Good day, everyone, and welcome to the Northern Trust Corporation’s Second Quarter 2020 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the call over to the Director of Investor Relations, Mark Bette, for opening remarks and introductions. Please go ahead.

Thank you, Jennifer. Good morning, everyone, and welcome to Northern Trust Corporation’s second quarter 2020 earnings conference call. Joining me on our call this morning are Michael O’Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Kelly Lernihan from our Investor Relations team. Our second quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today’s conference call. This July 22 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is a replay that will be available on our website through August 19. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our safe harbor statement. What we say during today’s conference call may include forward-looking statements, which are Northern Trust’s current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2019 annual report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results. Thank you again for joining us today. Let me turn the call over to Michael O’Grady.

Thank you, Mark. Let me join Mark in welcoming you to our second quarter 2020 earnings call. As the current public health crisis continues, I hope you and your families are healthy and well. And I offer my condolences to all who have suffered a personal loss. At Northern Trust, we remain focused on safeguarding our employees, serving our clients, and supporting our communities during these unprecedented times. We continue to operate in what we call resiliency mode, which means we are focused on providing continuity of service for our clients, while over 90% of our employees are working remotely. Although we have developed plans to position ourselves to return to our offices when conditions permit, we will only do so in a particular geography when we are comfortable and confident in our ability to ensure a safe environment for all of our employees and clients. As a result, we expect to remain in resiliency mode for some time to come. In this operating environment, we have adapted how we serve and communicate with our clients, as well as how we prospect for new clients. In each of our businesses, this has resulted in engaging with clients and prospects more than ever and provides an opportunity for us to deepen our relationships. In the second quarter, our Asset Management business won several new mandates across different products and strategies, including receiving significant new inflows into our global money market fund complex, which we’ve strategically positioned over time. In wealth management, we launched a new Navigate the Now digital marketing campaign, which is showing early promise, and introduced the Northern Trust Institute, a research center with 175 faculty covering 34 specialty areas designed to harness our expertise and experience and elevate our advice by bringing predictive insights to our clients. In asset servicing, we experienced a modest deferral of implementations and new fund launches in the quarter. However, new business continues to be healthy, as prospects become more comfortable conducting searches and due diligence virtually in the current environment. As Jason will discuss, the low interest rate environment will continue to create meaningful headwinds and pressure our financial performance. Through this environment, we will stay focused on our mission of being our clients’ most trusted financial partner and on generating organic growth and gains in productivity. I feel it’s also important to note that at Northern Trust, we have always been mindful that we have a duty to serve our communities as well. Recent attention to the civil, social, and economic inequities Black Americans face every day has provided us with an opportunity to reflect further on the service and role we play to address inequity in our communities. Toward this end, we have committed $20 million over the next five years to reduce the economic opportunity gap. This opportunity gap encompasses all the obstacles created by race, ethnicity, gender, environmental, and socioeconomic status that too often keep people from achieving their full potential. Our goal is to help shrink this gap by providing increased access to essential human needs, food, housing, healthcare, and education, so that each person may grow and thrive personally, professionally, and financially. Finally, I want to express my sincere appreciation for our staff whose commitment, excellence, and professionalism throughout these extraordinary times have been exceptional. Now let me turn the call to Jason to review our financial results for the quarter.

Thank you, Mike. Before I start, I’d also like to take a brief moment to recognize all those affected by this ongoing crisis, especially those working on the front lines. Our thoughts are with you, and we hope you and your loved ones remain safe and healthy. The health crisis and cultural issues we’re facing evoke both deep sadness but also hope and optimism about what we can be. I’d also like to express sincere gratitude to all the Northern Trust partners for their continuing hard work, resiliency, and flexibility in these uncertain times. I’m extremely proud to be part of this team that achieves greater for all of our stakeholders no matter the adversity. Now let’s dive into the financial results for the quarter starting on Page 2. This morning, we reported second-quarter net income of $313 million. Earnings per share were $1.46 per share and our return on average common equity was 12.2%. As you can see on the bottom of Page 2, the macroeconomic environment was mixed during the quarter. While equity markets performed well during the quarter, recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels, and thus, the current quarter’s fees were unfavorably impacted by the lagged market performance. Interest rates have, of course, declined significantly with one-month and three-month LIBOR rates down sequentially as well as versus the prior year. Let’s move to Page 3 and review the financial highlights of the second quarter. Year-over-year, revenue on an FTE basis was flat with noninterest income up 4% and net interest income down 11%. Expenses increased 3%. The provision for credit losses was $66 million in the current quarter. Net income was down 20%. In a sequential comparison, revenue declined 5%, with noninterest income down 4% and net interest income down 9%. Expenses decreased 3%. Net income declined 13%. The provision for credit losses of $66 million during the quarter was primarily due to an increase in the reserve evaluated on a collective basis, driven by downgrades in the portfolio and more severe projected economic conditions. The largest increases are within the commercial and institutional and commercial real estate portfolios. Underlying credit metrics remained strong during the quarter with net recoveries of $2.6 million and a 6% decline in nonaccrual assets, which totaled $99.4 million at quarter end. Return on average common equity was 12.2% for the quarter, down from 15.9% a year ago, and 13.4% in the prior quarter. Assets under custody administration of $12.1 trillion grew 7% from a year ago and increased 11% on a sequential basis. Assets under custody of $9.3 trillion grew 9% from a year ago and increased 13% on a sequential basis. Assets under management were $1.3 trillion, up 7% from a year ago and up 12% on a sequential basis. Let’s look at the results in greater detail, starting with revenue on Page 4. Second-quarter revenue on a fully taxable equivalent basis was $1.5 billion flat compared to last year and down 5% sequentially. Trust, investment, and other servicing fees representing the largest component of our revenue totaled $961 million and were up 1% from last year and down 4% sequentially. Foreign exchange trading income was $71 million in the quarter, up 18% year-over-year and down 20% sequentially. The increase compared to a year ago was driven by higher volatility and increased volumes, while the sequential decline was mainly due to lower volumes. Remaining components of other noninterest income totaled $102 million in the quarter, up 38% compared to one year ago and up 16% sequentially. Securities commissions and trading income increased 41% compared to a year ago and was down 21% sequentially. The year-over-year growth was driven by success within our integrated trading solutions product, as well as higher referral fees and interest rate swap. The sequential decline was driven by lower interest rate swap activity in core brokerage. Other operating income increased 46% compared to the prior year and 64% sequentially. Both increases were impacted by higher income associated with supplemental compensation plans and a higher market value adjustment for seed capital investment, partially offset by higher visa swap expense. The year-over-year performance also benefited from income related to a bank owned life insurance program that was implemented during 2019. The higher income on the supplemental compensation plans resulted in a related increase in staff related expense within other operating expenses. Net interest income, which I’ll discuss in more detail later, was $380 million in the second quarter down 11% from one year ago and down 9% sequentially. Let’s look at components of our trust and investment fees on Page 5. For our corporate and institutional services business, fees totaled $566 million in the second quarter and were up 3% year-over-year and down 1% sequentially. Custody and fund administration fees, the largest component of C&IS fees were $376 million and down 2% year-over-year and down 5% sequentially. The year-over-year performance was primarily driven by unfavorable lagged markets and currency translation, partially offset by new business and transaction fees. The sequential decline was primarily driven by unfavorable lagged markets, as well as the decline from currency translation, partially offset by new business and transaction fees. Assets under custody administration for C&IS clients were $11.3 trillion at quarter end, up 7% year-over-year and up 11% sequentially. The year-over-year performance reflected new business and favorable market impact, partially offset by unfavorable currency translation. The sequential performance was driven by higher market levels, new business and unfavorable currency translation. Recall that lagged market values factor into the quarter’s fees. With both quarter lag and month lag markets impacting our C&IS custody and fund administration fees. Investment management fees in C&IS of $128 million in the second quarter were up 16% year-over-year and up 6% sequentially. Both the year-over-year and sequential performance was driven by strong flows within our money market fund. Assets under management for C&IS clients were $954 billion, up 8% year-over-year and up 13% sequentially. Both the prior year and sequential comparisons were impacted by strong flows as well as higher markets during the quarter. Similar to custody and fund administration fees, note that lagged market values factor into C&IS investment management fees. Securities lending fees were $27 million during the quarter, up 25% year-over-year and up 17% sequentially. The year-over-year increase was primarily driven by higher spreads and slightly higher volumes. While the sequential increase was primarily driven by higher spreads, particularly in the beginning of the quarter. Securities lending collateral was $166 billion at quarter end and averaged $167 billion across the quarter. Average collateral levels increased 2% year-over-year and were down 2% sequentially. Moving to our Wealth Management business. Trust, investment, and other servicing fees were $395 million in the second quarter and were down 3% compared to the prior year quarter and down 8% sequentially. Both the year-over-year and sequential performance were impacted by unfavorable lagged market. For the year-over-year comparison, new business partially offset the market decline. Both market lag and quarter lag asset levels impact wealth management fees. Assets under management for our wealth management clients were $304 billion at quarter end, up 4% year-over-year and up 10% sequentially. The year-over-year growth was driven by net flows, while the sequential increase was driven by favorable markets and net flow. Moving to Page 6. Net interest income was $380 million in the second quarter and down 11% from the prior year. Earning assets averaged $125 billion in the quarter, up 18% versus the prior year. Average deposits were $111 billion and were up 24% versus the prior year. The net interest margin was 1.22% in the quarter and was down 39 basis points from a year ago. The net interest margin decreased primarily due to lower short-term interest rates as well as mix shift within the balance sheet. On a sequential quarter basis, net interest income was down 9%. Average earning assets increased 13% on a sequential basis. The growth in the balance sheet was driven by a 17% sequential increase in average deposits. The net interest margin declined 29 basis points driven by the impact of lower rates, as well as mix shift within the balance sheet. Looking at the currency mix of our balance sheet for the quarter, U.S. dollar deposits represented 71% of our total average deposits, this was up from 67% one year ago and up 69% in the prior quarter. As we look at the third quarter, the impact of lower rates, particularly LIBOR, will be more fully reflected in our run rate. Both one month and three month LIBOR have come down significantly from their second quarter averages. Based on our current view of the balance sheet volume and LIBOR levels continuing at the current levels, we expect third quarter net interest income to be down 13% to 16% on a sequential basis. Turning to Page 7. Expenses were $1 billion in the second quarter, and were 3% higher than the prior year and 3% lower than the prior quarter. Compensation expense totaled $460 million and was up 1% compared to one year ago and down 8% sequentially. The year-over-year growth was driven by higher salary expense due to staff growth and base pay adjustments, partially offset by lower cash based incentive accruals and lower long-term performance based equity incentive. The sequential decline was primarily driven by lower costs associated with long-term performance-based incentive compensation due to the divesting provisions associated with grants to retirement-eligible employees in the prior quarter, as well as lower cash-based incentive accruals partially offset by higher salaries, driven by base pay adjustment. Employee benefit expense of $90 million is up 1% from one year ago and down 8% sequentially. Both the year-over-year and sequential comparisons were impacted by lower payroll taxes and lower medical costs. The year-over-year comparison was impacted by higher retirement costs relating to pension expense. Outside services costs of $176 million were down 5% on a year-over-year basis and down 9% sequentially. The year-over-year decline was driven by lower costs across a number of categories, including data processing, third-party advisor fees, consulting, and sub-custodian fees, partially offset by higher technical services. The sequential decline was primarily due to lower technical services costs and third-party advisor fees. Equipment and software expense of $164 million was up 12% from one year ago and up 1% sequentially. The year-over-year growth reflected higher depreciation and amortization and software support costs. The sequential increase was driven by modest increases in software and equipment rental, support, and maintenance costs. Occupancy expense of $60 million increased 18% from a year ago and was up 17% sequentially. The year-over-year growth was driven by higher rent and the building operation costs related to our workplace real estate strategies. The sequential increase was primarily related to a $7 million reduction recorded in the prior quarter, resulting from a lease renegotiation. Other operating expense of $86 million was up 12% from one year ago and up 39% sequentially. Both of the increases were driven by higher staff-related expenses and higher charges associated with account servicing activities, partially offset by lower business promotional expenses due to reduced business travel. The higher staff-related costs were related to an increase in supplemental compensation plan expenses and resulted in a related increase in other operating income. Turning to Page 8. Our capital ratios remain strong with our common equity Tier 1 ratio of 13.4% under the standardized approach and 13.9% on the advanced approach. The second quarter increase in the common equity Tier 1 ratio was driven in large part by a decline in risk-weighted assets as financial market conditions stabilized versus Q1. Additionally, the absence of share repurchases allowed further capital accretion from net income and other comprehensive income from the investment securities portfolio. Our Tier 1 leverage ratio was 7.6% under both standardized and advanced approaches. During the second quarter, we declared cash dividends of $0.70 per share, totaling $148 million to common stockholders. As announced yesterday, our Board of Directors approved our third-quarter dividend of $0.70 per common share. As a result of the stress test published by the Federal Reserve at the end of June, our stress capital buffer requirement for the 2020 capital plan cycle was set at 2.5%. The 2020 stress capital buffer is effective October 1, 2020, and results in a common equity Tier 1 capital ratio minimum requirement of 7%. It’s times like these that show the importance of a strong capital base and liquidity profile to support our clients’ activities, and we continue to provide our clients with the exceptional service and solution expertise they come to expect. Our competitive positioning in wealth management, asset management, and asset servicing continues to resonate well in the marketplace. Thank you again for participating in Northern Trust’s second quarter earnings conference call today. Mike, Mark, Lauren, and I would be happy to answer your questions. Jennifer, will you please open the line?

We’ll go first to Alex Blostein with Goldman Sachs.

Good morning, guys. Thanks for taking the question. I guess, my first question is related to money market funds. I’m curious if you can give us your latest thoughts on the outlook for money market fee waivers. It doesn’t look like there’s really anything in the quarter so far, but clearly, rates have come down quite meaningfully. So to frame it, maybe as we think about the current prevailing market rate and second-quarter money market fund balances, if you were to kind of go through the repricing mechanism, can you give us a sense of what the fee areas could be as we look out over the next few quarters?

Sure, Alex. So first of all, you’re right, the quarter doesn’t have a lot. And so let me give you a couple of facts, and then I’ll get to what the outlook could look like. So first of all, in the second quarter, waivers were less than $0.5 million. As we think about the current run rate as we sit today, we’re about $2.5 million a quarter. That said, we’re going to start to see this ramp a little bit as the portfolio gets repriced. And so as we look out to the end of the fourth quarter and even into next year, assuming rates stay the way they are today, we could see waivers getting in the $20 million to $30 million a quarter range. Now those are the facts. I also want to just provide a little bit of kind of significant framework to your question about how people should think about it. We’ve got a lot of growth in the money market fund business, obviously. We talked about that earlier. And even if you look at the treasury fund, that’s among the top three in size and investment returns in the universe. It’s grown from $55 billion at year-end, and it’s about $90 billion today overall. Overall, the complex has about 30 funds, and they totaled $275 billion to $300 billion in aggregate. That whole complex is geared towards the very institutional and high net worth client base. That’s very important to realize because it means the pricing on average is lower than a retail complex. That complex of funds has a fee rate ranging, in general, think about 15 to 20 basis points. There are exceptions on either side, but that’s where the bulk of the assets are. If I take those 30 funds and boil it down to the ones that are most likely to have waivers, there’s really a handful or half a dozen funds that have both large AUM but also have yields that are within 10 to 15 basis points of the fees. Those handful of funds total $125 billion, plus or minus. The gross yield on those funds is about 30 basis points, and the stated fee on them, probably 20 basis points. Now each one of those strategies is different in expected yields and fees. So that’s just a high-level guide to give you a sense of how the overall complex might come into fee waiver mode as they reprice the portfolio. But that’s all given two caveats: one, the existing yield curve stays the way it is; and secondly, there are times when we will do promotional pricing in some of those funds. The analysis I just went through with you excludes that. This is purely waivers based on the yield curve coming down.

Great. That’s a super helpful remark. Thanks. And just I guess to clarify, the $20 million to $30 million that you mentioned, that’s a gross revenue impact. Are there any expense offsets that are kind of more directly related to that before you guys think in any action from an expense perspective that we should be mindful of as well? Or the revenue impact is pretty much the pretax impact?

Super minor. Super minor. You should really think about that, that gross impact is being pretty full.

Great. Second question around NIR, and again, I appreciate the guidance for the third quarter. Given the short-term nature of Northern’s balance sheet, I’m just curious to think about how the trajectory could evolve from there. So if most of the repricing can be done sort of in Q3, so that should really be pretty close to trough NIR for the business? Or you guys think there is incremental pressure beyond that? Thanks.

Sure. On provision in general, actually, let me give a couple of numbers, and then I actually think it’d be helpful to provide a sense of kind of the process because I think that’s important. The good and bad of CECL is that it’s a very forward-looking mechanism. And so let’s try to separate the credit results from the most factual to the ones that are more forecast-dependent. So let’s start on the factual side. And on the extreme, you’d just say, we’re going to look at charge-offs. And we had $2.6 million in net recovery in the quarter, so charge-offs actually benefited $2.6 million. If you come in from that spectrum, the next thing you’d look at from a quantitative-only factor basis would be what a non-performing looks like. And even there, non-performings were down $4 million in the quarter, and they currently are less than $100 million on a $30 billion to $35 billion loan portfolio, so it’s just 30 basis points of loans. And then next, even look at delinquencies, and delinquencies in the period were actually down. All of the factors that are most quantitative-only are all in very good shape. But then you start to look further down the spectrum, what are the qualitative-related factors? What drove our increase in provision, in our overall provision for the quarter were really two big factors: one, downgrades in the portfolio, that added about $40 million to the reserve; and then secondly, the macro scenarios, which added $20 million to $25 million. All of the increase that we've had is related to more of these qualitative factors. Even the downgrades, our instances where our credit team is looking and trying to be forward-looking about organizations and industry dynamics that they think are going to reflect credit quality. So that’s a background on how the provision number wound up. But Lauren, you spend a lot of time with them, why don’t you give 30 seconds on governance and process.

Sure, Jason. Thanks. The provision methodology goes through a very robust governance process, which builds on the best practices that we’ve developed and other internal forecasting exercises. Governance covers everything from the data that is used to the validation of models, to the forecast of functions, to the ultimate provision output. There are many levels of review and challenge throughout the quarterly process with participation from multiple disciplines around the company such as economic research, credit risk, treasury, foreign exchange controllers, and expertise of our business units. So we’ve fortunately had ample opportunity to pressure test this process over the last two quarters, and we feel confident that the governance is robust and produces a reserve that is not only well-supported but also responsive to the change in the economic environment.

We’ll go next to Ken Usdin with Jefferies.

Thanks. Good morning, Jason. A question on net interest income. So understanding the reset of LIBOR into the third quarter and the guidance that you gave, can you give us a sense of whether or not third quarter gets it towards stabilization of NII? And how – if rates hold similar from here, do you have any thoughts on how third to fourth would look? Thanks.

Sure. We have looked at that, frankly, closely. And the answer is it does get us very, very close to flattening out. And yes. Let me – I’ll just provide a couple of thoughts to give you a little bit more color on that guide. If we take the $380 million that we announced and the 13% to 16% down, it gives you kind of a $50 million to $60 million down. I think it’s important for people to realize how much LIBOR has come down. In first quarter, it averaged 1.39%; in April, it was 69 basis points; in May, it was 19 basis points; in June, it averaged 18 basis points, so really flattening out. As of today, it’s kind of at that 18 basis point level as we sit mid-July. It’s very much flattened out at 18. But then you got to compare that to what the average was across the second quarter. The average across the second quarter was 36 basis points. And so you just think about a loan portfolio of $33 billion to $35 billion; we’re assuming some of that comes out. You can see from the average that’s in the release and the period end. Today, we’re sitting just under $34 billion in loans. If we come down a little bit more, we might see $2 billion, $2.5 billion, maybe $3 billion in loan decline. You take an 18 point – 18 basis point differential between the second quarter and third quarter on that, that’s going to get you over $10 million in the $50 million decline. You start to look at just the impact of volume coming down 10% rates, 10%. Then you got to look at the securities book, there, you’ve got $50 billion to $55 billion in securities that are repricing. The dynamic here is that a lot of the repricing is actually starting to happen now. We’re experiencing it now, and we expect it less going forward. We think third quarter is going to be the significant decline, and then we should start to see a level off, maybe not 100%, but very close to fully leveled off going forward from there.

Okay. Thanks for that color. And on the expense side, with the decline in NII and then the fee waivers coming, that’s a lot of high-margin revenues that won’t be around next year on a run rate basis. You guys have done a good job getting the cost growth rate down to 3%. But how do you think about the dynamic, not so much in operating leverage, but just about absolute cost levels and cost growth, and what levers are there to pull? How do you think about that as well? Thank you.

Sure. Maybe looking at Page 7 of the release, to kind of – it’s where I always go to just think about how things are kind of moving. If you look at that, first of all, you get a sense into your point, things have leveled off at 3%. I will say, in general, as you know, we went through a very full replan that stripped out, call it, around $50 million in expenses, just to be open about it. Some of that was predictable from the macro environment, but some of it wasn’t. We then went through a full capital investment replan. Finally, just this past week, we reviewed with our board a strategic replan. We’re taking this environment extremely seriously. The value for spend, we hit it. The $250 million target was reached, but the foundations of that are far from over. We’re talking about it all the time. It’s very much embedded culturally. And if you were here, I think you’d get a sense that the priorities here around first in this resiliency mode that Mike talked about, it’s safety to resilience and preparation in support of clients. The third, the expense discipline. You look at Page 7 of the release and it details the NIE and you can see how a lot of these line items have flattened out. Even comp, which is down a lot, you take out the equity incentives from the first quarter, offset by base pay adjustment, that line item flattening. Employee benefits, you see across the board, some leveling in these areas. All I can say is, at this point, just laser focus on it. Value for spend has not stopped, and we understand that in this environment, organic revenue growth is going to be hard. It’s – money in motion is less. There are less RFPs that are going to be tossed into the environment. We have to ensure we’re focusing laser-like on expenses.

Got it. Thanks.

We’ll go to the next to Mike Carrier with Bank of America.

Good morning. Thanks for taking the question. I mean just on the – given the COVID environment and the work from home, just trying to get some color on the impact that it’s having on client activity. Obviously, transactional activity is strong. But more in terms of new business, you mean if you’re seeing significant delays or the pipeline is still building and it’s just like kind of prolonged implementations. Just trying to get a sense of how much of the drag the environment is creating on the new business?

Sure. And maybe I’ll start with a couple of headlines and then it’d be really good to hear from Mike on this. Clearly, on – if I just split it on the wealth side, lost business is down. That’s really important to realize. Not that it was ever large, but it just reflects that everything we’ve done, engagement we’ve had with clients has cemented relationships. They’re doing weekly online client events called Insights. Goals-driven wealth management is great technology to engage with clients, a very customized approach in real-time, on video, and it’s going well. If I give just one anecdotal advice, I was talking to the head of our central region last night, and he was talking about this ultra-high net worth client that has a split relationship with us and one other institution. They had a session with him to explore how to take advantage of low market values and low interest rates. They worked a very complex but unique wealth transfer opportunity, with his kids and grandchildren. He executed it, he was thrilled. He’s consolidated his whole relationship with Northern because he feels like we’re the trusted adviser, and he wants us to have a better lens into this whole financial picture. On the C&IS side, we mentioned really early, even things like integrated trading solutions starting to come on board. Pete Cherecwich talked about 10 onboardings, 10 new wins just in that environment. Some good news there, but also some caution about what the future holds in terms of RFPs. Mike?

Sure. I would just add to it that if you start with a question of whether there’s still a need for the service and what we do and the demand for it, frankly, that’s not only there but in many respects, has gone up in this environment. There’s pressure on every company and institution that’s out there. So just as we talked about how can we become more efficient? How do we rethink our operating model? Our clients are doing the same thing and then often presents opportunities for us, primarily around things like outsourced services, whether it’s on the trading front or it’s in the middle office. The demand is there for the services. A static analysis would tell you that the environment changes, but the way that we or our clients and prospects go about things don’t change. The fact of the matter is people adapt. Everything we do at Northern, we used to do things in person and then maybe conference calls. Now, as you know, everything’s is on video. In the same way with the search process, the RFP process, and the due diligence process, these activities have moved online or in something like virtual so that they can continue. As much as it’s a different environment and it presents new challenges, I would say we’ve changed the prospect, and client base has changed. As a result, it’s just a different set of opportunities.

Okay. That’s helpful. And then just as a follow-up. Given your strong capital position and then some clarity on the restructure with the SCB. Once the macro backdrop does get better and the industry has more flexibility and clarity, how are you guys thinking about capital management, including maybe CET1 internal or management minimum or buffer? Maybe investing in new growth areas and capital return?

Sure. We always take our capital levels, not just as a single topic, but we think about it in conjunction with our overall engagement strategy, our approach to the market. We want to ensure that as we look across peers, that’s one lens to make sure we look good on that basis. We’re also thinking about the regulatory environment and the optics of what to do there. We have very meaningful engagement with our Board of Directors about what we should do from a capital perspective. This past several months just give an indication that coming into an environment like what we experienced with strong capital levels, it helps us not just in the short run but provides really good illustration for clients and prospects of what a strong balance sheet means for us as we compete in the market.

Okay. Thank you all.

We’ll go next to Jim Mitchell with Seaport Global.

Good morning. Maybe just a quick follow-up on your thoughts on deposit trends so far in the quarter. I hear your sort of NII guide overall, but maybe you can help us more specifically on the balance sheet. It seems like deposits have been sticking, and how you think about the prospects for growth in a zero-rate environment.

Yes. First of all, on that, you’re right. Deposits are sticking. I don’t think I mentioned earlier, but even post close of the period, deposits are sticking at the same level. If you look at our balance sheet and add the interest-bearing deposits plus the DDA, you’d still see us somewhere in the $110 million range. $110 million to $120 million, we’re still actually at that level. That’s, in some ways, good news, and that drives the size of the balance sheet. That determines how we’re going to end the quarter at $151 billion. It has much less of an impact on NII and NIM. On the margin, as we have that incremental dollar coming in, it’s often going to go into IOER at the fed at 10 basis points or even if it’s in another currency, it’s going to go to a central bank deposit with not a lot on it. I keep coming back to encouraging people to look at and start to predict what’s going to happen with loan volume and rate. The info, the mini walk forward I went through earlier, is super dependent on rates being the way they are today. Everything we’re talking about is now. We were predicting a decline in LIBOR as we said 90 days ago. We’re assuming LIBOR is flat from here. If that happens, things have changed, but the deposits will absolutely impact the size of the balance sheet, much less of an impact on NIM and NII.

Okay. Makes sense. And then maybe just a question on wealth. I know that’s an area you guys have been targeting for accelerating organic growth. I think if you look at this quarter, the market impact, it was hard to kind of see a lot of organic growth there. I guess, maybe just give us an update on how that effort could kind of accelerate growth in wealth is working. Maybe it’s being slowed by COVID. That’s it, just curious.

We tend to look at organic growth on a year-over-year basis and much less on a quarter-to-quarter basis just because it’s such a tight time frame on close cycles that happen over a longer period of time. Secondly, to your point, within wealth, specifically, the theme I’d want you to take away is with the GFO businesses continuing to be the driver of growth there and the regions are growing less quickly. Over short periods of time, might even show areas of decline, nothing we’re worried about from a strategic perspective. GFO is certainly the area that’s continuing to grow more.

Okay. Thanks.

We’ll go next to Brian Bedell with Deutsche Bank.

All right, great. Thanks, good morning folks. A question on the net interest rates, so I appreciate that, Jason. Just one question on that for the loan yield repricing. I know they’ve mostly, I believe, repriced to one-month LIBOR predominantly and most of them repriced, I think, within a quarter. But if I recall, some you repriced with a lag of, I think, it’s three to four quarters. But if you could just talk about that and whether we could see some repricing down the road based on that, if that’s true?

In general, you think about that portfolio is about 70%, 75% floating against either 30-day LIBOR, 90-day LIBOR, or prime. You mentioned yield at the beginning, which is something I’m not sure I mentioned earlier, but I think it might be helpful because I would imagine you guys are going to try to predict – to dissect the balance sheet. Think about a yield in that component of the balance sheet very roughly around 200 basis points. As you think about the impact of converting, if we do have a decline in loans, think on that. If that has to be reinvested in IOER, think about that type of difference in yield.

Yes, that’s helpful. This is great.

That’s why this dynamic of looking at loan volume is so important because the conversion of $1 of loans to the alternative investment is significant. Yes. Well, I’ll do the – maybe I’ll do the expense side. Mark, maybe you can do the revenue side. But on the other operating expense side, we’ve got the supplemental comp there. We’ve got – when we have account servicing losses, that’s where that line item shows up. Business promotion, travel entertainment. Those are the big buckets I think about for other operating expense. Mark, do you want to do the other side?

Yes. Brian, this is Mark. One thing to keep in mind is in the first quarter, if we talk about other operating income, we had a negative drag from the seed investment’s mark-to-market that kind of came back this quarter. Similarly with the supplemental compensation plans that impact both income and expense, a negative last quarter because of the mark, a pretty significant positive this quarter. You can average, look at the first and second quarter on other operating income more as an average. But you do have other things like hedging and Visa-related things that happened there. Averages over time, and I think we – it holds true, you’re about in the mid-40s, now that the BOLI program that we put in place is at a full run rate as of the first quarter and continues that in the second quarter. If you stripped out the items we’ve called out over time and looked at the average, you’re probably closer to the mid-40s, which is actually close to what the year-to-date average for the other operating income would be as well.

And the seed capital positive, Mark, was how much in the quarter?

$8 million.

$8 million.

$8 million. And then just lastly, just on the outside services. I forgot to ask on that 1Q on that line item. Anything one-time in there? Or basically, from a run rate basis, I guess, given we had this drop from 1Q to 2Q?

I wouldn’t necessarily call out anything one-time. That line will move around. Certainly, there are some drags we have seen on the revenue side that are a little bit lagged, benefiting us on outside services to a certain extent this quarter. I don’t know that I would look at this quarter as a run rate. Jason, I don’t know if you would add anything to that. But nothing one-time necessarily to call out, but certainly, there were some things that went our way with the revenue-linked lines, data, third-party adviser fees.

Yes, nothing to add.

We go next to Brennan Hawken with UBS.

Good morning, thanks for taking the question. I actually just wanted to follow-up a little on that because the outside services expense line looked a little funky. It seems like what you’re saying is that the run rate, this is not the right run rate. We should instead look at the average of the past four quarters? And can you give a little bit more color on some of the drivers of the downside to the quarter? It said like third-party advisory fees, is that what you meant, Mark, when you said the lag effect as in there was a lag to the rally there?

Right, right. I mean, there’s a few things that we had – some of the market data costs that we had were down. Again, some of that ends up being timing, some of our data processing costs. We had – consulting expense was down during the quarter. It’s hard to – it was a pretty favorable quarter there. It’s just hard to pin down, that that’s the new run rate going forward because those will have some fluctuations to them, certainly consulting based on timing of engagements, etc.

Okay. And then when we’re thinking about investing services, investment services and the strength there, can you parse that out a little bit? Was that timing too? Or was there something more sustainable propping that?

You’re asking about the increase in investment management revenue in C&IS?

Yes.

Yes. This is an important dynamic. I think it really has added to the base of business. First of all, I hinted earlier, the treasury funds, but in that business, it’s not just that we’ve had flows in. The asset management business has done a lot over the last five years to position the business for growth in the liquidity front. Everything starts and ends with investment performance. Their investment performance has been in the top five over the last several months. Secondly, size. Clients there want to ensure that they’re investing in a fund that’s got large size to it. They don’t represent a high percentage, they feel better about the liquidity. The treasury fund size is $90 billion. They worked on cutoff times to ensure they are more competitive. They hired a dedicated distribution team. They launched a portal, and that’s up to almost $10 billion in assets, a decent amount of that is with Northern product. They reapproached the third-party portals to ensure when treasurers are looking at opportunities to park cash, we look very appealing. The increase that we’ve had there, the treasury and focusing a lot on the treasury fund because that’s where a lot of the growth has happened. Last quarter, it has been $39 billion to $40 billion in growth into those strategies, about $34 billion of it was on the institutional side. Those funds are 15 to 20 basis points, so very, very meaningful. The flip side to it is, those are part of that watch list that I referenced earlier that could be part of fee waivers. We’re trying to maintain humility about what that might look like. The good news is that the base of business there has increased significantly.

Okay. Thanks for predicting my follow-up about the fee waiver, so I appreciate that.

We’ll go next to Betsy Graseck with Morgan Stanley.

Good morning. Can you hear me? Okay. Thanks. I had two questions. First, on deposits. I think average deposits in the quarter was up somewhere in the teens, but end of the period was down. I know you just traditionally say, like typically say, don’t look at end of period. But wanted to understand how we should think about deposit growth over the next quarter, at least? If not, we’ll further out if we could talk about the drivers of what the deposit growth has been seem to be fading. So I would think it slows down, but would like to get your understanding of that.

Yes. You’re right. We were kind of in the teens, in the one teens and it’s held in there and we watch it on a daily basis, and we’re still seeing deposits at around that level. We are still anticipating that over time, our clients will look to put some of that money to work in more risk-on trades. As I mentioned, I’ll come back to what I mentioned earlier that it is important to watch, to the extent you’re trying to predict the size of the balance sheet, those deposits, particularly that layer that we think is not necessarily as sticky. It doesn’t have as much of an impact on NII or NIM.

And what percentage of the deposits, is that, in your opinion, that’s not as sticky?

That’s really hard to tell. I mean it’s – if you go back to maybe the beginning of the year and we saw client deposits in the mid-$80-some billions. An absolute worst-case scenario, you could take the delta there, but a lot of our clients are clearly exhibiting more stability and stickiness at least thus far.

Yes. Because the stickier, the more operational, you can take duration with that. So I guess I’m wondering how much of the deposit inflow that you’ve gotten over the past quarter or so has been deemed operational and put into duration versus over the next quarter or two? Would there be incremental opportunity to extend duration with deposits if they stick around more than expected?

Some of that determination of whether they’re operational or not is actually a time test. We talk about those deposits having to season. We can’t make a prediction or determination absent just time. But you’re right, at a point, we can start to lag out on those or go into non-HQLA and think about term and credit and achieve more at that point. We did talk on the last call about the fact that we want to be patient about doing that to ensure we weren’t in a situation where we couldn’t be there for clients, particularly if loan demand increased significantly.

And what kind of time test is it? Like is it three months? Six months? Is that something you can share with us?

It depends on – it’s different tests. The test is different if it’s a retail deposit versus if it’s institutional. And we talk about it quite a bit.

Yes. So there’s a range depending on which type?

Yes.

But should my takeaway be there is opportunity to extend duration if deposits meet the time test as we go into 3Q and 4Q?

Yes, there’s opportunity there. I certainly wouldn’t think about it as the $110 million minus $85 million, that volume level. There would be some opportunity to identify situations where we would want to extend more.

And then just my other follow-up question is regarding just agency RMBS. When I think about the securities book and where spreads could compress further, agency RMBS kind of goes to the top of the list because we recently got to, I think, historically it was in the mortgage rates. So I’m wondering what – how much did agency RMBS yields compression impact your second quarter results? How much do you think it is contributing to the outlook you have for third quarter NII decline? Just to get a sense of that would be helpful.

I’m not sure we’ve done that level of detail about the exposure and yield in that book. So I wouldn’t want to comment on it.

Yes.

Okay. All right. Thank you.

We’ll go next to Glenn Schorr with Evercore.

Thanks very much. Hello, there. I obviously hear loud and clear on your comments all around net interest income, little loan demand, and low yields in the public markets. But – and you’re not alone there, but many investors, whether you be pension funds or wealth funds, insurance companies, they’ve looked to the private credit markets for a source of yield. You might have to give up some liquidity, but not necessarily taking on worse credit. You’re probably the most conservative management team I’ve ever met, but curious if you’d put thought into the private credit markets.

Yes. We look at a very broad range of asset classes that we consider for investment. At this point, there’s such a focus on ensuring that we are there for clients. We’re not just – we’re not taking incremental risk because the yield curve has come down. I think that’s the prevailing theme, as we said and think from an investment strategy perspective. That said, we’re constantly thinking about risk and return and also the categorization of the different asset classes and whether they’re HQLA, non-HQLA, Level 1, 2 and trying to come up with a mosaic of thinking about and evaluating those opportunities on a risk and regulatory adjusted basis. But at this point, we want to make sure we’re not looking to grab yield just because the yield curve has come down.

Okay. Just a quick follow-up. You mentioned the growth in tech lending, and we could see that still up year-on-year, quarter-on-quarter. You mentioned spreads as being a big impact. Some of the spreads there have come in. Can you talk maybe about an exit rate or forward thought on tech lending for both spreads and volumes as we look forward from the second quarter?

Yes. I mean it’s interesting. You’re right, at the beginning of the quarter, the spreads were much wider. Frankly, volumes weren’t great. As we got later in the quarter, the spread started to thin, but volume came back, I think, as clients felt more comfortable. It’s a tricky dynamic to triangulate, and I think the volumes and the spreads are actually correlated. It’s hard to give a sense right now of where that ends up landing. Mark, I don’t know if you have other thoughts on it.

One thing you can look at is the three-month LIBOR versus overnight. If you plotted that out, you would certainly see that, like we’ve been saying earlier in the quarter, particularly early April was a significant benefit there. We’re exiting the quarter at a much tighter spread there.

Our view is LIBOR, really since May and June, both 30 and 90-day LIBOR has flattened out.

Okay. Thank you for all that.

We’ll go next to Rob Wildhack with Autonomous Research.

Good morning, guys. A little bit more of a big picture question. I think back to the fourth-quarter earnings call when you talked about a demand for increased scalability from some of your larger clients. I was hoping you could give us an update on your efforts there and what you’ve done and are doing to kind of meet that demand.

Sure. It’s Mike. I’ll take that. Absolutely, a critical objective for our business, I’ll say, overall, but particularly within asset servicing. We are battling out every day to make sure we can provide continuity of service for our clients. As Jason and Mark have gone through here and try to navigate the financial environment. At the same time, we are looking forward two, three, four, five years ahead with the business model, trying to determine how can we not only take care of clients and what their needs are. But build in more productivity into the business model. The investments have been in what we’re calling Matrix, our Matrix platform, which essentially is a data-driven architecture that takes all of the data in through one place, if you will, and ensures that that is clean, accurate data. From there, we’re able to utilize it in multiple platforms for multiple services. It also shifts the service model to one that right now requires a fair number of employees to provide that service to a model where there’s more either automation and how things happen and how they’re processed. We’re pretty optimistic on that. We have rolled out two releases over the last several months here despite the environment, so that continues to progress.

Thanks, Mike. Just quickly, the integration you announced with BlackRock and Aladdin, would you bucket that as part of that scalability goal? And then I know it’s early, but any sense for how clients are responding to the partnership so far?

Yes. Broadly speaking, I absolutely would put that in the same – it’s part of the same strategy because what we’re doing with BlackRock in that case is further integration with the Aladdin provider. In which case, by being more directly connected, it provides greater efficiency. What’s happening between our platforms, if you will, in Aladdin is directly linked, in which case, you get the same types of benefits I just talked about there.

Great. Thank you.

We go next to Vivek Juneja with JPMorgan.

Thanks for taking my question. A quick one, which is just an update on the Northern Trust open. Given the environment, should we expect a similar kind of increase as you’ve guided to in the past? Any color on that? And then I have a bigger picture question.

Headlines won’t see a significant decline relative to prior years. Typically, we see $16 million, $17 million sequential increase in business promo as we look into the quarter, a few thoughts on it. One, the tournament is going to be players only, as you know. We don’t give any specific cost about the tournament, but people should know most is the costs associated with the tournament are about television and the expenses related to tournament production, and those actually aren’t going to come down significantly. There will be modest savings as we think about reduction in travel and entertainment and some other things, but the reduction won’t be meaningful.

Okay. Shifting gears to a bigger picture question. As I look at over the last year, and if you look forward, if you think about your mix of asset servicing clients, what does that look like by type of client? Pension fund versus long-only versus insurance versus hedge funds and what levels? What does that mix? What is the change you’ve seen over the past year or two? What do you expect to see?

I’ll take it without a specific breakdown with the numbers and percentages of our client base because I don’t have it in front of me. Generally speaking, over the last several years, that would continue through last year. The proportion of our business that is coming from asset managers as opposed to asset owners has gone up. That’s been a combination of just the business strategy over time but also because the demands of asset managers for our types of services have been growing at a higher rate from a market perspective. We’re taking share as we continue to expand that business, both geographically and within particular segments. Geographically, if you think about what we did in Luxembourg and Switzerland, that primarily is going to drive business with asset managers. The asset owner side and subsegments within that vary with what’s happening across the globe, just broader macro factors.

Mike, any plans to break this kind of data out at least once a year in the 10-K or something to give us a sense of where you’re growing, etc.? And provide a little more granularity?

That’s definitely something we can take on to consider because, obviously, it’s something that we track closely, thus we can do it in a reliable way. It’s something we’ll consider.

Okay. Thank you.

We go next to Brian Bedell with Deutsche Bank.

Thanks for taking the follow-up. Just wanted to come back to expenses in the second half. Some of those were answered with the hope open. But typically, we do see that seasonal increase in the second half in outside services and certainly, equipment and software expense. I just wanted to check in and see if you still think that’s the case? Obviously, with the COVID environment, that could be fluid this time around. But I just wanted to sort of check in on that, especially since we saw the downtick in outside services in the second quarter.

A couple of things: one, you’re right in that there are some bounciness. On one hand, there’s COVID-related expenses that are impacting things a lot. We’ve got investments to make there. Some of that will come through in capital, but some of it will come through the income statement as we spent decently at this point and continuing to ensure that in a resiliency mode, we’re doing everything we can to make sure we’re there for clients. The traditional view of expense ramps looks less reliable. It’s much more about what do we think is necessary to ensure resiliency and our strategy of being there for clients.

Okay. That’s good color. And then just lastly, just on the provisioning. And thanks for the all the color on that. You talked about some internal downgrades across the book. If we do have a situation where there’s a second wave of COVID-19, that’s – hopefully not, but worse than people are expecting, is that a significant part of your credit assessment, even if you think the credit qualities are relatively good, but nevertheless could drive higher provisioning in the second half?

We run multiple macro scenarios, and some of those scenarios will incorporate that type of worsening, a W type as opposed to a V. As things approach, we play with the weights of those factors, and that has heavy influence on what the output is, and so we monitor that closely. If things worsen significantly, just like what we experienced last quarter, things worsened from the end of March to the beginning of April. This time, we haven’t seen that type of dynamic shift between the end of the quarter and the time we’re talking to you. But there’s so much time between now and then. We’re reliant on what those macro forecasts look like, and they’ll always influence what provision looks like.

Okay, great. Thanks for the all color. I appreciate it.

And at this time, there are no further questions.

Thanks, everyone. Stay safe, and we look forward to talking to you about the third quarter.

This does conclude today’s conference. We thank you for your participation.