Good day, and welcome to the Northern Trust Corporation Second Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Jenny, and good morning, everyone. Welcome to Northern Trust Corporation's second quarter 2023 earnings conference call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnut, our Controller; and Grace Higgins from our Investor Relations team. Our second quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today's conference call. This July 19 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through August 19. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our Safe Harbor statement regarding forward-looking statements on Page 12 of the accompanying presentation, which will apply to our commentary on this call. During today's question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Jennifer. Let me join and welcome you to our second quarter 2023 earnings call. Our results for the second quarter reflect solid sequential performance. Trust fees and assets under custody and management increased sequentially, which included positive organic growth in each business. Net interest income was down modestly on a linked quarter basis, reflecting higher funding costs associated with the highly competitive deposit backdrop. Expenses excluding the neutral items are well controlled, reflecting the rigor of our cost discipline, as well as the impact of various productivity initiatives. We reported $64 million in charges in the second quarter associated with these steps. Our wealth management business modestly grew assets under custody and management and trust fees on a sequential basis. We continue to see strength in the higher wealth tiers and within our global family office segment, where we captured several marquee wins. Our industry leadership position also stood out in the quarter. We held our third annual Northern Trust wealth planning symposium, bringing together legal and financial experts to share innovative strategies and insights to shape the future of wealth management. Sessions averaged more than 1,000 participants and included attendees from North and South America, Europe, Asia, Africa, and the Middle East. We also released the second Family Office Trends Report co-authored with the Wharton School. Notably, we received a utility patent for cloud-based, goals-driven Wealth Management Technology during the quarter, and we're named Best Digital Innovator of the Year and Best Private Bank for Digital Wealth Planning by the Financial Times Group. In asset management, we saw strong flows into our institutional money market platform, capturing market share. We also won a number of key mandates across products, including outsourced investment solutions, tax-advantaged equity, and quant active. Our new product launches in the quarter focused on alternatives. Within asset servicing, we continue to have good momentum in core custody and fund administration, particularly with asset managers in Europe, and our pipeline remains robust. In the U.K., we were reappointed by Brightwell for middle office services. Brightwell is the primary service provider to the British Telecom pension scheme, which has more than $50 billion in assets under management. Among asset owners, we clinched several key multimillion dollar takeaway wins in North America, where our front office solutions, which provide a comprehensive view across public and private assets, were cited as a key differentiator. As a testament to our capabilities, we were recently awarded three prestigious industry awards, including Best Global Custodian for Asset Owners by Asian Investor. In the second quarter, we launched A-Suite, a content community and Collaboration Hub for global asset owners. Within the first few weeks of launch, we've seen significant client engagement. Going forward, we expect this new communications channel to create relationships with key target audiences and further showcase our expertise in the market. In closing, our balance sheet continues to be very strong with ample capital and liquidity. Our new business momentum is gathering steam, and our pipeline remains robust. While there's still more work to be done, we're making solid progress following the trajectory of our expense growth. Rationalizing our cost base remains a top priority, and the governance and control mechanisms we're putting in place today should drive sustainable improvements for both the near term and for years to come. We head into the second half of the year well positioned to support our clients and generate value for all of our stakeholders. I'll now turn the call over to Jason.

Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our second quarter 2023 earnings call. Let's dive into the financial results for the quarter starting on page four. This morning, we reported second quarter net income of $332 million, earnings per share of $1.56, and our return on average common equity was 12.4%. Currency movements had an immaterial impact on our revenue and expense growth in both periods. Our second quarter results were impacted by two notable items. We recognized a $38.7 million pretax severance charge impacting both our compensation and outside services line items. We recorded a $25.6 million pretax charge associated with the write-off of a client capability. Notable items from previous periods are listed on the slide. Excluding notable items in all periods, revenue was up 1% on a sequential quarter basis and down 1% over the prior year. Expenses were down 1% on a sequential quarter basis and up 5% over the prior year. This reflects an expense to trust fee ratio of 116%, down from 120% in the first quarter and 122% in the fourth quarter of last year. Pretax income was up 13% sequentially but down 9% over the prior year. Trust investment and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion, which reflected a 3% sequential increase but a 4% decrease as compared to last year. All other noninterest income was flat sequentially but down 10% over the prior year. Net interest income on a fully taxable equivalent basis, which I will discuss in more detail in a few moments, was $525 million, down 4% sequentially but up 12% from a year ago. We had a $15 million credit reserve release in the second quarter due to improved credit quality on a small number of larger loans, which is offset in part by expectations for higher future economic stress in the commercial real estate market. Turning to our asset servicing results on page five. Assets under custody and administration for asset servicing clients were $13.5 trillion at quarter end, up 2% sequentially and up 5% year-over-year. Asset servicing fees totaled $621 million, which are up 3% sequentially but down 3% year-over-year. Custody and fund administration fees, the largest component of fees in the business, were $427 million, up 3% sequentially but down 1% year-over-year. Custody and fund administration fees increased on a linked quarter basis for the second consecutive quarter due to solid new business activity, higher transaction activity, and favorable markets. They decreased from the prior year quarter primarily due to unfavorable markets. Assets under management for asset servicing clients were $990 billion, up 3% sequentially and up 4% year-over-year. Investment management fees with asset servicing are $134 million, up 6% sequentially but down 10% year-over-year. Investment management fees increased sequentially primarily due to asset inflows and favorable markets. They decreased from their prior year quarter primarily due to asset outflows and unfavorable markets. Moving to our wealth management business on page six, assets under management for our wealth management clients were $376 billion at quarter end, up 2% sequentially and up 7% year-over-year. Trust investment and other servicing fees were $475 million, up 3% sequentially but down 5% compared to the prior year. The sequential increase in fees in the regions was driven primarily by favorable markets. Sequentially, the increase in GFO fees was driven by net inflows. Relative to the prior year, the decrease in fees in the regions was primarily due to unfavorable markets and product-related asset outflows. Within GFO, the decrease in fees was largely due to unfavorable markets. Moving to page seven, our balance sheet and net interest income trends. Our average balance sheet decreased 1% on a linked quarter basis, primarily due to lower client deposits, partially offset by higher leveraging activity. Earning assets averaged $134 billion in the quarter, down 1% sequentially and down 4% versus the prior year. Money market assets primarily absorbed the decrease. Client liquidity continued to grow during the second quarter. While we saw a decline in average deposits, it was more than offset by increases in other categories. Relative to the first quarter, our money market funds were up $8 billion, or 6%, and our CDs were up 29%. Average deposits were $106 billion, down $6.6 billion, or 6% sequentially, but remain consistent with late April levels. We experienced a $2.6 billion sequential decline in noninterest-bearing deposits, mostly within the institutional channel as clients continued to shift to higher yielding alternatives. This reduced the mix of noninterest-bearing deposits to 17%. At quarter-end, operational deposits comprised approximately two-thirds of institutional deposits. These tend to be the stickiest deposits, as clients use them to operate their businesses. Approximately three-quarters of our average deposits are institutional, with the remainder related to wealth clients, including GFO. Shifting to the asset side of the balance sheet, average securities were down 2% sequentially, reflecting the natural runoff we observed reinvesting at the short end of the curve. Our $50 billion investment portfolio consists largely of highly liquid U.S. Treasury agency and sovereign wealth fund bonds and is split approximately evenly between available for sale and held to maturity. The duration of the securities portfolio continued to edge down in the second quarter to 2.1 years. The total balance sheet duration is now less than a year. Loan balances averaged $42 billion and were up 1% sequentially. Our loan portfolio is well diversified across geographies, operating segments, and loan types; approximately 75% of the portfolio is floating, and the overall duration is less than one year. Our liquidity remains strong, with cash held at the Fed and other central banks up 9% to $43 billion. More than 45% of our overall balance sheet comprises cash, money market assets, and available for sale securities. This translates to $73 billion of immediately available liquidity of more than 60% of the total deposit base. Net interest income on a fully taxable equivalent basis was $525 million for the quarter, down 4% sequentially but up 12% from the prior year. Net interest income reflected the impact of several dynamics. We saw continued client migration out of deposits into higher yielding alternatives. Noninterest-bearing deposits as a percentage of total deposits slid to 17%. Deposit costs increased, with our interest-bearing deposit beta during the quarter reaching 88% and our cumulative beta for the cycle at 68%. The net interest margin on a fully taxable equivalent basis was 1.57% for the quarter, down 5 basis points sequentially but up 22 basis points from a year ago. The sequential decline reflects the impact of higher funding costs, partially offset by higher short-term market rates. Our net interest income in the third quarter will continue to be driven by client behavior which has been less predictable given the speed and velocity of the cycle's rate hikes. Our average client deposits thus far in the quarter are approximately $106 billion. Deposit outflows are expected to continue in part due to seasonality as August is typically our low point in the year as European activity slows materially. The pace of the outflows is expected to moderate. Turning to page eight, noninterest expenses were $1.3 billion in the second quarter, 4% higher sequentially and 9% higher than the prior year. Excluding charges in both periods, as noted on the slide, expenses in the second quarter were down 1% sequentially but up 5% year-over-year. I will highlight just a few points. Compensation and technology expenses continued to be the areas of highest spending. Compensation expense excluding severance charges was down 5% sequentially but up 4% compared to the prior year. It was down sequentially due to the payment of our annual retirement-eligible incentives in the first quarter. This is partially offset by the impact of this year's base pay adjustments, which are granted in the second quarter. The year-over-year growth in compensation expense largely reflects inflationary wage pressures and last year's employee expansion, partially offset by lower incentives. Excluding charges, non-compensation expenses were up 3% sequentially. The primary driver of the increase was growth in the outside services line which was up 9% sequentially. The increase is largely due to timing, as we reported a sequential decline in outside services of 9% in the first quarter due to delays in technical services projects. We have heightened our focus on expense control; we expect our operating expenses to grow more modestly, and our expense to trust ratio to show further improvement. Turning to page nine, our capital ratios remain strong in the quarter; we continue to be well above our required regulatory minimums. Our common equity Tier-1 ratio under the standardized approach was flat to the prior quarter at 11.3%, despite continued common stock repurchases. This reflects a 430 basis point buffer above regulatory requirements. Our Tier-1 leverage ratio is 7.4%, up slightly from the prior quarter. We returned $257 million to common shareholders in the quarter through cash dividends of $158 million and common stock repurchases of $99 million. And with that, Jenny, please open the line for questions.

Thank you. I have a question from Steven Chubak with Wolfe Research. Please go ahead.

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

Sure. So betas have continued to increase, and from here, I think we still have to separate the institutional client base from the wealth client base. We noted that we're cumulatively across the platform within this quarter in the high 80% range. The institutional channel is likely going to be at 100% at this point. The wealth channel still provides some benefit; the betas there are a lot lower. But at this point, we're seeing about 100% in the institutional channel, and still much less than that in the wealth channel. Both of those trends seem to be continuing as we've seen early signs in the quarter.

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

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

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

So a couple of questions around expense trends. I guess, one, a little bit more near term. You guys announced some action, obviously, over the course of the quarter, and there's a severance charge. So maybe help us quantify what it means in terms of savings and your updated views on the overall firm-wide expense growth for the year, excluding the charges incurred in the second quarter. I think last time you talked about bringing that down to below 7%, but maybe an update there would be helpful. And then a bigger picture question: You guys are running at a kind of high 20-ish percent pretax margin that used to be north of 30%. So as you think about the fee environment getting a little bit better with the market, but NII has clearly peaked, as we talked about before. Is there an opportunity to get back to that 30% plus? And how do you see achieving that if that's the goal? What's the time frame around that?

Sure. So let me tackle the expense-related question first. First, I'm sure people are curious where the base is from here. So let me just provide some background on the kind of first quarter to second quarter, second quarter to third quarter. I think from here, we'd say flat to down from second quarter, excluding the severance charge in the compensation line. So if I go back to last quarter, we explained that the movements for second quarter would be the $40 million seasonal decline in equity awards and then the $20 million increase in the base pay coming online. That would have put compensation at about $575 for the quarter. And obviously, ex the charge, we ended up about $8 million better than that, including currency. So two factors led to that. First, we pulled a lot of levers in the quarter to flatten compensation, including accelerating and nearing completion of the actions that we launched in the fourth quarter of last year. So in January, we communicated that the projected reduction by late '23 would be about 300 roles, and about $5 million to $7 million in quarterly comp benefit net of reinvestments. We got a portion of that work done in the first quarter, and we mostly finished it in the second quarter, and that was a big part of the reason it put us ahead of schedule. Second, as we saw the timing of that first program, accelerating and coming to completion, we launched a new effort during the second quarter, specifically related to the severance charge that we announced. We've already received some benefit of that within the quarter, and that's reflected in the results. So overall, this new program should impact about an incremental 600 roles; many of those will be backfilled based on a lens of skills or geography. But same goal—we should be able to get $5 million to $7 million a quarter in run rate savings, and a portion of that got embedded in the second quarter. We did pull levers hard this quarter, so there's some hiring that is in the queue, but we also pushed a fair amount back. So that's why with various puts and starts, it's good to think about a flat to down from the comp levels you see in the second quarter ex charges going into third quarter. To get to your questions for the rest of the year, where do we see expenses? At a high level, we've taken about a point out of the curve for the year based on the trajectory that we're on. To your point, if you take out the notable items, each quarter has been under 6%, and we think we've taken that point out of the curve at this point, and that should continue through the rest of the year. Regarding margins, you're right that we've been in the 30s and are now in the 20s. Our target has us, one of our key performance indicators, aiming to be in the 30s, and we have not lost sight of that. That's where we're trying to get. That gets impacted largely by what's going to happen in our minds, we can control the expense side. And obviously, we're doing a lot of work there, and we're also getting good benefit because we saw good organic growth in the quarter. So both levers are working in the right way, but we have definitely not changed our target of being in the 30s from a margin perspective.

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

Yes, you heard right. It's held in quite well so far in July. In June, we saw a spike at the end of the quarter. But in general, June and July have been at about this level and have been holding in well. Our client activity is good. We've taken action here to ensure we're communicating with clients aggressively, and we want to continue providing excellent liquidity services for them, whether it's lending or holding onto their deposits. We talked last quarter about the fact that we think about liquidity broadly. It's about client liquidity. And it was good to see money market funds up this quarter. That adds to margins really well too, as we consider where clients are holding their assets, including in brokerage. Client liquidity seems to be holding in well. On the seasonality dynamic, August is typically a low point, but it doesn't drop dramatically. We've looked back several years, and so we feel that deposits at these levels seem to be holding okay. I believe it's prudent to think about another decline, even though deposits are holding in reasonably well. I expect another NII decline of about 5% for the quarter. Again, June and July volumes have held in at about $100 billion to $110 billion, but we just have to be mindful of the competitive environment and what summer typically holds in terms of volume pressure.

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

Maybe just to go back to expenses. I appreciate the color you gave, Jason. Normally, you start to talk about the seasonal lift that you typically get in the second half in things like equipment and software and outside services. I wonder if you want to comment on any projection there?

Sure. Well, it's good to call it out. I think in equipment and software, in particular, we were better than we thought we'd be, but that was really two factors. One, we had some delays in projects moving from work-in-progress to being depreciated. Those will come online; it's more timing. Secondly, we've been working very aggressively through our productivity office to negotiate costs and try to push inflation down, and we had some good results there, bringing costs down. From here, we expect third quarter expenses in that line item to be up $5 million to $10 million. In the fourth quarter, we can expect an additional $5 million to $10 million lift from that perspective and outside services no update to make there.

Okay, great. And then, Mike, you started off the call talking about the new business wins in asset servicing and wealth management. I guess how should we think about that contributing to organic revenue growth? Maybe just broadly, if we're in a flat market situation, would you expect this to have a positive impact in the next couple of quarters and going into '24 on revenue?

Yes, Brian. The answer is yes. To your point, we only consider it organic growth once it's transitioned in. We know the pipeline of business or mandates that we've won that have not transitioned in yet. In each of the businesses, it's a little bit different. There's more of a forward pipeline with asset servicing, but the pipeline looks very good based on recent activity that I mentioned. Within Wealth Management, there's not as much of a forward pipeline, but I would still characterize the activity as very steady. A great deal of wealth management has been built on doing what's right for the client, and sometimes that results in different financial implications for the company, but over time is best for the company and the shareholders. This involves considerations around deposits and money market funds and treasuries and managing those aspects. Client activity has been very good, and I would say we are optimistic about how some shifts with rates will have implications on where those funds get redeployed. So, overall, positive on the wealth management front in a steady manner. Asset Management, as Jason mentioned, has seen strong flows into the money market platform as well, and we're keen to see these funds redeployed in other ways over time. Overall, good across the board.

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

Yes, that's right, Brian. On the fee side, it tends to grind up more gradually based on market conditions, while NII can be more volatile. The other area I would highlight is around our capital markets activity, foreign exchange, and brokerage and trading, which has been relatively subdued during this time period due to lower volatilities and lower activity. That can also change and has different profitability implications.

Indiscernible from Wells Fargo.

I guess the first question is on fee growth kind of more broadly. You sort of indicated that you're at the 5% expense growth rate. Does that go down? But do the fees—where do you see fees growing to get up to that expense level so that you could grow fees faster than expenses?

In the short run, I don't think we're still absorbing an inflationary environment from an expense perspective and would like to do better than what we're doing now in the long run from an expense growth perspective. On the revenue side, as you know, our financial model enables us to generate lift from two different areas. One is the market lift, which has tended to provide low single-digit growth rates, but it's a strong component of the financial model. Secondly, organic growth—if we can have low single-digit growth in wealth management organically and mid-single-digit growth in asset servicing, that provides a solid model for us to get well above the expense rates we think we can maintain in the long run and provide good operating leverage.

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

Yes. It's interesting. It's not just the family office but the very top end of wealth advisory. These clients can be similar in size; they just don't have a family office and are leaning more toward us for wealth advice instead of more operational and reporting services that Global Family Offices provide. We're doing better at the top end, and if you look at the new business that came on board and the pipeline, accounts above $20 million have seen more velocity. This has been consistent for a while in that segment. So there is something to that dynamic; we are doing better at the top end and that's where a disproportionate percentage of the growth has come from.

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

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

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

Perfect. Thank you for clarifying that. And then, you guys had a write-off of a client capability. I don't remember seeing that in the past; it was just a little confusing to me. So maybe if you can help me understand it. When did you build that capability, and then what happened that caused you to write it off?

Yes, I can give you some thoughts on it. Just from a timing perspective, it's been in the works for many quarters. One of the pillars of the productivity office is to evaluate internal investments to ensure that they're on track to meet our hurdle rates or returns and margins. The charge was a project to build out a new client capability in asset servicing, specifically in the asset owners channel. After working and discussing with different stakeholders, we didn't reach a commercial agreement on terms that would meet our hurdles. So we halted the project. Importantly, I would assume you'd ask if there are others like this in inventory: absolutely not. This is a large project endeavor that we've been working on and didn't reach resolution that met our hurdle rates, so we stopped the project.

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

Yes. It was indeed more costly to build than we thought, and the revenue dynamics were not going to reach our hurdle rate. It really reflects our disciplined approach to areas like this; we're not going to dedicate resources to areas where we're not going to achieve our hurdle rate. Well before we discussed this, even internally, one of the pillars of the productivity office was to examine our internal investments, and this fits squarely in one of those areas—allocating resources, whether it's capital or expense dollars, without meeting our hurdle rate. This was one area where we decided to halt before investing further.

Thanks for explaining that, Jason; it's actually a lot more encouraging than I interpreted it on paper.

Thank you for asking. It probably helps to clarify for others as well.

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

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

Yes. If we can stay in the 110 range—105 to 110—then we feel like we're in good shape to do well. We're grinding to get down there. We got down there before; we've been well above it. We managed to go below that range for a couple of quarters. Higher inflation, markets coming down, and the effects of NII not helping that metric have pushed us outside that range, but it's an important part of our financial model to be in that range. So it’s the first thing I look at: where are we? We’re working towards getting back to that target range.

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

Yes. So Rob, your two questions relate to each other which is the primary way that we can drive that ratio to the range Jason talked about is through organic growth on the fee side and then controlling organic expenses. To your point, if you have higher organic growth, that will likely require more resources, and to the extent that you don't achieve that, you must ensure that you're reducing organic growth on the expense side to get there. Those are the two areas that we control the most. Beyond that, as Jason mentioned, fees will be impacted by market dynamics, and expenses will be affected by inflation.

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

This is actually Cornell Schmitz filling in for Betsy. So just one question, a little bit nuanced on the credit portfolio. It seems like a little bit of an outlier. I know it's small, but on the reserve release, it seems like an outlier that there's an improved outlook on your commercial real estate book. Can you just explain what's going on there and where you see this line item from here?

So actually, to clarify, there was the reserve release, which resulted from some improvements in a small number of borrowers in that book. However, that more than offset an overall worsening outlook we have for commercial real estate. It's not dramatic, but our outlook on that portion of the book would have also caused an increase in reserves.

Got it. Okay, that makes more sense. I guess one other question on the investment portfolio. You mentioned the duration is still below one year and you're mostly in cash. Given the context of potential future rate hikes, where do you see this duration heading in the coming months? How are you planning to shift this book in that context to protect NII?

Yes, absolutely. The duration of the securities book is at one, while the duration of the balance sheet is just under one. You're correct to note that it’s an interesting time regarding the yield curve. We've been allowing the maturity of securities to become more liquid as we reinvest them, which has brought the duration down. We are evaluating where the yield curve stands and how that may influence what we wish to do as the large securities book continues to mature and present opportunities for reinvestment.

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

Yes. As deposits come down, securities can indeed act as the funding mechanisms for it. That doesn’t move very quickly. The deposit size is always going to influence the earning asset size. Consequently, the constraining factor tends to be leverage. We have considerable room for leverage, and that might prompt us to consider discretionary leveraging to ensure we’re not missing potential opportunities for NII, even if it's a thin net interest margin based on the size of the balance sheet, as it doesn't adjust swiftly.

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

Maybe just actually following up on that question there. We noticed that the complexion of your balance sheet has been shifting on the funding side. Naturally, that makes sense. But your deposits, they declined by 6%, but we saw that the higher-cost Fed fund purchased balance jumped meaningfully quarter-over-quarter has been growing this year. Why not just allow the balance sheet to decline more? What's going on there in terms of the mix? How could that progress from here should deposits continue to trend down? As you talked about, should the Fed funds purchased balance continue to grow as an offset to fund the assets?

Yes. Part of it is that the deposits have just been so volatile, so you don't want to commit to significant movement in shrinking the balance sheet. We want to accommodate our clients. We've ample capital and room from a leverage perspective, and so we've not been overly eager to make drastic moves right away. As deposits decrease, it creates the opportunity to use some discretionary levering to optimize our positioning; we reported a Tier 1 leverage of 7.4%, which provides a lot of room. If we hadn't implemented leveraging, that incremental leveraging would have been even higher, likely in the 7s. At some point, we just have to be prudent and ensure we are seizing opportunities that exist.

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

The overall theme of what you saw in this quarter makes sense in the near term where you'd see us be in the market for share repurchase. The AOCI worked slightly against us this quarter; usually, in a neutral rate environment, the pull to par gives some lift, but it didn’t happen this quarter. Even so, the $100 million we did is about what we're envisioning. The big caveat is that the FDIC special assessment coming online presumably in the third quarter would be a similar dollar amount as what we did from a repurchase perspective this quarter. Thus, you could see us saying to hold off for a quarter, get that payment done, then revert to your original game plan.

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

Jason, can you share with us, I think you gave us the cumulative beta through the cycle of 68% and then the incremental beta, of course, is higher. I think you touched on it this quarter may be 100%. The question is this: how is the beta behaving relative to past tightening cycles? I don't know if 2016 to '18 is a cycle that really is that comparable; maybe I have to go back a little further. Then second, how quickly, if the Fed starts cutting rates in 2024 sometime, can you reduce your deposit costs?

Well, on the first, just to clarify, the 100% going forward would be for the institutional side of the business, not for the overall deposit base. Regarding how this compares historically, we're currently seeing higher betas than in previous cycles. There are various dynamics driving this, and I think 2016 to 2018 can be a relevant reference point. There's strong competition for deposits right now for various reasons, so we want to ensure we're present for our clients. We want to maintain our fair share and provide this liquidity capability. On deposit cost reductions, the cuts can come quickly; due to our pricing and agreements, we can adjust deposit costs rapidly as rates decrease.

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

It is indeed more volatile, not just over the long run but even within the quarters, showing significant fluctuations. This volatility is driven by macro factors, including early March incidents that spooked many depositors, followed by debt ceiling risks, and another trend towards deposit competition—these all factor into the significant shifts we’re observing in client preferences, not only in which banks to choose but also the choice between banks, money market funds, and treasuries. These factors lead to heightened volatility.

Next question comes from Vivek Juneja from JPMorgan. Please go ahead.

A couple of questions. I'll start with noninterest-bearing deposits. The big outflow you saw in the second quarter, which segment did that come more out of, and what are you seeing in that trend? Sorry if I'm repeating a question; there have been overlapping calls.

The significant movements are mostly going to come from the asset servicing segment. The asset servicing segment has generally been stable overall; while we see large movements in and out, the overall level has stayed consistent. The wealth segment is more granular considering there are more clients in that category, making it appear more variable.

And regarding the Wealth Management segment, the low single-digit expense growth—is that because that's where you've done a lot of the headcount cutting discussed earlier? What are the implications for service levels there?

Service levels have been great. We didn't provide detail on the expense allocation between business units. Generally, headcount is down with no negative effects on service levels whatsoever. The low single-digit growth I mentioned was due to organic growth within Wealth Management.

Next question comes from indiscernible from Wells Fargo.

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

Yes. In certain categories, it will. In equipment and software, we'll see upward pressure in that line item, generally projecting $5 million to $10 million for the third and fourth quarters. I didn't specify other line items, and we mentioned outside services being relatively flat, so that's really the only forward-looking information I provided, excluding the compensation number you referenced.

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

It's not included in the 6%. We haven't publicly discussed what the amount will be.

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