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Northern Trust Q2 2023 Earnings Call Transcript


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Participants

Corporate Executives

  • Jennifer Childe
    Senior Vice President, Director of Investor Relations
  • Michael G. O'Grady
    Chairman and Chief Executive Officer
  • Jason J. Tyler
    Executive Vice President and Chief Financial Officer

Analysts

Presentation

Operator

[Starts Abruptly] Second Quarter 2023 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, ma'am.

Jennifer Childe
Senior Vice President, Director of Investor Relations at Northern Trust

Thank you, Jenny, and good morning, everyone. Welcome to Northern Trust Corporation's Second Quarter 2023 Earnings Conference Call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO; Jason Tyler; our Chief Financial Officer; Lauren Allnutt; our Controller; and Grace Higgins 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 19th 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 19th.

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 12 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.

Michael G. O'Grady
Chairman and Chief Executive Officer at Northern Trust

Thank you, Jennifer. Let me join and welcome you to our second quarter 2023 earnings call.

Our results for the second quarter reflect solid sequential performance. Trust fees and assets under custody and management increased sequentially, which included positive organic growth in each business. Net interest income was down modestly on a linked-quarter basis, reflecting higher funding costs associated with the highly competitive deposit backdrop. Expenses, excluding unusual items, were well-controlled, reflecting the rigor of our cost discipline as well as the impact of various productivity initiatives. We reported $64 million in charges in the second quarter associated with these steps.

Our Wealth Management business modestly grew assets under custody and management and trust fees on a sequential basis. We continue to see strength in the higher wealth tiers and within our Global Family Office segment, where we captured several marquee wins. Our industry leadership position also set-out in the quarter. We held our Third Annual Northern Trust Wealth Planning Symposium, bringing together legal and financial experts to share innovative strategies and insights to shape the future of Wealth Management. Sessions averaged more than 1,000 participants and included attendees from North and South America, Europe, Asia, Africa and the Middle East. We also released the second Family Office Trends Report, co-authored with the Wharton School. Notably, we received the utility patent for our cloud-based goals-driven Wealth Management technology during the quarter and we're named Best Digital Innovator of the Year and Best Private Bank for Digital Wealth Planning by the Financial Times Group.

In Asset Management, we saw strong flows into our institutional money market platform and have recaptured share. We also won a number of key mandates across products, including outsourced investment solutions, tax advantage equity and quant active. Our new product launches in the quarter focused on alternatives.

Within Asset Servicing, we continue to have good momentum in core custody and fund administration, particularly with asset managers in Europe, and our pipeline remains robust. In the U.K., we were reappointed by Brightwell for middle office services. Brightwell is the primary service provider to the British Telecom Pension Scheme, which has more than $50 billion in assets under management. Among asset owners, we clinched several key multi-million dollar takeaway wins in North America, where our front office solutions, which provides a comprehensive view across public and private assets, was cited as a key differentiator. As a testament to our capabilities, we were recently awarded three prestigious industry awards, including Best Global Custodian for Asset Owners by AsianInvestor.

In the second quarter, we launched A-Suite, our content, community and collaboration hub for global asset owners. Within the first few weeks of launch, we've seen significant client engagement. Going forward, we expect this new communications channel to create relationships with key target audiences and further showcase our expertise in the market.

In closing, our balance sheet continues to be very strong with ample capital and liquidity. Our new business momentum is gathering steam and our pipeline remains robust. While there is still more work to be done, we're making solid progress, following the trajectory of our expense growth. Rationalizing our cost base remains a top priority and the governance and control mechanisms we're putting in-place today should drive sustainable improvements for both the near-term and for years to come. We head into the second half of the year well-positioned to support our clients and generate value for all of our stakeholders.

I'll now turn the call over to Jason.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our second quarter 2023 earnings call.

Let's dive into the financial results for the quarter starting on Page 4. This morning, we reported second quarter net income of $332 million, earnings per share of $1.56 and our return on average common equity was 12.4%. Currency movements had an immaterial impact on our revenue and expense growth in both periods. Our second quarter results were impacted by two notable items. We recognized a $38.7 million pre-tax severance charge, impacting both our compensation and outside services line items. We recorded a $25.6 million pre-tax charge associated with the write-off of an investment in a client capability. Notable items from previous periods are listed on this slide. Excluding notable items in all periods, revenue was up 1% on a sequential quarter basis and down 1% over the prior year. Expenses were down 1% on a sequential quarter basis and up 5% over the prior year. This reflects an expense to trustee ratio of 116%, down from 120% in the first quarter and 122% in the fourth quarter of last year.

Pre-tax income was up 13% sequentially, but down 9% over the prior year. Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion, which reflected a 3% sequential increase, but a 4% decrease as compared to last year. All other non-interest income was flat sequentially but down 10% over the prior year. Net interest income, on an FTE basis, which I'll discuss in more detail in a few moments, was $525 million, down 4% sequentially, but up 12% from a year ago. We had a $15 million credit reserve release in the second quarter due to improved credit quality on a small number of larger loans, which was offset in-part by expectations for higher future economic stress in the commercial real-estate market.

Turning to our Asset Servicing results on Page 5. Assets under custody and administration for asset servicing clients were $13.5 trillion at quarter-end, up 2% sequentially and up 5% year-over-year. Asset Servicing fees totaled $621 million, which were up 3% sequentially, but down 3% year-over-year. Custody and fund administration fees, the largest component of fees in the business, were $427 million, up 3% sequentially, but down 1% year-over-year. Custody and fund administration fees increased on a linked-quarter basis for the second consecutive quarter due to solid new business activity, higher transaction activity and favorable markets. The decrease from the prior year quarter, primarily due to unfavorable markets. Assets under management for Asset Servicing clients were $990 billion, up 3% sequentially and up 4% year-over-year. Investment management fees within Asset Servicing were $134 million, up 6% sequentially, but down 10% year-over-year. Investment management fees increased sequentially, primarily due to asset inflows and favorable markets. The decrease from the prior year quarter, primarily due to asset outflows and unfavorable markets.

Moving to our Wealth Management business on Page 6. Assets under management for our Wealth Management clients were $376 billion at quarter-end, up 2% sequentially and up 7% year-over-year. Trust, investment and other servicing fees were $475 million, up 3% sequentially, but down 5% compared to the prior year. Sequentially, the increase in fees in the regions was driven primarily by favorable markets. Sequentially, the increase in GFO fees was driven by net inflows. Relative to the prior year, the decrease in fees in the regions was primarily due to unfavorable markets and product-related asset outflows. Within GFO, the decrease in fees was due largely to unfavorable markets.

Moving to Page 7 and our balance sheet and NII trends. Our average balance sheet decreased 1% on a linked-quarter basis, primarily due to lower client deposits, partially offset by higher leveraging activity. Earning assets averaged $134 billion in the quarter, down 1% sequentially and down 4% versus the prior year. Money market assets primarily absorbed the decrease. Client liquidity continued to grow during the second quarter. While we saw a decline in average deposits, it was more than offset by increases in other categories. Relative to the first quarter, our money market funds were up $8 billion or 6% and our CDs were up 29%. Average deposits were $106 billion, down $6.6 billion or 6% sequentially, but remained consistent with late April levels.

We experienced a $2.6 billion sequential decline in non-interest bearing deposits, mostly within the institutional channel as clients continued to shift to higher-yielding alternatives. This reduced the mix of non-interest bearing deposits to 17%. At quarter-end, operational deposits comprised approximately two-thirds of institutional deposits. These tend to be the stickiest deposits as clients use them to operate their businesses. Approximately three-quarters of our average deposits are institutional, with the remainder related to wealth clients, including GFO.

Shifting to the asset side of the balance sheet. Average securities were down 2% sequentially, reflecting the natural run-off, which we've seen to reinvest at the short end of the curve. Our $50 billion investment portfolio consists largely of highly-liquid U.S. treasury, agency and sovereign wealth fund bonds, and it's split approximately evenly between available-for-sale and held-to-maturity. The duration of the securities portfolio continued to edge-down in the second quarter to 2.1 years. The total balance sheet duration is now less than a year. Loan balances averaged $42 billion and were up 1% sequentially. Our loan portfolio is well-diversified across geographies, operating segments and loan types. Approximately 75% of the portfolio is floating, and the overall duration is less than one year. Our liquidity remains strong, with cash held at the Fed and other Central Banks up 9% to $43 billion. More than 45% of our overall balance sheet is comprised of cash, money market assets and available-for-sale securities. This translates to $73 billion of immediately available liquidity and more than 60% of the total deposit base.

Net interest income on an FTE basis was $525 million for the quarter, down 4% sequentially, but up 12% from the prior year. NII reflected the impact of several dynamics. We saw continued client migration out of deposits and into higher-yielding alternatives, non-interest bearing deposits that, as a percentage of total deposits, slid to 17%, and deposit costs increased, with our interest-bearing deposit beta during the quarter reaching 88% and our cumulative beta for the cycle at 68%. The net interest margin on an FTE basis was 1.57% for the quarter, down 5 basis points sequentially, but up 22 basis points from a year ago. The sequential decline reflects the impact of higher funding costs, partially offset by higher short-term market rates. Our NII in the third quarter will continue to be driven by client behavior, which has been less predictable, given the speed and velocity of the cycles' rate hikes. Our average client deposits thus far in the quarter are approximately $106 billion. Deposit outflows are expected to continue, in-part, due to seasonality as August is typically our low point in the year as European activity slows materially. The pace of the outflows is expected to moderate.

Turning to Page 8. As reported, non-interest expenses were $1.3 billion in the second quarter, 4% higher sequentially and 9% higher than the prior year. Excluding charges in both periods is noted on the slide. Expenses in the second quarter were down 1% sequentially, but up 5% year-over-year. I'll hit on just a few highlights. Compensation and technology expense continued to be the areas of highest spend. Compensation, expense excluding severance charges, was down 5% sequentially, but up 4% compared to the prior year. It was down sequentially due to the payment of our annual retirement-eligible incentives in the first quarter. This was partially offset by the impact of this year's base pay adjustments, which were granted in the second quarter. The year-over-year growth in compensation expense largely reflects the impact from inflationary wage pressures, and last year's employee expansion, partially offset by lower incentives. Excluding charges, non-compensation expense was up 3% sequentially. Primary driver of the increase was growth in the outside services line, which was up 9% sequentially. The increase is largely due to timing, as we reported a sequential decline in outside services of 9% in the first quarter due to delays and technical services projects. With our heightened focus on expense control, we expect our operating expenses to grow more modestly and our expense to trustee ratio to show further improvement.

Turning to Page 9. Our capital ratios remained strong in the quarter and continue to be well above our required regulatory minimums. Our Common Equity Tier 1 ratio under the standardized approach was flat to the prior quarter at 11.3%, despite continued common stock repurchases. This reflects a 430 basis point buffer above regulatory requirements. Our Tier 1 leverage ratio was 7.4%, up slightly from the prior quarter. We returned $257 million to common shareholders in the quarter through cash dividends of $158 million and common stock repurchases of $99 million.

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

Questions and Answers

Operator

Thank you. [Operator Instructions]

And I do have a question from Steven Chubak, Wolfe Research. Please go ahead.

Sharon Leung
Analyst at Wolfe Research

Hi, good morning. This is actually Sharon Leung calling in for Steven. Just a question on deposit betas. They came in a little bit better-than-expected this quarter. Can you help us understand how to think about the incremental betas from here.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure. So, betas have continued to increase. And from here, I think, we still have to separate the institutional client base from the wealth client base. We noted that we're cumulatively, across the platform, within this quarter, in the high 80% range. The institutional channel is likely going to be at a 100% at this point.

The wealth channel still provides some benefit. There's -- the betas there are a lot lower. But at this point, we're seeing about a 100% in the institutional channel, and still much less than that in wealth. And that seems to those -- both of those trends seem to be continuing as we've seen early signs in the quarter.

Sharon Leung
Analyst at Wolfe Research

Great. And then as a follow-up, you noted you're at about 17% non-interest bearing deposits today. I think you had troughed closer to about 15% in the '04 to '06 cycle. Can you help us think through where that potentially goes from here? And once that starts to normalize, where you see NII exiting the year?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure. Well, like you, we've looked-back a lot, where it's troughed. And the data we have showed at a little higher than 15%, you mentioned, I think it's 16%. But I don't think about that as a floor. There's nothing structural in the base to consider that a floor. Now that said, it has been moderating significantly. And we don't see -- we haven't seen much movement at this point. Obviously, there is a step-down this quarter of another percentage point, but it seems to be leveling-off at this point.

Sharon Leung
Analyst at Wolfe Research

Great. Thank you.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Thank you.

Operator

Next question comes from Alex Blostein from Goldman Sachs. Please go ahead.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning, Alex.

Alexander Blostein
Analyst at Goldman Sachs & Co.

Hi, good -- good morning. Hello, everybody. So, a couple of questions around expense trends. I guess, one, a little bit more near-term. You guys announced some action, obviously, over the course of the quarter, there's a severance charge. So, maybe help us quantify what it means in terms of savings and your just updated views on the overall sort of firm-wide expense growth for the year, I guess, excluding the charges occurred in the second quarter? I think last time you talked about bringing that down to below 7%, but maybe an update there would be helpful.

And then bigger picture question. You guys are running at a kind of high 20%-ish pre-tax margin, that used to be north of 30%. So, as you kind of think about the fee environment getting a little bit better with the market, but NII has clearly peaked as we've talked about before. Is there an opportunity to get back to that 30% plus? And how do you see sort of achieving that if that's the goal? And what's the timeframe around that?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure. So, let me tackle the expense -- the compensation-related first. First, I'm sure people are curious, where is the base from here. So, let me just provide some background on kind of first quarter to second quarter; second quarter to third quarter. I think from here, we'd say flat to down from second quarter, ex the severance charge in the compensation line. So if I go back to last quarter, we explained that the significant movements for second quarter would be the $40 million seasonal decline in equity awards and then the $20 million increase in the base pay coming online, that would have put comp at about $575 million for the quarter. And, obviously, ex the charge, we ended-up about $8 million better than that, including currency. So, two factors led to that. First, we pulled a lot of levers in the quarter to flatten compensation, including accelerating and close to completing the actions that we launched in fourth quarter of last year. So, in January, we communicated that the projected reduction by late '23 would be about 300 roles, and about $5 million to $7 million in quarterly comp benefit, net of reinvestments. So, we got a portion of that work done in the first quarter and we mostly finished it in second quarter, and that was a big part of the reason it put us ahead of schedule.

Second, as we saw the timing of that first program, accelerating and coming to completion, we launched a new effort during the second quarter, specifically related to what you've referenced Alex in the severance charge that we announced this morning. We've already gotten some benefit of that within the quarter and that's reflected in the results. So, overall, this new program, to your question, should impact about an incremental 600 roles, many of that will be backfilled based on a lens of skills or geography, but same goal. We should be able to get $5 million to $7 million a quarter in run-rate savings, and a portion of that got embedded in the second quarter. So, we got to remember that we did pull the lever hard this quarter, so there's some hiring that's in the queue. But we also pushed a fair amount back. And so, that's why, with various puts and starts, it's good to think about a flat to down from the comp levels you see in the second quarter, ex charges, going into the third quarter. So, that's, hopefully, a helpful background there.

To get to your questions on for the rest of the year, where do we see expenses. At a high level, we've taken about a point out of the curve for the year based on the trajectory that we're on. If you take-out -- to your point, if you take-out the notable items, this year, on a -- each quarter has been under six, and we think we've taken that point out of the curve at this point and that should continue through the rest of the year.

To margins, the -- you're right that we -- we've been in the 30s, and now in the 20's. Our target has us -- one of our key performance indicators is for us to be in the 30s. And no way we lost sight on that. That is where we're trying to get. That gets impacted largely by what's going to happen. In our minds, we can control the expense side. And obviously, we're doing a lot of work there. And we're also getting good benefit, because we saw good organic growth in the quarter. And so, both levers are working in the right way, but we have definitely not changed our target of being in the 30s from a margin perspective.

Alexander Blostein
Analyst at Goldman Sachs & Co.

Got it. Thanks. Super comprehensive. Just a quick follow-up around deposits. So, good news you guys were kind of in-line with what you updated us on around $105 billion. It sounds like deposits are fairly stable. I think you said $106 billion right now, with a kind of similar non-interest bearing mix as we saw over the course of the quarter. Can you help just frame the seasonal deposit outflows in any other kind of client conversations you're hearing that could give us a sense where deposits could ultimately trough in the cycle? It sounds like there's a little bit more to go, but just curious to hear what the endpoint might be?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah, you heard right. It's held-in quite well so far in July. And in June, you see the end of the quarter, and there is a spike there. But, in general, June and July have been at about this level, have been holding in well. Our client activity is good. We've taken action here to make sure we're talking to clients aggressively and telling them we want to continue providing good liquidity services for them, whether it's lending or holding onto their deposits. But we've got -- we talked last quarter about the fact that we think about liquidity broadly, it's about client liquidity. And it was good to see money market funds up this quarter, that adds to margins really well too. And even as we think about what clients are holding in brokerage, and so all of the client liquidity seems to be holding in well.

On the seasonality dynamic, August is a low-point, but it's not -- it doesn't go down dramatically. We've looked-back several years. And so, we're feeling that deposits at these levels seem to be holding in okay. So, I can even give a little bit of thought from our perspective at this point based on our outlook, I think, it's prudent to think about it -- another decline, even though deposits are holding in pretty well. But we see the competition. And so, we think it's prudent to think about another NII decline of about 5% for the quarter. Again, June and July volumes have held-in at about $100 billion to $110 billion, but we just have to be conscious of the competitive environment and what the summer tends to hold in terms of volume pressure.

Alexander Blostein
Analyst at Goldman Sachs & Co.

Understood. Great. Thanks so much.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

You bet. Thanks, Alex.

Operator

And our next question is going to come from Brian Bedell from Deutsche Bank.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Great. Thanks and good morning, folks.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning, Brian.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Good morning. Hope all is well. Maybe just to go back to expenses, I appreciate the color you gave, Jason. Normally, start to talk about the seasonal lift that you typically get in the second half and things like equipment and software and outside services. I don't -- wonder if you want to comment on any projection there?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure. Well, it's good to call it out I think. In equipment and software, in particular, we were better than what we thought we were going to be, but that was -- really two factors led to that. One, we did have some delays in projects coming from WIP into being depreciated. Those will come online, so that's more timing. And then secondly, we've been working very aggressively as part of the productivity office to just negotiate on -- and try and push inflation down, and we had some good results there, bringing costs down.

And so, from here, we think third quarter up $5 million to $10 million in that line item. Fourth quarter, we can even tell, because some of it's baked, an additional $5 million to $10 million lift from that perspective. And in outside services, not -- no update to make there.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Great. And then, Mike, you started off the call talking about some of the new business wins in Asset Servicing and Wealth Management. I guess how should we think about that contributing to organic revenue growth maybe just broadly? If we're in a, say, a flattish market situation, would you expect this to have a positive impact in the next couple of quarters and going into '24 on revenue?

Michael G. O'Grady
Chairman and Chief Executive Officer at Northern Trust

Yeah, Brian, so, the answer is yes. And to your point, we only consider it organic growth once it's transitioned and in. And yet we know the pipeline of business or mandates that we've won that have not transitioned in yet. And in each of the businesses, it's a little bit different. There's more of a, I'll call it, forward pipeline with Asset Servicing. But the pipeline looks very good based on recent activity that I mentioned there.

Within Wealth Management, there's not as much of a forward pipeline, if you will. But similarly there, I would say, very steady activity. And as much as anything with Wealth Management keeping in mind that -- this -- as a company, but also that business has been built on doing what's right for the client and sometimes that results in different financial implications for the Company, but overtime, is best for the Company and the shareholders. And my point being the discussion around deposits and money market funds and treasuries, and managing things like that, they all have different implications for us. But the client activity has been very good and we're, I would say, optimistic about how some of the shifts with rates will have implications on where those funds get redeployed. So, again, positive on the Wealth Management front in a steady fashion.

And then Asset Management, as Jason mentioned, we've seen strong flows into the money market platform there, but that -- also in some other areas as well. And likewise, I'd like to see those get redeployed in other ways overtime. So, good across the board.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Is it fair to say the revenue growth on the fee side is definitely better than the NII side for the organic growth equation now -- at least now?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah.

Michael G. O'Grady
Chairman and Chief Executive Officer at Northern Trust

That's right, Brian. And I view it as you're kind of implying there. On the fee side, it tends to kind of grind up more gradually, subject to the markets. And NII can be more volatile. And the only other area, I would just highlight is around our capital markets activity, FX and brokerage and trading there, which has been relatively subdued during this time period with lower volatility, lower activity, which -- that can also change and that has different implications to, just meaning those can be more profitable.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Great. Thanks for all the color.

Michael G. O'Grady
Chairman and Chief Executive Officer at Northern Trust

Sure.

Operator

And Robert Rutschow from Wells Fargo. Please go ahead.

Robert Rutschow
Analyst at Wells Fargo Securities

Hey, good morning. Thanks for taking my question. I guess the first question is on fee growth, kind of, more broadly. You've sort of indicated that you're -- the 5% expense growth rate, does that go down? But -- did the fees -- where do you see fees growing to get up to that expense level so that you could grow fees faster than expenses?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Well, I mean, in the short-run, I think, we're still -- I don't think -- we're still absorbing an inflationary environment from an expense perspective. And so, we'd like to be able to do better even than what we're doing right now in the long-run from an expense growth perspective. On the revenue side, as you know, the lift -- the financial model enables us to have lift from two different areas. One is the market lift and that's tended to provide low-single-digit growth rates, but it's a very strong component of the financial model. And then secondly, the organic growth. And if we can have low-single-digit growth in Wealth Management organically and then mid-single-digit growth in Asset Servicing, that provides a good model for us to get well above the expense rates that we think we can lead to in the long-run and provide good operating leverage.

Robert Rutschow
Analyst at Wells Fargo Securities

Okay. And if I could follow-up on Wealth. You've improved growth there as well. Are there any differences in the competitive dynamic among the top-end and the low-end? Are you having more success? You said you're having more success in the Global Family Office. I guess can you talk about the funnel of new clients, sort of, in the middle tier and what you're doing to grow that?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. It's interesting, it's actually not just the family office, but the very top-end of wealth advisory. And those clients can be similar size as they just happened to not have a family office and are leaning more toward us for wealth advice as opposed to the broader set of more operational and reporting services that the Global Family Office provides.

We are doing better at the top-end. And looking at the new business that came on-board and at the pipeline accounts above $20 million, just that was where there was more velocity, and that's been consistent for a while on that business. And so, there is something to that dynamic, where we seem to be doing better at the top-end, that's where a disproportionate percentage of the growth has come from.

Robert Rutschow
Analyst at Wells Fargo Securities

Okay. Thank you.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

You bet.

Operator

And our next question is going to come from Brennan Hawken from UBS. Please go ahead.

Brennan Hawken
Analyst at UBS Group

Good morning.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning, Brennan.

Brennan Hawken
Analyst at UBS Group

Hey, how're you doing? Just a quick clarification point. Jason, you referenced a point of expense benefit. Is it right to interpret that as coming off of your prior 7% or better expectation or was that meant in a different way?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

It is correct to interpret that as saying, we don't see 7% at this point. We've said 7% or better. And at this point, we should be doing 6% or better. We've done that first half and we see a path to that in the second half as well.

Brennan Hawken
Analyst at UBS Group

Perfect. Thank you for clarifying that. And then...

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Thank you.

Brennan Hawken
Analyst at UBS Group

Sure. You guys had a write-off of a client capability. I don't remember seeing that in the past, just a little confusing to me. So, maybe, could you help me understand it, when did you build that capability, and then what happened that caused you to write it off?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. I can give you some thoughts on it. It's -- just from a timing perspective, it's been in the works for many, many quarters. But one of the pillars of the productivity office is to look at, what we refer to as, internal investments to ensure that they are on-track to meet our hurdle rates to returns and margins. The charge was a project to build-out a new client capability in Asset Servicing, specifically, in the asset owners channel.

So, after working and eventually discussing with different stakeholders, we didn't reach commercial agreement on terms that would meet our hurdles. And so, we halted the project. I think it's -- importantly, I'd presumed you would ask, are there others like this in inventory? Absolutely not. We don't -- this is a large project, endeavor that we've been working on and didn't reach resolution that got to our hurdle rates, and so, stopped the project.

Brennan Hawken
Analyst at UBS Group

Okay. Did something happen in the, sort of, like revenue opportunity that diminished it versus where you planned? Because I'm sure you guys went through the process before you broke ground, so to speak, at least metaphorically. Or was it that it's really pricey, it turned out to be more expensive to build. Was it the expense side that hurt the outlook versus plan, or was it the revenue opportunity?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. It will -- it was more costly to build than we thought. And the revenue dynamics, we're not at that point going to get to our hurdle rate. And this -- it really is reflective of us taking an extremely disciplined approach on items like this, where we're not going to devote resources to areas where we're not going to achieve our hurdle rate. And so, well before we talked about this, even internally, one of the pillars that we've talked about for the productivity office was looking at our internal investments and this fits squarely in one of those areas. We define that as areas where we're allocating resources, whether it's capital or expense dollars, and we're not at our hurdle rate. And so, this is one where we were disciplined and saying, we're going to stop now, halted and not make -- not invest more into this.

Brennan Hawken
Analyst at UBS Group

Yeah. Thanks for explaining that, Jason. It's actually a lot more encouraging than that -- I interpreted it on paper. So, thanks for the color.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

No, thanks for asking it. It's probably -- if it's helpful to you to clarify, it's helpful to others. So, thank you.

Operator

Our next question comes from Rob Wildhack, Autonomous Research. Go ahead, please.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning, Rob.

Robert Wildhack
Analyst at Autonomous Research

Good morning, guys. Good morning. Just a bigger picture question on expenses. Where do you want or what's your target, I guess, for that expense to trust ratio over the long-run? And then what are the sort of necessary ingredients to get there?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. If we can be 110 to -- 110% range, then that's 105 to 110, then we feel like we're in good shape to do well. And we're grinding to get down there. We got down there before, we've been well above it. We got down into that range. In fact, even slightly below it for a quarter or two. And now, for all the factors we've talked about, higher inflation, markets coming down, and the effects of NII going up not helping that metric, we're outside that range. But it is an important part of our financial model to be in that range.

And so, we're -- it's the first thing I look at is where are we, and it's good to see us getting back towards the number that we -- the range that we've articulated. It's another one of the key performance indicators that we talk about internally.

Robert Wildhack
Analyst at Autonomous Research

Got it. Thanks. And just one follow-up on the positive organic growth commentary this morning. If you saw a big acceleration in organic growth or sustained period of strong organic growth multiple quarters even several years, how do you think that would impact expense growth, if at all?

Michael G. O'Grady
Chairman and Chief Executive Officer at Northern Trust

Yeah. So, Rob, the -- your two questions relate to each other, which is -- the primary way that we can drive that ratio to the range that Jason talked about is through organic growth on the fee side, and then controlling organic expenses, alright? And to your point, if you have higher organic growth that is going to require more resources. And to the extent that you don't achieve that, then you have to make sure that you're reducing the organic growth on the expense side to get there. But those are the two areas that we control the most. And then you say, okay, but beyond that, as Jason mentioned, on the fee side, it's going to have the impact of markets and sometimes currency. And on the expense side, you're going to have the impact from inflation and, to some extent, currency. And so, you try to focus on what you can control the most, which are those two items, organic growth on fees and organic growth on expenses, to ultimately drive it to the target range.

Robert Wildhack
Analyst at Autonomous Research

Okay. Thank you, both.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure.

Operator

And Betsy Graseck from Morgan Stanley is next. Please go ahead.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning, Betsy.

Connell Schmitz
Analyst at Morgan Stanley

Hi, good morning. This is actually Connell Schmitz calling in for Betsy.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

How are you?

Connell Schmitz
Analyst at Morgan Stanley

Good. How are you? So, just one question, a little bit nuanced on the credit portfolio. It seems like a little bit of an outlier. I know it's small, but on the reserve release, it seems like an outlier that there's an improved outlook on your CRE book. Can you just explain what's going on there and where you see this line-item from here?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. So, actually the -- just to clarify, there was the release, the release as a result of some improvement in a small number of borrowers in that book. But that more than offset an actually worsening outlook that we have overall for CRE. And so, it's not dramatic, but the -- our outlook on that portion of the book actually would have caused an increase in the reserve.

Connell Schmitz
Analyst at Morgan Stanley

Got it. Okay. That makes more sense. I guess one other question on the investment portfolio. You mentioned duration is still sub one year. And you're mostly in cash. At what point -- just given the context of potential future rate hikes, where do you see, like, this duration heading in the coming months and how are you planning to mix shift this book in that context to protect NII?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. Absolutely. So, the duration of the securities book is it to one [Phonetic], the duration of the balance sheet is just under one. And -- but you're absolutely right to call out that this is -- it is an interesting time and what we think it was the evolution of the yield curve. And so, we've been allowing the maturity of securities to go -- to become more liquid as we reinvest them, that's brought down duration.

At this point with the yield curve, we are talking about where to go from here, and that's not indicating it's going to go up, but it's not on a -- at this point, we are thinking about where is the yield curve, where is it going and how does that influence what we want to do as the large securities book continues to mature and provide opportunity for reinvestment.

Connell Schmitz
Analyst at Morgan Stanley

Okay. And then I guess one follow-up on that same topic. How should we think about earning asset growth in the context of deposit outflows potentially? Should those flout on one-to-one basis or will you maintain certain balance sheet size, or?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. Our -- as the deposits come down, the securities can act as the -- obviously, the funding mechanisms. It doesn't -- that doesn't move very quickly. And so, the deposit size is always going to influence the earning asset size. And so, what we have to then think about the constraining factor at that point becomes what is leverage look like. And we've got a lot of room from a leverage perspective. And so, that's what sometimes will lead us to think about discretionary leveraging, just to make sure that we're not missing opportunities to pick-up some NII, even if it's at very thin NIM, based on where the size of the balance sheet is, because it doesn't flex super quickly.

Connell Schmitz
Analyst at Morgan Stanley

Got it. Okay. That's helpful. That was it from me. Thanks a lot.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Thank you. Sure.

Operator

And our next question is going to come from Mike Brown from KBW. Please go ahead.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning, Mike.

Michael Brown
Analyst at Keefe, Bruyette & Woods

Thank you. Good morning. Maybe just actually following-up on that question there. We noticed that the complexion of your balance sheet has been shifting on the funding side. Naturally, that makes sense. But your deposits, they declined by 6%, but we saw that the higher cost, Fed fund purchased balance actually jumped meaningfully quarter-over-quarter, it's been growing this year.

I guess what has led the balance sheet decline more, like, what's kind of going on there in terms of the mix and how could that progress from here should -- if the deposits continue to trend down as you talked about or that balance -- the Fed funds purchased balance continue to grow as an offset to fund the assets?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yes. And part of it is, in this -- the deposits have just been so volatile. And so, you don't want to commit to significant movement in shrinking the balance sheet. And we want to be there for our clients. We've got plenty of capital. We've got plenty of room for a leverage perspective. And so, just not anxious to quickly do any significant moves. And so to that extent, as deposits come down, you have the opportunity to then say, maybe, we want to use some discretionary leveraging. Again, we printed a 7.4 Tier 1 leverage, which is -- leaves you a lot of room. And so, if we hadn't done leveraging that, that incremental leveraging would be even higher in the 7s. And at a point, you just have to say, it is prudent to make sure you're taking advantage of the opportunities that exist, so.

Michael Brown
Analyst at Keefe, Bruyette & Woods

Okay. Great. Thanks for the color there. And then I guess, maybe, just following-up on that point there on the capital side. You guys increased the share buyback or you bought back about $100 million or so of stock this quarter. Any expectation on how that could progress from here? What should we think about in terms of your capital return going ahead?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure. Well. Yeah. The overall theme of what you saw in this quarter makes sense in the near-term, or you see speed in the market for share repurchase. The thing that worked against us is, AOCI actually slightly against us this quarter. Usually, in a neutral rate environment, the pull-to-par will give us some lift there. But it didn't this quarter, that -- and that's fine. But even so, the $100 million we did is about what -- it's kind of -- that's the model we're thinking about in the short-run.

Big caveat is that the FDIC special assessment coming online, presumably in third quarter, that would be a similar dollar amount as to what we did from a repurchase perspective this quarter. And so, you could see us saying, hold-off for a quarter, get that payment done and then get back to your game plan.

Michael Brown
Analyst at Keefe, Bruyette & Woods

Okay. Thank you for the color.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure.

Operator

Next question comes from Gerard Cassidy from RBC. Please go ahead.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning, Gerard.

Gerard Cassidy
Analyst at RBC Capital Markets

Hi, Jason. How are you?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Very well.

Gerard Cassidy
Analyst at RBC Capital Markets

Jason, can you share with us -- I think you gave us the cumulative beta through the cycle of 68% and then the incremental beta, of course, is higher. I think you touched on it, this quarter, maybe, 100%. The question is this, how is the beta behaving relative to past tightening cycles? I don't know if 2016 to '18 is the cycle that really is that comparable or maybe you have to go back a little further?

And then second, how quickly -- if the Fed does start cutting rate -- excuse me, cutting Fed funds rates in 2024 some time, how quickly can you guys reduce your deposit costs?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure. One, the first just to make sure, I said it, right, earlier, the 100% going forward would be for the institutional side of the business, not for the overall deposit base. And...

Gerard Cassidy
Analyst at RBC Capital Markets

Okay. Got it.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yeah. And to the question of how does that compare historically, it's -- this is higher than it has been historically. And I -- just there's different dynamics that you and I could talk about, I think, that are driving that. But there's just -- there's some very strong competition for deposits right now and for various reasons. And so, we want to make sure that we're there for our clients, and we still -- we've got the ability to do that. And so, we are -- we want to make sure that we're holding onto our fair share and providing that liquidity capability for clients.

To think about reductions, the reductions can -- they can come quickly. And our -- the way we price, the way we -- the way our agreements work, we get fast movement on the way down. And so, we should be able to get deposit costs down quickly as rates come down.

Gerard Cassidy
Analyst at RBC Capital Markets

Very good. And then as a follow-up, you also touched on the volatility of deposits. Is it more -- based on your guys' experience at Northern, are you finding that this period's volatility is even greater than past periods? And is it because of quantitative tightening or Fed actions that is causing greater volatility in your guys' estimate?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Well, it is more volatile, not just over the long run, and we went from $90 billion to $138 billion down to $106 billion. And -- but even within the quarters, a lot of volatility. And -- but I think that's driven by some of the macro factors and what we saw in early March spooked a lot of depositors, obviously, and then another trend of debt ceiling and then leading to another trend of deposit competition, all of those things are having -- or driving significant different preferences that clients have, not just between which bank to go to but whether to use banks versus money market funds versus treasuries. I think all of those factors are what's leading to the heightened volatility we're seeing.

Gerard Cassidy
Analyst at RBC Capital Markets

Got it. Okay. Thank you.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure.

Operator

And the next question comes from Vivek Juneja from JP Morgan. Please go ahead.

Vivek Juneja
Analyst at J.P. Morgan

Hi.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Good morning.

Vivek Juneja
Analyst at J.P. Morgan

A couple of questions. I'll start with non-interest-bearing deposits. The big outflow you saw in the second quarter, which segment did that come more out of and where -- what are you seeing in that trend? Sorry, if I'm repeating a question, there have been overlapping calls, just made it. I hope I'm not doing that.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

The significant movements are almost always going to come, well, not almost always, in this case, came from Asset Servicing.

Vivek Juneja
Analyst at J.P. Morgan

Okay. And the stabilization, where are you seeing more of that, which segment?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

The Asset Servicing segment is actually overall been relatively stable. We'll see big chunky movements in and out, but the overall level has been about the same. The Wealth segment is more granular. The GFO client base has -- is much chunkier, but you just think about the amount of clients in the Wealth segment, it just makes it more granular.

Vivek Juneja
Analyst at J.P. Morgan

Yeah. And on the Wealth Management segment, the low-single-digit expense growth, is that because that's where you've done a lot of the headcount cutting that you all talked about? And what are the implications for service there?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Service has been great. And we didn't provide detail in the expense allocation between the business units. But just in general, you'll note that the headcount is down but no impact to service levels whatsoever.

The low-single-digit growth I referenced was related to organic growth within Wealth Management.

Vivek Juneja
Analyst at J.P. Morgan

Okay. All right. Thanks.

Operator

The next question comes from Robert Rutschow from Wells Fargo.

Robert Rutschow
Analyst at Wells Fargo Securities

Hi, just a quick follow-up. You mentioned that equipment and software, you had some projects being delayed. Does that mean that non-comp expense will see some upward pressure in the second half of the year?

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Yes. In certain categories, it will. And so, in equipment and software, we'll see -- in that line-item, in particular, we'll see upward pressure, $5 million to $10 million third and fourth quarter. But...

Robert Rutschow
Analyst at Wells Fargo Securities

Okay.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Not, I have -- I didn't reference other line items. We mentioned outside services relatively flat. So, that's really the only forward-looking information we provided, except for the comp number, which you referenced.

Robert Rutschow
Analyst at Wells Fargo Securities

Great. Thank you.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

You're Welcome.

Operator

And Brian Bedell from Deutsche Bank, please go ahead.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Just wanted to clarify on the FDIC special assessment, is that included in that expense guide of 6% or better? And I don't know if you're able to frame the size of the essential assessment yet.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

It's not included in the 6%. And we haven't talked publicly about what the number is.

Brian Bedell
Analyst at Deutsche Bank Aktiengesellschaft

Okay. Fair enough. Thank you.

Jason J. Tyler
Executive Vice President and Chief Financial Officer at Northern Trust

Sure.

Jennifer Childe
Senior Vice President, Director of Investor Relations at Northern Trust

Okay. Thank you very much for joining us today. We look forward to speaking with you again soon.

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