The Northern Trust Corporation held an earnings conference call for the Second Quarter of 2023, which was led by Jennifer Childe, Director of Investor Relations. Mike O'Grady, Chairman and CEO, joined the call and reported solid performance in trust fees, assets under custody and management, and organic growth in each business. The call was webcast live on the Northern Trust website and a replay will be available through August 19.

Net interest income was down modestly on a linked quarter basis due to higher funding costs, however expenses excluding neutral items were well controlled. Northern Trust's wealth management business saw growth in assets under custody and management, trust fees, and global family office segment. They held their third annual Northern Trust wealth planning symposium, released the second family office Trends Report, and received a utility patent for cloud based goals driven Wealth Management Technology. In asset management, there were strong flows into their institutional money market platform and new product launches in the quarter focused on alternatives. Lastly, they had good momentum in core custody and fund administration, particularly with asset managers in Europe.

Brightwell is the primary service provider to British Telecom pension scheme, with over 50 billion in assets under management. They have recently been awarded three prestigious industry awards, including Best Global custodian for asset owners by Asian Investor. They have also launched A-Suite, a content community and Collaboration Hub for global asset owners. In the second quarter, they reported net income of $332 million, earnings per share of $1.56, and a return on average common equity of 12.4%. They are well positioned to support their clients and generate value for all stakeholders.

In the second quarter, the company recognized a $38.7 million pretax severance charge and a $25.6 million pretax charge associated with the write-off and an COVID investment and a client capability. Revenue was 1% higher than the previous quarter, but 1% lower than the prior year. Expenses were 1% lower than the previous quarter, but 5% higher than the prior year. Net interest income was 4% lower than the previous quarter, but 12% higher than the prior year. Assets under custody and administration for asset servicing clients were up 2% sequentially and 5% year-over-year. Asset servicing fees totaled $621 million, up 3% sequentially but down 3% year-over-year.

Custody and fund administration fees increased for the second consecutive quarter due to new business activity, higher transaction activity, and favorable markets. Assets under management for asset servicing clients were up 3% sequentially and 4% year-over-year. Investment management fees with asset servicing were up 6% sequentially, but down 10% year-over-year. Wealth management assets under management were up 2% sequentially and 7% year-over-year. Trust investment and other servicing fees were up 3% sequentially, but down 5% compared to the prior year. Average balance sheet decreased 1% on a linked quarter basis due to lower client deposits, but other categories increased.

In the second quarter, deposits decreased 6% sequentially, with noninterest-bearing deposits declining 2.6% due to clients shifting to higher yielding alternatives. Securities declined 2% and loan balances increased 1%. Cash held at the Fed and other central banks increased 9%, comprising 45% of the overall balance sheet and providing $73 billion of immediately available liquidity, which is more than 60% of the total deposit base. Money market funds and CDs both increased.

Net interest income on an FTE basis was $525 million for the quarter, down 4% sequentially but up 12% from the prior year. The net interest margin was 1.57% for the quarter, down 5 basis points sequentially but up 22 basis points from a year ago. Noninterest expenses were $1.3 billion in the second quarter, 4% higher sequentially and 9% higher than the prior year. Excluding charges, expenses were down 1% sequentially but up 5% year-over-year. Factors such as client migration out of deposits, higher deposit costs, and annual retirement eligible incentives contributed to the changes in expenses.

The company reported strong capital ratios in the quarter with their common equity Tier-1 ratio at 11.3%, and their Tier-1 leverage ratio at 7.4%. They returned $257 million to common shareholders through dividends and stock repurchases. Deposit betas came in better than expected and are in the high 80% range across the platform.

In the second quarter, the company announced some cost-cutting measures, which included a severance charge. The firm is aiming to bring their expense growth for the year below 7%, and they are currently running at a high 20-ish percent pretax margin, which used to be north of 30%.

Jason Tyler discussed the changes in compensation from first quarter to second quarter and second quarter to third quarter. He explained that the significant movements for the second quarter included a $40 million seasonal decline in equity awards and a $20 million increase in base pay. Tyler also discussed how they pulled levers to flatten compensation in the quarter, including accelerating the program they launched in fourth quarter of last year. Finally, he mentioned the new effort they launched during the second quarter, which resulted in the severance charge announced in the morning and is reflected in the results.

The company has taken a point out of their curve for the year and are aiming to be in the 30s from a margin perspective. They are doing a lot of work to control expenses and have seen good organic growth in the quarter. Deposits have been fairly stable and are in line with the updated target of 105.

Jason Tyler states that deposits have held in well in June and July, with client liquidity also remaining steady. He also mentions that August is a low point for deposits, but doesn't usually drop dramatically. He advises that it is prudent to expect a 5% decline in NII for the quarter due to the competitive environment and the summer's volume pressure.

Jason Tyler discussed the increase of equipment and software expenses in the second half of the year due to delays in projects and the productivity office's efforts to reduce inflation. Mike O'Grady then commented that the new business wins in asset servicing and wealth management would contribute positively to organic revenue growth in the next couple of quarters and beyond.

Mike O'Grady explains that the company has seen steady activity in both Wealth Management and Asset Management, with positive implications for clients and shareholders. On the fee side, revenue growth is better than NII side for organic growth, and capital markets activity such as FX and brokerage has been relatively subdued.

Jason Tyler explains that Wells Fargo can achieve good operating leverage through low single-digit growth in wealth management organically and mid-single-digit growth in asset servicing. He also notes that they are having success in the Global Family Office and the very top end of wealth advisory, where clients are leaning toward them for wealth advice rather than operational and reporting services.

Jason Tyler explains that the company had written off a client capability that had been in the works for many quarters, as it had not met their return and margin requirements. It was a project to build out a new client capability in asset servicing for the asset owners channel, but commercial agreement on terms could not be reached and so the project was halted.

Jason Tyler explains that a large project endeavor was stopped due to it costing more than expected and not being able to reach the company's hurdle rate. Robert Wildhack then asks about the company's target expense to trust ratio in the long run.

Jason Tyler explains that the company needs to be in the range of 105-110 in order to do well, which they have achieved in the past. Robert Wildhack asks how a period of strong organic growth would affect the expense growth, to which Mike O'Grady answers that it would require more resources, but that the company must also reduce expenses to get to the desired range. He further explains that the fee side will be impacted by markets and currency, while the expense side will be impacted by inflation and currency.

Jason Tyler explains that the release of reserves in the credit portfolio was due to improvements in a small number of borrowers, but the outlook for the portfolio overall is worsening. He also mentions that the duration of the securities book is currently under one year and they have been allowing the maturity of securities to become more liquid as they reinvest in order to protect NII.

The balance sheet size is constrained by deposits, which declined 6%, but the higher cost Fed fund purchased balance has been growing. Jason Tyler explains that the securities can act as a funding mechanism, but it doesn't move quickly, so the deposit size will influence the earning asset size. Leverage has room to increase, so the bank may opt to use discretionary leveraging to pick up NII, even if it's a thin NIM.

In the short term, the bank plans to continue its share repurchase program, buying back around $100 million worth of stock in the quarter, though this may be put on hold for a quarter due to the FDIC special assessment.

Gerard Cassidy asked Jason Tyler to compare the current beta to past tightening cycles, and how quickly Northern Trust can reduce deposit costs if the Federal Reserve cuts rates. Jason Tyler responded that the 100% beta is higher than in the past, due to strong competition for deposits. He also noted that Northern Trust can reduce deposit costs quickly, and that the volatility of deposits is greater than in past periods, likely due to quantitative tightening and Fed actions.

Jason Tyler discussed volatility of deposits and attributed it to macro factors, such as the debt ceiling and competition between banks, money market funds, and treasuries. He then answered a question from Vivek Juneja about noninterest-bearing deposits, noting that the outflow was primarily from the asset servicing segment and that the wealth segment was more granular. Finally, Tyler mentioned that headcount cutting in the Wealth Management segment had led to low single-digit expense growth, but that service had remained great.

Jason Tyler and Jennifer Childe answered a follow-up question about the delay of equipment and software projects, which will lead to an increase in non-comp expenses in the second half of the year. They also clarified that the FDIC special assessment is not included in the 6% expense guide and did not provide the size of the assessment. They concluded the call by thanking everyone for joining.

This summary was generated with AI and may contain some inaccuracies.