Executives: Bev Fleming - Director of Investor Relations Biff Bowman - Chief Financial

Officer
Analysts: Ashley Serrao - Credit Suisse Adam Beatty - Bank of America Merrill Lynch Glenn Schorr - Evercore ISI Alex Blostein - Goldman Sachs Ken Usdin - Jefferies Brian Bedell - Deutsche Bank David Long - Raymond James Betsy Graseck - Morgan Stanley Gerard Cassidy - RBC Capital Markets Brian Kleinhanzl - Keefe, Bruyette & Woods, Inc.

Operator: Good day, everyone, and welcome to the Northern Trust Corporation First Quarter 2016 Earnings Conference Call. Today’s call is being recorded. At this time, I’d like to turn the call over to the Director of Investor Relations, Bev Fleming for opening remarks and introductions. Please go ahead.

Bev Fleming: Thank you, Zack. Good morning, everyone, and welcome to Northern Trust Corporation’s First Quarter 2016 earnings conference call. Joining me on our call this morning are Biff Bowman, our Chief Financial Officer; Jane Karpinski, our Controller; Mark Bette, our incoming Director of Investor Relations; and Kelly Mullen from our Investor Relations team. For those of you who did not receive our first quarter earnings press release and financial trends report by e-mail this morning, they 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 April 19th call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is a replay that will be available on our website through May 17th. 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 2015 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 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 Biff Bowman.

Biff Bowman: Good morning, everyone. Let me join Bev in welcoming you to Northern Trust’s first quarter 2016 earnings conference call. Starting on Page 2 of our quarterly earnings review presentation, this morning we reported first quarter net income of $242 million. Earnings per share were $1.01 and our return on common equity was 11.4%. A number of environmental factors impact our businesses as well as our clients.

Let me review how some of these factors unfolded during the first quarter. Equity markets rebounded in March after a volatile and negative start to the year. In U.S. markets, the S&P 500 ended the quarter down 0.4% year-over-year and up 0.8% sequentially. In the international markets, the MSCI EAFE index was down 10.7% year-over-year and down 3.7% sequentially.

Recall that some of our fees are based on lagged market values and fourth quarter 2015 markets were generally higher. In bond markets, the Barclays U.S. Aggregate Index was lower year-over-year and higher sequentially. Currency volatility as measured by the G7 index was 2% higher than the first quarter of last year and 12% higher sequentially. Foreign exchange market volumes were varied in the first quarter.

As measured by two of the interbank brokers, volumes were down 11% to 14% year-over-year, and up 19% to 24%, sequentially. You’ll recall that currency volatility and client activity influenced our foreign exchange trading income. Currency rates influenced the translation of non-U.S. currencies to the U.S. dollar and therefore impact client assets and certain revenues and expenses.

Dollar strength, primarily versus the British pound sterling, tempered custody asset growth and related fee growth while benefiting expense growth. U.S. short-term interest rates were higher following the Federal Reserve rate increase in December. Thee-month LIBOR and the Fed funds effective rate averaged 62 and 37 basis points respectively, both higher sequentially. The overnight repo rate was also higher averaging 46 basis points in the quarter.

Let’s move to Page 3 and review the financial highlights of the first quarter. Year-over-year, revenue increased 5% with noninterest income up a modest 1% and net interest income up a strong 18%, expenses also increased 5%. The provision for credit losses was $2 million. Net income was 5% higher year-over-year. In the sequential comparison, revenue increased 3% with noninterest income up 2% and net interest income up 6%.

Expenses were essentially flat when compared with the fourth quarter. Net income was 1% higher sequentially. Client assets under custody of $6.2 trillion increased 2%, both year-over-year and sequentially. In the year-over-year comparison, strong new business was partially offset by lower international equity markets and the currency translation impact of a strong dollar. In the sequential quarter comparison, new business, favorable quarter end equity markets, and currency translation were all contributors to asset growth.

Assets under management were $900 billion, down 6% year-over-year. Lower equity assets were the primary driver due to outflows from certain sovereign wealth fund clients and weaker global equity markets. In addition, fixed income assets were lower, primarily due to the loss of one passive mandate from a non-U.S. institutional client, which I mentioned last quarter. Assets under management increased 3% sequentially, primarily driven by higher cash and equity balances.

Let’s look at the results in greater detail starting with the revenue on Page 4. First quarter revenue on a fully taxable equivalent basis was approximately $1.2 billion, up 5% year-over-year and up 3% sequentially. Trust investment and other servicing fees represent the largest component of our revenue and were $748 million in the first quarter, up 3% year-over-year and essentially unchanged sequentially. Lower money market mutual fund fee waivers were an important driver this quarter. Fee waivers were approximately $8 million in the first quarter, lower by $25 million year-over-year and $13 million sequentially.

I’ll go into further detail on trust and investment fee shortly. Foreign exchange trading income was $61 million in the first quarter, down 15% year-over-year and up 15% sequentially. Lower client volumes drove the year-over-year decline, while the sequential improvements reflect higher volumes and volatility. Other noninterest income was $74 million in the first quarter, down 2% from last year and up 9%, sequentially. The sequential increase primarily reflects higher other operating income.

In the first quarter, we recorded a net gain of $2.3 million related to our decision to exit a portion of a non-strategic loan and lease portfolio, which I mentioned on this call last quarter. Our fourth quarter results included a $1.1 million net loss in other operating income related to the same decision. Net interest income, which I will discuss in more detail later, was $314 million in the first quarter, increasing 18% year-over-year and 6% sequentially. Let’s look at the components of our trust and investment fees on Page 5. For our Corporate & Institutional Services business, fees totaled $433 million in the first quarter, up 6% year-over-year and 1%, sequentially.

Custody and fund administration fees, the largest component of C&IS fees were $286 million, up 3% year-over-year and unchanged sequentially. Assets under custody for C&IS clients were $5.7 trillion at quarter end, up 2% both year-over-year and sequentially. These results primarily reflect new business partially offset by the unfavorable impact of equity markets and currency translation. Recall that lagged market values factored into the quarter’s fees with both quarter lag and month lag markets impacting our C&IS custody and fund administration fees. Investment management fees in C&IS of $89 million in the first quarter were up 17% year-over-year and 4% sequentially, driven in large part by lower money market mutual fund fee waivers.

Fee waivers in C&IS were approximately $2 million lower by $13 million year-over-year and $6 million sequentially, driven primarily by higher gross yields in the funds. Assets under management for C&IS clients were $670 billion, down 8% year-over-year, primarily reflecting the outflows that I mentioned earlier and up 3% sequentially, due primarily to a $15 billion increase in cash balances and a $5 billion increase in equities. Securities lending fees were $23 million in the first quarter, 5% higher than last year and 1% higher sequentially, primarily reflecting higher spreads. Securities lending collateral was a $106 billion at quarter end and averaged to $115 billion across the quarter. Average collateral levels decreased 9% year-over-year and 7% sequentially, primarily reflecting lower loan volumes in U.S.

treasuries. This asset class has been most impacted by the regulatory landscape, as actions have been taken by agent lenders and borrowers to calibrate capital usage in the securities lending business. Other fees in C&IS were $35 million in the first quarter, up 10% year-over-year, reflecting higher fees from investment risk and analytical services and other ancillary services. In the sequential quarter comparison, other fees were up 4%, reflecting the normal seasonal pattern in our benefit payments business. Moving to our wealth management business, trust investment and other servicing fees were $315 million in the first quarter, down 2% year-over-year and 1% sequentially.

Within wealth management, the global family office business have strong performance with fees increasing 13% year-over-year and 6% sequentially, due to solid new business and lower money market mutual fund fee waivers. Performance in the regions was lower in both comparisons, as lower money market mutual fund fee waivers were more than offset by the impact of unfavorable lag markets and lower fees on equity mutual funds. Recall that fees within the regions are based on month lagged asset value, so the difficult equity markets in January and February negatively influenced first quarter fees. Money market mutual fund fee waivers in Wealth Management totaled approximately $6 million in the current quarter, down $12 million year-over-year and $7 million sequentially, primarily reflecting the impact of higher short-term interest rates on the gross yields in the underlying funds. Assets under management for wealth management clients were $230 billion at quarter end, down 1% year-over-year and up 1% sequentially.

Moving to Page 6, net interest income was $314 million in the first quarter, up 18% year-over-year, driven by higher level of earning assets and a higher net interest margin. Earning assets averaged $105 billion in the first quarter, up 6% versus last year, driven by higher level of deposits. Demand deposits, which averaged $26 billion increased 19% year-over-year and non-U.S. office interest-bearing deposits, which averaged $49 billion, or up 4% year-over-year. We saw solid loan growth again as loan balance averaged $34 billion in the first quarter, up 6% year-over-year.

On a sequential quarter basis, net interest income increased 6%, primarily driven by higher net interest margin, as average earning assets were unchanged sequentially. The net interest margin was 1.21% in the first quarter, up a 11 basis points year-over-year and up 10 basis points sequentially. The improvement in the net interest margin primarily reflects a higher yield on earning assets as short-term interest rates rose following the Fed’s move in December. In the sequential quarter comparison, the benefit of higher interest rates was partially offset by higher premium amortization or mortgage-backed securities portfolio. Premium amortization was $6 million in the first quarter, up from less than $1 million in the fourth quarter.

Turning to Page 7, expenses were $829 million in the first quarter, up 5% year-over-year and essentially flat sequentially. Compensation expense of $379 million increased 7% year-over-year, primarily reflecting staff growth, the impact of last year’s annual base pay adjustments, and higher accrual for incentive compensation, partially offset by the favorable translation impact of changes in currency rates. Staff levels increased approximately 5% year-over-year with more than 60% of the growth emanating from our global operating centers in Bangalore, Manila, and Limerick. On a sequential basis, compensation expense increased 4%, primarily reflecting higher performance-based incentive compensation, including the requirement to immediately expense options granted to retirement eligible employees and the immediate vesting of certain restricted stock units awarded in the first quarter. Employee benefit expense of $71 million decreased 3% year-over-year, primarily reflecting lower pension expense.

On a sequential quarter basis, employee benefit expense increased 2%, due primarily to seasonally higher payroll taxes, partially offset by lower medical and lower pension expense. Outside services expense of $150 million was a 11% higher year-over-year. The increase primarily reflects higher technical services expense and higher consulting expense due to evolving regulatory requirements. On a sequential quarter basis, outside services expense declined 3%, primarily reflecting lower consulting expense. Equipment and software expense of $114 million was up 3% year-over-year, primarily reflecting higher software related costs in support of client and regulatory technology initiatives.

In the sequential comparison, equipment and software expense was down 2%, primarily reflecting lower equipment related expense. Other operating expense of $74 million increased 1% year-over-year and was unchanged sequentially. In the sequential comparison, seasonally higher business promotion expense related to the Northern Trust open was offset by lower expense in various other categories. Our loan loss provision was $2 million in the first quarter. This compares to a provision credit of $4.5 million in the year earlier quarter and a provision credit of $18.5 million in the fourth quarter.

Recall that we changed our methodology for estimating inherent losses effective December 31, 2015. This change resulted in the provision credit of $18.5 million last quarter. Loan quality remains very strong with nonperforming assets of $174 million at quarter end, down 7% versus year-end and the ratio of nonperforming loans to total loans equal to only 48 basis points at quarter end. The effective income tax rate in the first quarter was 32.7%. Turning to Page 8, a key focus has been on sustainably enhancing profitability and returns.

This slide reflects the progress we have made in recent years to improve the expenses to fees ratio pre-tax margin and ultimately our return on equity. The ratio of expenses to trust an investment fees is a particularly important measure of our progress, as it addresses what we can most directly control, reducing this measure from where it was previously as high as 131% in 2011 to the levels we see today is a key contributor to the improvement and our return on equity. We have seen the ratio hold steady or move slightly upward over the most recent quarters, as both macro and seasonal factors can impact this measure in the short-term. This metric remains an important barometer of our progress and we remain committed to lowering it on a sustainable basis going forward through continuing to win new business, to drive fee growth, and drive productivity within our expense base, our ongoing initiatives focused on location, strategy, procurement, and technology. Turning to Page 9, our capital ratios remains solid with common equity Tier 1 ratios of a 11.6% and 10.6%, respectively, calculated on a transition basis for both advanced and standardized.

On a fully phased-in basis, our common equity Tier 1 capital ratio under the advanced approach would be approximately 11.4% and under the standardized approach would be approximately 10.3%. All of these ratios are well above the fully phased-in requirement of 7%, which includes the capital conservation buffer. The supplementary leverage ratio at the corporation was 6.1% and at the bank was 6%, both of which exceed the 3% requirement, which will be applicable to Northern Trust in 2015. With respect to the liquidity coverage ratio, Northern Trust is above the 90% minimum requirement effective as of January 1, 2016, and is also above the 100% minimum requirement that will become effective on January 1, 2017. As Northern Trust progresses through fully phased-in Basel III implementation, there could be additional enhancements to our models and further guidance from the regulators on the implementation of the final rule, which could change the calculation of our regulatory ratios under the final Basel III rules.

In the first quarter, we repurchased 2.3 million shares at a cost of $140 million. Our 2015 capital plan provides for the repurchase of up to an additional $145 million of common stock through June 2016. In closing, the first quarter of 2016 was characterized by volatile markets, low commodity prices, low and even negative interest rates, and geopolitical uncertainty. Despite that difficult backdrop, Northern Trust produced solid financial results growing earnings per share 7% year-over-year and delivering a return on equity of a 11.4%. Our sequential performance demonstrated our commitment to improving our operating efficiency.

Expenses were essentially flat to the fourth quarter even with the seasonal uplift the results from the Northern Trust open and annual equity compensation grants. In addition, we returned $234 million for our shareholders through dividends and stock purchases, while maintaining strong capital ratios and funding our growth. Our wealth management business grew revenues 3% year-over-year and continue to produce attractive returns achieving a pre-tax margin of 34% in the first quarter. Our ability to serve complex client needs and create sophisticated solutions for our clients was evident within our global family office business, which serves ultra-high-net-worth individuals and family offices. Global family office had strong new business at a 13% trust fee growth in the quarter.

C&IS continue to grow as well. One growth driver over the last couple of years has been providing services to help our clients meet new regulatory requirements. For example, we provide depositary services, so clients can meet their AIFMD, UCITS V, and other asset safety related regulations. Another growth driver has been providing new tools and technology to enhance our client’s oversight of their increasing investments and alternatives. We’ve recently announced the exclusive agreement with AltX to offer our clients access to the largest amount of data for hedge funds on a single platform.

These are just a couple of examples how we’re growing our business by doing more for our clients. I’d like to take a moment to acknowledge that this will be Bev Fleming’s last earnings call after remarkable 15 years as our Director of Investor Relations. So many of us within Northern Trust have relied on her expertise. Her wisdom, advice and counsel will most certainly be missed. Please join me in wishing her well in retirement.

We’re also fortunate to have Mark Bette joining Investor Relations. Mark joined Northern Trust in 1994 and has served in a number of leadership roles within finance, including a Senior Financial Analyst and Investor Relations from 2001 to 2006. He brings a wealth of knowledge about the firm to the role. Before I conclude, as is customary for our first quarter earnings call, we will need to end today’s call to allow sufficient time for all of us to get to our annual meeting, which begins

at 10:30 Central Time this morning. Please accept our apologies in the event that we have to close off the question-and-answer period earlier than our normal practice.

Thank you, again, for participating in Northern Trust first quarter earnings conference call today. Bev and I would be happy to answer your questions. Zack, please open the line.

Operator: Thank you. [Operator Instructions] We’ll take our first question from Ashley Serrao with Credit Suisse.

Please go ahead.

Ashley Serrao: Good morning, Biff.

Biff Bowman: Good morning, Ashley.

Ashley Serrao: So first question just on a couple of expense line items. I wanted to get a sense if you feel that outside service expense has finally normalized somewhat.

And also if you could share some color on what drove the reduction in occupancy despite all the growth efforts?

Biff Bowman: Yes. I’ll take the first part of that on outside services in terms of normalizing. The regulatory environment still remains robust and we need to continue to make investment in that, but we will continue to get feedback from the regulators as our CCAR was submitted last week, April 5, and as we sense that. But there are other line items inside and outside services that I think we demonstrated control of in the quarter, and those include, I would say non-regulatory consulting spend, legal spend, and other items inside of that category that I think we demonstrated good discipline during the quarter. So I’m hesitant to tell you where that run rate will go.

But I think the vigilance around the most controllable items inside of that we remain steadfast on. The second part of your question was around…

Bev Fleming: Occupancy expense….

Biff Bowman: Occupancy expense in the quarter. From an any given quarter, we could have certain leases that we need to advance the accounting work, make changes to the accounting that could move it by a modest amount in this quarter. Certain leases in Europe were adjusted.

But the – that’s essentially what we did in the quarter.

Ashley Serrao: Okay. Thanks for the color there. And just one clean up question on expenses. Can you quantify the seasonally higher comp items this quarter, what were they in total?

Biff Bowman: So seasonally we do have, as we said in the script, we have certain equity expense that relates to the vesting of retirement eligible individuals that is a first quarter seasonal expense that we experienced to deal with our retirement eligible employees option expense for them.

Bev Fleming: And as it is – this is Bev. Those numbers will be disclosed in our 10-Q, so I would ask you to refer to that. There’s a table in the 10-Q that will provide you some of that information and that’s probably the best way to get the exact figures that you are looking for.

Operator: We will take our next question from Adam Beatty with Bank of America. Please go ahead.

Adam Beatty: Thank you, and good morning. A couple of questions on asset servicing, particularly hedge fund and mutual fund. I want to get your thoughts on the recent FSOC update, which seems to call for greater data collection and also assurance around third-parties, and then maybe get your thoughts as well on the termination of Aurora 50 South and how you are thinking about M&A in that area? Thank you.

Biff Bowman: Let me take the second part of your question first. Alternative investments really remain a strategic priority for Northern and 50 South Capital, our alternative arm.

I don’t really have anything to offer beyond what was announced in the press release after consideration from all parties we mutually agreed to terminate the agreement. In terms of the second part of yours was the FSOC on certain data requirements for mutual funds. I think can we get back to you on that question? Bev and I will and Mark will follow-up with you Adam on that one.

Adam Beatty: Sure, that’s fine. Yes, just and maybe a follow-up on Aurora and 50 South, Do you feel as though M&A continues to be a good way to expand your asset servicing and hedge fund servicing business, or are you looking more around partnerships or expanding services organically? Thanks.

Biff Bowman: So our general philosophy on growth has been to do it through organic means. However, when opportunities to either fill a product gap, a geographic gap, a technological gap, or a regional gap, as I said our geographic gap, as I said, we will be opportunistic in those, but we really fundamentally still have an organic growth bias. And so in this space, discussions with Aurora were based on filling client and product needs, and we will continue to look at the strategies I laid out for you.

Operator: And we go next to Glenn Schorr with Evercore ISI. Please go ahead.

Glenn Schorr: Hi, two quickies related to net interest income.

Biff Bowman: Hi, Glenn.

Glenn Schorr: Hi, Biff. The two were you mentioned I think $5 million of premium amortization, just curious what the impact was on the NIM in the quarter if this is a big jump up? And the other part was with average securities up 8%, curious on what you’re buying on the asset side these days, and what the change in duration, if any of the overall securities portfolio was?

Biff Bowman: Okay. The premium amortization as we described in the quarter, it was up sequentially from the fourth quarter.

I think it was $6 million in the quarter. We have discussed in the past that amortization is typically $9 million to $10 million in a quarter. It can move so it was slightly better than the normal run rate, but in the fourth quarter of 2015, we actually experienced kind of a low at only $1 million of premium amortization. So sequentially, it actually hurt the returns. On a year-over-year basis, it actually helped by a small amount, actually a modest amount.

So that’s a little bit of color on premium amortization. In terms of what we’re buying and the improvement in the security portfolio, first of all, I would say the – we benefited from the rate move in the portfolio. We did at about -- you could see about a $1 billion of treasury securities. Those were largely five- to seven-year duration purchases, but swapped back to something closer to three months. So the duration in the portfolio was really not extended, but we were able to get some enhanced feel there.

We did have a small portion of that billion that we went out a little longer in duration. So the overall duration of the index duration of the portfolio only increased modestly.

Glenn Schorr: Okay. So I don’t want to put words in your mouth, but it sounds like this – this is the most rational jumping off point we have for the NIM going forward?

Biff Bowman: Yes, that’s a reasonable assumption.

Glenn Schorr: Excellent.

Okay, thanks, Biff and Bev, you’re the best.

Bev Fleming: Thanks, Glenn.

Operator: And we’ll go next to Alex Blostein with Goldman Sachs. Please go ahead.

Alex Blostein: Thanks.

Hey good morning, guys. So just picking up the discussion around NII and NIM. So, Biff, it sounds like the securities overall has to be very short duration. There might be additional benefit just as the security portfolio kind of reprices even, I guess, if you don’t get them anymore hike this year. Can you help us understand that dynamic a little bit more, so if 120 is kind of a decent starting up point assuming no more rate hikes, how meaningful of a benefit could we still see through the NIM from the initial hike? And the follow-up also around the net interest income discussion.

It looks like the ending balance sheet ended a bit higher than the average. So just wondering whether it’s the timing of the kind of net new business that came in a little bit later in the quarter, or is it just the typical and quarter stuff, so the balance sheet was a little bit lower, but the average should kind of normalize, as we’re looking to the second quarter.

Biff Bowman: So I’ll take the second part of the question first. The ending balance sheet is just traditional quarter end balance sheet maintenance that can happen. It can move, as you know on March 31 or any quarter end period based on client activity, et cetera.

So I would say there was nothing unusual about that movement from our perspective. In terms of the NIM and the expansion or potential expansion of the NIM, two components that I want to address there. First is, you have to remember that approximately half of our balance sheet is in foreign office time deposits. And in some of those places, we’re experiencing negative spreads and others where that compression is not impacted by necessarily by treasury rates. In the U.S., two things to consider there.

If there are no further rate hikes, many of our assets repriced in the first three months of this year or since the rate hike, but there are still some repricing opportunities left inside of that portfolio, remember, it’s of a short duration. So there is some benefit in there. So I would say, we’re going to wait and see how that plays out. But to-date, as you rightly saw in the NIM, the data has been relatively close to zero and the assets have been able to reprice, so we’ve been able to capture that 11 basis point increase in the NIM.

Glenn Schorr: Got it.

That’s all for me. Thanks, again, and…

Biff Bowman: Thanks.

Operator: And we’ll go next to Ken Usdin with Jefferies. Please go ahead.

Ken Usdin: Hey, thanks.

Good morning. Just on the trust fee side, you’ve got a great benefit obviously also from the first hike on the fee waiver side. Can you just help us understand, if we got another hike, do you anticipate at this point now seeing the experience of the first hike that you’d get the rest of the seven and change back?

Biff Bowman: Yes. The – we did get a majority of the waivers back with the first hike. And our anticipation would be that, we would get a significant portion with the second hike that remains.

But we have, as you can reduce we had meaningful movement with just the first 25 basis point hike in that.

Bev Fleming: And, Ken, another way to think about that is the fees on the funds for the retail fund family, 35 basis points for the institutional fund family, 22 basis points. So I think that should help to answer your question.

Ken Usdin: Yep, okay. And then my second follow-up is just on the – just a follow-up on the wealth management business, which and this come up in the last couple of quarters.

But you mentioned the mutual fund pricing in there, and I’m just wondering, if you give us some of the underlying growth dynamics, if we take out that fee waiver recovery and wealth management the growth rate of wealth continues to be slower than the positive growth rate that we’re seeing in C&IS. So just any other dynamics that just help us understand in terms of whether it’s pricing or activity on top of that clear explicit one you mentioned on the mutual funds one?

Biff Bowman: Sure. So in the quarter new business and lower money market mutual fund fee waivers weren’t really sufficient to offset the drag from, remember, we have month lag equity markets. So the fees are based on February month end, which was still quite down, and the lower fees on equity mutual funds, as you discussed. If you think about this, there’s an ongoing and broad industry trend towards passive management, as investors continue to face lower overall returns.

And they look to control what they can control, which is namely fees. So we have seen that kind of fee pressure in our funds into lower cost alternatives. So the combination of the month lag in the fees, the migration, if you will to lower fee structured products was not enough to offset the positive fee waiver in the quarter. We do still think relative to the industry that the growth rates are healthy and that the business is indeed strong, it’s just a difficult macro environment for that business.

Ken Usdin: Understood.

Best of luck, Bev.

Biff Bowman: You bet.

Bev Fleming: Thanks, Ken.

Operator: And we’ll go next to Brian Bedell with Deutsche Bank. Please go ahead.

Brian Bedell: Great and congrats Bev also and welcome back Mark. The first question is just on just trying to get a better handle on the expense trends going into second quarter you mentioned on the occupancy side, the lease adjustment and as we think about some of the cost-cutting that you’ve had and then I guess merit increases, I think we’re posting to 3Q, I believe, if that’s correct?

Biff Bowman: Correct.

Brian Bedell: And if you could just talk a little bit about that trajectory coming into the – sort of the second quarter – through the CCAR process as well?

Biff Bowman: Yes, so if you think about – let me start with the first quarter. There is some seasonality in the first quarter that you can see if you look historically. As it relates specifically to the occupancy expense, I think looking at a longer period of quarters in the past, probably gives you a better indication of the run rate in our occupancy expense.

So that line item as you look historically has remained fairly consistent. And that’s probably your better trending. Other line items you suggested, we did differ salary increases to October 1st for all employees. So that we did April of 2015, we did merit salary increases. We will not have that in this sequential comparison and we continue to be vigilant on business promotion non-regulatory consulting spend and all other key discretionary line items and there is a continued focus on that line item as we enter Q2 and beyond.

Brian Bedell: Great and then just a follow-up would be just on customer behavior, I guess first of all on the deposit side, you said the deposit beta was extremely low, went through the passing on rates. Do you see any impact on deposit behavior? And then similarly you mentioned within wealth management, obviously continued shifts towards passive products, do you see that trend across your wealth management franchise continuing? Are you seeing more of your own manufacture products such as FlexShares into that client base and should we expect to the – sort of the revenue yields, you’re obviously capturing that on the passive side, but the revenue yields would potentially be pressure longer-term in that trend?

Biff Bowman: Yes, so in terms of the client behavior, first part of your question on deposit behavior, we do not see any exodus of clients based on our deposit base that we push through. So we did not really see that and you can see that from sequentially a very stable balance sheet size and even growth on a year-over-year basis, which is really driven by I would say our core organic growth rate, so no real behavior changes. In terms of the migration from active to passive, what I would say first is that in some cases that’s from higher fee to lower fee solutions as our clients have struggled to get returns. They focus on what they can control, which is the fee portion of that.

So they’re looking for lower fee opportunities. And in some cases, along that spectrum from active to passive, there are our product and capabilities that we continue to discuss with our clients. Those could be FlexShares, those could be engineered, paid our engineer equity offerings. So we do have products along the spectrum if you will between fully active and fully passive to help – some of that fee compression that we talked about.

Brian Bedell: Okay.

Thank you.

Operator: And we’ll go next to David Long with Raymond James. Please go ahead.

David Long: Good morning guys.

Biff Bowman: Good morning.

David Long: We’re talking about the change in active versus passive and my question just looking at the Corporate & Institutional Services, the custody fees and the Investment Management fees, given a strength in the markets and the decline in the fee waivers, how do expected those lines would be a little bit stronger? Is that – is this just go back to that mix shift change? Why those lines maybe didn’t have the full benefit?

Biff Bowman: So in the C&IS business, it was a smaller AUM. As we talked about in the past sovereign wealth fund migrations as they needed to convert those assets for whatever those reasons were for the sovereign wealth fund. So we’ve seen a lower base on those. So smaller AUM and I think that’s probably driven more than offset migrations into passive solutions at this point, though the sovereign wealth fund an example was down almost 33% from a year-over-year, the AUM, down to, I believe $46 billion and down 32%, as I said year-over-year. So their low basis point realization of products, but high AUM.

David Long: Okay, got it. And then as a follow-up, the effective tax rate was down 32.7% in the quarters, seems a little bit lighter than where it has been running. Any reason for that and should we expect it to normalize?

Biff Bowman: I would say that it was normal actions that can be taken in any quarter typically those could be APB23 actions, they could be the release of a small reserve in a region or something like that. But it will typically be normal, if you look historically that that’s probably the right rate to put into your thinking.

David Long: Great.

Thanks, Biff.

Operator: And we’ll go next to Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck: Hi, good morning.

Biff Bowman: Hi, Betsy.

Betsy Graseck: I was just wondering about the buybacks and I heard what you did this quarter. But I was wondering, if you included within that some incremental like we’ve seen some of the other institutions this quarter or de minimis addition to what was approved last year?

Biff Bowman: Betsy, we did not – our total payout ratio as you can see is very high and we did not utilize the de minimis exception.

Betsy Graseck: And I was just wondering if you would consider doing that in the future, or was there a reason why it shows not to do that, given the strength of the capital ratios that you have?

Biff Bowman: Yes, first of all, I think, we already have a very high payout ratio, as we look at this. And our capital ratios, if you look at our common equity Tier 1, it’s sort of in the median of the CCAR banks and we view that as the prudent level in terms of right now how we think about that.

Betsy Graseck: Okay.

Biff Bowman: We’ll say we will use it, but we didn’t use it last quarter.

Betsy Graseck: Okay. And is there any consideration for potentially issuing pref and doing buyback just to use that bucket, which some other people have used wondering if that how you think about that?

Biff Bowman: Yes, we always evaluate our capital structure and in fact obviously spend meaningful time evaluating it as a part of our submission of our capital plan. And we think about all the ways we could maximize our capital structure.

Betsy Graseck: Okay.

All right. Thanks very much and Bev have a great retirement.

Bev Fleming: Thanks, Betsy.

Betsy Graseck: Okay.

Operator: And we’ll go next to Gerard Cassidy with RBC.

Please go ahead.

Gerard Cassidy: Thank you. Good morning, guys.

Biff Bowman: Hi, Gerard.

Gerard Cassidy: Bev, it just seems like yesterday you joined Perry [ph], so congratulations on your return.

Biff, I apologize, I had to jump off on the call, so if you address this, I can read in the transcript. But you guys are doing a very good job in driving that ROE higher, as you show in Slide 8 in the presentation. I know the business at times can be seasonal. Are we at the best you can do for whether it’s the margin at 30.6% or the noninterest expenses as a percentage of trust and investment fees, because when I look at first quarter 2015, you’ve kind of given an apples-to-apples approach those numbers in first quarter 2015 are a little better. These are good numbers I recognize that, but are we at the best, or do you think there is improvement to be had?

Biff Bowman: So we’re indeed committed to driving long-term improvement in the expense to fee ratio, and it remains a key strategic focus.

And that obviously has a knock on impact to produce better ROE. Improvement in the ratio was driven by achieving positive fee operating leverage. And as is the case with operating leverage in the short term, there could be periods of time where we have degradation in the ratio sometimes due to seasonal impacts. This quarter, for instance, while the ratio would have benefited from lower level fee waivers, the seasonal expense impact of stock-based compensation in the Northern Trust open more than offset the improvement in fee waivers. So we remain focused on the two parts of that equation that we can the first is and what I would describe is the organic growth rate of our fees.

And the second is on the strategic long-term initiatives on the expense side include location, strategy, procurement, technology. If we focus on those things that we can control, we think we can continue to drive that down.

Gerard Cassidy: Thank you. And then just as a follow-up and again I apologize if you have given this number. I believe many of the banks are going to see higher FDIC premiums in the third quarter to boost up the reserves of the FDIC.

Did you guys disclose what you expect your premium or will you see higher premium and if you will, can you disclose what that number will be?

Biff Bowman: Yes. Right now we anticipate in the third quarter of 2016 that we would have an incremental $3 million headwind. Obviously, balance sheet size and other things can move that around, but that’s – our anticipation is about a $3 million headwind starting in Q3.

Gerard Cassidy: Great. Thank you.

Operator: And we’ll go next to Brian Kleinhanzl with KBW. Please go ahead.

Brian Kleinhanzl: Hi, good morning, Biff.

Biff Bowman: Good morning, Brian.

Brian Kleinhanzl: Sort of quick question.

Since the last Div Arb season over in Europe, there has been a lot of discussion about from tax regulators, as well as politicians on investigations about Div Arb. Have you heard anything additional about that from clients, or is there any concern that there would be less seasonality in the Div Arb season this year?

Biff Bowman: At this point in time, we are entering that season and our team anticipates a similar seasons they have experienced in the past in my conversations with them.

Brian Kleinhanzl: Okay, good. And then some of the large like [ph] few years also had a Living Well feedback given to them. Does their feedback affect how you think about the outside services fees and how that run rates over the back of the year, I know there is some increase due to the feedback that you got from regulators from Living Well.

So it is the fact that some of those banks have passed and it’s generally looking like there’s a blueprint for the Living Well process allow you to kind of lower those fees over the back half of the year?

Biff Bowman: Yes. So at this point we’ve not received feedback. So we haven’t had a designation made regard to Northern Trust 2015 resolution plan. We don’t have any indication as to when that determination will be announced for us from the Fed or the FDIC. That being said to answer your question, we have been in regular contact with the Fed and the FDIC.

We have engaged industry expertise to help guide us through that process, and we are certainly reading the feedback given to our two closest competitors as in that our business model is similar in structure and that we can learn from the feedback that they’ve received, which is public. We will incorporate that into our thinking around our resolution planning. So more to come, as we get our feedback.

Brian Kleinhanzl: Okay. Thanks.

Operator: [Operator Instructions] And it appears we have no further questions at this time.

Biff Bowman: Okay. Well, thank you. I appreciate it. Bev, thanks again for everything.

Mark, welcome and thanks to everyone on the call, and that’s it. Thank you.

Operator: Thank you. This does conclude today’s conference. You may now disconnect and have a wonderful day.