The operator introduces the Northern Trust Corporation Third Quarter 2023 Earnings Conference Call and hands over to Jennifer Childe, Director of Investor Relations. Childe welcomes everyone and introduces the speakers for the call. The call will be webcast live and a replay will be available on the company's website. The company's third quarter earnings press release and financial trends report are also available on the website. Childe reminds listeners to refer to the safe harbor statement regarding forward-looking statements. During the question-and-answer session, participants are asked to limit their questions to one initial query and one follow-up. CEO Mike O'Grady then begins his remarks, highlighting the company's solid execution in the face of challenging interest rates.

The third quarter saw expected deposit levels, but higher funding costs affected net interest income. The company is focusing on areas within their control, such as trust fees and expenses, and saw growth in trust fees and well-controlled expenses. Wealth management grew trust fees, particularly in higher wealth tiers and global family offices. The company also saw success in new marketing approaches and referrals. In asset management, there were positive flows and strong performance in tax-advantaged equity products. The company also won large asset servicing contracts, showcasing their strength as One Northern. Asset servicing had good momentum and a solid pipeline, with front office solutions being well-received by clients.

In the third quarter, the company had a notable win with the Abu Dhabi Pension Fund, and they were also selected to provide services for a U.S. asset owner. The company entered the fourth quarter with a strong balance sheet and healthy business momentum. They reported net income of $328 million, earnings per share of $1.49, and a return on average common equity of 11.6%. Assets under custody/administration and assets under management were down slightly from the previous quarter but up significantly from the previous year. Currency movements had a positive impact on revenue growth but a negative impact on expenses.

The paragraph discusses the financial performance of the company on a sequential and year-over-year basis. It mentions that currency impacts were not significant and that revenue was down 2% in both periods, while expenses were up 1%. Pre-tax income was up 1% sequentially but down 20% from the previous year. The largest component of revenue, trust, investment, and other servicing fees, increased by 1% sequentially and 3% year-over-year. Net interest income was down 10% sequentially and 11% from last year. The company also had a small net recovery and a modest increase in nonperforming loans. Assets under custody and administration for asset servicing clients decreased by 2% sequentially but increased by 10% year-over-year, while assets under management for these clients decreased by 3% sequentially but increased by 10% year-over-year. The decline in assets under management will impact trust fees in the fourth quarter.

The Wealth Management business saw a decrease in average balance sheet and deposits, with a shift towards noninterest-bearing deposits. The securities portfolio duration decreased slightly, while loan balances remained flat and well-diversified. The company's liquidity remains strong, with a majority of highly liquid assets. Net interest income decreased due to client migration into higher-yielding cash alternatives.

In the third quarter, deposit cost increases and competitive pressure led to a 46 basis point increase in funding costs. The company repriced some products to protect deposit volumes and engaged with clients to shift to higher paying term deposits. NII in the fourth quarter will be driven by client behavior, which has been less predictable due to the rate hikes. Modest outflows are expected to continue, and NII is expected to be in the range of $430 million to $440 million. Noninterest expenses were $1.3 billion, down 4% from the previous quarter but up 4% from the previous year. Looking ahead to 2024, there are various factors that could impact net interest income.

In the third quarter, expenses were up 1% sequentially and over 5% year-over-year, excluding unusual items. Compensation expense decreased 2% sequentially, but increased over the last year due to base pay adjustments. Non-compensation expense increased 3% sequentially, with an improved expense-to-trust fee ratio. For the fourth quarter, expenses are expected to continue to improve. The full year adjusted expense growth rate is estimated to be around 5%, 400 basis points lower than 2022 levels. The financial model is based on mid-single-digit trustee growth from a combination of organic growth and market appreciation.

The company hopes to generate increased trust fee operating leverage in normal macro environments. Their capital levels and ratios remain strong and they have a buffer above regulatory requirements. They have returned money to shareholders and slowed buyback activity in anticipation of an FDIC special assessment. They are well positioned to meet proposed regulatory requirements without significant changes to their operating model. The company is currently in budget season and is considering their approach to expenses given the uncertainty of external factors.

The speaker discusses their financial model, which includes potential equity market lift and low to mid-single-digit organic growth. They aim for 100 to 200 basis points in fee operating leverage to achieve good EPS growth. They have been working to decrease expense growth rates, particularly in labor and technology, and expect to continue this trend in the future. The speaker also mentions the potential impact of RWA on their capital.

The custody and fund admin fees were flat quarter-over-quarter, which was slightly lower than expected. The lower market levels will present a challenge in the fourth quarter, but there are positive dynamics in new business. The currency was a push year-over-year.

The company saw a 1.5% to 2% increase in net new business in Custody & Fund Admin Fees. Transaction volumes were low, possibly due to clients moving towards more indexing and less active management. Overall, the business is strong and the pipeline looks good. On the deposit side, there is still pressure but it seems to have stabilized. Clients are terming out their deposits and moving into CDs, particularly in the wealth channel.

Northern Trust has strategically taken a portion of their deposits and focused on maintaining liquidity for day-to-day payments. Deposits on the wealth side have increased, indicating that their pricing actions have been successful. On the institutional side, there has been a decline in deposits as clients move to longer duration or higher-yielding liquidity types. Overall, liquidity across the company has remained flat. The balance for the quarter is currently higher than expected and the company is anticipating deposits to average around $93 billion to $95 billion in order to achieve a net interest margin of $430 million to $440 million. Currently, deposit levels are holding higher than expected.

The speaker addresses the recent pricing changes and how they have caught up to the market. They mention that they are not price makers but rather price takers, and that the pricing actions taken were targeted and seem to have been successful. They also mention that the majority of the changes were in the U.S. custody and MMDA areas.

The company's new business has received positive feedback, but converting it to fees is challenging. The company is focused on managing expenses and is committed to bringing on new business with low expenses. They are also driving productivity to have the capacity to invest in the business.

The speaker discusses the need to offset new business with resources, and mentions that the 3-4% increase in revenue mentioned earlier is actually less than 5%. The next question is about the underlying assumptions behind the expected revenue for the fourth quarter, which is around $430-440 million. The speaker clarifies that this estimate is based on a deposit base of 93-95% and a flat net interest margin, but they are prepared for further declines in deposits. They also mention that they expect NII to increase in the future due to factors such as higher yields on reinvested securities.

The speaker discusses their defensive positioning of their balance sheet and their ability to use multiple levers to work on NII. They caution against annualizing their fourth quarter results for 2024, as it will depend on competition for deposits. They also mention a Visa gain of $10-15 million, which is a result of a derivative associated with their Visa position. This was impacted by news of a shareholder proposal to release half of the shares, which changed the mark-to-market.

During a conference call, a question was asked about the reinvestment of securities and how much AFS and HTM roll off is expected per quarter. The speaker, Jason Tyler, mentioned that a lot of the reinvestment has been in cash, but this may change in the future. He also stated that the runoff averages about 2% and there is about $1 billion a quarter across all currencies that is maturing and being reinvested. Another question was asked about the increase in other income from $55 million to $68 million, and the speaker clarified that the noise from the Visa swap gain will eventually go away and the current run rate may be too high.

Brian Bedell asks about the $430 million to $440 million NII guide and whether it is FTE. He also asks about potential competition in the future and how it may impact deposits in the custody and wealth business. Jason Tyler explains that the institutional business has a lot of deposits for processing payments, and they also have to consider liquidity. The amount of deposits that are sensitive to rates are negotiated with large clients.

The business has seen increases in non-checking account areas and CDs, which has a big impact on the wealth side. 75% of deposits are in wealth and 25% in institutional, and there has been movement of $2-4 billion within the $20-30 billion base. NII guidance for the fourth quarter is down 6-8%, but this should not be taken as a run rate. The NII inflection point may come later as the business takes actions to invest in higher yielding securities.

In the fourth quarter, there may be a low point for the company due to factors such as securities runoff. However, the company is considering different strategies to increase revenue, such as reinvesting in similar securities. The company has also been focused on cutting costs and has seen success in reducing expenses through productivity initiatives. They plan to continue these efforts to improve their financial performance.

The speakers are discussing their continued focus on productivity and the need to adapt to a new environment of higher interest rates. They mention the importance of functionalizing, automating, and centralizing processes, as well as utilizing technology to achieve savings. They also acknowledge the uncertainty of the market and the need to adjust their business strategies accordingly.

The speaker discusses the impact of low and high interest rate environments on the business, specifically in terms of transaction volumes and pricing. They emphasize the importance of being appropriately compensated for high value-added services and mention the need to adjust pricing and relationships with clients accordingly. The company is looking at this issue holistically in order to meet financial targets, and the budgeting season is approaching.

The speaker is asked to compare the budgeting process from a year ago to now. They mention that last year was difficult due to heavy inflation and competition for talent, but this year's macro headwinds are not as severe. They thank the participants and conclude the call.

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