Northern Trust Corp ($NTRS) Q2 2026 Earnings Call

Good day, and welcome to the Northern Trust Corporation second quarter 2026 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Steve Carroll, head of investor relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Northern Trust Corporation second quarter 2026 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 Stedman 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 22nd 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 22nd. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements 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.

Thank you, Steve, and good morning, everyone. Let me join in welcoming you to our second quarter 2026 earnings call. Our results this quarter reflect strong execution of our One Northern Trust strategy and a very constructive market environment. We delivered an eighth consecutive quarter of positive organic fee growth and generated significant positive operating leverage, underscoring both the strength of our diversified business model and the discipline with which we are managing the firm. As we've discussed, our strategy is centered on driving sustainable organic growth, improving productivity, and strengthening resiliency. Across each of these priorities, we continue to see clear proof points and are demonstrating our ability to perform consistently across a range of market environments. In the quarter, we participated in the second tranche of the Visa Class B common stock exchange offer, positioning us to recognize a pre-tax gain of nearly 525 million. Reported results also include approximately 220 million in restructuring charges and other notable items, which Dave will discuss in more detail. Excluding notable items, earnings per share increased 40% year-over-year. Total revenue increased 13% driven by 10% growth in trust fees, 11% growth in net interest income, and 69% growth in capital markets revenues, including foreign exchange trading and securities commissions and trading income. Non-interest expense was up 5% as we continue to balance disciplined cost management with ongoing investments in the business. Importantly, strong revenue growth combined with expense discipline drove positive operating leverage of over 700 points, excluding notable items. We returned almost 500 million dollars to shareholders during the quarter. And year-to-date, we've returned over 1 billion dollars to shareholders. Excluding notable items, this represents a payout ratio of 95% through the first half of the year. Overall, these results demonstrate solid progress on our financial objectives and reinforce the strength and durability of our business model. Turning to wealth management, the business delivered another solid quarter with trust fees increasing 10% year-over-year, reflecting continued client engagement and strong execution across the franchise. Assets under management were up 7% sequentially and 14% year-over-year. We also continue to make progress against our strategic growth priorities. Our differentiated capabilities continue to support growth in global family office and the ultra-high-net-worth segment. GFO revenue increased 9% in the first half of 2026 and continued momentum internationally. Revenue from wealthy individuals and families with more than $100 million in assets outpaced the broader portfolio. Family Office Solutions is an important part of this success as we extend our proven GFO playbook to clients that can benefit from an outsourced family office model. Talent remains one of the most important drivers of wealth management growth. We're making solid progress adding revenue-generating professionals, particularly critical producer roles. Our pending hires and active recruiting give us confidence in the trajectory of the second half of the year. This is a competitive market for the best talent, but we believe Northern Trust offers a differentiated platform, an excellent brand, deep fiduciary expertise, strong banking capabilities, and a compelling position in the upper tiers of the market. We also continue to expand our alternatives offering and deepen adoption across our client base. During the quarter, we added funds to our platform across secondaries, buyout, venture, and growth strategies, while also expanding our custom fund of one offering. Capital raised in the first half of the year, or currently in process, is approaching 80% of last year's full year total. Finally, we're generating more leads through our digital channel through the introduction of our lead lab, which is helping us better qualify and prioritize opportunities. In the first half of the year, marketing qualified leads were up over 50% from the same period last year. This is driving increased activity that can ultimately be translated into durable organic growth. Overall, wealth management continues to deliver on its differentiated value proposition. And we're making solid progress against the strategic priorities that should support stronger growth over time. Turning to asset servicing, the business delivered another strong quarter with revenues up 16% year-over-year and a pre-tax margin of over 30% excluding notable items. The results benefited from a constructive market and rate environment, but also reflect the progress we're making against our strategy. Alternatives remain an important growth area. Assets under administration across hedge funds, private capital, and semi-liquid structures now exceed $1 trillion. We added two semi-liquid mandates during the quarter. And the number of new product launches from existing hedge fund clients increased approximately 50% quarter-over-quarter, highlighting continued demand for institutional grade servicing as clients launch and scale more complex vehicles. Banking and capital markets continued to perform well. Favorable market conditions supported higher client activity, but we're also expanding the underlying business through new client wins and continued adoption of our solutions. For example, revenues from our outsourced capital markets solutions, such as complete FX and integrated trading solutions, were up almost 50% year-over-year. Momentum in these scalable businesses deepen client relationships beyond core custody and fund administration. Finally, we continue to progress our digital assets capabilities as institutional clients look for trusted providers to support the evolution of tokenized markets. Our approach remains targeted and disciplined focused on areas where Northern Trust can bring institutional standards of control, servicing, and risk management to both traditional and digital markets. Overall, asset servicing's performance reflects the continued execution of a focused strategy, deepening relationships with sophisticated clients, scaling high-value capabilities, and investing in the areas where clients' needs are evolving. Turning to asset management, NTAM continued to build momentum in the second quarter with diversified asset gathering across several priority areas. Starting with ETFs, we had another strong quarter, marking our fifth consecutive quarter of positive flows. Quarterly asset flows were particularly strong in US quality large cap, US equity factor tilt, and tax-efficient fixed income strategies, reflecting the investments we've made in the ETF platform and the benefits of a one Northern Trust approach, particularly our collaboration across asset management and wealth management to address specific client needs. Liquidity was also a standout area. We had a record quarter for liquidity flows, extending our streak to 14 consecutive quarters of positive organic liquidity flows, while continuing to gain market share across both the US and EMEA. As a top 10 money market fund manager in the US, we continue to benefit from the breadth of our global liquidity platform and clients' confidence in our risk discipline and service model. Tax alpha remains another important growth area. We continue to build on our position as a top three direct indexer and are growing our long-short tax alpha strategies, expanding the range of solutions we can offer larger taxable clients seeking more sophisticated after-tax outcomes. Finally, our alternatives platform continues to progress with ongoing fundraising momentum and continued demand for custom alternative solutions. Over the past several quarters, the conversation on AI has moved from experimentation to execution. Across the industry, firms are positioning AI around many of the same benefits, productivity, scale, and efficiency. Those are important, but they will not be enough on their own. At the same time, clients are asking a more fundamental question. How will AI change the relationship they have with the institutions they trust? They do not want judgment, accountability, or personal service handed over to a machine. They want AI to sharpen and elevate the people, advice, and standards they already rely on. That is how we're organizing our approach at Northern Trust. Across our businesses, we're aiming AI not simply at baseline improvements, but at the qualities that have always made Northern Trust uniquely valuable to our clients. Our service, expertise, and integrity. These principles have defined Northern Trust for more than 135 years and remain core to our One Northern Trust strategy. We view AI as augmented intelligence, a force multiplier that can help us deliver on those commitments with greater speed, insight, and consistency, while keeping our people and clients at the center. Service is becoming hyper-personalized, more predictive, and adaptive, creating experiences built around each client's unique needs at scale. One clear proof point is the use of client action plan agents that help relationship managers quickly synthesize data to drive more meaningful client engagement. Expertise is being amplified, delivering knowledge, insights, and advice with greater speed, precision, and impact. In our asset management business, for example, we're using AI to enhance our investment research and idea generation, uncovering signals that may be overlooked by traditional industry approaches. These capabilities are embedded most directly in our adaptive equity quant strategies. And integrity is extending beyond individual judgment and being embedded into our data practices, models, and controls to strengthen the rigor and resiliency of how we operate. A tangible example of this is horizon scanning agents that enhance our vulnerability detection and strengthen cybersecurity capabilities. This technological rigor is built on a foundation of human oversight and accountability. We're especially pleased with how quickly our partners have embraced AI in their daily work. That momentum is helping us turn AI from a set of tools into a true force multiplier, strengthening our service, expertise, and integrity in ways that create lasting value for our stakeholders. More broadly, we also launched Invested as One, a new employee ownership initiative that provides eligible employees with Northern Trust shares. Together with our employee stock purchase plan, it strengthens employee ownership and reinforces our culture of shared accountability for performance and long-term value creation. Looking ahead, the macro environment remains dynamic, but we remain confident in our ability to deliver consistent performance as our strategy is designed to perform across a range of conditions. We remain focused on execution, driving organic growth, maintaining disciplined expense management, and continuing to invest in the capabilities that strengthen our competitive position. With that, let me turn it over to Dave to take you through the financial results in more detail.

Thank you. 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 the signal to reach our equipment. In the interest of time, we ask that you please limit yourself to one question and one follow-up. Again, press star one to ask a question. We'll pause for just a moment to assemble the queue. We will take our first question from Glenn Schorr with Evercore.

Hi, thanks very much. Maybe we'll start right where you left off. The 400 basis points of positive operating leverage is great. You were a lot better than that in the first half. Maybe you could help with the right perspective on the jumping-off point for expenses because there were some moving parts this quarter. And what things should we be considering on the top line side that bring down the operating leverage? There's seasonality, FX trading was really high. Let's just square that circle for us in terms of the right perspective on the second half operating leverage. Thanks.

I appreciate that. That's very good. One tiny little follow-up within the one-time items, there is the software write-down, and I appreciate taking advantage of the Visa gain. Very cool with it. I'm just curious what software you took a look at, you wrote down, how that decision was made, and then what you replaced with it. Are you building something on your own? I'm just curious for obvious reasons. Thanks.

I appreciate you are not exactly vibe coding a whole new infrastructure. I appreciate that. Thanks.

We will take our next question from Ken Usdin with Autonomous Research.

Hi, good morning.

Just wanted to follow up on the deposit point, Dave, and the NII. I mean, it makes sense that the implied new guide would be for a little bit lower run rate than the second quarter. But you know, these deposits are proving, I guess, can you just walk through what you see happening in the environment with regards to deposit generation and that related activity that you cited? And you know, why wouldn't these deposits, outside of seasonality, prove to be more sticky in terms of a run rate? Thanks.

Okay. Second question, just on the wealth management business. You obviously we knew about the lag from the first quarter, slight market decline. So wealth management fees were down a little bit. It obviously should pick up with the baked-in lag we have for the third quarter. Just wanted to ask, outside of the markets, was there anything else that pulled down wealth management fees a little bit sequentially in terms of either activity or flows, or should we just expect a better trajectory from here? Thanks.

Thanks for all that, Dave.

We will take our next question from Mike Mayo with Wells Fargo Securities.

I just have another question on wealth. And if you could just give an update in terms of extending the GFO approach to a wider swath of your higher end net worth clients. And also, to what degree are you at a competitive disadvantage because you don't have IPOs that you offer to your high net worth clients, or maybe you do and I don't know about it, but some talk about net new assets really getting a lift from some of the IPOs that they've done. Thanks.

And maybe a related question to that, when we talk about the top of the funnel and your new client growth, what's your main key areas for that driver?

Thank you.

We will take our next question from Brendan Hawken with Capital Markets.

Good morning. Thanks for taking my questions. These gains this quarter were pretty substantial. I don't believe you touched on this. Apologies if I did. But could you give us your update on how you plan to use these proceeds? Should we be thinking about reinvestment in the business, return of capital? What's the best way to think about this?

So, Brendan, the answer is yes in the sense of how we think about it. So it's a capital gain for you. For us, as Dave went through, there are certain areas where we can invest it immediately. So repositioning the investment portfolio, it gives us the ability to do that and take advantage of the shape of the yield curve right now as one example. Second though is to your point, if we can deploy that capital in the business through the deployment of RWA, then we would look to do that. If we were to do something inorganic, it gives us the capital to be able to deploy it that way. And then finally, it strengthens our capital ratios now, that just puts us in a position to be able to buy back more stock. And if you recall a couple years ago when we had the Visa gain, similarly we had an increase in our capital ratio or CET1 ratio, and then over time we brought it back down into our target range of 11 to 12%. So it gives us that flexibility in how we want to be able to deploy it best.

Okay, great. Thank you. And I assume the order that you went through those is significant. But if that's wrong, Mike, just let me know. Is that fair?

That's fair.

Great. Thank you. Follow up, asset servicing, 24% pre-tax margin here in the quarter. It's down a bit from late 2025, although had some good year-over-year revenue growth. Previously you talked about maybe letting some of the lower margin business roll off to help drive the servicing margins into the high 20s. Could you provide maybe color on the pacing of that, how that's going? Is that presenting a headwind to future revenue in that business and how we should think about the pre-tax margins in servicing going forward? Thank you.

Sure. I'll start and Dave may want to add to this, but this has been the strategy for that business. Scalable growth and profitable growth and increasing the margin in the business. Very favorable environment without a doubt, but also we're seeing progress on that. So we have been very selective in the new business that we're taking on, ensuring that it will provide not only profitable business for us, but quicker to the levels of profitability that we like to have for those businesses. And we've seen success with our asset owners business in the Americas, similarly in Europe, meaningful wins that many of them are just coming on board or being transitioned in right now. So that's very positive. And then I'll also say with our asset manager clients, it's trying to not only work with those clients where we already have a strong existing relationship, but doing more with them and doing it in ways that makes that relationship more profitable. And so a great example of that is our integrated trading solutions, so outsourced trading, and there are more and more examples of what we consider one Northern Trust examples, where we're providing that service now to the asset manager, amongst other things, currency management for them as well. And those are higher margin services for us. And so you're seeing that the strategy come together with a favorable environment, and as a result, the margin going up.

Great. Thanks for clarifying.

We will take our next question from Steven Chubak with Wolfe Research.

Hi, good morning. This is Ashley filling in for Steven. So we saw some really encouraging deposit remixing trends in the interest-bearing versus non-interest-bearing. Looks like you guys have been more focused on managing the deposit costs and maintaining very disciplined pricing. So I heard what you said about expecting some of the recent deposit strengths to kind of reverse in the third quarter, but was wondering if you could talk about your outlook for the deposit mix. And if we do see some rate hikes from the Fed, what are you anticipating in terms of deposit beta?

Okay, perfect. And then just staying on the topic of balance sheet, can you just talk about how much of a benefit you're anticipating from the balance sheet restructuring and redeploying some of those proceeds at higher rates?

Okay, perfect. Thank you so much.

We will take our next question from Manan Gosalia with Morgan Stanley.

Hi, good morning. So my question is around the wealth pre-tax margin. You know, we're already at 37%, you're saying you should have a better quarter in wealth next quarter. But as we go through this, some of the investment spend on the wealth side, how do you expect the wealth margins to trend from here?

Got it. And then maybe just on the hiring and talent side, I know you said that you're seeing some momentum there. Can you talk about how much success you've had on the hiring front and also any competitive dynamics you're seeing in the upper tier of wealth?

Great, thank you.

We will take our next question from David Smith with Truist Securities.

Hey, good morning.

Morning.

On capital, you're running around 95% payout ratio on an adjusted basis for the first half of this year. Is 100% still the right benchmark we should be thinking about for the full year adjusting out these notable items?

And then on the inorganic front, are you looking mostly at smaller tuck-in type acquisitions or are you considering something larger too if the opportunity set was right?

Thank you.

Through yesterday, it's no longer the case effective today.

We will take our next question from Gerard Cassidy with RBC Capital Markets.

Hi Mike. Hi Dave.

Hey Gerard.

Can you guys share with us? Mike, I think you touched on this about IPOs, and I believe Dave in your prepared comments you mentioned about stock loan was benefited from partially from the IPO securities lending area. But besides the wealth management and in the stock loan with this robust IPO market, are there other parts of the business that are benefiting from the IPOs, whether it's any of the servicing areas or the custody areas?

Absolutely. With that activity, Gerard, you're right, even aside from wealth management, we see the impact and the benefits from that. So we've talked about liquidity broadly speaking. When there is greater capital raising, those dollars need to go somewhere initially, and so we've seen the specific benefits of that flowing into whether it's the balance sheet but also into our money market funds. And then also as far as the capital markets activity, once these stocks are out there and they're trading, the ability to potentially short the stocks or any other hedging activity, that's something where we see it in the lending part of the business, and you saw that we had significantly higher volumes, but also it's the nature of the loans and the collateral for that, just meaning if you have certain equities, you get a higher spread on those equities. So it's something that we've seen cut across the businesses.

Very good. And then, as a follow-up, I think Dave you talked about some price compression on select index mandates. Can you give us any more detail on that, and how does that compare historically? You and your peers in the custody business have talked about pricing pressures. Is this something different than what you've seen in the past, or is this just a continuation of a trend that's been around a fair amount?

And not specifically competition from other...

Competition from other...

I'm sorry, go ahead, Mike.

No, I'm just saying, it was I wasn't relating it to custody and other broader fees.

Got it. Okay, thank you.

There are no further questions at this time. I will now turn the conference back to Mr. Carroll for any additional or closing remarks.

Thank you for joining us, and we look forward to speaking with you again soon.

This concludes today's call. Thank you for your participation. You may now disconnect.