Q3 2024 Northern Trust Corp Earnings Call
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Operator: Good day and welcome to the Northern Trust Corporation's third quarter 2020 four earnings conference call. As a reminder, today's conference is being recorded.
Speaker Change: Good day and welcome to the Northern Trust corporations third quarter 'twenty 'twenty four earnings Conference call. As a reminder, today's conference is being recorded at this time I'd like to turn the call over to MS. Jennifer Childe Director of Investor Relations. Please go ahead ma'am.
Jennifer Childe: At this time, I'd like to turn the call over to Ms. Jennifer Childe, Director of Investor Relations. Please go ahead, ma'am.
Jennifer Childe: Thank you operator, good morning, everyone and welcome to Northern Trust corporations third quarter 2024 earnings Conference call. Joining me on our call. This morning is Mike O'grady, our chairman and CEO, Jason Tyler, our new President of wealth management, and former Chief Financial Officer, Jay Fox, Our New Chief Financial Officer, John <unk>.
Jennifer Childe: Thank you, operator. Good morning, everyone, and welcome to Northern Trust Corporation's third quarter 2024 earnings conference call. Joining me on our call this morning is Michael Grady, our Chairman and CEO; Jason Tyler, our new President of Welp Management and former Chief Financial Officer; Dave Fox, our new Chief Financial Officer; John Landers, our Controller; and Grace Tiggins from our Investor Relations team.
Jennifer Childe: Anders our controller and Greece Higgins from our Investor Relations team, our third quarter earnings press release and financial trends report are both available on our website at northern Trust's Dot 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 23rd call as being.
Jennifer Childe: 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 23rd 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 23rd. Northern Trust just claims any continuing accuracy of the information provided in this call after today.
Jennifer Childe: Webcast live on Northern Trust Dot com the only authorized rebroadcast of this call is the replay that will be made available on our website through November 23rd.
Jennifer Childe: 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 on page 12 of the accompanying presentation, which will apply to our commentary on this call. During today's question and answer session. Please limit your initial query to one question.
Jennifer Childe: Please refer to our safe harbor statement regarding forward-looking statements on page 12 of the accompanying presentation, which will apply to our commentary on this call.
Jennifer Childe: 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.
Jennifer Childe: And one related follow up this will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining US today, let me turn the call over to Mike O'grady.
Michael Grady: Let me turn the call over to Michael Grady. Thank you, Jennifer. Let me join in welcoming you to our third quarter 2020 for our earnings call. As Jennifer mentioned, Dave Fox became our CFO on October 1st when Jason became President of our wealth management business. Jason will review our financial performance for the third quarter in a few minutes, and he and I will take your questions. Dave will take Jason's place on our fourth quarter earnings call, and many of you will have the opportunity to meet Dave in the coming weeks. We're grateful to Jason for his considerable contributions over the past five years at CFO, including successfully managing our balance sheet through a number of challenging events, including the COVID pandemic and the collapse of several financial institutions last year.
Mike O'grady: Thank you Jennifer let me join in welcoming you to our third quarter 2024 earnings call.
Speaker Change: As Jennifer mentioned, they Fox became our CFO on October one with Jason became president of our wealth management business.
Speaker Change: Jason will review, our financial performance for the third quarter in a few minutes and he and I will take your questions. Dave will take Jason's place on our fourth quarter earnings call and many of you will have the opportunity to meet Dave in the coming weeks.
Speaker Change: We're grateful to Jason for his considerable contributions over the past five years as CFO, including successfully managing our balance sheet through a number of challenging events, including the COVID-19 pandemic and the collapse of several financial institutions last year I'm confident that Jason has the right skills understanding of the business and vision to lead welcoming.
Michael Grady: I'm confident that Jason has the right skills, understanding the business and vision to lead wealth management into its next chapter of growth. I also want to welcome Dave to the CFO chair. Dave has a long track record of success in leading businesses in driving financial performance. Most recently, Dave ran our global family office business. Under his tenure, GFO trustees grew at a compound annual rate of 10%. Dave also served as head of acid servicing for the Americas. Dave is a highly respected leader whose deep industry knowledge and strong financial acumen, making the right choice to serve as Northern's next CFO.
Speaker Change: It's been into its next chapter of growth.
Speaker Change: I also want to welcome Dave to the CFO Chair, David has a long track record of success in leading businesses and driving financial performance. Most recently they've ran our global family office business under its 10 year CFO Trust fees grew at a compound annual rate of 10%. Dave also served as head of asset servicing for the <unk>.
Eric is David is a highly respected leader, whose deep industry knowledge and strong financial acumen make him the right choice to serve as northern next CFO.
Michael Grady: Turning to our third quarter performance, a results benefited from strong market performance but also reflect continued positive momentum across our businesses. Related to the prior year, trustees were up 8%; then interest income grew 21%; and excluding notables, earnings per share grew 36%. Importantly, we generated positive trustee and total operating leverage while continuing to make significant investments in our business and infrastructure. We also returned 453 million to shareholders.
Speaker Change: Turning to our third quarter performance our results benefited from strong market performance, but also reflect continued positive momentum across our businesses.
Speaker Change: Relative to the prior year Trust fees were up 8% net interest income grew 21% and excluding notables earnings per share grew 36%.
Speaker Change: Shortly we generated positive trust fee and total operating leverage while continuing to make significant investments in our business and infrastructure. We also returned $453 million to shareholders.
Michael Grady: members. Within wealth management, we generated a strong year-over-year trust fee growth of 9% and reached record AUM levels. Our new business momentum improved, reflecting the maturation of a number of initiatives started over the past 12-18 months. Global family office performed particularly well, generating mid-single-digit organic growth, both in the third quarter and year-to-date. International relationships, which have been an area of focus in recent years, drove a healthy portion of this growth, including a marquee win sourced through collaboration with asset servicing, demonstrating the power of our one-Northern Trust strategy. Asset management generated positive liquidity flows for the seventh consecutive quarter and positive flows in tax advantage equities, active fixed income, and alternatives.
Speaker Change: Within wealth management, we generated strong year over year trust fee growth of 9% and reached record AUM levels.
Speaker Change: Our new business momentum improved reflecting the maturation of a number of initiatives started over the past 12 to 18 months.
Speaker Change: Global family office performed particularly well generating mid single digit organic growth both in the third quarter and year to date.
Speaker Change: International relationships, which had been an area of focus in recent years drove a healthy portion of this growth, including a marquee win source through collaboration with asset servicing demonstrating the power of our one Northern Trust strategy.
Speaker Change: Asset management generated positive liquidity flows for the seventh consecutive quarter in positive flows in tax advantaged equity active fixed income and alternatives.
Michael Grady: This translated into healthy organic AUM growth, despite continued pressure on index products. Continued strong investment performance is supporting our organic growth, with active fixed income outperforming benchmarks over 1, 3, and 5-year timeframes. Entance performance is also attributable to leveraging our one-northern trust strategy to deliver clients to solutions and capabilities of the entire firm. Year-to-date, NTAM has launched 13 new products, including a Treasury-only money market fund that has generated nearly 2 billion inflows in less than six months, largely from GFO clients. Our asset servicing business performed well in the quarter. Transaction volumes were healthy, capital markets activities were up double digits for the second quarter, and new business growth continues to be booked at attractive margins.
Speaker Change: This translated into healthy organic AUM growth. Despite continued pressure on index products.
Speaker Change: Continued strong investment performance is supporting our organic growth with active fixed income outperforming benchmarks over one three and five year Timeframes.
Speaker Change: <unk> performance is also attributable to leveraging our one northern trust strategy to deliver clients to solutions and capabilities of the entire firm.
Speaker Change: Year to date, and Tim has launched 13, new products, including the Treasury only money market fund that has generated nearly $2 billion in flows in less than six months largely from GFS clients.
Speaker Change: Our asset servicing business performed well in the quarter transaction volumes were healthy capital markets activities were up double digits for the second quarter and new business growth continues to be booked at attractive margins.
Michael Grady: As we discussed, our goal is to generate new business that is scalable. We've shifted our focus to opportunities that require lower levels of incremental costs and to cross-selling products and services to existing clients. As an example, this week we announced an expansion of our relationship with Artemis, a leading UK-based asset manager with more than 33 billion in AUM, wherein all trading activity for Artemis' equity funds and all OTC and exchange-traded derivatives will be outsourced to Northern. We will now support the complete life cycle of these investments, from execution to custody, including fund administration, depository, global custody, and transfer agency services for its UK and Luxembourg-Domace Outfunds.
Speaker Change: As we discussed our goal is to generate new business that is scalable we have shifted our focus to opportunities that require lower levels of incremental costs and to cross selling products and services to existing clients.
Speaker Change: As an example, this week, we announced an expansion of our relationship with Artemis, a leading UK based asset manager with more than 33 billion in AUM.
Speaker Change: In all trading activity for Artemis as equity funds, and all OTC and exchange traded derivatives will be outsourced to northern.
Speaker Change: We will now support the complete life cycle of these investments from execution to custody, including fund administration Depositary Global custody and transfer agency services for its U K and Luxembourg domiciled funds.
Michael Grady: Well, we'll take time to realize the full benefits of the pivot and our strategy. It should lead to more profitable growth as our business makes shifts.
While it will take time to realize the full benefits of the pivot in our strategy it should lead to more profitable growth as our business mix shifts.
Michael Gerard OGrady: During the third quarter, we proudly celebrated our company's 135th anniversary. The core principles of service, expertise, and integrity, upon which our company was founded, still guide us today. As we look forward, we're taking steps to strengthen the foundation, position the firm for higher underlying growth, and enhance our operational efficiency. All will continue to invest to meet the evolving needs of our clients and to create value for all our stakeholders for years to come.
Speaker Change: During the third quarter, we proudly celebrated our company's 135th anniversary the core principles of service expertise and integrity.
Speaker Change: On which our company was founded still guide US today as we look forward, we're taking steps to strengthen the foundation position the firm for higher underlying growth and enhance our operational efficiency all while continuing.
Speaker Change: We're going to invest to meet the evolving needs of our clients and to create value for all our stakeholders for years to come.
Michael Grady: And with that, I'll turn it over to Jason to review our financial performance for the quarter. Jason?
Speaker Change: And with that I'll turn it over to Jason to review, our financial performance for the quarter Jason.
Jason Tyler: Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our third quarter 2024 earnings call. Let's dive into the financial result of the quarter starting on page 4.
Jason: Thank you, Mike and let me join Jennifer and Mike and welcome you to our third quarter 2024 earnings call.
Jason: Diving into the financial results for the quarter starting on page four this morning, we reported third quarter net income of $465 million earnings per share of $2 22.
Jason Tyler: This morning, we reported third quarter net income of $465 million. Earnings per share of $2.22, and our return on average common equity was 15.4%. Our reported results included a $68 million pre-tax gain on an equity investment and a $13 million escrow payment associated with our existing visa swap agreements. Together, these two notable items boosted other operating income by $55 million pre-tax and $43 million after tax. Trust, investment, and other servicing fees totaled $1.2 billion. The 3% sequential increase and an 8% increase compared to last year. Net interest income on an FTE basis was a record $569 million, up 7% sequentially and up 21% from a year ago.
Jason: And our return on average common equity was 15, 4%.
Jason: Our reported results included a $68 million pre tax gain on an equity investment and a $13 million escrow payment associated with our existing visa swap agreements together. These two notable items boosted other operating income by $55 million pretax and $43 million.
After tax.
Jason: Trust investment and other servicing fees totaled $1 2 billion.
Jason: 3% sequential increase and an 8% increase compared to last year net interest income on an FTE basis was a record $569 million up 7% sequentially and up 21% from a year ago.
Jason Jerrome Tyler: Our assets under custody and administration were up 5% sequentially and 23% as compared to the prior year. Our assets under management were up 6% sequentially and 22% year over year. And overall, our credit quality remains very strong. Excluding notable items in all periods, other non-interest income was down 5% sequentially and down 3% over the prior year. Revenue was up 3% sequentially and up 10% on a year-over-year basis. Expenses were up slightly less than 1% sequentially and up 6% over the prior year. And earnings per share grew 36%.
Jason: Our assets under custody and administration were up 5% sequentially and 23% as compared to the prior year.
Jason: Our assets under management were up 6% sequentially and 22% year over year.
Jason: And overall, our credit quality remains very strong.
Jason: Excluding notable items in all periods.
Jason: Other noninterest income was down 5% sequentially and down 3% over the prior year.
Jason: Revenue was up 3% sequentially and up 10% on a year over year basis.
Jason: Expenses were up slightly less than 1% sequentially and up 6% over the prior year.
Jason: And earnings per share grew 36%.
Jason Jerrome Tyler: Turning to our asset servicing results on page 5. Assets under custody and administration for asset service and clients were $16.3 trillion at quarter end. Reflecting a 23% year-over-year increase. At the servicing fees totaled $667 million. Custody and fund administration fees were $453 million. Up 6% year over year, reflecting the impact from strong underlying equity markets and a weaker US dollar. Both comparisons were dampened by the client exits we discussed last quarter, which are now fully reflected in our run rate. Assets under management for asset service and clients were $1.2 trillion, up 22% over the prior year.
Jason: Turning to our asset servicing results on page five.
Jason: Assets under custody and administration for asset servicing clients were $16 three trillion at quarter end, reflecting a 23% year over year increase.
Jason: Asset servicing fees totaled $667 million.
Jason: Custody and fund administration fees were $453 million up 6% year over year, reflecting the impact from strong underlying equity markets and a weaker U S dollar.
Both comparisons were dampened by the client exits we discussed last quarter, which are now fully reflected in our run rate.
Jason: Assets under management for asset servicing clients or one two trillion.
Jason: Up 22% over the prior year.
Jason Jerrome Tyler: Invested management fees within asset servicing were $153 million. Up a strong 11% year over year due to favorable markets and to a lesser extent new business activities.
Jason: Investment management fees within asset servicing were $153 million up a strong 11% year over year due to favorable markets and to a lesser extent new business activities.
Jason Jerrome Tyler: Moving to our wealth management business on page 6. Assets under management for our wealth management clients were $444 billion at quarter end, up 20% year over year. Trust, investment, and other servicing fees for wealth management clients were $530 million. Up 9% year over year due primarily to strong equity markets.
Jason: Moving to our wealth management business on page six.
Jason: Assets under management for our wealth management clients were $444 billion at quarter end up 20% year over year.
Jason: Trust investment and other servicing fees for wealth management clients were $530 million up 9% year over year due primarily to strong equity markets.
Jason: Moving to page seven and our balance sheet and net interest income trends.
Jason Tyler: Moving to page 7 and our balance sheet and net interest income trends. Our average earning assets were flat on a length quarter basis, as a decrease in loans was offset by an increase in securities. Our average liquidity levels remained strong, with highly liquid assets comprising 62% of our deposits and more than 50% of total earning assets on average.
Jason: Our average earning assets were flat on a linked quarter basis as a decrease in loans was offset by an increase in securities.
Jason: Our average liquidity levels remained strong with highly liquid assets, comprising 62% of our deposits and more than 50% of total earning assets on average.
Jason Jerrome Tyler: College. The duration of our security portfolio is 1.6 years, and the total balance sheet duration continues to be less than 1 year. Net interest income was $569 million, and our net interest margin was 1.68%. The strength was attributable to several factors. First, deposits came in modestly better than our expectations. Average deposits were $113 billion, down less than 1% from second quarter levels, and non-interest bearing deposits remained stable at 15% of the mix. Second, deposit pricing improved. We had several large client deposits with very thin spreads roll off, and they were replaced by a similar level of more attractively priced deposits.
Jason: The duration of our securities portfolio is one six years and the total balance sheet duration continues to be less than one year.
Jason: Net interest income was $569 million and our net interest margin was 168%.
Jason: The strength was attributable to several factors first deposits came in modestly better than our expectations.
Jason: Average deposits were 113 billion down less than 1% from second quarter levels and non interest bearing deposits remained stable at 15% of the mix second deposit pricing improved we had several large client deposits with very thin spreads roll off and they were replaced by <unk>.
Jason: Similar level of more attractively priced deposits.
Jason Jerrome Tyler: And, as expected, we realized a very strong deposit beta on institutional accounts relative to the recent rate cuts.
Jason: And as expected we realized a very strong deposit beta on institutional accounts relative to the recent rate cuts and third given especially conducive market conditions, we saw higher than average quarterly contributions from transactional and other items.
Jason Tyler: And third, given a specially conducive market conditions, we saw higher than average quarterly contributions from transactional and other items. In the aggregate, these items elevated third quarter NII by approximately $10 to $15 million, turning to page 8. As reported, non-interest expense was approximately $1.4 billion in the third quarter, down 11% sequentially and up 6% as compared to the prior year. Excluding notable items in both previous periods, as listed on the slide, expenses in the third quarter were approximately 1% sequentially and 6% year over year. Now, let's go back and review our core expenses from the quarter, which exclude all notable items. Compensation expense was up 5% over the prior year, reflecting the impact of this year's base pay adjustments, modest levels of hiring associated with our modernization initiative, an underlying growth in the business, and unfavorable currency movements.
In the aggregate these items elevated third quarter NII by approximately $10 million to $15 million turning to page eight as.
Jason: As reported noninterest expense was approximately $1 $4 billion in the third quarter down, 11% sequentially and up 6% as compared to the prior year.
Jason: Excluding notable items in both previous periods as listed on the slide expenses in the third quarter were up approximately 1% sequentially and 6% year over year.
Jason: Now, let's go back and review our core expenses from the quarter, which exclude all notable items.
Jason: Compensation expense was up 5% over the prior year, reflecting the impact of this year's base pay adjustments.
Jason: Modest levels of hiring associated with our modernization initiative and underlying growth in the business and unfavorable currency movements.
Jason Jerrome Tyler: Compensation expense was flat sequentially. Outside services expense increased 12% relative to the prior year period, largely due to incremental modernization and resiliency spend. It was also flat sequentially. Equipment and software expense increased 14% year over year, mostly related to higher depreciation and amortization expense. Sequentially, it was up 4%. Excluding notable, we generated over 100 basis points of trust fee operating leverage, over 150 basis points of overall operating leverage, and our expense to trust fee ratio improved by 200 basis points on a linked quarter basis.
Jason: Compensation expense was flat sequentially outside services expense increased 12% relative to the prior year period, largely due to incremental modernization and resiliency spend it was also flat sequentially.
Jason: Equipment and software expense increased 14% year over year, mostly related to higher depreciation and amortization expense sequentially. It was up 4%.
Excluding notables we generated over 100 basis points of trust fee operating leverage over 150 basis points of overall operating leverage and our expense to trust fee ratio improved by 200 basis points on a linked quarter basis.
Jason Tyler: As we look out to the fourth quarter, we expect our total operating expenses to be up approximately 2% relative to the third quarter.
Jason: As we look out to the fourth quarter, we expect our total operating expenses to be up approximately 2% relative to the third quarter.
Jason Tyler: Turning to page 9. Our capital levels and regulatory ratios remain strong in the quarter, and we continue to operate levels well above our required regulatory minimum. Our common equity tier 1 ratio under the standardized approach remained flat at 12.6% as capital accretion was offset by a slight increase in our WA levels. Our Tier 1 leverage ratio was 8.1%, up 10 basis points from the prior quarter. A quarter end, our unrealized pre-tax loss on available-for-sale securities was $603 million.
Turning to page nine our capital levels and regulatory ratios remained strong in the quarter and we continue to operate at levels well above our required regulatory minimums.
Jason: Our common equity tier one ratio under the standardized approach remained flat at 12, 6% as capital accretion was offset by a slight increase in <unk> levels.
Jason: Our tier one leverage ratio was eight 1% up 10 basis points from the prior quarter.
Jason: Quarter end, our unrealized pre tax loss on available for sale Securities was $603 million.
Jason Tyler: Awards. We returned $453 million to common shareholders in the quarter through cash dividends of $152 million and common stock repurchases of $301 million.
Jason: We returned $453 million to common shareholders in the quarter through cash dividends of $152 million in common stock repurchases of $301 million.
Jason Tyler: Now, before starting the Q&A portion of the call, on a personal note, I want to offer a quick thank you. It has been a joy and an honor to serve as CFO for Northern for the last five years. It's been a pleasure to work with the analyst community and the world-class investors we have as shareholders. I wish Dave Fox the very best as he takes on the new role. I worked closely with Dave since he joined Northern 12 years ago. He's a strategic, forward-thinking executive, and he's going to play a critical role in driving impactful change within the company and ensuring that it's positioned for long-term success.
Speaker Change: Now before starting the Q&A portion of the call on a personal note I want to offer a quick thank you.
Speaker Change: It's been a joy and an honor to serve as CFO for northern for the last five years, it's been a pleasure to work with the analyst community and the World class investors, we have as shareholders.
Dave Fox the very best as he takes on the new role.
Speaker Change: I worked closely with Dave since he joined Northern 12 years ago. He is a strategic forward thinking executive and he is going to play a critical role in driving impactful change within the company and ensuring that its position for long term success.
Operator: And with that, please open the line for questions. Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions.
Speaker Change: And with that please open the line for questions.
Speaker Change: Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star one to ask a question we will pause for just a moment to allow everyone an opportunity.
Speaker Change: To signal for questions.
Steven Schubach: We will take our first question from Steven Schubach with Wolf Research. Hi, good morning.
Speaker Change: We will take our first question from Stephen <unk> with Wolfe Research.
Speaker Change: Hi, Good morning, this is Sharon actually filling in for Steven This morning.
Sharon: This is Sharon, actually filling in for Steven this morning.
Sharon: Jason, earlier this year, you had talked about the asset sensitivity across the different categories on the balance sheet. So, you know, cash 100% sensitive to short rates, loans and securities about a third floating. Can you give us a quick update on the floating rate mix just given that you've done a couple of securities repositioning actions since the last time we updated? I'm sorry. I didn't catch up. Can you, I just want to make sure I answer your question really precisely. Can you do it again a little louder? Yeah, sure. Sorry. So, earlier this year, you had talked about the asset sensitivity across the different balance sheet categories.
Speaker Change: I'm Jason earlier. This year, you had talked about the asset sensitivity across the different categories on the balance sheet. So.
Speaker Change: Cash, 100% sensitive to short rates loans and securities about a third floating.
Speaker Change: Can you give us a quick update on the floating rate mix, just given that you've done a couple of securities repositioning actions since the last time, we updated it.
Speaker Change: I'm, sorry, I didn't catch how can you keep I just want to make sure I answer your question.
Speaker Change: Really precisely can you do it again, a little louder yeah sure sorry. So earlier this year, you talked about the asset sensitivity across the different balance sheet categories.
Sharon: Cash 100% sensitive to short rates and loans as well and securities book about a third floating. Just given some of the securities repositioning actions you've taken since that update, can you give us like a quick mark to mark it on the floating rate mix?
Speaker Change: Cash of 100% sensitive to short rates and loans as well in the securities book about a third floating.
Speaker Change: Just given some of the securities repositioning actions you've taken the stance that update can you give us like a quick mark to market on a floating rate mix.
Jason Jerrome Tyler: Yeah, floating is about 50% at this point.
Speaker Change: Yeah floating is about 50% at this point.
Jason Tyler: Okay, great.
Speaker Change: Okay, Great and then.
Sharon: And then, as we look at our expense forecast beyond 2024, can you just frame how much of this year's expense growth was inflated by investments in resiliency, when those investments should be completed, and whether we should expect those investment dollars to fall to the bottom line or get redeployed elsewhere in the franchise? And just to clarify, you're asking about the expense investments and mannerization resilience in how that's going to turn over time. So, we do expect that that will continue for the next at least two to three quarters, but at some point, likely late next year, we'll start to see it decline.
Speaker Change: As we look at our expense forecast beyond 2024 can you just frame how much of this year's expense growth was inflated by investments and resiliency when those investments should be completed and whether we should expect those investment dollars to fall to the bottom line or get redeployed elsewhere in the franchise.
Speaker Change: And just to clarify you're asking about the expense investments in modernization and resilience and how that's trended over time.
Speaker Change: So yes. So we do expect that that will continue for the next at least two to three quarters, but at some point likely late next year, we will start to see a decline we don't have any plans to.
Jason Jerrome Tyler: We don't have any plans to dollar for dollar or thematically redeploy that somewhere else. This is more of a distinct effort to try and address our desires to improve modernization and some other technology and automation. in the business.
Speaker Change: Dollar for dollar or thematic Lee redeploy that somewhere else. This is more of a distinct effort to try and and and address our desires to improve modernization and some other technology in autumn and automation efforts in the business.
Sharon: Great. Thank you very much.
Speaker Change: Okay, great. Thank you very much.
Speaker Change: Sure.
Ebrahim Huseini Poonawala: We will take our next question from Ebrahim Poonawala with Think of America. Good morning. Morning, Ebrahim. How are you? Good, and congrats Jason and David on your roles.
Speaker Change: We will take our next question from Ebrahim <unk> with Bank of America.
Speaker Change: Hey, good morning.
Speaker Change: Good morning, everyone. How are you.
Speaker Change: Good and congrats Jason and David Oni noodles.
Ebrahim Poonawala: Just maybe following up on expense and more broadly going back to the leadership changes that were announced back in September, maybe my Jason, give us a perspective of I think I am frustration from investors from time to time around just the focus on operational efficiency kind of not translating into bottom line results. What should we read into these changes, the alignment of something a little bit out of the ordinary in terms of what it means for operational efficiency going forward. Would love any perspective there and how we should think about incremental expense spend. I know I heard what you responded, Jason. I'm just wondering, is all of this baked into the expense space as we come out of the fourth quarter, or will there be more additional expenses and investments tied to resiliency?
Speaker Change: Just maybe following up.
Speaker Change: On expense and more broadly going back to the leadership changes that were announced back in September maybe Mike Jason give us a perspective of I think.
Speaker Change: I presentation from investors from time to time, but I'm just.
Speaker Change: The focus on operational efficiency not translating into bottom line results.
What should we read into these changes the alignment is something a little bit out of the ordinary in terms of what it means for operational efficiency going forward.
Speaker Change: Would love any perspective, there and how we should think about incremental expense spend and I heard what you Jason.
Speaker Change: Jason and I'm, just wondering is all of this baked into the expense base as we come out of the fourth quarter or will there be more additional expenses and investments tied to resiliency. Thank you.
Ebrahim Poonawala: Thank you.
Michael Grady: Sure, Ebrahim, it's Mike. I'll start off, so I would say, you know, we believe in structure following strategy, and so the organizational changes that we announced in September reflect the strategy, excuse me, that we put in place going back over a year ago. We've tried to keep very straightforward, which is focused on strengthening the foundation, optimizing our growth, and driving productivity. And we already mentioned the changes with Jason and Dave, but importantly, one of the other big changes was creating the role of a COO, Chief Operating Officer, which Pete Chair, which will be the COO or is the COO of the company. And with Pete's decades of experience in managing both complex client relationships, but also global operations, he's really well positioned to drive operational excellence, resiliency, and also scalable growth. So, to your point, we are very much trying to align the organization in such a way that we can get greater scale and operating efficiencies and resiliency out of the company on that front.
Speaker Change: Sure, it's Mike I'll start off.
Mike: So I would say we believe in structure following strategy and so the organizational changes that we announced in September.
Mike: It reflects the strategy excuse me that we've put in place going back over a year ago, and we've tried to keep very straightforward, which is focused on strengthening the foundation optimizing our growth and driving productivity and we already mentioned the changes with Jason and Dave, but importantly, one of the other big.
Mike: <unk> was I, creating the role of COO, Chief operating officer, which Pete Chair, which.
It will be the COO, where is the COO of the company.
Mike: And with Pete's decades of experience in managing both complex client relationships, but also global operations, he's really well positioned.
Mike: To drive operational excellence resiliency and also scalable growth. So to your point, we are very much trying to align the organization in such a way that we can get greater scale and operating efficiencies and resiliency out of the company on that front.
Michael Gerard OGrady: Theresa Parker I took over the role of President of asset servicing for Pete to work through that organizational transition to ensure that we do it in a way that we continue to be client focused and differentiate ourselves in that way. Likewise, Steve Bradkin is a vice chair and importantly is focused on the one Northern Trust strategy and operationalizing all the things that we do on that front. So, feel very good about the organizational changes to help us drive the strategy.
Mike: It treats a Parker I took over the role of president of asset servicing for Pete to work through that organizational transition to ensure that we do it in a way that we continue to be client focused and differentiate ourselves in that way.
Mike: And likewise I, Steve Fradkin.
Mike: He is a vice chair and importantly is focused on the one northern trust strategy and operationalize in all the things that we do on that front. So.
Mike: Feel very good about the organizational changes to help us drive the strategy.
Ebrahim Huseini Poonawala: Got it, and I guess if I may follow up on just the NII question, Jason, for you it was a positive surprise this quarter. When we look at that 569 million NII this quarter, if we get some graduate cards given the positioning of the balance sheet, if the deposit backdrop of stable lighting should be expect, and I continue to grow from the 12th quarter levels. There are some good news in the NII results for sure, and even though it looks like deposits were just flat underneath that, we had meaningful exits of some very thinly large deposits, and we knew that coming into those were going to leave coming into the quarter.
Speaker Change: Got it and I guess, if I may follow up on the NII question, Jason for you.
Mike: Good.
Mike: Well, it's been a surprise this quarter when we look at that $569 million in NII this quarter.
Mike: If we get some gradual rate cuts given the positioning of the balance sheet.
Mike: If the deposit backdrop of stabilizing should we expect.
Mike: <unk> continues to grow from the third quarter levels.
Mike: Were there is some good news in the NII results for sure and even though it looks like deposits were just flat underneath that we had.
Meaningful exits of some very thinly large deposits.
Mike: And we knew that coming into that those are going to leave coming into the quarter Thats part of the reason, we anticipated deposits being down but.
Jason Jerrome Tyler: That's part of the reason we anticipated deposits being down, but we were pleasantly surprised by the fact that in other areas of the organization, that level deposit was replaced with much more attractively priced deposits. You add on to that, we didn't see the typical seasonal decline that we go through in August in particular, and so it's not just the deposit level holding in, but the underlying nature of the deposits and where they are now is much better. That said, we look into fourth quarter, we're anticipating rate cuts, and as much as we feel good about the strength of the deposit book right now, it's hard to offset the deposits fully, and so an increase from here would have to call it unlikely. It's possible, but that's why we think in general, we're looking at a 5.50 to 5.60 level for a quarter in NII, which is still good, still very strong, but would be slightly down.
Mike: We were pleasantly surprised by the fact that in other areas of the organization.
Mike: That level of deposit was replaced with much much more attractively priced deposits you add onto that we didn't see the typical seasonal decline that we go through in August in particular, and so it's not just the deposit levels holding in but the underlying nature of the deposits.
Mike: And where they are now is much better that said when you look into fourth quarter, we're anticipating rate cuts and as much as we feel good about the strength of the book the deposit book right now, it's hard to offset the deposits fully and so an increase from here would have to call it unlikely it's possible.
Mike: But that's why we think it is.
Mike: In general we're looking at a 550 to $5 60 level for fourth quarter in NII, which is still good still very strong, but it would be slightly down.
Ebrahim Huseini Poonawala: But, thank you.
Mike: But thank you.
Mike: Thank you everyone.
Alexander Blostein: We will take our next question from Alex Blasty with Goldman Sachs. Hey, thanks. Hey, good morning everybody, and congrats to the whole team on various moves.
Speaker Change: We will take our next question from Alex Blaustein with Goldman Sachs.
Alex Blaustein: Yeah. Thanks.
Alex Blaustein: Hey, good morning, everybody and congrats to the whole team on various moves.
Alex Blostein: Just the level said then, and I eyed discussion just one more time, so Jason sounds like, Q3 had $10 to $15 million of elevated transaction activity. Do you expect that to basically fall off in Q4, and that's what's partially driving the kind of this question decline, and maybe expand on kind of what those were, and on deposits, this is the right jump and off point to use as far as cost of deposits go, and then obviously deposit baiters are likely to be fairly high from there, but I'm just trying to level said, on the go forward, potentially beyond the fourth quarter guidance, if you've something that you highlighted.
Alex Blaustein: Just to level set the NII discussion just one more time, so Jason it sounds like Q3 had $10 million to $15 million of sort of elevated transactional activity do you expect that to basically fall off in Q4 and announcements partially driving the kind of the sequential decline and maybe expand on kind of what those were and.
Speaker Change: On deposits. This is the right jumping off point to use as far as cost of deposits go right and then obviously deposit betas are likely to be fairly high from there, but I'm just kind of trying to level set on the go forward potentially beyond the fourth quarter guidance. If you have something that you highlighted.
Jason Tyler: Sure, so let me try and go on a virtual or going to pause it on a launch point, feel like this is a good level, and then if I come back to the third quarter items, there's, there's, there's the core, just asset and liability pricing, but there's also another element of effect swap activity, FHLB dividends, premium AM, FTE adjustment, repo activity, in leverage, and there's a whole basket of other things, it doesn't add up to a lot, but, and there's, usually there's puts and takes in that, most of those went in our direction this quarter, and so that's that 10 to 15 million dollar elevation, but the way you ask the question is, is, is thoughtful, because we actually don't expect all those to just go away into the next quarter, it's just part of it is the environment the way it is right now, what the way rates are, it gives us more of an opportunity to do more FHL swaps and to have other activity that adds to NII, and so we don't expect it to fully, that lift to fully come down, it was more of an explanation of why we saw the elevation going from second to third quarter, and so that 550 to 560, largely it is a reflection of some of those items going to more normalized levels, but also impact of rate actions with different central banks that are going to have a drag on the five.
Speaker Change: So let me try and go in reverse order and deposits on a launch point feel like this is a good level and then if I come back to the third quarter items there's.
Speaker Change: There is the core asset and liability pricing, but there's also another element of FX swap activity <unk> dividends premium am.
Speaker Change: FTE adjustments repo activity leveraging that whole basket of other things it doesn't add up to a lot.
Speaker Change: But.
Speaker Change: Usually there is puts and takes in that most of those went in our direction this quarter and so thats that $10 million to $15 million elevation, but the way you asked the question is is as thoughtful because we actually don't expect all those to just go away and into the next quarter.
Speaker Change: Part of it is the environment the way it is right now with the way rates are it gives us more of an opportunity to do more FX swaps and to have other activity that adds to NII and so we don't expect it to fully to that lift to fully come down. It was more of an explanation of why we saw the elevation going from <unk>.
Speaker Change: Second to third quarter, and so that $5 50 to 560 largely is a reflection of some of those items going to more normalized levels, but also impact of rate actions with different central banks that are going to have a drag on the $5 69.
Jason Jerrome Tyler: 169.
Got it alright, thank you for clarifying that.
Alex Blostein: All right, thank you for clarifying that. And then a question on expenses for you guys, just with respect to maybe longer-term expense growth, some algorithm, and like I heard your answer to the previous questions around the organizational changes that you got if made, which obviously substantial and hopefully can, you know, further align the growth into business with the expense structure. But I guess in the past, you talked about maybe this five-ish percent bogey for expense growth over time, hoping to be below that. This year is obviously shaking out to be north of six, and there's a market-related items and stronger revenues to come along with that, so it's good news.
Speaker Change: And then a question on expenses for you guys just with respect to maybe longer term expense expense growth algorithm and Mike I heard your answer to the previous questions around the organizational changes that you guys have made which obviously substantial and hopefully can.
Speaker Change: Further align the growth in the business with the external structure, but I guess in the past you talked about maybe this five ish percent bogey for expense growth over time, helping to be below that this year is obviously shaking out to be north of six.
Speaker Change: And there are some market related items and stronger revenues to come along with that so it's good news, but maybe help us so to summarize given these changes where you expect the firms kind of longer term expense growth to be over the next couple of years.
Jason Jerrome Tyler: But maybe help us so to summarize, given these changes, where you expect the firms' kind of long-term expense growth to be over the next couple of years. So Alex, we're continuing to be focused on driving positive operating leverage and positive operating leverage. You know, with the level of our expense to trust your ratio, at this point for this quarter, you know, year-to-date, it's still above our target range of 105 to 110. So we want to continue to grind that down into that target range, and likewise, from a margin perspective, pre-text margin, I want to be in the low 30s as a target area as well.
Speaker Change: So Alex we're continuing to be focused on driving positive fee operating leverage and positive operating leverage.
Speaker Change: With the level of our expense to trust fee ratio at this at this point for this quarter year to date, it's still above our target range of 105 to 110. So we want to continue to grind that down into into that target range and likewise from a margin perspective pre tax margin.
Speaker Change: I want to be in the low thirties as a <unk>.
Speaker Change: Target area as well so.
Jason Tyler: So that's the first driving goal, and then to accomplish that, you know, we've had strong revenues this year, which has enabled us to achieve the leverage that we have. That said, you know, can't always count on the strength in the markets and the rate environment that may drive that. So we need to bring the absolute expense growth rate down further.
Speaker Change: That's the first driving goal and then to accomplish that we've had strong revenues this year, which has enabled us to achieve the leverage that we have.
Speaker Change: That said you can't always count on the.
Speaker Change: The strength in the markets and in a rate environment that may drive that so we need to bring the absolute expense growth rate down further.
Jason Tyler: And so that will be the objective as we go into 2025, is to achieve that operating leverage and also increase the probability of hitting it by driving down our expense growth rate below the level that it's been.
Speaker Change: So that that will be the objective as we go into 2025.
Speaker Change: To achieve that operating leverage and also increase the probability of hitting it by driving down our expense growth rate below the level that it's been.
Speaker Change: Got it that's helpful. Thank you guys.
Alex Blostein: Got it. That's helpful.
Alex Blostein: Thank you, guys.
Speaker Change: Sure.
Betsy Grayson: We will take our next question from Betsy Grayson with Morgan Stanley. Morning. Good morning. Hi. Good morning. How you doing? Good. How are you? All right. Okay.
We will take our next question from Betsy <unk> with Morgan Stanley.
Betsy: Good morning, Dan Good morning.
Betsy: Yeah.
Betsy: Hi, Good morning, how are you doing.
Betsy: Good how are you alright, okay.
Betsy: So a couple of questions here one on Mike you mentioned the deepening of relationships is a key focus for growth going forward.
Betsy Grayson: So a couple of questions here. One on Mike, you mentioned the deepening of relationships as a key focus for growth going forward. Could you help us understand how that pivot is affected? Is there, is that different for what you've been doing before? Is it more, you know, just take key off the last conversation? Is it more resources to hire or is it more products to deliver and then how should we be thinking about where in the organization? You have the most opportunity. Is this asset servicing asset management? Is it investment management? Is it the wealth platform?
Could you help us understand.
Betsy: How that pivot.
Betsy: Is affected is there is that different from what you've been doing before is it more you know.
Betsy: Just to key off the last conversation is it more.
Betsy: Resources to higher or is it more products to them.
Betsy: Deliver and then how should we be thinking about.
Betsy: Where in the organization you have the most opportunity is this.
Betsy: Net servicing asset management is it investment management is it the wealth platform.
Michael Grady: Help us understand how you're thinking about where the pockets of opportunity are richest for those deepening of relationships? So Betsy, dear point, that is our one northern trust strategy, which is to ensure that all the businesses and all the groups within the company are working together to produce the best outcomes for our clients and likewise for other stakeholders. And from a client perspective, you know, it is a combination of a number of things. So first, it is the businesses working more closely, you know, right from the beginning, if you will. So going to market an opportunity.
Betsy: Help us understand how you're thinking about where the pockets of opportunity are rich asked for the deepening of our relationships.
Speaker Change: So Betsy to your point that is our one northern trust strategy, which.
Speaker Change: Is to ensure that all of the businesses and all of the groups within the company are working together to produce the best outcomes for our clients and likewise for other stakeholders and from a client perspective I. It is.
A combination of a number of things. So first it is the business is working more closely.
Speaker Change: Right from the beginning if you will so.
Speaker Change: Going to market and opportunities. So for example.
Michael Grady: So for example, with asset servicing and asset management, providing an overall solution for clients as opposed to necessarily starting with one and then trying to cross-sell, if you will. The second opportunity on that front. You know, as far as where the opportunities are, definitely between asset servicing and asset management, but I would also highlight with wealth management as well. A lot of work has been done to ensure that the linkages between those two businesses are very strong. And that we are thinking about the needs of our wealth management clients as we produce new investment management products.
Speaker Change: With asset servicing and asset management I, providing an overall solution for our clients as opposed to necessarily starting with one and then trying to cross sell if you will.
Speaker Change: <unk> opportunity on that front.
Speaker Change: As far as where the opportunities are definitely between asset servicing and asset management, but I would also highlight with wealth management as well a lot of work has been done to ensure that the the linkages between those two businesses are very strong and that we are thinking about the need.
Speaker Change: <unk> of our wealth management clients as we produce new investment management products.
Michael Grady: As I mentioned, we launched a number of new funds this year that were really off of the back of, I'll say, research that was done for some of the needs of our specific client base. We'll continue to do that in order to provide the right solutions for them. Also, as far as the types of capabilities that we have to deliver to your point, it is new new product or new services. So I mentioned the Artemis example; that's just, you know, the latest client where we're providing a new capability to them. We've got a lot of resources of outsourced trading, or what we call it, integrated trading solutions, which we launched a number of years ago.
As I mentioned.
Speaker Change: We.
Speaker Change: Launched a number of new funds. This year that we're really off of the back of <unk>.
Speaker Change: I will say research that was done for some of the needs of our specific client base will continue to do that in order to provide the right solutions for them.
Also as far as the types of capabilities that we have to deliver to your point. It is new new products or new services. So I mentioned.
Speaker Change: The Artemis example, that's just.
Speaker Change: The latest.
Speaker Change: Client, where we're providing a new capability to them of outsourced trading or what we call. It integrated trading solutions, which we launched a number of years ago, and we've built that business up and.
And we've built that business up and taking this to a level where that capability works for clients of size like Artemis. So a lot of opportunity on that front as well. So, as you can see, go ahead.
Speaker Change: Taking this to a level where that capability works for clients of size like Artemis, So a lot of opportunity on that front as well.
Speaker Change: So as you can see.
Speaker Change: Ahead.
Speaker Change: No you finish I'm sorry.
Betsy: No go ahead Betsy.
Betsy: Thanks very much for those examples that was very useful I just wonder Holistically then as we're thinking about them not just the expense line, but just overall impact on profitability. When you think about what you're looking to accomplish and the opportunities you see in this pivot.
Betsy: How do you think that's going to translate into a return on tangible return on common equity.
Speaker Change: Yeah. So there's no question that to the extent, we already have the client relationship that the incremental services that we provide to them are more scalable for us.
Speaker Change: And so that's where it translates into more profitability overall, the second thing I would mention Betsy on that front is in thinking about the type of business that we're pursuing the most as we say we want more scalable growth on that front and what we really mean on that front is focusing on.
Speaker Change: New opportunities that require less in the way of new resources. So to the extent that we can win the business that is again more scalable for us.
Speaker Change: Areas, where we've had a lot of success for example, this year with asset owners in America, but also.
Speaker Change: In Europe, where we're providing.
Speaker Change: Custody to them in a way that the incremental.
Speaker Change: Incremental resources required both in people, but also in technology are less than if we are adding other.
Speaker Change: Other services or to other segments.
Speaker Change: That would require that that translates into a higher level of profitability. Overall, so that's the objective on that front.
Okay. Thanks, so much really appreciate it.
Speaker Change: Sure.
Speaker Change: We will take our next question from Mike Mayo with Wells Fargo.
Speaker Change: Good morning, Hi.
Mike Mayo: Good what I say 135 years best in class private banking relationships.
Speaker Change: The one northern trust initiatives and everything else happening in that.
Speaker Change: I think the stock price that is loss of premium versions of trust bank peers even.
Speaker Change: Even trades three.
Speaker Change: Point below a Morgan Stanley or something so.
Speaker Change: I'm just wondering how much and maybe this is an opportunity and if it is let us know why but how.
Speaker Change: How much of this is <unk>.
Business mix, how much of this is the environment and how much of it is execution and I hear what you have to say and our strategy drive structure drives execution should drive results I guess that would drive the stock price, but I'm just trying to wonder.
How or why.
Speaker Change: In the same cast of characters can generate better organic growth in your new roles and I saw the press release come out with.
Speaker Change: The CFO and COO and head of wealth and head of asset servicing and had a family.
Speaker Change: All changing at the same time.
Speaker Change: Havent seen something like that or I don't recall off like that sounds like you have a perspective on that but can you give that perspective, why you think critical claim.
Mike: Sure Mike.
Speaker Change: It's a combination of.
Speaker Change: Both putting people into new roles, where we can leverage their experience, but also we brought in talent from the outside so I just over about a year year ago year, and a half ago, we brought in Daniel Gamba to run up run asset management and so.
Speaker Change: We want to have both the benefit of people, who really understand everything you've talked about as far as northern Trust and how we are client focused but also new new new blood and new ideas from the outside and we will continue to do that as we go forward.
Speaker Change: Also to drive it.
Speaker Change: It does come back to execution.
Speaker Change: To where we're focused and so that's what we're trying to drive that's where we spend our time on that front and that will then ultimately drive not only the earnings but also the multiple for the stock.
Speaker Change: I think that another big part of this is the strategy around where that growth comes from so that's why when we talk about.
The one northern trust aspect of it and the type of growth.
Speaker Change: That also affects the the stability and growth rate.
Speaker Change: The earnings as well so it's not just the earnings themselves, but it's the quality as you know so that's what it's all directed at to ultimately create value through the earnings and the multiple.
Speaker Change: To drive the stock price.
Speaker Change: And then maybe just ask one follow up so the incremental extra that we might be able to expect by that fresh perspective by the manager bring in their new roles, maybe Dave as it relates to the CFO function adjacent is right next to you, but incrementally what would you like to emphasize a little bit more maybe it's already started and <unk>.
Speaker Change: And what would you like to emphasize a little bit more and well.
To take it to the next level.
Speaker Change: Yeah, So what I would emphasize with those two and then I do think it's a good opportunity for Jason just to give his initial thoughts here.
Speaker Change: It is around the more scalable parts of our company overall, so not just products or service company and that is our wealth management business and our asset management business. So we are trying to grow those businesses organically faster than we have in the past and so that's the the tilt or the push.
Speaker Change: On that front and I think with Dave you and others will quickly get comfortable with.
Speaker Change: His deep understanding of the business is strategic approach to it and also understanding of our value creation, but Jason do you want to talk just a little bit about just some of your initial views yeah sure Mike So.
Speaker Change: Obviously.
Jason Oni: I've already been on the road, a lot and I know the business reasonably well and spend time in just the last few weeks L. A New York, Texas.
Jason Oni: Go into a really good client event Tonight in San Francisco and then.
Jason Oni: But I do think there is opportunity for us to do more and a framework to think about Mike as well.
Jason Oni: One way you can think about the business or the markets that we're in the segments that we're in which gets to where do we have specialization that we can deepen and hope to leverage more and then different solutions for our clients and you know really well we have a phenomenal.
Jason Oni: <unk> client base and great talent across the organization and so I think it's very clear that there is more that we can do and using that framework as a way that I think we can talk about it in the future where we're putting the initiatives.
Jason Oni: In each of those different dimensions to try to grow the business faster.
Jason Oni: Alright, thank you.
Jason Oni: Okay.
Speaker Change: We will take our next question from Brennan Hawken with UBS.
Brennan Hawken: Good morning.
I'm good I'm good alright, thanks for taking my question.
Brennan Hawken: So I actually wanted to circle back on expenses.
Brennan Hawken: And I totally appreciate the commitment that was made operating leverage and driving down expenses to two.
Brennan Hawken: Geez.
Brennan Hawken:
Based on the fourth quarter Guide I think my my quick math suggests that we're gonna be north of 6% on expense growth in 2024.
Jason Oni: And Jason.
Jason Oni: As your sort.
Jason Oni: Last act as at least CFO in name right right before the press release went out.
<unk> said that it made another commitment to keep 2025 sub 5%.
Jason Oni: And so.
Jason Oni: Dave is an internal.
Jason Oni: Candidate, so does that 2025 commitment hold with our new CFO.
Jason Oni: How should we think about it and like.
Jason Oni: Mike.
Importantly, I understand operating leverage matters and whatnot, but.
Jason Oni: <unk> growth has really been an issue it's gotten more elevated here recently in recent years compounded a bit with inflation, but it's not a new issue for northern.
How is it that.
Jason Oni: You guys can get this under control to a point, where you can have a more steady cadence of operating leverage without without having the bar quite.
Jason Oni: Quite high.
Speaker Change: Yes, so Brent and part of it is the organizational change. So just fundamentally that will involve centralizing a number of operations that are now more distributed.
And so it's more than just I'll say.
Speaker Change: Committing to it it's actually making changes.
Speaker Change: To do that.
Speaker Change: The other part of it is you have to make the investments.
Speaker Change: Where they're required and when they're required that's part of managing this for the long term.
Speaker Change: And in the environment that we've been in as far as just the I'll call it the level of volatility and risk.
That's in the broader environment, we felt that making these investments in the foundation is the right thing to do longer term now that does require.
Or create some level of variability in what those are but when we think about what we're doing on the technology front. For example, the modernization that Jason has mentioned, where it's quickly trying to move off of end of life platforms transitioning to the cloud, which definitely requires investment to do increase.
Speaker Change: <unk> the automation of the changes we make within technology, ensuring we have redundancy to the extent that there are incidents doing more testing of all of those platforms to ensure that we have the stability on that front.
Speaker Change: Making sure that when we are working with third party providers that we understand their resiliency as well so theres a number of things that we've done and are doing to kind of harden and solidify that core because we think that's a good investment for it not just from a I'll say risk and resiliency perspective, but also from a client.
Speaker Change: <unk> perspective, and also from an efficiency perspective. So that's why we've tried to be very clear on what we're doing and why we're doing it and why we think ultimately not only is that good for the clients, but it's good for shareholders as well, it's going to drive high quality growth as we go forward and that's the plan.
Speaker Change: Okay, I look forward to getting some meat on those bones in the coming quarter. So that's great.
Speaker Change: If I could transition to the balance sheet it looks like loans pulled back.
Speaker Change: A decent amount this quarter I don't think you touched on it you know what caused that.
Speaker Change: And how should we be thinking about loan growth or the outlook for.
Speaker Change: Any growth or further decline in balances from here.
Speaker Change: Sure.
Speaker Change: I have noted before the loans and deposits can be very spiky and headline is there's nothing strategic or.
Speaker Change: Creating a a trend that we see and what we experienced in the quarter and then in terms of growth going forward. We've had initiatives in the past to specifically grow the loan book, we don't have that initiative right now we're not trying to shrink it either and so you should think about growth in the loan book coming along.
Speaker Change: <unk> growth in the overall client franchise a lot of our.
Speaker Change: There's a lot of our lending ironically, it's the deposits are more on the institutional side. The lending is more on the wealth side of the business and so the correlation will be more tied to growth.
And the wealth business.
Speaker Change: Okay. Thanks for that.
Speaker Change: Sure.
Speaker Change: We will take our next question from Glenn Schorr with Evercore.
Glenn Schorr: Alright, good morning.
Glenn Schorr: Maybe another question on the wealth side like we always wanted to grow wealth is a great business and you are great at it.
Glenn Schorr: You talked about the concept, maybe drill down a little bit more because I think you've been making some investments in people products and new geographies, maybe talk a little bit about that include maybe a comment about the Hamilton Lane collaboration that you mentioned that you had a press release on yesterday. Thanks, so much.
Glenn Schorr: Well, yes, so I'll start so I think.
Glenn Schorr: Should see is.
US investing even more aggressively at the upper end.
Glenn Schorr: We do really well at the high end of the market and you see it very clearly in what David has been able to do with the GFS business because that's the on average those are our largest clients and that's been growing faster than the rest of well. If you were to look beneath that you'd be able to see that even within the regions. We're doing.
Glenn Schorr: Better at the at the higher end, that's where our franchise and that's where our value proposition holds well and.
Glenn Schorr: We feel great about that we can invest even more heavily there in revenue generating and client generating professionals and in the talent that supports those clients from an experience perspective, so a lot of our EIS brag about having.
Glenn Schorr: One or maybe two App Tech fellows.
And those are the most respected people and trust and estate planning Northern has 15 or 20 and so when clients are trying to go deeper and there are state work more complicated planning, we've got the professionals to do that and that's part of the reason why just in that area, we do well, but also the same thing.
Glenn Schorr: In investment advising and and in banking and so the more we invest at the upper end of the market, that's where we feel we're going to have a better return so we announced in <unk>.
Glenn Schorr: Altra distinct ultra high net worth group, just this past quarter and we're dedicating.
Glenn Schorr: Professionals to just that area, where theyre going to be dealing with clients at the very upper end of wealth in Missouri, and working closely with the family office business to bring those capabilities into the more traditional wealth space for us and so there's a lot of things. We were excited about that where we feel we're planting seeds for growth.
Glenn Schorr: And then.
Glenn Schorr: We also look at just the talent, we're being we're able to bring on board.
Glenn Schorr: Really exciting hires across the franchise that we think are going to be helpful to growing the business growing our client franchises.
Glenn Schorr: And Glenn on Hamilton Lane.
Glenn Schorr: That is a.
Glenn Schorr: Partnership that we're excited about which is with our asset servicing business to provide even better data and analytics on the private investments of our large institutional clients. As you know as there is asset allocators portfolios have moved more and more to.
Glenn Schorr: Private markets and alternatives the capabilities required to due diligence them analyze them.
Glenn Schorr: Has gone up and we've had our.
Glenn Schorr: Our offering front office solutions, which looks across the entire portfolio.
Glenn Schorr: That we've been very successful with and this is in addition to that that will provide even better as I said data analytics to it so very positive and promising.
Speaker Change: Alright, thanks, so much for all that.
Glenn Schorr: Okay.
Speaker Change: We will take our next question from Gerard Cassidy with RBC.
Speaker Change: Hey, Gerard how are you.
Gerard Cassidy: Good how are you congratulations Jason.
Gerard Cassidy: Mike you touched on northern won number of times in your prepared remarks, as well as your answers to questions as outsiders investors.
Gerard Cassidy: How should we measure the success of what you're trying to achieve your peers are using similar types of programs as well our strategies and I was wondering if you could somehow pointing us to some metrics that we can.
Speaker Change: We review regularly.
Speaker Change: Measure your success in pursuing this strategy.
Speaker Change: Sure Gerard so I get it.
Speaker Change: To your point using one is not unique to the fact that it's one northern trust is what is unique about it because it's our business.
Speaker Change: That we're focused on with it.
Speaker Change: And it's something that Gerard is really important I'll say within the company, but also in the marketplace within the company, we want to make sure that we're breaking down silos and that everybody across the company, regardless of what business or group you're in are working together.
Speaker Change: In order to get the right outcomes and that can be certainly as we've talked about on the client front, but it can also be and ensuring that we're getting the right efficiencies across the businesses, so that that cuts across that way.
Speaker Change: And then as I mentioned, certainly are going to market and with the client we're stronger as northern trust than we are as any one of our businesses alone. So that's what's behind it to your point on unmeasured. It the way that we're doing it is we start with the specific objectives of what we're trying to do so thinking about specifically I.
Speaker Change: Mentioned, okay. How many times did we go to market with a new opportunity. We're involved two or all three of our businesses to do that that's something that we can measure granted it's an internal.
Speaker Change: It's an internal measurement our metric, but it has to start there if it is going to flow through to the kpis that are that the key performance indicators that they're we're then looking at which really then it's going to be in our organic growth rate and so that's what we're trying to drive as a higher organic growth rate and so to do there.
Speaker Change: That we need to see that collaboration between the businesses that then flows into our financial performance overall, when you add into it the markets and the impact from that so ultimately you're going to see it in the financial performance and we can provide I'll say some kpis as we go forward here.
Speaker Change: That's part of what I mentioned with Steve Fradkin, who as you know has worked across all of these businesses in one way or another over his career and that's why we're looking to not just say one northern trusts that actually ensure that we're doing it by operationalize ing a lot of those activities.
Speaker Change: Very good I apologize screwing.
Speaker Change: Screwing up the name Northern one minute one northern trust, but thank you.
Speaker Change: Right.
Speaker Change: Jason coming back.
Jason Oni: You touched on the net interest income expectations for the fourth quarter and with the balance sheet duration. I think you said the entire balance sheets about a year and securities portfolios, a little longer than that.
Jason Oni: If the forward curve is correct and we do see a fed funds rate by the end of next year in that three 5% range. So lets call. It in the long end of the curve stays anchored above 4%. So we get a positive slope in the curve.
Speaker Change: I'm not asking for a guidance number on twenty-five NII, but generally is that a favorable net net interest income environment for you folks or.
Can you share some color there.
Speaker Change: Well for various reasons, we came shorter on the securities portfolio and so the.
Speaker Change: The rest of the balance sheet is pretty stable cash is what it is in the loan book.
Speaker Change: We haven't done anything to strategically change the duration of that effectively so the duration of the balance sheet and NII moves largely with what we do with the securities portfolio and.
Speaker Change: We did come shorter that played out well for us we did it for a variety of reasons.
Speaker Change: One was a view of the yield curve and that played out well for us at this point, if we look at what the yield curve is telling us, it's obviously going to be more of a headwind going into next year. So.
Especially if we see 567 rate cuts there is.
We're not going to change our risk tolerances, our philosophy our approach on how we manage the balance sheet. So thats going to be a headwind that said there are some offsets to it.
Speaker Change: Our occurring just in how we normally manage the portfolio towards.
Speaker Change: One we are feeling better.
Speaker Change: The stability of the deposit level, so that gives us the ability to consider even more non agency <unk>.
Speaker Change: Second if we did see a rise effectively in the base of the deposit book and so we think deposit levels are.
Speaker Change: Positive and then there is still a slight benefit into next year from the.
Speaker Change: The reinvestment of securities that are maturing not as much as what we would have seen before but there is some and so those are just some of the puts and take and you're right. It's too early for us to give guidance, but I did want to make sure people realize all the different factors that are playing into it there are some puts as well as the takes.
Speaker Change: Very good and is it fair to say that.
Speaker Change: Thank you pointed out to us in your queue, when you're giving us the interest sensitivity table that you guys are asset sensitive presently at the end of the third quarter or is that a fair statement.
Speaker Change: Thanks for clarifying that I Should've mentioned that in my in my summary of where we are Gerard. So there is slight asset sensitivity at this point just largely coming from the actions, we've taken and the balance sheet over the last couple of years.
Speaker Change: I appreciate it thank you so much.
Speaker Change: You bet.
Speaker Change: We will take our next question from Brian Bedell with Deutsche Bank.
Brian Bedell: Great. Thanks. Good morning, Thanks, Good morning, and congrats congrats to you and everyone else on the organizational changes.
Brian Bedell: A question for you, Jason and Mike can chime in too, maybe but just going back to the organic growth comments and I. Appreciate all the comments you've talked to.
Speaker Change: Discussed in Q&A.
Speaker Change: And the wealth segment.
Speaker Change: First and foremost I think we're focusing on our organic revenue growth.
Speaker Change: Asset growth. So I, just want to confirm that and do you see more of that organic growth coming internally so from.
Speaker Change: Let's say selling more.
Speaker Change: Providing more northern trust investment managed product.
Speaker Change: Say doing more lending potentially within the wealth segment are there things that you can do internally as opposed to.
Speaker Change: Getting a new customer so as to would we see more of the organic growth revenue growth coming from that and if you could just think about maybe just what type of target organic growth rate are you looking for Nols overtime.
Speaker Change: Yes.
So let me start with you and I.
Speaker Change: We're we have talked about somewhere around a 3% level of organic growth for the business. Overall, we've historically said that wed like to see that we should expect a higher amount coming from asset servicing and a little bit lower amount from well.
Speaker Change: I think we should try to be more have more of an expectation that that's balanced and so I think in the in the medium term of 2.5% to 3% number for wealth is reasonable.
Speaker Change: We start to break it down to where that's coming from it's got to be a combination of both new new clients and doing more with existing clients, but within the existing client base, there's a lot of different categories that the.
Speaker Change: People should think about and I want to try and focus.
Speaker Change: On a couple to give a sense of where we're focusing because it's less for us about thinking about more product utilization, we've talked about that but it's not something that we would aggressively target.
Speaker Change: And even more lending if that comes organically within our philosophy and risk tolerances, great, but not an area, where we see we're going to be pushing the envelope in changing our risk tolerances and so it's more thinking about our wallet share with clients thinking about different solutions, we can do with them.
Speaker Change: And also at the upper end of the market to the extent that our overall client base shifts that way those clients are still in a mode of they still gain well.
Speaker Change: So their growth becomes our growth and our view is that that's organic as well if they are creating more flows into our business not just theyre not theyre market growth, which we don't think of as organic but they're new flows coming into the company. Then you couple that with what we should be able to do from a new client perspective, and that's how we are.
Speaker Change: That's how we're thinking about getting to that organic growth target level.
Speaker Change: That's super helpful. And then maybe just a couple of cleanup questions. Just one on loan pricing. It looks like the yields went up is that a factor of the lag.
Speaker Change: <unk> got about.
Speaker Change: Correct me, if I'm wrong, but I think three quarters of the book prices within three months, that's variable rate and then there's.
Speaker Change: A portion that prices over a longer time periods. So just maybe if you could talk about the pricing.
Speaker Change: Pricing relative to rates in that book and then just one on expenses and thanks for all the commentary on expenses. It's great. Just one question there would be that expense growth, which looks like 6%. This year, you're targeting to bring that down if you havent really strong revenue year, and you're generating operating positive operating leverage on.
Speaker Change: Total revenue and your expense trust fee is moving towards your goal is.
Speaker Change: Is it possible that you would still have expense growth that could be 6% or higher in that scenario.
Well first on the lags you got them right.
Speaker Change: In terms of the month lag but.
Speaker Change: Just keep in mind there is a small portion in both business that is daily as well.
Speaker Change: That's tied more to the extent that clients are have.
Speaker Change: More mutual funds, but that's that's a very that's a small dynamic but youre right in general on the month lag and then on the expense growth then Mike likely want to comment on it here one of the things we talked about last year was that we want to try to decouple. This.
Speaker Change: The concept of if we have a strong revenue growth that should lead to a higher expense growth now some of that is inevitable because if we're growing the business. There are some expenses that are going to come along with it we've talked about the impact of markets on expenses, but in general we shouldnt, we're trying to get away.
From that dynamic are projecting higher revenue growth and therefore tolerating higher expense growth it has to be more of an absolute and so.
Speaker Change: That's why next year, we came into this year with good confidence about being able to do 5% or less coming in next year confidence levels even higher.
Speaker Change: Agreed.
Speaker Change: Again, the same framework that we've talked about Brian.
Speaker Change: Yes.
Speaker Change: Thank you for that just on the on the pricing I was talking about the <unk> <unk> to <unk>.
Speaker Change: <unk> rate loans on that not not the market.
Speaker Change: Was it three quarters of the book I think was.
Speaker Change: Our loans were variable rate and reset within three months and a quarter resets later, so the way I guess, what drove the yield up this quarter.
Speaker Change: No. It was the overdrafts are a little bit we're a little bit higher that's what drove thanks I really appreciate you clarifying that but and it is about.
Speaker Change: 70% to 80% debt that's floating in the loan book.
Speaker Change: Got it thank you so much.
Speaker Change: Thank you.
Speaker Change: We will take our next question from Jim Mitchell with Seaport Global.
Jim Mitchell: Hey, good morning.
Good morning, Jason Yes. Good morning, just maybe on the on the capital return you guys have been stepping up the buybacks capital ratios are pretty flat and as you pointed out it's still well above the minimum. So is this something we should expect this level for the intermediate term.
Jim Mitchell: As profitability improves.
Jim Mitchell: Yes.
Jim Mitchell: Rates are pretty stable. So OCI looks good do you can you keep this level up or is this.
Jim Mitchell: Is this sort of a high watermark on the buyback side.
Speaker Change: It's it's not.
It's maybe neither and so the.
It is elevated but it should stay it could stay elevated for a while and if I walk through the pieces.
If you think about we.
Speaker Change: We have about a third of the net income going to dividends at this point, we talk about it being 30% to 50% over time and it's right at about a third right now if you take out the.
Or even actually including the equity investment.
Speaker Change: And the and the visa dynamic and but.
Speaker Change: US being at 12, 5% or 12, six that's the upper end of where we had been in CET, one and we've been at that level before and so we're comfortable at that level, but it's the upper end, but visa.
Speaker Change: Monetizing that obviously put a lot of liquidity available for share repurchase and so we are deploying that over time.
Speaker Change: We could continue to do that and still be at approximately this 12, 5% level, maybe it comes down a little bit and the reason we would tolerate that as we know at this point, we still have other visa tranches coming over the next year or two.
Speaker Change: So it'll be another roughly equivalent benefit and so would be okay for us to see <unk> come down from the $12 six a little bit, but we'll we're thinking about it working through it and not trying to be overly aggressive at any point in time trying to take more of a thoughtful.
Speaker Change: Thoughtful approach over several quarters, not not trying to do anything too aggressively.
Speaker Change: Alright, great.
Speaker Change: Great and then when you think about the monetization of the second half of the visa shares. That's obviously a tailwind do you contemplate maybe.
Maybe longer term intermediate term of a lower lower than 12, 5% CET one given given the excess you have can you take it to 12 are lower.
Speaker Change: I should.
Speaker Change: We're talking that far in the future I should let.
Speaker Change: Mike or.
Speaker Change: As Jason was saying <unk> is a very strong level of capital and that's fine given the I'll say the broader environment I end and yet at the same time, yeah, absolutely are comfortable at lower levels as well. So we feel very good about the capital position and the higher level of repurchases that we had in this quarter.
Speaker Change: And as we move into next year.
Speaker Change: Okay, great. Thanks for taking my questions.
Jim Mitchell: Thanks, Jim.
Speaker Change: We will take our next question from Vivek <unk> with Jpmorgan.
Vivek: Hi, Thanks, Good morning couple of questions Firstly.
Speaker Change: Jason you had mentioned the <unk>.
Speaker Change: Incremental spending for resiliency modernization et cetera.
Speaker Change: That's what's driven your expense growth to the 6% level how.
Speaker Change: How much is how much has that out of a deal would you say, it's a couple hundred basis points to the growth rate this year and.
Speaker Change: That goes away in three quarters.
Speaker Change: What would that does that bring you down to since you won't need to fund that.
Speaker Change: 4% or below in the second half of next year and any any more clarification on that any more color on that.
Speaker Change: Yes, so vivek I think it's difficult to I'll say do an attribution on the.
Speaker Change: The 6% and then project at all going forward.
I do think that one indication of the growth in the areas that I talked about there you see it in the higher growth rate that we have in equipment and.
Speaker Change: And surfaces so.
Speaker Change: That's where you'll see most of that technology spend come through.
Speaker Change: But it's not the one that doesn't make up 6%. If you will as Jason has broken it down before you know there are other components that drive overall, including the fact that we are levered to the market both on the revenue side and on the expense side. So that's an aspect of what drove that the rate to 6%. This year as we go.
Forward as we've talked about Vivek, certainly looking to bring that down.
Speaker Change: But we will make the investments we need in technology and just more broadly.
Speaker Change: To be able to accomplish what we want to overall.
Speaker Change: Yes.
Speaker Change: Separate question for you Mike.
Speaker Change: There was a question earlier about the organizational changes.
Speaker Change: Why not to use this opportunity.
Speaker Change: Such a lot of changes at one shot.
Speaker Change: Bring in.
Speaker Change: Some more talent from the outside.
Speaker Change: Yeah over time Vivek, we will continue to do a combination of both.
Speaker Change: And so there are a number of roles.
Speaker Change: Some of which we've talked about here, but other roles, which.
Speaker Change: Which we will go to market and bring in external talent.
Speaker Change: Some time period that has been the strategy on management.
Speaker Change: As you know as much as you might say.
Speaker Change: Jason our or Dave or myself have been at northern for some time period, but we'd actually been at other places longer than we've been at northern So it's a mix between.
Speaker Change: Promoting talent within because we think we have strong talent that we develop and having a strong talent development.
Speaker Change: Program, if you will.
Speaker Change: A big part of what we want to do and at the same time, bringing in talent from the outside so I there.
Speaker Change: There will be plenty of opportunities to be able to do that.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change #100: We will take our next question from Mike Mayo with Wells Fargo.
Mike Mayo: Alright, Thanks, my follow up.
Speaker Change #100: No.
Mike Mayo: Yes, So did I hear you right I think youre targeting organic growth in wealth of 2.5% to 3% how does that compare to the last few years.
Speaker Change #101: Benchmark that versus peers, how does that stack up.
Speaker Change #102: We've seen growth in the all space private equity some other broker.
Speaker Change #102: Seems like it's more than that in maintenance check the sandbox, where you compete.
Speaker Change #103: Sure. So a couple of things one.
Speaker Change #104: It's that would be higher than what it's been over the last couple of years, it's been it's been lower than that over the last couple of years before that we had been at.
Speaker Change #104: Within that target range and so we've done it before and that's why we feel confident we can do it we can do it again and then from a from comparative purposes.
Speaker Change #104: Good.
Speaker Change #104: It's other there are some firms that are doing better than that and some that are doing worse, we want to be we want to be a winner we want to be at the top end of that range.
Speaker Change #104: And I also think it's very hard to compare.
Speaker Change #104: Some firms include banking some clues some firms don't some firms include their product fees some firms Don.
And our model also is from a profitability perspective, because of our financial model that we can do better from an earnings perspective relative to our peers. If we do same amount of growth that's.
Speaker Change #104: The profitability and the incremental profitability of our wealth business is very strong and that's why that's part of the reason, it's such a such a good business the clients are embedded in their institutionalized.
Speaker Change #104: It makes it so that our growth leads to better economics for shareholders and so we feel really good about the feel good about that target and what it would mean for for shareholders.
Speaker Change #105: Thank you.
Thank you.
Speaker Change #106: We do not have any further questions I would like to turn the call back to Jennifer Childe for closing remarks.
Speaker Change #105: Yes.
Jennifer Childe: Thanks for your participation on today's call. We look forward with you again in the near future.
Yes.
Speaker Change #107: This concludes today's call. Thank you for your participation you may now disconnect.
Speaker Change #107: [music].