Northern Trust Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 19, 2022

There are 16 speakers on the call.

Operator

Good day, and welcome to the Northern Trust Second Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Child. Please go ahead.

Speaker 1

Thank you, Kevin. Good morning, everyone, and welcome to Northern Trust Corporation's 2nd quarter earnings conference call. Joining me on our call this morning are Mike O'Grady, our Chairman and CEO Jason Tyler, our Chief Financial Officer Lauren Alnutt, our Controller and Mark Betti and Briar Rose from our Investor Relations team. Our 2nd 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.

Speaker 1

This July 20th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through August 17th. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our Safe Harbor statement regarding forward looking statements on Page 11 of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session, please limit your initial query to one question and one related follow-up.

Speaker 1

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.

Speaker 2

Thank you, Jennifer. Let me join in welcoming you to our 2nd quarter 22 earnings call. We generated solid results in what turned out to be a more volatile and uncertain market and macroeconomic backdrop that we've experienced in some time. New business momentum continued to be strong and our capital position remains robust. Revenue increased 12%, EPS grew 8%, and we delivered a return on average common equity of 15.7%.

Speaker 2

2nd quarter results benefited significantly from higher interest rates and the elimination of money market fee waivers related to low rates. The weaker equity and fixed income markets began to impact our fees and client levels. And due to the lag in our billing cycle, this impact will continue in the Q3. We saw a 7% sequential decline in average deposits. However, these were largely non operational in nature.

Speaker 2

Our clients continue to see us as a valuable partner for the liquidity needs. Our expenses increased 9% compared to the prior year, reflecting inflationary impacts across our cost base, particularly within our compensation and equipment and software lines. Despite this inflationary pressure, we achieved 3 points of positive operating leverage in the Q2. In Wealth Management, We continue to see healthy levels of engagement with new and existing clients. Growth within our global family office was particularly strong.

Speaker 2

In Asset Management, consistent positive flows into our FlexShares ETF complex helped to partially offset equity market headwinds And broad based liquidity outflows in our institutional channel. At $21,000,000,000 our FlexShares assets under management were up 13% year over year. We also saw strong growth in our alternatives offerings in the quarter. Notably, we were recognized by Asia Asset Management's 2022 Best of the Best Awards as the winner of the Best ESG Manager in Asia, Best Factor Investing Manager in APAC as well as the Best Application of ESG. Our Asset Servicing business continued to see positive new business momentum and the pipeline remains robust.

Speaker 2

Notable wins announced in the quarter, including Wilmington Trust and UK Based International Biotech Trust. Our integrated trading solutions capability continues to be an area of strength. We also continue to see strong interest in our investment data science product suite. In closing, as we navigate these volatile and uncertain times, we remain laser focused on serving our clients, generating profitable long term growth and delivering value to our stakeholders. Before turning it over to Jason to review our financial results in greater detail, I would like to note that we plan to publish our 2020 1 sustainability report in the next few days.

Speaker 2

I'm very proud of the progress we've made in our sustainability journey and serving as a force for change. Highlights for the report include our commitment to be net 0 by 2,050, a summary of our community support initiatives and the launch of a more holistic business diversity program. I'll now turn the call over to Jason.

Speaker 3

Thank you, Mike. Let me join Jennifer and Mike in welcoming you to our Q2 2022 earnings call. Let's dive into the financial results of the quarter starting on Page 2. This morning, we reported 2nd quarter net income of $396,200,000 Earnings per share were 1.86 And our return on average common equity was 15.7%. Results for the quarter included a 20 point $3,000,000 pension settlement charge within the employee benefits expense category.

Speaker 3

Also recall from last year, we implemented accounting reclassifications to certain fees at the beginning of the year, which will continue to impact the year over year comparisons as noted on this page. Our effective tax rate was 26.7 percent, which compared to 24.3% in the prior year and 23.8% in the prior quarter. The increase is largely related to our international earnings mix, including reserves for uncertain tax positions. We now expect our effective tax rate to be approximately 24% to 25% on a go forward basis.

Speaker 4

Let's move to

Speaker 3

Page 3 and review the financial highlights of the quarter. Year over year, revenue was up 12% and expenses increased 9%. Net income was up 8%. In a sequential comparison, revenue was up 3% and expenses were up 1%, while net income increased 2%. The strengthening of the U.

Speaker 3

S. Dollar resulted in a reduction in our year over year revenue and expense growth rates of approximately 2% A reduction in the sequential growth rates were approximately 1%. The provision for credit losses was $4,500,000 in the quarter. Return on average common equity was 15.7% for the quarter, up from 13.7% a year ago And up from 14.2% in the prior quarter. Let's look at the results in greater detail, starting with revenue on Page 4.

Speaker 3

Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1,100,000,000 And we're up 6% from last year and down 2% sequentially. All other remaining non interest income declined 2% from both the prior year and the Net interest income, which I'll discuss in more detail later, was $470,000,000 And was up 37% from 1 year ago and up 21% sequentially. Let's look at the components of our trust and investment fees on Page 5. For our asset servicing business, fees totaled $643,000,000 and were up 5% year over year and down 3% sequentially. Custody and fund administration fees were $434,000,000 Down 5% year over year and down 4% sequentially.

Speaker 3

The year over year decline was primarily driven by unfavorable currency translation, partially offset by new business. The sequential decline was driven by unfavorable currency translation as well as unfavorable markets. Assets under custody and administration for asset servicing clients were $12,800,000,000,000 at quarter end, Down 13% year over year and down 12% sequentially. Both the year over year and sequential declines were primarily driven by unfavorable markets and unfavorable currency translation. It's an unfavorable currency translation.

Speaker 3

Investment management fees and asset servicing of $148,000,000 are up 47% year over year and up 1% sequentially. The year over year performance was driven primarily by lower money market mutual fund fee waivers And the previously mentioned accounting reclassification, partially offset by client outflows. Sequentially, the increase is primarily due to lower fee waivers, partially offset by client outflows and unfavorable markets. There were no fee waivers relating to low interest rates in the 2nd quarter results compared $28,000,000 in the prior quarter $50,000,000 in the prior year quarter. Assets under management for asset servicing clients were $950,000,000,000 down 19% year over year and down 13% sequentially.

Speaker 3

Both declines are driven by unfavorable markets, client outflows and unfavorable currency translation. Securities lending fees were $22,000,000 up 11% year over year and up 14% sequentially As wider spreads offset the impact of lower volumes, average securities lending collateral levels were down 7% year over year and down 5 Other trust fees were $39,000,000 up 7% compared to the prior year and down 11% sequentially. The sequential decline was primarily driven by higher seasonal benefit payment services fees in the prior quarter. Moving to our Wealth Management business. Trust, investment and other servicing fees were $501,000,000 And we're up 8% compared to the prior year and down 1% from the prior quarter.

Speaker 3

There were no fee waivers in relation to low interest rates in the current quarter compared to $23,000,000 in the prior quarter $29,000,000 in the prior year quarter. Within the regions, the year over year growth was driven by lower money market mutual fund fee waivers and new business. For the sequential performance, the decline within the regions was primarily driven by unfavorable markets, partially offset by lower fee waivers. Within Global Family Office, the year over year growth was driven by lower fee waivers, new business and favorable markets. The sequential increase is mainly related to lower fee waivers, partially offset by unfavorable markets.

Speaker 3

Assets under management for our Wealth Management clients were $353,000,000,000 at quarter end, down 5% year over year and down 11% on a sequential basis. The year over year decline was driven by unfavorable markets, partially offset by client flows. The sequential decline was driven by unfavorable markets and client outflows. Moving to Page 6, Net interest income was $470,000,000 in the quarter and was up 37% from the prior year. Earning assets averaged $140,000,000,000 in the quarter, down 1% versus the prior year.

Speaker 3

Average deposits were $129,000,000,000 and were up 1% versus the prior year, while loan balances averaged $41,000,000,000 And we're up 12% compared to the prior year. On a sequential quarter basis, net interest income grew 21%. Average earning assets and average deposits both declined 7%, while average loan balances were up 3%. The net interest margin was 1.35 percent in the quarter, up 38 basis points from a year ago and up 30 basis points from the prior quarter. The increases from the prior year and prior quarter were both driven primarily by higher average interest rates, The favorable balance sheet mix and $7,000,000 in non recurring interest received from certain non accrual loans.

Speaker 3

Turning to Page 7, expenses were $1,200,000,000 in the 2nd quarter and were 9% higher than the prior year and 1% higher than the prior quarter. The current quarter's expenses included a $20,300,000 pension settlement charge Within the employee benefits category, while the prior year quarter included a pension settlement charge of $17,600,000 Also included in the quarter is the impact of the previously mentioned accounting reclassification, which increased other operating expense by $10,400,000 compared to Prior year. Excluding these impacts, expenses were up 8% versus the prior year and flat sequentially. Compensation expense was up 12% compared to the prior year and was down 3% sequentially. The year over year growth was primarily driven by higher salaries as well as higher cash based incentives.

Speaker 3

The sequential decrease is primarily due to the prior quarter's equity incentives, Including $49,000,000 in expense associated with retirement eligible staff, partially offset by higher salaries. Both the year over year and sequential comparisons benefited by favorable currency translation. Excluding the previously mentioned settlement charges, employee benefits expense was down 1% compared to the prior year and down 5% from the prior quarter. Outside services expense was $213,000,000 and was down 2% from a year ago and flat Sequentially, the year over year decline was primarily driven by lower third party advisor and technical services costs, partially offset by higher consulting expenses. Equipment software expense of $204,000,000 was up 14% from 1 year ago and 5% sequentially.

Speaker 3

The year over year and sequential growth were both primarily driven by higher software costs Due to continued investments in technology as well as higher amortization, occupancy expense $51,000,000 is down 2% from a year ago and flat sequentially. Other operating expense of $90,000,000 Was up 33% from a year ago and up 13% sequentially. The year over year increase was driven by the previously mentioned accounting reclassification Higher business promotion and other miscellaneous expense, partially offset by lower supplemental compensation plan expense. The sequential performance was primarily due to higher business promotion and staff related expense. Turning to Page 8, our capital ratios remain strong with our common equity Tier 1 ratio of 10.5% under the standardized approach, Down from the prior quarter's 11.4%.

Speaker 3

Our Tier 1 leverage ratio was 6.7%, Up from 6.5% in the prior quarter. An increase in net unrealized losses on the available for sale securities portfolio Current quarter was a loss of $1,500,000,000 with a loss in the 2nd quarter totaling approximately 600,000,000 During the quarter, we declared cash dividends of $0.70 per share, totaling $148,000,000 to common stockholders. As announced yesterday, our Board of Directors approved an increase in our 3rd quarter dividend to $0.75 per share. The current environment continues to demonstrate the importance of a strong capital base and liquid balance sheet to both weather the uncertain economic conditions and to support our clients' needs. We remain laser focused on providing exceptional client service, while executing on our strategic priorities to grow the franchise And create long term value to our shareholders.

Speaker 3

Before we open it up to questions, I'd like to take a moment to thank Mark Betti, He's transitioning from heading Investor Relations to his new role as CFO for our Shared Services Group. Mark, thank you for your leadership, your partnership and your unwavering commitment to serving our analyst and investor community over the past 6 years. I know I speak for all of us when I say we've learned so much from your insights and perspective. So thank you. And with that, Please open the line for questions.

Operator

And the first question today comes from Alex Blostein of Goldman Sachs.

Speaker 3

Good morning, Alex. Hey, Jason.

Speaker 5

Good morning, everybody. I'd like to echo your prior comments for Mark as well. It was great working with you and good luck in your next role. So maybe to start with NII related questions, and I'm sure you guys didn't expect Given the theme of the quarter, you've spoken in the past about deposit outflows about a month ago. They Seems like they have continued a little bit in June.

Speaker 5

So maybe help us unpack sort of the sources of where you guys seeing some of the deposit outflows, the mix Between interest bearing and non interest bearing, any comments on kind of how the things are standing so far in the Q3? And any sort of broader commentary you might have Around where deposit levels could ultimately trough? Sure.

Speaker 3

So I'll give you some thoughts, but don't hesitate if You want us to touch on a different component of it. First of all, just taking a longer term perspective, deposits have been strong since the beginning of the pandemic, including Relative to peers in the industry, so the institutional channel has declined in the last few months, but it appears that we just we may have If you go back to the beginning of the pandemic, our deposits are still up meaningfully. We started the pandemic at About $90,000,000,000 and you see now we're around $130,000,000 So going forward, the strategy is The retail deposits are effectively all operational. So our 2nd quarter deposit volumes were down 6.5%, but I want to unpack where those sub channels came from. So first of all, more than half of that decline Was in non operational financial deposits.

Speaker 3

Generally, that is the most rate sensitive channel By far, it's also the fastest declining category for us. It was down over 11%. The second Fastest category of decline was actually other non operational deposits, which declined about 5%. And so if you focus on the wealth channel and the institutional deposits that are operational, the Mine was just 3%. And another dynamic to think about is that within that period, we had Tax payments, and so you'd expect some decline alone just coming from that.

Speaker 3

So I think that just highlights the focus on The fact that the vast majority of the decline has come in non operational. And then I think you wanted to get a sense of where we are in the quarter Even at this point, deposits have been down from the average of second quarter, but they seem to be leveling off. The decline that we saw in second quarter was Actually largely just in the month of May and since then deposits have stabilized at about $120,000,000,000 That's a lot, but I'll stop there. But that should hopefully give you a good sense of how deposits have been trending.

Speaker 5

Great. And is it fair to assume that the outflows that you guys have seen, albeit smaller outflows so far in the 3rd quarter Also non operational and is there a way to frame what you guys think the total size of non operational deposits kind of bucket is and how much of that could ultimately still leave?

Speaker 3

So I'll answer the first, which is just what we've seen so far this quarter, 85% of that has been non operational. So strong continuing of that theme that those deposits are non operational. We haven't talked externally about the mix of operational and non operational deposits. And so we can think about that and whether in future quarters we want to do it unless But I think that's a lot for you guys to be able to work from at this point.

Speaker 6

And this is Mark. And as a reminder, The non operational deposits wouldn't all be at risk. I mean, we had plenty of them before the pandemic. And So, but that is where we've seen the flows, the movement so far.

Speaker 5

Got you. All right. Thanks. I'll hop back in the queue.

Speaker 3

Thanks, Alex.

Operator

We can go to Steven Chubak of Wolfe Research.

Speaker 7

Hi, good morning.

Speaker 5

Good morning.

Speaker 7

I wanted to start off with a question on the NIM outlook. Just looking at last rate cycle, your NIM peaked Somewhere in the low 160s. I saw a nice uplift this quarter and with loans composing a similar percentage of the balance sheet today Versus last cycle, you have the benefit of higher terminal Fed funds, higher non U. S. Rates contributing as well.

Speaker 7

Is it reasonable to expect higher NIMs this cycle? Any way you could help us frame how you think about peak NIM potential given some of those tailwinds?

Speaker 3

Sure. So, one, you're absolutely right. If you go back to mid-twenty 19, even if you look inside 2019, we were over 160 in the middle of that year. And you're highlighting the right things to look on mix. There's no reason we shouldn't Achieve or frankly surpass that level.

Speaker 3

The only caveat would be if you saw a very significant change in the yield curve, But we're not anticipating that. So no reason why we couldn't achieve or surpass that 160 ish level. And then just as you're thinking about the starting point though, we gave you that number about it was $6,000,000 or $7,000,000 in interest income that came from recovery Non accrual loans. And so the starting point should be not one it's a little net, but it shouldn't be 130 5, think about it more at 133, 132. And then betas is another thing that would be helpful maybe Just so you can work the models better, for 2nd quarter betas are right at 25%.

Speaker 3

And as we're looking into 3rd quarter, The betas could be twice that, but not 100%. And so we're still seeing Attractive increase. And so I'm glad you asked about that because we hit on deposit levels and then NIM. And So we're trying to give you both volumes and betas, so that at least gives you the building blocks to work from as you're thinking about modeling NII going forward.

Speaker 7

Thanks for that color, Jason. And just for my follow-up on capital, you've noted in the past that you've wanted to run with Capital levels are consistent with your GSIB peers despite the lower reg requirements. And given some of the AOCI volatility that we've seen as well as the strong loan growth, which has certainly consumed some capital of late, I was hoping you could provide some updated thoughts on how you're thinking about target CET1, Whether that 10% to 11% range is something you're comfortable running at and just how it informs your appetite to potentially accelerate buybacks, especially if Other categories like lending potentially begin to slow in a rising rate backdrop?

Speaker 3

You're right in that we just competitively, we like to have a strong position relative to the G SIB peers. And it's When we're I always say when clients are depositing $100,000 those deposits are insured usually by the FDIC. When they're depositing $100,000,000 or $1,000,000,000 they're effectively lending money to us and we want to reflect Our balance sheet is strong, and so we look at that closely. We look at the CET1 is important, which you highlighted, but also The leverage ratio and so looking at those in conjunction, we look good on a relative basis and obviously plenty of room relative to any regulatory limits, but we'll continue to look at where We continue to look at what opportunities we have in the returns on buyback versus what opportunities we're seeing. The loan growth we had, We were very deliberate in looking at what the returns on that growth are, and we also talked about the spikiness Of loan volume and other activity that even right now currency markets moving aggressively Has an impact on FX positions, which has an impact on what our RWA looks like.

Speaker 3

So all these things come into play. But in general, we feel good about the capital levels, but you've got to also note we have historically been in a higher range.

Speaker 7

That's great. Best of luck, Mark, in the new role and thanks so much for taking my questions.

Speaker 3

Thanks, Steve.

Operator

The next question comes from Glenn Schorr of Evercore.

Speaker 3

Hi, Glenn.

Speaker 8

Hi. Hello there. So in the quarter, obviously, the operating leverage is welcome, but we know what's coming with the lag deposit pricing and lower fees. So I wonder if you could give us any Thoughts on expenses on a go forward basis. I know on any given quarter, you'll have ups and downs, but just your thoughts The jumping off point for expenses and then the possibility of operating leverage on the full year, I know it's a moving part moving boat right now.

Speaker 8

Thanks.

Speaker 3

Sure. Well, you're right that it's hard to look in a quarter. And it's In this year, it's even hard to think too aggressively about operating leverage for the full year. If you think about what's happening And the influence of rates, it has a big impact on net interest income. That's coming over time.

Speaker 3

It comes over quarters. The impact on expenses is happening more quickly. And so we can't get too excited about the Net interest income coming and but we've got to stay focused on expenses. But let me walk through a little bit on the expense side and just give you A couple of highlights and if you want us to drill in farther, we can. So first and it relates To inflation, let's talk about compensation.

Speaker 3

And so for the quarter, just a couple of comments and I'll give you a bullet point or 2 on Q3. The base pay adjustment came into play in 3rd quarter and fall, and that's in and of itself $20,000,000 lift Quarter over quarter, it's usually half that amount. And then headcount was higher And we also had some off cycle adjustments, which brought in another, call it, dollars 10,000,000 Currency helped significantly, call it $5,000,000 to $10,000,000 and then but a big component is The cash is cash based incentive accrual. And so I think sometimes people forget as we do better, Even in a category like NII, we're going to have higher CBI accrual coming along with it. And so that's something that's really important To think about, the second category on expenses that I'll call out Is equipment and software because that was a big that was a $10,000,000 lift just quarter over quarter.

Speaker 3

And we mentioned it in the last Conference that we were going to have about a $5,000,000 lift in amortization Alone, that's coming through. We'll have another sequential lift going into Q3. And then the other component That we experienced in Q2 in addition to the increase in amortization is just software rental and support costs are higher. And some of that is inflationary, some of it is just our consumption is higher, but we are at this point anticipating another Similar rise, and so just looking into Q3, you'd see a similar step up potentially from 2nd to 3rd quarter than what we experienced In 1st to second quarter. So those are the 2 big categories within expenses that I'd call out at this point.

Speaker 8

Okay. That is definitely helpful. I appreciate it. And maybe just a quick follow-up to the previous convo on deposits and NII. Just curious, it might be a timing thing.

Speaker 8

You made the point obviously that your investment portfolio Turns over time, so you get the NIM benefit of higher rates over time. Can you grow NIM from here in the near term if betas are Doubling? Just curious how to think about that in the short term.

Speaker 3

Yes, definitely. And The power of rates going up on where we are and if you look at just the way the balance sheet is naturally positioned and Loans are probably 75 ish percent floating and then even a big chunk of the The asset side is significantly floating. And so even if we give up Just half the increase on the deposit side, then we still have plenty of room to grow NIM And NII significantly on in a rising rate environment even from here.

Speaker 8

Awesome. Thank you for that. Appreciate it.

Speaker 3

Sure.

Operator

The next question comes from Mike Mayo of Wells Fargo Securities.

Speaker 9

Hi, Mike. Hi. Part of your NII guide, I guess higher, but you're I guess you're not telling us how much higher because you tell us Your sensitivity to lower stock markets, the impact on fees, you're not giving us the NII guide, but I I guess you're giving us some building blocks, but one component is loan growth and it's up 12% year over year. And one reason Some investors hold Northern stock because it's perceived as a safe haven during a recession. Your loan losses tend to be a fraction of the industry.

Speaker 9

So my question to you is, what are you seeing in the loan growth, especially among your retail customers? How much appetite do you have to expand that? Are you noticing some more competition because some of your peers are mentioning this more Vocally about being a growth area and does Northern experience recession if we were to have one because The clients are such high end. Thanks.

Speaker 3

Sure. So a few things there. On loan growth, The rate should definitely slow relative to what we experienced over the last 2 years. The last 2 years, that growth was Highly initiative driven. We had a plan to communicate more with our clients, tell them that We wanted to be there more in their journey of investing more in their businesses and we wanted to be being a liquidity provider isn't just deposits, it's also creating loan opportunities for clients when they need it.

Speaker 3

The growth has been very largely In that type of channel and the quality and our appetite It has not changed at all. And we were extremely deliberate in saying our appetite from a credit Quality perspective was not changing. And if you look at some of the even the numbers around credit quality at Nothing has changed. All of the increases we had this quarter were in the inherent reserves, not specific reserves. We actually had net Coveries again, a small amount and so all early signs are very good and that gets into your last question Do we have a recession and do we have loan issues in a recession?

Speaker 3

We don't want to proclaim victory before Something like that happens, but at this point, all the indicators are what are look good and we haven't changed our appetite in what we brought on.

Speaker 9

And I'm going to ask one more really big picture question. Maybe this is for you, Mike. But One concern about going into a recession is the negative wealth effect. And since you deal with The highest end customers, especially the family offices and like, what's the behavior of Your customers after such a decline in their personal net worth. Thanks.

Speaker 2

You're exactly right, Mike, that portion of our client base does have different dynamics to it. And so We're coming off of a time period where as we know, not only did we see asset values increase significantly, But also, as we've talked about in previous calls, the opportunity to monetize assets, if you will, meaning Sell businesses or real estate or whatever it may be, also was at a very high level. And so that dynamic Clearly has changed as we've seen. So you see it in the sense of market activity as far as IPOs and things like that going down. And as much as There's still plenty of private equity capital that's out there and looking to do transactions.

Speaker 2

Valuations are lower and that changes their attitude about whether now is the right time to sell that business. That said, The position that a lot of these clients are in is that they've had a high level of liquidity. And so when they see the markets go They are in a position to be very long term investors. And so we see a lot of those clients actually deploying capital Into the markets at this point, so investing that liquidity that they've raised in the previous phase. Now as you move forward from that, beyond having no idea where markets go, etcetera, but just to your point on the wealth effect, There's no doubt that our business benefits when the overall wealth is increasing and accumulating and markets are robust.

Speaker 2

So that is a better environment for us. We think that it's more resistant on the downside of it as well. But all the same, it's at a lower level than when things are so good. So hopefully that addresses your macro question.

Speaker 4

All right. Thank you.

Speaker 2

Thank you.

Operator

The next question comes from Michael Brown of KBW.

Speaker 10

Hi, good morning.

Speaker 3

How are you? Hello?

Speaker 11

Good. Thanks for taking my questions. So the ACA decline was a bit greater than we were expecting this quarter and above some of your peers on a sequential basis. Can you just expand on some of those key drivers? I mean, you called out that you had some wins intra quarter, but was there any material lost Business or is it truly just FX and Markets that hit the AUCA levels this quarter?

Speaker 6

Mike, just to confirm, did you say AUCA?

Operator

Correct.

Speaker 6

That's under the customer's administration? Okay.

Speaker 3

Yes. And I can take and you add anything you'd like, Mark. Nothing significant from a flow perspective to call out. So if I look at it Just mathematically, FX was so currency translation was a 2.5% hit And market levels, another 8. And so the vast majority of the movement you see was in those Two factors, but the core business, nothing to note from a flow perspective.

Speaker 11

Okay. That's helpful. Thank you, Jason. And just as a follow-up, one of your peers talked about a plan to reprice certain aspects of their Servicing business and they talked about areas that are experiencing greater wage pressure and capacity constraints. Just curious, is this a dynamic that you guys are seeing?

Speaker 11

And is there any opportunities to reprice your business higher as you think about The coming quarters or year would be inflationary pressures that you and the industry are experiencing?

Speaker 2

Why don't I take that, Michael? So I would say that we tend to approach the My relationship is a little bit different, I think, differently than some of our competitors. And what I mean by that is, On an ongoing basis, we look to make sure that we have a, I'll call it, balanced relationship or one that is generating value for Both the client and ourselves. And there are a lot of dynamics to the relationships that we have with our clients, Meaning that we're providing a lot of services that were paid a fee for. There's a lot of other activity, whether it's balances or FX and things like that, that we're doing that, the nature of the compensation, the revenues are different.

Speaker 2

And so it's always kind of shifting. And sometimes it can go more or less to one side with particular clients, and we like to be in dialogue with them. That doesn't always involve a change in the fee, up or down. It can be a change The level of activity that we're doing with them, that they do leave more balances with us or do other things. And so it's just it's a different approach and I would say less programmatic about going out at a particular time and looking to necessarily increase fees.

Speaker 2

And as we know, just over time, because the asset levels have gone up, that's why there is a bit more Pressure on the fee side of the equation to come down over time. When you have periods like this with inflation, I think you do see less of that activity Because all the players are in the same position. So, a client or prospect going out to put their business out to bid, so to speak, Is less likely to get aggressive bids by multiple parties in this type of environment than they would in others. I would say there's no doubt that as you can see, we're feeling the impact of inflation on the expense side. We get a benefit in the sense of interest rates are higher.

Speaker 2

So that's a little bit of a hedge, if you will, that's built into our financials. And then just something that we look at over longer periods of time.

Speaker 11

Thanks. Very interesting perspectives, Mike. Appreciate it.

Speaker 9

Sure.

Operator

The next question is from Brennan Hawken of UBS.

Speaker 3

Good morning, Brennan.

Speaker 10

Good morning. Thanks for taking my questions. And I'd also like to say congrats to Mark. It's It's been a real pleasure working together. Always helpful to talk to you and wish you the best of luck.

Speaker 12

Thanks.

Speaker 10

You got it. Sure.

Speaker 9

So curious, you guys gave a lot

Speaker 10

of color on the non operating deposits and the runoff and kind of comparing that to How the operating deposits look. But I and it was clear that the deposits were under pressure, but the NIM looks really good So what I'm hoping to understand and maybe you could give us a bit of a comparison, can you help us frame what the Spreads look like for non operating deposits versus operating deposits. I think that might help when we try and frame Not just what mechanically the deposits might and the balances might look like, but really how that might actually triangulate to NII?

Speaker 3

Yes, absolutely. So one, just a couple of things at a high level, then I'll dig in a little bit. So I mentioned I think before probably 75% of the loans repriced within 90 days. And even the securities portfolio, about a third of Those are floating and then the cash portfolio obviously is very short. Those are the 3 big categories.

Speaker 3

And It's interesting because in non operational deposits, and that's why I specifically separated the financial versus the non financial, The most extreme case of something where you have to stay liquid with the deposit is a non operational Financial services channel deposit. You really can't go you really can't invest that long. And so that just that stays effectively overnight. And it largely, there are exceptions, but largely. And that's part of the reason why If you see our deposits come down, I talked about the fact that they were largely non operational and that's why you saw the On the earning assets come largely from our cash position.

Speaker 3

And so You can see what the yields are in the cash positions. And if you think about the cost on the non operational deposits, Again, highly rate sensitive. And in many instances, those clients are saying it's Fed funds minus something. And So it's tight. Those spreads are tight.

Speaker 3

And then if you work toward Operational deposits, those are ones that by nature you're able to invest longer. And so those are there's a component of it that you have to Keep liquid, you have to maintain liquidity for, but generally that's what's going to be represented in the longer duration of the securities portfolio. And In today's environment, those are repricing and we're waiting anxiously for those to mature, But it just gives you a sense that those spreads are actually likely going to increase over time. So first of all, those clients tend to be Those are transaction accounts. They tend to be less spread sensitive And we've got opportunity to invest them longer.

Speaker 3

And so that's why we keep emphasizing this distinction between the operational and non operational or transactional and non Non operational or transactional or non transactional because the economics underneath them are very, very different.

Speaker 10

Right. Okay. That's a it's really important and thanks for laying that out, Jason. It sounds like there's a big difference in between the economics. I guess my follow-up would be on beta.

Speaker 10

So you talked about the beta increasing in the 3rd quarter. Number 1, That's a 3rd quarter beta commentary, the roughly 50%, not a cumulative, right? So we would be not necessarily looking to get the whole TEMU was up to $50,000,000 And then does that increase in beta also contemplate the reduction in these Far more rate sensitive, non operating deposits running off and maybe how much Are those non operating more rate sensitive deposits pressing that beta higher? Are they the largest contributor? And as they continue to run off, Will that help to contain continued increases in beta?

Speaker 10

Sorry, it's a multi parter, but

Speaker 3

That is multi, multipart. But so let me give you a couple of thoughts, but don't hesitate. We want to be helpful as you guys Thinking this through, so don't hesitate to clarify anything. So, let me try to work backwards. I may not get all the way back to the beginning.

Speaker 3

Yes. To the extent that the non operational deposits are the ones that continue to run off faster, That insulates betas a little bit. And then secondly, as we provided some commentary on what betas look like in the Terry, on what betas look like in the Q3, yes, that is incremental within the quarter, but That's us leaning in, in the spirit of trying to be helpful to uncertainty. We just don't a lot of what we're doing is just trying to hold on to those Deposits, those operational deposits because we feel they're so volatile. And so we're not starting from we want our betas to be 50% And we'll see what deposits hold in.

Speaker 3

We're talking with clients, telling them we want to be the liquidity partner for them. And so we're going to in large ways at this point in the cycle, we're going to follow what we see out there to make sure that for those valuable operational deposits, We maintain deposit levels.

Speaker 10

Okay. And the 3rd quarter beta of 50, that's just a 3rd quarter, not a cumulative, right? Yes. Yes.

Speaker 3

But again, that's A lot of uncertainty in what that's going to look like. That's less factual, it's less target and it's more just Our forecasting of what we think is going to happen based on what we think is going to happen with the yield curve and what we think is going to happen in the market.

Speaker 10

And it's so the last component of the I know and I apologize it was so many parts, but the last component is Does the 50% like is that based on the current mix of operational, non operational, Financial, non financial, is it based on the current mix? Or as that non operating piece winds down, does that Ease the upward pressure on the beta, you know what I mean, so it could allow for some better beta outcomes than you're thinking?

Speaker 3

Yes. That 50% is overall based on what we currently see and project the mix to be. Thanks for the color. It's reflected. Appreciate the color.

Speaker 3

Yes. Sure.

Operator

The next question is from Brian Bedell of Deutsche Bank.

Speaker 10

Great.

Speaker 5

Good morning, Brian.

Speaker 13

Good morning. Good morning. Thanks very much. And I also echo my comments for Mark as well. It's been great working with you, Sue.

Speaker 13

Also, best of luck. I think Brendan got my multiparts on the deposit betas as well. So I'll move over to expenses. And the only other 2 categories, again, Jason, thanks so much for the granular color there. The only other 2 categories I just wanted to get a comment on was The typical seasonal lift that we see in outside services in the second half of the year, whether you think that's likely to repeat as it has in the past?

Speaker 13

Then on the other expense line, in lieu of having the Gulf open, I know you've wanted to reallocate those expenses Marketing initiatives, is that also a second half event like the Northern Open was or have you done those Over the course of the year, so we shouldn't see as much of a spike up.

Speaker 3

All right. So on let me start on outside services. So yes, there tends to be a second half lift there. We don't expect it to be that dramatic at this point. In this Quarter, it was we actually remember a lot of the expenses there are actually volume related and so It's related to you guide market data and other transaction related Services, there's other items that are very volume related and frankly some of it market level related.

Speaker 3

And so that's Something to just keep in mind that can dominate the seasonality component of that line item. And so In the Q2, volumes were down slightly and that was fully offset by a little bit higher consumption level in consulting and legal. And so as we go into Q3, we'd actually those two dynamics are probably still at play, and we'll see which ones as we get further into the quarter, Which one wins out? And then on marketing related, Mike, you want to talk about that for me?

Speaker 2

Sure. Just on the marketing, Brian, there. Yes, we're Spending that, if you will, throughout the year. So there's no seasonality major seasonality like you had with the golf tournament. And as we talked about before, it's less about one particular area and more just doing marketing within the three businesses.

Speaker 13

That's great color. Thanks. And then maybe Mike, if I could just follow-up on alternatives. I think you mentioned that in your prepared Briefly, but if you could just characterize the, what you're seeing from your wealth client base in terms of demand for illiquid products, both private equity, private credit impact funds and to what extent you've added But maybe just also share if you think that can also have a revenue impact for Northern Trust even if you're not managing them, but rather Having them on your shelf, so to speak.

Speaker 2

You described it well as far as our approach there, which is We want to be able to provide the full set of alternatives for our clients and yet Provided the added value, if you will, of certain particular funds that we can offer for them, and then funds that we manage On our own or through vehicles on our own. And so within Wealth Management, for the platform, you hit on some of the areas that are of greatest interest right now like private credit. And so it's a much Broader set than maybe it was years ago as to alternatives. When somebody says alternatives, it used to mean that Hedge funds are PE. Now it's a much broader set of the types of products that they would have there.

Speaker 2

And then also my comment around the growth was particularly related to 50 South Capital, which is within asset management Where we offer funds of funds. And there again, we've seen strong interest on the part of our clients to have that type of more diversified Exposure to alternatives. And you're right, it has the benefit certainly from a return perspective for our clients, but from our perspective, It is something that has a more attractive financial profile for us and one that further Cements the relationship that we have. So we expect, although there's always ups and downs and volatility With the various categories, but longer term still that alternatives will be an area of growth.

Speaker 13

Good. That's great color. Thank you.

Speaker 9

Sure.

Operator

Next question comes from Ken Usdin of Jefferies.

Speaker 14

Good morning, Ken. Hey, good morning, guys. Thanks. Just one more follow-up on the earning asset side. Just given Rising rates and the OCI, just can you talk us through about where your securities portfolio duration is and what you're seeing on incremental pickups of New pickups relative to the roll off on the back end and just how you're thinking about mixing the portfolio and protecting OCI from here?

Speaker 3

Sure. So a couple of thoughts. 1, Duration overall duration is down to about 2.6 from 2.7. And then secondly, just as from a reinvestment perspective, we're just that fact alone indicates We've been going shorter. And as we're reinvesting maturities that are maturing, we're leaving that Powder dry effectively for the time being given a couple of dynamics.

Speaker 3

1, just the significant volatility in the markets and then secondly, anticipating higher rates. And so we've very much been not reinvesting longer on the curve at this point. Then what was the second part?

Speaker 14

The second part was then just related to capital on the earlier question. Just about OCI and have you been moving Things from AFS to HCM, are you rethinking at all how into your prior point about changing duration, how you protect Incremental AFS from here and I guess just how would you expect the existing OCI to kind of return back into capital So just all things related to OCI Management?

Speaker 3

Sure. Couple of thoughts there. One is we did move about $7,000,000,000 from AFS to HTM, and we did that post quarter close actually. And The future impact is that should be that should protect about half of the exposure we have had on from an OCI perspective. And then in terms of return, it should be about 3.5 years total for us to recoup, It may be a little bit longer to recoup that, but it gives you an overall general sense of what the trajectory looks like.

Speaker 14

Okay, got it. Thanks a lot, Jason.

Speaker 3

Sure.

Operator

Our next question comes from Betsy Graseck of Morgan Stanley.

Speaker 4

Hi. Good morning.

Speaker 2

Good morning.

Speaker 4

Hi. Okay. Just want to make sure you can hear me. A couple of questions. One, a little nitpicky, but on the average balance sheets, I think you You know what the yields are obviously by asset class.

Speaker 4

And I'm just wondering repo yields went up. It looks like a repurchase agreements went up about 2 percentage points Q on Q and I wanted to make sure I understood that.

Speaker 6

Yes, Betsy, part of that this is Mark. Part of that was a there's a footnote I think on our reports that kind of talk about A netting change that we made and those yields, I think it's both on the asset side and the liability side. And the yields would have been, for instance, on the asset side, just trying to find that line, which is reported as 2.31. I think it would have been around $70,000,000 I believe. But there is so that so it was really driven by this, kind of gross to net change both on the asset and liability side.

Speaker 4

Okay. So any details there we can do offline? The second question is just as we look The 10 Q analysis regarding rate sensitivity and impact of 100 bps parallel shift versus what we got this quarter. Obviously, this quarter was a Much bigger benefit than what the Q would suggest. And I just want to make sure I understand, the differences of what the assumptions are in the Q that we see Yes.

Speaker 6

I mean, I guess one thing I would say is in the Q, It's a model process and it does look at the forward curve And it's really a shock, a movement away from the forward curve. So I know that I think from beginning of the quarter to the end of the quarter, there was a move From the forward curve, but probably not in the same magnitude of how it would have been modeled within the queue. So it's a directional guide. I mean the base case is what is not there, which is what the forecast is with the forward curve. But So I don't know if that helps, Betsy.

Speaker 3

And timing matters a lot too. I mean, we came into the quarter with some lift from where rates were prior And then we also had mix was another benefit of probably 8 basis points alone just by higher mix in the balance sheet. And so There are other dynamics that came into play. And frankly, back to when you're doing those Shock scenarios, you're making assumptions around beta, you're making assumptions around a bunch of different things, but it's not In reality, this doesn't always play out that way. And the data is at 25% For us, we're low and we also had movements in other currencies and so a lot of things At play that led to the increase in NIM.

Speaker 4

Okay. And then just lastly, I know at the beginning of the call you mentioned that Non operational deposit outflows look like they've stabilized. And I guess my question is, How do you feel your non operational deposit depositors are behaving? In other words, we're about to get another 75 bps Next week, and do you feel that they are optimizing for their over this next 6 months already? Or do you feel They optimize each time the Fed's moving.

Speaker 4

In other words, I'm wondering if we should be expecting another outflow as the Fed continues to jack up rates here.

Speaker 3

I think those I think that channel of depositors Disproportionately, relative to others, have relationships at multiple institutions and Cash doesn't have a long term commitment on it and they're able to seek yield when it's important to them. And I'm glad you asked the question because I don't want the interpretation to be that we don't want non operational deposits. Oftentimes, those deposits are tied to broader relationships. Sometimes, we do want those deposits for various reasons. The reason that we're highlighting the distinction is just the economics and the behavior of those deposits It's very different.

Speaker 3

And as you think about where NII is going, it's important to understand and appreciate those differences.

Speaker 4

Yes. Okay. Thanks so much for the color. Sure.

Operator

Our next question is from Vivek Janija of JPMorgan.

Speaker 15

Hello. Hi. Thanks for Hi. Thanks for taking my questions.

Speaker 8

A couple of one is how

Speaker 15

much benefit did you have to expenses from FX translation, Jason?

Speaker 6

So on a year over this is Mark. On a year over year basis, it was about 2% And on a sequential basis, it was about 1%. And that's for total expense.

Speaker 15

Right, Right. And most of that would show up in which lines?

Speaker 6

Most in comp and benefits, it would be, As I look at it probably

Speaker 3

A little in equipment and software as well.

Speaker 6

Yes, equipment and software. And you're probably looking at Just like our expense base, I guess, maybe 2 thirds of that probably being within comp and benefits.

Speaker 15

Okay. Completely different question. Wealth Management assets under sorry, wrong one. Asset Servicing assets under management Fell 19% linked quarter, much more than overall Wealth Management AUM was down much less. 19% seems like a lot.

Speaker 15

Any color on that? It seems more than what markets dropped.

Speaker 3

Sure. Yes. That was We had outflows in the money market mutual fund business and so that business has grown significantly since pre pandemic, But declined in the quarter from a flow perspective.

Speaker 15

All right. Thank you. Sure.

Operator

The next question is from Jeff Harte of Piper Sandler.

Speaker 3

Good morning, Jeff. Hey,

Speaker 12

good Good morning, guys. Excuse me. One question left for me. How do you expect funding cost on non U. S.

Speaker 12

Interest bearing deposits To move with the ECB hiking, I'm just trying to think, could we see some near term pressure on NIM or NII as ECB goes from negative through Is 0 bound to something higher than 25 basis points?

Speaker 3

Yes. Higher beta. And the client and again, I'm glad you brought that up. For clients where they have Potentially been in negative rates. We're expecting datas to be higher.

Speaker 3

Just as clients to say, we understand that we were negative, but when do we get out? And that's the one channel where we expect that to be Aggressive. Mark, what would you anything to add there?

Speaker 6

Yes. Anything I would I was just going to mention that the size of that. So the euro deposits for us, it's about it's a little bit over 5%, 6% of our total deposits. So that's just something to keep in mind from an order of magnitude perspective.

Speaker 12

Okay. I mean, any guess to how much higher betas might be there? I guess It would be purely a guess, I suppose, but

Speaker 3

Yes. It's just super hard to tell and sometimes these rates are Part of larger pricing and relationship considerations, but we would just expect at this point in the curve for those betas to be quite high. And again, not it's 6% of the total. It's not Tremendous an impact, but I don't think it's crazy to assume. And again, we're I'm just speculating, Say 75% to 100%, I don't think it changes the dynamics of the outcome significantly on NII, but it's when we say significantly higher, it's not 55 versus 50, it's more like 75,100 is a safer way to model it.

Speaker 3

Okay. Thank you. Sure.

Operator

Next question is from Alex Blostein of Goldman Sachs.

Speaker 5

Hey, guys. Thanks for taking

Speaker 6

the follow-up.

Speaker 5

I wanted just to get your perspective, maybe top of the house view on operating leverage. Over the years, we've kind of gotten accustomed to thinking about operating expenses as a percentage of fees and obviously quarter to quarter That will move around and you guys gave some explicit guidance, I guess, for a couple of line items. So really just kind of want to zoom out and think about In an environment we're in today where the markets are a little choppier, I guess to say the least and inflation is rising, what is the new normal for that expense The fee ratio over the next, say, a year or 2, right? So clearly, you guys are highlighting that some of the higher NII It will show up in comp with respect to, I guess, incentive based compensation. So that will, I guess, also pressure that expense to fee ratio.

Speaker 5

So Just kind of think through that is like if we live in 105, but we're now thinking like 110 plus. And Are there any expense initiatives that you guys are starting to contemplate beyond 2022? It feels like the budgeting for this year has sort of Left the station, but any incremental thoughts there would be helpful.

Speaker 2

Sure. Alex, it's Mike. So the way that we're thinking about it is that, as you pointed out, a number of factors on both the revenue side and on the expense side, That we want to be in the range for a pre tax margin of kind of that mid low to mid-30s. That's the type of range that gets us at the higher end of our ROE target as well. So that's what we're shooting for.

Speaker 2

And then you're exactly right. We're also looking at that expense to trust fee ratio, which has a different set of dynamics to it And has more pressure on it when you have markets going down and inflation. But That's not a reason to say that we're not focused on trying to keep that in the range that we've been in. And so that is Kind of the whether it's 105 plus or minus around that, that's where we're trying to keep it because our view is that Over time, that's a better, more stable level or measure of our profitability for the business. So that's what we're looking to do.

Speaker 2

As far as looking at expenses, again, always trying to be focused on that. And I would say, even though you said the train has left the station for this year, we are very much focused on Getting productivity in all the businesses, but particularly in the asset servicing business. And Those initiatives were very much in place at the beginning of the year, and we're executing on those. And as we do next year, there'll be a new set of initiatives around How we get greater scale and efficiency in the company, but particularly in that business.

Speaker 5

Great. Very helpful. Thanks, Mike.

Speaker 2

Sure.

Operator

The next question is from Jared Cassidy of RBC.

Speaker 3

Hi, Jared. Hi, Mike. Hi, Jason. You guys may have touched on this and I apologize if you didn't and I missed it on your call. But Obviously, you're talking a lot about betas with deposits with rates going higher.

Operator

Have you guys been

Speaker 3

able to map out or build models to see what Impact, the full blown quantitative tightening will have on deposit flows at your organization. You figure They're going to reach what $95,000,000 $95,000,000,000 a month coming up soon here. And we really haven't gone through this before. We're in uncharted Territory, so how do you guys approach that? We have modeled it.

Speaker 3

We've looked back to see what correlation there is. And I have to say the takeaway is it's not our client base just doesn't It's not granular enough to say that there's strong correlation between what the modeling spits out. And you think about $130,000,000,000 deposit base, we have clients that have $10,000,000 $50,000,000 $100,000,000 $200,000,000 some super large institutional or even wealth or even global family office clients would be over Sometimes over $1,000,000,000 And so it's just it's very spiky and it's hard to Throw a correlation out publicly at what those models spit out. I think what's the one thing I think it's instructive to think through is that a lot of our clients think about cash as And asset allocation output. And so one of the things to think about is you're predicting where Even core operational transactional deposits will look like is what are overall asset And what are market levels?

Speaker 3

Because our clients consistently think about liquidity as an asset allocation tool And probably less affected in a predictive way by what's happening at the macro level by the Fed. Very good. Thank you. And then as a follow-up, granted the market conditions are very unsettling Today, a lot of disruption going on out there, but there's also probably opportunities to pick up maybe some businesses at Discounted prices relative to where it was maybe a year or 2 years ago. Northern over the years has done acquisitions.

Speaker 3

So Mike, can you give us some color of Allocating capital, should something come up for sale that really makes sense? Is that something you guys could consider in the next 12 to 18 months?

Speaker 2

George, you're right. Historically, the company has been opportunistic and having the Ability to add core capabilities during times like this. So that attitude or approach It hasn't changed. I wouldn't say that we're out looking to take advantage of the environment per se. I would say it's more a similar strategic focus, which is growing the business organically.

Speaker 2

And then over time, if there are opportunities to accelerate that through acquisitions, then we consider

Speaker 6

it. Great.

Speaker 3

Thank you. And Mark, good luck in the next run. Good working with you. Thank you. Thanks, Gerard.

Speaker 3

Appreciate it.

Operator

We can go back to Vivek Janija of JPMorgan.

Speaker 15

Hi, thanks for taking a follow-up Question, going back to capital, Jason, I hear your comment on competitively you want to be ahead of your peers. Is there a level below which you would not want to see your CET1 go, especially given there's uncertainty in the markets and volatility and what do you intend to do to not let it go below that?

Speaker 3

We've got a lot of different guardrails around how we think about what to do. We obviously We have not been share repurchase is the first thing to do. Conversely, you saw us increase our dividend at this point. And so I think that tells you that we're not desperately trying to increase levels from here. We feel Fine.

Speaker 3

And again, we've got plenty of room from a regulatory perspective, and we feel good how we look on a competitive basis. And so And we've always said it's a combination of different factors. We have very good conversations with our Board about how we want to position capital levels, But we feel good where we are and always want to at the same time take advantage of any opportunities in the market to Grow the business and sometimes that means just what we did with loans a couple of years ago and we made a big investment there from a capital perspective In the form of higher RWA exposure. And so it's just a good example of how we're balancing different factors At any given point in an economic cycle, the absolute levels is an important, but it's just one of those factors.

Speaker 15

Thank you. And Mark, I was remiss. Thank you for it was great working with you and good luck in your new role.

Speaker 6

Thanks, Vivek. Appreciate

Operator

it. We will now turn the call over to Mike Mayo of Wells Fargo Securities. Hi.

Speaker 13

How are you doing, Mike?

Speaker 9

Yes. As we tweak or update our earnings models, I'm just looking at Page 38 of your proxy and I'm looking at your peer group and you do have a lot of banks in this peer group, but the 2 most comparable Banks seem to have tax rates that are 500 basis points below what you have. So I think you're in the range of 25% and Those other 2 trust banks are close for 20% or below, give or take. And so the question is we always talk about pre tax margins. What about after tax margin?

Speaker 9

What can you do, Jason, to better manage your taxes, which is one of the biggest expenses at the firm? And then You'll love this question, Mike. So would you under what circumstances would you consider a move away from Chicago like Citadel To the extent that, that could help your taxes. Thanks.

Speaker 3

Two very different questions. I'll hit the first one. And you're absolutely right, tax rate matters. And so I'll give you a sense of first, I'll give you a sense of Where we are relative to others, first, a high percentage of our income is from Wealth Management and that's predominantly business, which comes with a higher tax rate to even within the domestic exposures, We're in Illinois, California, New York. We're in high tax states.

Speaker 3

Then a lot of our We've got less benefits from tax credit investments. And another dynamic is we've got less income from tax exempt income. And then more of a nuanced, but important factor is there are limitations on U. S. Foreign tax credits And that's actually increasing in our difference relative to our peers.

Speaker 3

And so those are at least a half dozen things That get to vast majority of the reason why there's a difference. Going forward, there are things that we can look at And try and implement to try and get that tax rate down. And so we're not just resting on that as A fait accompli, it's something that we want to work on over time.

Speaker 2

And Mike, I would say, We're a global company that is headquartered in Chicago, proud to be headquartered in Chicago. And like other important decisions, we look at it from a stakeholder perspective. You highlight 1, which is, I'll say the tax rate, but more broadly, the financial implications of being headquartered anywhere. And that is absolutely a relevant consideration and one that we're Looking at all the time, but then you have other stakeholders that are critical to that, certainly where our Clients are and where we need to be to serve them, but then also equally important is all of our partners, meaning our employees. It needs to be a great place to live.

Speaker 2

And so we are very focused on not just Monitoring that over time and determining if it's a great place to live, but I would say actively being a part of the community to Address the challenges and make Chicago an even better city to live in and to have our headquarters.

Speaker 9

Thank you.

Speaker 2

Sure.

Operator

Ladies and gentlemen, that concludes today's Question and answer session. I would like to turn the call back to Mark Beck for any additional or closing remarks.

Speaker 6

I think we're all good. So thanks Thanks everyone for joining us. Appreciate it and we'll talk to you next quarter.

Speaker 3

Congratulations Mark on a great run. Thank

Speaker 6

you Mark. Thanks

Speaker 3

everybody.

Operator

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation. You may now disconnect.

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Earnings Conference Call
Northern Trust Q2 2022
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