Northern Trust - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered solid operational progress: diluted EPS rose to $2.13 (+12% QoQ) and GAAP revenue to $1.998B (+3% QoQ), aided by record net interest income and better pre-tax margins; trust fees grew YoY despite FX trading pressure.
• Versus Wall Street: EPS beat by ~$0.07 and revenue modestly exceeded consensus; Q4 2024 and Q1 2025 were also EPS beats, with Q1 a slight revenue miss (S&P Global data)*.
• Management raised the medium-term ROE target to 13–15% (from 10–15%), reaffirmed 2025 OpEx growth “below 5%” (ex-notables, regardless of FX), and guided FY 2025 NII to mid-single-digit YoY growth; dividend increased to $0.80 per share and buybacks reached $339M in Q2.
• Near-term catalysts: clearer independence stance, higher ROE target, dividend hike/buyback intensity, and improving segment margins; watch for normalization of deposit levels and non-recurring ~$10M NII boost from Treasury FX swaps to fade in Q3.

What Went Well and What Went Wrong

• What Went Well

  • “Record net interest income” and “meaningful expansion in our pretax margin,” with EPS up ~20% excluding prior-year notables; dividend increased by $0.05 (7%).
  • Asset Servicing pre-tax margin expanded >10 pts YoY to 23.2%; Custody & Fund Administration fees +5% YoY; continued wins with asset owners and alternatives momentum.
  • Clear cost discipline: H1 2025 OpEx +4.8% YoY (3.8% ex-FX), on track for <5% FY growth; AI and automation (e.g., GitHub Copilot) cited as productivity drivers bending the cost curve.

• What Went Wrong

  • FX trading income declined QoQ and YoY due to unfavorable treasury FX swap activity; core FX ex-swaps was +10% YoY, but reported FX was pressured.
  • Provision for credit losses rose to $16.5M on higher reserves for a small number of NPLs and macro outlook deterioration (partly offset by CRE improvements).
  • Wealth Management fees were flat QoQ (-$2.6M) with pre-tax margin “flattish” (37.2%); organic growth beneath ultra-high-net-worth tiers remains a gradual build via targeted market penetration.

Transcript

Operator (participant)

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.

Jennifer Childe (SVP and Director of Investor Relations)

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 Stegman 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 23rd 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 23rd. 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. During today's question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O’Grady.

Michael O’Grady (Chairman and CEO)

Thank you, Jennifer. Let me join in welcoming you to our Second Quarter 2025 Earnings call. We reported another quarter of improving results, reflecting a 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 multi-year transformational strategy, which is producing clear proof points that it's gaining traction.

Turning to slide two, our One Northern Trust strategy is centered on our mission to be our client's most trusted financial partner and 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.

Turning to slide three. 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. Turning to slide four. 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.

In asset servicing, we continue to expand our leadership position, in particular in the semi-liquid fund market, where we now support six of the 12 long-term asset funds in the U.K., with seven more in the pipeline. We also support five European long-term investment funds. We're 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. Turning to slide five, 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's 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 that 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 of GFO, combined with a dedicated Family Office Solutions relationship advisor 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 in 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. We're also actively investing in revenue-generating talent across these regions to strengthen client coverage and drive new business. Turning to slide six, 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 advisor 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. In ETFs, we're enhancing our platform with the planned upcoming launch of 11 new fixed-income strategies in the third quarter.

These products are designed to meet growing demand for efficient, transparent, and scalable exposures and will complement our existing index and liquidity offerings. Turning to slide seven, 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 our 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 up-market 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 US 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. Turning to slide eight, 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 multi-year 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. 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.

On 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. Turning to slide nine, 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, and 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%-15% to 13%-15%. Turning to slide 10. 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. With that, I'll turn it over to Dave to review our second quarter results. Dave?

Dave Fox (CFO)

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, pre-tax 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.

Michael O’Grady (Chairman and CEO)

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 non-interest 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 non-performing 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 pre-tax 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 pre-tax profit nearly doubled over the prior year period, and the asset servicing pre-tax margin was up more than 10 points to 23.2%. Excluding $75 million in notables in the prior year, asset servicing pre-tax profit increased 29%, and the pre-tax 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 pre-tax profit increased 18% over the prior year period, and the pre-tax margin was flattish at 37.2%. Excluding approximately $33 million in notables in the prior year period. Wealth management's pre-tax profit increased 5% year-over-year, while the pre-tax margin decreased 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 in our balance sheet and net interest income trends. Our average earning assets were up 6% on a link 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 one 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 non-interest-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 one ratio under the standardized approach decreased by 70 basis points on a link 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 one 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. 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 5-cent or 7% increase to our quarterly dividend. Turning to our guidance, 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, a mostly stable deposit mix, meaning that we would not 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. With that, operator, please open the line for questions.

Operator (participant)

Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open.

Again, that is star one to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for a question. Our first question comes from Glenn Shore with Evercore. Your line is open.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Hi, thanks. Thanks for that definitive declaration of independence. Put that to bed. I am curious on these. There are multiple initiatives across alternatives and the 11 new fixed income ETFs that you have scheduled for the second half. I guess, A, I would love any numbers that you could throw at it because you talked about the progress, but whether it be AUM, capital raising, AUC, revenue, anything. I am also very interested in, How much you define that as push, meaning you rolling out products and pushing them across the platform and playing a little catch-up versus pull, where you're seeing whether it be client or advisor demand from these products and you're developing as a response to that. I appreciate it. Thanks.

Michael O’Grady (Chairman and CEO)

Sure. Thanks, Glenn. On the alternatives front, as you heard, yes, a lot of effort on that front. Overall, I would definitely characterize it as pull. I say that because of just the changes in the marketplace that you're well aware of towards more private markets versus public markets. We need to make sure for our clients that we're providing the right alternatives for them. That is, I would say, the overriding factor that's driving it. On the other side of it, we have to also say push internally to make sure that we have those alternatives for them.

That is why across the front you see everything from 50 South through the advisory, through our third-party platform. We're trying to do it in a number of different ways. It is not just one thing pushing hard. To try to size it for you a little bit, excuse me, I would say in the first half, we raised across all of those about $2.5 billion. That does not include the advisory, which was another approximately $1 billion on that front. When you think about just at a high level kind of what the opportunity is, if you just look at our wealth franchise and our wealth client base, our clients are below 5% when it comes to allocation to private markets. There is still plenty of room in their portfolios to get closer to what we would even see as the appropriate allocation.

That is going to depend on the client segment. At the upper tiers, as you know, family offices can have as high as 40-plus % allocation to alternatives. As you work your way through the tiers, you would be closer to maybe 10% or 15%. That is still a lot of, I'll say, room for them to grow through that pull of what they want in their portfolios.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

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. Thank you.

Michael O’Grady (Chairman and CEO)

Sure. 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. This is another example of how asset management and the wealth management business work together to develop specific products that fit for the needs of our client base. 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.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Thanks for all that. Appreciate it.

Michael O’Grady (Chairman and CEO)

Sure.

Operator (participant)

Our next question comes from Betsy Gracek with Morgan Stanley. Your line is open.

Betsy Grascek (Analyst)

Hi. Good morning.

Dave Fox (CFO)

Good morning.

Betsy Grascek (Analyst)

I wanted to just dig in a little bit on the decision to tighten up the range for ROE. I think it's from 10-15% to 13-15%. 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?

Michael O’Grady (Chairman and CEO)

Sure. If we go back in time a little bit, when we first set the range at 10-15%, our ROE was below 10%. A lot of the objective at that point was get into the range, which we did some time ago. 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. That's why we, over time, maintained it at 10-15%.

It took into account, I'll say, different interest rate cycles and significant changes in the equity markets. We felt like that was the right broad range. We've been producing returns now at that upper half for some time period. With the momentum that we have here in the strategy, we think that's going to continue to be the case. I would also say that over time, there's been less clarity or certainty around the capital framework, the regulatory capital framework. 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. We just have greater comfort, I'll say, that the capital requirements are in the range that we're in right now.

As long as we continue to execute and under, I'll say, somewhat normal level of market conditions, we think that range of 13-15% is appropriate. 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 105-110. We're working our way towards that. We're at 115 now. That's down from where it was. We'll look to continue to grind it into that range. That, obviously, then provides a higher level of profitability, which then translates into the ROEs in that range.

Betsy Grascek (Analyst)

Okay. Thank you.

Michael O’Grady (Chairman and CEO)

Sure.

Our next question comes from Abraham Punawalla from Bank of America. Your line is open.

Ebrahim Poonawala (Analyst)

Hey, good morning. Morning. 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, 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?

Michael O’Grady (Chairman and CEO)

Sure. As you've heard from my comment, we are completely focused on executing on our strategy. We believe that that strategy of independence is what will produce the best returns for our shareholders, ultimately. The reason why that is, is a little bit to your point. We believe that that provides a unique value proposition for our clients.

Frankly, through this, the last several weeks, we've heard from a lot of our clients who've made it clear that they have lots of alternatives for various providers or financial partners that they could have across—this is across families through very large institutions—who have said, "We chose Northern Trust because it's a different value proposition." It's one where you are focused on trying to provide a higher level of client service, where you do have very targeted expertise in just certain segments of the market where you compete. We believe that that differentiated value proposition is the one that's going to create the most value. Now, over time, as you know, we have done acquisitions that enable us to either enter another market or to bolster our capabilities in a particular market. We'll continue to look at those over time if they make sense.

We're an organic growth company, so it's not by any means the primary driver. If at times there's something that would be attractive for us on the inorganic front to do to improve that value proposition, we would consider doing it, obviously, with very high standards.

Ebrahim Poonawala (Analyst)

Got it. I guess maybe just sticking with capital deployment, just remind us how you think about pace of buybacks relative to just given—I mean, the stock's obviously done well year to date—is there a certain valuation, price to earnings, price to tangible book multiple, where buybacks begin to look less attractive? Thank you.

Michael O’Grady (Chairman and CEO)

Sure. I'm going to let Dave take that.

Dave Fox (CFO)

Yeah. 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. 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. I think we're at a very healthy clip, close to $500, obviously, this quarter. We 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.

Ebrahim Poonawala (Analyst)

Got it. Thank you.

Dave Fox (CFO)

Sure.

Operator (participant)

We'll take our next question from Mike Mayo with Wells Fargo. Your line is open.

Mike Mayo (Analyst)

Hey, I'm going to continue the line of discussion. There's been so much press, and it must be disruptive to your clients and employees and perhaps annoying, but it still comes up among investors. I hear you. Commitment to independence, 135 years, be around for generations to come. You've mentioned the short-term four quarters of growth and operating leverage, medium-term, higher ROE targets, long-term one, Northern Trust. I hear you loud and clear. Mike, you're before Northern Trust. Certainly, you know about deal-making. That's all clear. It doesn't stop others from saying, "Hey, maybe we want to buy you." You've been in that state for the last, I'd say, three decades. That's also nothing new. Having said that, under what circumstance would you consider ridding the custody business? Because you talked about scalability. The first word when you gave the update there. Perhaps that could use more scale or the way I think of it, I think of the crown jewel as the private bank and the asset management. The asset servicing, you're trying to optimize more, but maybe strategically, you could do more there. Alternatively, maybe you could buy somebody else to get that scale.

Michael O’Grady (Chairman and CEO)

Thanks for the question, Mike. 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? 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 because 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. 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. That's the first piece. The second piece of that is a place that you do get scale is through technology. How can we apply technology in such a way and leverage technology to create that?

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. 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. 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. The third thing I would say is there are different parts of the value chain that create scale for you.

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. As you move back through the value chain, we find those areas where more centralization, more standardization, more automation is where you create that scale. 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. All of your capital markets capabilities, specifically cash, payments, that's the way we're organizing it underneath the COO, Peter Cherecwich. Then again, centralize, standardize, automate using technology to do that. We're seeing the early returns or benefits from that.

We've gone down headcount consistently since we've started on that transformation of the operations. 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. It has to flow through to the numbers. That is why the margins in our asset servicing business need to go up. We are in the low 20s right now. Those should be in the high 20s. That is what we are moving towards with that.

At the end of the day, that is what will demonstrate. Are you getting scale? Is that an attractive business? To the extent it is not, to your point, you think about different ways that you can potentially modify that or change it to ensure that you get it.

Dave Fox (CFO)

Yeah, Mike. 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 are trying to go. As that business gets bigger and the asset management side of the equation gets smaller, you are going to see the margins drift up as well. That particular segment we have identified is already there.

Mike Mayo (Analyst)

Got it. Thank you.

Dave Fox (CFO)

Thank you.

Operator (participant)

We will take our next question from Alex Blustein with Goldman Sachs. Your line is open.

Alex Blostein (Analyst)

Hi. Good morning, everybody. Thank you for the question. Appreciate all the extra segment disclosure on the margins, profitability, and obviously the target as well. That is all very helpful. I wanted to ask you guys around the timing to achieve some of these. You have had the 30% plus pre-tax margin as a target out there for a little while. It is helpful to understand the pieces a little bit. As you think about how long it will take you guys to get there, and ultimately, what interest environment does that contemplate? Obviously, there is a lot of profitability related to NII, and you are talking about profitability of the firm as a whole. Curious kind of how that plays into the rubric.

Michael O’Grady (Chairman and CEO)

Sure. Just as far as the backdrop on the market environment for it, it is one of, I would say, 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 have gone through a time period, obviously, where rates were going up, then they went down to zero, then they went up very fast. Now it appears that we are at the beginning of a time period where they are 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 will say, leg into that change in the shape of the yield curve. That is the expectation.

Of course, we have to be positioned for different things happening on that front. To the, I will say, the more important part, Alex, which is just what is the timeframe on that? Obviously, we are 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. 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're achieving that 30+%. If we can get there sooner, great. As I mentioned, the environment can help us. It can create a headwind as well, but that's what we're looking to move towards. Gotcha.

Alex Blostein (Analyst)

Thanks, Mike. That's helpful. Just to follow up on NII. Heard the guidance for the full year, obviously implies something in the maybe $570 million 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 one-year duration overall. With rate cuts, kind of how are you thinking about the trajectory from NII off of that jumping-off point? Are there any things you could do today to mitigate the effects of potentially lower interest rates in the U.S.?

Dave Fox (CFO)

Yeah. 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 runoff yield. That's one area to do it.

The second area, obviously, as we've been very focused on our deposit pricing and things of that nature, we are not just in U.S. dollars in deposits as well. We take a look at opportunities across all the different currencies. There are rate cuts that are going to be, I think, realized with some of those currencies as well. 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 2026 as well. Great.

Alex Blostein (Analyst)

Thank you.

Operator (participant)

Up next is Ken Huston with Autonomous Research. Your line is open.

Ken Houston (Analyst)

Hi, good morning. 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? I guess kind of how would you help us understand the push and pull between organic growth and markets' help 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? Thanks.

Dave Fox (CFO)

Yeah. Yeah, 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 was just they took the business in-house. We've not lapped that yet.

I would say 0.5% of the growth got nicked by that. As we get beyond those two client losses, you'll see some more realistic numbers in terms of year-over-year comparisons on that. That's sort of the way I think about it.

Ken Houston (Analyst)

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

Dave Fox (CFO)

Yeah. After the third quarter, those have been lapped definitively. Right now.

Ken Houston (Analyst)

Go ahead. Yep. No, go ahead. You follow up.

Dave Fox (CFO)

No. I mean, basically, the quarter was client neutral, I mean, when you think about it. From that perspective. 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? You've got to take that into consideration as well. That also affected the wealth business. Wealth is obviously on a month-lag basis. In Q1, if you look at the S&P, it was down 5%. NASDAQ down 10.5%. Take all that into consideration as you're taking a look at those absolute levels.

Ken Houston (Analyst)

Yep. Follow up just on the wealth side. I like the layout that you gave and that Mike gave in the prepared remarks and the slides. 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?

Michael O’Grady (Chairman and CEO)

Yeah. As we talked about, we are seeing positive organic growth in the wealth business. It is not at the level that we want and are targeting. To your point, it's a little bit more of a gradual increase in momentum. The way we're going about it is a few different ways.

The first, and you heard this in my comments again, is from, I'll call it, a segmentation perspective. We're trying to get more focused on certain segments so that we can increase the rate there. We've had that in GFO, so we're trying to essentially replicate that in the ultra-high net worth segment. It's early days on it, but the win rates are higher. As a result, we've also added more talent on that front to be able to continue to increase the growth rate of that segment. I would say as you go down to the tiers below that, that's where we're really focused on particular markets, geographic markets, where essentially what we're trying to do is get our market penetration. More in line with the way it is in our more mature markets.

We have very strong market share in Illinois, in Florida, as maybe you'd expect, a high success rate there. We are trying to do the same thing in Northern California, Southern California, Texas, New York, where our market share is still low relative to the potential. On that front, I would say you heard some of the organizational changes, adding some additional leadership, some from the outside. We are going to be hiring more revenue-generating roles in those markets to be able to drive that. To your point, it takes some time to get more people on board, get them up to speed, and to get then that higher level of organic growth. We are extremely focused on it.

Ken Houston (Analyst)

Great. Thanks a lot, Mike.

Michael O’Grady (Chairman and CEO)

Sure.

Operator (participant)

Up next is David Smith with Truist. Your line is open.

David Smith (Head of Consumer Lending)

Thank you. Good morning.

Dave Fox (CFO)

Good morning.

David Smith (Head of Consumer Lending)

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

Dave Fox (CFO)

Yeah. 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. From that perspective, they are running a little bit higher. I will say in the current quarter, they are starting to normalize, and that's probably why I'm giving 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. Fourth quarter picks up a little bit. They are 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 deposit that came in. 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. We did have some deposit activity that was concentrated among some very large clients in the quarter as well.

David Smith (Head of Consumer Lending)

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

Dave Fox (CFO)

Yeah. I mean, it's back to where we thought it would be. 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 risk-off trade, it's back to those levels.

David Smith (Head of Consumer Lending)

I think you said that flows in 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?

Michael O’Grady (Chairman and CEO)

Yeah. 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. 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. In a time period where, for market reasons and others, some of the strategies of our asset management clients resulted in net outflows for them, we've seen that stabilize. That's a positive for us as well on the asset manager side.

Dave Fox (CFO)

Yeah. I'd also add that AUM flows, which obviously impact both businesses, were positive. Liquidity was a real standout, and that is biased towards the institutional business. $8 billion in the second quarter, $19 billion year to date on the liquidity side, which represents our 10th consecutive quarter of positive liquidity flows. That's obviously great for our business.

David Smith (Head of Consumer Lending)

Thank you.

Dave Fox (CFO)

Sure.

Our next question comes from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell (Director)

Great. Thanks. Good morning, folks. Thanks for taking my question. I appreciate all the extra color in the slides and your commentary today on the businesses. It's really great. Two questions. Maybe the first one, they're both going to focus on wealth management, but the first one, going back to the efficiency initiatives within wealth management, particularly on the digital side and AI, and automating some more of the services. Can you comment about how that's enhancing the ability for client delivery and relationship management? Just thinking about some of your differentiating aspects as a wealth manager, obviously the personal relationship side is a huge one. Is there any risk of getting too automated, or rather do you see it as really just enhancing and actually strengthening the relationship? In that vein, you've gone sort of upmarket for really the last couple of decades in terms of the services. Any interest in moving a little bit downmarket within the wealth spectrum to potentially improve that organic growth rate?

Michael O’Grady (Chairman and CEO)

Sure. On the first one, what I would say is definitely those initiatives are focused on enhancing the client experience. 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, and 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 definitely creates productivity for us, but also makes it easier for the employees to be able to utilize that information. 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. On that front.

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. Enhancing in that way. 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 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. With regard to the markets, 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? You heard me talk about, obviously, GFO, but then ultra-high net worth, and then absolutely below that level. Think kind of anywhere from $10 million-$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.

Brian Bedell (Director)

That's great color. On alternatives, you mentioned, I think, a 5%, or at least less than 5% penetration across the franchise. GFO, obviously, much more, much higher, more institutional based. If you can, can you strip out the allocation between those two segments? I guess what I'm getting at is, excluding GFO, what do you really see as the current penetration and therefore the runway? Do you currently have all the right products available? What I'm really getting at is the access to the largest, even publicly traded alternative managers or private market managers that have democratized product in the channel. Do your clients have full access to those yet?

Michael O’Grady (Chairman and CEO)

Sure. 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 the penetration level, if you will, is even lower than it would be in our core wealth on that front. A lot of it's because they're going direct to the largest managers on their own. 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 the, I'll call it the research capability of 50 South, where we will then bring certain managers to them that they might not otherwise have access to. That's how to think about the GFO side of it.

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 WM Alts platform, our third-party funds platform. We'll continue to provide some of that. Frankly, our clients tend to be interested in things that are more bespoke or hard-to-get type managers, where we do have the relationships through 50 South. As a result, we can provide those types of funds. 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. 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 vehicles. Base.

Dave Fox (CFO)

Yeah. 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. If it fits our client base accordingly. The other thing I would say is we're doing a lot more on the alternative 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. 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.

Brian Bedell (Director)

Right. That's super great color. Thank you so much.

Dave Fox (CFO)

Sure.

Operator (participant)

Up next, Gerard Cassidy with RBC. Your line is open.

Thomas Leddy (AVP)

Hi. Good morning. 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?

Michael O’Grady (Chairman and CEO)

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'll 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 tokenize 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.

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 in other areas. We just see this as the next stage for this.

Thomas Leddy (AVP)

Thank you. 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 SEBs coming out of that. Can you just share your thoughts on the potential benefits for Northern Trust, more specifically, from expected relief?

Michael O’Grady (Chairman and CEO)

I'm sorry. Your phone cut out there for just a minute. Can you repeat your question, please?

Thomas Leddy (AVP)

Yeah. Of course. Sorry about that. It appears the expected regulatory relief for the banking industry will have a pretty big impact on at least the money center banks. We saw the recent stress test results and the resulting SEBs. Can you just share your thoughts on the potential benefits, more specifically for Northern, from expected relief?

Michael O’Grady (Chairman and CEO)

Yeah. We would say that the regulatory environment, as we look out, is very constructive overall. There's 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. 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. We think it aligns with the regulatory environment.

Thomas Leddy (AVP)

Okay. Great. Thank you for taking my questions.

Dave Fox (CFO)

Sure.

Operator (participant)

Our next question comes from Vivek Junanijay from JP Morgan. Thank you.

Vivek Juneja (Senior Analyst)

My question, a follow-up on some of the questions that have come up on the call today. I hear you. You want to increase your operating margin on the servicing business to the high 20s. Why is that good enough? I mean, given your mix, 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, above your high 20s. Why would you not consider something much more value-additive more quickly rather than over a multi-year period? And think about alternatives like getting rid of, 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?

Michael O’Grady (Chairman and CEO)

Yeah. The business model for Northern Trust is highly integrated. When you think about just the various segments, there are a number of ways why we have a One Northern Trust strategy, because of the interplay between the businesses. We've talked a lot about the success and differentiation we have with GFO. The platform behind GFO is our asset servicing platform. 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, but importantly, to those GFO clients as well. Needless to say, the integration of our asset management business with the other two is highly aligned. 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. We believe 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. We certainly 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.

Vivek Juneja (Senior Analyst)

The high 20s might—sorry, go ahead.

Dave Fox (CFO)

No, 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. That's what we've got. We have that scale through GFO and by leveraging off our asset servicing business to do that. When you think about a family office infrastructure, it almost looks and feels a lot 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. That interlink is incredibly important.

Vivek Juneja (Senior Analyst)

Okay. Dave, let me thank you. I'll join the chorus of applauding you on the increased disclosure. It's taken us several years to get there, but thank you for doing that.

Dave Fox (CFO)

Did it just for you?

Vivek Juneja (Senior Analyst)

Yeah.

Operator (participant)

Our next question comes from Brennan Hawkin with Bank of Montreal. Your line is open.

Brennan Hawken (Analyst)

Good morning. Thanks for taking my question.

Dave Fox (CFO)

Good morning.

Brennan Hawken (Analyst)

I recognize you've gotten a lot of questions on this. I also appreciate that it's disruptive. I really do. 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 of subpoints. You said in your prepared marks that you're well positioned to continue to create value. When I pull up the comp function for Northern and Bloomberg, it just shows the past five years, the stock's lagged 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. It's owned by the shareholders, not the customers. Why be so categorically closed off to exploring those options when the independent path has resulted in the stock lagging?

Michael O’Grady (Chairman and CEO)

Sure. 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. We have an exceptional board. They take their fiduciary duties extremely seriously. They understand the duty that they owe to the shareholders. That's how they operate. That's the framework at which they look at everything. 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. That's the first one. 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. 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 pre-tax margin was about 32% over that time period. Earnings per share grew at double digits over that time period.

As we have talked about, we then have gone into a period where we have made some investments in the organization, a number of them across enhancing and bolstering the resiliency of the company, which, again, we have tried to detail and outline with investors. We have also invested in the businesses. We have 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 over that and going forward.

As a result, whether you, again, use four years or five years or three and a half 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 is 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. We are, call it, a year and a half into that, executing on it. Hopefully, you and others heard today with our progress. We have tried to be very objective and even clinical about how we look at our performance. What we are trying to convey is we have good momentum, but we are nowhere near finished with executing on our strategy.

Given the proof points that we see, the strategy is working. It is a matter of staying focused on that strategy and executing it in order to see the performance for all of our constituencies. Yes, including clients and our partners that are working on this and others, but specifically for shareholders as well through improved financial performance, which will translate into improved stock price performance as well.

Brennan Hawken (Analyst)

Right. Okay. Mike, thank you for the clear and thoughtful answer to what can be a very charged question. I appreciate that. For the first time in I do not know how long, my follow-up actually is related. Great to see the ROE target come up. If you guys are moving online and staying independent and totally committed, why not re-underwrite some of these targets? You said you have been at the upper end of the new range. You also said that recent performance has sort of lagged. Why not up the ante and make the ROE target range in its entirety, not just the lower end, but the upper end too, move higher and really press for some value creation?

Michael O’Grady (Chairman and CEO)

Yeah. A little bit like my response on margins too. It is like we are going to work our way through this. 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. That is the intention. Part of it as well, Brennan, as you know, is the 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 is why our strategy is also about organic growth because that is what generates more shareholder value over time, the combination of the two.

Brennan Hawken (Analyst)

That's great. Thanks so much, Mike.

Michael O’Grady (Chairman and CEO)

Okay. Thanks, Brennan. Appreciate it.

Operator (participant)

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. 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. Thank you for participating.