Ladies and gentlemen, good day, and welcome to the Northern Trust Corporation Second Quarter 2025 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, operator. Good morning, everyone, and welcome to Northern Trust Corporation's Second Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman 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 23 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 23. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding the forward-looking statements in the back of the accompanying presentation, which will apply to our commentary on this call. Thank you again for joining us today. Let me turn the call over to Mike O'Grady.

Thank you, Jennifer. Let me join in welcoming you to our second quarter 2025 earnings call. We reported another quarter of improving results, reflecting the consistent execution of our One Northern Trust strategy, which we introduced at the beginning of 2024. We delivered our fourth consecutive quarter of generating positive organic growth and operating leverage. Revenue grew 8% and earnings per share increased 20%, excluding notables in the prior year period, and we returned more than 100% of our earnings to our shareholders through dividends and record share repurchases. As we pass the midpoint in the year, I'd like to share our progress on our multiyear transformational strategy, which is producing clear proof points that are gaining traction. Our One Northern Trust strategy is centered on our mission to be our client's most trusted financial partner and our commitment to leverage the full breadth of the firm's capabilities to deliver seamless, high-impact solutions. We deliver a holistic client experience through the collaboration of our three businesses to serve the full spectrum of individual and institutional clients. A great example in the second quarter is our work with Timeline, one of the U.K.'s fastest-growing discretionary fund managers. As Timeline evolved its business model to launch a proprietary fund-to-funds range, Northern Trust Asset Management and Asset Servicing partnered to deliver a fully integrated solution. Together, we provided investment management, fund infrastructure, and operational support, enabling Timeline to scale its offering with speed and confidence. This win reflects how Northern Trust brings together capabilities across the firm to support the growth of high-potential clients in dynamic markets. While we continue to deliver exceptional outcomes for clients, we're equally focused on delivering long-term value for all of our stakeholders. Our One Northern Trust strategy is anchored in three pillars: optimizing growth, driving productivity, and strengthening resiliency and managing risk. These overlapping pillars operate as a flywheel, each one amplifying the others. Our organic growth is gaining momentum, fueled by numerous strategic initiatives launched over the past 12 to 18 months that are now delivering results and are well-positioned to drive greater performance in the months and years ahead. In parallel, we're driving meaningful gains in productivity across the organization through a client-centric, capability-driven operating model. We're aligning resources more effectively to deliver value where it matters most. We're also accelerating the deployment of AI tools to streamline processes, reduce manual effort, enhance decision-making, and manage risk. Together, these efforts are bending the cost curve and freeing up resources to enable reinvestment in growth and innovation, all while delivering higher margins and a better experience for our clients and employees. Finally, the investments we've been making in resiliency are paying off through an enhanced control environment. Over the past year, we've added new roles across our three lines of defense and built greater stability, security, and scalability into our technology infrastructure. These capabilities are increasingly embedded into how we operate, influencing decision-making and enabling us to manage risk proactively and stay ahead of a rapidly evolving industry. As we execute on our One Northern Trust strategy, we're advancing several enterprise growth initiatives that are aligned with both evolving client needs and represent opportunities where we have differentiated capabilities across our businesses. One of these is clearly alternatives, which I'll spotlight today. The rapid expansion of global private markets is undeniable and projected to continue at twice the pace of public markets over the next decade, with total assets expected to exceed $60 trillion. Our integrated model and expanding capabilities position us well to capitalize on this growth and deliver long-term value for clients and shareholders. We're leveraging this vast opportunity in several ways. First, 50 South Capital, the alternatives investment platform within our Asset Management business, which specializes in fund-to-funds primarily targeting emerging managers, is having a record fundraising year. They recently closed their largest secondaries fund with investors across wealth, family offices, intermediaries, and institutions. Second, in Wealth Management, we continue to build out our platform for third-party funds. Several year-to-date raises have already exceeded initial targets, underscoring the strength of our offerings and the trust clients place in our platform. We're also unlocking incremental value for clients through collaboration with 50 South Capital's research team, which has cultivated relationships with over 270 managers to offer access to highly curated, hard-to-reach alternative investment funds. As a result, our fund launch pipeline has tripled compared to prior years, reflecting strong client demand. Third, for clients with significant alternatives portfolios, we also offer our alternatives advisory services, which provide consulting and customized solutions. Assets under advisement are up 66% year-over-year, reflecting demand from both institutional and wealth clients for differentiated high-conviction strategies. Recent examples such as a $1.25 billion private credit mandate for a multinational corporate pension and one for a family office from the Middle East highlight our ability to deliver bespoke solutions at scale. Lastly, in Asset Servicing, we continue to expand our leadership position, particularly in the semi-liquid fund market, where we now support six of the twelve long-term asset funds in the U.K. with seven more in the pipeline. We are building real momentum in alternatives, and we're only just beginning to unlock the full potential. In parallel with these firm-wide priorities, each of our businesses is executing targeted growth strategies that reflect their unique client bases and market opportunities. Starting with Wealth Management, our Wealth Management business continues to deliver on its unique value proposition and is making solid progress on the three core strategic priorities I outlined at the beginning of the year. First, our Global Family Office franchise is a powerful example of our strategy in action by integrating asset servicing, an industry-leading custody platform, and technology capabilities, Wealth Management's deep fiduciary and banking expertise, and Asset Management's innovative investment solutions. GFO delivers a seamless end-to-end platform tailored to the world's most sophisticated family offices. GFO continues to deliver strong organic growth, with revenue growing 8% in the first half of 2025, including international revenue growing at over 20% and now accounting for nearly 15% of total GFO revenue. With the launch of Family Office Solutions earlier this year, we're building on the proven success of our GFO playbook to bring a new offering to ultra-high net worth clients who do not have a dedicated family office structure but can benefit from institutional-grade capabilities and the personalized service Northern Trust delivers. The new offering leverages the same elite capabilities as GFO combined with a dedicated Family Office Solutions relationship adviser serving as a single point of contact to coordinate the client's entire financial life. In just the first two quarters, this new approach has achieved a higher than 75% win rate with a deep pipeline heading into the second half of the year. We're also making deliberate changes and investments to increase our market share in key geographic markets. We recently reorganized our core Wealth Management business from three to four regions and appointed new leadership in both the West and Northeast, bringing in experienced executives with strong market connectivity and a clear mandate to accelerate growth. Northern Trust Asset Management continues to execute successfully against its strategic priorities. In addition to scaling our alternatives platform through both 50 South Capital and our alternatives advisory capability, we're expanding into other key growth areas, particularly custom SMAs. As a leader in direct indexing and tax-advantaged equity strategies, we continue to build on strong inflows into our strategies by investing in technology and adviser tools to scale personalization, extend internationally, and deepen penetration across institutional and wealth channels. Another example of our success is a recent $1 billion equity mandate with the public investment fund in Saudi Arabia, one of the largest sovereign wealth funds in the world. We expect this mandate to expand to additional quant strategies, demonstrating our ability to serve the world's most sophisticated sovereign clients. Our Asset Servicing business is executing on a disciplined strategy centered on scalability and client centricity to drive profitable growth. We serve a focused set of client segments where we have deep expertise and a differentiated value proposition, one that continues to drive strong win rates and high levels of client satisfaction and retention. I already mentioned our strong position with alternative investment managers, where assets under administration are now approaching $1 trillion, underscoring the strength of our platform and the trust placed in us by leading institutional clients. We also have good momentum in the Asset Owner segment, one of our highest margin businesses, which now comprises 50% of our segment-level revenue. Our success is driven in part by our upmarket strategy to serve larger, more complex institutions with tailored solutions and global reach. Recent wins include the $89 billion University of Texas, Texas A&M Investment Management Company, a $55 billion Canadian foundation, a top 20 U.S. pension plan, Telstra, one of Australia's most significant superannuation funds, and a large sovereign wealth fund, our first front office solutions client in Saudi Arabia, where our technology was cited as a key differentiator. Our Capital Markets business continues to perform well. In the first half of the year, revenue was up 15%, including more than 30% growth in both outsourced trading and currency management. These results reflect the strength of our capital-efficient model and our ability to deliver scalable, high-value solutions to institutional clients. This disciplined approach is delivering tangible results. Organic growth is accelerating with new business tracking well and at above-average profitability, and overall margins improving significantly. We've demonstrated our ability to bend the cost curve and remain firmly committed to continuing to do so while making necessary investments in critical infrastructure and growth initiatives. Through the first half of the year, expense growth was 4.8%, and we're on track to achieve our full-year goal of below 5%. Our progress is underpinned by a series of structural and operational advancements. We're modernizing our operating model and increasingly leveraging AI, such as GitHub Copilot and document digitization to enhance employee productivity and increase automation across the enterprise. For example, thoughtful reorganization of our global operations under our Chief Operating Officer is unlocking efficiencies while preserving our world-class service. Headcount within asset servicing and operations has declined for nine consecutive quarters and is down 7% from its peak. Importantly, these gains are accreting to margin and we've strengthened our governance and controls to ensure they are sustainable. We’ve also implemented centralized oversight of multiyear technology programs and introduced new tools to monitor hiring activity and workforce composition in real-time. These measures give us confidence in our ability to continue driving productivity and margin expansion while maintaining the flexibility to reinvest in areas that support growth. And that reinvestment is underway, focused on three levers: talent, product expertise, and technology. On the talent front, we're hiring revenue-generating professionals across wealth and asset management. From a product standpoint, we're ensuring we have the expertise to create innovative solutions and support the growth across the businesses, which I described earlier. In the technology side, we're investing in capabilities that enhance the client experience and support scalable growth. These investments are enabling us to deliver more personalized, efficient, and high-impact solutions. Together, these efforts reflect our disciplined approach to cost management and our commitment to sustainable margin expansion while continuing to invest in the capabilities that will drive long-term value for clients and shareholders alike. Our financial model is designed to deliver an attractive combination of growth and returns, and we're making tangible progress against these targets. Organic growth is steadily improving and should accelerate as our initiatives further develop and expand. We have a clear and credible pathway to generate higher margins. At the core is our rock-solid balance sheet, which provides flexibility for our clients and meaningful capital return optionality for our shareholders. Continued successful execution should translate into double-digit annual earnings per share growth, substantial capital return, including meaningful share repurchases, and higher ROEs. Given our recent momentum and confidence in our trajectory, we're changing our ROE target from 10% to 15% to 13% to 15%. To close, I want to reaffirm our commitment to remain independent. Contrary to recent speculation, during my tenure as CEO, we have never entertained discussions regarding the sale of the company with any financial institution, nor do we intend to. The Board and management team remain confident that Northern Trust is well-positioned to continue driving long-term growth and value creation as evidenced by our visibly improved performance and momentum in our One Northern Trust strategy. Our 135-year track record of stewardship of multi-generational personal and institutional wealth, unwavering fiduciary commitment, ingrained culture of integrity, and long-term perspective instill confidence in our clients that we will be here for them, not just today, but for generations to come. And with that, I'll turn it over to Dave to review our second quarter results.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our second quarter 2025 earnings call. You may have noticed that we included a number of new disclosures in our earnings materials this quarter. They include additional segment-level detail, including average loans, average deposits, pretax profit and margins, along with enhanced regulatory and capital metrics. These additional metrics aim to enhance the quality and transparency of our disclosures, ensuring we are responsive to shareholder feedback. Now let's discuss the financial results of the quarter, starting on Page 12. This morning, we reported second quarter net income of $421 million, earnings per share of $2.13, and our return on average common equity was 14.2%. As Mike mentioned, we delivered our fourth consecutive quarter of generating positive organic growth and positive operating leverage. It's also our fourth consecutive quarter of delivering positive trust fee operating leverage and improving our expense to trust fee ratio on a year-over-year basis, excluding notables. These are clear signs that we're moving in the right direction and our strategy is gaining momentum. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 90 basis points and unfavorably impacted our expense growth by approximately 100 basis points. Relative to the prior period, currency movements favorably impacted our revenue growth by approximately 110 basis points and unfavorably impacted our expense growth by approximately 130 basis points. Trust, investment, and other servicing fees totaled $1.2 billion, a 1% sequential increase and a 6% increase compared to last year. Net interest income on an FTE basis was a record $615 million, up 7% compared to the prior period and up 16% from a year ago. Excluding notables in the prior year, other noninterest income was down 4% year-over-year, largely reflecting weaker reported FX trading income, partially offset by strength in other capital markets activities. One reminder related to our FX trading income: we've seen steady growth in the underlying core business over time, but it's often muted by the overnight swap activity conducted by our treasury department, which was more pronounced this quarter. Core FX trading revenue, excluding the impact of our swap activity, was up 10% year-over-year. Our assets under custody and administration were up 7% sequentially and up 9% compared to the prior year. Our assets under management were up 6% sequentially and up 11% year-over-year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. The provision for credit losses increased to $16.5 million in the second quarter, largely reflecting an increase in reserves related to a small number of nonperforming loans, but we expect it to return to more normalized levels in subsequent quarters. Relative to the prior year period, and excluding notable items, revenue was up 8%. Expenses were up 4.8%. Our pretax margin was up 160 basis points. Earnings per share increased 20%, and our average shares outstanding decreased by 5%. Turning to our Asset Servicing results on Page 13. Our Asset Servicing business performed well in the quarter. Transaction volumes were particularly strong. Capital Markets activities were up double digits over the prior year, and new business growth continues to be booked at attractive margins. Assets under custody and administration for Asset Servicing clients were $16.9 trillion at quarter end, reflecting a 9% year-over-year increase. Asset Servicing fees totaled $692 million, reflecting a 6% increase over the prior year. Custody and fund administration fees were $469 million, up 5% year-over-year, largely reflecting the impact from strong underlying equity markets, favorable currency, robust transaction activity, and new business generation. Assets under management for asset servicing clients were $1.2 trillion, up 11% over the prior year. Investment management fees within Asset Servicing were $157 million, up 8% year-over-year due to favorable markets and new business activities. As you can see on the right side of the slide, average deposits grew 7% sequentially, accounting for most of the total increase. Loan volume increased slightly relative to the first quarter. Asset Servicing pretax profit nearly doubled over the prior year period. And the Asset Servicing pretax margin was up more than 10 points to 23.2%. Excluding $75 million in notables in the prior year, asset servicing pretax profit increased 29% and the pretax margin expanded by approximately 330 basis points. Reflecting the pivot in our new business approach, our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline our operations. Moving to Wealth Management business on Page 14. Wealth Management also had a healthy quarter with continued strength in Global Family Office. Assets under management for our Wealth Management clients were $469 billion at quarter end, up 12% year-over-year. Trust, investment, and other servicing fees for Wealth Management clients were $539 million, up 5% year-over-year, primarily due to strong equity markets. As you can see on the right side of the slide, both average deposits and average loans were flattish relative to the first quarter. Wealth Management's pretax profit increased 18% over the prior year period and the pretax margin was flattish at 37.2%. Excluding approximately $33 million in notables in the prior year period, Wealth Management's pretax profit increased 5% year-over-year, while the pretax margin decreased by 25 basis points. It's worth noting that more than two-thirds of the $16.5 million second quarter provision was allocated to the Wealth segment. Moving to Page 15 and our balance sheet and net interest income trends. Our average earning assets were up 6% on a linked-quarter basis fueled by higher deposit levels, which drove an increase in cash held at the Fed and other central banks and a slight increase in securities. The duration of our securities portfolio decreased to 1.5 years. While we're opportunistically adding duration to protect against future rate cuts, we've also shifted the mix of the portfolio slightly. So the fixed-floating breakdown is now 52% to 48%, including the impact of swaps. The duration of our total balance sheet remains under 1 year. Net interest income on an FTE basis was a record $615 million, and our net interest margin held steady at 1.69%. NII outperformed our expectations, largely due to higher-than-expected deposit levels. Average deposits were $122 billion, up 6% compared to the first quarter levels. Within this, interest-bearing deposits increased by 7%, while noninterest-bearing deposits decreased by 60 basis points, comprising 14% of the overall mix. The quarterly contribution from transactional and other one-time items was elevated in the second quarter, mostly due to the overnight FX swap activity conducted by our treasury team, as we capitalized on FX volatility during the quarter. We estimate this added an incremental $10 million to second quarter NII that is not expected to persist. Turning to our expenses on Page 16. Excluding notable items in the prior period as listed on the slide, expenses in the second quarter were up 4.8% year-over-year. Excluding notables and unfavorable currency movements, expenses were up just 3.8%, the lowest rate of growth in the past six quarters. Turning to Page 17. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach decreased by 70 basis points on a linked-quarter basis to 12.2%, with capital accretion more than offset by an increase in RWA. The RWA growth was driven largely by quarter-end lending, coupled with higher capital markets activities. Our Tier 1 leverage ratio was 7.6%, down 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $481 million and we returned $486 million to common shareholders in the quarter through cash dividends of $146 million and common stock repurchases of $339 million, reflecting a payout ratio of 117%. Finally, based on the 2025 CCAR results, we recently disclosed that our stress capital buffer will remain at the 2.5% minimum requirement. And yesterday, our Board approved a $0.05 or a 7% increase to our quarterly dividend. Starting with expenses, we continue to expect our total operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. Turning to NII, we now expect the full-year NII to increase by mid-single digits over the prior year. This assumes a modest decline in third-quarter deposits in line with seasonal trends and mostly stable deposit mix, meaning that we wouldn't expect absolute levels of NIB to move materially from current levels, but the percentage of the overall mix could change. Market implied forward curves as of this week, and slightly weaker institutional deposit betas with the next series of global rate cuts. And with that, operator, please open the line for questions.

Our first question comes from Glenn Schorr with Evercore.

Thank you for that clear statement. Moving on, I'm interested in the various initiatives concerning alternatives and the 11 new fixed income ETFs planned for the second half of the year. I'd love to hear any relevant figures you can provide, as you mentioned progress, including AUM, capital raising, AUC, revenue, or any other metrics. Additionally, I'm curious about how you classify this as push or pull; specifically, are you actively rolling out products and promoting them across your platform, or are you responding to client or adviser demand for these products? Thank you.

Certainly. There are numerous efforts underway in the alternative investment space. I would describe the current situation as driven by demand due to the shift in the market towards private markets over public ones. It's essential for us to provide the right alternatives for our clients, which is a key factor influencing our approach. Internally, we must actively work to ensure we have these alternatives available. Our efforts span across various avenues, from 50 South to advisory services and our third-party platform, reflecting a multifaceted approach. To give you an idea of scale, we raised around $2.5 billion in the first half across these efforts, excluding advisory, which accounted for another approximately $1 billion. When we assess the opportunity within our wealth franchise, our clients currently allocate less than 5% to private markets, indicating significant room for increased investment in this area. Specifically, family offices might even allocate over 40% to alternatives, while other tiers might range from 10% to 15%. This highlights a substantial opportunity for growth in their portfolios based on demand.

Thanks. Maybe anything on what's driving the 11 fixed income ETFs? You talked about efficient scalable exposures. I'm just curious what that might encompass that you didn't already have in the portfolio.

Sure. So on the ETFs that we're rolling out, I would say at this point, our ETF complex has mostly index and other certain exposures, whereas there's less on the fixed income front, particularly the type of fixed income characteristics that our client base is looking for. So this is another example of how Asset Management and the Wealth Management business work together to develop specific products that fit the needs of our client base. So I won't go into all the detail because we're going to be rolling that out very shortly. But think about the needs across municipal securities. Think about the need for fixed income ladders, all trying to put that in a very efficient vehicle for them to be able to invest in.

And our next question comes from Betsy Graseck with Morgan Stanley.

I wanted to just dig in a little bit on the decision to tighten up the range for ROE. I think it's from 10% to 15% to 13% to 15%. And within that, understand where the line of sight is that you have on the expense ratio with the operating leverage that you're delivering? Where do you anticipate you can take this expense ratio to as you move forward over the next several years in the medium term?

Sure. If we go back in time a little bit, when we first set the range at 10% to 15%, our ROE was below 10%. So a lot of the objective at that point was to get into the range, which we did some time ago. And then, frankly, we've just continued to move up in that range and at times have been at the top end and even a little bit over. It definitely depends on our, I'll say, organic performance and execution, but also it's influenced by market conditions. And so that's why we, over time, maintained it at 10% to 15%. It took into account, I'll say, different interest rate cycles and significant changes in the equity markets. And so we felt that was the right broad range. Well, we've been producing returns now at that upper half for some time period. And with the momentum that we have here in the strategy, we think that's going to continue to be the case. And I would also say that over time, there's been less clarity or certainty around the capital framework, the regulatory capital framework. And so it was also taking into account that there could be higher capital requirements as much as we can't predict where that goes and for how long. At this point, we believe there's a very, I'll say, constructive framework around capital. And so we just have greater comfort, I'll say, that the capital requirements are in the range that we're in right now. And so as long as we continue to execute and under, I'll say, somewhat normal level of market conditions, we think that range of 13% to 15% is appropriate. And then, Betsy, just to address the expense part of it. From an expense to trust fee ratio perspective, we believe the right range as we put out there is 105% to 110%. We're working our way towards that. We're at 115% now that's down from where it was. And so we'll look to continue to grind it into that range. And that obviously then provides a higher level of profitability, which then translates into the ROEs in that range.

Our next question comes from Ebrahim Poonawala from Bank of America.

So I guess, maybe Mike, thanks for kind of going through that in your prepared remarks in terms of strategy update, etc. I guess as we think about independence or some version of mergers. I guess, is there any scenario in which you think M&A would make sense from a shareholder return perspective? Or do you think the uniqueness of the Northern franchise, the scale in the custody business, all of that kind of make just M&A unattractive strategically? How should we think about it outside looking in as shareholders?

We are fully committed to executing our strategy, which we believe will ultimately yield the best returns for our shareholders. This strategy of independence offers a unique value proposition for our clients, as we have heard from many of them recently. They have numerous options for providers and financial partners, and they have chosen Northern Trust because of our distinct value proposition. We prioritize delivering a higher level of client service and possess specialized expertise in specific market segments. We are confident that this differentiated value will generate the most value for our clients. Over time, we have engaged in acquisitions to enter new markets or enhance our capabilities in existing ones, and we will continue to consider those if they align with our goals. However, we primarily focus on organic growth, so acquisitions are not our main focus. That said, if an attractive opportunity arises to improve our value proposition through an acquisition, we would evaluate it carefully while maintaining high standards.

Got it. When it comes to capital deployment, can you remind us how you view the pace of buybacks, especially considering the strong performance of the stock this year? Is there a specific valuation, like price to earnings or price to tangible book multiple, at which buybacks start to become less appealing?

Yes. So when we look at buybacks, it isn't just about the stock price, right? We're looking at our regulatory capital, earnings power, ROE, loan growth, and as you know, dividends. We like our balance sheet to be available for our clients, right? So we still like to run a little bit of a cushion, if you will, that we want to have in the system. We've picked up our capital return to shareholders significantly. When you think about the current pace that we're on, we will probably end up exceeding what we did all of last year, and last year had Visa included in it. So I think we're at a very healthy clip close to $500 obviously this quarter. And so you take all those factors into consideration, not just the stock price, when we look at it, and we balance that against our capital requirements and other issues at the time.

And we'll take our next question from Mike Mayo with Wells Fargo.

I want to continue the discussion. There has been a lot of media attention, which might be disruptive to your clients and employees and possibly frustrating, but it continues to be a topic among investors. I appreciate your commitment to independence and your long history of 135 years serving generations. You've mentioned short-term growth over the next four quarters, medium-term targets for higher return on equity, and the long-term vision of One Northern Trust. I understand your perspective clearly. Mike, before your time at Northern Trust, you were involved in dealmaking, so that's understood. However, that doesn't prevent others from suggesting that they might want to acquire you. This has been the case for at least the last thirty years, so it's not new. With that said, under what circumstances would you consider divesting the custody business? You mentioned scalability, which is a key point in your update, and perhaps that business could benefit from increased scale. I view the private bank, asset management, and asset servicing as the crown jewels of your operations. While you're optimizing these areas, there's potential for further strategic moves, whether that's expanding through acquisition or looking to enhance scale in some way.

So when it comes to scale, I think it's important to start with the fact that size does not necessarily equal scale. We absolutely need scale, but we don't need size to get there. Our strategy is around that, but then you have to execute to demonstrate it, right? Because scale is all about the ability to, I'll say, grow the revenue side at a pace that's faster than the cost side or increase your volume at lower unit cost, so to speak, as you go forward. The reason why I say it's not about size is that there are different drivers of creating that scale. We try to focus on just certain sectors where we believe we can build scale within the sector and also differentiate ourselves. So when you think about specific areas on the institutional side like U.S. pension plans, U.K. pension plans, our business with hedge funds in the U.S., those specific segments where we say our value proposition resonates, but now we also have to drive scale so that we can get the value proposition to a place that's attractive and we can get the financial returns on that front. The second piece of that is a place that you do get scale is through technology. And so how can we apply technology in such a way and leverage technology to create that? And certainly, the direction of travel on that front is one that, once again, doesn't necessarily favor just being bigger. There's more complexity with being bigger and the ability to not have to necessarily operate everything yourself, meaning on-prem and to do more through the cloud is an equalizer, if you will, when it comes to scale. And then certainly with AI, the AI is a tool, which we know creates tremendous leverage and scalability for both processes but also for people. We're in the early days of that. We have to be able to deploy those technologies in a way that it creates scale within it. And then the third thing I would say is there are different parts of the value chain that create scale for you. And what we've tried to do and are in the midst of, I'll say, transforming it again, is to make sure that on the front end, dealing with the client that we have that differentiation. But as you move back through the value chain, we find those areas where more centralization, more standardization, and more automation are where you create that scale. And so more specifically, that's why we're moving to what we call our client-centric capability operating model. We're trying to take the common processes from across the businesses, but particularly within asset servicing and focus them on capabilities as opposed to necessarily being in a particular region or for just a particular segment. So all of your capital markets capabilities specifically cash, payments. That's the way we're organizing it underneath the COO, Pete Cherecwich. And again, centralized, standardized, automated using technology to do that. We're seeing the early returns or benefits from that. We've gone down headcount consistently since we started on that transformation of the operations. And then the last thing I would say is in areas where there is a benefit for size and scale, that's where we just are centralized across the entire company. Think about our core technology group and infrastructure. We may not have the same, I'll say, buying power as the other large players on that front, but frankly, that differential at that level is not enough to outweigh all the benefits of the chain that I talked about. We need to continue to do it. We know we need to demonstrate it. So it has to flow through to the numbers; that's why the margins in our Asset Servicing business need to go up. We're in the low 20s right now. Those should be in the high 20s, and that's what we're moving towards with that. But that actually, at the end of the day, that's what we'll demonstrate, are you getting scale? Is that an attractive business? To the extent it's not, to your point, you think about different ways that you can potentially modify that or change it to ensure that you get it.

Yes, Mike. And I would only add to that, that when you look at the Asset Owner segment within Asset Servicing, it already chins the bar in terms of our margins where we're trying to go. As that business gets bigger and the Asset Management side of the equation gets smaller, you're going to see the margins drift up as well. So that particular segment we've identified is already there.

And we'll take our next question from Alex Blostein with Goldman Sachs.

I appreciate all the extra segment disclosure on the margins, profitability and obviously, the target as well. That's all very helpful. I wanted to ask you guys around the timing to achieve some of these. So you've had the 30% plus pretax margin as a target out there for a little while. It's helpful to understand the pieces a little bit. But as you think about how long it will take you guys to get there, and ultimately, what interest environment does that contemplate? Because obviously, there's a lot of profitability related to NII and you're talking about profitability for the firm as a whole. So I'm curious kind of how that plays into the rubric?

Sure. Just as far as the backdrop on the market environment for it, it's one of, I would say, like normalized, meaning a normal yield curve, normal shape of the yield curve, and the pace at which you get there. What makes it difficult in managing for any financial institution is the speed of those changes. We've gone through a time period, obviously, where rates were going up, but then they went down to 0, then they went up very fast. And now it appears that we're at the beginning of a time period where they're going to go down, but at a more gradual pace that just allows for the transition of duration in the portfolio on the balance sheet to be able to, I'll say, leg into that change in the shape of the yield curve. So that's the expectation. But of course, we have to be positioned for different things happening on that front. I'll say the more important part, Alex, which is just what's the time frame on that. Obviously, we're executing hard on that. You see the positive operating leverage that we achieved in a quarter like this where, as I say, it's kind of chunkier yards, if you will, and you need to pick those up while you can. But if you said, okay, but there are certain quarters or even multiple quarters where it's more difficult to get those chunkier yards and you're grinding more up, that would infer that it's likely to be kind of 2027 where we achieve that 30-plus percent. If we can get there sooner, great. And as I mentioned, like, the environment can help us, it can create a headwind as well, but that's what we're looking to move towards.

Got you. That's helpful. And just a follow-up on NII. I heard the guidance for the full year, obviously implies something in the maybe $5.70 range per quarter, I guess, from here on. As you look at the balance sheet, I think I heard you say a little bit less than 1-year duration overall with rate cuts, kind of how you're thinking about the trajectory from NII off of that jumping off point? And are there any things you could do today to mitigate the effects of potentially lower interest rates in the U.S.?

Yes. As I've said to you guys before, we have about $1.5 billion of securities that roll off every quarter, and we can reinvest those at, I think, 100 basis points over the yield, the runoff yield. So that's one area to do it. The second area, obviously, is we've been very focused on our deposit pricing and things of that nature. We are not just in U.S. dollars and deposits as well. So we take a look at opportunities across all the different currencies. And there are rate cuts that are going to be, I think, realized with some of those currencies as well. So from our perspective, it's really going to be a question of the reinvestment going out a bit longer when we have the opportunity, not just to protect Q3 and Q4, but to protect '26 as well.

And up next is Ken Usdin with Autonomous Research.

Dave, I was going to ask you to follow up on your comments about the Asset Servicing fees. You mentioned that the transaction activity was really strong. I'm sure part of that's just the core business, but was part of that just in relation to the April dislocation? And I guess kind of how would you help us understand the push and pull between organic growth and market health that you already have baked in for the third quarter versus some of the stuff that might have been above trend just given the environment?

Yes, it was because of that. I mean, transaction volume was higher than it would be traditionally, if you look at the averages during the quarter, which wasn't surprising to anybody. You also have to take into consideration in Asset Servicing. When you look at the growth side, and you guys know this, we had two large client losses in Q2 and Q3. One of those losses, which is they took the business in-house. We've not lapped that yet. And so, I would say 0.5% of the growth got nicked by that. So as we get beyond those two client losses, you'll see some more realistic numbers in terms of year-over-year comparisons on that. So that's the way sort of the way I think about it.

And will those be out? Do you know when those will be lapped? Are they lapped in the third quarter or after the third quarter?

Yes, so after the third quarter, those have been lapped definitively. So right now...

No, go ahead. You follow up...

No. So, I mean, basically, the quarter was client neutral. From that perspective. And keep in mind, when you look at the Asset Servicing business, you know this, I'm sure it's on a quarter lag basis, right? So you've got to take that into consideration as well. That also affected the Wealth business. Wealth is obviously on a month lag basis. And Q1, if you look at the S&P, it was down 5%, NASDAQ down 10.5%, so take all that into consideration as you're taking a look at those absolute levels.

Yes. And a follow-up just on the Wealth side. Just like the layout that you gave and that Mike gave in the prepared remarks and the slides. Is there any change in just the organic growth rate in wealth? I know you have a lot of these initiatives going forward. But when do you think we'll start to see a definitive, observable change in the organic growth rate there?

Yes, we are experiencing positive organic growth in the wealth business, although it's not quite at the level we desire. The momentum is increasing gradually. We are focusing on specific segments to enhance growth rates, similar to what we've achieved in GFO, and we aim to replicate that success in the ultra-high net worth segment. It's still early, but we're seeing higher win rates and have added more talent to support growth in this area. Additionally, we're concentrating on particular geographic markets to align our market penetration with that of our more mature markets. We have strong market shares in Illinois and Florida, and we seek to achieve similar success in Northern California, Southern California, Texas, and New York, where our market share is currently low compared to the potential. To support this initiative, we've made some organizational changes, including adding leadership and hiring more revenue-generating roles in these markets. While this process takes time to onboard and train new team members, we are very focused on driving organic growth.

And up next is David Smith with Truist.

Any color on what's driving the strength in deposits this quarter?

Yes, I mean we talked about it last quarter a little bit. Obviously, there was a bit of a risk-off trade that we took advantage of during the period. So from that perspective, they are running a little bit higher. I will say, in the current quarter, we're starting to normalize. And that's probably why I'm keeping the guide where it is. When I look at third and fourth quarter, third quarter tends to always be a little bit weaker just because of a seasonal pattern. The fourth quarter picks up a little bit, but they're beginning to normalize back to what I would say is a more predictable run rate. We did have, in particular, and the swap activity was driven by this. We had a very extremely large euro deposits that came in. And this is why I always tell you folks that we want to have a flexible balance sheet because we have very large clients that come to us not just for loans, but for deposits as well. So we did have some deposit activity that was concentrated among some very large clients in the quarter as well.

Got it. So it’s normalizing beyond typical seasonality so far in the third quarter?

Yes. I mean it's back to what we thought it would be. I mean the average is 122 for this quarter. I think if you take a look at our last three quarters, but before the Liberation Day and the risk-off trade, it's back to those levels.

I think you said that flows and Asset Servicing were relatively neutral in the second quarter. Any detail you can offer on segments where you're seeing stronger growth versus where there's more opportunity for catch-up?

Yes. I would just go back to the upmarket of asset owners. You heard about some of the wins that I talked about there, which are significant clients at this point, relatively large clients as well. So that's where we're seeing particular strength on that front. The other thing I would just say is we often are impacted as well by the success of our clients. And in a time period where for market reasons and others that some of the strategies of our Asset Management clients resulted in net outflows for them. We've seen that stabilize. So that's a positive for us as well on the asset manager side.

Yes, I'd also add that AUM flows, which obviously impact both businesses were positive. Liquidity was a real standout. That is biased towards the institutional business. But $8 billion in the second quarter, $19 billion year-to-date on the liquidity side, which represents our tenth consecutive quarter of positive liquidity flows, and that's obviously great for our business.

And our next question comes from Brian Bedell with Deutsche Bank.

I appreciate the insights provided in the slides and your comments today concerning the businesses. I have two questions, both centered on Wealth Management. Firstly, could you discuss how the efficiency initiatives within Wealth Management, particularly in digital solutions and AI, are improving client delivery and relationship management? Considering your unique position as a Wealth Manager, while personal relationships are crucial, is there a risk of becoming overly automated, or do you believe this technology actually enhances and strengthens those relationships? Secondly, you've historically focused on the higher end of the market for your services. Are you considering exploring opportunities further down the wealth spectrum to potentially boost organic growth?

Sure. So on the first one, what I would say is definitely those initiatives are focused on enhancing the client experience. And let me be more specific about what we're doing on that front. I would put it into three categories. The first being processes, the second being what we would call partners or the employees, and then the third being with clients. On the processes side, if you just think about all of the documentation that is involved with client relationships, in this case, I'm speaking about Wealth Management. So think about trust documents and things like that. The ability to use AI to digitize those documents creates productivity for us but also makes it easier for the employees to be able to utilize that information. So that's the type of thing we're doing to improve the client experience as a part of that. Specifically on the partner side or our employees, making them more efficient, giving them the tools to be able to do things more quickly. We have deep knowledge and, I'll call it, databases, if you will, of this deep knowledge, the Northern Trust Institute, etc. The ability for our partners to be able to very efficiently and quickly tap into that data and that information to provide the advice to the clients is another unlock on that front to enable them to be not just more reactive quickly but proactive, right? To be able to prompt different discussions and conversations that should be had with the client. So enhancing in that way. And then also, certainly the client itself. And I would say that's where providing them additional capabilities that enable them to do things, I'll say, on their own because of the technology is kind of the third aspect or a wave of what we think we can do with the AI. All of that, to answer your question, goes to the experience, but it also produces the efficiency and the productivity. And then with regard to the market, you're thinking about the direction of travel of our strategy correctly, which is we're trying to say how do we replicate for the different tiers such that we get higher organic growth overall. And so you heard me talk about GFO but then ultra-high net worth. And then absolutely below that level. So think kind of anywhere from $10 million to $100 million segment we are further refining what is the value proposition specifically for those groups of clients and prospects and how can we then, as a result, increase the growth rate there. To your point, we see stronger organic growth right now in everything above kind of the $10 million segment versus below. The more we can differentiate what we're doing on those different tiers, we think it gives us stronger growth across all of them.

That's great insight. Regarding alternatives, you mentioned a penetration rate of around 5% or less across the franchise. However, the GFO segment is much higher and more institutional. Can you break down the allocation between these two segments? What I'm trying to understand is, excluding GFO, what do you see as the current penetration and growth potential? Also, do you have all the necessary products available? I am particularly interested in whether your clients have full access to the largest publicly traded alternative managers and private market managers who have made their products available in the market.

Sure. So I'll comment on GFO a little bit, but Dave certainly adds. The way to think about GFO is really more thinking about the assets that we custody for them. Again, very large dollar amount of it, the amount that then is invested with us through alternatives is relatively small. So that the penetration level, if you will, is even lower than it would be in our core wealth on that front. A lot of it is because they're going direct to the largest managers on their own. But we have found that we have the ability to bring differentiated opportunities to them. Some of them do utilize 50 South, but also often they're utilizing, I'll call it, the research capability of 50 South, where he will then bring certain managers to them that they might not otherwise have access to. So that's how to think about the GFO side of it. And then more broadly, or certainly with core wealth, I would say it's less about providing access to things that they don't have or that we couldn't get access to; it's just providing more of it. Some of the largest alternative managers, we do have them on our WMLTs platform, our third-party funds platform. And so we'll continue to provide some of that, but frankly, our clients tend to be interested in things that are more bespoke or hard to get, tight managers where we do have the relationships through 50 South. And as a result, we can provide those types of funds. And then I would also say, just with regard to vehicles, we expect that the vehicles will continue to evolve from what used to be the straightforward funds to then what will be interval funds to evergreen funds. So this whole idea of democratization of alternatives, that’s going to continue to evolve. We're going to make sure that we have the right vehicle base.

Yes. I would just add to that, particularly on the GFO front. I mean access to top managers is not a problem. We have the client base that all the top managers want. I think we are extremely discerning and have a very high bar in terms of what makes it onto our platform and if it fits our client base accordingly. The other thing I would say is we're doing a lot more on the alternatives advisory front. A lot of our clients that got very heavy into alts have not seen a lot of realizations in the recent past and have come to us with a bent towards what do I have and what should I do with this existing portfolio. We've been restructuring a lot of that stuff for them, giving them advice on that to make sure they've got the right mix within their portfolio. So it's not just selling our own product; it's also taking a look at what they've done and giving advice on all that.

And up next is Gerard Cassidy with RBC.

This is Thomas Leddy standing in for Gerard. Just given all the recent headlines, can you give us your latest thoughts on stablecoins and how broader adoption could impact both your businesses and then deposit levels?

Sure. We're excited by the direction of what I'll just call more broadly, digital assets. This is an area that we've been embracing for some time and developing capabilities for some time. We really do feel like we're on the precipice of the next stage of evolution for digital assets. Specifically, it is starting with stablecoins. We think it will evolve into tokenization of a number of different asset classes on that front. We've developed the capabilities to be able to do both stablecoins, but also tokenized assets. The key part of it is going to be we've done them on private blockchains. A lot of this now will move to public blockchains, so we need to have the capability to interact with the public blockchains on that front and are planning to do that. We've already done a number of things with tokenization for carbon credits and in other areas. We just see this as the next stage for this.

That's helpful. And then just a quick follow-up. It appears expected regulatory relief for the industry will have a pretty big impact on at least the money center banks. We saw the recent stress test results and then the resulting SCBs coming out of that. Can you just share your thoughts on the potential benefits for Northern Trust more specifically from expected relief?

We would say that the regulatory environment as we look out is very constructive overall. There are a number of changes. I think they're trying to make. From our perspective, whether it's across capital, liquidity, but also as they think about how they regulate operational risk. All of this is setting up for a constructive environment for us on that front. A lot of it is around predictability, and we do feel that we're in a time period here that allows us to ensure that we have the right risk management framework at the company, the right controls. We've made investments over the last number of quarters on that front. We have more to do, but feel very good about the results that we're getting from that, and we think it aligns with the regulatory environment.

And our next question comes from Vivek Juneja from JPMorgan.

My question, a follow-up on some of the questions that have come up on the call today. I hear you want to increase your operating margin on the custody of the servicing business to the high 20s. Why is that good enough? I mean, given your mix like you've got hedge funds, that's an attractive margin business, as your peers have talked about. Your peers are well above that, some of your peers are well above that today about your high 20s. So why would you not consider something much more value additive more quickly rather than over a multiyear period? And think about alternatives, like spinning off or merging the custody part. If the Wealth Management is where your unique service ability is, why not split the two? Why is that not a consideration?

Yes. The business model for Northern Trust is highly integrated. When you think about just the various segments, there's a number of ways why we have a One Northern Trust strategy is because of the interplay between the businesses. So we've talked a lot about the success and differentiation we have with GFO. The platform behind GFO is our Asset Servicing platform, and the technology, much of it is from our Asset Servicing business. When you think about the financial aspects of the company, a lot of the deposits that we generate on the institutional side through Asset Servicing and what we're doing for those clients get deployed through Wealth Management and our ability to offer credit to both our core Wealth Management clients and importantly, to those GFO clients as well. Needless to say, the integration of our asset management business with the other two is highly aligned. And it's not just, I would say, distribution channels for Asset Management, but it's the things that we talked about here. It's the co-creation of product to get better outcomes for our clients. So we believe that the model is integrated. We know that we have to be able to demonstrate the profitability of all aspects of the business and the company overall. To your point on those margins, the only difference between saying that the target is in the 30s for that business, and it's the high 20s, we have to get through the high 20s to get to the 30s. So we wouldn't stop when we get it into that range. It's just trying to say, how do we get there first and then we'll move above that from there.

Yes, Mike. And I would just like to emphasize particularly for the Family Office business that it isn't just about investments, right? It's about operating alpha. At the end of the day, a lot of these Family Offices don't want to be in the vendor management business. They would much rather go to a firm that has the scale and ability to help them operate the full infrastructure inside a family office. And that's what we've got. We have that scale through GFO and by leveraging off our asset servicing business to do that. So when you think about a Family Office infrastructure, it almost looks and feels like a very sophisticated investment office, and a lot of the tools like front office solutions that are used by those sophisticated asset managers are also used by our Family Office clients. So that interlink is incredibly important.

And our next question comes from Brennan Hawken with Bank of Montreal.

I recognize you've gotten a lot of questions on this. And I also appreciate that it's disruptive. I really do. But some of your shareholders have asked me to ask a fiduciary obligation question here. Mike, I'd like to explore your conviction that remaining an independent company is in the shareholders' best interest. A couple subpoints, like you said in your prepared remarks that you're well-positioned to continue to create value. But when I pull up the comp function for Northern and Bloomberg, which just shows the past 5 years, the stocks lagged like all of the relevant benchmarks and the close peers. I appreciate that some of your customers want you to be independent, but the company isn't structured as a mutual, so it's owned by the shareholders, not the customers. So why be so categorically closed off to exploring those options when the independent path has resulted in the stock lagging?

Sure. And Brennan, I appreciate the question because it gives me the opportunity to kind of wrap up on this point. First of all, we have an exceptional board. It's a board that we've built up and evolved over time, but it has a great combination of experience in different industries, including financial services, technology expertise, deep expertise and experience on governance matters and frankly, situations like this. So we have an exceptional board. They take their fiduciary duties extremely seriously. They understand the duty that they owe to the shareholders, and that's how they operate. So that's the framework at which they look at everything. And you heard where they stand with regard to the strategy, but they also understand that they have to always make sure that they're upholding those fiduciary duties. So that's the first one. And hopefully, that's crystal clear. To your second point, just stepping back a little bit on, I'll say, performance over time, I think you can divide it up into some different time periods to just kind of understand the stage that we're in right now. You use five years; we could use any number of different time periods, but there was a time period for a number of years where we were operating very much within our target financial model. Frankly, going into COVID and coming out of COVID, the growth rates for revenue, both organic and overall, were within that target financial model. Our average pretax margin was about 32% over that time period. Earnings per share grew at double digits over that time period. We then went into a period where we've made investments in the organization, a number of them across enhancing and bolstering the resiliency of the company, which, again, we've tried to detail and outline with investors. We've also invested in the businesses. We've built out a number of these capabilities that we talked about so that we can have long-term organic growth. Sometimes you need to make those investments that can hit margin in the short term but produce the opportunity to grow for a much longer time period. As a result, whether you, again, use four years or five years or 3.5 years or whatever it is, over that time period, our financial performance in that period has lagged and has not met up with our long-term standards and expectations for performance. That's why, going to the beginning of 2024, we launched the One Northern Trust strategy because that was going to take us forward for the next, say, four-year time period over that. So we're, call it, a year and a half into that, executing on it. Hopefully, you and others heard today with our progress. We've tried to be very objective and even clinical about how we look at our performance. What we're trying to convey is we have good momentum, but we're nowhere near finished with executing on our strategy. Given the proof points that we see, the strategy is working. It’s a matter of staying focused on that strategy and executing it in order to see the performance for all of our constituencies, including clients, our partners, and others, but specifically for shareholders as well through improved financial performance, which will translate into improved stock price performance as well.

Thank you, Mike, for your clear and thoughtful response to what can be a challenging question. I appreciate it. For the first time in a while, my follow-up is related. It's great to see the return on equity target increase, but if you are fully committed to remaining independent, why not reconsider these targets? You mentioned being at the upper end of the new range, but also acknowledged that recent performance has lagged. So, why not raise the entire ROE target range, including the upper end, and push for more value creation?

Yes. A little bit like my response on margins too. It's like we're going to work our way through this range, if you will, and then we'll reestablish a range above that to the extent that we likewise say, okay, now we've been performing in that range. Maybe that's part of our, I'll say, approach or style or culture to make sure that we deliver on what we say we're going to do, but that's the intention. And part of it as well, Brennan, as you know, is ROE is important, but it's not just the ROE. As I talk about our financial objectives, it's growth and returns. If it was a matter of just can you top tick on the highest ROE in a particular period of time, we don't think that creates the greatest value for shareholders. They want growth as well. That's why our strategy is also about organic growth, because that's what generates more shareholder value over time is the combination of the two.

And there are no further questions in queue at this time. I will now turn the conference back to Jennifer Childe for closing remarks.

Thank you, operator, and thanks, everyone, for joining us today. We look forward to speaking with you again in the future.

Thank you, ladies and gentlemen. This concludes our call for today. You may now disconnect, and thank you for participating.