NTRS - NASDAQ

Good day, and welcome to the Northern Trust Corporation's Third Quarter 2024 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.

Thank you, Mike. And let me join Jennifer and Mike, and welcome you to our third quarter 2024 earnings call. Let's dive into the financial results of the quarter starting on Page 4. 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 pretax 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 $40 million after tax. Trust, investment and other servicing fees totaled $1.2 billion, a 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. 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% for 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%. Turning to our asset servicing results on Page 5. Assets under custody and administration for asset servicing clients were $16.3 trillion at quarter end, reflecting a 23% year-over-year increase. Asset 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 U.S. 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 servicing clients were $1.2 trillion, up 22% over the prior year. 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. 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. Moving to Page 7 and our balance sheet and net interest income trends. Our average earning assets were flat on a linked quarter basis as a decrease in loans was offset by an increase in securities. Our average liquidity levels remain strong with highly liquid assets comprising 62% of our deposits and more than 50% of total earning assets on average. The duration of our securities portfolio is 1.6 years, and the total balance sheet duration continues to be less than one 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. 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. In the aggregate, these items elevated third quarter NII by approximately $10 million 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 up 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 and underlying growth in the business and unfavorable currency movements. 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 expenses. 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. As we look out to the fourth quarter, we expect our total operating expenses to be up approximately 2% relative to the third quarter. Turning to Page 9. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimum. Our common equity Tier 1 ratio under the standardized approach remained flat at 12.6%, and its capital accretion was offset by a slight increase in RWA levels. Our Tier 1 leverage ratio was 8.1%, up 10 basis points from the prior quarter. At quarter end, our unrealized pretax loss on available for sale securities was $603 million. We returned $453 million to common shareholders in the quarter through cash dividends of $152 million and common stock repurchases of $301 million. 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. And with that, please open the line for questions.

Thank you. [Operator Instructions] We will take our first question from Steven Chubak with Wolfe Research.

Hi. Good morning. This is Sharon actually filling in for Steven this morning. Jason, earlier this year, you had talked about the asset sensitivity across the different categories on the balance sheet. So 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 on. 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 talked about the asset sensitivity across the different balance sheet categories, 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-market on the floating rate mix?

Yes. Floating is about 50% at this point.

Okay. Great. And then, as we look at our expense forecast beyond '24, 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?

Yeah. And just to clarify, you're asking about the expense investments in modernization and resiliency and how that's going to trend over time?

Yeah.

Yeah. So we do expect that, that will continue for the next at least two, three quarters. But at some point, likely late next year, we’ll start to see it decline. We don’t have any plans to dollar for dollar 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 efforts in the business.

Great. Thank you very much.

Sure.

We will take our next question from Ebrahim Poonawala with Bank of America.

Hey, good morning.

Good morning, Ebrahim. How are you?

Got it. And I guess, so 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 in NII this quarter. If we get some gradual rate cuts, given the positioning of the balance sheet, if the deposit backdrop is stabilizing, should we expect NII continues to grow from the third quarter levels?

We're -- there's 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 -- that those were going to leave coming into the quarter, 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 of 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 levels holding in, but the underlying nature of the deposits and where they are now is much better. That said, if you look into the 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 as possible. But that's why we think that -- in general, we're looking at a 550 (ph) to 560 (ph) level for fourth quarter in NII, which is still good, still very strong, but would be slightly down.

Thank you.

Thank you.

Hey. Good morning, everybody and congrats to the whole team on various moves. 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 that's what's partially driving the kind of the sequential decline and maybe expand on kind of what those were? And on deposits, this is the right jumping off 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 that you have you highlighted.

Sure. So let me try and go in reverse order. On deposits on the launch point, I feel like this is a good level. And then if I come back to the third quarter items, there's the core asset and liability pricing, but there's also another element of FX swap activity, FHLB dividends, premium AM. FTE adjustments, repo activity, leveraging the whole basket of other things. It doesn't add up to a lot. But -- and there's -- usually there's put takes in that. Most of those went in our direction this quarter. And so that's that $10 million to $15 million elevation. But the way you ask the question 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 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 -- 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 (ph) 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 569 (ph).

We will take our next question from Betsy Graseck with Morgan Stanley.

Okay. Thanks so much. Really appreciate it.

Yeah. Sure, Mike. So obviously, I've already been on the road a lot, and I know the business reasonably well and spent time just in the last few weeks, L.A., New York, Texas, I'm going to a really good client event tonight in San Francisco. And I -- but I do think there's opportunity for us to do more. And a framework to think about, Mike, is one way you can think about the business, 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 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 is a way that I think we can talk about it in the future where we’re putting the initiatives in each of those different dimensions to try to grow the business faster.

All right. Thank you.

We will take our next question from Brennan Hawken with UBS.

Good morning, Brennan. How are you?

Okay. I look forward to getting some meat on those bones in the coming quarter. So that's great. If I could transition into the balance sheet, it looks like loans pulled back a decent amount this quarter. I don't think you touched on it. What caused that and how should we be thinking about loan growth or the outlook for growth or further decline in balances from here?

Sure. I've noted before, the loans and deposits can be very spiky. And the headline is there's nothing strategic or creating a trend that we see in 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. And so you should think about growth in the loan book coming alongside growth in the overall client franchise. A lot of our lending, ironically, the deposits are more on the institutional side. The lending is on the wealth side of the business. And so the correlation will be more tied to growth in the Wealth business.

Okay. Thanks for that.

Sure.

We will take our next question from Glenn Schorr with Evercore.

Good morning.

Yeah. Maybe another question on the Wealth side. Like, we always want to grow Wealth. It's a great business, and you're great at it. 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 and include maybe a comment about the Hamilton Lane collaboration that you had a press release on yesterday. Thanks so much.

All right. Thanks so much for all that.

Sure.

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

Hey, Gerard. How are you?

Very good. And I apologize screwing up the name Northern One -- One Northern Trust, but thank you. Jason, coming back, I know 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 sheet is about a year in securities portfolio is a little longer than that. If the forward curve is correct, and we do see a Fed funds rate by the end of next year in that 3.5% range, let's call it, in the long end of the curve stays incur above 4%. So we get a positive slope in the curve. I'm not asking for a guidance number on '25 NII. But generally, is that a favorable net interest income environment for you folks or can you share some color there?

Well, for various reasons, we came shorter on the securities portfolio. And so the rest of the balance sheet is pretty stable. The cash is what it is. And the loan book, 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 we did come shorter, that played out well for us. We did it for a variety of reasons. One was a view of the yield curve. And again, 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 five, six, seven rate cuts, there's -- we're not going to change our risk tolerances, our philosophy, our approach on how we manage the balance sheet. So that's going to be a headwind. That said, there are some offsets to it that are occurring just in how we normally manage the portfolio. For example, one, we are feeling better the stability of the deposit level. So that gives us the ability to consider using more non-HQLA. Second, if we did see arise effectively in the base of the deposit book. And so we think deposit levels are positive. And then there's still a slight benefit into next year from the reinvestment of securities that are maturing, not as much as we would have seen before, but there is some. And so -- those are just some of the puts and takes. And you're right, it's too early for us to give a 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.

Very good. And is it fair to say that I think you pointed out to us in your Q, when you give us the interest sensitivity table that you guys are asset-sensitive presently at the end of the third quarter. Is that a fair statement?

Yeah, and thanks for clarifying that. I should have mentioned that 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 in the balance sheet over the last couple of years.

Appreciate it. Thank you so much.

You bet.

We will take our next from Brian Bedell with Deutsche Bank.

Great. Thanks. Good morning and congrats to you and everyone else on the organizational changes. Maybe a question for you, Jason, and Mike could chime in too maybe. But just going back to the organic growth comments, I appreciate all of the comments you've talked -- you've discussed in Q&A. In the Wealth segment, first and foremost, at focusing on organic revenue growth as opposed to asset growth. So I just want to confirm that. And do you see more of that organic growth coming internally? So from, let's say, selling more or providing more Northern Trust investment managed product, doing more potentially within the Wealth segment. Other things that you can do internally as opposed to getting new customers. So 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 in Wealth over time?

Yeah. So let me start with the end. We're -- we have talked about somewhere around a 3% level of organic growth for the business overall. We've historically said that we'd like to see that we should expect a higher amount coming from asset servicing and a little bit lower amount from Wealth. I think we should try to be more -- have more of an expectation that, that's balanced. And so I think in the medium term, a 2.5% to 3% number for Wealth is reasonable. If we start to break it down with where that's come from, it's got to be a combination of both, new clients and doing more with existing clients. But within the existing client base, there's a lot of different categories that people should think about, and I want to try and focus 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. 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 and 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. 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 Wealth. And so their growth becomes our growth. And our view is that, that's organic as well if they're putting more flows into our business, not just not their market growth, which we don't think of as organic, but there are 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're thinking about getting to that organic growth target level.

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? I think you've got about -- correct me if I'm wrong, but I think a three quarters of the book prices within three months, that's variable rate and then there's a portion that prices over a longer time period. So just maybe if you can talk about the 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 have a really strong revenue year and you're generating operating -- positive operating leverage on total revenue, and your expense Trust fee is moving towards your goal. Is it possible that you'd still have expense growth that could be 6% or higher in that scenario?

Well, first, on the lags, you got them right in terms of the month lag. But just keep in mind, there's a small portion in both business that is daily as well, that's tied more to the extent that clients have more mutual funds. But that's a very -- that's a small dynamic. But you're right, in general, on the month lag. And then on the expense growth, and 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 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 shouldn't -- we're trying to get away from that dynamic of projecting higher revenue growth. And therefore, tolerating higher expense growth. It has to be more of an absolute. And so we -- that's why next year, we came into this year with good confidence about being able to do 5% or less. Come into next year, confidence level is even higher.

Yeah. Thank you for that. Just on the pricing, I was talking about the loans, the variable rate loans on that, not the market. So -- was -- is it a three quarters of the book, I think was -- of the loans were variable rate and reset within three months in the quarter resets. So the lag is what drove the yield up this quarter?

No, it would over draft a little bit higher -- we're a little bit higher. That's what drove the yield up. Thanks. I really appreciate you clarifying that. But – and it is about – it’s like 70% to 80% that’s floating in the loan book.

Got it. Thank you so much.

Thank you.

We will take our next question from Jim Mitchell with Seaport Global.

Hey, good morning.

Good morning.

Yeah. Jason, -- yeah. Good morning. Just maybe on the capital return. You guys have been stepping up the buybacks capital ratios are pretty high, as you pointed out, still well above the minimum. So is this something we should expect this level for the intermediate term as profitability improves and rates are pretty stable? OCI looks good. Can you keep this level up or is this is sort of a high watermark on the buyback side?

It's not -- it's maybe neither. And so, 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 have about of third of 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 including the equity investment and the Visa dynamic. And -- but us being at 12.5% or 12.6%, that's the upper end of where we've been in CET1. And we've been at that level before, and so we're comfortable at that level, but it's the upper end. But Visa monetizing that obviously put a lot of liquidity available for share repurchase and so we are deploying that over time. And 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 tolerate that is we know at this point, we still have other Visa tranches coming over the next year or two. And so it will be another roughly equivalent benefit. And so would be okay for us to CET1 come down from this 12.6% 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 approach over several quarters, not trying to do anything too aggressively.

Right. 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 longer term, intermediate term of a lower than 12.5% CET1 given the exit I have? Can you take it to 12% or lower?

We will take our next question from Vivek Juneja with JPMorgan.

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

Hi. Thanks for my follow-up. So did I hear you right because you're targeting organic growth and Wealth 2.5% to 3%. How does that compare to the last few years? And when you benchmark that versus peers, how does that stack up when you see growth in the off state private equity, some other brokers just seems like it's more than that, and maybe it's just the Sandbox where you compete? Thanks.

Sure. So a couple of things. One, it's -- that would be higher than what it's been over the last couple of years. It's been lower than that over the last couple of years. Before that, we had been at -- within that target range. And so we've done it before, and that's why we feel confident we can do it again. And then from comparative purposes, it's other -- there are some firms that are doing better than that and some that are doing worse. We want to be a winner. We want to be at the top end of that range. And I also think it's very hard to compare. Some firms include banking, some firms don't, some firms include their product fees, some firms don't. Some -- and our model also is from a profitability perspective because of our financial model that we can do better from an earnings perspective, if relative to our peers, if we do same amount of growth. That's our -- the profitability and the incremental profitability of our Wealth business is very strong. That's why that's part of the reason it's such a good business. The clients are embedded and they’re institutionalized. And it makes it so that our growth leads to better economics for shareholders. And so we feel good about that target and what it would mean for shareholders.

Thank you.

Thank you.

We do not have any further questions. I would like to turn the call back to Jennifer Childe for closing remarks.

Thanks for your participation on today's call. We look forward to speak with you again in the near future.