Good day, everyone and thanks for standing by. Welcome to today's Northern Trust's Third Quarter 2020 Earnings Call. A quick reminder that today's program is being recorded. And at this time, I'd like to turn the floor over to Mr. Mark Bette, Director of Investor Relations. Please go ahead, sir.

Thank you, Greg. Good morning, everyone and welcome to Northern Trust Corporation's third quarter 2020 earnings conference call. Joining me on our call this morning are Mike O’Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Kelly Lernihan, from our Investor Relations team. Our third quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This October 21 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 18. 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. During today's question-and-answer session please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O’Grady.

Thank you, Mark. Let me join and welcome you to our third quarter 2020 earnings call. Amid the ongoing public health crisis, I hope you and your families are healthy and well. At Northern Trust, we continue to operate in what we call resiliency mode, which means we're focused on providing our clients continuity of service, while over 90% of our employees worldwide are working remotely. In this environment, we have adapted to a new normal as to how we serve and communicate with our clients. Though challenging, the transition across each of our businesses has been effective. Within Wealth Management, earlier this year we introduced the Northern Trust Institute, the embodiment of the intellectual capital of our Wealth Management business drawn from our experience serving the most affluent individuals and families in the world. It combines and integrates the best thinking of our firm across 34 practices, including areas such as investments, fiduciary, banking, planning, family business, philanthropy and governance. We have also published a number of insights and research pieces covering timely topics in the current environment, including family governance, philanthropy, commercial real estate, investing and the upcoming U.S. election. Lastly, we've been very encouraged by the client and prospect participation in our digital Navigate the Now campaign, which is driving more engagement. Our asset management business is seeing considerable market share gains during 2020 within our liquidity products, which have strategically been positioned over time. We've also experienced recent success in our active and index fixed income and tax-advantaged equity products. We manage nearly $100 billion in assets globally under ESG mandates where our strong capabilities position us for future growth in this space. Within asset servicing, as we've mentioned previously, we did see a deferral in implementation activity from the end of the first quarter and into the most recent quarter. However, the pipeline is strong and opportunities have increased as clients and prospects have adapted and become more comfortable operating in the current virtual environment. Recent notable public wins include Treehouse Capital Management and Federated Mutual Insurance Company in the U.S., Marks & Spencer Pension Trust in the UK, Hannover Re, a European-based insurer, and Azimut Limited for its funds in the Middle East. We continually develop our solution-based services to support the needs of our clients with two recent examples being enhancements to our ESG analytics capabilities to support our clients' oversight, risk and exposures and the launch of dynamic valuation and reporting tools for asset owners using our innovative front office solutions product. We also continue to build our positioning in the outsourcing space most notably in outsourced foreign exchange and trade execution. Finally, we just recently published our latest corporate social responsibility report detailing our progress towards reducing our greenhouse gas emissions, enhancing our diversity, equity and inclusion strategy and launching client-focused ESG tools and investment vehicles, as I previously mentioned. As we move forward in the current and persistent low interest rate environment, we will accelerate our focus in two areas. First, we will continue to drive greater efficiencies with a focus on technology solutions to drive productivity gains. Second, from a growth perspective, we're focused on doing more with our existing client base and also bringing on new clients to allow us to continue to grow organically in a scalable profitable manner. Finally, I want to express my sincere appreciation for our staff, whose commitment, expertise and professionalism throughout these extraordinary times has been exceptional. Now, let me turn the call to Jason to review our financial results for the quarter.

Thank you, Mike. Let me join Mark and Mike in welcoming you to our third quarter 2020 earnings call. Before I start I would 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. Now let's dive into the financial results for the quarter starting on Page 2. This morning we reported third quarter net income of $294.5 million. Earnings per share were $1.32 a share and our return on average common equity was 10.5%. The quarter included a $43.4 million pretax charge related to a corporate action processing error. The issue was identified internally by our corporate actions team and to put the impacted clients in the same position as they would have been if the error had not occurred, we executed open market transactions which resulted in the loss. You can see on the bottom of Page 2 equity markets, particularly domestic U.S. 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 both the S&P 500 and EFA local had strong sequential performance based on those calculations. It's worth noting that on a year-over-year basis the EFA local index remains negative which creates an unfavorable impact to our fees compared to the prior year. As shown on this page average one-month and three-month LIBOR rates continued to decline during the quarter. Let's move on to Page 3 and review the financial highlights of the third quarter. Year-over-year revenue was down 3% with non-interest income up 3% and net interest income down 21%. Expenses increased 6%. The provision for credit losses was $500,000 in the current quarter. Net income was down 23%. In a sequential comparison revenue declined 1% with non-interest income up 2% and net interest income down 11.4%. Expenses increased 6% and net income declined 6%. Return on average common equity was 10.5% for the quarter down from 14.9% a year ago and 12.2% in the prior quarter. Assets under custody and administration were $13.1 trillion, grew 13% from a year ago and increased 8% on a sequential basis. Assets under custody were $10.1 trillion, grew 16% from a year ago and increased 9% on a sequential basis. Assets under management were $1.3 trillion, up 9% from a year ago and up 4% on a sequential basis. Let's look at the results in greater detail starting with revenue on Page 4. Third quarter revenue on a fully taxable equivalent basis was $1.5 billion down 3% compared to last year and down 1% sequentially. Trust investment and other servicing fees representing the largest component of our revenue totaled $1 billion and were up 3% from last year and 4% sequentially. Foreign exchange trading income was $62 million in the quarter up 3% year-over-year and down 14% sequentially. The increase compared to a year ago was primarily driven by higher volatility while the sequential decline was impacted by lower volumes and lower volatility. The remaining components of non-interest income totaled $91 million in the quarter up 7% compared to one year ago and down 10% sequentially. Securities commissions and trading income decreased 10% compared to a year ago and was down 22% sequentially. Both year-over-year and sequential declines were primarily due to lower interest rate swap activity and with royalties. Other operating income increased 19% compared to the prior year and was down 5% sequentially. The increase compared to the prior year was driven by higher income related to a bank-owned life insurance program, as well as higher miscellaneous income primarily associated with the market value increase in the supplemental compensation plan. This higher income resulted in a related increase within the other operating expenses. The sequential performance was impacted by a lower market value adjustment for seed capital investment relative to the prior quarter partially offset by lower Visa swap expense. Net interest income which I'll discuss in more detail later was $336 million in the third quarter down 21% from a year ago and down 11.4% sequentially. Let's look at components of our trust and investment fees on Page 5. For our corporate and institutional services business fees totaled $585 million in the third quarter and were up 4% year-over-year and up 3% sequentially. Custody and fund administration fees, the largest component of C&IS fees, were $395 million and up 1% year-over-year and up 5% on a sequential basis. The year-over-year performance was primarily driven by favorable currency translation and new business partially offset by unfavorable markets. The sequential increase was primarily driven by favorable currency translation as well as favorable markets. Assets under custody and administration for C&IS clients were $12.3 trillion at quarter end up 13% year-over-year and up 8% sequentially. Both the year-over-year and sequential increases were attributable to new business, favorable markets and favorable currency translation. Investment management fees in C&IS of $137 million in the third quarter were up 19% year-over-year and up 7% sequentially. The year-over-year growth was primarily driven by strong flows within our money market funds. The sequential increase is primarily driven by the impact of favorable markets. This quarter's results included $0.9 million in money market fund fee waivers within our C&IS investment management fees. Assets under management for C&IS were $993 billion, up 10% year-over-year and up 4% sequentially. The growth from the prior year was driven by favorable markets, client flows and favorable currency translation. The sequential growth was driven by favorable markets and currency translation. Securities lending fees were $20 million in the quarter, down 2% year-over-year and down 28% sequentially. The year-over-year decline was primarily driven by lower spreads and lower volumes, while the sequential decline was primarily driven by lower spreads. Average collateral levels declined 5% year-over-year, but were up 1% sequentially. Moving to our Wealth Management business. Trust, investment and other servicing fees were $419 million in the third quarter and were up 1% compared to the prior year and up 6% sequentially. Both the year-over-year and sequential performance were impacted by favorable markets, partially offset by money market fund fee waivers. Within our Wealth Management business fee waivers totaled $4.4 million in the quarter. Assets under management for our Wealth Management clients were $319 billion at quarter end, up 6% year-over-year and up 5% sequentially. The year-over-year growth was driven by favorable markets and net flows while the sequential increase was primarily driven by favorable markets. Moving to Page 6. Net interest income was $336 million in the third quarter, and was down 21% from the prior year. Earning assets averaged $129 billion in the quarter, up 23% versus the prior year. Average deposits were $113 billion, and were up 27% versus the prior year. The net interest margin was 1.03% in the quarter, and was down 58 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 11.4%. Average earning assets increased 3% on a sequential basis while average deposits were up 2%. The net interest margin declined 19 basis points, primarily due to declining asset yields as securities and loans re-priced to lower interest rates. Turning to Page 7. Expenses were $1.1 billion in the third quarter, and were 6% higher than both the prior year and prior quarter. Expense during the quarter included the previously mentioned $43.4 million charge. Excluding the charge, expenses were up 1% on both a year-over-year and sequential basis. Compensation expense totaled $462 million and was up 1% compared to one year ago and flat sequentially. The year-over-year growth was driven by higher salary expense due to staff growth, base pay adjustments and unfavorable currency translation, partially offset by lower incentives. On a sequential basis, higher salaries driven by unfavorable currency translation and staff growth were mostly offset by lower incentives. Employee benefits of $97 million was up 11% from one year ago and up 8% sequentially. The year-over-year increase was primarily related to higher pension expense. The sequential increase was primarily driven by higher medical costs. Outside services expense of $186 million was down 4% on a year-over-year basis and up 5% sequentially. The year-over-year decline was driven by lower costs across a number of categories, including technical services, consulting, third-party advisory fees and data processing, partially offset by higher sub-custody expense and brokerage clearing costs. The sequential increase was due to higher technical services cost, third-party advisory fees, consulting and sub-custody related cost. Equipment and software expense of $171 million was up 13% from a year ago and up 4% sequentially. The year-over-year growth reflected higher depreciation and amortization as well as software support costs. The sequential increase was driven by increases in software support and equipment maintenance costs. Occupancy expense of $52 million decreased 2% from one year ago and was down 14% sequentially. Both declines were related to lower costs associated with executing workplace real estate strategies. Other operating expense of $127 million was up 38% from one year ago and up 48% sequentially. Results for the quarter included the previously mentioned $43.4 million charge. Excluding the charge the category declined 9% compared to one year ago and was down 3% sequentially. The year-over-year comparison was impacted by lower expense related to business travel, partially offset by higher mutual fund co-administration fees as well as higher costs associated with supplemental compensation plan expense within staff-related expense. The sequential comparison is impacted by higher costs associated with the Northern Trust sponsored golf tournament, offset by lower other miscellaneous expenses within the category. 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% under the advanced approach. Both unchanged from the prior quarter. Our Tier 1 leverage ratio was 7.7% under both the standardized and advanced approaches. During the third quarter, we declared cash dividends of $0.70 per share, totaling $148 million to common stockholders. And it's times like these that show the importance of the 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've 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 third quarter earnings conference call today. Mike, Mark, Lauren and I would be happy to answer your questions.

And first from Jefferies, we have Ken Usdin.

Thanks. Hey, thanks. Good morning, guys. Just want to follow up on the whole side of rates. So good news that NII was down better than the original guide. And I was just wondering if you can update us on what your thoughts are as far as the outlook for NII? And at what point do you expect NII to get close to just flattening out? Is that sometime early in 2021? Or how can you help us think through that? Thank you.

Yes. First of all I think it's important for people to realize that there are components of the securities portfolio that are longer dated. And there are securities we bought in 2017, 2018, 2019 that aren't going to mature for another two, three, four, five years. And so it's going to take a long time to get this whole portfolio repriced. That said, at this point 75% of overall earning assets have been repriced on the new yield curve. And if you break it down even a little bit further, you can see that effectively all of the floating rate assets have been repriced, 80% of the loan book has been repriced and about 50% of the securities book has been repriced. And so I think the best way to think about it from what you can see is that from here about 1% to 2% of the overall earning asset base is going to reprice every quarter. And so we've gotten through most of it. And if you think about how aggressively we had to get through going from the first quarter where everything was on the prior book, to then in the second quarter, and now this third quarter movement we've got the vast majority of it done. That's why we think the flattening is at that point now. It's just trickles from here, but it's not going to be 100% flat for a long time as those longer-dated securities play through.

Okay. And I guess just relative to your prior comments I just want to give you the opportunity to just level set us on what your expectation would be for 4Q NII versus third Q?

Yes. The way we look at it now and it comes back to that dynamic of about 2% repricing, you could say it's going to be down 2% give or take a point. And I think that's what you should expect from the math at this point. That said, now that we're at the point where so much of the book has been repriced, the movement in NII from here is going to be driven more by what happens in the business and more by what happens in loans and what happens in the deposit book and how that stays on. And frankly, our confidence level in reinvesting that into not just cash at central banks went into higher-yielding assets. And so from here, it's going to be much more business driven.

Okay. Thanks, Jason.

Thanks, Ken.

And next from Evercore, we have Glenn Schorr.

Thanks. So definitely not the norm for you guys, but I think everyone has a little bit higher sensitivity to issues. So I was going to ask just for a little more color on the corporate action item, was this a manual issue? What have you done to rectify? And have there been MRAs outstanding related to this? I think some of the Q&A back and forth pre-call was about that such that you may just address it? Thanks.

Sure. I appreciate it. So first of all I just want to provide a little bit of context on this group for people that don't know it well, and how an item like this occurs. I think it's important to understand with $13 trillion in assets under custody or administration, the securities services group is processing literally millions of transactions a year. We've got errors in the group on a consistent basis and they total somewhere between $5 million, $10 million a quarter on average. That's typically what we experienced there. And they're accounted for consistently in the other operating expense line on the income statement that you see. And so, the event itself is not unusual, it's the dollar amount. And if we focus on that a little bit, we think over the last 10 years we've actually never had a loss cumulatively in a quarter to even get to $20 million. And if you look back even on the years we've never had a full year that amounts to this level of a loss. Interestingly, this quarter in and of itself from a volume perspective of losses, it was light. And even, the other items added up to a less than normal level, it was at the bottom end of that kind of $5 million to $10 million range. And so then if you ask, what have we done you can imagine the first thing we do is unpack the situation. Once we're confident that there's been a mistake, we did everything we needed to do in order to make our clients whole. We did that. And then at that point, we look at the processes, identify ways to improve even processes we felt strongly about, but we identified ways to strengthen them. We put those in place. And at this point, we move on. From an MRA perspective, we wouldn't be able to talk about that at this point, if it were even surfaced. But obviously, we took this very seriously. This is not — I think it's important to note, this isn’t out of the normal course of servicing $13 trillion in assets in terms of the event. It was really the fact that we had a very large exposure within it that was unusual.

Okay. Cool. Maybe, I do a follow-up on some related to the balance sheet. Jason the other securities line is up 30% year-on-year and it's almost the biggest part of earning assets now. The footnote talks about community development investments. But could you just expand a little bit more on that, because it's such a larger part and it's growing more? What benefit you get from that? What kind of yield pickup? And should we expect to see more of that? Thanks so much.

Sure. So in general the treasury group is always looking for opportunities to lean out a little bit from just cash and we feel confident. And there'll be types of investments that are short-term, where it's not cash, but it's other items where we pick up a little bit of yield. So it could be short-term T-bills, it could be other short-term instruments where we pick up a little bit of yield, without taking too much incremental exposure. And so they've been looking at that in different ways. And part of it, I think we talked last time about the fact that part of this NII journey is going to be not just the size of the balance sheet, but when we felt confident that we could step out of central banks, and so as the treasury group is looking to do that, they're looking for not just these traditional two-year, three-year, four-year securities or mortgage backs, but other items that can stay short, but still pick up a little bit in yield. And so that's not necessarily something you should see as a longer term trend. It's something that as we did this initial step out, we saw opportunity.

Great. Thanks so much. Appreciate it.

Next question will come from Alex Blostein with Goldman Sachs.

Hey, guys. Thanks. Good morning. So maybe just a quick clarification on NII first. So, I hear you on the kind of 1% to 2% decline in NIR from here as the securities book reprices. Does that include any mitigation efforts to offset the roll-off roll-on dynamics? Or that's really kind of like a gross number? And then there are things you could do to help mitigate the remaining pressure albeit it's obviously some in small, which could get you to more of a kind of flattish NIR from here?

The answer is it's very much just looking organically at the amount that's in the book. So that doesn't include any other strategic items. That's just the math of what's rolling off from here. That said, I do want to caution people even though net interest income is down significantly obviously, we're not going to be looking to have dramatic changes in our strategy, or our risk profile to think about offsetting the decline in rates. And so we're constantly thinking about optimizing the investment book, and we continue to do that. No change in our risk appetite at all. But the 1% to 2% a quarter is very much just the math of what exists in the book right now, absent any other things that we would be doing. So you shouldn't be thinking that's exactly what's going to happen over time. There are other things we're thinking about in terms of the securities portfolio, other things we can do with the balance sheet, but those were things we were contemplating before rates came down frankly.

Got it. That's very clear. Thanks for that. My bigger picture question kind of revolves around fees. And this has obviously been a pretty volatile year with respect to both markets and new business and volumes et cetera. Maybe help us level set what has been the organic fee growth in the business, maybe kind of over the last 12 months, given your comments around strong pipeline and sort of the building momentum in C&IS, maybe help frame what that kind of organic fee growth could look like over the next 12 months? And then specifically, I was hoping you guys could also hit on the multi-family office business. That revenue has been kind of flat for the last four quarters, despite a pretty significant growth in assets. I know there's a little bit of lag there, but still feels like the fees are lagging the asset base. So kind of bigger picture question, but if you guys could hit on all of that that will be awesome. Thanks.

Sure. So if I start on C&IS, I think we separated into two different buckets there interestingly. One is that there has been significant growth that's come in the investment management fee line. And that's come from very good collaboration between the asset management business and C&IS. And a lot of work we did in the last couple of years, setting up the liquidity business to be able to take on assets. So I'm going to do this at the corporate level, but a lot of these assets apply to C&IS. If you go back to last year to the beginning of this year, the liquidity business had $215 billion in AUM. And now we're close to $285 billion, $290 billion, very significant growth bigger than what's happened in the industry. And so that's led to good organic growth in the business, as a result of good collaboration. Again not 100% of that is in the C&IS business, but the vast majority of it is. The other aspects of C&IS as you get to the traditional custody and other asset servicing type activities, interestingly the organic growth this quarter was not great. It was positive, but it wasn't great. They do feel stronger about the pipeline that they have in the non-funded business. And part of that is a result of the fact that there were a lot of prospects that we won that delayed implementation partially because of COVID, but still very high confidence level that's going to be onboarded in fourth quarter or first quarter. And so we see good opportunity set to bring on that business in the next couple of quarters. That said, the growth in the money market mutual fund business, it's been great. But it has flattened out at this point. And so it's good diversification in the business to sometimes get growth coming from the investment management side and sometimes from the other.

This is Mike. I think importantly longer term, we continue to see the opportunity to grow at a higher organic growth rate. Having said that, as we've always said, it's critical that that's profitable growth for us. And so that we're doing it in a way that is coming with operating leverage and fee operating leverage. Now with the change in the rate environment that dramatically impacts your ability in the short-term to get the operating leverage. And so as a result, it focuses us on ensuring that that growth does not come with the requirement for significant resources. So we're looking at the expense side of the equation and just making sure we keep those in line in this type of environment. And that the growth is high quality scalable growth for us. On the asset servicing side, and Jason mentioned asset management, just to close off on wealth management, again, as you mentioned, this has been an unusual year. And so we've had to shift our sales and new business strategy as a result. I would say that I'm very optimistic on the long-term prospects for that. But it has in this interim period caused some additional volatility in the normal sales pattern that we would have. So long-term very positive, but to your point, there's some bumpiness that we've had this year that we haven't had in previous years.

Alex, this is Mark. And I could comment on the GFO asset growth. I think you're seeing the growth step-up in the second quarter. Can't get into a lot of the specifics there but that type of client, that type of segment for us, both clients can move pretty large concentrated asset holdings onto our custody platform. And that's what the majority of the increase was in the second quarter. There's not necessarily a corresponding noticeable increase in fees with that, just because of the nature of the holding—single holding that we might be having on our platform for those clients.

Great. Thanks everybody for tackling and hold that. Thanks.

Next up from Morgan Stanley, we have Betsy Graseck.

Hi, good morning. I had a couple of questions. On the capital ratios, I know you typically sit with a pretty nice cushion above your regulatory minimums and above what your management buffers might add to it. Obviously in this period with no buybacks that some capital ratio is improving even further. Could you give us a sense as to how you're thinking about utilizing that excess capital in the event that the cessation on buybacks continues? Is there anything that you might want to discuss about how you could be using that capital outside of buybacks? We've seen some acquisitions in the space recently on the asset management side. And wanted to get your sense on that if there's anything to do there? That's the first part of the question. Thanks.

I'm going to start with four components to how we think about deploying capital. The first is we have very good discussions with our Board about it. We're completely aligned and we want to make sure we're not being presumptuous in saying where we want capital levels to be without those conversations. Secondly, we think about capital on an absolute basis; we want to have good cushion relative to where we need to be from a regulatory perspective. Third, we look closely out the side view mirror and on a relative basis. When we talk to clients and prospects they care and it's part of our overall value proposition that we've got strong capital levels and we have to be able to evidence that on a relative basis. The fourth, and instructive given the fact that the stock price has come down, is thinking about things on a returns basis. We think about that deployment of capital not just do we take capital up or down, but what types of returns are we getting for it? We have to compare what returns we get by investing in our own stock effectively, which has to do with price-to-book and trading. Secondly, what opportunities do we have to reinvest organically in the business. Third, what examples there are where we can invest non-organically outside. We're very open, particularly in the wealth management space where it is difficult to have organic growth. We feel very strong about the franchise and our ability to maintain a high-quality client base if we were to bring that in.

So when you're talking about wealth management you're talking about teams, firms, portfolios, is there any nuance to that?

Yes. The teams approach is harder. Those tend to be culturally inconsistent for us to acquire. I think firms where you've got more of a sense of scale that's been there, but they're maybe not at the scale that we are and we can bring that in. We think about our different groups almost as large teams and the offices we have. The $320 billion in assets you split that between the offices we have. You have teams of $1 billion, $2 billion, $3 billion. Something of that size or up to $8 billion is kind of a couple of teams from our lens. Extracting a team out of another firm is not something we intend to do. We think more about an established organization with a client base and leadership that hasn't developed succession plan in place or they think it might be better to go to the infrastructure of a larger organization. We can be a good solution for firms that don't have succession planning in place.

Okay. And what I'm hearing in your answer is wealth management over asset management. Is that fair?

There are opportunities in asset management as well. It's a bit more nuanced. We've done some small things quietly that are consistent with our strategic desire to do more intermediary distribution. We look closely at those as well. The distinction might be a higher bar right now to do something in size at the asset servicing side of the business.

Got it. And then what if the Fed does lift the restrictions on buybacks maybe you could give us a sense as to how you're thinking about how you would manage the capital in that scenario in terms of the pace that you might start buybacks back up at? And how quickly you want to get back down to the capital ratios that you think are most efficient for your business model?

Betsy, Jason laid out the framework. Prior to the pandemic, we were repurchasing our shares. It depends on the broader environment that we would lay over with the regulatory constraints. I would hope that to the extent the Fed removes the restrictions that's also an indication that the environment is relatively favorable, which will put us back in a position similar to the beginning of the year where we were both able to and were repurchasing our stock.

Okay, got it. Thank you.

Next question will come from Mike Carrier with Bank of America.

Good morning. Thanks for taking the question. First, you guys have been focused on both investing in the business, but also doing a good job on driving efficiencies and marketing leverage. The longer we're operating in this work from home backdrop. I'm just curious if you find additional areas of potential efficiencies whether it's in area out of real estate or other areas that could drive that longer term?

This environment has made everybody take a step back and think about that. We have. There are things that we're accelerating. I mentioned in the opening comments that we're on a real estate strategy journey right now. We looked deeply at that just a couple of months ago in the midst of this to say how does the health care crisis influence that strategy. There are elements that it accelerates and consolidations we were thinking about that we can do faster. And there are other things we were not considering before that this situation makes us consider. A year ago I did not know how many square feet we had off the top of my head and now I do. I know where they are and how much we're paying per foot. We're talking about that a lot to think about what real estate looks like in the future not just domestically but internationally. There are many creative things we can do to be more efficient and leverage the technology we've invested in to decrease reliance on square footage, and that also leads to areas about resiliency with our workforce overall. We've had to make them more technologically equipped and that adds flexibility. We're thinking creatively about resiliency centers and other things.

Okay. Helpful. And then Jason, you mentioned in the past, the loan demand will be a key driver to NII going forward and we've seen fairly divergent trends across the industry. It's still fairly weak new loan demand, but pockets of strength within the wealth area. So just wanted to get an update on your front in terms of the demand that you're seeing across the business?

It's interesting. You can't see it from the financial statements, but loans are actually picking up within September even. That surprised us. When you go back 90 days ago we thought liquidity would come down, deposits would come down, loans would come down. But our balance sheet on average was up in the quarter. It's not just clients holding more deposits, but loans were held in. Some loan demand is coming from clients who want to be ready to do things if opportunities come up. It's unclear whether they'll actually pull the trigger. Liquidity in general is a big component of what we do with our clients, and they view our balance sheet as strong. Our money market mutual funds have strong investment performance and are large. Our treasury funds were $80 billion to $90 billion. There are appealing places for very large institutional investors to invest. Clients know we understand their asset composition and can be a thoughtful lender in structuring efficiently.

Thanks a lot.

Moving on from Deutsche Bank, we have Brian Bedell.

Great. Thank you very much. Just a couple of 4Q questions just to get this out of the way. Just if you could comment on the typical seasonality that we see an uptick in expenses that we typically see in the fourth quarter in conjunction with the Gulf Open, which added some expense in 3Q. And also the exit rate for money market fee waivers in September to get a sense of where we're running into for 4Q on that?

Mike do you want to take this?

Sure. There are components of expenses in fourth quarter that are not ideal run rates for some of them. Benefits for example, medical has gone up compared to second quarter. Medical in second quarter was about $17.5 million and went up to $26 million in third quarter. That's closer to a typical run rate but could still see some tweak up. Outside services is another area where we could see a step-up in fourth quarter. There's a lot of business volume related costs within that category that are likely to increase. Equipment and software costs are up year-to-date and likely close to where we're going to land for the full year. Occupancy will have volatility. We're going to make investments in occupancy to try to get our longer-term run rate down, so you'll see that line bounce around. In general, it's less about seasonality and more about undoing COVID-related influences on expenses and what investments we're going to make to decrease our run rate in the long run.

That's helpful. On the money market fee waivers trajectory at the end of 3Q?

This quarter we had $5 million in waivers. The $300 billion in money market mutual fund assets is relatively stable but rates are moving around a lot. As we sit today the run rate on a quarterly basis is about $11.5 million. The team thinks we could have waivers in the fourth quarter of $20 million to $25 million exiting the year, so as a launch point coming into 2021 could be $25 million to $35 million. To give perspective, at the beginning of this year when we had $215 billion in assets, the overall revenue run rate was much lower than what it is now. Now at $290 billion the run rate is over $400 million in revenue. We have waivers but from a much higher revenue base so it's a mixed story.

Okay. That's very helpful. And then Mike maybe on just ESG. You mentioned that at the outset, the ESG analytic service that you have served. But maybe if you could just talk about where you are in the growth path of that and are you rolling that out to all of your asset servicing clients? And how is the take up? And then also on the wealth management side, are you seeing more demand from your wealth clients for investing in ESG product that you have and the organic growth outlook in the investment management side for your ESG products?

ESG runs across the company and each of our businesses. We are seeing more demand from clients both institutional and on the wealth side including our GFO clients for ESG investment products and strategies. We've fulfilled those demands with ESG products from our asset management group; we have over $100 billion at this point under ESG mandates, but it's still early days for that trend and growth opportunity. Institutional clients, particularly asset owners, are being held to a higher standard on ESG and need analytics. We've rolled out capabilities, but it's early days as this is a long-term trend.

Great. That's super helpful. Thank you.

And next we have Vivek Juneja from JPMorgan.

I just want to follow up on the operating error. I know you've had those for years and I know you're aware of what's happened to others when the amount got much larger similar to their business. What do you plan to do to automate more of these processes so that you have fewer of these errors? Simply how do you talk about trying to do stuff where you need less reconciliation, less checking? Mike what do you need to do to step up to limit these and hope that something like this doesn't get even larger in the future?

As Jason mentioned this is the nature of our businesses and that part of the business is processing transactions for our clients broadly speaking. There are aspects that have been automated years ago. Where activities lend themselves to automation you get efficiency and risk reduction. That's the longer-term path we've been on. Other aspects don't lend themselves as much to automation because of idiosyncratic transactions. In this case corporate actions—certain aspects are straightforward and already automated, but other parts are difficult because of the lack of homogeneity. This area gets a lot of attention from a procedures and control perspective. While there have been errors in the past, it's been very well controlled. It's higher inherent risk but with procedures and controls that we've managed and mitigated. We continue to add workflow tools and automate more. We've been investing significantly for years to modernize technology in securities services. It's on a path and an incident like this draws attention, but it wasn't an area we've ignored; we've controlled it and tried to improve it.

Understood. Thanks. A quick one for Jason. The C&IS fees you mentioned year-on-year benefit from FX translation. Could you give us a number ex-FX translation?

About 2%.

Okay. So that 2% growth ex-FX translation?

Just to clarify, the custody and fund services line is where most of the currency impact would be and that impact was about a 2% benefit on a year-over-year basis. I should also add that this is the area where we saw the EFA local is down on a year-over-year basis. So that was actually a drag for that line; markets were, because that line as we've talked about before is probably two-to-one more based on EFA local than domestic indices are.

Okay, great. I did notice you mentioned that markets were down and I wonder which ones, I'm glad you clarified that one. Thank you.

Moving on we have Brennan Hawken with UBS.

Good morning. Thanks for taking my questions. Just actually following up on that line of question from Vivek. When we look at the trends in AUC/A growth in C&IS versus revenue, it looks like there was some fee rate pressure. Could you provide some color in helping us understand what might have caused some of those dynamics? Are those sustainable? What was behind that, just to help us inform our modeling and where to go from here?

More and more, there will be less connectivity between the asset level and revenue level. Negotiations increasingly include a holistic approach to the relationship including what we do with investment management, integrated trading solutions, how we're handling cash and treasury. It's frustrating to not be able to use a simple ratio to predict revenue. The business prices relationships holistically. Mark, do you want to add thoughts?

Part of it is fee structure. About 35% to 40% of those asset servicing fees in C&IS are not directly linked to assets. So in an environment where assets are rising, that factor alone would probably put the fees at a lower growth rate. More importantly, mix of business matters. Within asset servicing fee category, a very large domestic U.S. custody mandate may have much lower fee for large assets, while a fund administration mandate with less assets could have significantly higher fees. Mix is at play besides timing which we've talked about before—end-of-period versus earning over a quarter.

Okay. So were trends in the third quarter reasonably sustainable or was there noise that caused divergence to look wider, to help our modeling?

A couple of thoughts. There is some compression in fee levels as a secular trend, and we've honored pricing adjustments. But the more important influence is short-run timing dynamics. You can have flows into and out of the business reported at period end while revenue is based on prior period levels, which is misleading for short-term modeling. Large pieces of business may be at low fee rates while middle-market activity is higher. Business mix influences this but less on ultimate profitability.

Okay. Thanks for your patience with that one. My second question is around the processing error. Will this have impact on investment in the near-term or expense lines as you look to shift or invest in some automations, hire additional staff for that effort or is it more operational focus?

It's some of both. Operationally we scrubbed this incident and changed procedures and controls already. From a resource perspective it wasn't a question of insufficient resources causing the error. We will ensure resources are adequate. The incident doesn't change our investment plan, but it does influence prioritization. We have more investment opportunities than we can deploy in a year, so we prioritize productivity, risk management, and innovation and growth investments. Given the environment we must ensure operational resiliency and productivity improvements to drive scalable growth.

Great. Thank you.

Next from Seaport Global, we have Jim Mitchell.

Can you hear me? Sorry about that. Maybe just a follow-up on deposits. It seems like non-interest-bearing deposits for you grew nicely both on an average and period end basis where your peers saw declines. It seems like that helped you outperform on NII a little bit. So is there anything unusual in the non-interest-bearing side? Is that something you're trying to grow? Or is that just episodic puts and takes?

I'd put it in between. The reason we did better than we anticipated with NII was a little less around size of deposits and more around being able to turn on non-cash and loans held in better. We talk about liquidity a lot with our clients and they tend to view our balance sheet as very strong. We're happy to be a liquidity partner and that influences where clients park their short-term assets.

Okay. That's fair. And maybe for Mike, you mentioned it upfront that you're trying to do more with current clients. Any examples in terms of biggest opportunity set to do more with current clients?

Within the businesses there's opportunity, particularly with asset managers. Our approach is whole-office: not just back office or middle office but what we can do on the front office. For example, integrated trading solutions or outsourced trading for institutions—doing more for those clients by using our back- and middle-office strength in front-office services. Across businesses, if we have an administration client, can we provide wealth management to executives of that firm? If we service a corporate client's pension plans, can we provide wealth management for their executive group? It's cross-business opportunities where historically we've done well; we're being more purposeful and disciplined about it.

Okay. Great. Thanks for the thought.

Moving on, we'll take our next question from Steven Chubak with Wolfe Research.

Hi, good morning. I wanted to start off with a question on some of the NII comments. Specifically, I was hoping you could help us think about the incremental capacity that you have currently to remix some of those excess reserves into securities. As we think about modeling the securities yield, where are you reinvesting today versus the 130 basis points on the back book?

Capacity is tricky because it depends on how quickly deposits come in and whether deposits season in to get proper treatment. The size of the deposit base doesn't necessarily correlate exactly to non-cash reinvestment opportunity. We stepped away from central bank deposits once we felt balance sheet stability. In third quarter we took incremental steps out in size and asset class. Eventually we can move toward longer-dated securities, CLOs and MBS. In a typical environment you might see a 50 to 70 basis point differential between non-HQLA and HQLA portfolios; it's compressed now to about 30 basis points. There are other things we can explore given risk and return frameworks. That gives you the framework for how we think about it quantitatively.

Got it. That's helpful color. Then on the expense outlook for 2021, how should we be thinking about expense growth trajectory? NII is expected to decline low double-digits versus current run rate; fee income growth potentially mid-single digits organically. Is there room to do better on costs so expense growth lags organic fee growth to dampen pressures? What's your internal philosophy?

We consider ourselves a growth firm and we're investing for growth. Some investments, like money market fund growth, take upfront investment. We think about operating leverage in three ways: total operating leverage, trust fee operating leverage, and organic trust fee operating leverage. Total operating leverage includes the declining NII component, which makes it difficult. Organic trust fee leverage isn't a GAAP number. Focus on trust fee leverage in the middle—it's the best lens to track. Trust fee operating leverage is a key item for expense trajectory next year. We've re-planned expenses, capital and strategy. With the net interest income environment we're in, we have to be disciplined and have a high sense of urgency to get expenses as lean as possible.

Thanks for that context. Two quick modeling questions: how should we think about the jumping-off point for other income given quarter noise? And to clarify quickly on fee waivers: $5 million was the impact this quarter but expectation is $25 million to $35 million exiting this year, is that right?

Yes, that's right.

On other operating income, it has volatility. If you look at averages over the last 1.5 years you're probably looking at something in the mid-to-upper $40 million range. This quarter we had some benefit from the supplemental compensation plans that sit within that line which were outsized versus normal. So you're probably a little high this quarter; average mid-to-upper $40s is a reasonable reference.

Perfect. Thanks for clarifying that. Appreciate taking my questions.

Moving on we have Mike Mayo with Wells Fargo Securities.

Hi. It looks like you have best-in-class fee growth led by best-in-class wealth and asset management growth. But I still need help on the disconnect between the growth in assets under custody which were up twice the pace of peer year-over-year up 16% and the custody fee line which is up only half as much. You said timing is part of it. But if you look at the last 12 months your assets under custody are up twice as much and related fees are not; it seems like pricing pressure or something else. How should we think about this?

That AUC growth in wealth is largely GFO. Those clients can move very large concentrated asset holdings onto our custody platform. That can spike AUC without corresponding fee increases because of the nature of the holdings. Single large holdings may not produce much fee compared to the asset increment.

What's happening with those super high net worth customers then? What are they doing? What have you seen recently?

Often they have a large sale—life event, business sale, single stock exposure—and ask us to custody those assets until they decide where to put them to work. Our goal is to be custodian and then introduce other advisers or managers. They might put assets into our liquidity funds, ask us for tax-advantaged equity investing, or a more aggressive ESG mandate. Custodying large mandates changes the denominator but not the numerator in the short run.

Okay. And then just one follow-up. Is pricing competition in the servicing business getting worse or better? Sometimes it might make sense to take lower prices because of scalability?

Conversations are increasingly about capability set and resiliency. How did you handle the crisis? What can you do for outsourcing or integrated trading? Over time, these conversations should reduce frequency and severity of pure pricing discussions. We do have concessions in pricing at times and those play through early in the year. On new business price is a factor and we price to win at a profitable margin; if we cannot reach agreement we lose the business.

I think the secular trend is about 1.5% to 2% a year of price compression. The word concession may be different but repricing is something we've seen consistently.

Thank you.

Next we have Gerard Cassidy with RBC.

Good morning, everyone. Big-picture question: your balance sheet, deposits—what do you think is a normal size for your deposits? Do you expect current elevated levels of liquidity to persist? Any thoughts on timing for normalization—2022, 2023?

I would say the water level is higher and I think it will remain higher for some time. It's a long-term period for this type of monetary policy. It's hard to define 'normal'. As for the liquidity our clients have now and what they're doing with it, whether on our balance sheet or in funds, there's going to be a lot of liquidity in the marketplace for some time. It ebbs and flows for our balance sheet and funds, but generally a higher baseline.

Very good. Then on the processing error, you mentioned processing errors occur routinely. Was the execution upsized such that it caused the outsized cost? And how quickly did you identify and remediate the error?

It was a large corporate action in the market and our clients were active in it. Size was large for the market; not necessarily larger for us relative to others. The error was identified within minutes and remediated as soon as practically possible. We did not carry a risk position for an extended period. We acted to mitigate costs quickly.

Very good, Mike. Thank you.

Moving on we have Rob Wildhack with Autonomous Research.

Good morning guys. Mike you started to touch on scalability and tech solutions. Could you give us an update on progress on these priorities and where you think the best opportunities are to increase scalability and up your tech solutions going forward?

The largest opportunity is in asset servicing operations and processes—dollar-wise that's the biggest. We've been pursuing this for some time. The pandemic has affected pace and in some ways accelerated opportunities. Remote work creates different process needs and new scalability opportunities. In parts of the business already relatively scalable—like wealth management as it becomes more digital—that increases scalability further. Clients want to do more digitally; that changes scalability since volumes can rise without proportional resource increases. This is happening across the company; it's a matter of continuing to execute.

Thanks a lot.

Moving on, we'll take our final question from Brian Kleinhanzl with KBW.

Thanks guys. When you think about the pipeline, it's a mix of different clients and services. When you think about the onboarding process in this operating environment, how much longer is the onboarding process for these transitions compared to previously?

We did have a deferral in transitions in the second quarter and they picked back up in the third quarter, particularly toward the end. We have a high level of business won that needs to be transitioned. Some transitions are easier in a virtual environment—custody-type mandates can be done virtually. Broader IOO (Investment Office Outsourcing) mandates involve more people and take longer to implement when people are remote. There are mandates in between and we're moving on them. Fund administration wins in the 40x space have been good. It takes a little longer to onboard given the nature of some activities.

Thanks everyone for joining us. We'll talk to you in 90 days.

That does conclude our call. Thank you for joining us. You may now disconnect.