increased 40% year-over-year. Total revenue increased 13%, driven by 10% growth in trust fees, 11% growth in net interest income and 69% growth in capital markets revenues, including foreign exchange trading and securities commissions and trading income. Noninterest expense was up 5% and as we continue to balance disciplined cost management with ongoing investments in the business. Importantly, strong revenue growth combined with expense discipline drove positive operating leverage of over 700 basis points. excluding notable items.

We returned almost $500 million to shareholders during the quarter. And year-to-date, we've returned over $1 billion to shareholders. Excluding notable items, this represents a payout ratio of 95% through the first half of the year. Overall, these results demonstrate solid progress on our financial objectives and reinforce the strength and durability of our business model.

Turning to Wealth Management. The business delivered another solid quarter with trust fees increasing 10% year-over-year, reflecting continued client engagement and strong execution across the franchise. Assets under management were up 7% sequentially and 14% year-over-year. We also continue to make progress against our strategic growth priorities. Our differentiated capabilities continue to support growth in global family office and the ultra high net worth segment. GFO revenue increased 9% in the first half of 2026 and continued momentum internationally. Revenue from wealthy individuals and families with more than $100 million in assets outpaced the broader portfolio.

Family Office solutions is an important part of this success as we extend our proven GFO playbook to clients that can benefit from an outsourced family office model. Talent remains one of the most important drivers of wealth management growth. We're making solid progress, adding revenue-generating professionals, particularly critical producer roles or pending hires and active recruiting give us confidence in the trajectory of the second half of the year.

This is a competitive market for the best talent, but we believe Northern Trust offers a differentiated platform. an excellent brand, deep fiduciary expertise, strong banking capabilities and a compelling position in the upper tiers of the market. We also continue to expand our alternatives offering and deepen adoption across our client base. During the quarter, we added funds to our platform across secondaries, buyout, venture and growth strategies, while also expanding our custom Fund of One offering. Capital raised in the first half of the year are currently in process is approaching 80% of last year's full year total.

Finally, we're generating more leads through our digital channel through the introduction of our lead lab, which is helping us better qualify and prioritize opportunities. In the first half of the year, marketing qualified leads were up over 50% from the same period last year. This is driving increased activity that can ultimately be translated into durable organic growth. Overall, Wealth Management continues to deliver on its differentiated value proposition, and we're making solid progress against the strategic priorities that should support stronger growth over time.

Turning to asset servicing. The business delivered another strong quarter, with revenues up 16% year-over-year and a pretax margin of over 30%, excluding notable items. The results benefited from a constructive market and rate environment. but also reflect the progress we're making against our strategy. Alternatives remain an important growth area. Assets under administration across hedge funds, private capital and semi-liquid structures now exceed $1 trillion. We added 2 semi-liquid mandates during the quarter, and the number of new product launches from existing hedge fund clients increased approximately 50% quarter-over-quarter, highlighting continued demand for institutional-grade servicing as clients launch and scale more complex vehicles.

Banking and capital markets continued to perform well. Favorable market conditions supported higher client activity, but we're also expanding the underlying business through new client wins and continued adoption of our solutions. For example, revenues from our outsourced capital market solutions, such as complete FX and integrated trading solutions were up almost 50% year-over-year. momentum in these scalable businesses, deepen client relationships beyond core custody and fund administration.

Finally, we continue to progress our digital assets capabilities as institutional clients look for trusted providers to support the evolution of tokenized markets. Our approach remains targeted and disciplined, focused on areas where Northern Trust can bring institutional standards of control, servicing and risk management to both traditional and digital markets. Overall, asset servicing performance reflects the continued execution of a focused strategy, deepening relationships with sophisticated clients, scaling high-value capabilities and investing in the areas where clients' needs are evolving.

Turning to Asset Management. NTAM continued to build momentum in the second quarter. with diversified asset gathering across several priority areas. Starting with ETFs. We had another strong quarter, marking our fifth consecutive quarter of positive flows. Quarterly asset flows were particularly strong in U.S. quality large cap, U.S. equity factor tilt and tax-efficient fixed income strategies, reflecting the investments we've made in the ETF platform and the benefits of a One Northern Trust approach, particularly our collaboration across asset management and wealth management to address specific client needs.

Liquidity was also a standout area. We had a record quarter for liquidity flows, extending our streak to 14 consecutive quarters of positive organic liquidity flows, while continuing to gain market share across both the U.S. and EMEA. As a top 10 money market fund manager in the U.S., we continue to benefit from the breadth of our global liquidity platform and clients' confidence in our risk discipline and service model.

Tax alpha remains another important growth area. We continue to build on our position as a top 3 direct indexer and are growing our long short tax alpha strategies. expanding the range of solutions we can offer larger taxable clients seeking more sophisticated after-tax outcomes. Finally, our alternatives platform continues to progress with ongoing fundraising momentum and continued demand for custom alternative solutions.

Over the past several quarters, the conversation on AI has moved from experimentation to execution. Across the industry, firms are positioning AI around many of the same benefits, productivity, scale and efficiency. Those are important, but they will not be enough on their own. At the same time, clients are asking a more fundamental question, how will AI change the relationship they have with the institutions they trust. They do not want judgment, accountability or personal service to hand it over to a machine. They want AI to sharpen and elevate the people, advice and standards they already rely on. That is how we're organizing our approach at Northern Trust. Across our businesses, we're aiming AI not simply at baseline improvements but at the qualities that have always made Northern Trust uniquely valuable to our clients, our service, expertise and integrity.

These principles have defined Northern Trust for more than 135 years and remain core to our One Northern Trust strategy. We view AI as augmented intelligence. a force multiplier that can help us deliver on those commitments with greater speed, insight and consistency while keeping our people and clients at the center. Service is becoming hyper-personalized, more predictive and adaptive, creating experiences built around each client's unique needs at scale. One clear proof point is the use of client action plan agents that help relationship managers quickly synthesize data to drive more meaningful client engagement.

Expertise is being amplified, delivering knowledge, insights and advice with greater speed, precision and impact. In our asset management business, for example, we're using AI to enhance our investment research and idea generation, uncovering signals that may be overlooked by traditional industry approaches. These capabilities are embedded most directly in our adaptive equity quant strategies, and integrity is extending beyond individual judgment and being embedded into our data practices, models and controls to strengthen the rigor and resiliency of how we operate.

A tangible example of this is horizon scanning agents that enhance our vulnerability detection and strengthen cybersecurity capabilities. This technological rigor is built on a foundation of human oversight and accountability. We're especially pleased with how quickly our partners have embraced AI in their daily work. That momentum is helping us turn AI from a set of tools into a true force multiplier, strengthening our service, expertise and integrity in ways that create lasting value for our stakeholders.

More broadly, we also launched invested as one, a new employee ownership initiative that provides eligible employees with Northern Trust shares. Together with our employee stock purchase plan, it strengthens employee ownership, and reinforces our culture of shared accountability for performance and long-term value creation. Looking ahead, the macro environment remains dynamic. but we remain confident in our ability to deliver consistent performance as our strategy is designed to perform across a range of conditions. We remain focused on execution, driving organic growth, maintaining disciplined expense management and continuing to invest in the capabilities that strengthen our competitive position.

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

Thanks, Mike. Let me join Steve and Mike in welcoming you to our second quarter 2026 earnings call. Let's discuss the financial results of the quarter. This morning, we reported second quarter net income of $792.2 million, earnings per share of $4.23 and return on average common equity of 25.9%. Pretax income was $1.1 billion, and our pretax margin was 39.6%. Our results reflect strong underlying momentum across the franchise, including continued organic fee growth, disciplined expense management and meaningful operating leverage.

Our reported results included a $525 million pretax gain in other operating income related to our participation in the Second Visa Inc. exchange offer. That gain was partially offset by a $74 million pretax loss in other noninterest income associated with the strategic repositioning of the available-for-sale securities portfolio. The repositioning improved the portfolio's earnings profile while maintaining a relatively short duration, a neutral liquidity position and the flexibility to adapt as the rate environment evolves.

Additionally, expense in the quarter included a $62 million pretax charge related to software dispositions, a $51 million pretax severance charge associated with the reduction in force and a $33 million pretax compensation expense related to a onetime equity grant. In aggregate, these notable items had an approximately $306 million favorable pretax income impact and an approximately $232 million favorable impact to net income in the quarter.

Similar to our approach to the First Visa Inc. monetization, the exchange offer provides an opportunity to realize value from a long-held asset, while the offsetting actions we took this quarter support future positioning of the business. Excluding notable items in all periods, total revenue was up 2% sequentially and up 13% year-over-year. Total expenses were down 1% sequentially and up 5% year-over-year and we delivered over 700 basis points of operating leverage.

Currency movements were immaterial to revenue and expense growth in both the sequential and prior year comparisons. Trust, investment and other servicing fees totaled $1.3 billion, up 1% sequentially and up 10% compared to the prior year as favorable markets benefited fees, and we delivered our eighth consecutive quarter of positive organic fee growth. Excluding notable items, other noninterest income was up 42% year-over-year with elevated client activity and higher value trading flows, particularly in Asia Pacific, driving strong FX trading and securities commission and trading income.

Our assets under custody and administration were $20 trillion, up 8% sequentially and up 11% year-over-year. Our assets under management were $2 trillion up 10% sequentially and up 16% year-over-year. Overall, our credit quality remains very strong. In the quarter, we recorded a $5 million reserve release, reflecting improved portfolio quality primarily in the commercial and institutional book and an improving macroeconomic outlook. Our effective tax rate was 25.6%, up 60 basis points from the prior quarter and up 20 basis points from the prior year. We continue to expect the full year effective tax rate to be approximately 26% to 26.5%.

Turning to our Wealth Management business on Page 8. Wealth Management delivered another solid quarter, where success with ultra high net worth clients and an expanding capability set drove double-digit fee growth. trust, investment and other servicing fees for Wealth Management clients were $592 million, up 10% from the prior year quarter. Assets under management for our Wealth Management clients were $534 billion at quarter end, up 7% sequentially and 14% year-over-year. Average deposits within Wealth Management were $26.7 billion, up 1% sequentially, while average loans were $35.8 billion, also up 1%. Pretax income was $334 million, generating a pretax margin of 37%.

As discussed in the second quarter of 2025, we reorganized wealth management to better drive growth and client coverage. Our financial disclosures continue to reflect the legacy structure. As of the second quarter of 2026, we have updated our disclosures to align with how we operate the business today, consolidating the regions into private wealth. This creates consistency with how we manage the business and the rest of our disclosures for wealth management, including assets under management.

Moving to our Asset Servicing results on Page 9. Asset Servicing also performed well in the quarter, driven by adding scalable new business executing our enterprise liquidity strategy and continued strength in capital markets-related activity. Assets under custody and administration for asset servicing clients were $18.6 trillion at quarter end, up 10% from the prior year quarter. Asset servicing fees totaled $757 million, up 9% from a year ago. Custody and fund administration fees were $512 million, up 9% year-over-year. Assets under management for asset servicing clients were $1.4 trillion, up 17% year-over-year. Investment management fees were $172 million, up 10% from the prior year quarter, driven largely by favorable markets and growth in liquidity solutions. partially offset by price compression and select index mandates. Securities lending income was $29 million, up 46% year-over-year, driven by elevated demand for U.S. equities, robust borrowing of Asia Pacific and IPO-related securities, among other factors.

Average deposits were $101 billion, down 1% sequentially, while average loans were $5.8 billion, up 3% sequentially. Pretax income was $323 million of 24%. Excluding notables, Asset Servicing's 8-point margin expansion year-over-year reflects the disciplined execution across new business economics deepening relationships with existing clients and a favorable macro environment backdrop.

Turning to our balance sheet and net interest income trends on Page 10. Our average earning assets were $151 billion down 2% sequentially as lower deposits drove a decrease in money market assets. The fixed percentage of the securities portfolio was 52%, consistent with the prior quarter, including the impact of swaps. The duration of the securities portfolio was 1.4 years and the duration of our total balance sheet remained under 1 year. Average deposits were $128 billion, down 1% sequentially, reflecting slight normalization following elevated short-term institutional deposits in the first quarter.

Within the deposit base, interest-bearing deposits decreased 2% sequentially, while noninterest-bearing deposits increased 4%, representing 15% of the overall mix. Net interest income on an FTE basis was $683 million, up 3% sequentially and up 11% from a year ago. Sequentially, NII was favorably impacted by an improved deposit mix, higher yields from securities repositioning mentioned earlier and 1 additional day in the quarter. Our net interest margin on an FTE basis was 1.81%, up 6 basis points sequentially, reflecting a favorable deposit mix in the second quarter. The sequential comparison also benefited from the reversal of NIM compression in the first quarter due to the impact of elevated short-term institutional deposits.

Turning to our expenses on Page 11. I Noninterest expense was $1.6 billion, up 9% sequentially and up 16% year-over-year. Excluding notables, noninterest expense was down 1% sequentially and up 5% year-over-year. The year-over-year increase was driven primarily by compensation and benefits, reflecting higher incentive compensation tied to improved financial performance, while outside services spend was muted. Excluding notables, our expense-to-trust fee ratio improved to less than 111% compared to 115% in the prior year quarter.

Turning to capital on Page 12. Our capital position remains strong in the second quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach was 12.2%, up 20 basis points from the prior quarter. The Visa transaction, partially offset by notable expense items and higher RWA was the primary driver of the improvement. Our Tier 1 leverage ratio was 7.6%, up 30 basis points from the prior quarter.

At quarter end, our unrealized after-tax loss on available-for-sale securities was $373 million. We returned $499 million to common shareholders in the quarter through common stock dividends declared of $148.8 million and common stock repurchases of $350.6 million. This represented a 63% payout ratio on a reported basis. Excluding notable items, the payout ratio was approximately 90%, consistent with our ongoing commitment to disciplined capital return while preserving flexibility to support clients, invest in growth, and manage through a range of environments.

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

Turning to our guidance. For the full year, assuming a relatively stable market environment and interest rate backdrop, we now expect net interest income to be up 9% to 10% year-over-year. This is an increase from our previous guide up mid- to high single digits. We now expect total revenue to grow by 9% to 10% year-over-year, which is an increase from our previous guide of up mid-single digits. Excluding notable items, we now expect to deliver approximately 400 basis points of operating leverage for the full year.

And with that, operator, please open the line for questions.

[Operator Instructions] We will take our first question from Glenn Schorr with Evercore.

Maybe I'll start right where you left off. The 400 basis points as operating leverage is great. You were a lot better than that in the first half. Maybe you could help with the right perspective on the jumping off point for expenses because there were some moving parts this quarter. And what right things? Or should we be considering on the top line side that bring down the operating leverage, their seasonality, FX trading was really high. Just maybe square that circle for us in terms of the right perspective on the second half operating leverage.

Sure. You kind of gave part of my answer for me there. It's more revenue-driven than expense driven. At the end of the day, from our perspective, the year-over-year comparisons get a bit tougher in the second half of the year. The S&P really had a pretty good run from Q2 to Q4 in '25. It was up 20%. As we get into Q3 and Q4, it's going to be a tougher year-over-year comparison. It still implies solid growth and positive operating leverage in our business going forward. It's just we do feel, as you mentioned, there will be some normalization of foreign exchange, capital markets, sec lending from particularly elevated flows that we had in the quarter.

We also had some very large deposits that came in Q1 and actually also came in Q2, which was unexpected. And those deposits are not expected to last into the third quarter, which tends to be our weakest quarter in terms of overall average deposits. And so from that perspective, those are sort of the issues we looked at. We're assuming a flat market as well. We're not assuming any additional uplift from the market, and we're assuming stable interest rates and all of that. So if you do all the math, it's roughly a 5% to 7% increase in total revenues during that period. And we feel like the operating leverage number is manageable at around $400, we need to do all the math.

I appreciate that. That's very good. One tiny little follow-up. Within the onetime items, there is the software write-down. And I appreciate taking advantage of the Visa gain, very cool with it. I'm just curious what software you took a look at you wrote down how that decision was made? And then what you replace with it? Are you building something on your own? I'm just curious for obvious reasons.

Well, first of all, I would say it's not necessarily timed with anything in particular. It was a periodic review that we do as part of our capital planning and investment planning during the course of the year. And as you probably know, the pace of change that's going on today with AI and project lengths have gotten extremely shortened. And so some of our longer-term projects, we have to take a look at. We just don't keep funding them at infinitum. And this, in particular, was a subset of an existing fund administration project that we had going on. And when we looked at our operating model and infrastructure, we just decided that it didn't hit the appropriate ROI compared to other opportunities that we had to invest in. And so we just took advantage of that opportunity to sort of declassify or take a certain amount of work in progress and say, we're not going to complete that portion of it.

So it really was -- it was not a wholesale part of it. It was just a certain portion of that particular fund administration infrastructure that we decided to change. And we're not expecting to do that again anytime soon.

I appreciate. You are not exactly by coding a whole new infrastructure. I appreciate that.

We will take our next question from Ken Usdin with Autonomous Research.

Just 1 follow-up on the deposit point, Dave, and the NII. I mean it makes sense that the implied new guide would be for a little bit lower run rate than the second quarter. But these deposits are proving stickier. I guess, can you just walk through what you see happening in the environment with regards to deposit generation and that related activity that you cited? And why wouldn't these deposits outside of seasonality proved to be more sticky in terms of a run rate?

Well, listen, I mean, the average deposits are higher, which is why we have growth in NII for the year. I do think we have some very large institutional clients that in the first and second quarters, decided to put substantial amounts on our balance sheet. And we don't view those as being permanent. And so as I guided you last quarter, we were about $4 billion above what we normally would have been. I guided you down, but obviously, we had a second quarter event related to different client but a different situation. And in that case, it was a good better economics as well. But that also arrived during the second quarter. And those are idiosyncratic. You can't really predict those. And so we try to really distinguish between what we consider to be operational deposits, sticky deposits and ones that are more onetime. And in this particular case, in Q2, it had to do with a particular fund that was liquidating. And so they had to, as part of that transition, put that cash on our balance sheet for a certain period of time.

Okay. Second question, just on the Wealth Management business, obviously, we knew about the lag from the first quarter, slight market decline. So wealth management fees were down a little bit. That obviously should pick up with the bike in lag we have for the third quarter. Just wanted to just ask outside of the markets, was there anything else that pulled down wealth management fees a little bit sequentially in terms of either activity or flows? Or should we just expect a better trajectory from here?

Sure. So I just would like to say on the top end that the fundamental business activity is strong. Pipeline is strong. Flows are good. We have these quarterly aberrations, what I would call them and having run the family office business for a long time. I usually had to explain quarter-over-quarter what was going on because a lot of the change sequential distortion comes from GFO. And when you think a little bit about there's 70% of their fees being on a lag basis and the fact that the S&P went up 1,000 points during the quarter. You do get a disconnect between AUM growth, which was up and fee growth, which was moderately down.

The other thing I would say, particularly as it relates to GFO is the billing and GFO is different than Core Wealth. Core Wealth is pretty straightforward. You've got advisory fees and product fees. GFO is as a [indiscernible] of different types of services that we provide to clients. So the fee structures we have are much more customized and sometimes take longer and/or have true-ups, and they also have a much higher allocation to alternatives. And when you think about alternatives, those are valued much less frequently and also done a lot manually. And so you're going to have situations there where you're going to have some inconsistencies between the quarters. And so I tend to look at the wealth management business more on a run rate basis and 6 months is a better indicator of where we're going.

So I would take your last sentence to say that's absolutely true. What you're going to see is better sequential results from wealth in the third quarter. You also have things like onetime fees, like a state settlement as well. And we have seen a little bit of price compression as it relates to some of our liquidity products. And then we had some seasonal tax-related outflows, which we typically have. And so when you add all that together, it does create some distortion in the numbers and a disconnect between the assets going up and the fees going down.

We will take our next question from Mike Mayo with Wells Fargo Securities.

Just another question on wealth. And if you could just give an update in terms of extending the GFO approach to a wider swath of your higher-end net worth clients. And also, to what degree do you like -- are you at a competitive disadvantage because you don't have IPOs that you offer to your high net worth clients or maybe you do, and I don't know about it, but some talks about net new assets really getting a lift from some of the IPOs that they've done.

Sure. So I'll take both of those. To your point, one of our areas of focus is taking that set of GFO capabilities to the ultra-high net worth segment of the market. And that's what we call family office solutions. And I would say that's going very well in the sense that, that offering is resonating extremely well with new clients where we're pitching on new business and prospects, but also with some existing clients where we're moving them into that offering. So it's going very well. And if anything, it's just a matter of our ability to scale that offering up and be able to make sure that we have the teams to be able to -- and talent to be able to provide that offering. So very encouraged by the market reception to that and the progress we're making, just want to do it faster.

On your second point, you're right. I mean we're set up differently than the wealth management firms that are attached to an investment bank. And so when you have very robust IPO markets and capital markets activity like that, we're not going to have the same type of referral opportunities that are going to come from that. That said, that doesn't mean that we don't work with clients and don't prospect for that type of wealth. And frankly, we try to get out in front of it. So even with some of the recent offerings, the notable recent offerings, we benefited from those because we were working with some of the executives over 5 years ago with how they can manage their wealth. And once again, being a holistic provider there were things that we could do with them when it came to banking that was valuable to them at that point. They are now clients, and then we benefit as their company goes public and some of that wealth gets monetized. So it's still a positive for us, but we are positioned differently than the investment banks.

And maybe a related question that when we talked about the top of the funnel and your new client growth, what's your main key areas for that driver?

So it's a combination of things. But you're exactly right. We're trying to drive more at the top of the funnel and then, of course, higher conversion as well. But on the top of the funnel, One driver is certainly just talent overall. We talk about both revenue-generating roles, but also specifically producer roles. And so we are trying to hire more people that would enable us to prospect more and put more through the top of the funnel. On that front, it's a competitive market for talent. We think we have an attractive value proposition for that talent, but it takes time to build that out. So that's one.

Two is we work very closely with centers of influence. So think about estate planning attorneys and accountants and those types of service providers that are working with high net worth but more ultra-high net worth clients with family offices. And so they're almost like a client base to us and the focus that we have on them because often, they're going to get the first call or they've been working with the family or the prospect in advance of when they begin to work with one of the wealth managers.

And then third is around marketing and specifically digital marketing. I made a couple of comments in the opening remarks about really trying to ramp that up further. And the key there is not only utilizing the latest technology and AI to be able to more aggressively determine where there are prospects that meet our profile or potential prospects on that front, but then trying to get them converted and do so at an attractive cost per lead. So a lot of effort on that, both, I'll say, internal team, but then the data sources that we're using and the technology to be able to increase the number of leads that we get and then likewise increase the conversion rate.

We will take our next question from Brennan Hawken with BMO Capital Markets.

Visa Games this quarter were pretty substantial. I don't believe you touched on this. Apologies if you did, but could you give us your updated thoughts on how you plan to use these proceeds? Should we be thinking about reinvestment in the business, return of capital? What's the best way to think about this?

So Brennan, the answer is yes in the sense of how we think about it. So it's a capital gain for you, for us, as Dave went through, and there are certain areas where we can, I'll say, invest it immediately. So repositioning the investment portfolio, it gives us the ability to do that and take advantage of the shape of the yield curve right now as 1 example.

Second, though is, to your point, if we can deploy that capital in the business through the deployment of RWA, then we would look to do that. if we were to do something inorganic, it gives us the capital to be able to deploy it that way.

And then finally, it strengthened our capital ratios now. That just puts us in a position to be able to buy back more stock. And if you recall a couple of years ago, when we had the Visa gain, similarly, we had an increase in our capital ratio or CET1 ratio. And then over time, we brought it back down into our target range of 11% to 12%. So it gives us that flexibility in how we want to be able to deploy it best.

Okay. Great. And I assume the order that you went through those is significant, but if that's wrong, I might just let me know. Is that fair?

That's fair.

Great. Follow-up, Asset Servicing, 24% pretax margin here in the quarter is down a bit from late 2025, although had some good year-over-year revenue growth. Previously, you talked about maybe letting some of the lower margin business roll off to help drive the servicing margins into the high 20s. Could you provide maybe color on the pacing of that, how that's going? Is that presenting a headwind to fee revenue in that business? And how we should think about pretax margins in servicing going forward?

Sure. I'll start, and Dave may want to add to this. But this has been the strategy for that business, scalable growth and profitable growth and increasing the margin in the business. and very favorable environment without a doubt, but also we're seeing progress on that. So we have been, I'll say, very selective in the new business that we're taking on, ensuring that it will provide not only profitable business for us, but quicker to the levels of profitability that we like to have for those businesses. And we've seen success with our asset owners business in the Americas. Similarly, in Europe, meaningful wins that many of them are just coming on board or being transitioned in right now. So that's very positive. .

And then I'll also say with our asset manager clients, it's trying to not only work with those clients where we already have a strong existing relationship but doing more with them. and doing it in ways that makes that relationship more profitable. And so a great example of that is our integrated trading solutions, so outsourced trading, and there's more and more examples what we would consider 1 Northern Trust example where we're doing -- providing that service now to the asset manager amongst other things, currency management for them as well. And those are higher-margin services for us. And so you're seeing the strategy come together with a favorable environment and as a result, the margin going up.

I think, Brennan, the pretax margin you quoted actually includes the notables. So if you take those -- the notable items out, the pretax margin is much higher, closer to 30%. So we continue to see, given what's going on in the capital markets side of the business, too, which is growing double digits, the asset servicing margins are continuing to go up. So we just need to take that notable item and put it to the side.

We will take our next question from Steven Chubak with Wolfe Research.

This is actually Sharon Leung filling in for Steven. So we saw some really encouraging deposit remixing trends in the interest-bearing versus noninterest-bearing. It looks like you guys have been more focused on managing the deposit costs and maintaining very disciplined pricing. So I heard what you said about expecting some of the deposit -- recent deposit strength to kind of reverse in the third quarter. But -- so wondering if you could talk about your outlook for the deposit mix. And if we do see some rate hikes from the Fed, what are you anticipating in terms of deposit beta?

Yes. So let's talk a little bit about what we benefited from in the quarter. And you're right, our noninterest-bearing deposits did go up substantially. And we did have obviously took advantage of the fact that we did some deposit repricing last year, and we still haven't wrapped all that. So we have the lag benefit of that. We had lower wholesale funding costs as well. So that obviously has helped. And then we had some fixed asset repricing, which obviously we do almost every quarter from that perspective. And so when you think about the NIM going forward, the NIM was negatively impacted in Q1 by some of those very large deposits. And so it kind of normalized back up in this quarter to what I think is going to be a more sustainable NIM level. If anything, as rates go up, that's good for us.

And so when you think about the betas, 2/3 of our deposits are in U.S. dollars, right? And so if it's a Fed increase, that's 1 thing that will have a bigger impact. And so the beta we like to say is a combination of the wealth, beta is much lower than the institutional beta. So we rounded out to about 80% in total on dollars. Other currencies are a little bit different. but they're much less a percentage of the overall picture.

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

Yes. So it should add about $30-plus million to NII annually, the repositioning that we just did. .

We will take our next question from Manan Gosalia with Morgan Stanley.

So my question is around, I guess, the wealth pretax margin. We're already at 37%. You're saying you should have a better quarter in wealth next quarter. But as we go through this in some of the investment spend on the wealth side, how do you expect the wealth margins to trend from here?

So as you heard from my discussion of the strategy there, we are definitely investing in the wealth business for growth. And it right now has an attractive pretax margin to it. And so really, I believe we're like in the right range for that business, meaning that it can go up a little bit depending on the conditions, but it also can go down. as a result of the investments we're making. And so bracket it by a few 100 basis points on both sides is kind of the range that I would expect as we go forward.

Got it. And then maybe just on the hiring talent side, I know you said that there's -- that you're seeing some momentum there. Can you talk about I guess, how much success you've had on the hiring front? And also any competitive dynamics you're seeing in the upper tier of wealth?

Yes. So it is a very competitive market, as I mentioned, for talent. And I would say that we've seen good progress in our goals for the year on the hiring front. But it's something where we're going to continue to have to keep at pace in order to achieve those goals. As I mentioned, I think we offer a proposition to advisers and other roles that's different than others in the market. So that's the good news. But it also means that it takes time to be able to recruit the right people to that model because it is different than most other models, I would say, out in the marketplace. So you're doing more very targeted hiring as opposed to just broadly anybody who's in the wealth management business, that doesn't fit our overall profile. So it takes time to build that up.

We will take our next question from David Smith with Truist Securities.

On capital, you're running around 95% payout ratio on an adjusted basis for the first half of this year, is 100% still the right benchmark we should be thinking about for the full year, adjusting out those notable items?

Yes. So the 100% number isn't sort of a hell or high water. For us, it's sort of the -- when we started planning at the beginning of the year, obviously, we're ahead of pace in terms of how much we've returned for the first half. because we're making more money, obviously, and have more capacity to do that. And as Mike mentioned earlier, while we still have aspirations to continue to have very, very healthy return of capital at the same token, we want to have that flexibility to be able to obviously cover the dividend, et cetera, but we have inorganic. We've got balance sheet issues and things of that nature. And you've heard me talk about our balance sheet being open to our clients and being a liability-driven institution. So we don't like to comment specifically. It's really hard to land on the head of a pin as it relates to payout. I would say it's consistent with what we were trying to do at the beginning of the year, and we take a look at it on a very dynamic basis. So and absolute capital levels matter. stakeholder issues matter, clients matter as you look at that. And so I would just say that we're squarely within the range we wanted to be in. and we're actually ahead of ourselves in terms of what would have been 100% when we started the year.

And then on the inorganic front, are you looking mostly at smaller tuck-in type acquisitions? Or would you consider something larger to if the opportunity set was right?

Yes. So we're looking for opportunities that can accelerate the organic strategy that we have. So if you just go along the lines of what we've talked about as to where we're focused and what we're trying to achieve, if there's ways that we can accelerate that inorganically, then we would consider that. And it would have to obviously meet all the other parameters, both cultural fit, business fit and also financial profile of that. So that's how we consider inorganic opportunities. .

We will take our next question from Gerard Cassidy with RBC Capital Markets.

Did you guys share with us, Mike, I think you touched on this about IPOs. And I believe, David, your prepared comments, you mentioned about stock loan was benefited from -- partially from the IPO securities lending area. But besides the wealth management and in the stock loan with this robust IPO market, are there other parts of the business that are benefiting from the IPOs, whether it's any of the servicing areas or the custody areas?

Absolutely. With that activity, Gerard, you're right, even aside from wealth management, we see the impacts and the benefits from that. So we've talked about liquidity, broadly speaking, when there is greater capital raising, those dollars need to go somewhere initially. And so we've seen the specific benefits of that flowing into whether it's the balance sheet, but also into our money market funds. And then also as far as the capital markets activity, once these stocks are out there and they're trading and the ability to potentially shorten the stocks or any other hedging activity, that's something where we see it in the lending part of the business. And you saw that we had significantly higher volumes, but also it's the nature of the loans and the collateral for that, just meaning if you have certain equities, you get a higher spread on those equities. So it's something that we've seen, I'll say, cut across the businesses.

Very good. And then as a follow-up, I think, Dave, you talked about some price compression on select index mandates. Can you give us any more detail on that? And how does that compare historically, you and your peers in the custody business have talked about pricing pressures. Is this something different than what you've seen in the past? Or no, this is as a continuation of a trend that's been around a fair amount?

Yes. I was -- thanks, Gerard. I was referring specifically to liquidity product, not index and retail liquidity product going into the wealth space, competition around that shorter term. strategies, not our long-term strategies.

I wasn't relating it to custody and other broader fees. .

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

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

This concludes today's call. Thank you for your participation. You may now disconnect.

Okay. Up next, we have Northern Trust. And I'm delighted to have with us today, Tom South, Chief Information Officer at Northern Trust; and Dave Fox, CFO. Thanks so much for joining us.

Thank you.

So Tom, maybe let's start with you on the technology function. I think you were last on the stage with Betsy in about 2023. And clearly, a lot has happened since then, and things have evolved a lot over the last 3 years. So let's start with you.

I think with the One Northern Trust strategy, it's built on 3 pillars, right, optimize growth, drive productivity and strengthen resiliency. And I think technology enables all of that. So can you break down your core strategic priorities and where the technology function is overall at Northern?

Yes, I'd be glad to. And by the way, I want to thank you in advance because I made some pretty bold predictions when I was here with Betsy. And some came through, and some didn't. I'm glad not to have to defend any of those.

We can do all of them.

So we've been just a little bit of a look at how we've been prioritizing over the last few years in terms of focus. We've had a pretty meaningful focus on -- in 3 areas primarily. Risk and resiliency was a big one. I talked about it back when I was here then.

There was a couple of big cyber events in the world in 2020 and 2021, and we really upped our game in that space. And that's been running at an elevated level since that time, really since 2020. Our modernization journey has been another one of those we've been on. Those two bundled together to make sure we're a safe, secure, reliable partner with whom to do business, whether you're an institutional client or a personal client or a sovereign wealth, et cetera.

So critically important. It's sort of like when we consider job 1, you have to get those things right, cybersecurity, in particular. Otherwise, everything else you're doing becomes a little bit perfunctory. And so we've had elevated investments in that space for the last few years. Really going back to 2021, you can see a pretty big jump in tech spending in that time frame. And then the other part of that has been in the efficiency and productivity, which has had an elevation at that time, but significantly lower than where we are today.

So we still think about those dimensions really critically in terms of what I'll call the tech-driven investments. And the place I think we're adding the most incrementally right now is in emerging technology. I know it's been almost 90 seconds in and we haven't mentioned artificial intelligence yet, which may be a record for a tech conversation.

But it isn't just AI, it is AI, and it's a lot of AI. But we're interested in making sure we're looking around corners up the curve a little bit. So thinking about quantum, which is starting to gain some acceleration. I often tell groups, I wish I could take 10% of the AI mania and switch that into quantum mania because I think these things are -- I think quantum, AI and digital assets are likely going to have a moment in which they start to converge. It's not this year, but it's not so far off that we aren't starting to think about that a little bit.

So we think about those core investment themes in that arena. And then if you think -- I want to think forward a little bit. And by the way, I should note, lots of folks in this room probably know this. We've been running -- post-2020, we started running at a very elevated growth rate. I think the peak year-over-year was about over 13% and in a range of about 8% to 13% generally over the last 5 years.

It's because I think post some of those big cyber events in the world, we really dug in on resiliency, broadly, cyber reliability and recoverability, critically important. And so they're important both because of the exogenous issues in the world at that time. And by the way, it's not like it's a nice quiet environment right now from a geopolitical and other perspective. But from a brand reinforcement perspective, too, right? At some point, one of the rationales for being a client in Northern Trust is it's a safe place to be in the most troubled of times, and we want to make sure we were investing enough to keep up with the risks around that.

But as we look forward, it isn't like those things are important. They're critically important, but we actually moved into the range in which we're performing on the reliability side, at the highest level we've ever recorded, for example. We still have improvement targets every year, but we're performing at the highest level ever recorded at a level of change in our environment that's triple what it was when we started measuring that 5 years ago against this plan.

And so we've achieved some of the metrics that told us we could start to level that growth and start to tilt that growth towards emerging tech and towards a more business growth unlock over time. So it's not a big shift in 1 year, but we are seeing that tilt. And the other thing you should see from us is we are seeing some abatement in that growth rate. That 8% to 13% is one we're trying to drive single digits this year. We expect it to be single digits this year. And we'd like to aspirationally move into a range of about 4% to 6% or 4% to 7% on a sustained basis.

Now you may be wondering, boy, in this era of AI, even my time spending here, tech is such a critical component of the success of the firm, how are we seeing that number come down? Well, we're getting efficiencies in the IT space that are pretty substantial. And they're giving us hope that, that new range is more sustainable. But it's hard to predict that far out. And like I said before, even some of the elevated spend was driven by external factors, not so much internal factors.

So we always have that -- Dave stresses, and I think it's awesome, a flexible financial model to adapt to adverse conditions. I think Dave often refers to that as adverse economic conditions, but there are other kinds of adverse conditions in the world that we have to react to with the Glasswing out there where the industry is reacting to an adverse condition right now. And we have that -- so that flexible model has to lever not just economic conditions as they change, but nonfinancial variables that we have to deal with, and we're flexible enough to do both.

So Tom, you started on the cybersecurity side. So maybe let's dig in a little bit there before we move on to the modernization and AI. Well, I guess cybersecurity, I think you have to talk about it with the AI perspective, just given all the headlines around Mythos and everything that's happening out there. So how are you thinking -- maybe delve one level deeper on the cybersecurity risk, what you did before? How have things evolved now with AI and where you're spending your time?

Yes. And I'll be candid, that's a bit of a chunky topic because it is hard to extract cybersecurity from artificial intelligence. And not artificial intelligence from the kind of future prospects of the firm on both the top and bottom line.

Let me start with cyber and AI and what we're doing on that front. So like every new emerging technology -- and I've been around the firm long enough to have seen a couple of generations of these now -- almost every one of them is a double-edged sword in some way, shape or form. And we have been extremely excited, like a lot of firms, about the prospects of both productivity, efficiency and new products and services as it relates to AI. And I could talk about those in a minute.

But if you're not careful, these things come around on you. And the Glasswing and Mythos revelations over the last few months remind us that, that other edge of this is out there. The risks associated can be profound and have to be managed. And large regulated firms, that can't be accidental, have got to be quite thoughtful and proactive in many cases.

And so -- and I saw a really great article last week from Jen Easterly, who used to be the Head of CISA under the last administration, is as clear cut a cyber expert as you'll find out there. And she wrote this really great article saying you don't really have an AI problem with Mythos. You have a legacy of 30-plus years of deficient or vulnerable software that was created, and it's operating in all of our businesses. And all Glasswing's efforts are doing are taking would have been years of exposure or discovery of those and compressing them into a very tight window. And so I happen to subscribe to that characterization of where we're at right now pretty energetically.

So -- but to talk about what we've been doing in the years leading up to this, and I'm thankful we were building out more robust programs around vulnerability management, cybersecurity hygiene, I'll call it for folks that wouldn't hear that word in this space, your hygiene in cybersecurity. If you're coming at it from a robust position, particularly in vulnerability management, but other areas, if you're coming at this from a pretty robust position, then yes, this is an urgent, urgent activity in terms of scanning your environment, discovering these vulnerabilities before someone else does. And fixing them, right? Super important.

But if you came at this from a standing start, boy, that's really a challenging thing to do. We're fortunate enough to have built out a robust program around this. I was telling a couple of clients earlier -- late last week that we already had 5 scanning tools we were running every single day to try and find gaps in our environment and a whole program around remediation around those.

So we come at this in our -- from a sense of we had a really good program, but this is new. And what's new about is the time frames, right? The time from discovery to exploitation was measured in weeks and months in the -- and has been in the industry for a lot of months usually in the environment that we've operated in. That window is about to go down to hours, days, weeks at best. And so we're going to have to adjust our position in terms of how we clean our environment, remediate our environment.

And this is what I always tell people is our goal right now, we're doing the same as probably every other firm. We built intelligent scanning tools. We're using every frontier model provider that's out there to try and inform these tools. But our goal as a financial institution, the brand promise to our clients is not to be the #1 discoverer of cyber vulnerabilities. It's to provide them a safe, secure environment in which to operate. And that means you have to be as good at cleaning up what you find as you are discovering it.

And I don't think people talk enough about that. And I don't see enough printed about that in the press because it's not as sexy as I'm working with Anthropic or I'm working with OpenAI or I'm working with Google on this. So I really think that end-to-end treatment of this is what we're really focused on.

And yes, we are -- [ today ], a little bit, we're investing a fair amount of unplanned energy and time, treasure and talent in this right now at our firm to make sure we're ahead of the inevitable release of these tools into the hands of adversaries that would do us harm. But I want to -- just because we're here at the AI junction, talk about -- so I don't want to be a storm cloud on artificial intelligence because there is this thing. We have to deal with it, and we are in a pretty strong position to deal with it.

But there are tons of other opportunities we are still pursuing. It's not like we said, well, okay, cancel the AI party. We're going to stop it. That was a fad, and we're going to do something else. Our conviction certainly on a long time horizon is still very high on both top and bottom line returns in this space.

And I would say, because I've been asked this question a few times today in meetings with a handful of folks that are here today in the room, where are we seeing impacts of artificial intelligence in our business today? Well, by far, the top impact is in IT. Right? The tools for our developers have become quite sophisticated quite quickly. Our folks are kind of using the AI as a partner programmer in a lot of cases and partner engineer, as a consultative partner in some cases.

And so we have seen -- as our teams have started to adopt this, the rate of change in our environment going up pretty dramatically. You can literally see the charts is when kind of a pre-AI, post-AI. The metrics we get out of there tells us that change volumes are up dramatically. Good news is code quality continues to maintain to be very strong. That was a concern for us.

So we're seeing a pretty big impact in information technology. And it's probably not super obvious in the earnings because a lot of that's CapEx and it gets a bit diluted by the depreciation schedule, but we are definitely seeing that. And by the way, our conviction basically talking to a lot of these AI model providers is we're at the beginning of this, not at the end of it. So I think there's a lot of, what I would call, revolution and transformation in software engineering still to come at this point. So a lot more on that horizon.

But there are opportunities we're pursuing agentic orchestrated solutions in almost every area of our business. I'll give just a couple of those. We're doing some work in our risk and compliance space that I think is going to be interesting. A lot of that's internal, much like the software development piece. Our audit team is starting to get involved in this. So a lot of good internal use cases where we thought they were lower risk. And that was stuff we were really starting to work with late last year as we were more in that experimentation mode.

Now that we're in implementation mode, we're excited to be building things for our Wealth Management business to enhance our advising personalization. I think if you saw our earnings last time, Mike O'Grady talked about hyper-personalization. We've got some really slick tools that we're developing and deploying to help our advisers personalize, refine and enhance the advice they're giving to our clients in near real time.

So that's combining the brilliant Northern Trust Institute body of knowledge we've built over the last couple of years. You probably heard from Jason Tyler at some point around that with our -- the deep knowledge we have about our clients, their goals and aspirations, their behaviors, their transaction history, all those things coming together and then semipublic and public information about them to build maybe the best advice we can. So not just depending on our adviser, but adviser plus a digital assist, an AI assist in that case.

And then in our asset management business, where we've already got -- doing research across in our municipal bond space. We're reasoning across the 90% of the data that people can't afford to get to with purely human efforts around that. We're tapping into data we never could have covered before on the research side to generate outcomes for our clients in the asset management space. But I expect that as like a lot of asset managers, we expect that to permeate all facets of the -- everything from research to portfolio construction to portfolio deployment to portfolio maintenance and compliance and everything around that.

So we're -- again, at the early stages on that. Mike Hunstad, who runs that business, and I, very bullish on what we can accomplish there even in the next 6 to 12 months. And we should have -- continue to have what I'll call a series of key components we deliver, key announcements we can make around capabilities there to the benefit of our clients and the consumers of those products.

So I don't want to make it sound like it's a dark cloud of cybersecurity concerns. They're absolutely real. But we've got a good program to manage those, and there's a lot of upside that we're pursuing pretty energetically. And we, like a lot of firms, are talking about last year was an experimentation and education year and a bit of evangelism by the IT folks. This year is an implementation. And I think we're now embarking upon this reimagination, right? To really extract that game-changing value, you've got to do some reimagination of how you deliver those services. And so we're entering into that phase now.

Okay. So you covered a lot there. So I'm going to jump around a little bit with my follow-up questions. So let's just wrap up the topic of cybersecurity. So I guess, how long does it take to find the vulnerabilities? It feels like it takes maybe hours or days at this stage, but how long does it take to fix them? And is it a continuous process given that there are -- there is legacy code over several -- probably several decades at this stage? So is it an ongoing process that's going to take years? Is it going to take just months? And how is AI going to help that process?

Yes, it's a really great question. So the discovery process, once we start deploying these tools, they live up to the billing. They are incredible at discovering what were unknown, very -- what might have been categorized as low likelihood, exploitable vulnerabilities. And so the discovery process is kind of expensive, candidly, but very effective and pretty fast.

I think the harder part of that is that back half of that, which is fixing those. So finding and fixing are somewhat discrete today. We would like to bring them together, and we are bringing them together very quickly. So the only way to keep pace with the really efficient engine of discovery of vulnerabilities is to start to get -- and that's happening at machine speed -- is to start to move towards machine speed on remediation.

So we are -- we have -- we originally did, like a lot of firms, we built a team to start doing automated intelligent code scanning. And probably within 3 or 4 weeks, we realized we need to build a team that was pursuing with equal zeal, the fixing of those, the remediation of those issues. So we're building both at once. And we've got a couple of strategic partnerships we're leveraging right now with some of the largest firms in the world. They see this problem the same way that this is an end-to-end problem, not simply a discovery problem. And so we're moving very rapidly towards a lot of automation on that remediation front.

You're asking a really great question, which is how long are we in this state. And it's hard to say at this point because I probably could answer that question for us on our -- the code we've built and deployed and how long that's going to take. And that's months, not years. So that's the best I can do to quantify that.

But the entire global financial system is an ecosystem of tons of large financial providers, financial market utilities, lots of big vendors that we all depend on. There's a lot of commonality in terms of large providers. And I think that could be a longer window. It's hard to predict right now. But for all of that ecosystem to be uplifted in terms of the quality of the code, the vulnerability assessment and remediation process, I think it could be longer than that.

So I don't want to make a big prediction around that as I did on stage last time I was here, but I think it will be longer than our own in-house scanning than remediation will be. And I think until those firms start doing this -- get come to the same conclusion we did, which is machines are -- AI is helping me find this, AI has to help me fix this. And I think that's going to be a longer period of time.

When we're done though, really, when we're through this, however long this takes, we will have a much healthier, much more resilient global technology platform upon which the industry runs, not just for Northern Trust, but for all the firms that we depend upon and interact with. And that will be better for our clients and quite frankly, better for the sort of Western financial system as we think about it.

Okay. Perfect. So there's certainly a lot more to dig into there, but maybe let's talk a little bit about the modernization effort and the investments there. When you think about the tech investment curve, you've moved, as you noted, past that double-digit growth in equipment and software spend. Where are you headed from here? Is it mid-single digits from here?

Yes, that's the aspiration was at mid-single digits, and we're not there yet. We'll be single digits this year and continuing that trend. So that's the model we have right now.

I was -- I didn't characterize it earlier, but because it's a hot topic, talking about AI investment right now, it's a relatively small part of our overall tech budget, but it's the fastest growing by far. So it grew triple this year. We expect that to double or triple next year and probably the same for the next couple of years.

And so while our aspiration is getting to that mid-single digits in terms of growth, it's very possible as our businesses start really getting energized around reimagining the processes that the demand may spike for some period of time. So I'm not ruling that out. But the model tells us right now that we think we're going to keep in that mid-single digits.

I think the piece that -- the other piece that's worth noting is we've been on this modernization journey, as you mentioned, and we still have some work to do. We're running -- just under half of our applications are running on the cloud base today. That's not where we aspire to. We aspire to be higher than that. So we still have some work to do on that. And every time when we migrate things, there's always this bubble between the things we're still running in our on-prem and the things we're running outside of our 4 virtual walls. And so there'll be a bit of that bubble, too.

So I think when I say we'll get to that mid-single digits, the time frame on that is a little challenging for me to predict right now. But we want to get to single digits this year and sustain that because it's been a long -- it's been 5 years since we've been in the single digits. So that's the start to that. When we get to that midrange, it might be '27, it might be '28, sort of depends on some variables outside of our environment.

So I guess a follow-up to that -- and Dave, I do want to bring you in here as well -- is when you think about the spend that's falling into run the bank versus change the bank, how is that changing? And how has that changed? And then what does that mean for operating leverage as we go forward?

Well, I'll start with the run and change. There's actually about 3 different ways we slice tech investment. I gave you the 4 buckets of what I'll call the IT-driven investment. And then -- but we want to make sure that we continue to invest enough in the businesses to continue to have them grow.

And when we tilted a few years ago into this resiliency and cybersecurity-heavy, heavy accelerated investment, that tilt of business-driven kind of change went under 50% for the first time in a long time. I'm happy to say it's tilting back over that 50% range. So it's to us, a little bit less about run and change right now. It's a little bit more what's driving us. And for a while there, cyber risk and resiliency were driving us -- that, the majority at least. That's tilted back to business-driven initiatives. And so we hope that's a good unlock around both productivity and growth in those businesses. And so I think that's probably how I characterize it.

From a run and change, I'll just give you this because everybody talks about this in the industry. We've gone from 60-40 to 40-60. And I've been over 20 years at the firm. I've seen it at 60% run and 40% change, and I've seen it the inverse of that. We're somewhere in the middle of that right now. I will say, again, during that tilt towards resiliency, some more of this became run as we added incremental capabilities on the run side. It is starting to tilt back again. So we're seeing the same tilt on business unlock is the same on run versus change.

But it won't change -- we won't get to our desired range, which is closer to that 60-40 on the change side until we finish some of this modernization work, and that's got another couple of years at least left to it. So we're tilting the right way, but we're on a journey, and it's a few years out still.

Got it. And then, Dave, anything on the operating leverage side as you think about the investments that are required, but also the underlying operating leverage that you're generating in the business, how should we think about that?

Yes. I mean when I think about operating leverage, obviously, we gave the guidance above, obviously, 1%. And if you think about how we do our planning on what he can spend and what other folks can spend internally, I think you remember this from the call, we start with productivity, right? Productivity informs the amount of investment we can do. And then that investment we do will define the expense growth, right?

So at the end of the day, the investment we make in the year is large, but the productivity is equally as large, right? So from my perspective, maintaining the operating leverage isn't just holding people back on their investment dollars. It's also doing what we're doing already more efficiently, right? So that productivity really drives the fact that we can reinvest in growth and in technology at the same time.

And the other aspect -- and we can dig into the AI investment spend here. But the other aspect is as you drive more productivity on the AI side, you also have to think about the cost of tokens. And how are you tackling that right now? And is that a priority? Will that be a priority later on? How should we think about that?

I'll start, and if Dave has a comment, he can chime in. So we have started to -- I know the buzzword is tokenomics now, and I'll use it sparingly. But it is a new variable for us to try and manage this one because our consumption is going up rather rapidly. And again, it's not -- I said not material this year, but it's quickly going to become so.

And what -- but maybe more importantly is it's really influencing prioritization right now. And so one of the examples we've often given is with most new tech innovations, it comes out, and it's generally the most expensive it's going to be when it hits the market, right? You can think of any innovation in the last 25 years, and the unit economics that get better as it gets produced in more scale by more providers.

And so we -- so in a lot of ways, if you look at NVIDIA sort of had the market on GPUs, and that created scarcity. And so it was -- we said, okay, it's the most expensive it's going to be. And it should come down -- AI cost should come down dramatically. But that, it's not entirely clear that that's going to play out here because there are a lot of other variables in this case. One, the demand for this technology is kind of the likes we've never seen before, at least not in a very, very long time. And the outlay of capital around data centers and those kinds of things, infrastructure in general, really substantial. And then this is one of those few technologies where there's power and water and there's a bunch of other sort of commodity or pseudo-commodity things that influence this. So it isn't completely clear to us that the economics of this are as sharply downward as virtually every other tech innovation has been over long periods of time.

So we do have -- so the reason I bring that up is we are having to prioritize. We have -- as Dave has mentioned to a group earlier, the range of ideas we want to push through in terms of AI development is very large, but the funnel has a filter on it. And one of the filters has to be whether this thing you want to automate or you want to build actually is going to be affordable to run based on the fact that I have a global operating model and may not be -- we've had -- we've thrown out things we built already because running it was more expensive than the people that were doing it. Now that's a weird place to be. And by the way, generally, in most -- almost in my 20-some years as a company, we would have lived with that. We would have taken that business case because we've assumed the cost of that tech was going to come down over time.

The uncertainty around tokenomics and how this plays out has us a little more circumspect on just taking neutral business cases and assuming they're going to become positive over time. So it's forcing us to do more prioritization in a way we maybe haven't had to before. So I would say that there's -- I'd say much like the cloud era of 10 years ago when that started to hit in financial services, we're more interested maybe in speed and capability than we are in hard savings in day 1. And it wasn't my phrase, but I'll reuse it here. These are assistive technologies we're building for the most part right now, which means they're largely elevating our people, not eliminating our people. Now maybe that's 5 years from now change, but that's where the economics have us right now.

Got it. So -- as we -- I think you went through some of the more impactful initiatives across some of the businesses. But maybe if you can double-click on that across the 3 different businesses, which are the areas you're deploying more AI, which are the areas you're deploying more tech? And where are you in that life cycle?

Yes, I probably jumped into that a little bit earlier. Again, I think the place we moved the earliest and fastest was in asset management. And I talked about some of the -- certainly, a lot of the research there has been assistive, I'll call it. We're not losing research as we're just researching across far more information than we ever did before. I think that's going to move up further into the more of the asset management activities over time. So I talked about that a little bit already.

On the wealth management side, this one wealth advisor tool that we're building that's growing, that's going to help our advisers continue to be assisted to them. You can imagine that to, over time, make them more effective and be able to have broader coverage. We're also pursuing some strategic partnerships with some of the larger AI firms to build some other tooling in the wealth management space. I won't jump to announce any of that, but I think we're excited about the fact that we're -- it's clearly an area of -- Dave and Mike have talked about, an area that we need to grow, organic growth. And so we've got investments directly aimed at helping assist that over time. So I'll say stay tuned on that, and I'll let that be Jason and Mike and Dave's news to share when those kind of come about.

But let's not forget that a big chunk of our company is operational, and technology is a big part of that, too. There are a number of initiatives there. I think the one that maybe that's most exciting for me is this fund transparency tool that we're starting to build out that will give our clients visibility into the life cycle as we're generating NAVs for them, asset valuations for their funds, give them visibility into the sort of supply chain as it's happening every day or every hour as we're doing that. They've been wanting that for a long time. It's generally done by e-mail and phone conversation today. That's going to become entirely automated and digitized over time, which we're excited about.

And there are -- we talked about in Mike's presentation from our last earnings, talked about alpha is of the 3 themes for outcomes we're generating. And absolutely, we should think about that as investment alpha where we've been aiming. But I do think there's a lot of operational alpha opportunity out there. We have not mined a ton of that yet, although we certainly have work -- a lot of work in progress there.

But think about that as a turbocharge of our digitalization work that we've been doing for the last 3 years, 3 or 4 years, where this is a technology that just makes it faster, more efficient. And quite frankly, the build-out of it just accelerated. So we're excited about that. So we think there's operational alpha generation. But again, I'm not prepared to make any big pronouncements, but more to come on that over the next 12 months.

So maybe last question on the tech side. You mentioned quantum and you mentioned wanting to invest more there. I guess, what exactly should investors be focused on from a quantum perspective?

Well, I think in the early days, there was -- there always have been in tech circles, this -- well, all of your encrypted data that somebody may or may not have seen before is going to be able to be decrypted, right? And that's absolutely true. But we're -- like for those of us that are spending a lot of time on quantum now, we're moving past that. And we're moving past that partly because quantum is starting to become more real, right? And I know that there have been firms that have been hyping this for 5 or 6 years, but the material science issues are being solved more quickly. And frankly, there's a lot more diversity in the approach that's being taken. So we're starting ready.

So I think there still is a security concern, but it's going to be less about decrypting old data and more about the way we all interact with each other and that you're going to have far more variability in encryption technologies. And I don't want to bore this audience with all that's going to mean, though, is that the way we send data in a trusted sense today has been fixed for a long time. It's going to become variable, and it's going to require us to start to work together in ways we haven't before. Us and our clients, us and other financial firms and us and other financial market intermediaries.

And so that's an area where it's starting to be talked about more. And I think I expect in 2027, a lot of people to come to realization that there's a lot of work to be done for us to start to move in some sort of lockstep around that. Having said that, I think there are going to be product, service and investment opportunities on the top line side. And I do think it will be in -- broadly in financial services. There are firms already making some moves in this space, but there'll be the types of optimization and products we haven't contemplated because they simply couldn't be performed before. Now whether they're economically viable, I think it's just like AI, it's a big question. These are expensive infrastructure to run.

And so that's hard for me to see. So that's why we're starting being -- with preparedness using the NIF guidelines and our own interaction with our counterparties and a number of other academic institutions to make sure we're ready when variable encryption methodologies are required, sort of post-quantum preparedness is the term you'll hear a lot about.

So we're in that, and I know a lot of our peer firms are, too. But I do think there's top line opportunities. We've got to start to mine those because we're going to spend a lot of money on the preparation end of this.

So Tom, that's a fascinating world, and I'm sure there's a lot more to dig into. But maybe we should bring this back to the environment. And Dave, can you give us an update on where you see the environment today, how you're thinking about the second quarter as we're about 2/3 of the way through?

Yes. Well, it's been less than 50 days since we reported earnings. So you're really saying what's happened in that period of time. And when I think about the current market environment, the word that comes to mind mostly is sustainability.

And that's the thing we think about mostly is we've had a good run. First quarter into the second quarter, the market conditions have been very conducive. You could call it a Goldilocks-type situation for banks with our kind of financial model, right? So -- and I had that information at earnings as well. And so from my perspective, everything I said last time still holds, and my conviction is still there.

What I'm looking for, I think, going forward in terms of full year is more sustainability, right? And so a lot of different things moving in different directions. Certainly, rates look like they're going to be stable, which is great. The market is still very volatile. Even though it's trending upward, it's still volatile. Happy to see earnings where they are.

Our capital plans really haven't changed. Our NII strategy is still there. So I think it's -- it hasn't been that much time actually since we gave the guide. So I think we're sticking to our guns, and we're hoping that there's some sustainability built into this. And it continues to trend in the right direction.

And can you just remind us on the Visa sale gains and the payout ratios and how you're going to use that?

Yes. Well, so Visa, when we talked about the payout ratios of our goal of 100% for the year, that did not include the Visa gain, right? So that wouldn't be something that would be included in there. But obviously, there is going to be a gain. And I think you guys generally know what the number is.

And so what we do with that is something -- as I said in the earnings call, we're thinking about and what the game plan should be. So -- but I continue to think about the 100% as it relates to the ongoing earnings of the firm versus the onetime gain process.

All right. Perfect. With that, we're out of time. Tom, Dave, thanks so much for your time here.

You bet. Thank you.

Thank you.

Good day, and welcome to the Northern Trust Corporation First Quarter 2026 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Jennifer Childe, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's First Quarter 2026 Earnings Conference Call. Joining me on our call this morning is Michael OGrady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Steve Carell and Trace Stegeman 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 21 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 21.

Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. [Operator Instructions] This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Jennifer. Let me join in welcoming you to our first quarter 2026 earnings call. We're off to a strong start in 2026, reflecting our ability to capitalize on a constructive market and rate environment while continuing to advance our One Northern Trust strategic priorities. Against this backdrop, first quarter trust fees increased 11%. Net interest income grew 15% and total revenue rose 14%, all on a year-over-year basis.

While continuing to invest in key growth initiatives, we generated more than 700 basis points of positive operating leverage, driving our pretax margin up nearly 500 basis points to 32% and fueling EPS growth of 43%. Return on average common equity reached 17.4% and which is at the higher end of our new medium-term target range, and we returned $510 million to shareholders, representing a total payout ratio of 100%. This included $359 million in share repurchases in the first quarter, contributing to a 5% reduction in share count as compared to the previous year. These results confirm that our One Northern Trust strategy is driving steady improvement in organic growth, consistent efficiency gains and resiliency in a volatile environment.

AI is increasingly embedded in how we operate. enabling our teams to deliver more value with greater consistency and speed. Moving forward, we are accelerating its deployment in ways that will further advance our strategy and financial objectives. We're applying AI not only to drive incremental efficiency but also to scale knowledge and expertise while maintaining the resilience, governance and client confidence that define our franchise. Our AI strategy is anchored in 3 outcomes: Hyperpersonalization, AI-generated alpha and infinite scalability. Together, these outcomes focus investment where it matters the most, enhancing the client experience, improving decision quality and increasing operating leverage.

Hyperpersonalization allows us to move toward highly contextual, tailored engagement. A tangible example is our One Wealth assistant, which integrates the Northern Trust Institute insights directly into workflows with future enhancements this will equip our wealth management advisers with real-time client-specific context, connecting market insights, portfolio considerations and client objectives, to support more informed high-touch conversations with speed at scale.

AI generated alpha focuses on strengthening investment outcomes through faster synthesis of information and generating deeper insight. Within Asset Management, AI-assisted research and product construction tools are enabling teams to process significantly larger structured and unstructured data sets, identify patterns more quickly and test scenarios more efficiently. This enhances both investment decision-making and operational execution, supporting stronger client outcomes without adding complexity. Infinite scalability is a key driver of operating leverage.

By digitizing work through agents, we further disconnect the relationship between growth and staffing, allowing for consistent execution across value chains and supporting stronger controls, all of which enable us to scale while maintaining rigorous risk management. With that backdrop, let me now turn to business performance for the quarter, beginning with Wealth Management. Momentum from last year carried into the first quarter as improved organic growth, underpinned by both strong advisory and product fees drove low double-digit trust fee growth. The regions delivered another quarter of solid results with trust fee growth accelerating to 11% supported by especially robust performance in the central region. We made good progress implementing various client acquisition initiatives across talent, centers of influence and digital channels.

Talent is our most important growth driver. We're advancing plans to increase revenue-generating roles by high single-digit percentages by year-end. This includes significant increases in critical producer roles. -- centers of influence, which include attorneys, accountants and other professionals are a vital referral source driving nearly 25% of our new business activity.

In the first quarter, we introduced a more robust and structured outreach framework to engage key centers of influence, including hiring a senior leader to accelerate this initiative, targeting a 10% increase in opportunities in 2026. Digital channels also continued to be an increasingly important source of new business. To boost the transition from interest to conversion we're enhancing data integration, lead qualification and personalization at scale.

Notably, the opportunities originating from digital channels in the first quarter grew by nearly 50% year-over-year. within our Global Family Office business, strength in international markets and investment management fees drove healthy performance. We also continued to scale family office solutions with early traction and client wins across several new markets. Expanding our investment offerings, particularly within alternatives, remains an important focus area.

We had 7 funds in the market during the first quarter, up from 5 in the previous quarter. Looking ahead, we will continue to build out our alternatives platform with a number of new alternative investment funds and strategies planned for launch this year with the goal of increasing alts fundraising by 25%. These offerings spanning areas such as venture capital, co-investments and secondary funds will broaden access and flexibility for clients seeking diversified sources of return while maintaining our disciplined approach to portfolio construction and manager selection. Collectively, these initiatives are strengthening our ability to generate repeatable, scalable growth while enhancing both the client and employee experience.

Turning to Asset Servicing. The business delivered another quarter of solid organic growth and strengthen profitability driven by disciplined execution of our strategic priorities. Trust fee growth of 10% coupled with significant NII and capital markets activity fueled over 700 basis points of year-over-year pretax margin expansion. Our differentiated service model, deep institutional expertise, and strength in supporting complex client needs continues to resonate, particularly with global asset owners.

During the quarter, we secured 9 new mandates across foundations, endowments and health care institutions, including 4 not-for-profit health care systems. As a result, we now serve 3/4 of the top 50 health care systems in the United States. Within alternatives, we remain a market leader with assets under administration approaching $1 trillion across hedge funds, private capital and semi-liquid vehicles.

Demand for scalable institutional-grade services remain strong. supported by more than a dozen wins during the quarter. These included [indiscernible] planned second quarter launch of a new private equity fund focusing on energy infrastructure in Europe, further expanding our global relationship across Europe, Australia and the U.S. We also announced an expansion of our CLO middle office services, delivering a unified operational and compliance framework that supports the full lifecycle of CLOs as interest in this offering continues to grow.

Strong momentum in capital markets continued in the first quarter as elevated volatility and heightened client activity drove 34% growth including another quarter of robust FX and core brokerage fees. We're also seeing continued interest in our digital asset strategy, particularly in custody, reporting and servicing of tokenized assets as tokenization moves towards scale.

During the quarter, we onboarded 5 new clients, providing custody and other services for tokenizes real-world assets, U.S. stable coins European money market funds and carbon credits. Turning to Asset Management. NTAM made good progress in the first quarter with strength across liquidity, alternatives and equities positioning the business well to meet its 2026 targets. Within liquidity, we extended our streak to 13 consecutive quarters of positive flows with associated AUM increasing to $350 billion. Importantly, we continue to diversify our funding sources across global liquidity vehicles and third-party platforms, while gaining overall market share.

We also launched the tokenized share class for our NIF treasury instruments portfolio during the quarter, marking Northern Trust's entry into the digital asset marketplace. By applying tokenization to institutional-grade liquidity strategies, we're offering clients a modern digital first way to access money market investments while maintaining our high standards for risk management and service. Within equities, ETF momentum remains strong. with the fourth consecutive quarter of positive flows. This was supported by the successful launch of the Northern Trust U.S. equity ETF, our latest active ETF designed to deliver tax-efficient outcomes for

investors. We also launched our first Saudi Arabia equity index strategy with $1 billion in client capital, reflecting our expanded presence and strategic partnerships in the Middle East. NTAM continued to broaden its alternative capabilities through active fundraising, which included 3 new sizable custom solutions and advisory mandates spanning secondaries, private credit and private equity.

Earlier in the quarter, we announced an important milestone in our third-party distribution strategy. Our institutional quality direct indexing capabilities became available on [indiscernible] platform, the largest independent TAM which supports approximately 1/3 of all financial advisers in the U.S. This will enable advisers to access our diverse lineup of equity strategies, empowering them to personalize portfolios at scale while managing tax outcomes. Finally, reflecting the strength of our active investment platform and the expertise of our investment professionals, NTAM was recognized by Barron's as a top fund family in 2025, ranking fourth overall and fifth in general equity out of [indiscernible] families.

To wrap up, as we enter the second quarter, our priorities are clear and we remain focused on disciplined execution. With that, I'll turn it over to Dave to walk through our first quarter financial results.

Thanks, Mike. Let me join Jennifer and Mike, and welcome you to our first quarter 2026 earnings call. Let's discuss the financial results of the quarter, starting on Page 4. This morning, we reported first quarter net income of $526 million, earnings per share of $2.71, and return on average common equity was 17.4%.

We're off to a strong start to the year. We delivered our seventh consecutive quarter of positive organic growth, positive operating leverage and year-over-year improvement in our expense to trust fee ratio, all excluding notables. We also returned 100% of our earnings to shareholders.

Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 120 basis points and unfavorably impacted our expense growth by approximately 130 basis points. Relative to the prior period, currency movements were immaterials, both revenue and expense growth. Trust investment and other servicing fees totaled $1.3 billion, an 11% increase compared to last year driven by favorable markets, currency and new business generation.

Other noninterest income was up 33% year-over-year, reflecting very strong FX trading and securities commission and trading income, which benefited from elevated macro volatility and uncertainty. Net interest income on an FTE basis was up 1% sequentially and to $662 million, a new quarterly record and up 15% from a year ago.

Our assets under custody administration were down 1% sequentially, but up 10% compared to the prior year. Our assets under management were also down 1% sequentially and up 11% year-over-year. Overall, our credit quality remains very strong with all key credit metrics in line with historical standards. We recorded a $3 million reserve release in the first quarter, driven by improvements to the C&I portfolio, which was partially offset by a small number of nonperforming loans.

Our effective tax rate was 25%, down 150 basis points from the previous quarter due to higher benefits associated with share-based compensation. We still expect the effective tax rate in 2026 to be approximately 26% to 26.5%. There were no notables in either the first quarter of 2026 or the first quarter of 2025.

Turning to our Wealth Management business on Page 5. Wealth Management started the year well, with strength in trust fees across both GFO and the regions, spanning both advisory and product channels. Assets under management for our wealth management clients were $498 billion at quarter end, down 2% sequentially but up 11% year-over-year.

Trust, investment and other servicing fees for wealth management clients were $601 million, up 11% year-over-year with particularly robust organic growth within GFO. Average deposits within Wealth Management were flat sequentially, while average loans were up 1%. Wealth Management's pretax profit rose 9% over the prior year period while the pretax margin remained flat at 37.1% as we continue to reinvest in the business to support future growth.

Moving to our asset servicing results on Page 6. Our Asset Servicing business also had a good start to the year, boosted by healthy new business generation, coupled with robust capital markets activity. Assets under custody and administration for Asset Servicing clients were $17.3 trillion at quarter end, reflecting a 9% year-over-year increase.

Asset Servicing fees totaled $741 million, up 10% over the prior year. Custody and fund administration fees were $498 million, also up 10% year-over-year, largely reflecting the impact from strong equity markets, favorable currency movements and net new business. Assets under management for Asset Servicing clients were $1.3 trillion, up 11% over the prior year. Investment management fees within Asset Servicing were $169 million, up 11% year-over-year due to favorable markets and new business activities.

Asset Servicing average deposits were unusually strong, increasing 11% sequentially while average loan volume decreased 2% from fourth quarter levels albeit off a small base. Asset Servicing pretax profit grew 59% over the prior year period and the pretax margin expanded 740 basis points year-over-year to 28.3%, benefiting from elevated deposit levels, higher volatility-driven capital markets activities and the pivot in our new business approach.

Moving to Page 7 on our balance sheet and net interest income trends. Our average earning assets were up 7% on a linked-quarter basis as higher deposit levels drove an increase in money market assets and in our securities portfolio. The fixed percentage of the securities portfolio remained flat at 52% in the first quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to $1.44 at the end of the quarter, and the duration of our total balance sheet continued to be under 1 year.

Deposit levels were higher than expected throughout the quarter as a result of both elevated volatility and general uncertainty in the marketplace. Average deposits were $129 billion, up 8% compared to fourth quarter levels and 11% year-over-year. From the deposit base, interest-bearing deposits increased by 8% sequentially and noninterest-bearing deposits increased by 5%, remaining at 15% of the overall mix.

Net interest income on an FTE basis was up 1% to $662 million sequentially and up 15% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, including growth in noninterest-bearing deposits, along with the impact from fixed asset repricing and deposit pricing actions we've taken, which was partially offset by the full quarter's impact from the fourth quarter rate cuts. Our net interest margin on an FTE basis decreased sequentially to 1.75% primarily reflecting several large short-term institutional deposits and the absence of the higher FTE adjustment recorded in the fourth quarter.

Turning to our expenses on Page 8. Expenses increased 6% year-over-year. We delivered 410 basis points of trust fee operating leverage and 740 basis points of total operating leverage our expense to trust fee ratio, while seasonally higher at 112.4% was down 440 basis points year-over-year. This translated to a pretax margin of 32% and up nearly 500 basis points year-over-year.

Turning to Page 9. Our capital levels and regulatory ratios remained strong in the quarter. and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio on the standardized approach decreased by 60 basis points on a linked-quarter basis to 12% driven by an increase in RWA related to elevated capital markets activities.

Our Tier 1 leverage ratio was 7.3%, down 50 basis points from the prior quarter, driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available-for-sale securities was $446 million. We returned $510 million to common shareholders in the quarter through cash dividends of $151 million and stock repurchases of $359 million, reflecting a 100% payout ratio.

Turning to our guidance. For the full year, we now expect NII to grow by mid- to high single digits over the prior year, which is an increase from our previous guide of up low to mid-single digits. We still expect to generate more than 100 basis points of positive operating leverage, and we expect to return at least 100% of our earnings to shareholders.

Before we open it up for questions, I'd like to take a moment to thank Jennifer Childe, our Head of Investor Relations and congratulations on our upcoming retirement. Steve Carroll, currently the CFO of Northern Trust Asset Management will be stepping into the role and we'll work closely with Jennifer over the coming weeks to ensure continuity. Jennifer has been a trusted partner to me and the leadership team, and we're very grateful for her many contributions over the years. And with that, operator, please open the line for questions.

[Operator Instructions] We'll now take your first question coming from the line of Ebrahim Poonawala with Bank of America.

I guess maybe just two questions. One, just at the very top of the house, when you look at the pretax margin, the ROE performance this quarter, including in Asset Servicing, but for the entire business. There's a component of the macro being very strong for Northern, but there's also a self-help component that has kicked off about a couple of years ago. As we think about the sustainability of the ROE or the pretax margin, just maybe frame for us where you think there might be a little bit of cyclical tailwinds that's leading to over earning on these relative to structural actions that have been taken over the last couple of years that may improve the resiliency relative to what we reported for 1Q?

Sure, Ebrahim, it's Mike. I'll take that. So our goal is to be a consistently high-performing company. And as you pointed out, that's something we put out there a few years ago, along with our One Northern Trust strategy. So we're very focused on executing on the 3 pillars of that strategy. We'll do that in different environments. And this past quarter was a very constructive environment. And so there's no question that we got a lift in our financial performance as a result of that. Equity levels are still relatively high. The level of volatility is attractive for our capital markets business and there's a fair amount of liquidity, broadly speaking in the market, which helps us with deposits, with money market funds as well. So very constructive on that front. That said, we also, to your point, think about it from a self-help perspective and try to just execute as well as possible, whether it's a really strong environment or not so strong. As far as the targets at the last earnings call, we put out medium-term targets. Some of those, as I mentioned, we've kind of largely hit or close to. That said, it was in this strong environment. So we're going to keep driving towards those medium-term targets.

Got it. And I guess maybe just switching to the Global Family Office. It's been a strong business over the last few years. Maybe talk to us around the win rate and the competitive landscape there. And just the evolution of that client when -- once they're on board, how do you think about just the growth runway and the opportunity to improve the ROI on the client once they're on board at Northern.

Sure. So the global family office business is absolutely one of our strongest businesses. It's an area where truly we can deliver the entire firm. It's the best of all 3 of the businesses and working together for these largest families and their family offices. And as you pointed out, it's grown at a high rate. And once again, here in the first quarter, the organic growth rate for GFO was above the average for the businesses. And there's a number of dynamics that are allowing us to continue to grow at that high rate. One it is certainly just the competitive position that we have and our offering on that front. But second is that it's still largely a U.S. domiciled or focused business. Right now, international is less than 15% of the client base and the revenues. And yet it's growing at a faster growth rate. And we do believe that this is something that is not only, I'll say, attractive offering globally, but also is something that is scalable globally. And then to the latter part of your question, you're absolutely right that often the relationship with the family office can start with a more limited breadth of offering. So it may focus primarily on custody and reporting to start. But then that's the opportunity to do much more with the family office when it comes to other opportunities, particularly along the lines of investment management, and you saw some of that in the first quarter as well. So we think it's a great business and continues to have a lot of upside.

Your next question will come from the line of Manan Gosalia with Morgan Stanley.

I wanted to start on the operating leverage side. I mean 740 basis points of operating leverage this quarter really strong. I think you reiterated the guide of generating over 100 basis points of operating leverage this year. Can you help us just think through how we should think about, I guess, expense growth this year? Are there any investments that were maybe got pushed out, any timing differences or anything else we should be considering here?

Our growth methodology hasn't really changed. If you think a little bit about the expense growth in this particular quarter. Most of it was driven by incentives, and there was some noise from currency as well. So actually, when you make more money, you obviously are going to have a rising expense line. We still have in process the idea of high end productivity funding investment and then solving for an expense growth as a result of that. And so we haven't changed. And what I would say is the productivity targets for the first quarter hit our target. The investments that we wanted to make, we were able to make and the expense growth we managed to was pretty much spot on where we thought it would be. And so that discipline and flexibility is built into our planning, which is why at the beginning of the year, I talked more about operating leverage than I did about attaching myself to a finite expense growth number. We wanted to have the flexibility to react when markets were conducive but also have the discipline to be able to flex down in environments that are less. So when I think about expenses, I think about a dynamic expense line, that basically is something we look at on a very continuous basis. And so it's very much driven today by the productivity and the investment side of the equation.

Got it. And then maybe to pivot over to capital. Any thoughts on the new Basel end game proposal and maybe how it impacts your capital deployment strategy going forward?

Yes. I think it's too soon to think about how it might impact the capital return part of it. I will say that on measure, our preliminary view of it is, it is a net could be a net positive for us as it relates to obviously the commercial loan side and the operational risk is something that we probably have less of than some other peer banks. And so net-net, we think that it's going to be a positive for RWA, but it's still early days. We're in the comment period. And so I would say is taking a cautious look to it. I don't think it's going to have a massive impact. But if it does, it will certainly be net positive at this point.

Got it. And congratulations, Jennifer.

Your next question will come from the line of Mike Mayo with Wells Fargo Securities.

Look, wealth is growing double digits. As you said, firm-wide revenue is up 14%, the higher end of return targets. So it seems like it was working this quarter. But what got my attention is, I think, new news that you look to grow wealth producers by 7% to 9%. I think that's this year. And so -- and correct me if you disagree, but I think this is the most competitive market we've seen in the Wealth business like almost ever. So the question is, I'm not saying it's a wrong strategy, the question is, why now do you look to increase the wealth producers? And what's your pitch because I think every -- literally, every large bank, large brokerage firms looking to expand wealth at this time. What's your pitch when you try to get the new producers?

Thanks, Mike. So you're right, we are focused on hiring and investing in talent in the wealth management business. And you're absolutely right. It's a very competitive marketplace for the best talent, which is what we're looking for. And we are trying to focus on roles that are revenue generating for us and within that producer roles. And part of it is, as we look back over the last several years, although that group has grown, it has grown at a lower rate than the growth of the business itself. And so there's an acknowledgment that we need more talent to increase the growth rate, the organic growth rate within wealth. As far as being able to have an attractive value proposition for wealth management professionals and advisers we think we have a very different value proposition. We have an excellent brand. We are positioned within the upper tiers of the market, which, I'll say, the highest levels of expertise want to be able to not only serve that client base, but look to bring on new clients on that front. We've been investing in the platform to do that. We've talked a lot about family office solutions which we believe really is a differentiated offering. It's, in our view, better and more attractive than stand-alone virtual family offices because it brings the full set of resources and banking capabilities that we have. And yet, it's also an opportunity to leverage the history and the fiduciary capabilities that we have and trust capabilities. So we think for an adviser or a professional that's looking to be able to apply their trade, if you will, and succeed, we offer the best platform for them to be able to do that. So that's a big part of it. It is a different model here at Northern. And that's -- as you know, that's part of why we think it's more attractive.

And as part of this increase investing for growth, whether it's wealth or firm wide because you rattled through a lot of growth initiatives, is that -- and maybe I got this wrong, but you're still guiding for 100 basis points for operating leverage this year, but you had over 700 basis points of operating leverage in the first quarter. Is the reason for no change in that guide just conservatism or also because you think you might be ramping up some spending as you bring on these new producers?

So as I mentioned before, obviously, it's a very constructive backdrop and macro environment for us. So there's definitely some acknowledgment that the strong revenue growth here was driven and supported by that backdrop. We don't know what's going to happen as we go through the year. And there are also some tough comps in the sense of last year, we had strong second, third, fourth quarters. So acknowledging that, that's ahead of us as well. And as Dave mentioned, we've really tried to align our, I'll say, resource deployment strategy based on productivity and looking to ensure that we're driving productivity to fund that investment. And so we haven't pulled off of that. Yes, we expect to continue to invest in these areas that we talked about. But the plan is to try to generate more productivity to do it and not necessarily change the expense growth profile that we've been on.

And I just like add to that. The direction of travel on expenses is down for the remainder of the year.

Next question will come from the line of Brennan Hawken with BMO Capital Markets.

So Dave, you flagged strength as far as the deposit growth goes and it looks like a lot of -- from the presentation, a lot of the deposit growth was driven by the servicing business. You also flagged some large institutional deposits weighing on NIM. So was that part of that deposit strength, some large institutional deposits? And how should we be thinking about the profile of deposits as we move forward and what your expectations are for that through the course of the year?

Yes, we had some largely unexpected extremely large deposits. I mean you've heard me speak in the past about why we keep our capital ratios where we keep them. And we want our balance sheet to be open at all times for our largest clients. And so occasionally, some of our clients will do some strategic repositioning and we want to be in a position to capture those deposits when they do that. They're not core operational deposits. They aren't there for a long period of time, but we want to be able to accommodate them. So in this particular quarter, it really drove up the average deposit level significantly. And that isn't going to obviously translate into a Q2, although I do think the increase was roughly $9 billion, and I think we're going to keep [4 to 5 ] of that, so in terms of average deposits. But at the end of the day, that's really what you saw there was client-driven specific or very large deposits from just a handful of just really important big clients.

Got it. Okay. That makes a lot of sense. And you also spoke to robust organic growth in [indiscernible] GFO business. but we didn't see a lot of deposit trends. We certainly saw the revenue look good. Is the organic growth in that business, less tied to deposits, the way we normally think about that, and therefore, that's the divergence. And also maybe could you give a little color around your new efforts around the GSO and how that's going? And when you guys talk about GFO, do you categorize those 2 together?

Sure. So just on the liquidity part of the question there, Brennan. So these family offices have significant liquidity, which they are, I'll say, utilizing and moving around quite a bit. And so it can move from on the balance sheet as deposits to -- into our money market funds or short-term treasuries. So it's, I'll say, a pretty active management of liquidity that we do, I'll say, on their part and for them. And so from quarter-to-quarter, for example, those deposit numbers can move up and down. And to your point, it's less of an indicator, I would say, of the organic growth and more of an indicator of just their activity. To the second part of your question, we have the benefit of having this strong family office business, which we've been in for quite a while and have built up the capabilities. And to your point, what we've looked to do with Family Office solutions is leverage those capabilities, but in such a way that we can create the virtual family office experience for a family that doesn't want to have to set up their own office. So it's not run as 1 business together, but I would say 2 businesses that are very closely related and highly coordinated in what they're doing because they're leveraging some of the technological capabilities, some of the expertise that cuts across that, and it's just a different service model where we're acting as essentially the head of that family office for them. as opposed to that person and team being employees of the client's family office.

Okay. And Jennifer, congrats on your retirement.

Your next question will come from the line of Alex Blostein with Goldman Sachs.

So Mike [indiscernible] question. So the tone in your prepared remarks and to some of the Q&A feels like leans and organic growth acceleration a little bit more than we heard from you guys in the past and you talk about some of the investments you're making to sort of support that. Can we talk through maybe the areas where you see the most opportunity to accelerate growth? And ultimately, what you think Northern's organic fee growth, so ex markets should look like over the next couple of years if you achieve these goals, both across the institutional business and the wealth?

Sure. So I would start, Alex, by saying that we see the organic growth opportunity across all 3 businesses. The nature of it is going to be different. We've talked somewhat on the call here about wealth management. A lot of the investment but also then the opportunity on the wealth management front is to add talent to that to increase the growth rate. So I think we've talked through that part of it. But it also cuts across other aspects that drive growth in thinking about marketing, I talked about digital marketing that we're doing, a focus on centers of influence. There are other areas where we're trying to essentially bring in more opportunities at the top of the funnel in order to increase that growth rate and many of them require investment to be able to do that. And I would also say on that front, that's an area where we believe that AI is going to create opportunities for us to continue to transform the client experience and the adviser experience particularly as you work down the wealth tiers. So we're excited about that, but that also does require investment to be able to drive that. Within the Asset Servicing business, as we've talked about there, the real goal is around scalable growth. And I would say staying focused on our current footprint, our current offerings, the segments that we're in, that's where we expect to get this continued growth at a profitable -- very profitable level and expect to continue to drive the margins up in that business. And then within Asset Management, really you've seen a lot of growth that's come from the core products for us, certainly liquidity. But where we're really investing there is on the ETF front as well as tax advantaged equity and also quant. And that requires investment in the sense of building out our distribution capabilities for third-party but we believe that's an avenue which right now represents a relatively small part of our asset management business that could grow at a much higher growth rate. So that's the -- I'll say, the combination across the businesses -- and we've talked about an organic growth rate that we've targeted around 3%. And certainly, from what I talked through there, that's going to drive the 3%, but we hope above that as well.

Got it. And then a quick follow-up just around capital management. With the Visa shares become available to you guys this year, can you maybe just talk through the amount of proceeds you expect the use of these proceeds and timing when it comes to potentially bigger buybacks?

Yes. So we'll roughly get half of our position, let's say, $470 million million pretax, so $350 million post tax depending on the share price. And we've only just begun to sort of think about what we're going to do with it. I don't think we're going to use the same obviously, playbook we had a few years ago. We've got other options at this point, but we're going to weigh it against all our other priorities and take a look at what to do at that point in time but haven't landed yet on that.

Your next question comes from the line of Ken Usdin with Autonomous Research.

I wanted to ask a question just about the balance sheet. You mentioned that the benefits that came through the size of the balance sheet and the deposits maybe some of that doesn't say maybe some of it does. But just given the higher for longer environment, how do you think it's just about duration of the securities portfolio? And any other changes to that? Or is it really more of a wait and see because you're not 100% sure of this elevated size of the balance sheet lingers?

Yes. So when you think about the upside to our balance sheet and to our NII during the course of the year, there's a bunch of different things we think of in trying to figure out what we're going to guide. And so the first one would be the investment securities maturity replacement. Obviously, we still have back book repricing, and we can take advantage of that through the full year in '26. We did take some deposit pricing actions as well towards the end of last year, let's say, third and fourth quarter, and we haven't lapped those yet. So those are built in increases that we see coming in the year. We've been leaning a bit more into some incremental investment strategies around higher-yielding opportunities. We've been looking at our wholesale funding mix a little bit more leaning a bit more into FICC repo as well. And so when you put all those together and then obviously, the deposit growth, so we still are -- we're thinking about having some deposit growth in line with the businesses -- and we also no longer have the potential headwind in our mind anyway, of rate cut in the U.S., and we've taken that off the table and may even have some rate increases in Europe. And so -- you put all that together, and that's sort of how we come up with it. It doesn't -- we're not going to reach for yield. We're not going to materially change our profile in terms of duration to try to get there. We don't need to, to be honest with you. to get there. We feel we can do it without that. So -- and there's a lot of uncertainty out there. So I think our positioning right now is pretty stable.

And just a bigger picture follow-up. We've got potential new Fed share coming on talks about potentially shrinking the size of the Fed balance sheet. That balance sheet has already been down $2.5 trillion and trust bank deposits keep growing, but can you just remind us of the rule of thumb to think about if the Fed balance sheet continues to shrink over time, how insulated the -- your balance sheet from that in terms of deposits?

So Ken, I would say that is something that we are obviously observing of and what's happening. And frankly, I'll say a little surprised that liquidity levels have remained so high on our balance sheet and in our funds, given that the Fed has reduced its balance sheet as much as it has. To the extent that we're in, say, some level of stabilization there, I think that's good because that means our deposit levels and money market fund levels will grow with our organic growth. So yes, there is definitely some exposure to the extent the Fed were to really shrink its balance sheet more. I think that pulls liquidity out of the marketplace. And our model as well as others, it tends to expand and contract with that somewhat. So some exposure on the downside, I think, less on the upside.

Your next question will come from the line of Steven Chubak with Wolfe Research.

It's actually Sharon Leung in for Steven today. Just wanted to ask on the margins in the business segments. The margin and asset in asset servicing has expanded nicely, but in wealth, the margin was flat year-on-year despite some strong revenue growth. So just wanted to understand like what are the components that are going to drive the, I guess, the path towards your medium-term target of 33% on the margin?

The goal of the asset servicing business, as I mentioned, is scalable growth. And as much as we did have a strong pretax margin here in the quarter. This is something that we're trying to consistently move up. And so the expectation is that we will continue to try to see a higher margin in the asset servicing business. We've talked about a particularly strong macro backdrop here. So capital markets, very strong NII, very strong in asset servicing. So that definitely contributed to the higher pretax margin for this quarter, but we want to make that even more sustainable, if you will, in a more resilient high level of margin. So there's more opportunity on that front. On Wealth Management, where we have had a very attractive pretax margin, that's an area you've heard a lot where we've talked about growth and making investments for growth. So we feel like we're in, I'll say, a good range for that margin, but we are emphasizing growth as opposed to trying to see that margin go up. And to the extent we did have some pressure on the wealth management margin as we make some of these investments in the near term, the expectation is that we'll more than make up for those with improvement in asset servicing.

Your next question comes from the line of David Smith with Truth Securities.

On organic growth, you said it 7 consecutive quarters of positive growth for the business as a whole and then there's a 3% target that you've put out there, but do you think there's an opportunity to do better over time. let's get a sense of where organic growth is today and where you were a year ago. We know GFO is above average, but is that servicing and the regional part of wealth barely positive today, 1% or so, 2% or so, circa bump around some quarter-to-quarter, but maybe over the past year, what kind of organic growth of each of those businesses earned and than wherever those say, like the year prior?

Sure. So to just start with this quarter, each of the 3 businesses had positive organic growth. And that would also be true within the major segments of the business. But to your point, if we look at each of them individually and a little bit, I'll say, over time, within Wealth Management, the organic growth has been closer to a consistent, I'll say, 1% with GFO being above that and the regions being a little bit below that. And that's where we're looking certainly for GFO to continue to grow at a high rate. but it's more with the region's incrementally increasing that growth rate as we go forward this year and into next year. to move it up in total above the 3%. So made progress this quarter, but again, it's all about consistency. In the asset servicing business, just given the nature of some of [indiscernible] mandates, that organic growth rate can, I'll say, swing or vary more from quarter-to-quarter or even in the year. So we did -- if you went back a few years, we did have some periods where we had some bids that rolled off that did bring that down to kind of flat to negative organic growth. as I mentioned, it's positive right now, again, in about the same range as the wealth management business. but we see the opportunity likewise to continue to see that growth rate increase with the focus on profitability and scalability for it. And Asset Management overall, a lot of the organic growth more recently has been primarily driven by liquidity, but we're seeing greater diversification in the growth with that business as well. So in the past quarter here likewise, some of the areas that I mentioned around ETFs and first time period tax equity have had nice organic growth across that front. So once again, at about the same [indiscernible] and same expectation to see that increase.

Got it. And do you expect over time all the major businesses to be doing 3% organic or medium term, would you expect to get there for the company as a whole, but some to be above and some to be below?

Yes. So the target is for all of them to be above the 3%. But just given the way that it varies, say, from quarter-to-quarter or even year-to-year, they may not all be, but that's the benefit of having the 3 businesses.

Your final question will be coming from the line of Gerard Cassidy with RBC.

I think you called out in your prepared remarks that you saw outsized growth in the wealth management area in your central region. Can you highlight what drove that?

Sure. You're right, Gerard. We did. And I would say often given that the company has been in the central region and headquartered in Chicago for a very long time. We have a very strong business here. And often, people think that it's a mature business that is not going to grow at the same rate or even at a higher rate. But the fact of the matter is the team and the leadership of this region, particularly under John Fumagalli and his team have consistently leveraged that strength to be able to grow at a higher rate. And one of the areas I would say more recently is around the family office solutions that I talked about. That's the area where we started with that solution set and with that offering. It's already gained momentum in this region. And now we're in the process of rolling that out to the other regions in the same way. So that's part of the driver of the strong quarter.

Very good. Obviously, the dominance of questions are all about the wealth management and the custody business. So I want to pivot because it's always good to ask you folks about credit quality since it's always so per guys obviously don't take a lot of risk in lending. Your portfolio is not that big relative to your asset size. Can you share with us what are you guys seeing in the credit quality trends. They're very strong. We understand that. Have things changed meaningfully from the financial crisis and pandemic that customers are more resilient today. Any color there?

Sure. Dave?

Yes. I mean -- so just keeping when we look at Northern's portfolio that we have a very -- we're very tilted toward investment grade on the corporate side and then -- and our clients in wealth we're usually doing secured facilities. And so at the end of the day, for those to be in the stress scenario, it would take quite a bit of downside to do that. So that's why you see our credit quality, so high. And we're not obviously also exposed to the same extent in the private equity and/or private credit space either where there's some pressure right now. we lend on the valuation performance of the underlying fund investments. And so we do subscription facilities where the underlying obligor, which most of whom are our institutional borrowers are really quite strong. And so from our perspective, we're not in a high-yield market. We're not in the leveraged loan market, if you will. So we're not seeing the same kind of pressures that other firms might be experiencing in that regard.

And it appears there are no additional questions at this time. I will now turn the call back to Jennifer Childe for closing remarks.

Thanks for joining us, and we look forward to speaking with you again in the future.

Once again, Jennifer, thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.

We will go ahead and get started. So next up, for a session post lunch, we have Northern Trust. With Northern Trust, we have David Fox, Chief Financial Officer. And with David, we also have Michael Hunstad, who's the President of Northern Trust Asset Management. So thank you, David, Mike, for joining us. And I believe Mike has prepared a few slides and remarks to go through. So over to you, Mike.

Yes. Great. Thank you. I want to talk just a little bit about the asset management business at Northern Trust. You undoubtedly heard a lot about our wealth management and our asset servicing business. But I want to stress that there are literally hundreds of asset managers that are in this space, but only a very small handful are in what I'll call the $1 trillion club. And we are privileged to be in that club. We are one of the largest asset managers in our own right in the industry. So why haven't you heard more about us? Well, we have this great brand name, jewel of a brand name in wealth management. We have $18 trillion in assets under custody. Admittedly, we are kind of a piece of the business, but a piece of the business that you don't necessarily hear a lot about.

So just by the numbers very quickly. Again, $1.4 trillion in total assets. A lot of times, I get the comment, well, is that not predominantly passive assets. And we are one of the largest passive providers in the world. There's no question about that, both for equity and fixed income. We've got more than $300 billion in our liquidity platform. But one thing I want to stress is that we go well beyond the passive dimension, almost 40% of our assets are in the active space. We have a robust alternatives business under the brand name of 50 South Capital. We do private equity, private credit. We have a great secondaries lineup of products, and we do a lot more than that. We do co-invest, hedge fund of funds. It's a terrific business, terrific track record, I'll talk a little bit more about. But also in the active dimension, fixed income, high-yield, ultrashort, multi-asset. We're big in the multi-manager in the OCIO. We're actually one of the top three tax-advantaged equity firms in the world.

We've got a 35-year track record. We're doing a lot more in that space going forward. So a lot on the active side. I didn't even mention a $50 billion quantitative strategies business where we showcase our capabilities in AI and alternative data. We built one of the best technology stacks in the business. The point is that we are a lot more than a passive manager. We're also much more than just a U.S.-focused manager. We have global footprint, 16 locations physically, but clients in many, many more countries around the world and premier clients. In the U.S. and the U.K., we have a lot of insurance, a lot of pension. Australia, we're very, very large in the superannuation space. increasingly around the world, sovereign wealth funds, sovereign pension funds.

We just signed deals within Saudi Arabia with two major clients for both our passive business, but also our quantitative strategies business. So very, very large footprint, very large client base. And I think the thing that makes us very unique is the way that Northern Trust is structured. So we have this tremendous wealth management business that asset management has been servicing for more than 25 years. We can create product. We can incubate product within our wealth management practice. We can then take that product and distribute it into the intermediary space. So platforms, wirehouses, RIAs. If we have product that's well designed for the wealth channel, that should very much play well in the intermediary space. So we design for wealth, we distribute within intermediary, but we can also scale through our institutional connections and asset servicing is a great partner in that regard.

$18 trillion in assets under custody. A lot of that is asset owners. Those are the same clients that we're going after. So our position within Northern Trust, I think, makes us very unique in the product development, but then distribution capabilities also. I think we're very, very well positioned and uniquely positioned to take advantage of that going forward. So a big part of our strategy. All right. So -- it's a little bit about what we do. We talked about asset classes, but I do also want to talk a little bit about vehicles. We're known for our mutual fund platform. We have one of the biggest CIT platforms in the business. We're very big in the DC space, but we go well beyond that as well.

So internationally, whether it's our UCITS or FGR funds in the Netherlands, AUTs in Australia, we have a lot of capabilities in how we actually wrap our products. And two that I want to highlight today is our ETF platform as well as our custom SMA platform. So in the exchange-traded fund area of the business, we have been in this space for more than two decades. And we were early in the, call it, innovation around alternatively weighted indices, now going more in the active space than the core space, and I'll talk about that in a second. In the custom SMA business, we're one of the top three in the industry in terms of the assets that we manage. So that format or that vehicle being very important to us as well.

So when you think about growth going forward, it's a combination of product and vehicle. ETFs is a fast-moving river, double-digit growth expectations going forward. We're going to double down here as well. We already have scale. We have great clientele. We have access to intermediary platforms. We co-develop our product with wealth, a key area of emphasis, alternatives, 50 South Capital brand name, obviously, a double-digit growth area as well. 25-year track records, great performance, great team, great process, great capabilities overall. And then finally, custom SMAs where we're thinking about how do we take everything that we do well and make a bespoke solution for our clients. Again, a double-digit area of growth for the industry. We have the right to win.

We're top three, $150 billion in assets, and we're growing every single year, a 35-year-old track record. So our achievements in 2025 that are going to carry over into 2026. ETFs, we launched 11 really creative ETFs this year in the latter part of 2025. When you think about our clients and what they need, a lot of them want an annuity kind of cash flow stream, but don't want to lock their assets up into an annuity contract. We launched laddered fixed income ETFs, both municipal bond as well as tax advantage or TIPS, to be able to recreate those cash flow streams for a specific need. On the alt side, we're -- we've increased our fundraising more than 2.5x year-over-year, significant investments across the organization. You're going to see more from us in that intermediary space as well.

Custom SMAs, more than $5 billion in asset gathering in this space last year. We've extended into new channels. We're doing a lot more in the long/short tax advantage space also. And then finally, I'll just mention this because this is happening yesterday in liquidity. $35 billion in growth last year, which was a fantastic year, 12 consecutive quarters for asset growth. But just yesterday, we launched our first tokenized share class of our treasury-only funds, with some great innovation. So a lot of product launches in 2025, a lot more to come in 2026. We just wanted to give you a taste of what the asset management business looks like.

Thank you very much for that. Maybe I just -- since -- to follow up on that, Mike, you took over the business last year, the leadership of the business. Just talk to us when you think about like when you laid out like the right to win across ETFs, alts, one, just looking back over the last three to five years, was there an aspect around execution, be it sort of manufacturing product, distribution or just speed of execution where you thought things could have been done better? And like where do you think we should expect the biggest changes on a go-forward basis relative to how this business was run over the last few years?

I would say innovation and speed of launch are two really critical components of that. Prior to what we did late last year in the ETF space, we hadn't launched an ETF for several years and the platform had been kind of what it was for a long period of time. So we need to speed up our product launches, but we also need to be more innovative in what we do. Another happening last year that I think is sort of part and parcel to that is we acquired a team in Amsterdam in the Netherlands that is focused on really AI and alternative data within the active space.

So our active strategies in equity and then increasingly in fixed income, utilizing these disparate data sources, very unique kind of alpha drivers. We're just rolling that out into products late last year and early this year, starting to see some great new mandates come out of that as well. So speed of launch, but also innovation are going to be really two critical dimensions.

Got it. So similar to, I think you mentioned the team in Netherlands, is part of -- when we think about just execution, the speed of it, do you need a lot more external talent? I'm just wondering what investments does it require either from an intellectual capital perspective or from a technology perspective to really get to the goals that you have?

Yes. So let's talk about both. On the human capital side, we spent the last several years really increasing our heft within the investments function. We brought a lot of new talent from the outside. We have also restructured some of our investment teams to be more aligned to their go-to-market strategies. So that, I think, is work that is now paying off, so to speak. On the technology side, though, I think this is a little appreciated but very important aspect of our business that I would say unambiguously that the asset management -- Northern Trust Asset Management has one of the best tech stacks in the business.

And what do I mean by that is like, yes, we -- Aladdin is our centerpiece, but we have created so much around that centerpiece in terms of cloud enablement, in terms of making sure that we have access to all the data sources from whether it's our fundamental data vendors, our index providers, our own internal accounting systems. More or less, we're getting to the point where everything will be cloud-enabled and not only cloud-enabled, but having kind of that seamless data flow. So why is that good? It's good because it allows you to scale your business in a couple of important ways.

One is just you can do more with less resources, and that's great. But the other is you have the ability to customize at scale. And this is something that Northern Trust is very good at, creating bespoke solutions for our clients. And again, we have this big custom SMA business, but allowing us to do so with a technology enablement that means that we can preserve our profit margins and still take on all these bespoke implementations.

Got it. I guess maybe zooming out a bit and David, for you, as we think about some of the strategic priorities for the firm, be it optimizing growth, driving productivity, resiliency. Just talk to us, I mean, I think you took over as CFO late 2024, and there are a bunch of leadership changes around that time. When we think about the three strategic pillars/priorities, what changes have been instituted over the last couple of years that have put Northern on a better path for growth, profitability and all of that being resilient?

Yes. Thanks for that question. I would say the main thing is the creation of the COO function and centralizing a lot of the best practices across the firm within that COO function, bringing some of the stuff that have been done in the silos towards the center. The One Northern Trust effort that we had generally inside the firm feeds both our growth and our productivity. So if you think about -- I talked a bit about this at the fourth quarter earnings call. When we think about our financial plan going into the year, we actually don't start with what's my expense growth going to be in the year. We talk about what's the productivity going to be. And everyone has a productivity target in the KPI.

Based upon that, how much money do you think you can invest in your expenses? And how does that inform your overall expense growth tolerance? And so -- that's the way we did our planning. That's a very different way of doing it. Everything is integrated. Your capital spend, your investment spend, your productivity spend and your expense spend, and we made it much more dynamic. And so you've got these -- you have the ability, I think, when you do it that way to be more flexible in terms of where you put your money based on where the markets are. And then you have the ability through the One Northern Trust part of it, not just in the operating side that [ Pietrzwicz ] is doing, but also in the -- on the business side to think a little bit about mining those themes between all three businesses.

And just thinking a bit what Mike just mentioned around the ETF creation, getting informed about new product creation through ideas that may come out of the wealth management business. Talking about alternative investments, not just from the perspective of advisory on investments, but all the best-in-class fund administration and asset servicing that we do around that particular space, which is really best-in-class. And so you combine all that together, it creates a lot of opportunity for growth and productivity on top of what is now a very resilient tech stack. So they all kind of are intertwined.

Got it. And I get your point in terms of thinking about productivity as opposed to just expenses, but it's been a huge focus in terms -- from an investor standpoint around expense growth and outlook, and it has been drifting lower the pace of expense growth. Just give us a sense of the top two or three areas of investment spend today? And then what are the offsets when you think about just opportunities to save within the bank, you're getting efficiency gains or cost savings?

Yes. Well, listen, I mean, our two most important areas for spending, obviously, are still going to be the infrastructure of the firm is incredibly important and making sure that, that infrastructure through the technology space is done in a way that enables the businesses to grow. And so we have technology spend that is business driven. We have technology spend that is the foundational technology of the firm. But I would say at least 50% of what we're doing on technology is going to be around growth and around business enablement to be able to grow those platforms going forward. If you think about the growth, though, from the pure client side, we're leaning very heavily into both wealth and into asset management.

So if you take a little look at what Jason is doing on the growth side for wealth, we talk a lot about family office solutions and family office. We're taking what we learned from the family office space around how to run and operate a family office and moving that into a different cohort, segmentation. Someone with, let's say, on average, $100 million to $750 million, but they don't have the critical mass to really want to form a family office. They want to do all the same things and get all the same services that you would get within a family office, but they don't have their own family office. So what do they do?

They want to turn to a firm like a Northern that basically creates a virtual office for them based on the knowledge we've gained from having serviced a lot of these large big clients in the family office space and recreate that experience for that individual family. They're going to own the same number of houses. They're going to have the same bill pay issues. They're going to have trust and estate planning and taxes and all the different things that you have within a family office.

And we found that by incubating that and trying to take what we had done in the central region already and pushing that into the various regions across the country and covering that client base on a different segment, that's going to be a large investment that we have going forward. And then Mike has talked about some of these growth initiatives already. I don't need to repeat those. But when you think about where we're leaning in, it's really going to be along the wealth and the asset management side.

Got it. And when you think about the other thing, just at the top of the house, you kind of nudged your strategic targets higher with last month. Northern had a very good 2025, ended the year on a very strong note. When we think about just the pretax margin for the business, the ROEs, are we just structurally rebasing to a higher level where some of these targets might be a little bit more of a floor as opposed to something that you're looking to achieve?

Well, no. I mean, we put the targets together as medium-term targets. So medium term means things are different people. For us, it's a 3- to 5-year target. And I think the idea behind it was to say we want to reach a state where through all the cycles, we have the ability to maintain what we think is a healthy margin, let's say, 33%, right? And so where we are now is we're trying to change the business mix to be much more geared towards wealth and asset management, which already have margins well above that target.

And then we're also refocusing our efforts within asset servicing on the asset owner population, where almost all of the new deals we bring in are already at or above that target as well. And so as the business mix changes through time, combined with productivity, we felt it was the right time to lift the medium-term targets. And when I say through the cycle, we obviously can't always rely on market lift and NII. So you want to have the ability to maintain those targets in a sustainable way going forward. So that's why we raised it, and that's how we think about it.

Got it. And maybe just talking about the market, maybe starting with from an NII standpoint, just does the interest rate backdrop like rates staying structurally higher make life easier from a balance sheet management standpoint?

Yes, absolutely. I mean we have the higher rate environment. And clearly, we've modeled in when we talk about our guidance, we modeled in two rate cuts for the year. And so we know what that sort of means, generally speaking, in terms of the headwinds we've got to try to make up for. And we've made up for it in our view, in terms of our deposit pricing, which we haven't lapped. We started putting a lot of that new deposit pricing in place at the middle to the end of last year. So we haven't lapped that yet. We have a lot of securities rolling off.

We can reposition at higher rates. We're leaning into alternate investments as well, whether it's FICC repo or other types of things that we can do. So there's other mitigating factors we think we can take during the course of the year to basically counteract what might be two rate cuts going into the year and then give you the guide that we gave you around NII. And so -- we feel pretty good also about our deposit growth. Our new client pipeline is very good. Deposits tend to grow with a new client pipeline. And so it's a concerted effort across all the different inputs that you've got going into it to make sure that you can maintain that. And really, at the end of the day, not to oversimplify it, is you want your liabilities to reprice faster than your assets, right? So you're looking more at fixed rate and you're just managing that against what you can do on the liability side actively.

Got it. And on the asset repricing, does that run its course this year as we move through 2026? Or will there be a lot left over?

No, there's a lot of repricing that happens every quarter. And obviously, a big maturity coming in the fourth quarter as well. But no, there's a healthy amount every quarter that gets repriced that we can redeploy into higher-yielding opportunities.

But does that benefit come to an end at some point later this year? I'm just wondering what's the duration of that book?

Well, the duration hasn't really changed. The book -- our book -- our securities book is still very low duration. It's like 1.5 years. And the balance sheet duration is less than one. So we haven't really changed it that much. So that gives us a lot of that flexibility. Of course, now with the yield curve looking more upward sloping, that obviously helps in terms of your ability to reprice as these things roll off.

And as you look at sort of the outlook, you mentioned your two rate cuts baked in. What would be the biggest risk to the NII outlook? Is it more about like deposit growth being more challenging or more rate cuts than expected?

Yes. Our NIM doesn't start to get compressed until you get to rates that are sort of in the 2s, right? So we don't really have any concerns about going into that level. And obviously, there's a Fed change and everything else, but we don't see it move down that low this year. And so from that perspective, it would have to be something around either business growth or deposits, which we don't see either in terms of a headwind. But no, I think at the end of the day, it's -- we feel pretty good about the first half of the year in terms of what we can see. And then the second half, of course, is going to depend on the macro environment.

Got it. And maybe just going back to the One Northern and the productivity improvement. Are there aspects like what are the areas where you're actually getting savings or cost cuts that are helping fund these investments?

Yes. So we look at it in three ways in productivity. We look at workforce, we look at vendor management, and we look at process improvements, right? So on the workforce, we've been looking a lot at span of control. So that -- meaning that how many -- if you have a manager in a particular position, how many direct reports does that manager have? Do you have too many? We have KPIs we've developed for every group to reach a different level of span of control. We like to say 8 is great, right? So a manager has 8 direct reports, good thing. If they have 1 or 2, not so good. You got too many managers.

We're also leaning into Tier 1 and Tier 2 and Tier 3 locations and saying, if you have a replacement post that's coming up, are you going to replace that post in a Tier 1 location? Or could it be better served or equally as served in a Tier 2 or Tier 3 location. And we've got metrics around that in terms of how much you can replace in a Tier 1 versus a Tier 2 versus a Tier 3. On vendors, we're consolidating our vendors. We had very much of a federated system around vendors. I talked about the creation of the COO office. We are going to be doing less vendors and more with those vendors to try to get more economies of scale through those vendors.

We have centralized procurement as well. So we've got all that in one place. We've in-sourced some activities we might have typically taken out. And then we're looking at outside consulting and contractors very carefully. Contractors, by their very nature, are 20% to 30% more expensive than an existing FTE. So we're taking a look at that contractor count as a total workforce matter and trying to work that down to a more manageable level. And then on process improvements, we're trying to just automate a lot of the manual stuff that we do, and that's where AI kind of comes in. When you think a little bit about that, our client-centric capability model, where we're centralizing a lot of those functions and trying to just weed out what might be too many hands on too many manual processes as part of that. So that -- all of those things combined are driving a lot of the productivity.

Maybe just talk to us about AI in terms of -- especially on the asset servicing side, like are there -- what the use cases have been thus far? And just how big of an opportunity does AI-driven efficiency present in that business?

Yes. Here's how I would describe AI inside the company. The first -- our first goal with AI was adoption. So what we did is we rolled out Copilot to every member of the employee base. And with that adoption, what you get is a lot of experimentation and use cases that you can actually apply to your business. And right now, we have a backlog of 150 use cases. We can't prioritize all of them. So we're sifting through them all and saying, okay, which are the ones that are going to produce either the most productivity or the most revenue growth. That being said, asset servicing is a great area to look at because of all the manual stuff that they're doing.

So they're already using AI for document digitization, new client prospecting. I mean, if you think a little bit about sifting through what clients you're going to go after, but also responding to RFPs in the asset servicing space, in particular, there's only really three providers, sometimes four that they go out to, to get a bid and the RFP documents are very voluminous and very detailed. It can take a long time to fill them all out. If you use AI, you can reduce that time significantly. GitHub, right? We're already using GitHub Copilot for coding. I mean that obviously saves a lot of time. You need less programmers. You can do a lot of that on your own. So that's pretty impactful.

So -- and we have our NT Byron, which we rolled out, which is our own internal AI engine that clients can actually -- I say clients, employees inside the firm can use to create their own agents to do some of the tasks that they're doing. So early stages, adoption really good, a lot of use cases already being used. We even like scrubbing e-mail. Right now, we get instructions over e-mail and fax. AI can go in and scrub all those and put a summary together so you can get client queries and respond faster to your clients. So I'd say on the productivity front, it's already having an impact, but the use cases have just begun. So I think the upside potential is enormous.

Got it. And I guess one last question on all things productivity. I think in the past, you've talked about you want to structure the bank such that if the revenue environment is tough, you can still mitigate that on the expense side. By when do you think the bank will be in a spot where you feel confident about being able to achieve that? Like are we there yet already? Or like is there a little...

I think we're there. Yes, I would say we're there. We have the discipline, and we know what levers to pull. And unlike in the past where it's not reactionary. So what we do is we have a contingency plan already in place in terms of what levers we would need to pull if the environment were to not be where we want it to be. And so -- and that's pre-agreed and vetted through all the business units and all the corporate functions so that no one gets surprised, right? And then we scaled all of our investments by mandatory and then discretionary so that we know which ones we absolutely have to do either from a risk and control perspective or an end-of-life technology perspective.

And the discretionary piece, we know exactly what they are and what we'd stop doing. And so that process is in place. It has been inventoried, and we know if we have to pull the lever, we will. We really don't really hope we don't have to. But that discipline is there. And it's not like it's going to be, oh my God, what do we do, the markets just went down 10%, right? We have it in place. We know what we're going to do. I mean there is a point at which no one can -- if rates go to 0 and the markets go down 30%, all bets are off for everybody, right? So...

That makes sense.

Yes.

I guess maybe, Mike, going back to you. When you look at sort of the strategic priority areas that you have on this slide and the product launches in 2025, like is the expectation here you're going to see the growth rates increase in '26 and '27 when we think about new product launches? Like just how should we -- if you can frame that for us?

Yes, absolutely. So part of the objective is you all know us or know the asset management business, again, primarily for probably index and liquidity. Those are our two big product areas. So part of the objective is to, again, lean into those faster flowing rivers, so to speak, higher growth areas, but also diversify our product set, meaning that if we're too overexposed to liquidity and that has a macroeconomic sensitivity, that's something we're going to want to diversify away from.

So these areas are relatively uncorrelated to each other, if you will. Alts and ETFs have very little correlation, so to speak, but are also high-growth areas where we have the right to win. So are we going to accelerate? Yes, absolutely going to accelerate more product launches, more investment of capital. These are the areas that we've been in that space for a great period of time. We just want to make sure that we can project that out into the market and be relevant outside the bounds of Northern Trust.

Got it. And you mentioned launching the first, I guess, tokenized share class. Just talk to us, like I've heard competing views around what tokenization means, what it's trying to solve for. Like just in your world, like what do you think tokenization is solving for? And what's the opportunity set there?

Yes. It's -- I'd say it's kind of ironic that the industry went down the path of tokenizing what you'd say is the most liquid asset class there is. But there's a great use case for this in that more and more our clients are looking to use tokenized money funds, especially treasury-only funds as collateral or derivatives contracts. So there's a very specific use case in the tokenization of these kinds of funds for that application. I think this is just the start. There will be more going forward, and we will be right there on top of it. But this is a situation where we have a treasury-only fund. It's got more than $10 billion in assets.

Clients came to us and say, hey, I want to pledge that as collateral. We need a tokenized share class because that is more tradable. It's 24/7, 365 essentially in terms of trading activity. And because it's so fungible, more and more that we can pledge that as collateral. So that's very specific. Going forward, I would say the industry is evolving in the specific use cases of tokenization. But I would say, for the time being, within the cash management space, within the liquidity space, we're going to see more activity there.

I guess you mentioned about...

I would just add on the tokenization front, just on the asset servicing side, we have a concerted effort around making sure that our infrastructure is built in such a way that it can accommodate -- it will be chain agnostic. So it can basically report on tokenized assets the same way we report on any other asset. And our clients, being the client-centric firm we are going to be pushing us along those -- along that curve to make sure that we keep up. And so a big focus also on the infrastructure of asset servicing around tokenization as well.

Understood. And maybe just moving to the wealth management and the Global Family Office business, you mentioned what Jason is doing there. Just talk to us around what are the hiring plans there? Like when we think about the growth sort of cadence of that business, what's going to be driving that growth? Is it bringing on senior bankers who bring in books of business? Just how you're thinking about the growth outlook this year, but over the next 3 to 5 years?

Yes. So I think if you think about the family office solutions, which I think some folks have been a little bit confused as to what that means exactly, and I tried to explain a little bit at the front end. But the type of portfolio manager that we've got in the regions could have on his -- on his plate in the past, a $10 million client, a $20 million client and a $250 million client, right? And so the issue really isn't that, that individual is not capable of doing all three. But at the end of the day, what do most people with $250 million want to know? They want to know what people like them are doing, right? So that's why the segmentation has worked so well in family office, and we feel that segmentation is going to work well as we push it out to the regions.

We don't have the same group that we've got in the central region seeded into some of the key markets that we've got. So when you look at what Jason is going to be doing around hiring, he's going to basically be trying to replicate what we've got in the central region in key markets like New York and California and maybe Texas to make sure that we have that center of expertise in those markets that will involve some recruiting. It might involve some reshifting of priorities among certain bankers that already have that capability. But at the end of the day, we think that segmentation drives greater success.

We find that when you do that, our win rate goes up about 80% because you're just providing a whole series of services you would not get from just a basic wealth manager in those markets. And so it's going to be super impactful, we think, as we spread it out to those larger regions.

And how easy or challenging is it in terms of spreading that out? Is it -- like what's the governor on that -- the pace of that spread out? Is it finding the right talent? Like...

Yes, it's finding the right talent. I think Jason's got in his '26 plan to really build that out this year as quickly as he possibly can. And so that's just going to depend on availability and resources and things of that nature. But I think a lot of folks want to be part of our platform as it relates to that particular segment because really nobody does the family office segment the way we do it in terms of holistically looking at the entire continuum of services offered to a family office client and applying that to the family office services segment to run a virtual family office for a client, you need to have that knowledge base. Most folks when they talk about family office, they just think investments. It's much, much more than that, right?

And so I think that from that perspective, what we offer is differentiated, and you have to be able to have that expertise. And by the way, they can currently draft off of all that knowledge we have in family office. So it's not as if they have to make it up. I mean, at the end of the day, we have all the knowledge. We're going to get a lot of seats and chairs to make sure that, that happens. But at the end of the day, the knowledge base is there and the procedure for going about doing those clients and advising them is already there.

And is that focus mostly U.S. centered when you think about this year or...

Yes. I mean the family office group is growing internationally. They're the only group that has an international platform right now. The Family Office Services segment involves a lot of other products that we don't have internationally right now, right? When you think about -- and of course, tax planning across different jurisdictions is different. So you've got to be specific to those particular jurisdictions. So no, it's really primarily a domestic.

And just outside of that, from an international standpoint, like -- where do you see sort of growth momentum? Where is the energy in terms of the -- across the business?

So we've been really successful in Europe and the Middle East, the EMEA countries in general. A lot of the asset servicing stuff that we do for our clients, our sophisticated clients in the private investment space tends to be applicable to some of our family office clients, particularly the Luxembourg structures that we've been using.

So we've already got momentum in that regard within Europe, within the Middle East. We have -- we did set up an office in Singapore. There's a lot of, obviously, money in Asia we're trying to capture. That market is a bit more fragmented. And I would say the family office growth there is still in a relatively -- compared to the U.S. and Europe in a much more nascent phase and how you define a family office. So the amount of targets that we have overseas in Asia tends to be a little bit smaller because they don't have the large sophisticated offices that have really been built up in the same way they have in Europe.

Got it. I guess two minutes, maybe one last question just around capital allocation. Just talk to us in terms of, one, I think from a regulatory standpoint, we had a panel earlier talking about changes to liquidity rules, Tier 1. So I'm not -- so from your standpoint, is there anything on the table or being considered that could make a difference in how you allocate and manage capital and/or liquidity?

No. I mean, yes and no. What I would say right now, nothing has changed. The rules are all the same. We still have a target of 11% to 12% CET1. We're well above our minimums and liquidity and CET1. I would say we're probably leaning more into inorganic than we ever have before. So when you think about M&A, we want to have some dry powder around for that. If there's something to do on the distribution side for Mike or something to do with Jason in terms of filling out geographies or other capabilities, -- we want to have that capability. We still are very liability-driven as an institution.

We have very large clients that come to us with very large needs. So we're always going to have a capital buffer, right, that we have -- we can't predict RWA. And so it's really hard to do that. And we want to make sure our balance sheet is really open for business for all of our clients all the time. So my guess is depending on if other folks shift down their minimums, I think Northern is going to take a very conservative approach to that and make sure that we can still return capital to our shareholders the same way we did in '25, but at the same time, be able to have that buffer because our clients expect us to have that when it's available.

And then you talk about inorganic, you mentioned this on the earnings call as well. Frame that for us, like what does it mean? Could it be like large transaction that could be somewhat transformational? Like just how would you put a framework around what would be a good deal for all them?

We're going to stick to our knitting, right? So it's going to be something in asset management or something in wealth, and it doesn't have to be an outright acquisition. It could be a partnership or it could be a distribution agreement. We're going to be very disciplined. It's a very high bar. And given some of the valuations, particularly on the wealth side, the attractiveness of those right now is not particularly high. It would need to be something that would really thrive as part of our platform and how we do business. And we do it a little bit differently than everybody else. And we're not rolling up teams of people and doing it that way. We're not a wirehouse.

So from that perspective, it's got to fit. And so it's going to be very selective and it's going to be in the key markets that we have gaps in, I think. So probably more geographic, maybe some product stuff as it relates around alternatives. But at the end of the day, we feel we have all the pieces we need in place to grow organically. So we have to be one of those things that just stands out as something that just screens, this should be a part of Northern, right?

Got it. I think with that, David, Mike, thank you so much.

Thank you.

Good day, and welcome to the Northern Trust Corporation Fourth Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's Fourth Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O'Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team.

Our fourth 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 January 22 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 February 22.

Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call.

[Operator Instructions] Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2025 earnings call. Turning to Slide 4.

In 2025, we made significant progress executing on our One Northern Trust strategy, delivering strong and improving financial performance and providing solid momentum going into 2026. In the fourth quarter, compared to the prior year, trust fees grew 7%, net interest income increased 14% and revenue was up 9%, excluding notables. For the sixth consecutive quarter, we delivered positive trust fee and total operating leverage while continuing to invest meaningfully in the business. Excluding notables, pretax margin expanded to 33% and EPS grew 19%.

For the full year, revenue rose 7% and expenses grew 5%, delivering over 2 points of operating leverage and a 30% pretax margin, 14.8% return on equity and 17% EPS growth, all excluding notables. We returned $1.9 billion to shareholders in 2025, including a record $1.3 billion of share repurchases, which reduced share count by 5%.

These results reflect strong market conditions and demonstrate the strength of our One Northern Trust strategy, which serves as our road map to becoming a consistently high-performing company that delivers meaningful value for clients, partners and shareholders.

Turning to Slide 5. We've made significant strides across each of our strategic pillars. Starting with optimized growth. We advanced several initiatives at both the enterprise and business unit levels, resulting in deepened client relationships and expanded market share in key areas. We broadened our private markets footprint across the enterprise and further enhanced our capital markets and banking penetration, which now contributes more than 1/3 of enterprise revenue.

These firm-wide efforts improve collaboration across our businesses, allowing us to bring the full capabilities of Northern Trust to our clients while accelerating the pace of product development and innovation.

Turning to productivity. We initiated significant changes to enhance and scale our operations. Our client-centric capability operating model provides a unified and consistent way of working across the company, standardizing core processes, increasing spans of control, reducing organizational layers and empowering the broad adoption of AI-driven automation, inclusive of our AI platform and

For example, the Chief Operating Officer's organization, which encompasses more than half of our workforce, increased managerial spans and control by over 35%, while reducing management layers by over 20%. This is improving speed, accountability and efficiency across the firm, creating a leaner, more agile operating structure and fostering enhanced collaboration. Our accelerated deployment of AI across high-volume activities such as digitizing documents and automating manual tasks is driving efficiency gains while improving quality and consistency across key workflows.

Overall, we increased productivity savings last year, representing more than 4% of our expense base. We strategically reinvested these savings into growth and resiliency initiatives fueling our future performance. For 2026, we plan to raise our productivity target by 10%, supported by maturing initiatives, further structural and workforce improvements and broader AI deployment.

On resiliency, we strengthened the firm's risk technology and operational foundations. We advanced cybersecurity, upgraded our data environment, expanded cloud adoption, modernized key software platforms and enhanced core risk and control processes. These initiatives help future-proof the company.

Turning to our business unit performance, starting with Wealth Management on Slide 6. We delivered strong momentum in the fourth quarter, particularly in our upper tier segments, continuing to deepen our leadership position in global family office and the ultra-high networth market. GFO achieved record new business in 2025, surpassing last year's high watermark with strong contributions from both domestic and international markets, the latter up 15%.

Last year, we launched family office solutions, extending our world-class GFO platform to families with more than $100 million in networth to serve as their outsourced family office.

FOS exceeded its goals for clients and assets last year, and we're scaling this proven model across all markets. Together, GFO and FOS position us exceptionally well to meet the needs of the most complex segment of the market.

Another area of focus is talent. In 2025, we unified sales across GFO and the regions, strengthen coverage models and enhanced pipeline rigor and win rate expectations. We will continue to invest in high-performing growth-oriented front office talent, while sharpening incentives around new client acquisition and organic growth.

The third area of focus is expanding our suite of investment solutions. Alternatives remain a key priority in 2025, as we more than doubled the number of funds launched on the platform and tripled assets raised, broadening client choice across strategies. We also made the fund launch and distribution process more scalable, which will support a faster cadence in 2026, including our first Evergreen Fund.

Finally, we will enhance our client acquisition strategies across segments, geographies and channels, including deeper engagement with centers of influence and intensified digital engagement initiatives to generate more high-quality leads. Across each of these areas, we are simplifying processes, upgrading platforms and applying AI to reduce friction and service delivery. These steps will enhance both the client and partner experience, and strengthen wealth management growth.

Turning to Asset Servicing on Slide 7. Overall, we ended the year with improved organic growth and profitability, driven by our strategic focus on scalable growth in core product areas. Capital markets performed particularly well in 2025, ending the year with robust FX trading and Integrated Trading Solutions activity in the fourth quarter.

Private Markets were another highlight, with wind-related revenue up 18% over prior year, further solidifying our leading position with global hedge fund managers and U.K. LTAS. We will build on the success in 2026 by further scaling core fund administration and depository services while increasing cross-sell of capital markets activities.

Led by our industry-leading front office solutions offering, which continues to be a key differentiator, we will further expand our global asset owner franchise, building on the over 100 new mandates in 2025.

Finally, we will sharpen our focus on selectively enhancing the products and services we offer such as growing ETF servicing in the U.S., expanding European transactional banking and building out our digital asset capabilities. Asset servicing enters the year with solid tailwinds and a clear path to accelerate profitable growth.

Turning to Asset Management on Slide 8. NTAM delivered another solid year and is well positioned to continue executing on its growth initiatives. Liquidity was particularly strong with the fourth quarter marking the 12th consecutive quarter of positive flows and liquidity AUM reaching nearly $340 billion. We continue to broaden our successful liquidity franchise by leveraging digital capabilities, including introducing a tokenized share class of one of our money market funds.

Building on last year's strong alternatives fundraising, we will continue to expand our product capabilities and strengthen distribution across wealth and institutional channels. On the product innovation front, we maintained a high velocity cadence last year, doubling product launches year-over-year, including 11 new ETFs, meaningful expansion of our SMA fixed income suite and the rollout of multiple custom solutions across alternatives.

NTAM will maintain an elevated new product base and work closely with Northern Trust Wealth Management to codevelop tailored solutions, building on the first of their kind distributing later ETFs and introduced in 2025. Direct indexing and customized SMAs remain areas of strong client demand, supported by $5 billion of net organic flows in our tax-advantaged equity suite in 2025.

We will extend this momentum through the launch of a long-short tax-advantaged equity strategy and expanded customized fixed income SMAs, reinforcing our position as a top 3 industry provider. Together, these priorities strengthen our growth trajectory, deepen our client engagement and expand our ability to deliver differentiated high-demand investment solutions.

Turning to Slide 9. The execution of our One Northern Trust strategy over the last 2 years is translating into improved financial performance. Productivity and expense discipline are driving positive operating leverage, reducing our expense to trust fee ratio and improving pretax margin levels, while ROE has been at the high end of our target range and EPS have grown at a double-digit pace for the past 2 years.

Turning to Slide 10. As we move forward, we're doing so with a clear vision, good momentum and a resolute commitment to consistently deliver on our strategic pillars, producing financial performance that rewards shareholders. With the goal of generating attractive returns on capital and double-digit EPS growth through cycles, we have a conviction to boost 2 of our medium-term financial targets.

In addition to targeting expense to trust fees below 110%, we're now targeting a pretax margin of 33% and return on equity in the mid-teens.

To wrap up, this progress is only possible as a result of the exceptional efforts of my fellow Northern Trust colleagues. I want to thank them for their commitment to delivering for our stakeholders.

With that, Dave will take you through our fourth quarter and full year financial results.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2025 earnings call. Let's discuss the financial results of the quarter, starting on Slide 12. This morning, we reported fourth quarter net income of $466 million, earnings per share of $2.42 and our return on average common equity was 15.4%. Our fourth quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model.

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 140 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth.

Trust, investment and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 7% increase compared to last year. Net interest income on an FTE basis was up 10% sequentially to $654 million, a new record, and up 14% from a year ago.

Our assets under custody and administration were up 3% sequentially and up 11% compared to the prior year. Our assets under management were up 2% sequentially and up 12% year-over-year. Overall, our credit quality remains very strong with all key credit metrics in line with historical standards. We recorded an $8 million release of the credit reserve in the fourth quarter, largely reflecting refinements to factors used to estimate losses for the C&I portfolio.

Our effective tax rate was 26.5% in the fourth quarter, up 310 basis points over the prior year's rate, largely as a result of higher tax impacts from international operations. We expect the effective tax rate in 2026 to be approximately 26% to 26.5%. Our results included $69 million in net unfavorable notable items, including $19 million in expenses associated with our Visa swaps recognized within other operating income; $59 million in severance-related expense, primarily recognized within compensation expense; and a $10 million release of our FDIC special assessment reserve, recognized within our other operating expense.

Relative to the prior year period and excluding notable items, revenue was up 9%, expenses were up 5% and our pretax margin was up 250 basis points to 33.2%. We generated over 4 points of positive operating leverage. Earnings per share increased 19% and our average shares outstanding decreased by 5%.

Turning to our Wealth Management business on Slide 13. Wealth Management had a good quarter with strength in both GFO and the regions. GFO won 3 of its largest wins of the year in the quarter. Priority Markets delivered their best overall quarter of the year, and the Regions posted their best quarter for flows.

Assets under management for our wealth management clients were $507 billion at quarter end, up 13% year-over-year. We saw healthy incremental flows late in the quarter, including $5 billion within GFO. Trust, investment and other servicing fees for wealth management clients were $578 million, up 6% year-over-year, primarily due to strong equity markets as the favorable flows occurred late in the quarter.

Trust fees within the Regions were up 5% year-over-year in the quarter and were up 6% for the full year, with strength mostly attributable to favorable equity markets as strong advisory fee growth was mostly offset by continued product pressure. Within GFO, trust fees were up 6% in the fourth quarter relative to the prior year, showing healthy improvement from the third quarter's more muted performance. They were up 5% for the full year.

Wealth management average deposits were up 5% sequentially, reflecting year-end portfolio repositioning coupled with new business momentum. Average loans were down 4%, reflecting the repayment of a large GFO loan. Including severance charges of $15.2 million, wealth Management's pretax profit decreased 3% over the prior year period's record levels and the pretax margin contracted by 300 basis points to 38.9%. Excluding these charges, the pretax margin was down 120 basis points.

Moving to asset servicing results on Slide 14. Our Asset Servicing business also had a very strong finish to the year. Transaction volumes accelerated, capital markets activities were robust, while new business generation continued to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17.4 trillion at quarter end, reflecting an 11% year-over-year increase.

Asset servicing fees totaled $730 million, reflecting an 8% increase over the prior year. Custody and fund administration fees were $496 million, up 9% year-over-year, reflecting the impact from strong underlying equity markets, net new business and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 12% over the prior year.

Investment management fees within asset servicing were $166 million, up 6% year-over-year, largely due to favorable markets. Asset servicing average deposits increased 3% sequentially, reflecting normal seasonal patterns and were up 6% year-over-year. Loan volume increased 6% from third quarter levels, but remained down 8% year-over-year, albeit off a small base.

Asset servicing pretax profit grew 23% over the prior year, or 40%, excluding severance charges. The pretax margin expanded 210 basis points year-over-year to 25.5% and increased 550 basis points, excluding severance. The segment level margin benefited from the NII associated with the seasonally strong deposit levels; the pivot in our new business approach, including our focus on cross-selling high-margin capital markets; and other adjacent products and services, which translated to a pretax margin on our new business that was above 30%; as well as our efforts to streamline our operations.

Moving to Slide 15 and our balance sheet and net interest income trends. Average earning assets were up 3% on a linked quarter basis, as higher deposits drove an increase in cash held at the Fed and other central banks and in our securities portfolio. We issued $1.25 billion in new debt in November, $500 million in senior and $750 million in sub-debt.

The debt was swapped to floating, and proceeds were invested in floating rate securities at a positive carry. As a result, the fixed percentage of the securities portfolio dropped to 52% from 54% in the third quarter, including the impact of swaps. The duration of the securities portfolio dipped slightly to 1.48 at the end of the quarter, and the duration of our total balance sheet continued to be under 1 year.

Average deposits were $119.8 billion, up 3% compared to third quarter levels, reflecting normal seasonality. Deposits performed largely as expected throughout the quarter, and we saw a higher-than-usual surge in the last 2 weeks. We expect deposit levels to normalize in the first quarter.

Within the deposit base, interest-bearing deposits increased 2% sequentially and noninterest-bearing deposits increased by 10%, climbing to 15% of the overall mix. Net interest income on an FTE basis was $654 million, up 10% sequentially and up 14% compared to the prior year. Sequentially, NII was favorably impacted by higher deposit levels, a greater proportion of noninterest-bearing deposits and the ongoing impact from deposit pricing actions we've taken outside of rate cuts. Our net interest margin increased sequentially to 1.81%, reflecting the favorable deposit pricing actions taken, coupled with a more favorable deposit mix shift.

Turning to our expenses on Slide 16. Expenses increased 9% year-over-year in the fourth quarter. But excluding the notables listed on the slide, they were up 5% over the prior year. Excluding both notables and unfavorable currency movements, expenses were up just 3.8% in the quarter and 4.3% for the full year. This translated to an expense to trust fee ratio of 110.8%, excluding notables, and our sixth consecutive quarter of year-over-year improvement.

Turning to Slide 17 and our full year results. Including notable items listed on the slide, full year revenue decreased 2% and EPS declined by 11%. Our ROE was 14.4% and we returned 111% of our earnings to shareholders. Relative to 2024, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 60 basis points.

Our full year results included $69 million in net unfavorable notable items, all reported in the fourth quarter. 2024 results included $536 million in net favorable notables recorded in quarters 1 through 3, including an $878 million gain related to the Visa B share monetization. Excluding notable items in both periods, 2025 revenue was up 7%; expenses were up 4.9% or 4.3%, excluding unfavorable currency impacts. Our pretax margin was up 160 basis points to 30%. We delivered over 200 basis points of positive operating leverage and earnings per share increased 17%.

Turning to Slide 18. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our Common Equity Tier 1 ratio under the standardized approach increased by 20 basis points on a linked-quarter basis to 12.6%, driven by capital accretion and a decrease in RWA.

Our Tier 1 leverage ratio was 7.8%, down 20 basis points from the prior quarter, driven by our larger balance sheet. At quarter end, our unrealized after-tax loss on available-for-sale securities was $401 million. For the fourth quarter, we returned $522 million to common shareholders through cash dividends of $152 million and stock repurchases of $370 million. For the full year, we returned $1.9 billion, including a record $1.3 billion in share repurchases. This reflected a 113% payout ratio in the fourth quarter and 111% for the full year.

Turning to our guidance on Slide 19. As I've been signaling, we're moving away from an expense growth target and instead focusing on positive operating leverage, which is our North Star. We want to maintain the flexibility to opportunistically invest in growth initiatives when top line growth is more favorable and dampen expense growth when the market environment is more muted.

But generally speaking, I can assure you that the direction of travel for expense growth will be down. As shown on the slide, we now expect full year 2026 NII to grow by low to mid-single digits over the prior year, which is up from our previous guidance. This assumes current market implied forward curves and relatively stable deposit mix. We expect to generate more than 100 basis points of positive operating leverage, and we expect to return more than 100% of our earnings to shareholders.

And with that, operator, please open the line for questions.

[Operator Instructions] And our first question is going to come from Brennan Hawken from BMO Capital Markets.

Really encouraging to see the targets moved higher in the medium term and actually, what looks like really some encouraging ambition in the targets. Can you speak to your conviction in driving change across the organization? And like when you think the timing of some of this traction could start to come through in the financial results?

So I would say, Brennan, that we have a high level of conviction that we're seeing the change transmit through the entire company. I talked about in my comments there just the fact that this is an effort on the part of all of our employees, all of our partners to do this. And I think you're seeing what I think, I'll call it, the early days of the results from a financial perspective and that to the extent we continue to maintain that conviction and execute on the strategy, we'll continue to see consistently high performance like we did this quarter, and that's why we had the confidence to move the targets up in the medium term, which we look at as kind of a 3- to 5-year time frame.

And if you just think about what Dave has said even for the year that we're in right now, trying to generate more positive operating leverage, that will take us in the direction towards those targets.

Right. Okay. And definitely really encouraging to see it. It was great. Maybe one on the balance sheet. So the deposit cost trends were encouraging here in the quarter. Can you speak to what drove the lower cost on the IB side? We saw the NIBs, the noninterest-bearing, balances move higher, but sometimes that's seasonal. So you spoke to, I think, stable deposits in the outlook for the NII. Does that mean that -- does that include maybe the IB composition normalizing? And how sustainable is the ability to drive down the interest-bearing deposit costs?

Yes. So there's a lot to unpack in that question. I would say, generally speaking, the fourth quarter growth, in NIB particularly, I think you had a lot of factors, definitely seasonal. But also keep in mind that the government was closed for 43 days during the quarter. And I do think there was some cash stockpiling during that period because of the lack of economic data. So I think it may have been a little inflated because of that.

Going forward into Q1, you should expect the seasonality of that to fall. Too soon to say when and how. Usually, it happens sort of after audit season when the fund admin companies decide that they've spent all their money for that particular quarter. So it will normalize at some point during Q1. So I would just say that Q4 is definitely not a jumping off point for NII going forward into Q1. It will -- Q1 will definitely be lower in terms of total NII.

In terms of the deposit pricing, we continue to spent a lot of time through our liquidity solutions efforts to look at our deposit pricing, and we still have a lot of tools in our tool shed to continue to lower that going forward. We also had in the quarter though some expensive wholesale funding that rolled off and we didn't need to replace it, and so because of that, more stability there, we're able to bring down our deposit costs accordingly.

And our next question is going to come from Ebrahim Poonawala from Bank of America.

I guess, maybe if you could just start on the fee growth side? And just talk to us, I mean, I appreciate you don't want to sort of pin down the guidance, but if we assume a relatively sort of a steady-state macro backdrop. One, what does that imply for fee growth this year? And then just talk to us in terms of like 1 or 2 areas you think drives strength. You talked about GFO ending '25 on a strong note. Would love to get some color around sort of the 2 or 3 drivers of growth that you're seeing on the fee side for 2026?

Yes. So the way we look at '26, and we just finished our planning period, is if the market conditions as the way you described, we would think that we would be around mid-single digits in revenue growth and trust fee and revenue growth, maybe revenue growth a bit higher, but around mid-single digits.

And that would also give you an implication in terms of where we want to solve for our expense growth for the year as well. So that's sort of how we're thinking about it going into '26. In terms of the fee growth, as you know, in GFO, the business there can be very lumpy. And when you win, you usually win very large amounts. And so the traction and win rate in GFO really picked up in Q3. And because of the quarter lag, you saw a lot of it in Q4.

But we even had additional inflows in GFO of another $5 billion in Q4, which you're going to see primarily in Q1. So that's driving a lot of the growth. The other thing I would say, and Mike can comment on this as well, is the traction we're getting in the ultra-high net worth segment around from the -- or the family office solutions, which really we're finding our win rate and our traction in our backlog in that particular area of the $100 million-plus that don't have a family office has really picked up considerably.

Yes, I would just add beyond wealth management that in the asset servicing business, again, with our strategy focused on moving upmarket, just meeting some of the larger, more complex asset owners, where we had the success in the wins in 2025, some of those are being onboarded now. So you'll see some of the strength in the fee growth in '26 and that's both in the Americas, but also U.K. and more broadly.

And on the asset management front, we've, as you've heard, continued to have strong flows in liquidity. And in many respects, that's been offset from a flow perspective by outflows on the index side. To the extent that, that slows down, that, that drag goes away and we still have the strength and liquidity, that will add a boost on the asset management front.

Got it. I guess, maybe just sticking with asset management. So this leadership changes 18 months ago, we're seeing the results in terms of the targets. When we think about on a go-forward basis, the capital position that you have, where the stock trading, are there opportunities in asset management to bolster that business inorganically via tuck-in deal or something larger? Just give us a sense of kind of how you're thinking about that business over the next year or 2.

Sure. Yes. So -- and as you heard in my opening comments there, the strategy is pretty focused in asset management. And so looking to continue to execute on that from an organic perspective. And to the extent that we can accelerate it with inorganic opportunities, whether that's acquisitions or partnerships, we're certainly open and looking to do that.

If you think about where those might be on the capability side, you've heard about the success we've had in alternatives, but it is an area that continues to grow. And so that's an area that we certainly look at ways to increase our exposure there.

And then on the other side, opportunities to expand our distribution. The majority of NTAM product is distributed through the partners in the business through wealth management and through the asset servicing side and quite well. But anything we can do to expand to third-party intermediary, which we do, but it's right now a smaller portion than we'd like to see long term.

Our next question is going to come from Mike Mayo from Wells Fargo.

What is it about now that gives you the confidence to increase your pretax return targets? And 3 to 5 years, I guess, that would be somewhere between 2029 and 2031, I'm reading that correctly?

Yes. And Mike, I would say it's a few things, and they're aligned with the strategy and with what we're seeing. So from the first perspective is we've talked about optimized growth and we've talked about it now for a few years here. And the whole point on that was focusing on scalable growth, focusing on profitable growth.

And that has a couple of dynamics to it. One is just the mix overall for the company. So the emphasis on growing the wealth management business faster in asset management, and those 2 businesses have higher margins. So just the mix shift that we'd like to see as we grow those businesses.

And then even within Asset Servicing, focusing on, again, scalable opportunities and where we've built out our capabilities in those specialized areas or segments where we have the scale to not only compete effectively, but do so in a profitable way. So we're seeing that work. So that's the first thing I'll say that gives us confidence as we go forward.

The second is around productivity. Again, you heard me mention our productivity for 2025 was about 4% of our expense base. And this year, we bumped that up. It's going to be closer to 5%. And a lot of that is because of the impact we're seeing of AI. It lends itself to a lot of our activities across the company, but I would say particularly in asset servicing and in the COO organization, so that makes the business more scalable as what we're seeing. A long way to go, but that's why I'll say the 3- to 5-year time frame makes sense to see that.

And then the third is on returns. We have a strong capital position. We always want to have a strong capital position. So we feel good about the level that we're at. And as you saw, we repurchased more than 100% of our net income this year. Dave mentioned, we'll be somewhere in that neighborhood next year -- or excuse me, 2026. So that is a demonstration of just the level of capital we think we need in the business.

But also, I would say the clarity and stability on the capital regime and regulations around that also gives us more confidence in that level. So you put that together and also just trying to raise the bar to make sure that we're doing everything we can to meet the financial expectations of our shareholders.

And there's still the lingering question about would Northern combined with another bank. I assume your Board saw these revised targets approved them. So I guess that puts a fork in the idea of you doing anything other than this organic growth through the medium term. And -- but if you can confirm that, but also as far as you pursuing acquisitions, I mean, you've seen some of your peers do some smaller deals.

Sure. So as we've said consistently, we have to earn our independence. And so yes, that involves having strong financial performance like that. And so that is absolutely our strategy and our intention. And as always, the Board also takes its fiduciary duties very seriously and has to always consider what would be best for our stakeholders and for our shareholders. So that is absolutely the plan.

And yes, to your point, we'll look at acquisitions. We do look at acquisitions, but we're primarily focused on organic growth and generating these types of results. If we see opportunities that we think can help in those areas that I mentioned along the strategy, that's when we would look to deploy capital where we think we can get an attractive return on it that will help us further meet those targets.

And our next question is going to come from Steven Chubak from Wolfe Research.

So maybe to start just on the expense to trust fee ratio. When we think about the improvement in margins that are contemplated in the medium-term guidance, given some of the enhanced focus on improved profitability, at what expense of trust ratio are you underwriting new business today? And does the mid-single-digit revenue growth that's contemplated in the guide for earnings this coming year assume any revenue attrition from shedding less profitable business? Just trying to gauge how the enhanced focus on profitability might impact some of that through the cycle revenue growth?

So the answer to the first part of your question is: Yes, when we price new business, we absolutely look at that expense to trust fee ratio. But that's at a, I'll call it, high level. Just meaning that it really depends on the nature of the business as to what the right expense to trust fee ratio is. So you can just imagine certain relationships, the fee portion of that relationship is going to be higher or lower relative to other businesses, other relationships that you're looking to price.

So that's one important factor. Second is it gets broken down even further as to the types of expenses as a percentage of those fees. So it's very much -- the expense to trust we use is the broader metric, it breaks down much further by business, by product and by client type on that front.

And I would just say that to the second part of your question, yes, we continually look at client profitability. That's something that we view is a part of good relationship management. It's something where we don't want to have relationships that are not value generating for both partners, meaning ourselves and our clients.

And we look to address those relationships in a way that we can get improved profitability as opposed to just necessarily exiting relationships. But from time to time, if it's not aligned, that's when we have to take those types of actions. I wouldn't say there's anything dramatic in there, but it is just something we do on a continual basis.

That's great. And for my follow-up, just on the NII and maybe the NIM outlook more specifically. NIM in the quarter reached post-GFC high. You guys have been very focused on optimizing the balance sheet. I was hoping you can unpack, as we think about the glide path towards a 33% margin, how much of that is a function of continued benefit from rate tailwinds versus volume? Just trying to gauge what's going to -- how you're thinking about sustainable NII growth over the next couple of years, so beyond 2026?

Yes. So a couple of things. The NIM in the quarter, of course, was artificially boosted by about 3 points because of the FTE true-up that we did. So think more high 170s than 181. The second thing would be that as we go forward, we have a lot of levers we can pull, both on the asset and the liability side. And we don't see a lot of compression in the NIM until we get to much lower interest rates.

And so from our perspective, we think during the course at least of '26, I would never want to do an estimate of '27 at this point. But in '26, we think we can keep the NIM pretty stable during the course of the year in the 170s, and that's how we're looking at it going forward.

So obviously, deposit growth is something that we're looking at quite carefully and in particular, in the wealth management business there is an effort going on to get our loan-to-deposit ratio higher within that business. And so from that perspective, we're trying to drive more deposit growth.

But we're also looking at both sides, asset and liability side, to make sure we have offsetting measures. And we really feel like we have a lot we can still do. I would also tell you to keep in mind that a lot of the deposit pricing actions that we took, we took in the middle to the end of last year. And so we haven't lapped those yet. So as we go into the first and second quarters, it gives us more confidence around our NII guide and our ability to continue to kind of grow that line going forward.

And our next question is going to come from Betsy Graseck from Morgan Stanley.

Just one follow-up on the deposit question here. I know you indicated there was a bit of a boost in the quarter with the government shutdown. And when I look at the balance sheet, it looks like most of that boost came from non-U.S. offices and interest-bearing. Should I just anticipate that the Q-o-Q increase that we got there around $7 billion comes out over the course of the quarter as you've been discussing, it's going to take some time to flow out. Is that the level about that you see as being unusually high from the government shutdown?

No. I mean I think the increase in the noninterest-bearing was around $3 billion. I do think there was a lot of new business as well that we grow with new business. But I think there was also some cash hoarding, as I mentioned previously, because of the lack of economic data. So I wouldn't take out the entire $7 billion. A lot of that was just normal growth that we would have in the quarter.

Okay. Perfect. And then a follow-up question here is on the buyback. You indicate over 100% payout ratio. And I just wanted to understand what's the governor on the buyback? Which capital ratios are you thinking about with regard to how high and how long you let that over 100% ride?

It's a good question and the variables -- the number of variables in that decision are many. It's regulatory capital, it's earnings power, it's ROE, loan growth, dividends, M&A, you go through the entire menu of what you're looking at, and then share price, obviously, has a role. But at the end of the day, if we feel there's an opportunity to reinvest in the business, that's also compelling. But right now, we feel as if we'll have that ability going forward into 2026 in sort of the same way we did in 2027. That's how we're looking at it.

And our next question is going to come from Glenn Schorr from Evercore.

Let's start with an easy one. FX trading was strong, better than peers. In the text, you talked about lower FX swap activity on your part. Could we just break down what's you driven versus client driven and just so we can get our expectations going forward?

Yes. So obviously, volatility and volumes will help us quite a bit in the quarter, but we also added quite a few new clients. And one of the things we don't talk about a lot, as it relates to foreign exchange flows, is the integrated trading solutions business or the outsourced business we have in both FX and brokerage. And we've seen a much greater adoption as clients start to realize that they can offload middle and back office functions on an agency basis to us.

And as a result of that, we get more flows because of it. So the growth in that ITS business has really been strong and continues to be strong. So I would say it's a combination of volume, but I'd also say it's also a lot to do with the traction we've gotten in our integrated solutions business and outsourcing going forward.

And just to add to that, Glenn, that level of activity that Dave is talking about is more consistent than what comes through the FX line there because of that swap activity. And so this quarter, just the nature of the swap activity resulted in more of that showing up in the FX line and less even though the actual level of activity was not that much greater than the previous quarters.

Okay. I don't want to put words in your mouth, but does that mean this quarter is as good as we got as a jumping off point, obviously, volume dependent on the markets?

Yes. I mean, volatility is going to play a huge role there. But I do think it's going to steadily tick up because of the additional clients we're bringing in. So I would just say that in that business, generally, there's more traction than just waiting around for clients to make a decision around their hedging. There's proactive sourcing of new business going on as well.

And our next question is going to come from Ken Usdin from Autonomous Research.

This is [indiscernible] in for Ken. I heard you guys talking about growing the wealth and asset management businesses, which helps the PTM. How do you guys just think about the split between the 2 businesses? Do you still envision high 20s for the asset servicing, while wealth grows at current PTM margins?

Yes. So I would say that with the asset servicing business, it had a good quarter from a margin perspective, but there's still more work that needs to be done in order to get consistently at the level of margins that we expect for that business in the high 20s. And with the wealth management business, it already has very attractive margins. We're looking to grow that business faster. .

And to the extent that, that came at some margin dilution, if you will, that would be okay if we were getting the growth that's creating more value on that side. So it's in the right range, but not something where we operate that business in order to just maintain high margins.

Got it. And just in terms of just organic growth trends within each business, what was the organic growth rate for this quarter? And how do you envision that to pick up over the next few years? Any color on that would be great.

Sure. So within the wealth management business, the organic growth rate was somewhere in the -- for the year, which is also consistent with the quarter, kind of the 1% to 2% range. As Dave talked about earlier, there are different parts of the business that are growing faster or slower within that. So a GFO, for example, is at a higher organic growth rate; the business, the ultra-high networth, so think about families with networth above $10 million, growing faster.

And then also the advisory component of what we do has a higher organic growth rate right now, whereas the product portion of the fee has been flat. And so as we go forward, we expect that combination to increase, and that's why the strategies that I talked about are focused on that.

In Asset Servicing, it had strong organic growth rate in the fourth quarter, closer to kind of 2%, 3%. And as we've talked about before, very focused on making sure that that's scalable, profitable growth for us. So it's at an attractive level for us at this point.

And our next question is going to come from David Smith from Truist Securities.

I was wondering if you could help us frame out how the degree of operating leverage might move depending on the revenue backdrop? I think this past year, for example, you did about 7% revenue growth and got closer to 200 points of operating leverage. If the revenue environment ends up being similar next year, is that 200 basis points like plus or minus a decent way to think about how you might keep the expense growth moving?

And on the flip side, how painful with the revenue environment have to be for you to feel like you would be better served going below 1 point of operating leverage in order to keep all the investments that you still want to make for the longer-term health of the business?

Yes. I think the way I would have you guys this year focus on the expense line in particular and in the operating leverage that comes out of that is the fact that our planning process this year is a little bit different than it was last year; in that, we start with productivity. We don't start with, I got this much last year in expenses, and I'm going to increase it by X or Y.

We start with productivity. And then we look at that number relative to the investments we want to make during the course of the year, and that implies an expense growth rate. And you kind of go back and forth on that until you sort of land where you think you should land. And so from our perspective, keeping that 1% is critical in any environment.

And the idea is, from my perspective, not to be attached to a particular expense growth number, but to know that we have the discipline built in, in the muscle memory developed within the company to flex up or flex down if we need to. We don't want to starve our businesses of growth opportunities. And right now, we're seeing a lot of really interesting growth opportunities organically within the company.

And so to the extent that the environment lets us do that, we want to maintain the one point of operating leverage, but at the same time, be able to invest in those businesses. So we don't sell for 1, 2, 3, 4, we sell for greater than 1, right? And so -- and then we look at every quarter, in terms of the relative investments we want to make, and we balance that against what we're seeing in the following quarter as well.

Okay. I mean just in your base case, though, if you're doing about 5 points of efficiency and net expenses are growing something like 4% of those 9% of like gross expense growth approximately, could you break it down for us, how much of that would be volume and revenue related versus new investments to grow the bank?

Well, and obviously, a large part of our expense base is compensation, right? And then it's going to be our technology spending. And if you look at equipment and software, as an example of that, depreciation is 2/3 of that. So when you think a little bit about the additional investment we're going to be making in the course of the year, a lot of that is going to be growth investment, right, from the business perspective.

So that's really what I'm talking about is the growth investments. So if we're able to free anything up during the course of the year, it's going to go towards the business growth, not towards the operate the bank growth, for example. We feel like we've got a very good handle on our tech expenses, on our modernization expenses at this point. So that additional dollar flow would go into those growth levers.

And our next question is going to come from Gerard Cassidy from RBC Capital Markets.

At the risk of being called a again like I was morning your peer calls earlier in the week. Can you guys -- the setup for yourselves, your peers, the banking initiative is very positive going into 2026. And we always are looking at both the positives and risks. Can you share with us, aside from the geopolitical environment that we're all dealing with, when you look around corners, what are you guys watching for is that you got to make sure we don't get surprised by as 2026 unfolds?

Sure. So as you know, Gerard, that can be either incredibly complex or relatively simple. And I would say we look around all the corners as best we can. We worry about everything. But if you boil your question down to, okay, what can have a very negative impact on the environment, which, to your point, right now, is very positive?

Certainly, on one front, if interest rates change dramatically, that is more difficult for us and for other financial institutions to adjust. We've seen that in the past. When interest rates go up 500 basis points in a year, that is a challenge to the financial models of financial institutions. So that can be up. Certainly, one direction it creates big issues. And also down. When you think about the impact on 0 rates, when you have waivers on money market funds, things like that. So that's where like big impact.

The second, obviously, is the market. Much of what we do is priced on AUM levels, AUC levels, AUA levels that are based on the market. And a lot of our growth that we've had this year is based on those strong market levels. So anything that obviously causes the markets to go down almost like regardless of what it is, is concerning, and will have a big financial impact to us.

And then the last thing I would just say is when you have challenging operational environment, just given the nature of our business, the pandemic certainly an example of that, where it's extreme and how you have to be able to operate the business to continue to provide the services to your clients.

And once again, hard to predict those. We try to do a lot to prepare for them, to anticipate them. And you've seen in the last few years, invest to be able to deal with those types of environments as well. So trying to do everything we can. I can't predict it, but hope for the best.

And there are no further questions in the queue at this time. I'd like to turn the conference back to Jennifer Childe for any additional or closing remarks.

Thanks for joining us, and we look forward to speaking with you again soon.

And this concludes today's call. We appreciate your participation. You may now disconnect.

Great. Well, I think we'll get started with our next session. Thank you, everybody, for joining us. Hope everyone is still having productive day here at Goldman Sachs. It's my pleasure to introduce Mike O’Grady, CEO of Northern Trust; and Dave Fox, the firm's CFO.

With about $14.5 trillion in custody assets and $1.8 trillion in assets under management. Northern Trust is one of the largest global custodians with unique capabilities in the ultra-high net worth space within the wealth management channel as well. Over the course of 2025, Northern continue to pivot the business towards more profitable areas of organic growth, delivered better-than-expected NII results while also remaining hyper-focused on operating expenses.

So with lots going on in the business. Thank you guys for joining us. Always a pleasure to have you here this time with the year to get your thoughts into how you're wrapping up '25 and your early thoughts in '26. So we'll get to all of that. So thank you for being here.

Look, why don't we start kind of there, right? So over the course of '25, you've made several strategic shifts, including kind of leaning more into the more sort of profitable institutional growth managing the balance sheet really well, making also a number of leadership changes. As you look out into 2026, talk to us a little bit about your top priorities for the firm and also some of the key milestones we should be mindful of for next year?

Great. So once again, thanks for having us here, Alex. Always pleased to participate in your conference. And what I'd like to start it is actually to go back two years just because that's where we set out the One Northern Trust strategy and have been executing on that strategy for the last two years. And the strategy is centered on three strategic pillars: one, around optimizing growth; the second around strength and resiliency; and then the third around driving productivity. And over that time period, of course, it's all about execution of that. And I would say that we feel very good about the progress that we've made over the time period.

If you look at it from an optimizing growth perspective, it was about how do we grow our wealth and asset management businesses faster. Very strong profitability, organic growth, but we would like to see it higher. And we'll talk a little bit more as we go forward, but the whole idea there is investing more in the way of resources in order to accelerate that growth rate.

And at the same time, improving the profitability of the asset servicing business. So continuing to grow it, but moving the margins up from -- in the neighborhood of kind of the low 20s up into the high 20s. And once again, making progress on that front as well.

A lot of progress on strengthening resiliency. We talked about some of the investments we were going to make in technology and building out the risk and control environment. All of that has proceeded well and feel like we're kind of on the back half of that part of the pillar.

And then driving productivity, again, levels of productivity that we haven't achieved in the past, just meaning a higher percent of our expense base, which has given us both the capacity to make some of those investments, but also, as you talked about, bending the cost curve in a very disciplined way.

So I feel very good about that, also trying to hit our target financial model. And over that 2-year time period, revenue growth on average about 7% over that time period, positive operating leverage of about 2 points on average for each of those 2 years. 13-plus percent ROEs, double-digit EPS growth. So hitting on that. But as we go into 2026, it's -- yes, those are the same three pillars, but how do we accelerate on those with a particular emphasis on growth and the productivity to fund that growth.

Got it. Okay. So we'll get into all of that. That's a good way to kind of set up the conversation. Maybe starting with the asset services business. Over the last several quarters, you really emphasized a sharper focus on profitable growth, even kind of the way you just described it now within the institutional servicing even if that means perhaps being more selective on kind of what type of business you're bringing on and perhaps what kind of lower return, lower margin business, you sort of let roll off. Help us think through what that sort of comes down to when we think about the multiyear fee growth algorithm in that business on a net basis?

Yes. So I think one way to think about the algorithm, if you will, would be three variables in the equation. The first being around retention, right? So we have this base of business. As you know, the nature of what we do for those institutional clients is very relationship-oriented, multiyear oriented recurring services and recurring business on that front. So high levels of retention, kind of high 90s on that front. Now that doesn't come easily. That's why we have to put so much in the way of service and capabilities to be able to retain that business. But there's a tremendous amount of power in having that recurring base and having to be at that kind of high 90s level.

That also does entail certainly at times. Things are either going to break your way or against you from the perspective of consolidation of clients. So you can have two businesses, two plans, whatever it may be, that merge, we can win or we could lose on those, but that can affect that as well.

And there's other situations, of course, where the client has grown, and that's great. But we do have to look at the pricing, a relationship that is economically attractive to both sides of that relation. So that's on the retention side. And just think about it this way, like one additional point of retention is the equivalent of one additional point of growth. You don't have a new client and in many ways, more attractive, more profitable.

And you guys are at around 90 you said and the goal is...

High 90s. Yes. And right. So do that, we have that, I would say, long track record on that front, particularly in the areas that we control. So not, truly I'll say, losing the client.

The second variable, expanding client relationships. So roughly half of our new business comes from existing clients, doing more with existing clients. Some of that can just be from offering them additional services capabilities that we have. Some of it can be from the success of the client, the distributed growth of the model. So if you have won the client when they're a small asset manager, for example, but they are very successful and have flows in becoming much larger, that's going to expand the relationship on that front. And so we spend a lot of time trying to expand the relationships. It can be in capital markets. It's in asset management. So once again, the One Northern Trust strategy, that's a lot of that focus is not necessarily just new clients, but existing clients, how can we do more for them.

And it's also this point, Alex, of if you have client relationships that are not attractive from a financial perspective, how can you make them more attractive by doing more for them? Or if you have to adjust the pricing, the other direction, that's what you need to do in order to get a balanced relationship. So it works on both sides. Maybe we've talked a little bit more recently about the fact that we want to make sure that we have the right profitability kind of across the portfolio of our clients.

And then the third variable, certainly is winning new clients. And it's critical to the long-term sustainability and health of the business to win brand-new clients. And on that front, you're in the competitive marketplace, right? So you're likely either taking that client over from a competitor or winning a new entity, if you will, regardless the process to win is highly competitive, right? And so that's where we've talked a lot about ensuring that the new business that we win is attractive, accretive right out of the gate.

And you might say, like, why wouldn't that always be the case? Well, some of it is because, one, you're in a competitive marketplace, so you don't know how others are, say, bidding the new client, but also with long-term client relationships, often, there's an investment period before you get to the level of profitability that you're looking for. And what we've been saying is, we, over the last several years, have built out particularly for the asset manager side of the business, kind of the full footprint for that business. And some of those clients were more investment-oriented clients, just meaning taking them on at lower margins so that we can build out the capability and move them up to be more attractive from a profitability perspective.

Now that we have it built out, we're not doing, I'll say, nearly as many investments on that front. We want it to be profitable from the beginning, both in the types of clients. So you've seen kind of a greater lean towards asset owners, which are just higher margin clients for us overall. But also, you've seen it on the services that we offer. So certain capabilities just by their nature, are lower margin. You take those on in the beginning with the expectation you can once again expand the relationship later. And what we're saying is we're not willing to make as many bets on that front. We want that new book to be accretive right from the beginning.

I got you. So in terms of, I guess, what it means for organic growth in that part of the model, in the past, we talked about like kind of low to mid-single-digit organic growth. I think on the wealth side, it was a little different, but like on the institutional side, does this materially change that? Should we still kind of be in that ZIP code? Or again, does that mean it just kind of comes down to that.

It's close -- it may come down a little bit. I mean, frankly, we've still seen a lot of opportunities that have been very successful with the screen and this approach to it. That said, we do understand that we're taking the risk, if you will, of not winning as many new opportunities because of that, I'll call it, price discipline.

Yes. But then the upside to that, obviously, is like the incremental margin on the business that you do bring in should be significantly higher than in the -- and I know you alluded to that in a couple of places, but maybe we'll try to put a bow around that discussion.

So if I look at the average servicing platform, margin is in mid-20s, you guys are hoping to obviously get that higher and really in the context of the whole firm moving in to kind of 30%-plus pretax margin. Where are you in that journey? How long do you think it will take you guys to get the margin in the asset servicing side of the business to a level that's more appropriate?

Yes. I would say we have a couple more years to get it to that high 20s level that we're targeting. Nice improvement this year, but it will take a couple more years of that type of progress to get it to where we think that's the appropriate margin.

Got it. Okay. That helps. All right. Let's pivot a little bit. We spent a decent amount of time over the last two days talking about the digital asset ecosystem and it kind of hits financial services in a number of different ways. So I was hoping to get your perspective how that might affect a number of verticals I could see how it could be relevant in the, obviously, traditional custody space, how that could be relevant on the investment management side and some of the tokenization of money market funds. So evolution of the space, the role you guys see Northern playing there, any of that particular needle moving over the next 2, 3 years or not worth talking about?

Yes, It's worth talking about. I mean, obviously, it's an exciting time with digital assets and what's happening. And I'll say the marketplace is moving very quickly. And part of that is because the regulatory framework and environment is moving quickly now too. And I think about it in kind of two ways or two buckets. One is capabilities and then the other is commercialization.

On the capabilities front, with the role that we have with our large, particularly institutional investor clients, we have to have the capabilities for them to interact in the capital markets. And so we can think -- before digital assets, you could think of other capital markets innovations, which were new and require different administration custody and processing. So think about like derivatives and all types of new instruments, we have to figure out how to do that for the clients. This is the same thing. So if it's -- whether it's stablecoins or tokenized assets, we have to have the capability to do that. Where we've been investing over the years here is making sure that, that an interoperable platform, if you will. In other words, it can be both digital and a part of the traditional platform that we do have so that we can provide those services to the clients.

Importantly, the other side is the commercialization. To your point, are there opportunities to generate new revenue, new revenue streams from that. And that's where I think with tokenization, there will be opportunities because different assets or asset classes can be tokenized in such a way that there will be new services required for it.

One example would be on the asset management side, for example, tokenizing a money market fund which we would look to do. And you can also see, as you know, there's so many other types of assets that right now are not really even kind of tradable or liquid, but in a tokenized form, could do that. It could be that way. And as a result, it could be a new type of fund or service we have to provide to that fund to be able to do it. If you said, okay, project out or forecast those revenues, that's the part where I would say too early to determine what that is, build out the capabilities and try to be innovative with what some of the opportunities on the commercialize...

How far in this capabilities build-out process are you guys? And is that sort of embedded in your overall expense framework as you think about areas where you need to kind of deploy incremental investments?

Yes. So I would say that we have tried to be, as you would expect, very targeted in the investments we're making there and the capabilities. That's a big part of how we have to approach everything, right? We're not in a position where we can try everything and put big dollars to it and hope it works out. So that's the way we've been very focused. If you've looked at some of the examples where we've done this, so tokenized carbon credit capability right? So it's an area where, hey, we can differentiate ourselves on this front, and it's not going to be a multi-hundred million dollar investment to be able to do that.

And where I would say from a journey perspective on it, a lot of the activity so far has been kind of private blockchain, if you will. And where we're moving now is public blockchain. So it's going to require some investment to get there to be able to do that, but that's the next big stage, and we're very much in that right now. And that's in the marketplace, but also within Northern Trust.

Got it. Okay. Perfect. All right. Let's shift gears, spend a few minutes on the wealth business. It continues to be in a really, really important business for you guys, highly profitable that incremental disclosure has been helpful on just how well the margins held up in that business for some time. But at the same time, it's a really competitive space. And a lot of companies that I cover on the pure wealth side of things, continue to talk about going up market, going after the more high-end net worth end of the well spectrum.

How do you defend your market share there? How do you think about organic growth in that business and looking at them both kind of the traditional sort of high net worth business as well as the GFO business?

Sure. So I think that's the right place to start, which is thinking about the marketplace and as you point out, like there are multiple tiers or portions of the market. And historical -- we cover most of those segments of the marketplace, okay? Where we've been the strongest is at the highest end. So if you start at the highest with Global Family Office, we have differentiated capabilities on that front, largely because of the integration of the businesses that we're in. So being in the asset servicing business, having those capabilities to deliver to family offices that want an institutional offering. But it also is differentiating with wealth management expertise at that level. So the trust in the state type experts.

And on the asset management front, knowing what Global family offices want from an asset manager, so being able to provide OCIO specifically for the needs of family offices. So that's where we've been differentiated the most.

And to your point, what we're trying to do then is use those capabilities and go down to the additional tiers in a more differentiated way. So over the last year, where we spent Time is What we've called Family Office Services. So basically on that front, saying, "Take those family office capabilities but provide them to ultra-high net worth families that may not have a family office, but want the capabilities". So think about like hybrid family office or virtual family office capabilities.

And there, it starts with, I'll say, listening and doing the diagnostic as to what are the needs of that tier or those sets of clients. Once again, that has been very successful so far, much more to go because not every ultra-high net worth family is going to necessarily want all of those services. So it's a question of like how do you curate those in a way that fits their needs. And as we go into 2026, a lot of the focus then is going to be kind of the tiers below that, being able to differentiate more with what the needs are for those types of clients. And that -- it's more than just saying the services part or the product aspect of it but it's actually saying everything down to what type of technology platform should they have for a segment that doesn't have all of those complex needs so that we can compete even more effectively.

So really kind of locking in the client with extra capabilities as you kind of trickle that down to the...

Exactly.

Got it. SP1 Okay. Look, another important theme across the wealth space, which has been not surprising to you guys has been alts. We spent quite a bit of time on this theme as well. Talk to us a little bit about what percentage of your high net worth business even has an allocation to private markets. And as the world continues to shift, towards more assets going into the wealth space among privates, how are you thinking about that revenue opportunity for Northern Trust? Obviously, you have some capabilities internally. I imagine it's going to be a mix between your sort of proprietary products from 50 South Capital, maybe third party? How do you balance those two out? And how meaningful a revenue driver do you think that could be?

Sure. So first, just to talk about the opportunity obviously tremendously large market already, but one that's growing at a higher rate. And so in that sense, big opportunity. And then when you just start to think about from a Northern Trust perspective, once again, we cover all of those tiers of clients and the need and use of alternative is very different as you go through those tiers. So once again, at the highest level with Global Family Office, much higher allocations.

Now a lot of those allocations were providing the custody, but we're not actually providing the asset management for alternatives. But it's still an opportunity. We know where the dollars are, we know where the opportunities are. We just have to be able to provide the right private capital investments on that front. So that's at that end.

And then if you said below that, $500 billion in total of assets under management. Again, it's going to be different for a trust that has been set up for a particular purpose versus an ultra-high net worth family where the wealth is still growing, and they should have a higher allocation to alternatives. If you look at it overall, the overall allocation is below 5% on that $500 billion. So that just gives you an indication of the upside opportunity to the extent that we can provide the capabilities to do that.

And I think about it in a couple of ways. The capability part, you summarized it well there, but we've had 50 South as a capability for 25 years, and their primary client base is our wealth management client base, right? And they are providing products that are tailored the needs of that wealth client base. So it can be fund to funds and it can be other more tailored alternatives that fit for that client base. That will continue to grow. They doubled the capital raise that they did this year from 2024. So it has momentum on that one. And the key there is just to continue to innovate with what's best for that wealth client base. So you'll see more of the kind of semi-liquid and other types of private alternatives that fit with the needs of our wealth management clients.

That said, we want to make sure we're providing the full asset to the clients. That's what we call wealth management alternatives or WM Alt, and that's where we're putting the third-party managers on a platform and then we're curating for the client base. And there, in 2025, we'll more than have doubled the number of funds that we put on to the platform for that year. And so -- and yet, there's still the upside to do even more next year to provide more selection for the client bases.

So again, the key is going to be, yes, have the core building blocks, but provide differentiated opportunities. And we actually can leverage some of the relationships that 50 South has over a long time period, to do one-off funds with some of those managers that are in particular sectors or capabilities on that front.

The last thing I would say on the capability front there is it's more than just say, do you have the product and it all happens, right? You have to have the education, the technology platform, those foundational elements to be able to make that client experience, not only the investment performance, but the experience overall, something that's very positive and favorable, and we've made a lot of advances in the last year on that.

Yes. No, it requires a lot of handholding and advisers need that and may need that access. For the third-party products that are coming on to your platform, would you say that's a typical fee arrangement, meaning the GP pays you guys for placing the product on the platform? How does the commercial model work?

It depends on the specific circumstances on it. But generally speaking, for us, there is just a fee that we charge as a part of a client utilizing the alternatives platform, if you will. There are different models on how the economics could work.

Okay. Fair enough. All right. Why don't we shift gears a little bit. David, I'll bring you into the conversation. Let's talk about the financials. Q4 is almost at its tail end. So a good time of the year to give us a bit of an update on how things at tracking towards your expectations. And just to kind of remind everybody, you talked about NII finishing the year up mid- to high single digits year-over-year, implying Q4 flat to maybe marginally up versus Q3 levels. And you obviously talked about expenses being within the 5% range for the year. So let's start there and any other updates you want to share with us?

So NII is cyclical, right? And so when you think about what I talked about last time, the deposit levels drive most of that -- most of the NII results. And so last quarter is typically a seasonally low quarter for us. And when I gave the guide, I was basically saying that I felt as if we're going to have a recovery going into Q4. So what I would tell you is that if anything, I've had stronger conviction around the guide that I gave you before, and they have responded well. Deposit levels have responded well.

In addition to that, we've taken other measures in the quarter, whether it's back book repricing, securities portfolio and other issues that we've tried to address on our deposit pricing to protect that going into it. So I would just say I would reaffirm strongly the guidance that I gave you before going into the fourth quarter for NII.

On expenses, listen, the 5% or below is has been with me the entire year. I'll be very happy when it's over. But I think we've totally changed the way we do our expense planning. It's very dynamic. And so I continue to be committed to that below 5% for this year. And there's nothing I see on the horizon that would cause me to change that, if anything, the dollar strengthened a bit this quarter. So that headwind went away. So strong on both, okay, going forward on both those guys.

Okay. Anything notable on the fee side for Q4, again, the quarter is...

Yes, I mean on the fee side, but our lag fee structure that we've got in asset servicing, we have a month lag in wealth management. You did see a pretty big sequential increase in the markets from June 30 to September 30, right? So that's going to be very positive, right, for us.

Pipelines are strong. The fee -- the restructuring we talked about in the last quarter within the institutional side will have no impact in the fourth quarter on fees themselves, right? So I think fourth quarter should see some reasonably strong fee progression.

Got it. Okay. And then when we think about the drivers of NII to your point, you feel really good about -- I guess you said Q4 will be flat to marginally up quarter-over-quarter. So it's probably fair to assume it's more up than flat just given the sort of confidence you just alluded to in the...

You can do the math, we were up 9%, I think, year-to-date as of September 30 and so you can do the math from there in terms of...

How much of the improvement in deposit base in Q4 you think is truly seasonal versus something that you're seeing kind of on the core organic growth side of the business that might sustain more elevated deposit level as we look out into 2026 as a jumping off point for '26 NII?

Yes. Like I said, the pipeline is strong and it tends to grow with the underlying business. So part of the deposit growth will definitely be a function of some of the new business that we brought in, in the quarter. I also just think it's a function of -- if you look at the entire return we get in NII, deposit growth isn't the entire story, right? So it's the biggest component of it.

But there's a lot we've been doing around sweating the assets that we get. I mean you think about the cash we generate in the asset servicing business, we have really put a concerted effort around making sure that we price our deposits appropriately and that we invest the money wisely and we take advantage of opportunities in the marketplace to really do more there. And so I think folks have been surprised at our NIM levels and how we've been able to manage that, that's been intentional, right? So it isn't just deposits. It's also a whole bunch of other measures that we're taking including currencies and other things to maximize that balance sheet potential.

I got you. So I guess when you think about '26, just to build on that a bit, on the last quarter's call, I think you talked about NII will be flat up, marginally, 1% to 2% year-over-year in '26 to '25. A lot of reasons behind it is things you just sort of talked about around the proactive actions you've taken around the balance sheet. I think within that, you also talked about two rate cuts. We'll see what happens today. We'll see what the forward curve has done. How do you feel about that original guidance if you were to get more than two rate cuts from here?

So actually it was three rate cuts if you think about it, I mean, because December is a rate cut potentially today. okay? So there's December, and that will have an impact to the entire year. Then we're anticipating March and September, right, two more rate cuts. So actually it's three when I talked originally about it.

We think we've got mitigating stuff that we can do, and that's why I gave you sort of a flat to make sure that we don't have a dip going forward. Now you've got to make a lot of assumptions if you're talking about a full year projection. You've got to make assumptions around the yield curve and everything else and deposit levels. We also think we're going to have some growth in our business, in our pipeline, right? They'll drive higher deposits. And we're also not seeing a full year of effect of some of the deposit pricing stuff that we took. That's continuing. That isn't over, right? So we're kind of reaching the end of it. But at the end of the day, we haven't lapped it yet, right? You've got that coming into it. We've got all the back book repricing going to do, we can reinvest that at a higher yield going forward.

So all these other mitigating factors, right? We certainly think there's upside there. But at the end of the day, I know I can reach that sort of flat if everything is normalized going forward. with some upside potential.

Got it. Okay. Let's hit on expenses as well. You lived with sub-5% all year. There's going to be another number you're going to have to live with in '26. So if you'd like to share that with us, that will be helpful.

But bigger picture, I know everything we talked about today, obviously continues to focus on driving margins, driving efficiency throughout the ecosystem. What's the plan on that, again, near term into '26? What kind of growth expectation should we think about?

We did it little bit different. We haven't locked our plan in yet for '26, but we did a little bit of a different planning process this time in the sense that we -- and Mike talked about it. We started with productivity first, right? And then we looked at our investment. We want to make in-year investments expenses. And then basically, that spits out of expense growth, right? Then we went back and looked at it again and prioritized the investments. And then we try to drive higher productivity going into '26, right? So they're all interlinked, if you will.

What I will say is that we are still planning on a muted environment going into '26. We're not expecting or anticipating or relying upon the markets to basically bolster our results, right? So we still have to operate within a pretty tight band on expenses, right? Now if the markets are in our back and we see great growth opportunities and things like that, we can always reassess, but we've put this dynamic planning process together for a reason. We can look at it every quarter, right? And we can basically say, what's going on in the marketplace? How is the business going and adjust. We have a very detailed list of our capital expenses and our investments we can make during the course of the year, and we can toggle and be flexible on that, right? But we've built the discipline on the expense side to know how to flex up or down, right?

So to give you an exact number, it's really a positive operating leverage mortality that we've got right now, right? And Mike talked about it. We've had consistent positive operating leverage. That's going to be our North Star at the end of the day. We don't want to starve our growth businesses from key investments going forward. But we also want to have that discipline to say, if the markets are muted, we had a liberation Day earlier this year, which was -- S&P got down to almost 5,000. We have to be in a position to be able to maintain the rigor around expenses, right? So we're going to maintain that rigor and we know what the levers are, and we know how to pull them.

Got it. So I think you put it well, like North Star being positive operating leverage and not to paraphrase, but it sounds like you guys feel you could still get there even when NII is flat in '26 versus '25 and maybe a little bit of wiggle room around like the market activity?

Absolutely.

Yes. Okay. Great. We got about a minute left on the clock, so maybe just real quick on capital return priorities as well. I know it's also important you guys accelerated that opportunistically when you can, as you think about '26, any thoughts on the buybacks?

Yes. And so '25, just to finish off on '25, I think what I said before, was we think we're at 110% as of the third quarter, and we're driving towards at least 100% for the year, right?

Now capital, I always get this question, and Mike and I talk about it all the time, there's probably about 7 or 8 different inputs into capital, right? So when you think about your loan activity, you think about your ROE, you think about potential M&A opportunities, you think about your buffer you want to have over the G-SIBs, all that stuff kind of factors into it. But at the end of the day, we'd hope to be able to kind of keep the same clip we had in '25 to the extent that, that makes sense relative to everything else we're looking at.

We like the buffer that we've got, right? Now it's 11% to 12%. We've been more in the 12s in the 11s. If it leaks into the 11s, that's not a problem for us, right? So again, hard to land on the head of a pin because $700 million of RWA is equal to 0.1. And that can happen really quickly in our business, given the size of our client base.

That's right. Great. Okay. Well, great note to leave it on. Thank you both very much. I appreciate you guys for participating again this year.

Great. Thank you, Alex.

Good day, and welcome to the Northern Trust Corporation Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Mike O’Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team.

Our third 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 October 22 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 November 2. Northern Trust disclaims any continuing accuracy of the information provided in this call after today.

Please refer to our safe harbor statement regarding forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. During today's question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits.

Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Jennifer. Let me join in welcoming you to our third quarter 2025 earnings call. Our third quarter results underscore the momentum and disciplined execution of our One Northern Trust strategy. For the fifth consecutive quarter, we delivered positive organic growth and operating leverage, demonstrating our ability to capitalize on a constructive market environment while advancing our transformation agenda.

Supported by favorable equity markets and well-managed expense growth, third quarter revenue increased 6%, our pretax margin expanded by nearly 200 basis points and our earnings per share grew 14% each as compared to the prior year and excluding notable items. Return on equity reached 14.8%. And year-to-date, we've returned 110% of earnings to shareholders, contributing to a 5% decrease in shares outstanding.

Our strategy is firmly rooted in our mission to be our client's most trusted financial partner, powered by a culture of high performance. Our enterprise growth program is driving steady improvement in organic growth, particularly within private markets, where our integrated solutions are gaining traction across all business lines.

The transition to a client-centric, capability-driven operating model is already yielding measurable productivity gains. For example, in our enterprise COO organization, we've created approximately 40 capability teams, moving thousands of people from regional reporting structures to global capability reporting lines. This has enabled us to create a baseline for improving resiliency, process efficiency and quality.

AI is rapidly becoming a catalyst for innovation and efficiency. Our early investments inclusive of providing all employees with access to Copilot are already generating measurable results. Across the organization, AI is embedded in more than 150 use cases, enabling teams to more efficiently service client requests, automate workflows, analyze data and digitize documents, saving our partners tens of thousands of hours and allowing them to focus on higher-value initiatives. As we continue to deploy AI across the company, we expect it to accelerate these improvements, driving greater efficiency, further bending the cost curve and unlocking additional capacity for reinvestment and growth initiatives.

Let me turn to our businesses, starting with Wealth Management. We advanced key strategic priorities in the third quarter, adding experienced leadership and strengthening our geographic strategy. Our value proposition continues to resonate most with the highest wealth tiers, driving elevated win rates and client retention. Our deep expertise, institutional-grade capabilities and high-touch service culture position us to offer services across the entire continuum of family office structures from the largest stand-alone single-family offices supported by our GFO business to virtual and outsourced solutions offered by our new family office solutions group.

This offering for ultra high net worth families is most mature in the Central region, where robust demand has translated into several high-profile wins this quarter. Building on this momentum, we see significant runway for future growth as we replicate our playbook across other regions.

Client appetite for alternative investments within Wealth Management is accelerating, fueling both innovation and adoption. We continue to expand the number of third-party fund offerings in the quarter and are on pace to more than double the number of funds we've had in market within a calendar year. This builds upon the substantial amount of alternative assets raised by 50 South Capital this year with Wealth and GFO clients making meaningful commitments. Notably, 50 South Capital introduced a feeder fund structure in the third quarter, giving Wealth clients direct and exclusive access to top-tier alternatives managers.

Overall, new business activity remains brisk, contributing to healthy growth in core advisory fees. However, this positive momentum has been tempered by ongoing challenges at the investment product level.

Moving to Asset Management. In September, we announced the transition in leadership, appointing Mike Hunstad, a 25-year industry veteran and a proven leader within Northern Trust, as President of NTAM. Under his leadership, NTAM will continue its focus on strengthening foundational core capabilities including liquidity, indexing and quant equity while accelerating growth across alternatives, custom SMAs and our ETF platform.

The third quarter was marked by product innovation, including the launch of 11 new ETF strategies, 8 of which are industry-first fixed income distributing ladder ETFs developed in collaboration with Wealth Management investment leaders to address the needs of taxable clients seeking more tax and cost-efficient cash flow management.

Liquidity continues to be a standout area with NTAM reporting its 11th consecutive quarter of positive flows. We expanded our global money market fund platform in the quarter with the launch of a U.S. dollar treasury liquidity strategy for European clients, building on the success of our onshore U.S. treasury instrument strategy, which has already amassed more than $6 billion since its launch in June of 2024. Beyond liquidity, we saw positive flows in ETFs and custom SMAs, both key areas of focus, and fixed income including two large high-yield mandates.

And finally, moving to Asset Servicing. Our Asset Servicing business delivered strong results this quarter, executing on a disciplined strategy centered on scalable growth across key focus areas, including large asset owners, capital markets and alternatives. Success with large asset owner clients continued with year-to-date revenue from front office solutions increasing materially relative to the prior year period. This growth was driven by the strategic appeal of our integrated product offering, differentiated service model and ability to deliver meaningful efficiencies for clients.

Notable third quarter custody and fund administration wins included the $14 billion Sacramento County Employees Retirement System, a $16 billion Atlanta-based private foundation and the $19 billion New Mexico Educational Retirement Board. Not-for-profit health care was another highlight with strong third quarter wins, bringing our coverage to 75% of the nation's top 50 not-for-profit health care systems, a clear testament to our competitive positioning and deep commitment to the space.

Capital markets activity remains strong with more than 100 new clients added year-to-date, primarily through cross-sell, driving significant growth in core brokerage and FX trading, capital-light businesses that carry highly attractive margins. Momentum in the alternatives space also remained robust with our hedge fund services and private capital practices generating double-digit year-over-year increases in both reported revenue and won but not funded business. This included continued success in the LTIF and LTAF space, highlighted by a marquee win in the U.K., extending our market-leading position in this attractive high-growth area.

Our commitment to exceptional client service was recognized with the Best Administrator Overall Service Award at the U.S. Hedge Fund Management Service Awards. We were also honored as Custodian of the Year by the European Pensions Awards, our third win in 6 years, further validating our leadership and reputation in the industry.

Our disciplined strategy to drive scalable, profitable growth continues to yield tangible results. While recent wins may be smaller in scale compared to some of our prior asset manager mandates, they remain meaningfully accretive to pretax margins. We're also selectively allowing noncore and underperforming business to roll off as contracts expire. Therefore, we expect to see a continued gradual trajectory of margin improvement and overall growth.

To wrap up, as we enter the fourth quarter, our foundation is strong and our momentum is unmistakable. Nearly 2 years into our One Northern Trust strategic journey, I'm deeply encouraged by the progress we've made and grateful to my Northern Trust partners for their hard work and dedication. This decisive collaborative spirit that defines our organization is unlocking new opportunities to accelerate execution and fully capitalize on our core strengths.

Looking ahead, we remain laser focused on the disciplined execution of our strategy, which is positioning us to deliver consistently strong financial performance and create enduring value for our stakeholders regardless of the broader economic environment.

And with that, I'll turn it over to Dave to review the financials.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our third quarter 2025 earnings call.

Let's discuss the financial results of the quarter, starting on Page 5. This morning, we reported third quarter net income of $458 million, earnings per share of $2.29, and our return on average common equity was 14.8%. Our third quarter results reflect another quarter of solid progress towards achieving our financial objectives and enhancing the durability of our financial model. We delivered positive operating leverage of 110 basis points, 120 basis points of year-over-year improvement in our expense-to-trust-fee ratio, which was down to 112% in the third quarter and returned nearly 100% of our earnings.

Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth by approximately 30 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth.

Trust and investment and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 6% increase compared to last year. Noninterest Income on an FTE basis was $596 million, down 3% compared to the prior period and up 9% year-to-date from a year ago. Excluding notables in the prior year other noninterest income was up 10% year-over-year, largely reflecting stronger capital markets activities, particularly securities commission and trading and FX trading income, reflecting our focus on driving growth in these areas.

Our assets under custody and administration were up 1% sequentially and up 5% compared to the prior year. Our assets under management were up 4% sequentially and up 9% year-over-year. Overall, our credit quality remains very strong with all key credit metrics in line with historic standards. We recorded a $17 million release of the credit reserve in the third quarter, largely reflecting changes in macroeconomic projections. On a year-to-date basis, our provision remained essentially unchanged.

Our effective tax rate was 26.1% in the third quarter, up 70 basis points over the prior period's rate as a result of higher tax impacts from international operations. We expect the full year's effective tax rate to be in line with the year-to-date effective rate.

Relative to the prior year period and excluding notable items, revenue was up 6%. Expenses were up 4.7%. Our pretax margin was up 200 basis points. Earnings per share increased 14%, and our average shares outstanding decreased by 5%.

Turning to our Wealth Management business on Page 6. Wealth Management had a healthy quarter with particular strength in the regions. Assets under management for our Wealth Management clients were $493 billion at quarter end, up 11% year-over-year. Trust, investment and other servicing fees for Wealth Management clients were $559 million, up 5% year-over-year, primarily due to strong equity markets. Trust fees within the regions were up 7% year-over-year and are up 6% year-to-date with strength mostly attributable to favorable equity markets.

Within GFO, trust fees were up 1% year-over-year and are up 5% year-to-date. Sequentially, GFO growth was muted by a combination of asset allocation changes and portfolio restructurings. Importantly, the underlying business remains very healthy. We generated positive flows of $2 billion in September alone and new businesses on pace to break last year's record levels.

Average Wealth Management deposits were flat and average loans were up 2%, both relative to the second quarter. Wealth Management's pretax profit increased 11% over the prior year period and the pretax margin expanded 250 basis points to 40.5%.

Moving to Asset Servicing results on Page 7. Our Asset Servicing business delivered another strong quarter. As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remain robust, on pace to beat 2024s record levels, and new business generation continues to be healthy and margin accretive.

Assets under custody and administration for Asset Servicing clients were $17 trillion at quarter end, reflecting a 4% year-over-year increase. Asset Servicing fees totaled $707 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $483 million, up 7% year-over-year, largely reflecting the impact from strong underlying equity markets, net new business and favorable currency movements.

Assets under management for Asset Servicing clients were $1.3 trillion, up 9% over the prior year. Investment management fees with Asset Servicing were $160 million, up 5% year-over-year, due mostly to favorable markets. Average deposits within Asset Servicing declined 6% sequentially while loan volume decreased by 7%, albeit off a small base.

Asset Servicing pretax profit grew 14% over the prior year period, and the Asset Servicing pretax margin was up 150 basis points year-over-year to 24.7%. This reflected the benefit from favorable markets that pivoted in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services and our efforts to streamline operations.

Moving to Page 8 and our balance sheet and net interest income trends. Our average earning assets were down 4% on a linked-quarter basis as softer deposit levels drove a decline in cash held at the Fed and central banks. At the same time, we opportunistically added fixed-price securities to the portfolio to provide downside protection. The fixed floating breakdown of the securities portfolio is now 54% to 46%, including the impact of swaps. The duration of the portfolio remained flat at 1.5 years and the duration of our total balance sheet continued to be under 1 year.

Net interest income on an FTE basis was $596 million, down 3% sequentially but up 5% as compared to the prior year. Sequentially, NII was unfavorably impacted by the lower deposit levels, but this was partially offset by favorable deposit pricing actions we've taken outside of rate cuts. The quarterly contribution from transactional and other onetime items normalized in the third quarter, following elevated second quarter levels.

Our net interest margin increased sequentially to 1.7%, reflecting the favorable deposit pricing actions taken, partially offset by unfavorable change in asset mix. Deposits performed largely as we expected. Average deposits were $116.7 billion, down 5% compared to second quarter levels reflecting typical seasonal patterns, coupled with normalization from elevated second quarter levels. Within the deposit base, interest-bearing deposits declined by 5% and noninterest-bearing deposits decreased by 3% but remained at a 14% of the overall mix.

Turning to our expenses on Page 9. Expenses increased 4.7% year-over-year in the third quarter. There were no notable expenses in the current or prior periods. Excluding unfavorable currency movements, expenses were up 4.4%.

Turning to Page 10. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach increased by 20 basis points on a linked-quarter basis to 12.4%, driven by capital accretion and a decrease in RWA. Our Tier 1 leverage ratio was 8%, up 40 basis points from the prior quarter.

At quarter end, our unrealized after-tax loss on available-for-sale securities was $437 million. And we returned $431 million to common shareholders in the quarter through cash dividends of $154 million and common stock repurchases of $277 million, reflecting a payout ratio of 98%. Year-to-date, we returned over $1.3 billion, reflecting a 110% payout ratio, which puts us on track to return at least 100% for the full year.

Turning to our guidance. We continue to expect our operating expense growth to be below 5% for the full year excluding notable items in both periods and regardless of currency movements. We now expect full year NII to grow by mid- to high single digits over the prior year.

And with that, operator, please open the line for questions.

[Operator Instructions] We will take our first question from Ebrahim Poonawala with Bank of America.

I guess maybe just first, Dave, where you ended on the NII outlook, the mid- to high. Maybe address it two ways, if you could. One, on the deposit trends, it felt like the runoff was more than we expected. What are you seeing in terms of growth outlook and the mix shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet? If the Fed were to cut 3 or 4 times in quick succession, does that put negative pressure on the NII as we think about the first half of next year?

Yes. Sure. Happy to answer that. Deposits actually did perform pretty much in line with what we had previewed and they're actually up from last year at this time. So from that perspective, maybe less than you had anticipated but I think generally in the area we had anticipated. We've already seen a slight pickup in deposits in Q4 and we ended, obviously, September at $135 billion. But we think that Q4 deposits are going to be, I think, a little bit higher on average during the quarter.

And since we've already posted 9% year-to-date year-over-year NII growth, that's why we feel comfortable tweaking our guidance a bit to mid- to high single digits in NII, then which would imply -- frankly, that would be about flat to marginally 1% to 2% up in the fourth quarter.

As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have rate cuts built into our projections. We're not anticipating more than two rate cuts in the U.S. next year, for example. We have carry in that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are going to be rolling off in that quarter in the various quarters in '26. So when you do the puts and takes, we feel that NII in 2026 should be flat to up 1% to 2%.

Got it. That's helpful. And I'm not sure if I caught this in your prepared remarks when talking about -- when you're going to sort of Wealth Management and you talked about some of the challenges at the investment product level. I was wondering if you could just kind of elaborate on what the issues were on that front? And sort of what are the actions you're taking to kind of get that back on track?

Sure, Ebrahim. It's Mike. I'll take that. And so as you know, through NTAM, we offer a number of different investment solutions and products to our Wealth Management clients, and we're also open architecture so that we're offering the products of other asset managers as well. And where we tend to focus is on those core foundational areas. Think about liquidity, index, quant, other areas like that.

And the areas where we've seen pressure, some of it on the index, where it can be a combination of just asset allocation but also pricing pressure, fee pressure. And that then causes flows to lower fee products. And then second is asset allocation when it comes to areas of whether it's growth versus value. And on that front, we offer a multi-manager platform solution and it tends to lean more towards the value side of the equation. And there where we've seen a very narrow market, as you well know, it's difficult for those active managers to outperform and so we've seen some flows out of that multi-manager platform. And so that's been a drag as well.

Now as to what we're doing to address that, in addition to just focusing on those areas and making sure the products are not only performing but pricing at the right level, also as we've talked about, focus on ETFs, SMAs for the Wealth Management clients but also alternatives. And that's an area, as you heard, where we've increased the number of offerings for our clients on the alternatives platform for our Wealth clients.

We will take our next question from Ken Usdin with Autonomous Research.

Just wanted to ask you to talk a little bit about just some of the moving pieces of this quarter. I know it might just be temporary, but AUC/A up 1%. I know you're talking about new business wins. You said also in the press release some outflow. So is that just kind of the normal state of kind of getting some wins and some losses every quarter, just odd dynamic for this quarter that you saw just relative to the market strength that we saw?

Yes. Yes, I would say that if you take a look at the AUC/A growth, there were a number of individual clients that drove those AUC/A numbers. And have they not done that, we would have probably been on par with our peer group. These are asset management clients. And there's one client in particular that represented 2/3 of, I think, of the degradation in the AUC.

You have to remember that not all AUC is created equal. Not all AUC creates the same level of fees. And in this particular case, the vast majority was a restructuring that an asset manager made moving from mutual funds through a like-kind conversion into a CIT structure that's less expensive to the participants. And so we didn't lose clients. We lost assets. And that happens, as you mentioned, at the sort of puts and takes on the asset manager space.

One other loss was really just a redemption by one large client as part of a fund. That fund has actually started to fill back up again. And so when you add it all up in terms of impact, the total AUC that we're talking about is -- the fee realization on that AUC is going to be less than 10% of what we would normally see on a normalized AUC. And so you have to just take into consideration the type of business that is.

And so if you want to translate that into dollars, all combined, all the degradation would amount to $30,000 to $40,000 a month of fee changes -- of fee decreases. But some of that could be earned back by the next quarter. So yes, I think it's a lot of ebb and flow in the asset manager space is the way I would put it.

Great. That's really great, helpful, Dave. Second point, you're obviously firmly committed to that sub-5%. We saw it again this quarter. And just as you're starting to think about looking forward, I know you've said that you're strongly committed to inclusive of FX translation. I just -- any incremental thing we should think about that as we go forward? Just I know you're going to be thinking about positive operating leverage. We don't know what the markets will do from here. They've obviously been a big helper. But as you continue to kind of hone that messaging around the expense base, any new thoughts about where you can kind of try to hold that level on expense growth overall?

Yes. So for fourth quarter, we're pretty locked in. We're not changing our expectations at all. We feel like we have the measures in place to if flex necessary. And so I'm sticking very strongly to the below 5% growth number for Q4 and for the full year. So I think we feel very good about that. Nothing in particular that I would really cite. We're just starting to think about 2026. We're just getting into the planning of that.

And the one thing I would say is that we continue to bend the cost curve down on expenses. If you look at where I started, I think we were coming off a 6% growth down to 5% or 5.5%. It's been grinding down every quarter. And without currency, we would have been closer to 4% than we are to 5%, right? And we're not done. I think the message there is we're not done bending that cost curve down. The productivity that we are going to realize in '25 is great, but '26 will probably be greater. And so I think that we're just -- we're still seeing some opportunity there to keep grinding that expense curve down going forward.

We will take our next question from Brennan Hawken with BMO.

Mike, I'd love to drill into a comment that you made in your prepared remarks where you talked about sort of allowing more marginal business to roll off. I mean, you spoke to that aiding growth. Is that growth comment like an indication that it's going to be more about profit growth than top line growth? Do you expect that some of these efforts might result in more of a top line headwind, but you're going to be able to make it up for it in the sort of better unit economics on each of the new businesses that you're focused on? Can you help me maybe think through some of that?

Sure. So it is definitely a focus on profitability. So we have a great Asset Servicing business, but right now the margins are below the level that we think the business should be performing at. We're seeing nice improvement in that. So we were at one point kind of like 22%. We moved up to 23%, saw this quarter moving up closer to 25%. And that's a combination of, I'll say, a number of factors.

First is the new business that comes in, we're making sure that it's coming in at very accretive margins. And to your point, that can have an impact on the gross top line growth that you're going to get. But in our view at this point, again, we want to see greater profitability and growth in profitability.

Second, I would say is in the business that we have and the that we have, just trying to carefully at those areas and see if, one, if we can improve on this situation, either the activity or with the economics with the client. But to the extent where we're not achieving that, then it is something where we'll have to look over time to transition that business out. So that's the second piece of it, which again will aid profitability.

And then the third, Dave touched on it a little bit just with his comment around expenses, but really focusing on the efficiency of our operations. And I talked in my comments as well, Brennan, about our client capability operating model. Everything around that is trying to be organized in such a way that we can deliver our services in a way that is resilient but also efficient. And so that's where a year ago, we reorganized in a way that brought a lot of those activities together and centralized them under a COO organization so that we could be more aligned both between operations and technology to drive the scalability and efficiency that's necessary to see that continued improvement in profitability.

Great. And then there was a lot of movement in the markets. You already spoke a bit to GFO and some of the changes that happened within some portfolios. But we did see fee rates, at least the way we're able to calculate them, and I know that that's sort of flawed given how you guys bill because we don't have intra-quarter visibility, but did you guys see fee rate pressure in some of the other businesses this quarter as well? Or was it just around the math in how you bill and how much the markets moved? If you could help maybe disentangle that a bit.

Yes. So think about GFO in particular as resembling a little bit more of the Asset Servicing side of the business than the Wealth Management side of the business. They've got an extremely strong pipeline and they're going to produce a record year of new business off of a previous record year. And so what you do see in GFO is large shifts in portfolio composition and a higher sensitivity to cash. And so Q2 was pretty volatile and then there's a lot of movement going in there.

The other thing I'd say about GFO is they're less exposed, at least at Northern, to fixed income and equity movements. They are very cash focused. And so unlike the regions, they're not as influenced as much by the overall equity markets. A better way to look at the business like a GFO business would be to look at their year-to-date fees. So year-to-date fees are up 5% and revenues are up 9%. And then...

Dave, I'm sorry. I'm sorry, I probably worded my question poorly. I was looking at the businesses aside from GFO. Like I get that GFO had some of those moves, I mean, like in the servicing business and the investment management business. We saw a little fee rate pressure there, too. So I was just curious about whether that was just the math in markets or whether there was actually some -- you guys experienced some fee rate pressure.

Sure. What I would say, Brennan, is on the asset management side, there's consistently persistent pressure on fees overall. Nothing that I would note in the quarter. I did mention in a previous question just about making sure that our pricing is competitive for all of our clients but particularly within Wealth Management. So from time to time, yes, we will bring down the fees on an investment management product to make it more competitive.

On the servicing side, I would say, once again, there's always -- it's a competitive marketplace, but there's nothing that transpired in the quarter that necessarily resulted in a reduction in fee levels. And in fact, if anything, Brennan, to your first question, we're trying to be very disciplined around pricing and economics to make sure that the business we're bringing on is at those accretive margins.

We will take our next question from Mike Mayo with Wells Fargo Securities.

I just want to make sure I understand the big picture correctly. So I think you're running Asset Management and Wealth and especially GFO for growth and you're running Asset Servicing relatively more for profitability. And to get there, you're letting some low-margin business runoff. Did I get that correctly?

Yes.

Okay. So I guess the question is, under what circumstances would you say, you know what, the custody business, maybe you should downsize even more or disinvest? And I know this is an old question. You usually said, look, you might not have scale in absolute terms, but you have scale where you want to compete. I think that's kind of where you've been. But does that still hold? And under what circumstances would that change?

Yes. So it absolutely still holds. And if anything, Mike, I would say both the market, if you will, and what we're doing takes it even more that direction, i.e., that we have the necessary scale to be able to deliver these services efficiently. And what I mean by the market part, first of all, is just everything that's happening around both digital assets and AI make these activities more scalable.

And when we talk about our operating model, it's just trying to make sure that we're then organized in such a way to take advantage of such things. So first of all, when you think about digital assets, tokenization and even stablecoins, the whole idea there is around greater efficiency in the marketplace. And so as that happens, again, that leads to more straight-through activities, more liquidity in those markets, in those products, et cetera. And we're certainly making sure that we have the capabilities to do that.

With AI, it's about automating processes and taking things that right now maybe not so straight through. So if you take an example like private capital and the processing of private capital for our clients, so thinking where they're LPs and they're invested in literally hundreds of funds. And a lot of that activity is still paper-based. I mean, I would say, we could estimate that right now only maybe 1/4 of that activity that we do for our clients on that front is straight through. What we're focused on is how do we turn that into 50%, 75% automated, and that's where we're utilizing AI to be able to do that.

So all of those things take us to a model that I think gives us the necessary scale, meaning that as you grow, the unit economics improve. And to your point, these are all measurable things both from, I'll call it, internal perspective but also from a financial performance perspective, that if it's not proving to be the case there, you certainly have to look at it differently.

And then last follow-up. The one liner why someone of your size can compete with the Goliaths of the industry. I mean it's always skill versus scale, the argument. Why can you win in tech and AI but you don't spend as much money?

Yes. First of all, it's differentiation, right? So our strategy is focused on delivering a unique value proposition to our clients. In doing so, that requires greater focus for us. So as I think you pointed out in one of your earlier comments, we're not looking to compete in every segment across the globe. We're picking areas like asset owners in the United States, like pension funds in the U.K., like global family office, like hedge fund services where we believe that, that value proposition, that differentiation resonates.

Because it's still about the overall package. What do they get when it comes to not only the technology but the service that goes with that and who that financial partner is, but then can we deliver it in an efficient way, such that the value they're getting overall is more attractive relative to other alternatives. So there's no doubt in my mind that in the marketplace, that clients want differentiated offerings. And we believe that that's what we offer, and we just focus on those areas where we think we can be successful with it.

We will take our next question from Betsy Graseck with Morgan Stanley.

So just one more question on this thread regarding AI. I know at the beginning, you highlighted that AI is already generating measurable results with 150-plus use cases. Could you give us a sense as to where you see AI helping the -- well, let me put it this way.

Is there any differentiation within the organization about how much AI will be helping out? In other words, do you expect to see it more in the services side or Wealth side or it's equal across the organization? I'm just wondering if the efficiency improvements coming from AI are materially different between the different businesses that you run.

Sure. So Betsy, what I would say what's so exciting about this is it is impacting all of the areas of the company. And just to give you some idea, because how it's being utilized is different and maybe the results, yes, they may vary in different groups, but the applicability is based across the board. So we talked about operations there. I talked a little bit about what we're doing in the private capital space. So that gives you some idea.

But think about so many processes that are involved in operations. It clearly lends itself there and arguably a very high level that you'll get. I'm going to do another easy one which is within technology. Utilizing GitHub and other types of AI, we're seeing, I'm going to call it about 20% improvement in the programming, the engineering part of technology there. And I think, again, still in the earlier days of that.

But as you move to the businesses, take asset management. That's an area where a lot of the activity can be automated. So think about what we're even doing here with investor calls. We're already utilizing AI in our fixed income muni area within asset management to essentially summarize and analyze all the transcripts for all of the investor calls where they have investments. And this is in the hundreds of calls that normally an analyst has to listen to the calls, summarize them and, most importantly, take away the key points. Well, so much of that now has been automated so it saves dramatic time but also provides better insights.

Within Wealth Management, this is making at this point our advisers much better and much more efficient because in advance -- well, first of all, in thinking about where the opportunities might be in prospecting, AI is enabling that process to happen in such a way that it's highlighting where the best prospects are. But then from there, it's how to prepare for that. And so it can go in and it can pull the information both from our internal databases but also what's publicly available about a particular prospect and do so much more quickly than someone could do, I'll say, on their own to be able to do that.

And when they have a question, once again, we're working on the ability for our advisers essentially to be able to tap into proprietary databases that we have like the Northern Trust Institute to be able to immediately answer those questions. So it makes them better at serving the client on that front. When you think about risk, again, whether it's AML, KYC, whether it's fraud detection, these are all things right now where we have hundreds of people who do this activity and we'll still have plenty of them doing it, but they'll be using better tools to be able to do it better and faster. So it cuts across, I would say, the entire company. And I think at this point, we're still in the early days.

Okay. And then just a follow-up on the technology impacts on the business. Could you give us an update on how you're thinking about the outlook for how you would utilize a stablecoin? Do you issue your own? Do you get involved with the industry consortium as we move towards 24/7 trading? Having a stablecoin cash lag is going to be critical. So I want to understand how you're thinking about that dynamic as we roll forward here.

Sure. So I think that what's happening in the digital asset space, there are four key drivers from our perspective: innovation, regulation, client demand and then interoperability. And on the innovation front, to your point, whether it's stablecoins or tokenizations, there are so many things that are coming out and the technology is getting much better, much more scalable, things like blockchain becoming more scalable, going from private blockchains to public blockchain. So the innovation front, I think, is probably leading.

What's been lagging is more on the regulation front. And obviously, now with the Genius Act, this is going to change. And that is going to, I think, significantly facilitate further demand on the client front. And then you get to the idea of interoperability, which the point on that is our clients don't want to have to, I'll say, operate in two worlds. They want to be able to utilize, whether it's stablecoins or a tokenized asset, with their other assets. And so we're just making sure that our platform can do both of them.

Now specifically to stablecoin, I would say stablecoin will find the areas that have the greatest friction. And a lot of that, as you know, right now, is probably cross-border or outside the U.S. And I'll say we'll have the ability to utilize stablecoin, but we're not planning to issue a stablecoin on that front. Where we're more focused is on tokenization because we believe that, that will impact multiple asset classes. And a good place to start would just be around money market funds, so thinking about a tokenized money market fund. That's an area where I'd say we would look to be an issuer of a tokenized money market fund. So that gives you some idea of the direction that we see.

And yes, tokened money market fund is a type of stablecoin cash like, too.

Exactly.

We will take our next question from Glenn Schorr with Evercore.

Small but interesting one regarding the deposit rate paid on savings and money market and other deposits. So after going down for 4 quarters straight because rates have been coming down, it was actually up 6 basis points and we had a cut in the quarter, I think. So it's interesting, I'm more thinking about the go forward. But what caused that savings and money market rate to go up in a quarter when there's a rate cut. And I know you gave us your thoughts on next year, so I appreciate that. I'm just curious what's going on on these deposits.

Yes. Well, deposits are also multicurrency. They're not just U.S. dollar, right? So there may be some differences there that you might want to take a look at. But we could certainly get more granular with you. But on the top of it, I can't say in particular. I have to look at each currency in each particular investment that we made to kind of give you that read.

No worries. We can move on to the bigger question. You've been talking about some of the initiatives that you've picked up pace on, on private market side across Wealth, Asset Management and Asset Servicing. You dangled a little bit with your comment on the 50 South feeder fund. I would love to know a little bit more about what that is, what's on it and what's in it, if it's a fund-to-fund structure, things like that. And then maybe you could also just complete the thought on what's going on the Asset Servicing side as well.

Sure, Glenn. So the feeder fund, basically, as you know, 50 South historically was focused on fund to funds. And that business has performed very well and has been, I'll say, a perfect fit for our Wealth clients and continues to be. And they've continued to expand their offering both for our Wealth clients, but then for other wealth platforms and institutionally as well.

Specifically what happened in the third quarter is they have the relationships and have done the diligence and everything on hundreds of managers. And as a part of that, we're now using those relationships to be able to have specific single fund offerings for our Wealth clients. And this enables us, I'll say, to pick like the best of the best funds where access is often an issue. But through our relationship and by having the diligence done, we're able to offer it to our Wealth clients. And so this was one of the, I'll say, high-performing venture funds that was offered to Wealth clients in the quarter.

And then you said -- to the broader picture there, I'll say, just first on the Wealth front and 50 South, once again, an area of a lot of innovation and again, I think, coming in our direction when you think about evergreen funds and other things that just have greater liquidity that only enables our clients to get more comfortable, I'll say, investing in alternatives.

And then on the Asset Servicing side, there, not only is it that the work that we're doing with, as I mentioned, hedge funds, but then also private capital administration for either private equity funds, private capital funds, but then specifically around the vehicles, the LTAF and the LTIF vehicles. And I would say that is a similar trend phenomenon, if you will, in the European markets, where there's the introduction of more vehicles that have greater liquidity so that it allows for greater distribution and expansion of alternatives.

So we think it's still kind of earlier days for those vehicles as well. But whether it's the U.K. vehicle or the Luxembourg vehicle, we're well positioned to be able to provide those capabilities for the asset managers.

We will take our next question from Steven Alexopoulos with TD Cowen.

I wanted to start -- so I know on the pretax margin, and I know it bounces around quite a bit. But when you look at the revenue trajectory, expense trajectory, right, the guidance you've given for 4Q and full year, you're bending the cost curve down. Do you guys think you could remain fairly comfortably above that 30% medium-term target moving forward and even if the Fed's cutting rates?

So to your point, Steve, there's certainly the impact of markets and rates and levels of liquidity in the marketplace. So there's lots of factors out there. But our view is that the financial model that we have definitely should operate in that 30-plus percent pretax margin on an ongoing basis. So you have a quarter like this where we got there somewhat because of the environment, but also because of the provision release. So that bumped it up a little bit.

All the same, the longer-term trend, longer term, meaning over the last couple of years, has been an improvement in the pretax margin. So when you look at the year-to-date margin, it's closer to kind of 29%. And yes, we expect to move in to 30%. And then even though we're in that 30%, it doesn't mean that we're not still trying to drive positive operating leverage. We very much are. And so yes, the objective is to stay above that 30%.

Got it. That's helpful. And then going back to all the commentary on AI and productivity gains. In terms of the financial impact so far, is this material? Like is this helping you this year keep expenses below 5%? Or is 99% of that benefit still to come? .

Yes. So it's a great question because it's what I call capture. So we have these efficiencies and everybody is utilizing Copilot and other tools to become more efficient, how do we make sure that we're capturing that? And to your point, it's difficult if somebody's, I'll say, 3% more efficient as a result of it. Well, how does that actually affect your financials and your need for resources?

And so that's why we've also been very disciplined around headcount, around span of control, around how we're organized,so that it's a way to capture that. So that as you go forward and as you add new business and you grow, you're not adding more people in order to service that. But instead, you're capturing the efficiencies that you're getting from utilizing those tools. Some areas are easier to do than others, so we talked about GitHub and with the programmers. Those are the areas, Steve, where I'd say, yes, we're getting savings now. But to your point, it's still in the earlier days of capturing the efficiencies that you're going to get.

We will take our next question from David Smith with Truist Securities.

Is there any more color you can offer on the relative strength in FX trading and securities commissions and what you've been doing to drive this? You mentioned some initiatives to drive growth here. I wonder if you could just kind of help us frame how much of the strength do you feel like is a result of share gains and other things that are more the result of things that were in your control as opposed to just simply benefiting from broader market volumes being healthy.

Sure, sure. So capital markets, our capital markets business has performed extremely well. And it's a combination of both execution of their strategy and then also the favorable market conditions. But on the strategy part specifically, what the team has been doing there over the last several years is building out a more durable capital markets business. And what I mean by that is, yes, historically, the business has performed well and the markets and volatility are strong, but then it has gone down when it's not there.

And what they've tried to do is turn it into more of a service, if you will, in the activities that they pursue. And so what that means, for example, on the trading side, on the brokerage side is being the outsourced provider of trading for the asset manager. So instead of some of our asset manager clients having their own trading desk, they've outsourced that to us. And as a result, that's when I talk about adding 100 clients, a number of those clients are where they've outsourced the trading to us, and that produces a more kind of recurring predictable stream of brokerage commissions as a result of that.

On the FX front, we've always, in that business, basically enabled our clients to hedge positions that they want in one currency or another. But it's in the past done just on a transactional basis, where what we've done over the last few years -- several years is to turn that more into a service again by providing currency management as a service. where it becomes automated and it's just done over time as opposed to a transactional business. So that has also built up over time.

And then also from a liquidity perspective, we've expanded our liquidity capabilities. Certainly, we talk all the time about deposits and money market funds and being able to be on that side of it. The other side is, at times, they need overnight liquidity in the other direction. So not only securities lending, but also thick repo has been an area where we've added capabilities to be able to serve those clients, but then create a business that's both, I would say, diversified from the other activities we have but also attractive financial profile.

We will take our next question from Gerard Cassidy with RBC.

Dave, Mike, kind of different questions for you guys. And I always like to get the perspective from folks like you because you don't have a big exposure to this area. There's been a lot of talk this quarter about loans to nondepository financial institutions. And of course, in the top 20 banks, you're at the lowest. You've got the least amount of exposure.

Can you give us some color on what -- and I'm not asking you to talk about other banks, but these categories that are within this NDFI, whether it's private equity or mortgage, credit intermediaries, et cetera, how do you guys look at that NDFI category?

Yes. That's a good question, and I'll start and then maybe Mike can talk about the broader industry issues. There was a reclassification in the reporting methodology implemented by the FDIC that moved some loans into other categories that were into the FDI category. And so when you look at Northern, the vast majority of what we do are subscription lines to private equity firms. And those are lines of credit backed by the LPs capital commitments. And on top of that, there's borrowing bases that reflect uncalled capital as well.

And so that is not the same thing as lending directly to a private credit fund, right? There's also sometimes loans to management companies that we do. But in that case, you've got the management fees that secure your loan, right? And then thirdly, on the Wealth side, we have obviously some NAV loans that we do. The advance rates are extremely low, like I want to say around 30%. Those could have some private credit funds in them, but they're highly diversified across their entire private equity portfolio. So we don't lend against one particular fund. So that's sort of how Northern has looked at that business individually.

I'll let Mike talk broader about the industry in terms of what's going on. But we don't have any of the similarities, as you pointed out, to what's going on with everybody else.

No, I would agree, Gerard.

And as a follow-up question, the IMF has come out as well as the Bank of England with reports in the last couple of weeks citing, and I hate to use the word bubble, but really inflated in asset prices. And they point out that we've got to be careful of some maybe serious corrections. Obviously, when you look at your Wealth Management business, it's not all equities. You've got fixed income and cash in them. Can you share with us how you guys approach managing Wealth Management should a big correct to come? Or just your view on how you approach it with your clients?

Sure. So to your point, you can never, I'll say, time the markets or predict the markets. There's going to be volatility. Valuation is -- one person may say it's a bubble and another person say there's still tremendous upside to that. And as a result, that's why with our Wealth clients we take a different approach, which is what we call goals-driven wealth management.

And it's not only an approach but it's also a technology. It's a platform that is utilized with those clients where upfront, we go through the process of really determining what their needs are going to be not just in the next year but literally over their lifetime, in often cases, then into next generations. And as a result of that, we can then back into what is the right asset allocation as a part of that.

And one of the most important components of it, Gerard, then is knowing that there will be drawdowns in the equity markets over time, how do you make sure that you have the right reserve capacity in essentially risked off assets, such that you do not get into a liquidity situation, not get into a situation where you don't have the funds necessary for achieving what your objectives are.

And frankly, at that point, it's a lot easier also to have the conversation with the client and make sure that they're able to digest what's happening in a volatile market and be able to stay focused on what their long-term goals are and not, I'll say, overreact which, again, the empirical research would tell you that overreacting to market volatility is not the best long-term strategy.

And there are no further questions in the queue at this time. I will now turn the conference back over to Jennifer Childe for closing remarks.

Thanks, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again soon.

This concludes today's call. Thank you for your participation. You may now disconnect.

Thank you. Wrapping up what so far has been a very successful Global Financial Services Conference for day 2. Very pleased to have Northern Trust with us like we've asked for all the companies, the first ARS questions on the screen. From the company, very pleased to have Dave Fox, Chief Financial Officer; Pete Cherecwich, Chief Operating Officer. And it's interesting. A year ago, I think it was tomorrow, we had Jason Tyler on stage, and Northern came out with a number of leadership changes, including both of you. Dave, you were sitting in the front row then, little do we know that you'll be up here today as Chief Financial Officer. Prior you're running the Global Family Office business. Pete, you were running Asset Servicing. Now you're Chief Operating Officer.

So maybe, Pete, maybe we'll start with you. This Chief Operating Officer role was a newly created role. At the time, the release said you're going to focus on ensuring operational excellence and resiliency, effective risk management and controls and scalable growth. It sounds like all important stuff. Just maybe talk to you about what you've been up to specifically and just how that's translating into dollars and cents.

All right. So first, let me just talk about dollars and cents because that's the most important, I think, to everybody here. In 2025, we will achieve $200 million in productivity. And next year, that number will be higher. And more importantly to me is that approximately 75% of the productivity is sustainable. And what I mean by that is not delaying hiring, cutting travel, it's permanent reduction in roles that are needed to do a job or negotiated contracts with vendors for less spend, et cetera.

So the next piece, we talked a lot about scalable growth. Mike used that word a lot. And that's primarily with an Asset Servicing focus. So what I'll say there is that in the first half of 2025, when we look at all the wins for Asset Servicing, the average fully loaded margin was 470 basis points better as compared to all the wins in '24. So that's important. So we're taking on new business that is improving the margin in Asset Servicing in a significant manner. And when we look at the expense to trust fee ratio for the first half of ' 25 wins, that was below 100%. So in all the stats, new business is coming on better.

And furthermore, importantly, we have been taking a look at our portfolio of Asset Servicing clients with an eye towards scalable growth and attaining higher margins. Specifically, if there are cases where clients do not meet the hurdles or not underperforming, we may look to exit those relationships or take further action.

I guess -- so 2026, more than $200 million in productivity savings, a little bit more, a fair amount more. Do you care to size that something you have to wait until January to get on the earnings call? And just maybe just more context to that.

It's budget season. So I'm angling for a little bit more and Mike is angling for a lot more. I'll tell you how it comes in January.

That's fair. I guess basically what you said is just how does that fit into this modernization resiliency initiative that you've been talking about for the last year or so? And just kind of where are we or what inning are we in that venture?

Yes. So it's funny. I looked at the notes from the last Barclays, and Jason was here to say that he thought that sometime in mid-'25, we'd start to bend the curve. So I'm happy to say that as far as modernization resiliency goes, all right, we have started to bend the curve and the rate of growth is coming down. So middle innings, rate of growth is coming down. That's for sure. The way we're doing that is we're really focused on the simplification of our model.

And an example would be, for example, we ended up reducing the number of third-party vendors in the first half of the year by 10%, right? That's 10% less due diligence we have to do, right, filling out paperwork, managing, et cetera. So really helping for us to bend the cost curve. So middle innings, I would say we'll see that continue to come down in the next 2 years.

And I guess, Pete, as COO, you obviously also -- you're focused heavily on productivity. What are you doing to ensure the cost curve at Northern Trust really continues to bend down? And just maybe talk to how AI fits into that.

Yes. So I'll start without AI and then I'll include AI both, right? So we can do 2 things. One, as I said, $200 million this year, it's really based on, one, is vendor management. So really looking at reducing the number and consolidating. Simply put, right, it's -- you want higher volumes and better rates. And the way to get that is to consolidate vendors, right, having fewer partners. So laser-focused on that.

Workforce optimization. You hear a lot in the industry about span of control, things like that. Under the radar, we've increased our span of control by 22% year-to-date. And there's more to come. So we'll continue to focus on that.

Traditional lean methodologies. This is an industry where there's a lot of customization by clients and for clients. We have to look at that, figure out how to streamline that and how to make things more scalable using low-code tools that are out there. And so the teams are working on that. But ultimately, it is about automation, full automation because then it goes away.

And for full automation, we continue to invest in technology that will give us that. An example will be as we think about quality control checks, we have launched an application where all of our fund accountants instead of doing manual processes to double check if something is right, the system now does that for them. Why I bring that up is if I then layer on AI to that on top of it, I don't even need that individual to do the review of the quality controls, the system will do it for you. So AI is an interesting one and just where we are as a journey. And again, if I use your baseball analogy, it's still early innings on AI, and it's really twofold.

So one is let's just talk personal productivity. So if I'm a developer, we've rolled out GitHub across the organization, and they're estimating that it's saving about 31% of their time in terms of development activity. So a huge benefit with GitHub.

We've deployed Copilot. Many of you probably have Copilot. And Copilot is really something that is giving the individuals, right, the ability to just work smarter. A best example would be you'd be surprised if you look at your own firms, a number of people that take minutes, right, type things out, look at designs, how me typing out notes. If you transcribe it, you summarize it, all that can be done, huge productivity, just small examples. But those are the small things.

The big ideas are really things that we're building the guardrails for. So we have a group right now that is focused on saying, here are the guardrails for the company and then focusing on things like AML, KYC DUCs, right?

Document digitization. You think in this day and age, we wouldn't get documents. We still get millions and millions of documents on PDFs from our wealth clients, from GPs, et cetera, still come in. Sales and RFPs. So lots and lots of use cases that are either in production or being put in production shortly.

And then maybe one thing that I've heard Mike talk about is this whole client-centric capability model. Maybe explain to audience what that is, how it differs from your previous framework? And is this more of a productivity thing? Or could there be a growth impact?

Yes. So for me, this is the culmination of the pivot that Mike did, right, about 18 months ago when he announced this organizational structure and was heading down the path. Historically, we were organized in a vertical manner, such that the businesses controlled all their means of production and not just the 3 business lines, but also different geographies. So Luxembourg would have all of their staff report to them, et cetera, et cetera. What we did is say, we need to strip that out and come up with core capabilities that we'll organize around. And the reason we call it client-centric capability is because it's about delivering with greater consistency, speed and resilience while maintaining the trust our clients place in us.

So we're not trying to be a factory. We're trying to have our business services produce products that can then be combined with other products to produce the solutions that our clients are looking for. What does that mean though for productivity and resilience? Ultimately, if I have one group doing AML, KYC across the company, I'll do it better, I'll be more efficient. One group doing trade settlements. And when think about settlements, well, I don't have a capital markets division and a custody division doing settlements separately. We have one division now that's doing settlements for both. So it truly is breaking down the barriers across all of our lines of business and creating those capabilities.

Lastly, it's taking the business service and combining it with a technology partner such that a small team can manage the transformation of that capability together. And I think ultimately, in this day and age where the technology is moving faster and faster, having a technology professional that understands the domain and a business professional that understands tech combined can transform things faster and drive more productivity.

And I guess the other thing we've heard around Northern Trust is this whole kind of One Northern Trust, which I understand to be a multiyear kind of transformational approach. Maybe you can just expand on that, maybe detailing its impact and just informing us where you are in this journey?

Yes. So I'll take that because Pete actually just described a lot of what One Northern Trust is in terms of the productivity and the risk and resiliency part of it. So he's kind of already covered that. If you think about the other part, which is as important, it's the growth side of the equation. And we've got numerous examples. And in some ways, I would say that the growth part is already well on its way. And if you look at a good illustration of that would be the GFO business that I used to run. And there's other ones like family office services and private capital.

We're going to take the GFO footprint. We're going to try to interject that into these other businesses. And so when you think about GFO, it effectively has representation across all 3 businesses touching that client base with transparency. And vis-a-vis the client, they only look at One Northern Trust when they actually approach us on something. So they look at it as an integrated team. They don't look at it as, oh, that's the Asset Management guy I'm talking to or that's the Asset Servicing person or that's the GFO person. They look at it as an integrated One Northern Trust model, which allows us by sharing all that information and combining those teams to offer the best solution at the right time to those -- that client base.

We're kind of doing the same in alternatives, and I call it private capital. When you think about alternatives for Wealth Management and you think about it for Asset Servicing, it's more like the holistic offering we do around alternatives. And so when you think about even large wealth clients that have a huge concentration in that area, isn't just about finding the right manager and investing with the right manager. It's about the whole continuum of services you can provide around alternatives, whether it's the banking, whether it's the reporting and the structuring. So we marry those 2 things together. And when we talk about alternatives to our clients, it's from a One Northern Trust perspective. And everyone is in the room at the same time, right? So it just creates that ability to cross-sell without having to do a separate meeting and call a separate person in the room.

Helpful. I guess, Dave, as we -- now we have you involved, just maybe talk to, right, 1 year in the role as CFO. I guess, any observations of no biggest surprises, positive, negative? Any particular changes in your leadership you want to highlight? I will say that we did appreciate some of the increased disclosure we got last quarter...

Yes. No, you're welcome. Listen, I ran a big part of Asset Servicing. I ran an important part of the Wealth Management business. No surprises there and getting into the numbers and things like that. I would actually tell you the biggest surprise I've had so far is the size of the prize in the wealth management, asset management opportunity inside the firm and particularly as it relates to taking some of those capabilities and pushing them into the ultra-high net worth and into the core wealth side. I think I underestimated the ability and the opportunity there. It's much, much greater than I thought it was going to be. So I think that would be one thing.

In terms of the finance function, I think we've changed the way we do our financial planning. We've moved to a much more dynamic model, a more flexible model. We don't just set it and forget it at the beginning of the year. People get a plan. But very shortly after that plan is in place, we have a process we go through almost weekly. We look at the markets, we look at our sales, we look at everything. If we need to shift or change priorities, we can do that now. We've identified all of our discretionary and nondiscretionary spending, and we can use those levers if we need to in a given quarter to make sure that we're maintaining positive operating leverage. And I think that's sort of the way we're running the business today. So it's much more dynamic than it was in the past. And I think that's an important way to do that when you're in this type of environment where you've got some volatility you've got to deal with.

Makes sense. I guess on the topic of leadership changes, maybe just talk about some of the recent ones. Last week, there was an announcement kind of changing the Head of Asset Management, who's leaving. I think it was maybe a bit of a surprise to outsiders. Maybe start with that, and then we can kind of speak to some of the other leadership changes we've seen in the last year or so.

Yes. And I think the announcement about where Daniel is going out. So everyone kind of knows that. I think it was a very close call. I was involved in the recruiting effort for Daniel a few years ago, 2.5 years ago, roughly. And it was a very close call at the time whether we would go internal or external. We had very strong internal candidates. I think at the time, we were doing a bit of a shift in Asset Management, much more towards the alternative space, and I was part of that because family office, obviously, was an important part of what we were trying to do.

And I think at the time, we thought an external voice at the table could kind of level set and checks what we thought was already true in terms of our strategy going forward and bring some different thought processes into that shift that we were doing. And I think it was the right decision at that time.

The good news is it was a close decision, and Mike Hunstad is someone who is incredibly well respected and well known inside our institution is someone who could have done the job a couple of years ago as well. And the strategy that's been put in place was something he was integrally involved in putting together, together with Daniel. So there will be no change in the core strategy of the Asset Management business. We're now on these great sort of focused rails going forward. We know what we're doing. And he's going to just continue to execute off that original plan. So I wouldn't expect there to be any noise there. I'd also just say that it actually is a good thing that we're able to do a succession announcement so quickly. It just speaks to the strength of our bench and the fact that we've got this great team already in place.

And then I guess, this time last year, made changes to Asset Servicing and Wealth Management, the other 2 obviously big businesses. Kind of -- just any kind of updated thoughts in terms of how those businesses are run? Or is it kind of more status quo?

No, it's definitely not status quo, and I'll let Pete talk to the Asset Servicing side. But on Wealth Management, the family office services segment that they put together, I think, is going to be very powerful, and I'll tell you why. One of the big differentiators in GFO has always been your segment expertise and kind of knowing what other folks in that space are doing and why they're doing it. I think we've discovered with the cohort group that's $100 million and above, but doesn't have a family office, a lot of that same thing is true. And we actually incubated that idea in our central region Wealth Management group.

And we found that by having those dedicated individuals in that particular segment, our win rate was 75% or better. So what Jason is trying to do now is take that template and apply it to the different regions inside the U.S. to make sure that when that segment comes to the table, whether a new prospect or an existing client, they're getting the same level of coverage they would get as if they were part of that segment of the central region. So we already have a test case. We already know it's working. And also, it will help the migration. A lot of these clients will migrate up to having a family office at some point, and we can make that handoff very, very easily because the GFO folks and the family office services folks are sort of co-located. So I think that synergy is going to be super powerful.

The other thing Jason is doing is expanding the suite of alternative products that we have on our platform. We already had onboarded roughly $2 billion of alts onto the wealth platform, but he's already launched 4 new funds this year, has about, I think, another 8 coming down the pipe for the second half of the year and is accelerating that process. We found that our clients are really wanting to add that to their portfolios. I would say we started later than most in getting that into portfolios, and now it's really accelerating. So from that perspective, that's definitely not status quo.

And the last thing I'd just say on the wealth side is that he's looking at key geographies and beefing up the teams in those key geographies, including New York and the West Coast and other areas that you think would be important to us to make sure we've got the right folks and the right sort of sales management there as well. So...

So on the Asset Servicing side, a little awkward because I was there and now Teresa is taking over. What has she changed? First, obviously, the operations and all the services have come over to the COO world. But most importantly, one of the verticals we had was for asset managers and a separate one for asset owners. She's changed that now, and she's regionalized client service. So the U.K. runs all of the U.K., et cetera. The U.S. runs all of the U.S. that's enabled them to focus on more coherent strategy. And as part of the scalable growth initiative, really focusing on upmarket asset owners, global alts as well as our capital markets business.

So our capital markets business has been driving a huge amount of growth on the FX line. Our brokerage line is starting to go up. And so -- and liquidity is the last piece of that. So under our liquidity solutions group, cross-organization group has been focused on how we make sure we are getting as much wallet share of our clients' total liquidity, not just deposits or FICC repo or money markets, et cetera, but the entire liquidity basket, that's helping the NII line.

Got it. And I guess maybe I was hoping to kind of delve into some of the topics going around. But global -- not global -- just private markets in general is certainly something that's come up quite a bit. The growth there is expected -- has been and expected to continue to be pretty strong. Just how does -- how is Northern Trust positioned to capture this opportunity in the Asset Servicing side?

Yes. So really, really well. So we bought, I think it was 2012 now. I bought the Omnium platform from Citadel. That group right there was started at $10 billion. That group now has -- is #4 in the market, right? The amount of AUA has grown by 49% in the last 2 years. Interestingly, 90% of the assets are equally divided between private credit and multi-strat, which I would say are the hottest part in the market and well, well positioned for growth. So that investment and that team is doing great.

If I look at pure-play private capital across the globe over the last 5 years, we've seen our assets more than double. And then we just did a lift out of an organization, Igneo in Australia to give us that capability. And then one of the largest private managers in the world just appointed us to be there primary provider as well.

Last piece, which is interesting on the retail side. If you look in the U.K., their new vehicle for semi-liquid products, it's called the LTAP. We have over 60% of all funds authorized by the FCA are administered by NT. And so all the big managers that are launching this LTAPs of liquid alternatives product, we are there on the ground floor, and we expect that to continue to grow. So I feel well set up because of our focus on private credit and particularly in multi-strat.

Got it. And then maybe, Dave, just back to your prior job as running Global Family Office, 8% revenue growth in the first half of the year. Just talk about opportunities to further grow that business? And just how does it kind of play into the broader wealth franchise?

Yes. So -- we've had some really significant wins internationally in GFO. And what people don't fully realize is we've had an office -- Global Family Office business in London for the better part of 25 years. And so we're pretty well established. And then we put a team out in Singapore as well to take advantage of the APAC business. We really benefit substantially off of the penetration we already have in our Asset Servicing business. And when you get overseas, there's a lot of connectivity between some of the large EMEA and APAC sovereign wealth funds and other folks and actual personal wealth. And so our reputation, primarily as an asset servicer in these markets really appeals to some of these larger big family offices.

So the stuff we're going after internationally tends to be the biggest, most sophisticated family offices, and we've got a platform there that is already there. For example, like the Luxembourg business, the fund administration business there, very appealing to family offices. The GFO foundation, however, I think the really big lock domestically is this family office services segment. And what Jason recently did, which I didn't mention before, is he took the Chief Operating Officer of GFO and the Head of Business Development for GFO and made them head of all of wealth. COO all of wealth business development. And the idea behind that was to take some of the best practices we developed and growing that business and the technology we had and we're using at our disposal because a lot of the family office services folks want to access that technology and to push that more into the ultra-high net worth and even in some cases, the core wealth segment.

And I think that is really going to turbocharge that business. And it's also going to make sure that we put the right clients in the right swim lanes, right? So we have a fair amount of billionaire families that still aren't part of GFO. They're sitting within the regions. We have a sliver of their business. Now we can go in there with a bigger team and make sure that we put them in the right swim lane. So that synergy between those 2 groups is going to be extremely powerful to grow that platform.

Got it. And maybe kind of put the next ARS question as we shift to the financials. But average deposits, I think, were $122 billion last quarter, up 6%. I know typically, we see a seasonal decline in 3Q. Maybe just kind of talk to what you're seeing on that front?

Yes. So I said in the last earnings call that I expected the deposit base to normalize. There obviously was an uptick during the "Liberation Day" and the risk-off trade that ballooned our balance sheet a little bit. And I expected it to normalize back down. August is typically a slower month because of Europe obviously takes time off, and that's transpired. So I would say that it's actually worked out pretty much exactly along the lines that I had anticipated. It's gone back to what it was before in terms of just the deposit growth growing along with the underlying client business going forward.

So -- and obviously, fourth quarter -- third quarter is panning out. But fourth quarter, there's usually an uptick in deposits towards the end of the year. So again, I haven't seen that transpire, obviously, because we're not there. But I think, generally speaking, we feel pretty comfortable with that.

And then I guess, record NII in the second quarter, up 16% year-on-year. So you've talked to kind of only mid-single-digit growth for 2025. Maybe just talk to some of the near-term puts and takes. And obviously, you have a short duration balance sheet, the Fed is going to likely cut next week or I'm told so. Just how kind of we think about both the near-term and longer-term NII opportunity?

Yes. So that's another case where it's actually panned out the way we thought it would as well. We had at least 2 cuts modeled into our guide in Q2. And again, we think it could be 2, it could be 3. Even if it's 3, it won't matter because the third one would come in December and by then, it doesn't have much of an impact. So from that perspective, we feel like we're sort of on the same track that we mentioned before. In terms of '26, too soon to handicap '26. What I will say, though, is we have changed the fixed mix of our securities portfolio.

So the fixed portion has gone up over the last few months. And so we've begun to think a little bit about having anticipated a lower environment, how can we protect some of our revenues going into the following year. And so you'll find that when you see the numbers come out, we're actually a bit more on the fixed side and a little less asset sensitive than we might have been before. So to try to counteract a lower rate environment.

The room expects modest growth next year for what it's worth.

Okay. Well, where interest rate is going to be next year, we'll see. Yes.

And I guess maybe on the fee income side, the markets have obviously been strong. Just maybe talk to the current backdrop, new wins, pipelines, expected trajectory. I know some of your businesses benefit from lag pricing, which is really strong. Just how should we think about that?

Yes. So I'll let Pete talk about Asset Servicing. As it relates to Wealth, our pipeline is incredibly strong in the regions. It's running well ahead of this time last year. GFO had an incredible year last year, a record year, and they're on pace to match that. And so I feel really good about the Wealth Management pipeline. In Asset Management, sort of a tale of 2 cities, obviously, in the areas where we have put a lot of our energies into what we call our right to win, whether it's our U.S. treasury fund, whether it's our liquidity funds, whether it's our tax advantage product and even our alternatives. If you look at our 50 South capital raising, that's all been very good.

There are some industry headwinds. Obviously, we're grappling with, whether it's mutual funds or whether it's institutional indexing and things of that nature, and we've seen some weakness in fundamental equity managers. But that offsets that. But in the areas we've actually prioritized, we've actually seen some very decent growth and good pipelines. Pete, you want to address?

Yes. On Asset Servicing, I feel there's been strong momentum across the board. If we take our annual goal, right, we're at 80%. I'll caution everybody just because you sell something, the implementation time frames are way varied. So you can't really draw any conclusions from that, except that our sales process is being robust. If I look at where that robustness is occurring, in EMEA, right, 90% of our target for asset managers right now, and they've been delivering very strong results, partly because of our success in those liquid alternatives, right, in the LTAP funds, et cetera, but also in custody wins and standard fund accounting.

In the Americas, really a shining start here is asset owners has reached 160% of its target and mostly from all takeaway wins from our competitors, University of Texas being one of the major ones. And if you ask why, it really is our front office solutions product and the references we're getting from our other clients, right? That is winning the day. Ultimately, pipeline is doing great. And one step, which I thought was interesting is that we've retained 89% of rebids globally. And so there's not that many that are out there every time, but we do -- there's always people go out and do pricing exercises, et cetera. And so we continue to maintain our client base and do very well there.

And then just maybe on the expense front, you talked to -- we'll put up the next ARS question why I asked this. But you talked to less than 5% expense growth this year. Is that still the case? How are we thinking on going about that?

Yes. I mean, obviously, I would have wished the dollar to have hung in there better. But having made that commitment, we've definitely -- we put it out there, and we're sticking to it.

Got it. And then I guess, less than 5% this year is better than you did last year. So I guess how do we start to think about 2026? Could we do maybe less than 4% next year? You've also talked to this 105% to 110% expense to trust fee ratio and pretax margin targets. When do you think you can get to those?

So what I'm trying to do is redirect everybody to positive operating leverage as being the primary goal, right, as opposed to just a given number because everything is interconnected in terms of how we do it. And so when I took over the role, I knew that we had some credibility gap in terms of our ability to control our expenses. And so what I wanted to do is I put a target out there to say it's going to be below 5% because we have the intestinal fortitude to do that and the systems and the people that want to do it. And so we've proven we can do that, right? And we've built this financial model in such a way that if we have to flex, we can flex. And it can flex as low as we want it to a certain extent, right?

So from my perspective, it's going to depend to a large extent on the state of the markets and our pipeline and our business and everything else. But what I don't want to do is starve the businesses of growth investments, right? So if you were to see us do something, it would be more on the growth side. And then I want to marry it together with the productivity that Pete is doing. So they go hand in hand. So together with his productivity, we're looking at a model that can definitely flex every quarter and produce the kind of expense control we're looking for. I'm hoping -- Mike has always put the target out there that we want 3% organic growth, 3% market growth, so that's 6% revenue growth and 4% expense growth. That's sort of nirvana for us. That's sort of our overall goal, right?

Overall goal is like 2 points of operating leverage, right? We throw it out there as sort of our financial model that we're trying to attain. And so -- but we have to be flexible, right? So yes, if I need to take it down, I'll take it down. I know how to do that, right? So I just want you to understand that a particular number isn't the way I look at it. It's really positive operating leverage in all circumstances. That's sort of the way to look at it.

Got it. And then second quarter was record share repurchase, but you still have so much capital. I mean, I think over 500 basis points of excess capital, if you look at the most recent stress test, the next highest bank is like 350. So I know the customer comes first, but like can you do more here?

Yes. So we've returned 116% of earnings so far this year. And we've already said that the second quarter earnings call, we're going to do like 100% for the year if things are panning out the way they should, which is pretty darn good, okay? In terms of our capital, only -- if you -- every $700 million of RWA is basically 10 basis points of CET1. And we have a lot of clients that come to us without really any notice, which is fine because we have some very big, big clients. And they may borrow large sums of money in the billions, okay? So when you think about running at 12.9% was way too high, running at 12.2%, we're still above our target range of 11% to 12%. When we get closer to 12% or below, right, we're in the range, but we still have to have enough buffer that if these large clients come to us, it's not going to drive us too far down.

The second thing I would just say is we have some very large clients, particularly overseas, that like the fact that we have that excess buffer, right? And so to the extent that we look at the other firms and the regulatory environment, and we think that we can maybe run a bit lower, we might do that. But at the end of the day, we want to have that relative buffer over our peer group because we just think it's important given the size of our clients and our asset size, right? So we'll be very careful about that. So 11% to 12% is sort of -- is going to remain the target for now.

Got it. And then I guess, in July, you kind of increased the ROE target from 10% to 15% to 13% to 15% is like 15% the ceiling? Or do you think kind of the successful execution of a lot of stuff we talked about today, including that One Northern Trust strategy, can get you to something higher eventually?

Not the ceiling. And obviously, the Wealth and Asset Management businesses already attain that and more. I think the idea behind moving it was we want to be able to consistently be at the top end of our range, right? And that's why we took the 10% away, right? So we thought, okay, we can -- 13%, okay, that's good. If we can consistently be at 15% for a certain period of time, we can think about raising the target. It's definitely not a ceiling. But right now, that we have to prove that out. And we also don't -- one thing to consider, we don't manage to an ROE number. At the end of the day, it's a byproduct of everything else we're doing, right? We could manipulate ROE if we wanted to, right? But that's just not how we run our business.

Got it. And I got to bring up the late June Wall Street Journal article, particularly because one of my Sunday nights. But it mentioned Bank of New York approached Northern to express interest in merging and the CEO has talked. I know Mike was pretty direct on the earnings call in July that we never really entertained discussions regarding the sale of the company nor do we intend to.

So I guess 2 questions. First off, why don't you think it makes sense to at least entertain discussions?

And then maybe secondly, what leads you to believe that appendance is the right approach, just given these are scale businesses and you're not the largest player?

Yes. So just first and foremost, I think there was a -- I'll let Pete answer the scale side of it because I actually think it's not as important as people say it is, particularly with the advent of AI. But in terms of what Mike said at the last earnings call, I think it's important to note, and one of your fellow analysts has this quote that banks are sold, they're not bought, right? And that's very true. And we needed to make certain that our clients, and we had a lot of phone calls from clients and our shareholders knew that we, as an institution, had not initiated a process to sell the bank, okay? There is a reason why people come to Northern versus their alternatives. They don't like the alternatives. They like our business model the way it is.

And so from that perspective, we had an active pipeline. We still do. We've got clients that have large sums of money with us, not just on the wealth side, but on the institutional side. And we needed to basically take what was, in effect, a rumor and make sure they understood that we, as a management team and as a Board, we're not initiating a sale of the company, right? I think that's incredibly important for them to know that. And that's really what Mike was saying. Take into consideration, too, you've got -- Mike is a former investment banker, a former FIG investment banker, right? So he knows about M&A in the FIG space. I was an investment banker as well. And so when you think about shareholder value and inorganic opportunities and things of that nature, we're looking at stuff all the time, right?

I mean we know what's out there. We know what the art of the possible is. And our Board understands their fiduciary responsibilities very deeply, and they hold us to account. They're tough on us. But at the end of the day, when you look at our independent plan that we've got in place to grow the company and reach our financial targets, we have a high degree of confidence in hitting those targets as our current business is structured today, right?

The other thing I would just say is when you think about the growth of our business going forward, it's going to be primarily in Asset Management and in Wealth Management, right? It doesn't -- it's not going to be in custody, right? And so I think I want Pete now to address the scale issue, which I think I want to take off the table going forward because I think we feel like we can compete very effectively right where we are right now in that business. So Pete?

Scale. So there's 2 ways to get scale. One is volumes and rates. The other is being really smart about how you spend your money. So on the volumes and rates, yes, if someone has a data bill and they're bigger and they use more data, they might get a better deal. But I would argue that better deal is going to be on the margin. Where you get real scale is back to the capability is having one platform that services everything across your company and focus on only changing that one platform and managing that one platform. For an example, we right now are in the midst of implementing a cloud-native accounting platform. And I would argue the success of a cloud-native accounting platform, we put AI on top of that.

That will dramatically increase our ability to scale because the number of FTE you would need to run accounting goes way down. And because of our size and nimbleness, we will be able to get on to that platform much quicker than anybody else, right? So being in the middle where you have the capital to spend on the technology that you need, but you're at the size where you can actually convert and change, that actually is kind of the sweet spot right now given how fast tech is moving.

I guess, Dave, you opened yourself up to the last question, but you brought up your investment banking background, Mike's investment banking background. I guess on the flip side, just what -- do acquisitions play a role in kind of Northern Trust's future in terms of being a buyer?

Yes. Well, of course, they do. I mean, I think look at our history. So up until 2010, most of our acquisitions were either scale or geographic, and Pete was involved in many of those. And then if you look at 2010 onward, it's been more capability driven. If you think about Parilux and you think about Aviate and Omnium and a bunch of the other tack-on, those were more about capabilities, right? And as you look at the Wealth Management business, I would say it's got a very solid platform. And so capability-wise, I think they're focused on alternative investments, right? So how do we get that across the table? It doesn't have to be an acquisition, right? There are partnerships. There are joint ventures. There's other ways of doing it, distribution agreements, huge focus for Jason right now.

Asset Servicing, I think, has everything they need, right? So I wouldn't expect anything there. And then Asset Management is going to be -- I do think product will be an issue for Asset Management, looking at new product, whether on its own organically or with a partner, not on the level of possibility.

Great. On that note, please join me in thanking Pete and Dave for their time today. See you all back here at 7:30 tomorrow morning.