Good afternoon, everyone. Thank you for joining us. This is our first fireside chat following lunch. Again, I wanna thank Jason Tyler, Executive Vice President and Chief Financial Officer from Northern Trust, joining us once again. He's been a good friend of this conference over the years. Thank you, Jason. Jason joined Northern back in 2011 and has been the CFO since 2020. Just a couple stats for folks, Northern now has assets about $155 billion, market cap of $20 billion. Even on an adjusted AOCI book value and tangible book value, traded about 1.7x stated book and 1.8x tangible book. On a forward earnings basis, about 13x, which is a nice multiple. Jason, thank you so much for coming. Absolutely, Gerard. Good to see you in person. I remember vividly last year being on screen, but I wanna hear about how the conference is going. This is year 27? Yes. Twenty-seventh year. All right. I was saying earlier that we started out in Martha's Vineyard, 27 years ago with about 30 companies and 70 investors, and this is our best ever. Over 300 investors have registered and over 120 corporates, and I wanna thank you for being part of that. That's great. I always look forward to this. Congratulations. It's also really great to see everybody in person again. Yes. Yeah. Good conversations this morning. Great. Super. Thank you. Maybe we could start off with interest rates. Obviously, your firm, like all of the custody banks, have a very intense interest on what's going on with the yield curves as well as the direction of rates. Can you share with us what's the ideal interest rate environment for you guys? What's the Goldilocks scenario? Yeah. I do think about it as a Goldilocks scenario. Our treasurer asks me about this a lot, what would be ideal? If I could pick, if I was- Yeah ... master for a day, I'd say, one, low rates are bad. In general, when Fed funds gets below 1%, not good. The most important thing is we wanna see rates above 1%. The next thing that's important is to look at the steepness of the curve. If you go back to a few years ago, the very flat yield curve also worked against us. There's just nothing you can do with the ability that banks have to extend. The third dynamic is the velocity of change in the yield curve. You know, for us, we saw that rear itself in a tough way with rates going up so aggressively. I think every bank got surprised by the velocity of the rate increases. This time, we'd all planned for those types of scenarios, but this was actually the closest to a, an interest rate shock scenario. Right ... that you could imagine. slower pace, but getting to attractive rates above a point, but some steepness to the curve. The last thing I'll mention is that the why of how rates have gotten to where they would be. You can see in this environment where the Fed is clearly fighting hyperinflation, you have to worry about the implications of the economy and of credit if rates are at that point because of those negative dynamics. Yep, absolutely. When you look at this rate outlook or just how you're thinking about rates, how are you thinking of managing the balance sheet now for the next year to 2 years? Is there maybe a rate cut, even though it didn't sound that way today, of course, but maybe is there a rate cut coming in 2024? Just how do you guys approach managing the balance sheet? The best way to approach it is to think about different scenarios and position the balance sheet so that you have the ability to do what clients need. We like to think that we're positioned for rates going up, for rates going down, and so we're not picking scenarios. We're more picking a mid spot in a range of what we think might happen. If you think about our balance sheet, probably two-thirds of the securities portfolio is long, the way we classify it. That in and of itself positions us well for movements in rates. The biggest thing that we have done and that came to pass when the overall industry was under, we would classify as stress scenarios, just quick movements. We were able to be there for taking on deposits and also providing loans to meet client liquidity needs. That's our biggest litmus test. Yeah. Got it. I know Northern normally doesn't provide, you know, earnings guidance, like some other companies, is there anything you'd like to say about what the quarter is looking like or the full year for Northern? Yeah. The only thing, and it's relatively soon since we talked last time, but the capital markets activities have been light. Yeah. That impacts revenue for us in a couple different ways. It hits custody and fund administration fees because part of what our clients do isn't just say, you know, custody for us, but they're working on through transactions that we often charge for. It hits in trading, obviously. Most directly, it'll hit in foreign exchange revenue for us, that's tracking meaningfully lower than fourth quarter. The way it's tracking right now, it would come in about $10 million lower than where fourth quarter FX was. Otherwise, in terms of expenses in the balance sheet, nothing to update. Got it. When you look at the new business wins that you guys focus on as well as your peers, how important is growing the business from existing customers versus an entirely new customer that comes into the organization? Yeah. Over time, super roughly 50% of the new business will come from new clients and 50% comes from existing clients. I think that surprises people. If you think about what our existing clients are doing in the asset servicing side of the business, asset managers are opening new funds all the time. Mm-hmm. That creates new activity for us, and they're also opening new locations, that creates new opportunities for us. A lot of activity coming from our underlying clients growing. It's a big component of our growth. In wealth management, there's a lot of activity there. A lot of our clients in wealth own successful private businesses. As they're reaping the rewards of dividends and growth, they're often sending us that liquidity to manage, and that creates more growth opportunities for us as well. The growth of our underlying clients, it just can't be overstated in terms of our fundamental growth profile. Yeah. You're unique compared to your two primary peers that you're often compared to, of course, Bank of New York and State Street, in that you have a loan book and you've got corporate customers, and you just touched on that wealth part. How interactive is it between the wealth management side and your commercial borrowers? You know, is that an important link that you guys foster? Yeah. It's good you bring that up because I think in the deposits we have are disproportionately, they come from the institutional side of the business. Yeah. Right. Yeah. Right. Frankly, the foreign currency time deposits come as a, as I think probably a surprisingly high percentage of our overall deposit base. On the lending side, it's actually the reverse. Mm-hmm. The majority of our funded loans come from the wealth business. It's in a couple categories I would mention or a couple examples. One would be, we've got a lot of clients that might be investing through us, and they wanna buy a second home or a boat or a third home or invest in a business. Instead of liquidating the assets that they have with us, we can work with them to leave those assets in place, not take gains on those, provide the lending. That happens a lot for us. The second category will be, a lot of our relationships do start with lending, and we wanna make sure that quickly we get into an extremely holistic relationship. A lot of our wealth clients are still accumulating wealth. They're still running private businesses. We're lending to those businesses in the form of C&I loans, commercial real estate loans. Again, that's generally tied to liquidity that they have or we anticipate them having in short order. Yeah. Speaking of winning new clients and bringing them on board, what are some of the product areas that you have the most success? Not necessarily just wealth management, but when you look at your entire organization. Sure. let's start on the asset- Sure ... servicing side. Maybe three things I'll throw out. One, Integrated Trading Solutions is something that people have, that you can see over the last few years has actually done really well for us. It's exciting for us because we're then working with clients in some ways acting as an outsourced trading mechanism for them. Mm-hmm. They can focus on developing their best financial models or best investment models. We can help them on the execution of that. Been a really nice growth vehicle for us over the last several years, and the client count now is at an attractive level. Secondly, in asset servicing, something like Whole Office, where we go to clients and effectively talk to them about everything they're doing from front office to back. Third, Investment Data Science is something that we've talked to clients about lately. It actually helps them, the asset managers, execute on their investment philosophy. That's been a lot of fun. Ultimately, though, Gerard, in the asset servicing business, the traditional custody and fund services, that's the core- Yeah ... of what we do, and that's great. It's good. We implement that well. We're known for it. These other things are ways that we've evolved to work more with clients. Super quickly in wealth, we've been talking about onboarding a lot with clients and trying to make that process less laborious. Yeah. A lot of the technology investment that we've been talking about over the last few years, particularly in wealth management, has actually gone to making onboarding an easier process. In wealth, that process can be fast, and asset servicing onboarding can still be anywhere from 3 to sometimes it's 18 months. I know now of clients who are gonna be onboarding in 2024, it takes a long time on some of those. That's a big component of technology investment, too. Sticking with wealth for a minute, you know, we think of traditional wealth management, people walking into the branches and sitting down. How important is technology and digitalization to keep those customers satisfied? Yeah, I mean, it's everything. Yeah. You know, and the two things that jump out at me about the wealth business, one, the importance of just top-tier world-class talent. Yeah. You know, our advisors, our experts in different areas, it just makes it so much better for us to be able to interact with clients and add value. That's really what we're known for. Right ... is the advice that we're giving clients. The second thing is, we have to make those experiences user-friendly, and we have to make the company user-friendly. A big component, particularly over the last three years, of what we've done from a technology perspective, has been around improving technology for wealth clients. Yeah. It even helps us in the delivery of that advice. Some people have seen us talk about the journeys that we've identified for clients as specific persona or specific thing that they're exploring with us. Recently, we launched something, Clients Like Me, and it gets it using our data and analytics to identify broad-based groups of clients that might have similar characteristics. Mm-hmm. We can go to one of those clients and say, "This is what we've learned from our experience of dealing with clients like you in the past." It leverages the scale that we have. Right. We're not just saying we're $300 billion plus in assets, but we're actually using that to the advantage for our clients. Right. Very good. You mentioned the assets under custody or the assets under administration as a core part, obviously, a core part of the business. We have heard for years there's always pricing pressure in that business. What are your thoughts on that? Is there a certain level of new business you need every year just to kind of mitigate that pricing pressure? Yeah. Well, first of all, the pricing pressure is, I mean, it's intense. I don't think it's higher or lower than what it has been before. It's just intense. I think about the how to offset that. Yeah ... a little bit differently. Some people think about it in terms of what do you need to bring in a new business? I think about it separately because it more is how much market lift do you need to offset it. Okay. A lot of times our clients are thinking about, you know, the rebid activity... Right ... and price pressure. They're thinking about it because their assets have gone up. They're paying us based on assets, they're saying, "You've gotten effectively a price increase." In my mind, it's how much equity lift do we need? How much market lift do we have to offset that? So for us, it's just beneficial that in general, a typical equity market lift more than offsets that price pressure that we talk about getting every year. Yeah. Got it. Maybe pivoting a minute to capital- Mm-hmm ... which is always important. You guys have always maintained very strong capital levels. What's the thoughts on when you look at your capital and then you look at your annual earnings, how much do you like to give back to shareholders in dividends or buybacks? Yeah. Start with dividends, that's actually been the one that's much more stable over time. Yeah. I think you've, you know, you've commented on that a lot as you've written about us over the many years. It's for us, we try to stay in a kind of 30%-50% of earnings. We think that's about the right ratio to give back in terms of dividends. It gives the flexibility on the other ways we consume capital. We've tended to see, you know, so ±40%, kind of right about where we are now. That's not coincidence. You get into the other forms of capital give back. In our minds, we're thinking heavily about, you know, share repurchase in the form of competing against other ways to deploy capital. Yeah. We don't say, "Well, whatever's left, we just wanna buy back shares." We're thinking, "What does share repurchase look like in terms of return on equity. Right ...relative to other ways we can invest in the business? Sure. A lot of times, those other ways can be in the form of expenses, but it can also be in RWA. You remember, you and I have talked about it over the years. A couple of years ago, we intentionally saw an opportunity where our clients weren't using us for lending as much as we thought... Yeah ... they could. Yeah. That was actually the discussion we had internally around that was very much about should we use that RWA capacity. Mm-hmm ... for to increase lending, or should we use it effectively in the form of stock buyback? Right. We like to talk about those share repurchases as a healthy competition between other ways to invest in the business. Sure. Maybe share with us the binding constraint on the capital ratios, CET1. Yeah ... and the impact of AOCI and. Sure ... how that's moving. Yeah. No, you're right. That's why we talk about CET1 is that's, for us, it's a binding constraint. It's not very bound- Yeah Everybody at this point, but that is the binding constraint. Yeah. That's why we talk about it all the time. You know, a couple of dynamics there, you know, just as you mentioned AOCI, you know, we. Two things. One, we did take a pretty large percentage of the portfolio, and we moved it to held to maturity. Mm-hmm. That insulates us from further impact of AOCI. Right. In terms of how we think about the existing component of AOCI, we know that, you know, call it, you know, $60 million a quarter is gonna be pull to par there. Just as if we knew that there was something external that was gonna be negatively impacting our capital ratios, we would be thinking about that as we analyze what to do. Conversely, it's obviously on our mind that we know we're all other things equal, we're gonna have the $60 million a quarter pull to par. Yeah. Those are the big headlines. Yeah on how we talk about it right now. Got it. Good. Moving over to deposits, obviously quantitative easing is over. Quantitative tightening is underway. Right. What kind of impact have you guys seen from quantitative tightening on your balance sheet? Yeah. It's been an interesting journey. If you go back, you know, we were at, you know, call it $90 billion in deposits. We went up to $135 billion-$140 billion, somewhere in that range. You know, the Fed was up $5 trillion. If we were up 40, it tells you... $40 billion, it tells you we're probably at $8 billion per trillion. Yeah. That relationship worked on the way up. On the way down, by the way, the timing was pretty much aligned too. Yeah. The Fed went really quickly. On the way down, clients could clearly see that that was about to happen, and so we started to see the decline in deposits a little earlier. Even if we just rewind to January when we were talking about deposits, you could see about half of that increase had come off. That's probably in the neighborhood of where the Fed has signaled that they're gonna be in the short run, and so the relationship seems to be correlated well. I always, or I always caveat, are the deposits and loans for us super spiky. Yes ... and chunky. It's hard to tell, but it seems like the correlation working the same way up and down. Yeah. Speaking of deposits, with the deposit betas today with the elevated interest rate environment, how are they performing relative to expectations and maybe your past cycles? Yeah, this, you know, overall, so far, the betas have been about 60%. You know, we've talked about the fact that the institutional side, at this point... Yes ... from here. Yeah about 100%. Correct. Right. wealth is meaningfully lower than that. Yeah ... than that average. It's performed about as we anticipated. Our whole approach has been hold on to the assets. Right. Hold on to the client activity. We knew that and we'd have an aggressive cycle. As you know, we care so much about client retention, it's been less about, can we squeak out another $1 here and there? Can we hold on to 5 basis points of NIM? More on the spirit of, make sure that we hold on to the deposits. Right. Yeah. Moving over to asset servicing, obviously, it's a big part of your business with the asset servicing trust investment and other servicing fees. When we look at the U.S. business, there might be a perception that it's a mature business. I don't know what your thoughts on are about that. Is there some growth opportunities or no, it's fairly mature? There's no doubt that it's very mature. We've found that to be okay. I mean, first of all, we're still gonna get benefits from the equity market. Right ... that I talked about earlier, and that's a very good component of the financial model. Sure ... to know that you're gonna get that kind of, that kind of lift over time. Secondly, we've been able to innovate and add around the edges of what we're doing for those clients. I talked earlier about Integrated Trading Solutions. Right ... and about what we're doing in the Whole Office, and those are meaningful improvements. And then the same time, the asset manager sleeve- Right ... or the institutional client base is growing really nicely over time. Fundamentally, I think that we should use as a litmus test, what is the pre-tax margin in the business? That's been, you know, for any given interest rate environment, it's actually been relatively stable. Right. I think it tells you that the innovation that we've had, the client's usage of other products and services, and most importantly, productivity. Yeah ...the combination of those things has enabled us to maintain margin. That's important, and that's part of the reason why such strong sense of urgency right now on productivity and making sure we get at that and embed it in our culture well. Sure. When you look at this business, what% of it is priced off of the asset values? You know, almost like a variable pricing model- Yeah versus a flat fixed rate fee. Well, just by category, if you take the custody and fund administration and investment management fees. Yeah ... Those are the areas that are tied to assets. Right. That's 90% of the overall asset fees. Even within that, not all are. Those are the categories, but ultimately, about 40% are truly sensitive to equity. Right fixed income market movement. Got it. When you take a look at pivoting back to the wealth management business, which again, sets you apart, you've had some nice expansion from 20 years ago when it was primarily Chicago, 30 years ago, to around the country. When you look at it, what are the drivers for gaining new clients? Everybody knows you're in Chicago, obviously, but outside the Midwest, what's that success that you've had? We just, you know, ironically, we just had our board meeting in Florida. Yeah ... last week, and, we took our leadership team down there. We've been in Florida for over 50 years. Yes. That's right. You know, we started there in Miami, we've got, as much as we're known in the Midwest, we've got 20 offices around the, you know, the coast. We separated into 3 markets. When there's money in motion in Florida, I think we do well. Secondly, I think growth and wealth, there are some just categorical things that benefit us. A lot of it is when clients have liquidity events. They've been managing a business, growing a middle market business for 20 years. They sell it for $150 million. Their attorneys and their accountants are very likely to encourage them to call us, particularly in those. Right ... markets where we're well known. At the same time, the complexity of what's happening in taxes and other ways. We've created The Northern Trust Institute, another mechanism to get to clients and leverage the expertise we have, which I just can't overstate. That's what really has generated a lot of the success over time. You know, of course, our family office business, if people have noted, we report that separately. Right. You can see how well that's done over the last several years as a driver of growth and wealth. Sure. Is there any evidence, again, you've been in Florida for a very long time. There's a migration, it seems like, to some of our lower cost states, Florida being one of them. Especially for your customer base of wealth, it's a natural attraction. Obviously, there's probably been benefits. Have you guys seen any pickup in that because of some of the changes we're hearing about? Yeah. I think particularly as clients go through the. Yeah ... they know that we've got tremendous amount of expertise and repetitions in helping clients make that type of move. Right. You know, they're friends of mine that call all the time and say, "I'm thinking about re-domiciling or, you know, retiring and can you guys help me think through what I need to do?" It's, it's something that with all the experience we have of the all the clients that have done that, we're able to put together that and leverage it in ways that can help the next client well. Yeah. One of the big clients for both of us is moving to Miami. That's the rumor. There you go. Maybe coming back to expenses, it's something that was discussed on your fourth quarter call. Maybe you talked about bending the curve of expenses. Can you share with us what's going into that effort to bend the curve? Sure. We talked about productivity office and, you know, it starts there. The big categories for us, if you wanna just frame it, you know, one, it comes down to really people, the people costs, our workforce, and then secondly, technology. Let's double-click into it. Yeah ... from that framework. In people, we have to have strong analytics and data around where we need people, how we think about even replacing people when there's turnover, and at what wages are we gonna replace them. Building analytics around that and thinking about what the outputs are for different groups. Where should we deploy resources? There's a lot of analysis that can go into that to help us- Mm-hmm become better. In terms of technology, it also comes down to thinking about big costs or its vendors. We've got to negotiate well. Yeah. We've got to make sure we understand what our demand is, what our consumption is for different products and services. What are we paying on a per unit basis, and make sure there's efficiency both in what we're consuming and what we're paying for them. You know, a lot of this obviously gets down to leveraging some of the work we've done in technology to build systems where we can say, "This is where we need to deploy resources. This is where we don't have to." Even moving a lot of what we did and we talked about in January is getting the work done in the right places. There's opportunity we have to get work that might be done in North America should it be done in Asia. Right. Work that's being done in continental Europe. Yeah ... in the U.K. shouldn't be done somewhere else. There's still opportunities for us to identify those things and create good savings. And some of it, you know, obviously last year, fighting inflation, fighting a very difficult labor force environment. Yeah ... a lot of those things, pushed really hard, but we feel like these efforts can start to get at those categories in meaningful ways. Have you seen any benefits? Obviously, Silicon Valley is struggling. There's a lot of layoffs of very skilled people, tech people. How has that affected your hiring of tech people or keeping your tech people? Is that you guys seeing any benefit? It comes into play, Gerard. I mean, it comes in more. Yeah in lower turnover. Right. there's a lot of what happened last year was, is people always wanna hire for from Northern Trust. Sure. We talked 15 minutes ago about the importance of talent. We wanna retain our talent. Well, it's a big component of what we do from a human resources perspective. People know that if there's somebody that's been working on technology at Northern Trust with the client base we have, that's attractive. You know, all these things as the labor market changing. Mm-hmm should help us. speaking of technology, what's the annual investment in technology or how do you measure that to be confident you're spending the right amount of money for your company? We spend in the neighborhood of $1.3 billion a year on technology. Yeah. It shows up in equipment software, it shows up in our outside services, and it shows up in compensation. Yeah. Categorically, it's an enormous investment for us. Yeah. That's why I mention it as a core component of the productivity office and getting that right, you know, vendors, demand management, you know, data and analytics, and making sure that we're getting also returns on what we're doing, justifying the projects that we're gonna launch. There's a lot of good work that we can do there. Yeah. In the last minute here, I do wanna touch on the commercial banking business. Yeah. It's- Why- I don't know if it's the redhead- It's not you, Gerard, who would touch on it. There you go. Yeah, I don't know if it's the redhead stepchild or not. Anyway, can you share with us just how is that business going? You guys are always very good on credit underwriting. You mentioned a moment ago that two years ago, you guys stepped it up. Maybe just share with us what's going on in commercial banking. Yeah. It's core for us, and it's just being in Florida and hearing our market leaders talk about how credit has been able to deepen relationships early on and then lead to great trust and investment relationships is fantastic. You know the culture that we have. We've done well in growing loans, but we haven't changed our credit appetite. Right ... or our underwriting standards. A couple years ago, it was all about make sure our clients know that we're not a reluctant lender. We wanna be providing those loans. That worked. It created a big step-up. From here, it's probably business as usual, if not better, but that's what we want it to be. We're in that business. We find it's very attractive and leads to good relationships. Is Florida one of the growthier areas for you in commercial lending now, or is it still your heartland in the Midwest? Yeah. No, Florida is an area for us and where we're seeing good activity. The culture there of our teams down there. Yeah ... is strong in that area. You know, obviously in Chicago, we do really well there, but Florida is there. It's a really strong market for us, and we know it's not. You don't get the welcome to town loans- Yeah ... if you've been in the market for 51 years. Yeah. Right. Right. Yeah. No, listen, as we've run out of time, you ended it on a good note. I appreciate that. Jason, please join me in a round of applause thanking Jason for coming. Thanks, Gerard. Great.