Good day, and welcome to the Northern Trust Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mark Bette, Director of Investor Relations. Please go ahead.

Thank you, Stephanie. Good morning, everyone, and welcome to Northern Trust Corporation's Second Quarter 2021 Earnings Conference Call. Joining me on our call this morning are Mike O'Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Briar Rose 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 21 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be available on our website through August 18. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Now for our safe harbor statement. What we say during today's conference call may include forward-looking statements, which are Northern Trust's current estimates and expectations of future events or future results. Actual results, of course, could differ materially from those expressed or implied by these statements because the realization of those results is subject to many risks and uncertainties that are difficult to predict. I urge you to read our 2020 Annual Report on Form 10-K and other reports filed with the Securities and Exchange Commission for detailed information about factors that could affect actual results. During today's question-and-answer session, please limit your initial query to 1 question and 1 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, Mark. Let me join in welcoming everyone to our second quarter 2021 earnings call. During the second quarter, we continued to successfully execute on our growth strategies across each of our businesses. In our Wealth Management business, our goals-driven approach and last year's launch of the Northern Trust Institute continue to resonate with our clients, further increasing client satisfaction levels. Our digital Navigate The Now campaign, which we introduced last year, is successfully generating new contacts and leads, creating more opportunity. Uncertainty in tax law changes has also contributed to new business momentum. And earlier in the quarter, we announced the launch of our Tax Policy Resource Center, an extension of the Northern Trust Institute. Within Asset Management, we continue to see momentum in our liquidity products as well as strong growth in our FlexShares ETFs and ESG strategies. We continue to focus on expanding sustainable investment solutions. And earlier this month, announced the launch of the Quality Low Volatility Low Carbon World Strategy, an actively managed strategy focusing on high-quality, low-volatility stocks, while maintaining a low carbon footprint relative to the MSCI World Index. We also introduced the Northern Trust ESG Vector Score, which measures financially relevant ESG-related criteria that could impact the operating performance of publicly traded companies. Within our Asset Servicing business, we continue to see growth that was well diversified across regions, products and client segments. Recent notable public wins include Fundsmith, Marks & Spencer Pension Trust, Martin Currie Investment Management and Coal Pension Trustees Services Limited. We continue to invest and expand our asset servicing solutions as evidenced by us finalizing our acquisition of Parilux Investment Technology, which underscores our commitment to the front office solutions business. The execution of our growth strategies, combined with favorable markets, resulted in 12% year-over-year growth in…

Thank you, Mike. Let me join Mark and Mike in welcoming you to our second quarter 2021 earnings call. Let's dive into the financial results for the quarter, starting on Page 2. This morning, we reported second quarter net income of $368.1 million. Earnings per share were $1.72, and our return on common equity was 13.7%. This quarter's results included a $17.6 million pension settlement charge within the employee benefits expense category. As you can see on the bottom of Page 2, equity markets performed well during the quarter. Recall that a significant portion of our trust fees are based on quarter lag or month lag asset levels, and both the S&P 500 and EAFE Local had strong sequential performance based on those calculations. As shown on this page, average 1-month and 3-month LIBOR rates were stable during the quarter with only modest declines. U.S. dollar was weaker on a year-over-year basis, which had a favorable impact on our reported revenue, but is unfavorable to our expenses. Let's move to Page 3 and review our financial highlights of the second quarter. Year-over-year, revenue was up 5%, with noninterest income up 10% and net interest income down 9%. Expenses increased 8%, while net income was up 18%. In the sequential comparison, revenue and expense were both flat. While net income, taking our credit provision and taxes into account, was down 2%. The provision for credit losses reflected a release of $27 million in reserves in the current quarter compared to a provision of $66 million in the prior year and a release of $30 million in the prior quarter. Return on average common equity was 13.7% for the quarter, up from 12.2% a year ago and consistent with the prior quarter. Assets under custody and administration of $15.7 trillion grew 30%…

[Operator Instructions] Our first question comes from Alex Blostein with Goldman Sachs.

So maybe I'll start with expenses. And I was hoping, Jason, you could unpack some of the trends both on the comp and non-comp side of the equation. And I guess on the comp side, when we look at the sequential decline in compensation, almost all of that is really just kind of explained by the seasonal effects. So comp is pretty well controlled, especially in the context of gets better revenue environment. So how should we think about that for the rest of the year? Are there things that would -- is there enough for you guys to kind of hold the line on the expenses for the second half? And then similarly, on the non-comp side of things, things were, I guess, a little bit higher than originally expected and you previewed that at a conference a few weeks ago. But a similar line of question kind of how should we think about the jumping off points for the non-comp side of the equation?

Yes. So let me take them in order. I think you hit the comp walking into this period well, in that it was controlled. If you look at headcount in particular, Alex, and that's flat for the second quarter in a row, which evidences how we've been managing through the announcements we made in January about what we were trying to do. And part of that is that we also look to reinvest some of that savings, which maybe plays into the second part of your question, which I'll come to in a second. But in terms of thinking forward for the rest of the year, part of what we did was go through that expense savings exercise. Earlier in the year, we talked about $40 million to $50 million, somewhere in that range of savings. We've gotten through that and executed that pretty well. At this point, not saying that we're going to continue to see a downward trajectory. Now I think, frankly, the business growth and some of the investments we're making in the business might cause that to start to have more of a traditional feel going forward. So then if I come to the non-comp side. And I think the area you're probably looking at, Alex, is probably outside services. I mean we've got -- there's a $20 million increase sequentially there, and we did talk about that. I did reference that, that line item was going to be higher than anticipated. And so it probably makes sense for me to unpack that a little bit for the group. And the way we've been thinking about it is to separate that outside services category -- outside service line, 2 categories. First, there's a lot of business-related expenses that are in there. And so it's sub-custody, third-party…

Great. That's super helpful. And then maybe I could squeeze another follow-up just around capital return dynamics. The buyback was a little bit late this quarter. Obviously, you guys continue to have very strong capital ratios. And we've seen your peers talk about the willingness to sort of go even a little bit below their internal incentive management targets because the balance sheets have ballooned as much as they did. How does that inform at all your appetite for share repurchases? I know you guys kind of think about yourselves relative to peers and that sort of construct as opposed to the absolute sort of vacuum. But given the backdrop for share repurchases for State Street and BK, curious how you're thinking about yourselves?

Yes. No, we acknowledge a lot of firms have talked about aggressive share repurchase. To us, share repurchase is tied to a lot of factors as we think about how to deploy earnings. And if we -- to keep capital levels roughly level, we've got to consider dividends, which you consider those kind of predictable, then you're managing to 2 other factors. One, capital required to support RWA growth; and then lastly, share repurchase. So if you look at -- we actually looked at the last 5 years pre-pandemic, and dividends are interesting. They're consistently about 1/3 of net income. And so think about the other 2/3 split between supporting our RWA growth and share repurchase. Over that 5 years coming into the pandemic, RWA wasn't changing significantly. So the increase that we saw related to RWA growth is just about 15%, and that leaves about 50% of our earnings that were redeployed to share repurchase. Since the start of the health crisis, though, the relationship between repurchase and retention is actually flipped. And so dividends are still roughly 1/3, maybe a little higher. But the rise in loans and securities that you see on the balance sheet, that leads to an increase in RWA. So about half the earnings have been redeployed in the form of retention to maintain capital levels. And that left about 15% for repurchase. That's kind of the narrative -- the overall lens of how we've gotten to where we are. Now that is not to say that we wouldn't change our capital levels or that the change in RWA is a long-term phenomenon. We could easily see lower RWA levels in a lot of different scenarios that we could predict. But that at least explains what happened in the 5 years pre-pandemic and the trends you saw there, and then how things have changed in the midst of the health crisis and how, at this point, our share repurchase are like relative to what you saw coming pre-pandemic.

Our next question comes from Glenn Schorr with Evercore ISI.

So a question on just rate impact in general. Flat rates from here or better, do we finally see the signs of NIM, NII and fee waivers bottoming out? Or is there another level to think about as nonoperating deposits might start declining? Just curious to get your thoughts and the cadence from here.

Yes. High level, I think the band at this point has narrowed a lot. And so there's still runoff in the securities portfolio. We're 65 -- or 2/3 of the way through the runoff there. And we're still losing about 40 basis points. But if we think about the impact of what that's doing, it's not as significant as it once was. And then another component, people, obviously, you've seen IOER up. And I think one thing to note there, people see we've got about $35 billion in cash, but we only have about $13 billion, $14 billion, $15 billion at the Fed. And so that translates to $1.5 million or $2 million a quarter, it's not that much in [ lift ]. LIBOR continues to be a big impact. And you actually saw LIBOR come down a little bit and went from 12 basis points to 10 over the quarter. And so all those things together or at least at this point, we're not talking about $5 million and $10 million, $15 million moves, we're talking about $1 million, $2 million, $3 million moves a quarter, and they're offsetting each other largely. So I think we're in a band where the volumes across the portfolio are going to be the driver of what happens in net interest income.

Okay. I appreciate that. I wonder if you could just expand or just comment on the fixed versus floating rate mix of both your debt and in the securities portfolio? I'm just curious if you're thinking about locking in either side as rates have moved yet again lower.

No, it wouldn't cause us -- the recent moves wouldn't cause us to make a change. We're constantly looking out on the market and just thinking broadly about how we feel about it. And so we did have duration step out a little bit. It went from 2.5 to 2.6 -- and 2.6, maybe 2.7, somewhere in that range. But it's that's more reflective of the longer journey we've been on, extending the securities portfolio. But we're conscious to not try and chase return by doing anything inconsistent with what we've talked about strategically. And the strategy we talked about at ALCO has been to get about where we are right now and in duration and in mix. And so no significant changes that I would want to forecast coming up.

Our next question comes from Gerard Cassidy with RBC.

Can I follow up on the money market mutual fund waiver fees. Now that there's been a slight increase in rates in the reverse repo area, where many of the money market mutual funds are now engaged with the Federal Reserve, do you sense that your money market mutual fund waiver fees could actually decline sequentially? Some of your peers have pointed that out.

Yes, I think they will. Unless we get a significant change in the short end of the yield curve, but what happened in mid-June was helpful for waivers. And if you think about -- if you just think about the math of it -- well, first of all, I'll tell you -- I can tell you where we were. We peaked at a run rate of $80 million to $85 million a quarter. And that's where we were early June. And now as we sit today, the run rate is more like $70 million a quarter. And that changed -- that run rate changed pretty quickly after the Fed actions, June 16 or whatever it was. Now that said, there's not much -- I don't think there's that much more that's going to come in terms of run rate. And I think at this point, because the money market mutual funds are so short and probably 40% of them on average have 30 days or less in duration in the portfolio, so they've already turned over and reinvested. And so the run rate I gave you is largely reflective of the post IOER and overnight repo facility changes. But yes, there is a benefit that came from Fed actions in mid-June.

Very good. And then as a follow-up. You've talked a little bit about your reserves at the Fed. I think on your balance sheet, your total deposits at banks, all central banks is around $54 billion. if that's the right number? Can you tell me what's the more normal number once we get into maybe a more normal environment at some point in the future? Are you -- what would be a lower number that you'd be comfortable with?

Well, I'm not sure it's lower. It's interestingly -- we talk a lot about this, what is -- if we layer in the overall deposits, on average deposits are -- forget about just what's at the Fed. But just in general, what's driving the asset level is the liability side. And if we're at $125 billion, $130 billion, how much -- is that a post-pandemic normal? And it's just too hard to tell. And I think there's -- clients are, right now, they've held on to liquidity longer than what we would have anticipated and that 35 -- the USD 15 billion, the other $20 billion-ish that's in -- $20 billion, $30 billion, it's in other currencies at other central banks, it's all driven by the deposit base. And it's held in there pretty flat for a while now in that kind of $120 billion, $130 billion level.

Our next question comes from Brennan Hawken with UBS.

Jason, curious about the loan growth. So that was pretty robust this quarter and actually the end of period, higher than the average. So it certainly suggests it was steady through the quarter. Can you maybe give some color around what's driving the loan growth? And also the decline in the loan yield, was that simply a function of LIBOR? Or was there some mix that was contributing to that as well?

So the loan growth, I'd put it in 2 buckets. One is there's been an ongoing for the last several months, for this year and maybe even leading up to it, an initiative, a desire, a deliberate level of activity with clients to explain to them, we like the types of loans that we do, but we're willing to do more of them with those clients. And I've talked about being perceived as more of a reluctant lender. And so we're -- we've been talking to clients saying we'll do more. And so there's -- that has been a continued lift to our loan portfolio, I think, particularly relative to what we've seen in the rest of the industry. Now that said, there's also a chunk of it that's more -- that's probably more episodic. And we've talked about the spikiness in the deposits that can come from particularly GFO clients or very large asset owners. And there's an element that's there that's -- that we would view as episodic and spiky, and that's leading to both a big part of the increase that you mentioned and also is a driver of the yield. But back to the fact that we did see LIBOR come down a couple of basis points, that obviously is also going to have an impact on the loan portfolio as a whole.

Got it. Okay. And then thinking about organic growth in the quarter, what did you guys had signaled recently that things were starting to pick back up after being on hold with the pandemic and all of the disruption? So how did organic growth come in this quarter? And when you think about organic growth, particularly on the Wealth Management side, do you all typically use metrics that are consistent for Wealth Management like net new assets in order to gauge that growth? And is there any chance that we'll be getting some disclosure, maybe some formal disclosure around those metrics at any point so we can have a better, more clear sense of how this business is growing?

Well, the -- we feel like -- we're giving revenue numbers by region and also splitting out the family office business. And -- so we can come back to the disclosure element, if you'd like, but just maybe start sequentially with your questions. The organic growth across the company was good, and it was strong in C&IS for the quarter. We look at that very much year-over-year. It's very difficult to try and unpack that on a sequential basis. But the C&IS business has had strong new business growth and that's coming to fruition, it's being onboarded and we're seeing good organic lift in the business. And then wealth, as you can see, it's benefiting a lot. It's more exposed to market growth. And so that's been more of a help. But there's also been good year-over-year growth in the Wealth Management business as well. I'll also call out and looking at the numbers a little bit deeper that a portion of the growth sequentially in Wealth came from what we think it was some nonrecurring items. We have those items in C&IS and we call those out, but we also have those in the Wealth Management business. And so that can be trust and state settlements. It can be how we account for alternatives. Coming out of the income statement, not a huge amount, but you call it $3 million, $4 million of the lift that we had, nonrecurring in nature. But overall, it was a good -- it was -- we'd say very strong organic growth quarter for the enterprise.

Our next question comes from Mike Mayo with Wells Fargo Securities.

Mike, your opening comment, you mentioned the digital strategy and some changes that you made and how that's helping out right now. That's a very high-level comment, and it's appreciated. But can you connect that to some more concrete metrics on how it's actually impacting the results that we're seeing and maybe will impact the results ahead?

So I think with digital, Mike, there's a number of ways to look at it. But to start with the reference in my opening comments there, particularly in Wealth Management. A lot of this is, as I've talked previously about switching from a new business generation model that has historically been primarily, I'll call it, either in-person or on the phone, if you will, to being more digital. And so when I talked about the Navigate Now campaign, that was essentially or driven by an online digital campaign. And the key to it was that how do we generate more opportunities from that, so leads from that. And so both with what was online, it was supported then with some more traditional media through advertisements. That generated thousands of leads for us at a high level, which then have been worked through to get to the leads that fit our profile and then could be followed up, I'll call it, in a more traditional way in doing that. The other one I'll mention, Mike, that I referred to is the Tax Policy Resource center, which is part of the Northern Trust Institute. And while we talk a lot about, that is our knowledge base that we leverage for our clients, but it's also a significant new business generation assets. And the reason why that's also digital, specifically to your point, is when we launch that center, which essentially is online, then that has generated significant new leads. So just with that policy resource center, since it's been launched, we've had over 250,000 views of that. And then from that, that gives us the data, if you will, to then follow up with those that are going to the center. And again, that doesn't mean that 250,000 of them will be "good leads," but it's the funnel, which you then work those through down to, ultimately, being new clients. So that's -- when I mentioned digital, that was the reference on that front. And then to your point, more broadly with what we're doing just with digitalizing our entire business, that's much broader with regard to our technological capabilities that drive both new capabilities for clients, but also efficiencies for our business model.

And on that last point, when you talk about efficiencies for the business model, is there any way you can size the potential, your aspirational targets, lowering unit costs, improving the expense relationship? Any kind of context you can put around that?

Yes. So as you know, and you highlighted it there, there's a number of financial metrics, but one that we've looked to, which is the expenses to trust fees. And we've continued to drive that down over time. And I do think at a high-level financial perspective, that's where you're going to see it come through. And just to try to make that more tangible. So one of our big investments in Asset Servicing is in our matrix platform. That first is focus on transfer agency. And -- so with it, yes, it will provide a much better experience for our clients' clients, right, because we're doing that on behalf of asset manager clients. But also that is going to yield significant efficiencies for us. Essentially, that's the first, I'll call it, funding mechanism for the business plan to make that investment. And then the other, of course, is generating new business because of the capabilities.

Our next question comes from Stephen Chubak with Wolfe Research.

With regards to the outlook, Jason, I was hoping you could speak to what's driving. Is this some of the increased loan appetite in the current environment? I know you talked about really strong growth and demand across your client base. But I was hoping you could provide just some context around how much of seasonality or factor that maybe drove the step up given some of the tax seasonality? And just the implications for the NII trajectory in the back half? Whether there's a sufficient offset to the securities yield headwind that you had cited earlier in your remarks?

The -- not a lot -- there's not a lot of seasonality on the loan side for us at all. Some on the deposits, but not on the loans. And so what I was talking about earlier is there may be a layer there that's less about seasonality, but more about just the spikiness of how some of our very, very large clients will sometimes come to us and say, we want to borrow a very large dollar amount to either avoid selling a large asset, avoid the public sale of large assets and we're happy. Those are extremely high-quality loans, and they're meaningful to clients to help on their liquidity needs. But you can also imagine pricing on them isn't something that's driving incredible increase in NII either. And so I don't think that -- I think it probably sticks out more in volume levels than it will in NII levels over time.

Got it. And just for my follow-up also on NII. I was hoping to get a sense as to how you're thinking about managing some of the excess liquidity that parked at the Fed? You saw a very healthy step-up not surprisingly sequentially. And the securities growth has been relatively tepid as excess reserves have continued to expand. I want to get a sense as to whether you have sufficient excess liquidity or buffer? Some of those incremental funds back into securities?

Yes. We've got a lot of -- we've got plenty of room right now if we wanted to move from whether it's HQLA to non-HQLA, whether we wanted to increase the balance sheet size of clients were the driver there, and saying we wanted to do significant increases. Again, we haven't -- we're not incredibly receptive to the phone calls from organizations we don't work with saying, "Can we park $10 billion to $5 billion on the balance sheet?" We've always talked about the balance sheet being there for our clients and being a strategic resource for us engaging with our clients. But at this point, we feel like we've got a lot of flexibility. I think you look at Tier 1 leverage of 7.1, and that gives an indication in and of itself of tens of billions of dollars of room that we could have to bring on additional assets and then include in terms of how we would deploy it. there's also plenty of room we have to move between HQLA and non-HQLA based on what we see as attractive in the market and the risk profile that we're looking at across the different asset classes that we invest in.

Our next question comes from Betsy Graseck with Morgan Stanley.

I had a couple of questions on some of the initiatives that you've announced recently, in particular, the European ETF launch and the alternative asset servicing digitization initiative. Maybe you can give us a sense as to how we should be thinking about the rollout, the timing, the impact? Is it likely to come through earnings in the next couple of years? Or is this client acquisition over time type of initiative?

I'd headline both as long-term, strategically important, but short term, not needle moving from the income statement perspective. And take, for example, the European ETF, just -- we've got $160 billion in AUM in overall assets, mostly in Europe related to ESG. And we've got a nice business in Europe when it comes to dealing with ESG and fund launches. And so that's a good example of us thinking about what's important for our clients and working with the Asset Management business to determine what they can do to provide incremental resources for clients long term. Not -- if you think about the size of $1.5 trillion in assets in AUM in the Asset Management business, and that's not something that we think is going to be a needle mover to that $1.5 trillion, but also strategically really important. I don't know, Mike, if you have anything you want to add.

Betsy, to address the other one, it fits into my comments on digitalization and the fact that the first driver often is the efficiencies that we get from it. So what we announced there on the alternative asset side is the ability to use machine learning in order to essentially capture all the data for alternative assets and digitize them, if you will, so that then they can be much more efficiently processed through the entire process. And so something that will benefit us on the efficiency and productivity side.

Okay. And then just separately, obviously, equity markets are up nicely. We're hearing about a lot of pension plans that are looking to get frozen and put into the hands of OCIO providers. I know you're involved in that business. Could you give us a sense as to how you believe you're positioned for what seems like is a wave of opportunity here?

Yes. You're right. I mean we're in that business and in a good way. And we -- if you think about particularly North America pension plans, our OCIO business is -- I'm a little stale on the numbers, but it was a 1 point within the last few years. We were the leader in that space. And so it falls into our sweet spot well. We've got very good expertise, very sophistic client base, particularly on the DP side of the OCIO market. Now flip side to it is you get a lot of clients who, as they derisk and do other things with their portfolios, they can -- that can sometimes work against you. But -- and so I don't think about it as a big wave that again is going to move the needle on $4 billion in fees. But it's -- but that's a very strategically important business for us, where we've done extremely well over time with high-quality clients and a very talented team. And so when there's money in motion there for firms to be thinking about outsourcing their DB plans, I think we're very well positioned.

Yes. And I would just add, Betsy, because we do believe we're particularly well positioned for that trend because in addition to what Jason said, if you think about our business model, you have the OCIO practice that Jason talked about, but also we have relationships through Wealth Management and through the family office part of that as well, where we have exposure and connections into a number of foundations that might not be as large as some of the biggest that you read about, but are going through the same decision-making of whether they want to just outsource the investment activity there. And we think that will continue. And we think, again, we cover it, I would say, as broadly as anybody.

Okay. All right. And then just 1 squeeze-in question on the dividend. I know we talked earlier about the buyback, but should we be expecting any changes to the dividend going forward?

Well, if you look over the last few years, particularly pre-2020, which is kind of a goofy year, but our dividend is pretty consistently 30% to 50% of net income. And it's been very consistent. And if you look at where this quarter falls, it falls right in the middle of that 30% to 50% range. And so nothing there that would raise a flag up or down, and we think it's very attractive. And we also -- interestingly, I think something people don't do a lot. We look at dividends relative to RWA, which is an interesting way to combine thinking about payout ratio with returns. And so as we look at our peers and you can pick your own, but both in terms of that -- the level of that payout ratio on a percent basis relative to earnings, the consistency of it and also how it is relative to RWA, which again gets to both returns and payout, we -- relative to the peers we look at, we score really well on those different lenses.

Our next question comes from Ken Usdin with Jefferies.

Just a follow-up on that point on capital further. I just want to make sure I clear that. It seems like you're focusing as much on just maintaining capital ratios with that balancing act you mentioned on RWA versus the combined shareholder return. So I know you guys don't give us formal targets. But I think historically, I might have thought you might have lived relative to where the others are. Is this a little bit of difference? Maybe it's post pandemic or maybe it's a -- you want to keep some aside for inorganic opportunities? Just wondering like just how we think about -- how Northern Trust thinks about your absolute capital in that regard? I understand the mix of usage has changed, but coming back to just like where you want to live on absolute levels.

Sure. And Ken, it's Mike. I think you hit on the key factors and how those do change over time. So to your point, you said while the pandemic and how you may feel about that, that criteria is the operating environment. So we're always looking at that operating environment, determining where we think we need to be. The second, I would say, is certainly from a regulatory perspective. And again, feel very good about where we are there, but that's another lens to make sure that we think we're in the right place vis-a-vis all the ratios and the whole CCAR process and everything. And then third, as you mentioned, it's -- instead, I'll call it absolute, it's the relative capital ratios, which we know that, that is a part of the considerations that clients have when they think about a financial partner, a partner that they need to trust not just today to be around and be strong, but be around for a very, very long time. I mean that's part of the pitch, if you will, Ken, is that Northern Trust has been around and will be around through all types of environments and that we have amongst all the capabilities, but we also have the financial strength and capitalization. So that's why that criteria is important. And to your point, that can change over time as our peers move their capital levels up and down.

Right. Okay. It just would seem to me that you've got plenty of capacity on all of those factors, plus room for balance sheet growth, plus room for buybacks, but it just seems like the mix of the buyback has become a smaller proportion, obviously, as we saw this quarter?

Yes, it did. But as Jason went through, we've just gone through in the last 6 quarters, a meaningful increase in RWA. Largely intentional, if you will, as Jason talked about, where we saw the opportunity to really support clients and to get prospects that would not just be credit clients, but broader relationships. And so we saw that as a better opportunity at that time to redeploy in the business and RWA went up, as he said, more in the 6 quarters than it did in the 5 previous years in a meaningful way. Does that stay the same going forward? Yes, obviously, we don't know. But generally speaking, these things tend to change over time.

That's very fair. And just 1 question on the deposit growth, which has remained stickier as you guys have mentioned. Are you comfortable housing at all on balance sheet, even though you're getting relatively low returns in the low rate environment? Or do you contemplate trying to move some of it off into off-balance sheet vehicles?

We can start in that instance with what's best for clients. And we've got $280 billion in money market fund family. And so -- and the performance there is good. It's a very attractive set of money market mutual funds. At the same time, some clients really like the saying we want to be on the balance sheet. And some of i is geographic. Obviously, in the U.S., there's much more prevalence to use funds where some of our European clients like to use the balance sheet more. I think we're in a good position where we've got room on both sides, really good attractive offerings on both sides. Don't need to nudge clients one way or another for us. When -- that said, we sometimes look in different operating environments. We can think about pricing. We can think about the value proposition that we can offer clients in one platform versus another. And we can have conversations with them about that and do things, but not in a position at this point to have to nudge. Again, that 7.1% in this environment where all bank balance sheets are inflated, it gives us a lot of room to be able to just lead with what makes the most sense for large sophisticated depositors.

Our next question comes from Vivek Juneja with JPMorgan.

Just let me go back into the capital question since that -- since the buybacks and dividends have caught everybody's attention. Following up on your comment that you do, do it versus you watch versus peers and that you're focused on the risk-weighted assets, so that would imply that you're focused on the CET1 ratio versus peers. Is it a gap? What is the gap that you're trying to maintain above peers? Is it 100 basis points? Is it 50? Can you give us some sense of sort of as we think about how to -- in the constructs of your balance sheet, whatever assumptions we make, what is it that we should be keeping in mind?

Yes. There's no gap in particular, and that's not even -- I also wouldn't say that's the only ratio that we look at, CET1. We're looking at -- we've talked about Tier 1 leverage a few times just this morning on this call. And there are other things that we look at as well in terms of the balance sheet strength and what -- credit quality and other factors and how all that -- duration and what exposures like to interest rate risk. And so there's a lot of ways to litmus test that. And then at the same time, we've also mentioned and Mike just walked through the framework a few minutes ago. We're thinking not just about the relative, but at an absolute level where we want to be, thinking about what the regulatory environment is like. And then I always remind people that we're not just making this decision unilaterally internally. We have really good engaged conversations with our Board around this topic as well and where we might want to be -- where we might want to take the balance sheet strategically. And so I know it's tempting to kind of look and say, okay, well, what's the floor and where are you going? But there are so many factors that we're looking at. And also, what's the reinvestment opportunity set look like. And if we've got opportunities to let RWA grow in ways that we think are building the future earnings, and that's what I think some people can miss is that the RWA growth isn't just a drag. That theoretically should give you -- should give a sense that there's potential future earnings that's expected. And we're still -- we're trying to grow earnings. And so looking at dividends and share repurchase, I think can sometimes take -- pull that narrative toward thinking about those things as the better way to redeploy earnings. But the RWA growth is reflective in some ways over the long run of the base of business that we have. Now again, it's not to say that we think RWA is going to continue to increase, it could come down. Even mentioning the loan growth we've talked about is something that had a significant increase in RWA at this period. If that goes away in a year, then the RWA would come down. And so there's so many factors that when we sit around the table and talk about where do we want to go with redeployment of earnings, we've got to try and predict not just where things are, but where things are going in each of these elements. But it's certainly broader than thinking about a specific gap on CET1.

Okay. Okay. Great. And one more on -- as you look at your overall expenses, you told us that the other operating expenses, what do you expect the trajectory to be. Are you seeing any other impact from an inflationary standpoint? Any color on that given the big talk in the environment about inflation? What are you able to do to offset that?

I think we missed the operative word there. Are we looking to see any changes in -- what did you say to that?

From the rise in inflation, are you seeing any inflation creep impacting your expenses, Jason? And if so, how are you -- what are you being able to do to offset that?

Thanks for clarifying, and then just another component of the question. The comments we made earlier weren't on other expenses. It was on outside services, just to make sure everybody understands what we were talking about in detail there. But -- the inflation is showing up in different areas. I mean every firm is dealing with talent issues and the pressure is there. We certainly see that and experience it, and talking at management levels about how to address it and the inflation we see across the business in different areas as well. And some of it is unit cost, but some of it is just the increased cost of doing business. And we talked about the significant increase in technology-oriented expenses that we're having. In some ways, that's an inflation cost on the business. It's not just a unit price in inflation, but it's inflation in the overall cost of doing business. So it's showing up in different ways across the organization.

Yes. I would just add, Vivek, if you think about it in a manufacturing context, to Jason's point, we're seeing inflation on the cost side in a number of ways. In a manufacturing context, your question would be, are you able to pass that on to the end consumer? And that's not the way our operating model is set up. That said, if you think about generally how we're pricing what we do, a lot of it relates to the asset level. So to the extent that, that inflation is going through to AUM, AUC levels, you're capturing some of it there. And then also to the extent that you believe that there's inflation on the horizon as well, you would expect interest rates to go up as well, and we know where we are on rates and what the impact would be to the extent that those increase.

Our next question comes from Brian Bedell with Deutsche Bank.

Most of my questions have been asked and answered, but maybe just to come back on the seasonal expenses in the second half. You gave us the color on the outside service expense. Typically, you see a seasonal bump in equipment and software expense, that's been pretty reliable at least over the last 3 years. So if you could just maybe comment on whether we expect to see that similar dynamic? And then in other expenses, just -- I don't know if I missed it, but the Northern Trust open is that it's going to be a factor for 3Q.

Thanks for bringing up the equipment and software probably should have referenced that earlier. Yes, there's likely to be an increase there, as we think about what's happening over the remainder of the year. And it's not 1 or 2 areas that I could point you to, but it's just -- you're right, there are some dynamics where that tends to tick up. Some of the expenses that we -- some of the capital expenses that we put in place, you start to see depreciation come up there. And it's in a lot of different line items. It's -- but there should be a tick up there, a normal-ish or maybe even slightly above that increase in equipment and software. And then in terms of, Mike, you want to take that?

It will be in the third quarter.

Yes. And Brian, this is Mark. I mean you could look at the business promotional line, even though that's not all the, but there's seasonality to it. And if you looked at it, 2017 through 2019, there was about a $16 million to $17 million step-up from second to third quarter. So that's probably a decent way to think about it.

Okay. Great. That's helpful. And then -- yes, yes, go ahead.

Last year, as we came into people wondered whether because of the pandemic, those numbers would be lower. And I think everybody should be thinking about it as more of a normal year. Numbers are marked throughout. That would be the 1 thing that's important for people to take away, right?

Right. Okay. Yes, still make sense. And then maybe just on ESG, just back to that. 2-part question. You mentioned -- I think, Mike, you mentioned the ESG vector score that you launched. I think that's for asset owners, if I'm not mistaken. I guess the question there is, is that something that you are charging for separately or more built into the overall service offering? And then on the wealth side, are you seeing demand from your wealth clients increasingly to invest in investment with social responsibility? And are you meeting that through your own investment management or other open architecture managers on the platform?

Yes, we are seeing the demand, Brian, kind of across the fronts that you talked about. So let me just give a little more detail to it. First of all, with our asset servicing clients, to your point, as they invest more in ESG, they need the analytics and data on reporting to support that. And so we are providing that type of service to them. And one of the examples that I mentioned earlier, the Marks & Spencer mandate that we had in the quarter was for that service, just as an example. And then with Wealth Management, absolutely, our client base is interested in ESG and increasing their investable assets in that area. And as much as we have an open architecture model with Wealth Management, much of it is serviced through NTAM. And so we've seen the benefit of that in NTAM. And NTAM on its own or in addition, on the institutional side is seeing that demand and fulfilling it as well. And so just to put some numbers on that, our ESG assets and NTAM now are at about $155 billion, which is up over 50% from a year ago. So healthy growth in that area, and it's an area of focus for us as a company.

Thank you. This concludes today's Q&A session. Thank you for joining the presentation. This concludes today's call. You may now disconnect.