Northern Trust (NTRS) Q3 2026 Earnings Call: 14% NII Growth and Q4 Guidance

Northern Trust Corporation (NASDAQ: NTRS) reported third-quarter 2026 net income of $642.9 million, earnings per share of $3.40 and return on average common equity of 20.1%. Excluding notable items, revenue rose 11% year over year while expenses increased 4.9%, producing more than 600 basis points of positive operating leverage.

Key Takeaways

• Reported net income was $642.9 million, with EPS of $3.40, a 20.1% return on average common equity and a 34.9% pretax margin.
• Excluding notable items, revenue increased 11% year over year. Trust fees grew 8%, net interest income rose 14% and capital markets revenue increased 38%.
• Trust, investment and other servicing fees reached $1.4 billion, up 2% sequentially and 8% year over year, supported by favorable markets and organic fee growth across all three businesses.
• Wealth Management generated a 41% pretax margin, while Asset Servicing’s pretax margin reached 30%, up 6 percentage points year over year.
• Northern Trust returned $514.2 million to common shareholders during the quarter and more than $1.5 billion year to date. Its standardized CET1 ratio was 12.4%.
• Assuming relatively stable markets and interest rates, management expects fourth-quarter net interest income to rise 8%-9% year over year and total revenue to grow 6%-7%.

Key Financial Data

Reported results included $48.7 million of pretax gains in other operating income. This comprised a $34 million gain from the sale of the Guardian ship services business and a $14.7 million gain related to the second Visa exchange offer. The combined favorable impact on net income was approximately $36.6 million.

Business and Operating Performance

Wealth Management

Wealth Management fees were $612 million, up 9% year over year. Client assets under management increased 9% to $536 billion. Pretax income was $392 million, producing a 41% pretax margin.

Global Family Office fees rose 16% year over year, while asset flows were the strongest of any quarter in 2026. Clients with at least $100 million in assets continued to generate double-digit year-to-date growth in both fees and assets under management.

The company is investing in revenue-generating talent, family office services and alternative investments. Year-to-date fundraising for alternatives had already exceeded the total achieved in 2025.

A roughly 10-basis-point repricing of a Wealth Management money market fund reduced revenue by approximately $2 million per month, or $6 million per quarter. Management said the action reflected competitive pricing and that no further repricing was contemplated.

Asset Servicing

Asset Servicing fees rose 8% year over year to $762 million. Custody and fund administration fees increased 6% to $512 million, while investment management fees advanced 10% to $176 million. Securities lending income rose 38% to $29 million.

Assets under custody and administration for Asset Servicing clients reached $18.5 trillion, up 9% year over year. Pretax income was $405 million, with a 30% margin. Management attributed the margin expansion to a better business mix, disciplined new-business economics and a supportive macroeconomic environment.

Northern Trust also agreed to expand its fund administration relationship with UBS, subject to regulatory approval. The mandate is expected to increase UBS assets serviced by Northern Trust by more than 50% over the next two-plus years.

Asset Management

Northern Trust Asset Management recorded its sixth consecutive quarter of positive ETF flows and launched 10 ETFs. Its intermediary business delivered its strongest quarterly long-term flows in three years.

Management plans to convert six Northern funds representing approximately $33 billion of assets into ETFs during the first quarter of 2027. Priority growth areas include ETFs, tax alpha, alternatives and quantitative equities.

Technology and Digital Assets

Northern Trust said its AI-supported client action plan agents save relationship managers two to three hours per client memo. In alternative servicing, AI-enabled digitization has nearly doubled straight-through processing.

The company is also expanding digital-asset capabilities across tokenization, digital settlement infrastructure and stablecoin-related solutions. Recent initiatives include the Northern Institutional Funds Stablecoin Cash Reserves Portfolio and a tokenized share class of its treasury instruments portfolio.

Management Guidance

Under assumptions of relatively stable markets and interest rates, management provided the following fourth-quarter outlook:

• Net interest income growth of 8%-9% year over year.
• Total revenue growth of 6%-7% year over year.
• Positive operating leverage excluding notable items.
• Full-year operating leverage of at least 500 basis points.
• An effective tax rate closer to 25% in the fourth quarter and going forward.

Management said its net interest income outlook incorporates the carry-in benefit from the September rate increase, an anticipated additional Federal Reserve rate increase in December, continued securities portfolio repricing and a seasonal recovery in deposits. Portfolio yields were approximately 3.5%, compared with reinvestment opportunities of roughly 4%-5%.

Risks and Watchpoints

• Lower fixed-income market values are expected to create lagged pressure on fourth-quarter Asset Servicing fees, although management expects organic growth and potentially stronger transaction activity to provide offsets.
• Approximately 20% of custody and fund administration fees are transaction-driven, leaving revenue sensitive to client activity and market volatility.
• Foreign exchange trading remained above what management considers a normalized level. Future revenue will depend partly on market volatility and client flows.
• Third-quarter average deposits declined 3% sequentially due mainly to seasonality. Management expects balances to improve in the fourth quarter but noted that the broader liquidity backdrop may not remain as robust as in recent years.
• AI infrastructure costs, including computing and token consumption, are a management focus. Northern Trust is using internal infrastructure, strategic partners and multiple AI models to manage cost, capability and security.
• The quarter included a specific charge-off in the commercial real estate portfolio. Management described it as isolated to one borrower and said broader credit trends remained stable.

Analyst Q&A Highlights

Management described recent operating leverage as the result of a multi-year shift toward a client-centric capability model rather than a one-time benefit. The structure aligns operations and technology by capability, with the objective of improving resilience, efficiency and scalability.

On net interest income, management said higher securities yields, back-book repricing and an expected fourth-quarter deposit recovery should support growth. It does not currently expect net interest margin compression, as rate-sensitive deposits were largely repriced following the September rate increase.

On capital allocation, Northern Trust said dividends and organic growth remain the first priorities. Excess capital can support share repurchases, while strategically aligned acquisitions in Wealth Management or Asset Management may be preferred when they meet the company’s financial return requirements.

Management remains comfortable with a CET1 operating range of 11%-12%, despite the reported ratio standing above that range at 12.4%. It also indicated that share repurchases could remain robust in the fourth quarter, without committing to a fixed quarterly amount.

For Wealth Management, management said growth is the primary objective. Margins could decline modestly if the company identifies attractive opportunities to invest in talent, digital marketing and client acquisition.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Good day, and welcome to the Northern Trust Corporation Third Quarter 2026 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Steve Carroll, Head of Investor Relations. Please go ahead.

Steve Carroll

Thank you, operator. Good morning, everyone, and welcome to Northern Trust Corporation's Third Quarter 2026 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; Dave Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman from our Investor Relations team.

Our third 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 October 21st 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 November 21.

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 all our commentary on this call.

[Operator Instructions]

Thank you again for joining us today. Let me turn the call over to Michael O’Grady.

Michael O'grady

Thank you, Steve, and good morning, everyone. Let me join in welcoming you to our third quarter 2026 earnings call. Northern Trust had a strong third quarter in a macroeconomic environment that remains constructive, but evolving. Excluding notable items, revenue grew 11%, supported by 8% growth in trust fees, 14% growth in net interest income and 38% growth in capital markets revenues, which include foreign exchange trading, securities commissions and other trading activities. Expenses were well managed and increased 5%, generating more than 600 basis points of positive operating leverage and demonstrating the scalability of our business. Pretax income rose 21% and earnings per share increased 40% year-over-year. Our return on equity, pretax margin and expense to trust fee ratio were all at or slightly better than our medium-term targets, and all 3 businesses generated organic trust fee growth. Our capital position remains strong, giving us the flexibility to support our clients, invest in strategic growth opportunities and continue returning capital to our shareholders.

We returned more than $500 million in the third quarter and more than $1.5 billion year-to-date. We remain focused on executing on our One Northern Trust strategy and achieving our ambition to be a consistently high-performing company. We continue collaborating across the company to bring more of the firm to our clients and capture more of the opportunity within our existing and prospective relationships. For example, in our international global family office prominent European family during the quarter by combining our relationship expertise with our Luxembourg asset servicing platform, this integrated solution supports the family's complex investment structure and creates opportunities to deepen the relationship over time.

Similarly, a recent win with a large U.K. wealth manager brought together NTAM's index management capabilities with Asset Servicing strengths across custody, securities lending, foreign exchange and fund administration. This is One Northern Trust practice, combining capabilities around client needs, strengthening relationships and creating additional avenues for growth across the firm.

Accelerating our strategic execution and the transformation of the company is AI. Our focus has been on converting widespread adoption into business value. Our approach is disciplined, starting with outcomes, simplifying processes and redesigning work rather than just adding tools. We consider AI to be augmented intelligence and a durable force multiplier for our service, expertise and integrity and the long-term value we create for shareholders.

We're seeing this show up in results. Our client action plan agents now save relationship managers 2 to 3 hours on every client memo, time they can redirect to clients. In alternative servicing, AI-enabled digitization has nearly doubled straight-through processing, improving both client turnaround and the scalability of our platform and our internal AI assistant, Byron, provide answers to partner questions that will allow our wealth advisers to bring sharper insights into client conversations. We're building these capabilities internally and with frontier AI firms and our employees have access to some of the most advanced models available. In institutional client onboarding, for example, we combined advanced AI with enterprise-grade privacy, security and governance to make the process faster for clients.

We're also building for where markets are headed. In digital assets, our role is to help clients connect traditional and digital financial markets with the institutional standards of control servicing and risk management they expect. Demand is translating into mandates across tokenization, digital settlement infrastructure and stablecoin related solutions with momentum in asset servicing building in the third quarter. We also expanded our digital liquidity capabilities with the launch of the Northern Institutional Funds Stable coin cash reserves portfolio, a money market fund that helps stablecoin issuers meet their reserve needs through high-quality, short-term U.S. government assets.

Separately, earlier this year, we introduced a tokenized share class of our treasury instruments portfolio. Together, these launches demonstrate our continued focus on product innovation and help ensure we're well positioned to meet client needs as the digital ecosystem evolves. Digital assets remains an emerging business for us, and we will continue to build our capabilities thoughtfully.

Let me now turn to each of our businesses. In Wealth Management, Global Family Office fees increased 16% year-over-year and asset flows were the strongest of any quarter this year. Clients with $100 million or more in assets continued to outpace the broader wealth management portfolio with both fees and assets under management in this group growing at double-digit rates year-to-date. Demand is also growing for family office solutions, our outsourced offering for families with complex needs, and we're investing in the specialized talent needed to scale it.

We also continue to build our alternatives offering. Client interest remained broad-based across venture and growth, value buyout, hedge funds and customized strategies and year-to-date fundraising has already well surpassed the level achieved in all of 2025. Talent remains one of the most important drivers of growth in Wealth Management. Our focused recruiting efforts have accelerated hiring and contributed to growth in our revenue-generating population quarter-over-quarter and we'll continue that campaign through year-end.

Turning to Asset Servicing. We continue to expand our work with complex asset managers and asset owners while driving scalable, profitable growth. Third quarter pretax margin exceeded 30%, up 6 percentage points year-over-year. And excluding notable items, our year-to-date pretax margin is 30%. Expanding relationships with existing clients remains an important source of growth. We recently announced an agreement with UBS to broaden our long-standing fund administration relationship subject to regulatory approvals, UBS's Swiss and Luxembourg management companies will extend our mandate to additional funds over the next 2-plus years, including administering the former Credit Suisse funds in those markets, increasing UBS assets we serviced by more than 50%.

The expansion further cements our position as the leading fund administrator in Switzerland and reflects UBS confidence in us to handle more complex work. In the U.K., J O Hambro appointed our integrated trading solutions desk, building on the servicing relationship that dates back to 2008. We're also seeing relationships that begin with trading, expand into broader asset servicing mandates.

Alternatives also continued to be an important growth area, supported by demand for semi-liquid fund solutions with combined assets in our LTAS and LTIF more than doubling from the prior year. And in the U.S., where asset managers increasingly want a single provider to support both mutual funds and ETFs, and we are meeting that need through the launch of our ETF servicing platform.

In Asset Management, NTAM continued to execute across its priority growth areas, ETFs, tax alpha, alternatives, and quantitative equities. We achieved our sixth consecutive quarter of positive ETF flows and launched 10 new ETFs, expanding our fixed income capabilities and broadening the range of tax-efficient solutions available to clients. Our intermediary business also delivered its strongest quarter of long-term flows in 3 years.

Going ahead, we plan to convert 6 Northern funds, representing approximately $33 billion in assets into ETFs during the first quarter of 2027. In tax alpha, we're building on long-standing capabilities to capture opportunities in a direct indexing market estimated at more than $1 trillion. Our direct indexing adviser education program received a 2026 Wealth Management industry award and demand for our long short strategies continues to build with a growing pipeline across a range of mandate sizes. Our quantitative equity business is also gaining traction. Institutional clients, including a Middle Eastern sovereign wealth fund and a large asset owner in the Nordic region are seeding key strategies in our new Adaptive Equity suite, which brings together our established quantitative expertise with advanced data science and AI assisted research.

Stepping back, this quarter showed progress across each of our businesses and One Northern Trust is broadening what we do for clients. We've demonstrated the strength and resilience of Northern Trust across a range of macroeconomic environments, and we will continue to grow the franchise and pursue the opportunities ahead with discipline.

Before I turn it over, I want to acknowledge that Dave Fox has announced his plans to retire. He'll remain CFO through the first quarter of next year to ensure a seamless transition and there will be ample opportunity to recognize his many contributions before then. With that, Dave, over to you.

David Fox

Thanks, Mike. Let me join Steve and Mike, and welcome you to our third quarter 2026 earnings call.

Let's discuss the financial results of the quarter. This morning, we reported third quarter net income of $642.9 million, earnings per share of $3.40 and return on average common equity of 20.1%. Pretax income was $804.2 million, and our pretax margin was 34.9%. Our results reflect continued progress against our financial objectives, including positive organic growth disciplined expense management and another quarter of substantial operating leverage.

Our reported results included a $48.7 million pretax gain and other operating income, including a $34 million pretax gain related to the sale of the Guardian ship services business and a $14.7 million pretax gain related to our participation in the second Visa exchange offer. Together, these notable items had an approximately $36.6 million favorable impact to net income in the quarter. Excluding notable items in all periods, total revenue was flat sequentially and up 11% year-over-year. Total expenses were flat sequentially and up 4.9% year-over-year, and we delivered over 600 basis points of operating leverage.

Year-over-year, currency movements had an immaterial impact on revenue and benefited expense growth by approximately 35 basis points. Trust, investment and other servicing fees totaled $1.4 billion, up 2% sequentially and up 8% compared to the prior year, benefiting from favorable markets and organic fee growth across all 3 business [indiscernible].

Excluding notable items, other noninterest income was up 19% year-over-year. While market volatility moderated from second quarter levels, foreign exchange trading and securities commission and trading income remained strong supported by elevated client activity and continued momentum in integrated trading solutions. Our assets under custody and administration were $20 trillion, down 1% sequentially and up 9% year-over-year. Our assets under management were $2 trillion, flat sequentially and up 11% year-over-year. Moderate equity market appreciation in the third quarter was offset by lower fixed income market values and outflows from short-duration strategies.

Overall, our credit quality remains very strong. In the quarter, we recorded a $5 million reserve build, primarily related to a specific charge-off while broader portfolio trends remain stable. Our effective tax rate was 19.3%, down 630 basis points from the prior quarter and down 680 basis points from the prior year. The third quarter rate reflects an updated assessment of the tax impact from our international operations in 2026, including greater expected utilization of U.S. foreign tax credits. We expect the effective tax rate to be closer to 25% in the fourth quarter and going forward.

Turning to our Wealth Management business on Page 5. Wealth Management delivered another strong quarter supported by growth in our core advisory business, serving ultra-high net worth clients as well as strength in Global Family Office. Trust, investment and other servicing fees for wealth management clients were $612 million, up 9% from the prior year quarter. Assets under management for our wealth management clients were $536 billion at quarter end, up 9% year-over-year. Average deposits within Wealth Management were $27.5 billion, up 3% sequentially, while average loans were $36.4 billion, up 2% sequentially. Pretax income was $392 million, generating a pretax margin of 41%.

Moving to our Asset Servicing results on Page 6. Asset Servicing delivered another strong quarter reflecting disciplined execution on new business economics, broader solution penetration and strength across capital markets. Assets Under Custody and administration for asset servicing clients were $18.5 trillion at quarter end, up 9% from the prior year quarter. Asset Servicing fees totaled $762 million, up 8% from a year ago. Custody and fund administration fees were $512 million, up 6% year-over-year and flat sequentially. The lagged benefits from favorable equity markets were offset by lower transaction activity as volatility moderated from elevated second quarter levels. Assets Under Management for Asset Servicing clients were $1.4 trillion, up 11% year-over-year.

Investment Management fees were $176 million, up 10% from the prior year quarter. The increase was driven largely by favorable markets and year-over-year benefit of higher liquidity assets, partially offset by price compression and select index mandates. Securities lending income was $29 million, up 38% year-over-year, supported by borrowing demand across U.S. equities, Asia Pacific markets and IPO-related securities. Average deposits were $96 billion, down 5% sequentially, while average loans were $5.3 billion, down 8% sequentially. The sequential decline in deposits largely reflected typical third quarter seasonality and was consistent with our expectations.

Pretax income was $405 million, generating a pretax margin of 30%. The year-over-year margin expansion reflects an improved business mix and a supportive macro environment. Turning to our balance sheet and net interest income trends on Page 7. Our average earning assets were $148 billion, down 2% sequentially as lower deposit balances drove a decline in money market assets. The fixed percentage of the securities portfolio was 51%, down slightly from the prior quarter, including the impact of swaps. The duration of the securities portfolio was 1.4 years and the duration of our total balance sheet remained under 1 year.

Average deposits were $123 billion, down 3% sequentially, largely reflecting the typical third quarter seasonality discussed earlier. Within the deposit base, interest-bearing deposits decreased 3% sequentially and noninterest-bearing deposits decreased 5%, representing 15% of the [ overall mix ]. Net interest income on an FTE basis was $679 million, down 1% sequentially and up 14% from a year ago. NII declined modestly as lower deposit balances more than offset the benefit of higher securities yields, including the impact of late second quarter securities repositioning as well as one additional day in the quarter. Our net interest margin on an FTE basis was 1.83%, up 2 basis points sequentially, reflecting the benefit of our securities investment strategies.

Turning to our expenses on Page 8. Noninterest expense was $1.5 billion, down 9% sequentially and up 5% year-over-year. Excluding notable items, noninterest expense was flat sequentially and up 5% year-over-year, primarily reflecting higher technology costs, compensation and benefits and higher account servicing costs. Excluding notable items, our expense-to-trust fee ratio improved to less than 109% compared to 112% in the prior year quarter.

Turning to capital on Page 9. Our capital position remained strong in the third quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach was 12.4%, up 20 basis points from the prior quarter. The increase was primarily driven by lower risk-weighted assets, reflecting a decline in quarter end overdraft balances, which more than offset a modest decline in CET1 capital. Our Tier 1 leverage ratio was 7.8%, up 20 basis points from the prior quarter.

At quarter end, our unrealized after-tax loss on available-for-sale securities was $547 million. We returned $514.2 million to common shareholders in the quarter through common stock dividends declared of $161.9 million and common stock repurchases of $352.3 million. This represented an 82% payout ratio on a reported basis. Excluding notable items, the payout ratio was approximately 87%. Our capital position remains strong, providing flexibility to support clients, invest in the business and return capital to shareholders.

Turning to our guidance on Page 10. Assuming a relatively stable market environment and interest rate backdrop, we now expect fourth quarter net interest income to increase 8% to 9% year-over-year and total revenue to increase 6% to 7%. Excluding notable items, we expect to deliver positive operating leverage in the fourth quarter and 500 basis points or more of operating leverage for the full year. And with that, operator, please open the line for questions.

Operator

[Operator Instructions]

And we'll go to our first question from Brennan Hawkins with BMO Capital Markets.

Question-and-Answer Session

Brennan Hawken

Curious about the impact of the price compression that Dave spoke to on the index mandate. Could you help us understand the magnitude of that? And should we consider that sustainable on a bill forward basis?

David Fox

The price compression on the index mandates. I mean, I think what I was talking about specifically on some price compression for the quarter was the liquidity mandates that we had. We had to do a repricing of our money market fund related to our wealth management business of roughly 10 basis points, and that brought down the -- that's about $2 million a month or $6 million a quarter. So that's what I was talking about in terms of the price compression more importantly.

Brennan Hawken

Okay. Got it. The operating leverage here that you generated in the outlook is really encouraging and certainly, it feels like a new direction. Can you speak to what's going on under the hood and the progress that the office of the COO is making to drive greater efficiency?

Michael O'grady

Sure, Brennan. It's Mike. To your point, this has been a focus for us, ensuring that we're driving scalable growth in a way that still delivers the highest quality service for our clients. And going back basically a couple of years ago to when we did reorganize around the COO office, that was a big part of it. But the other aspect of it, to your point, under the hood, was changing to this client-centric capability operating model. And by doing that, that allows us to arrange not only the operations that we provide, but also the technology that's necessary in order to provide those capabilities.

That gives us greater resiliency, but also greater efficiency. And this is something that we have been just working our way through capability by capability in order to get those outcomes. And I think that, yes, you're seeing some of the results of that in the positive operating leverage and scalability that we're generating.

Brennan Hawken

Okay. So it sounds like you guys feel good about the sustainability of that momentum?

Michael O'grady

Yes, absolutely. I mean, this is something that is not a, I'll say, one-off, but something that we've been executing on for the last couple of years and continue to do that going forward.

Operator

And we'll go to our next question from Manan Gosalia with Morgan Stanley.

Manan Gosalia

I wanted to focus on the NII guide. So your guidance for next quarter implies some growth over 3Q levels. Can you walk through some of the assumptions, especially around the seasonality on the deposit side, deposit betas as rates move higher and any earnings asset growth and reinvestment yields that you expect?

Michael O'grady

Sure. Obviously, the rate path has moved in our favor. So we've got a carry-in benefit from the September rate hike. Our outlook is anticipating also on more Fed hike in December. We still have very healthy back book repricing opportunities and that remains a tailwind. So portfolio yields of roughly 3.5% and reinvestment opportunities of, let's say, 4% to sort of 5%. The portfolio keeps rising as securities mature and are reinvested. So from that perspective, that gives us a tailwind and then improving deposit balances is very typical in the fourth quarter after the seasonal dip we had in the third quarter. And so our average deposits are going to be higher than they were before.

And then lastly, we're not seeing any NIM compression going forward because a lot of the NIM sensitive deposits were already sort of priced in with the September rate hike.

Manan Gosalia

Got it. Very helpful. And on the asset servicing side, I think you've spoken about becoming a little bit more selective with new business and exiting lower-margin relationships. Can you talk about how much more opportunity there is to improve margins through business mix and other higher-value servicing businesses like outsourced trading.

Michael O'grady

Sure. So to your point, we've been very focused on scalable growth within the Asset Servicing business, and you can see some of the results of that with strong revenue growth at 12% in this quarter, expense growth at 3%. The pretax margin year-to-date at 30%. So continuing to make progress on that and want to continue to drive that forward. And to your point, that's coming in a number of ways. I talked about it on the cost side and efficiency that we get through the COO office, but also on the front office and the type of business that we're pursuing. There is a focus on trying to grow the scalable revenues faster. So even within custody and fund administration, the custody revenues in this past quarter and year-to-date are growing faster than the fund administration and investment outsourcing revenues that we have on that front.

And then to your point, you see NII growth and then capital markets at over 30% growth year-over-year. And some of that is certainly very market-oriented and the volatility in the markets. But underneath it, it is adding additional clients for the types of services really that we're offering in capital markets, such as the outsourced trading. So it's that combination underneath that we're trying to drive consistently going forward.

And then to your last point, just on clients and client activity. Yes, that's something we continually work with our clients to make sure that we're in the right place. And that can mean pricing one direction or another in order to have those scalable, profitable long-term relationships. And so yes, we've worked through some of it. But I would say that's something that we do on an ongoing basis so that we have a very durable, consistent fee growth rate that we can have in that business overall and continue to produce scalable growth.

Operator

And we'll go next to Ken Usdin with Autonomous Research.

Kenneth Usdin

On the core custody line, I heard your comments, Dave, that the market levels were offset by lower volumes. So just kind of thinking about the fourth quarter implied outlook for fees because you gave NII and total revenues. What does that imply for trust revenue as you think ahead, a little bit lower start, kind of, than we would have thought. But how does that like activity versus wins versus levels kind of act as you think ahead to the fourth quarter?

David Fox

Yes. So what you've got really is a battle between the lagged pressure you're going to get from fixed income, the pressure in the fixed income market balanced against transaction activity that should return to normal and then continued organic growth and it's not the same for both businesses, but for, let's just say, for Asset Servicing, obviously, a lot of the fixed income pressure came late in the third quarter, and those are going to weigh sequentially in the fourth quarter. They're going to be offset, hopefully, by some rising equity markets in the third quarter as well, but ultimately, that will be a bit of a headwind. On the tailwind side, we're hoping the transaction activity will recover. It already has started to recover in September, part of October. And roughly 20% of our custody and fund admin fees are driven by transaction income. So that should help alleviate some of the market pressure. And then new business remains strong, so organic growth should lift fee sequentially as well. So that's the way I look at it. The only business within wealth that has a lagged effect is GFO, although, frankly, fixed income is not as high a proportion of their asset base as it is in the Asset Servicing. The thing that will affect probably the wealth business the most is the ongoing liquidity repricing actions that we took that were already fully reflected in the third quarter results, and we're not contemplating any further actions going forward. So asset flows in the wealth side were actually very positive and Global Family Office in particular, had a very strong third quarter.

Kenneth Usdin

Got it. And on -- a similar question on the fourth quarter positive operating leverage, third quarter was 5% with modest help from FX translation. Can you help us understand where you're expecting the expense growth to land because you don't kind of just telling us generally positive operating leverage, I mean we can triangulate to the 500 basis points plus, but just some things to think about on that front as well would be helpful.

David Fox

Well, as you know, I don't give guidance on expenses in particular because I've tried to move away from that and look more at the productivity funding the investments and then, of course, the net of that becoming your expense growth. And so from that perspective, I think the biggest issue in fourth quarter on year-over-year is going to be the relative -- the relative performance of the fourth quarter last year versus the fourth quarter this year. So it's going to be harder to keep, I think, posting extremely high operating leverage as we go forward, obviously, because we had a very good fourth quarter last year.

That being said, we have the discipline built into the system to make sure that we monitor that on a very flexible and ongoing basis so that we can solve for what we need to solve for during the quarter. And so we're optimistic we can keep that trend going into the fourth quarter on the positive side.

Operator

And we'll go next to Scott Siefers with TD Cowen.

Unknown Analyst

Just wanted to ask on capital. Plenty of capital has been growing despite pretty robust payouts. I also noticed the $3.5 billion repurchase authorization from last night. Just maybe some refreshers on priorities and thoughts on how aggressive you might plan to be from here on the repurchase.

David Fox

Yes. So as Mike said, we've already returned over $1.5 billion, and we're sort of on track with our plans that we had at the beginning of the year. And obviously, if you just look at the nominal aggregate amounts, relative to our earnings payout ratio is close to 90%. We didn't anticipate, obviously, at the beginning of the year, we've outearned our pace, if you will, but we think that we've got, obviously, plenty of capital to continue a very robust buyback program. Obviously, in terms of prioritization, what we look to first is covering the dividend. And when we look at growth, I mean, growth is super important, and we like to have our balance sheet available for our clients and like to be able to fund our growth initiatives organically. And then when we have excess capital, we look at the share repurchases.

And so we don't have a fixed amount that we look to do every quarter. We balance that against everything else that we're looking at. But clearly, it remains a focus, and I think we'll be able to continue that very, very easily into the fourth quarter.

Unknown Analyst

Perfect. And then Dave by the way, congratulations on the announced retirement. And maybe, Mike, just at a top level, as you think about candidates for the CFO position. Maybe just very top-level thoughts on characteristics, you kind of find the most important as you kind of move forward and the industry sort of continues along with this, like technological innovation becomes sort of less traditional, et cetera. How are you thinking about those dynamics across currents?

Michael O'grady

Sure. Well, first of all, it will be impossible to replace Dave. So I'm not even going to try, so to speak. But obviously, he does a tremendous job and eventually, I had to allow them to retire. But as you saw from this days agreed to stay on to make sure it's a very smooth transition. And to your point, that's given us the opportunity to make sure that we look both internally, externally to find the right person for this important role as we go forward. There's no question the need for the strong financial background, but also having an understanding of the businesses that we're in and being a strategic thinker as well, which Dave certainly has been. And then to your point, with technology evolving so quickly, and frankly, the financial models around this with tokenization or tokens and trying to understand the cost of them and the consumption of them, et cetera.

That's another component we want to make sure that we take into account because we have our target financial model. We need to make sure as the cost and the financial implications of this technological revolution is happening that we're able to manage that really well going forward. So those are all the characteristics and then it certainly has to be somebody who also carries all of the cultural and competitive attitude, if you will, that we want to have here as a part of the team.

Operator

And our next question comes from David Smith with Truist Securities.

David Smith

On the FX trading, it didn't seem like this was a particularly volatile or active quarter broadly for just compared to some of the crazy quarters we've had over the past year or 2. Like would you say that this is a pretty sustainable run rate for the business going forward in like a normal market? Or how would you characterize like the extent to which you feel like you're over earning or under earning on FX today?

Michael O'grady

Yes. I definitely don't think it's a normalized market. And obviously, we're down from the previous quarter, but it's still at a very high level and volatility is still at a very high level. We did have some idiosyncratic issues that happened out of APAC that really drove the previous quarter. This quarter is still around flows and volatility. And I think going forward, we have reset what I believe is the run rate of FX, which is hard to predict. From what it might have been traditionally in the 50s, I think we're probably more in the 70s in terms of a normalized rate going forward. And that is largely due to the fact that we just added a whole bunch of clients. And we're getting outsourced FX trading and things of that nature that are feeding a lot of new flows. And so the new business feeds new flows. So I do think we've kind of reset to a new normal, but that new normal is not where we are today.

David Smith

Okay. And then sticking with that volatility theme, does the uncertainty around rates at all influenced the buffer that you feel like you need to run with on a capital basis. You've always run with a pretty healthy buffer on capital. I'm wondering if that's already incorporated the prospects for uncertainty in rate moves and for rates to spike up? Or if you feel like maybe that buffer needs to be a little bit higher today than it had been in the past?

Michael O'grady

Yes. We think we're very comfortable with the ranges that we have right now between 11% and 12% actually we're above 12%. So we feel very comfortable with our current capital ranges. And then on the interest rate front, what we watch carefully there is the yield curve, the direction of the yield curve. To the extent that you get a couple of more rate hikes and flattens, that's obviously something we're going to take a look at. That isn't in the cards right now. We've got a very constructive interest rate environment. So all the guidance that I gave you assumes a very constructive interest rate environment going forward. But I don't think that is going to have a particular impact on how we look at capital at this point in time.

Operator

And our next question comes from Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala

I guess Mike, you highlighted just in terms of fee growth across businesses and your returns are obviously running above the medium-term targets. Maybe just bigger picture, as you think about the next few quarters or the next few years, like from a strategic standpoint, give us some color around where do you see sort of the best opportunity? Is it a market share play? Is it an efficiency play? Or are there new products that you're sort of leaning into that's driving growth?

Michael O'grady

Sure. So you're absolutely -- we look at it years out, not quarters out necessarily, and that is our primary focus. And I think what's important when you think about our strategy is, first, just to your point, at the top, our strategy is client-driven. So it's not a particular product or service that we then try to push everywhere, but think about where the client is headed and what are their needs going to be and how can we anticipate it and frankly, help shape what's happening there. And so there's so much happening with regard to the market and also with technology. And so the first thing we have to take into account is the future needs of our clients are going to be different than what they need today. So not only are we utilizing AI in just about everything that we're doing, but our clients are evolving on this front as well.

And so their needs are going to change as well. A perfect example of this is around data. We have tremendous data that we basically provide in different forms for our clients. The ability to provide that in different formats in different ways as our clients are utilizing data and consuming data in a different way, in a different world. And so that's where I would say it starts.

The second is around One Northern Trust, right? It is trying to deliver solutions that cut across the 3 businesses. That enables us to provide solutions that are more differentiated. And you've heard about some of the examples that I mentioned earlier in the call here, but really where we can leverage the asset servicing platform with our wealth management clients, for example, with our GFO clients on that front.

And then going in a different direction, with asset management, you can see the emphasis and push on ETF. That's because we're developing products that are specifically oriented towards our wealth clients, but then we can also distribute those through intermediaries as well. So that's an area where we see a lot of opportunity on that front that both helps our existing client base, and we get the synergies from that, but also provides new growth opportunities. Without a doubt, we also look to focus on particular segments of the market because in our view, it's less about just the pure size of any company, but more where you're focused in those areas that you're focused that you have scale in those markets with those products and services that you're providing.

And so particular markets, such as the ultra high net worth segment where front office solutions is an area where we can differentiate and we're trying to further build that out and scale that capability on that front. And similarly, within the asset servicing businesses, there are geographies where we've experienced strong growth, but we have the ability to invest more to expand, for example, in the Middle East on that front. So there's a number of opportunities where we see longer term to utilize this strategic framework that we have in place to both grow but also grow in a scalable, profitable way.

Ebrahim Poonawala

That's helpful. And just, Dave, apologies if I missed this. I know it's small, but when we think about the price compression on the liquidity mandate, was that tied to just the Fed moving in September? And more broadly, how would you say pricing is behaving across asset servicing just from a competitive standpoint?

David Fox

Yes. Well, so the liquidity pricing that I talked about was primarily in the wealth management side of the business. That was just a competitive -- that was a competitive issue. It wasn't a rising interest rate issue from that perspective. That's the way I look at it. And then in terms of -- are you talking about the fee realization overall in the Asset Servicing business?

Ebrahim Poonawala

Yes.

David Fox

So not all AUC is created equal, as you know. And so from that perspective, when you look at fee realization, you have to take into consideration the type of business that you're in. And a lot of our wins recently are not market sensitive. And so when you've got mandates on the alternative side, for example, where they build on a unit cost basis, you're not going to get the same market volatility that you might get with other assets. So you can sometimes get a disconnect between your AUC growth and your fee growth and your fee realization.

Operator

And we'll go next to Mike Mayo with Wells Fargo Securities.

Michael Mayo

Dave, I'm just curious, you were CFO for 2 years. I know you're staying on through first quarter. So there's no imminent issues or anything like that. And I think there are some naysayers out there when you first took the job as CFO, and I think you've proven the naysayers wrong. But now I find myself wondering like why are you stepping down after just 2 years. That seems a bit of a surprise.

David Fox

Yes. Well, if you take a look at when I started my career, Mike, and you probably wouldn't have that question so much in your mind. So I date back to a firm that most people don't even know existed, which is called manufacturers Hanover. So I've done my time. I think when I was brought into this job and one of the things Mike just mentioned about someone new coming in was to take advantage of my knowledge of the businesses having run a very large part of asset servicing and the highest growth part of wealth and then having strategy in corporate development as part of the mandate was to kind of get us on a solid footing going forward with the shift that we took between the Asset Servicing side and the Wealth Management and Asset Management side to make sure that we had everything in place and 1 they have in place. So I feel like we've accomplished that. and gotten the financial model where it needs to be. And now Mike is going to fill out his bench going forward.

Michael Mayo

Okay. And then maybe as a segue for you, Mike. Asset Servicing seems to be the business that's not as competitively positioned to say well to the rest of the firm. And you've highlighted allocating more to say, global family office and wealth. But as it relates to AI, you highlighted the benefits, but in terms of the cost, I mean, the cost of compute is going up, which means cost of tokens go up, which means the cost of AI goes up, which means maybe you're not as competitively positioned as your larger peers. I guess that gets to token costs and do you pay the same rate as your big peers or not. On the other hand, I know you've always focused on scale by product and by market. So I'm just trying to understand the AI cost and where you are on that kind of cost benefit curve?

Michael O'grady

Sure. So this is a topic, Mike, that I would say we're obsessed with right now for all the reasons that you mentioned there. And so we've gone about this and are going about it, I'll say, pretty aggressively in trying to be set up to be able to ensure that we have an attractive, I'll call it, cost structure around this. So a couple of things on it. First is there are a number of of the aspects of our technology infrastructure that are owned, if you will. And so we're large enough to be able to have a number of things that we do on our own, which gives us that scale as the volumes go up, they are volumes that are on more of a fixed cost. So that's one.

Two is we absolutely have to leverage our largest partners. And so we're very focused on who those partners are and ensuring that we are getting the benefit of their scale. Certainly, for example, Microsoft is a strong partner of ours. And on that front, not only do we get the benefit of their scale, but it is a partnership-driven type relationship. So we need to get more out of it than I'll say just the pricing aspect of it.

So that relationship, for example, we're working with forward-deployed engineers that they're providing to us to address some of the biggest opportunities that we have. they want to collaborate to not only help us, but also develop some of the technology that they have in areas where we have the expertise. We have the capabilities on that front and it enables them to advance what they're doing and then utilize that more broadly in the marketplace. So that's another really important aspect of it. And then the other is you have to build basically flexibility or agility into the platform.

You cannot be single-threaded through 1 provider, 1 model, whatever it may be. And so the whole idea of being able to shift the work and shift the consumption to the best place, the optimal model, if you will, and the optimal way where you're getting the compute is another critical aspect of this. We've already seen, for example, in cybersecurity, an area where that's one of the areas that is definitely consuming the most in the way of tokens. And so for us to have the ability to essentially have a harness over multiple models enables us to automatically shift and get the right type of scanning happening on the right type of model.

And so that flexibility is going to be essential as we go forward. because not only are we working with and expect to continue to work with some of the frontier models directly. But we also have to have the flexibility to utilize some of the latest open models as well. And so it's a comprehensive approach to it that is driven not only by the cost side, but certainly the capability and also the safety of the models that we're using and the whole infrastructure that goes around that.

Michael Mayo

All right. Thanks for the comprehensive answer. And Dave, I do remember Manny Hanny myself. So take care.

Operator

And we'll go to our next question from Glenn Schorr with Evercore.

Glenn Schorr

One follow-up. You went through your capital priorities and you have tons of it and the stock's obviously done well, too. So I may ask little different question. You've seen a bunch of bolt-on deals across the Asset Management industry, and there are many, many private wealth management oriented companies that are looking for liquidity. Curious how you think about being a little more acquisitive in accelerating both growth and capabilities across either one of those 2 businesses?

Michael O'grady

Sure. I'll take that, Glenn. And I think, frankly, the way you framed it up is a good way to think about it. We are absolutely looking for opportunities to bolt on whether it's wealth management or asset management, I'll say, firms or capabilities on that front. And it is an attractive use of capital for us if it can advance our strategic objectives, such as we've talked about. So where there are opportunities that fit with the upper end of the Wealth Management spectrum that either are similar to what we're doing or frankly, can add an additional channel for us on that front. Those would be attractive. And as you pointed out, we have the ability to buy back the stock.

That's a pretty, I'll say, predictable type of return that you're going to get from this. So there's definitely a financial profile that the acquisitions have to make. But to the extent that we can meet that hurdle, find things that are strategically attractive as well, we would rather deploy the capital that way than necessarily just continuing to buy back stock.

Glenn Schorr

Too. Okay. And then 1 follow-up on the NII front. And I hear you on fourth quarter, I'm more thinking generically on a go-forward basis. Your deposit growth has been good. interest rates are favorable. Those two are good things. Average loans kind of were low this quarter on a year-on-year basis. But when you add it all up, it feels like it should be reasonably good backdrop. This course, I saw something weird. There was -- like net interest revenue was down 3% year-on-year, but net interest expense was down 10%. So the net result is NII was good. Maybe just talk about the weird parts in terms of the average loan growth being kind of [indiscernible] and then what was it that brought the interest expense down so much in a rising rate backdrop.

David Fox

Yes. I mean you have to dissect every single thing we're doing on the balance sheet. And one of the things where we had some distortion was when you -- when deposits go down, we obviously invest in money market funds, and those money market funds are at attractive yields. And so you have to -- those are the things that you will get out of, so that will drive your yield down. On the cost side, we still are implementing the deposit pricing initiatives that we had earlier in the year. So from that perspective, a lot of that still hasn't worked its way through the system. So that's probably something you you haven't factored into your calculations.

Operator

And we'll go to our next question from Alex Blostein with Goldman Sachs.

Alexander Blostein

Thank you guys for the question here. I was hoping to go back to the wealth business. I think at 1 of the recent conferences you guys talked about kind of helps to reinvigorate growth -- organic growth on the wealth side, which may require some spending. And obviously, when we look at the margins in the wealth channel, it's already quite strong. I think you guys are in the high 30s. I think this quarter, it was closer to 40. So as you sort of think about the ability to maintain or even improve the margin in the wealth business, is that part of the framework and kind of the rubric as we go forward or the margins at these levels feel pretty steady at least on the wealth side.

Michael O'grady

So Alex, I would say that the primary objective for the wealth business right now is on the growth side. And to the extent that we need to and are investing in what it takes to grow, we can see those margins even come down a little bit. To your point, they're very, I'll say, attractive in the high 30s. We certainly are focused on efficiency in that business as well. We like the attractive margins. But that said, we're willing and interested in making the investments that will increase the growth rate. And when you think about the investments, it starts with talent.

We want to make sure we're retaining the best talent we have and developing them, but also bringing on more talent, particularly revenue-generating talent on that front and have been successful. But that's an investment because it does take some time before you're going to see the growth that comes with bringing on additional people.

And then when it comes to what we might do on the marketing and promotion front, we're spending more and investing more in digital marketing because we're getting better results, frankly. And the ability to utilize and apply AI and your prospecting and promotion on that front is something that we'll continue to do to the extent that we see the positive results on the growth front. So that's a long way of saying the margins in wealth are very attractive. And we would only see them come down to the extent that we think we're making investments that are going to produce more growth.

Alexander Blostein

Fair enough. And then a quick follow-up just on the balance sheet as well. So to Glenn's point, deposit growth has been pretty good this year and actually has been pretty good for a couple of years now. And I generally view that, sort of, as a function of organic growth and we look at the organic growth, and that's been, sort of, below your guys' goal. So what's been the driver in deposit growth for the firm? What are kind of the key sources of that growth? And how do you think about deposit growth going forward?

David Fox

Yes. I mean, listen, we have had organic growth. So -- and the deposit base does tend to grow with the underlying business. So from that perspective, I think it's pretty consistent with what we've done in the past. We also had, in the first couple of quarters of the year, some elevated levels of deposits due to some client actions, whether it was restructuring or whether it was a fund that was returning its cash to their investors or things of that nature. So we had some idiosyncratic bump up in the deposit balances in the first 2 quarters of the year. So if you take those out, it would normalize back to what we think is a pretty normal deposit growth during the course of the year, we're up 6% year-over-year. And so that's consistent with the underlying fundamental business that we have coming into the company.

Michael O'grady

And Alex, I would just add that in addition to the growth of the company and the client base, there is the backdrop of liquidity. And it's an incredibly important aspect of what we do for our clients, so both on the balance sheet with deposits, but also through our liquidity funds. And we've seen more broadly that there's been more liquidity in the market, if you will, and I would say this is kind of the first quarter where we've seen some of that come down just overall, the backdrop on that front. And I think some of that is just redeployment on the part of our client base. right, moving out of whether it's deposits or money market funds into fixed income as a part of their investing activities. And so I would just take that backdrop into account. It's been very robust, if you will, for the last few years here and not likely to continue at that same backdrop pace.

Operator

Our next question comes from Steven Chubak with Wolfe Research.

Hang Leung

This is Hang Sharon filling in for Steven this morning. I just wanted to kind of think about the deposit remixing trends, which you noted, NIB trends were a bit weaker than interest-bearing. How do we reconcile that versus the better NII guide for fourth quarter? And how are you thinking about like outlook for deposit remixing from here?

David Fox

Defined deposit remixing. What do you mean by that?

Hang Leung

Just mixing like from noninterest-bearing into interest-bearing deposits.

Michael O'grady

Oh, I see. Well, obviously, the non-interest-bearing portion has remained relatively consistent since the '22, '23 reset that we had. And so from that perspective, we don't expect any change really in terms of the consistency of that as a percentage of the overall deposits. We're in an attractive interest rate environment. And so as I said earlier, we think that NIMs are going to continue to be solid and maybe slightly trend up. The deposit betas have been sort of held in, obviously, slower for the retail side and greater for the institutional side but those have held in as well. And so we see the current environment as being very productive in terms of the -- of maintaining that margin going forward.

Operator

And we'll go next to Gerard Cassidy with RBC.

Gerard Cassidy

Can you share on this -- obviously, you guys had a very strong quarter when it comes to ROE, and I know there were some onetime items in there, but you're comfortably above your long-term ROE targets. I think you set out in January, 13% to 15%. Can you share with us how much of this improvement is because of the business model just being so much better now versus market conditions, which of course, are quite favorable for everybody.

Michael O'grady

Yes. So Gerard, I agree that at this point, producing both the growth and the returns that we have really puts us in a very positive zone and one certainly that we'll want to continue to drive on, but to your point, there's some mix or a combination between what we're doing and the backdrop of the market. And I wish I could break it down perfectly as to which one is contributing more or what portion of that, but the way we literally look at it though, is less within, I'll call it, a quarter or even a year on that backdrop and really looking at things through the cycle.

And that's why when we talk about our target financial model, frankly, it doesn't have revenue growth of 11% in that target because that's unlikely that you're going to have a market backdrop over a 4-, 5-, 6-year cycle that's going to support that. And what's important on that is to the extent it doesn't, you have to make sure you have a model where the expense growth is not under the assumption that you're always going to be in very robust conditions.

And so that's the whole idea of the discipline that we try to drive into the financial model of always producing productivity so that we have the capacity to invest in the business and making sure that we're mindful of the costs at all times such that when we have periods like this, we can produce significant positive operating leverage. But when the conditions are not as robust, we can continue to grow the business, invest in the business, but also do in a way that is attractive and provides attractive growth.

Gerard Cassidy

Very good. I appreciate the color. And then just a small question. Obviously, lending is not a driving -- the main driver of your revenue or profitability, of course. And you mentioned the charge-off this quarter and you guys have always had and still do pristine credit quality. But I'm curious, what drove that charge-off? And what sector in the portfolio? Was it located in? Or what type of business was it?

Michael O'grady

Yes. Listen, in any particular quarter, you'll have 1 particular credit that may influence the reserve, and that was the case in this particular one. So it was in the CRE portfolio. But keep in mind, that's a really small percentage of our overall loan portfolio. And so -- and the overall reserve actually went down. So from our perspective, the credit quality hasn't changed. It's not something we're seeing across the entire portfolio was really isolated to that 1 borrower.

Operator

And there are no further questions at this time. I'll turn the conference back to Steve Carroll for any additional or closing remarks.

Steve Carroll

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

Operator

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