The operator welcomes listeners to the Northern Trust Corporation's Second Quarter 2024 Earnings Conference Call. Jennifer Childe, Director of Investor Relations, introduces the members of the conference call and directs listeners to the company's website for relevant documents and a live webcast. She also reminds listeners of the company's safe harbor statement regarding forward-looking statements. The CEO, Mike O'Grady, then takes over and thanks listeners for joining the call. He highlights the company's progress in executing their strategic priorities and credits strong equity markets and client activity for their positive results in the second quarter.

In the second quarter, Northern Trust saw a 6% increase in trust fees and strong deposit levels, leading to a multi-year high in capital levels. They also participated in the Visa Class B common stock exchange offer, resulting in a pre-tax gain of nearly $900 million. The company intends to use these proceeds for share repurchases, charitable contributions, and investments in the business. The quarter also included restructuring charges and other notable items as the company works to optimize their cost base. Wealth Management saw 9% trust fee growth and strong new business momentum, while Asset Management had positive liquidity flows and strong performance in active fixed income. The company continues to leverage their One Northern Trust strategy to deliver solutions and capabilities to clients.

In the second quarter, joint meetings between our asset management and asset servicing businesses led to over 100 new business opportunities and 15 wins. Our asset servicing business also performed well, with healthy transaction volumes and new business growth. We have shifted our sales focus to scalable opportunities with multiple points of connectivity, resulting in momentum, particularly among asset owners. We have secured notable wins, such as becoming the new custodian for Nest Invest, and have achieved over 30 new wins in North America. We are well-positioned to continue generating value in the current macroeconomic environment.

Jason Tyler, the speaker, thanks the listeners for joining the second quarter 2024 earnings call. He then proceeds to discuss the financial results of the quarter, including net income, earnings per share, and return on average common equity. He notes that assets under custody and administration and assets under management have increased, driven by strong equity markets. Excluding notable items, revenue and expenses have also increased. Trust, investment, and other servicing fees have seen a sequential increase of 2% and a year-over-year increase of 6%. Net interest income has remained steady. The credit quality is strong with no net charge-offs and non-performing loans representing 9 basis points of total loans. Assets under custody and administration for asset servicing clients were $15.5 trillion at quarter-end, with asset servicing fees totaling $651 million. Custody and fund administration fees were $446 million, up 4% year-over-year, and assets under management for asset servicing clients were $1.1 trillion.

In the second quarter, investment management fees within asset servicing increased by 9% due to favorable markets and strong flows into institutional liquidity funds. Wealth management assets under management were $419 billion, and trust, investment, and other servicing fees increased by 8% due to strong equity markets and asset inflows in Global Family Office. Average deposits increased by 1%, and deposit costs increased slightly due to large thinly priced deposits. Average earning assets increased by 1%, and average liquidity levels remained strong. Net interest income was $530 million, and the net interest margin was 1.57%. Non-interest expenses were $1.5 billion, up 12% sequentially and 15% compared to the prior year. Excluding notable items, expenses were flat sequentially. The Visa stake, which was held at zero value since Visa went public over 15 years ago, was valued at approximately $1.8 billion on a pre-tax basis.

The Visa transaction has allowed us to return capital to shareholders and prioritize certain strategic initiatives. We are using a portion of the proceeds to increase share repurchases and make a contribution to our foundation. Additionally, we will be investing in modernizing our technology infrastructure and enhancing our resiliencies. This will improve service levels, enhance the client experience, and reduce risk and inefficiencies. We have also announced restructuring charges and other notable expenses. Excluding these items, our core expenses for the quarter have remained stable.

In the past year, compensation expense increased by 3%, but full-time equivalent headcount decreased by 2%. Outside services expense increased by 12%, mainly due to modernization and resiliency projects. Equipment and software expense increased by 3%, but excluding notable items, the expense to trust fee ratio improved by 200 basis points. For the third quarter, sequential expense growth is expected to be up by 1%, with equipment and software expenses ranging between $270 million to $275 million. Capital levels and regulatory ratios remain strong, with a stress capital buffer of 2.5% and a common equity Tier 1 ratio of 12.6%. The Tier 1 leverage ratio also increased by 20 basis points to 8%.

In the quarter, the company had an unrealized pre-tax loss on available-for-sale securities of $667 million. They generated $607 million from the sale of Visa shares and expect to generate another $300 million in August. They returned $405 million to shareholders through dividends and stock repurchases. The remaining embedded gains in Visa will be realized in three pieces, with one piece still to come in August. The decision to monetize the remaining shares is not solely up to the company, but they have stated that Visa is not a strategic asset for them and they have been waiting to monetize at a higher value in the public markets.

The company has decided not to offer discounts for remaining shares and will continue to pursue this strategy. They are currently making investments in resiliency which will result in elevated spending for the next few quarters, but will eventually decline. Compensation may also increase as the work continues. The NII cadence for the rest of the year will depend on deposit levels and rates, with a slight seasonal decline expected in the third quarter.

The decline in balances due to seasonal factors may be offset by positive impacts from reinvestment spreads and other factors. The company has seen positive activity and a strong pipeline in asset servicing, although there has been a decrease in trust fees due to a client exit. The company is focused on pursuing opportunities that align with their value proposition and are willing to be more selective in their approach, resulting in higher margins for the business. So far, this approach has not affected the overall momentum in the business.

Jason Tyler discusses two headlines on wealth, including the softness in net new businesses but strong performance in bringing on new business from existing clients and external names. He also mentions the positive trend in advisory fees offset by lower product utilization. A question is then asked about the percentage of wealth management client assets in advisory accounts and the deposit costs for those accounts, which Tyler clarifies have not been historically disclosed.

The majority of the wealth management business's relationships have both advisory and product fees, with lower deposit costs compared to the institutional side. Recently, some of the largest providers in the industry have increased their deposit costs for advisory relationships. The business must remain competitive and react to these changes, as it is a dynamic marketplace.

The speaker discusses the reasons for a $200 million restructuring charge, which includes severance expenses. The main driver for this charge is productivity and the company needs to constantly evaluate their employees' skills and roles to ensure efficiency. The expected cost savings from this restructuring are not mentioned.

In paragraph 14, the speaker discusses the need to analyze the company's geographies, span of control, and layers in order to make necessary changes. These changes may result in a reduction in salaries, with the potential for reinvesting some of the savings in other areas of the company. The speaker also mentions a focus on profitable growth in the custody business, being more selective and strategic in bidding.

The author discusses the two main groups of clients in asset servicing: asset owners and asset managers. The services provided to asset owners are more scalable and may include front office solutions, while those provided to asset managers are more resource intensive. The company is focusing on differentiating their services and being selective about pursuing relationships with asset managers.

The speaker discusses the importance of having a variety of services for asset manager clients in order to maintain profitability. They also mention that deposit betas are expected to be high due to current interest rates, and there was a decrease in interest-bearing deposits on the balance sheet.

The speaker discusses the impact of interest rates on the company's deposits and differentiates between the wealth and asset servicing businesses. They mention that the wealth business has a higher percentage of deposits on standard rates and will be able to move in conjunction with Central Bank movements. The speaker also mentions that expenses increased by 1% in the third quarter and they are still targeting a 5% or better expense growth for the full year. They also mention the possibility of positive fee operating leverage and generating operating leverage on total revenue for 2024.

The company is facing challenges in achieving their goal of 5% or less expense growth this year due to market conditions and their decision to accelerate resiliency work. However, they remain committed to this long-term target and expect fee operating leverage in the second half of the year. Analysts are curious about the company's wealth dynamics and whether they will follow in the footsteps of their competitors. The company is still evaluating their options.

The interviewer asks if there are any other factors, such as regulatory pressure or potential litigation, that could force the industry to move towards using deposits for advisory relationships. The interviewee clarifies that their current practices are in line with the market, and that the majority of their deposit base comes from institutional clients rather than wealth clients.

The majority of deposits on the wealth side of the business are in U.S. currency and the company is implementing savings initiatives to improve their expense to fee ratio, with a target range of 105% to 110%. The company is balancing investments for organic growth and efficiency in order to achieve this goal.

The company is working on automating manual processes in various areas of the business to improve resiliency and efficiency. They have taken a larger severance charge this year, which will be embedded over the next 18 months. This puts them in a better position for next year, but it is still too early to determine what next year will look like.

The company is predicting a 5% or better outlook for next year and feels well-positioned for it. They have used a couple hundred million for buybacks, but still have more available. The stock was down 8% at one point, but the company expects third quarter NII to be flat due to a decline in balances being offset by investment yields. The company does not expect to be impacted by sweep deposits.

Jason Tyler, in response to a question from Ebrahim Poonawala, states that rate cuts in September may not have a significant impact on the NII. He also mentions losing a client, which will have a small impact on fee revenue. However, overall the business is doing well and the actions taken this quarter may lead to lower expense growth in 2025.

Jason Tyler confirms that some of the expenses incurred this year will decrease next year, but it is too early to give specific details about 2025. The advisory wealth deposits have the option to sweep into money funds that yield 5%, and this option is available at most wire houses. However, there may be concerns about fiduciary obligations and the necessity of paying out at this level from a legal perspective.

The speaker asks a question about potential changes in the company's plans and the response is that there are no immediate plans for changes, but adjustments may be made in the future depending on competitive pressures. The speaker also clarifies that rate cuts should not have a significant impact on the company's net interest margin and net interest income, and mentions that they have already passed on a 25 basis point rate cut from the ECB to clients. The call concludes with the speaker thanking everyone for participating.

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