Good day, and welcome to the Northern Trust Corporation Fourth Quarter 2023 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead.

Thank you, Ruth, and good morning, everyone, and welcome to Northern Trust Corporation's Fourth Quarter 2023 Earnings Conference Call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; John Landers, our controller; and Grace Higgins from our Investor Relations team. Our fourth 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 January 18 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 February 18. 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 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.

Thank you, Jennifer. Let me join in welcoming you to our fourth quarter 2023 earnings call. Similar to the last few years, 2023 presented a challenging operating environment. We experienced a combination of geopolitical instability, highly visible bank failures, and elevated inflation and interest rates. I would like to thank our teams across the company for their tireless efforts to serve our clients under these difficult circumstances. Turning to our numbers, our fourth quarter results capped off a solid year of progress toward driving improved long-term financial performance. On a year-over-year basis, reported fourth quarter revenue was $1.6 billion, expenses were $1.4 billion, and earnings per share were $0.52. Our performance in the quarter included the impact of $261 million in notable items. Adjusting for the notable items in both periods, fourth quarter revenue on a year-over-year basis was flat, with trust fees up 5% and expenses up 3%. We focused much of our efforts in 2023 on expense control, making various structural and governance changes to enable sustained long-term productivity improvements. Actions included disciplined headcount management, vendor consolidation, rationalization of our real estate footprint, and process automation. Although we brought our year-over-year expense growth down in each quarter this year, our expense growth in 2023 was still too high relative to our trust fee and revenue growth levels in recent years. As such, lowering the trajectory of our expense growth further remains a top priority this year as well. Turning to the businesses, our organic growth continued to be below historical levels, although we saw improvement throughout the year. Within wealth management, for the fourth quarter in the year, solid growth in client advisory fees was largely offset by product-level asset outflows. We continue to see ongoing strength in the higher wealth tiers above $50 million in client assets where our expertise, track record, and industry leadership are significant differentiators. Our ability to harness the data and analytics from serving the wealthiest people in the world for more than 130 years, coupled with our holistic, advice-driven culture, sets us apart in the marketplace and will continue to be an important driver of our success. Drawing from our experience working with some of the most sophisticated families around the globe, next month, the Northern Trust Institute will publish its first book, Secrets of Enterprising Families. The book will provide a window into what works for ultra-high-net-worth families who have succeeded generation after generation and what doesn't to help other families gain important insights and unlock value. The book will be launched with a series of client and prospect events around the country, giving us a new channel to establish relationships and develop business. Finally, as a testament to our exceptional client service and expertise, in 2023 we were named best private bank for family offices in the US and best private bank for succession planning in the U.S. by the Financial Times Group. Asset servicing generated solid new business growth in both the fourth quarter and full year, but this was largely offset by continuing asset outflows at the client level and generally lower transaction volumes and capital markets activities. We performed particularly well with asset owners in the Americas in the fourth quarter. Notable wins included the state of Nebraska Investment Council pension plan and Costco's retirement plan. We were also reappointed as asset servicing provider for the health care of Ontario pension plan. Throughout the year, we also generated healthy momentum with asset managers in the UK and EMEA regions where our solutions for alternatives and private credit were particularly well received. We recently finalized terms with one of the world's largest private market firms, which will add significant scale to our alternatives division. This appointment is a testament to our ability to successfully compete with some of the largest and most complex mandates. Our asset servicing business received numerous awards in 2023 for its innovation and industry leadership, including best outsourcing provider by Waters, European transfer agent of the year and administrator of the year by Funds Europe, best global custodian for asset owners by Asian Investor. In asset management following several quarters of client outflows, we generated positive overall inflows in the fourth quarter including healthy growth in index equity and our fourth consecutive quarter of positive liquidity inflows. We've seen particularly good momentum in our high yield complex with 93% of our taxable active funds outperforming their one-year benchmarks. Our alternatives funds have also continued to generate solid growth and remain an important driver of our fee revenue. As a result, our product launches during the year focused largely on alternatives capabilities. In closing, we enter 2024 with positive momentum, well positioned to navigate the ongoing macroeconomic and market uncertainty. Our focus is squarely on accelerating profitable organic growth, maintaining our expense discipline, and driving greater resiliency and efficiency in our operating model. With that, I'll turn it over to Jason to review our financial performance. Jason?

Thank you, Mike. Let me join Jennifer and Mike in welcoming you to our fourth quarter 2023 earnings call. Let's dive into the financial results of the quarter, starting on Page 4. This morning we reported GAAP fourth quarter net income of $113 million. Earnings per share of $0.52 and our return on average common equity was 4%. As noted on the slide, our reported results included a $176 million loss on the sale of securities related to a repositioning of the portfolio that we completed in November. They also included an $85 million FDIC special assessment. Our assets under custody/administration and assets under management were up sharply on both a sequential and year-over-year basis. Strong equity and fixed income markets coupled with favorable currency movements drove most of the improvement in both periods, offset slightly by asset outflows in both periods. Given the intra-period market movements and lag effects of our fee arrangement, markets had an unfavorable impact on sequential trust fee growth and a favorable on year-over-year trust fee growth. On a year-over-year basis, currency movements had an approximate 90 basis point favorable impact on revenue growth, largely within our Asset Servicing segment, and a 110 basis point unfavorable impact on expenses. On a sequential basis, currency impacts were immaterial. Excluding notable items in all periods, revenue is flat on both a sequential quarter and a year-over-year basis. Expenses were well-controlled, up 1.9% sequentially and up 2.6% over the prior year. Trust, investment and other servicing fees totaled $1.1 billion, a 2% sequential decrease and a 5% increase compared to last year. All other non-interest income on a FTE basis was down 6% sequentially and down 5% over the prior year. Net interest income on an FTE basis was $501 million, up 7% sequentially and down 9% from a year ago. Our provision for credit losses was $11 million in the fourth quarter. Overall, our credit quality remains very strong. Net charge-offs during the quarter were $2 million. Non-performing loan levels decreased to $64 million from $69 million in the prior period, and non-performing loans as a percentage of total loans remains stable. Turning to our asset servicing results on Page 5. Assets under custody/administration for asset servicing clients were $14 trillion at quarter-end. Asset servicing fees totaled $612 million. Custody and fund administration fees were $420 million. Assets under management for asset servicing clients were $1 trillion. Asset management fees within asset servicing were $131 million. Moving to our wealth management business on Page 6. Assets under management for our wealth management clients were $423 million. Assets and trust investment and other servicing fees for wealth management clients were $478 million. Moving to Page 7 and our balance sheet and net interest income trends. Our average balance sheet decreased 3% on a linked quarter basis, primarily due to lower borrowing activity. It declined 8% compared to the prior year due to lower client deposits. Average deposits were $102 billion, essentially flat with the prior quarter and meaningfully better than our expectations. We experienced a stronger than anticipated increase in deposits late in the quarter, ending the year at $116 billion. At quarter end, operational deposits comprised approximately two-thirds of institutional deposits and institutional deposits comprise 75% to 80% of the total mix. Despite significant leverage capacity, we reduced our average borrowings by $4 billion, relative to the third quarter or nearly 4%, reducing both our FHLB advances and Fed funds purchased. Shifting to the asset side of the balance sheet, the $3.2 billion securities repositioning we completed in November involved the sale of both high-quality liquid assets and non-high-quality liquid assets available for sale securities with a weighted average maturity of two to three years. Earlier this week, we completed another $2.1 billion repositioning, which enhances our flexibility given the dynamic rate environment. We'll record an associated loss in the first quarter of approximately $200 million. The proceeds of both sales were invested in short floating rate securities, further reducing the duration of the portfolio, which is now 1.8 years. Average loan balances were $42 billion, flat both sequentially and relative to the prior year. Our end of period loan balances were up $4 billion or 9% over the third quarter, reflecting an increase in overdrafts related to higher levels of year-end trading and settlement activity. Our loans have since returned to $42 billion. The heightened activity at the end of the quarter did not have a material impact on net interest income in either the fourth quarter or first quarter. As a reminder, approximately 75% of the loan portfolio is floating. The total balance sheet duration continues to be less than a year. Our average liquidity levels remain strong. Cash held at the Federal Reserve and other central banks was down, reflecting the decrease in borrowings. But high-quality liquid assets comprise more than 50% of our deposits and more than 40% of total earning assets on average. Our net interest income in 2024 will continue to be driven largely by client deposit behavior, which has been less predictable given the unique aspects of this rate cycle. We expect the November and January securities repositioning to provide an incremental $30 million in net interest income per quarter in 2024 relative to fourth quarter levels. We currently expect first quarter net interest income to be in the range of $480 million to $500 million. This assumes deposits remain stable, but deposit pricing continues to be under some pressure. With further NIM compression possible, as long as quantitative tightening persists and the deposit environment stays highly competitive. Turning to Page 8. As reported, noninterest expenses were $1.4 billion in the fourth quarter, up 9% sequentially and up 5% as compared to the prior year. Excluding notable items in both periods, as listed on the slide, expenses in the fourth quarter were up just under 2% sequentially and under 3% year-over-year. I'll hit on just a few highlights. Excluding all notable items, compensation expense was up 2% year-over-year. This reflected the impact from 2023 base pay adjustments, partially offset by reductions in incentive compensation and headcount actions taken year-to-date. Full-time equivalent headcount was down 200 or 1% sequentially and down 500 or 2% over the prior year. Excluding notable items in all periods, non-compensation expense was up 3% year-over-year. Equipment and software expenses were up 10% year-over-year, largely due to increased amortization expense. Recall, that as much as two-thirds of this line item is comprised of depreciation and amortization expense. And finally, we realized 200 basis points of trust fee operating leverage in the quarter. Turning to the full year results on Page 9. Trust fees were down 2% in 2023, largely due to asset outflows and weaker transaction volume, partially offset by the elimination of rate-driven fee waivers and new business generation. Excluding the impact of the two securities repositioning, other non-interest income was down 9%, reflecting weakness in foreign exchange trading and other capital markets activities. Net interest income was up over $100 million or 6%, which largely offset the decline in the other non-interest income categories. This translated to flat total revenue growth. Reported expenses were up 6% for the full year to $5.3 billion. Excluding notable items in both periods as listed on the slide, the expenses were $5.1 billion in 2023, up 4.8%, which compares favorably to 2022. As we've noticed previously, we expect to bring the expense growth rate down further in 2024. We have clear line of sight to two key areas of increase: base pay adjustments within compensation expense and depreciation and amortization increases within equipment and software. On a blended rate, we expect to provide base pay adjustments of approximately $65 million in 2024, which will hit our compensation line beginning in the second quarter. This compares to base pay adjustments of $80 million in 2023. Within equipment and software expense, we expect a $65 million or 10% increase in 2024. Combined, these two-line items will drive approximately a 3% increase in operating expenses above 2023 levels alone. That said, we expect to continue to generate meaningful efficiency gains from our productivity office and have identified further opportunities for improvement. As we look out to the first-quarter, we expect the following: first-quarter compensation expense will include our annual equity incentive payments, including those for retirement-eligible employees, along with modest employee headcount growth associated with growth in the underlying businesses. This should translate to a sequential increase of $50 million to $55 million. Employee benefits expense is expected to increase by approximately $10 million due to seasonally higher payroll taxes. Turning to Page 10. Capital levels and regulatory ratios remained strong in the quarter. We continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 ratio under the standardized approach was flat with the prior quarter at 11.4%, as capital accretion offset a modest increase in risk-weighted asset levels. This reflects a 440 basis point buffer above our regulatory requirements. Our Tier 1 leverage ratio was 8.1%, up 20 basis points from the prior quarter. At quarter-end, our unrealized pretax loss on available-for-sale securities was $924 million. We've returned over $300 million to common shareholders in the quarter through cash dividends of $156 million in common stock repurchases of $146 million. For the full-year, we returned approximately $980 million to common stockholders, including common stock repurchases of approximately $350 million.

Thank you. We'll go first to Glenn Schorr with Evercore.

Good morning, Glenn.

Good morning. So I appreciate all the numbers you helped us, but I’ll try to peek a little bit more under the covers. So, deposits stable, heard your thoughts on 1Q NII on the further deposit pricing pressure. So the question is, as we go throughout the year do you have any window into that stability and deposits sticking around? And then with the combination of 75% floating-rate loan book and still pressure on deposits is it reasonable to assume that NII might go down in second quarter forward before stabilizing later in the year and rising? I know that's a little bit further look into the future, but…

Yes. I think it’s reasonable to consider how things will unfold over the year. It's too early for us to provide full year projections, but it's useful to think about the impact of potential rate cuts on our assets and liabilities. Reflecting on how net interest margin was affected by rising rates, the initial response was different from what we saw later when the betas increased significantly. We may experience a similar pattern when rates begin to decrease, with the first cuts possibly leading to different outcomes than those that follow. There are two key points to consider. First, we have never aimed to set deposit prices; our focus has always been on retaining deposits and we have actively followed market pricing. Second, as we encounter these initial rate cuts, we might see the market reacting to maintain higher deposit yields to retain clients' deposits. This could make the early stages tougher compared to later adjustments. Overall, volumes are crucial, and predicting them has been challenging. We noticed improvements in October, November was better than October, and December surpassed November. Therefore, volumes will significantly influence what happens in the first half of the year, making it difficult to forecast accurately.

I definitely appreciate that. This one might be a little bit easier, the follow-up on fee operating leverage. I mean, just by means of pricing alone, or the markets alone, the markets had a strong end to the fourth quarter, so your fee run rate should probably be a lot better going into the first quarter, and with your comments on even sharper discipline on expenses, do you expect to make some meaningful progress early on in the year in this fee to expense ratio?

Yes, you're right to call out that there is a lift, the launch point is higher coming into the year. And I don't know if I'd say meaningful, but it's definitely higher. And the lag effects will help us as we walk into the year. And so, that's the math of it. But then more strategically, we do feel positive about the pipeline in both asset servicing and in wealth management. And underneath both businesses, our asset management business is incredibly important. And as Mike mentioned in his commentary, there's some early signs of flows back in. And we always think just as we do on deposits, just keep the money in the house, keep the client assets in the house, but if our asset management business does better, then that helps as well. And so I think the strategic component is also we're feeling early signs of some positive movement from an organic perspective.

We'll now hear from Steven Chubak with Wolfe Research.

Good morning, Steven.

Hi. Good morning. So, I was hoping to maybe just unpack, like, the deposit discussion a bit further and specifically just get a sense as to how you're thinking through the impact of ongoing Fed QT. It does feel like a lot of the liquidity in the system has come out of RRP that's provided a bit of stability or at least has helped drive better deposit resiliency over the last six months. But with the RRP expected to be exhausted over the next, call it, three to four months, just want to get a sense, once that happens, how you expect deposit flows to ultimately trend.

I'll start, and Mike may have some thoughts as well, because we've discussed this extensively, and it's more about predictions than simply providing numerical results. I believe the RRP program had a significant effect on deposits, essentially competing with banks for them. With its decline, I think that has been beneficial. The situation has changed, and we need to consider that interest rate movements will also affect clients' perceptions of deposits. The substantial increase in deposit costs during the second half of the year greatly influenced clients' behavior. As rates decrease this year, we could see further impacts. It's not solely about the RRP program; it's also how clients compare 5% rates to 3% rates and how that influences their decisions, leaning towards a more risk-oriented approach. Therefore, we need to consider both the program and the current rate environment.

I would agree with what Jason said there and just as there was a transition on the way up with QE, there's going to be a transition on the way down. Uncharted territory for everyone on QT and how they go about that and when they might stop, more aggressively seeing their portfolio come down. So I think that the timing of that will matter. And then also we saw with client behavior that as rates went up, more of the liquidity moved into treasury and that had an impact on it and as we come down, I think over time a lot of the fund that moved into treasuries will start to move into other alternatives. And as Jason said, our objective is to work with the client and really try to meet any of those needs and keep the dollars in the house.

That's great. And just for my follow-up, the duration on the asset side of the balance sheet admittedly has been a little bit more volatile, especially given some of the repositioning actions you talked about. The asset betas with rate hikes were quite elevated for you guys and some of your trust peers as well. Just wanted to get a sense as to what percentage of the asset side of the balance sheet, if we took a snapshot today, is sensitive to movement in short rates as we do prepare for eventual rate cuts.

We categorize it into three areas. First, for cash, it's entirely rate sensitive. Second, about three quarters of the loans are responsive to rates. Regarding the securities portfolio, the duration is significant at around 18, and the weighted average maturity is just under four years. We provide this balance to demonstrate the effect of the substantial cash component and the large floating nature of the loan portfolio.

And Jason, can we just clarify what percentage of the securities book today is floating?

Yes, it's about a third of the book is floating.

We'll go next to Alex Blostein with Goldman Sachs.

Hey, Alex.

Hey, Jason. Hey, Mike. Good morning, everybody. Just building on Steven's questions for a second. I guess, given the fact that rates are expected to come down and you guys have actually been, I guess, shifting the balance sheet to be maybe a little bit more floating for the right reason and obviously been a good trade for NII for last quarter, this quarter. Any expectations to actually start locking in higher yields going forward and maybe extending duration a little bit? I know this is pretty quick. You guys have just kind of gone the other way, but the balance sheet effectively became a little more floating as rates are about to come down, so just curious how you're thinking about that?

Yes, we are definitely considering this issue and have reduced the duration, which adds flexibility given the dynamic nature of the markets. I expect there will be a point where we decide to step back a bit. Over the past year, our trend has been towards shorter durations, and that has proven to be advantageous given how rates have developed. However, moving forward, we need to carefully assess our strategy. It’s less about locking in yields and more about mitigating the risk of a significant drop in rates. We believe there are ways to protect against that.

I got it. Makes sense. I wanted to follow-up for my second one just around the expense outlook. 2023 was super noisy, there's a bunch of one-timers, obviously. So just want to clarify a couple of things. So, I guess, the ultimate message is that, 2024 expense growth is expected to be lower than 2023. I think the core expense growth in 2023 was about 5%, so just want to confirm that? And then the core base you're speaking to, is it still kind of $5.1 billion to maybe $5.2 billion in sort of core expense base, off of which we should think about 2024?

So to clarify, the expectation for 2024 is that the number for 2023 is approximately 5%, but slightly lower at about 4.8%. We are starting from a base of 5.1% in 2023. It’s also important to address a few details. If you examine the reported figure of 52.84 and then exclude the severance-related charges and two occupancy charges that total around 13, along with the client capability write-off we mentioned in the second quarter of 26, the FDIC Special Assessment of 85, and a small equipment credit of 4 million in the third quarter, you'll have a clearer picture. The severance-related charge in the second quarter is 39 million, just to provide the complete numbers. Therefore, we will work from a base of 5.1%.

We'll go next to Brennan Hawken with UBS.

Hey, Brennan.

Hey, good morning. Thanks for taking my question. Would love to follow up on that last question actually. So thanks for clarifying the base. That's helpful. Number one, just to confirm, you did mention that I think it would be inclusive of adjusting for the write-off of the client capability. I just want to confirm that. And just to clarify the message on the investing, super clear that you're looking to drive expense growth lower than you saw in 2023, but you also laid out an uplift of 3% from base paying software. So does that represent like a floor to growth or do you have sufficient levers to offset at least some of that?

It's not a definitive baseline, but it does provide an understanding of what we have established for 2024. We need to leverage productivity more aggressively moving forward. Some of our productivity efforts are already incorporated, but we need to achieve more this year. We aim to be very open about the known factors contributing to the 2024 increase, so you can estimate that growth level.

Okay. And is the write-off of the capability that was in other operating expense part of the adjustments, too? Sorry if I missed that.

Yes.

Our next question comes from the line of Mike Brown with KBW.

Hi, Mike.

Hi. Great. Good morning. Thanks for taking my questions. The sequential increase in the noninterest-bearing, that was a positive to see this quarter. Could you just touch on maybe some of the key drivers there? Was this supported by some of the new business activity that you referenced in the prepared remarks? And then, I appreciate the comments on the deposits and the potential for the stability here near term, but I guess focusing on the NIBs, can they stabilize at this level, either in terms of like an absolute dollar basis or as a percentage of the total deposits?

My observation is that it relies less on percentage and more on the underlying base. I mention this because a significant portion of our non-interest-bearing accounts comes from one specific channel in our institutional business, which has actually outperformed the other parts of our institutional sector over the past few weeks. This indicates that this particular client segment behaves independently and seems to have stabilized somewhat. I wouldn't call it a plateau yet, but it has certainly shown better performance than the broader institutional portfolio. Additionally, the wealth management segment saw an increase in its deposit base this quarter, which, although not substantial, was encouraging to see rise on average. While the overall deposit book remained quite flat, it's good to note that the wealth segment is performing well. Despite the economic appeal of non-interest-bearing deposits, wealth deposits are also very attractive, and that segment performed well this quarter.

Thank you for your insights, Jason. Regarding the servicing aspect of the business, could you discuss the competitive landscape and the opportunities on the alternative asset side for Northern Trust? Additionally, could you elaborate on your current capabilities and any investments you are making to capture market share in that area?

Yeah, Mike, so I'll address that. We believe that the alternative space, or broadly speaking, just private markets, is a major opportunity for us on the asset servicing side and that largely follows with what's happening in the marketplace from an investor perspective. And so, we expect that market to grow and we think we have the value proposition that is compelling within that. You heard in my comments earlier that we recently won a very large mandate with one of the large private market firms and it was after an exhaustive process that we went through to win that business. Very capabilities oriented, very global as to the capabilities necessary and the footprint necessary to do it. So again, it's an area of focus for us and one where we think we're going to be able to continue to grow as the market grows and as we're able to take share.

Thanks, Mike. I appreciate the commentary there.

We'll go next to Ryan Kenny with Morgan Stanley.

Hi, good morning. I have a question on capital. So your CET1 ratio of 11.4%, it's well above the regulatory minimum, well above last year's level. And then we got the comment letter from Basel Endgame a couple of days ago, and there's clearly a lot of industry pushback there. Your earnings generation from NII looks a little bit higher than consensus expected. So putting that all together, how should we think about how Northern's approaching buybacks this year and this quarter, is there any room to maybe lean in a little bit there?

Sure. You're correct in your assessment of the numbers, as there is definitely room for improvement. We conducted a significant amount of buybacks this quarter, slightly exceeding our usual pace, and we continuously evaluate this against other investment opportunities for our capital. In the short term, we're considering whether it's more beneficial to invest in risk-weighted assets to potentially expand our loan book, increase activities in foreign exchange, or enhance securities lending, or if we should take a different approach with our securities portfolio. The repositioning we undertook this year has positively impacted our capital by moving to shorter durations and from non-high-quality liquid assets to high-quality liquid assets, which is beneficial. We're aware of how closely we monitor our peers and take pride in our capital levels, as it's a key component of our financial and business model that we communicate to clients to demonstrate the strength of our capital base. While there’s definitely room for additional actions, we must also consider the Basel Endgame, which you briefly mentioned, as its impact remains uncertain. We submitted a comment letter, as you noted, but we still don't fully understand the implications. We believe we are in a strong position compared to our peers but will keep monitoring the situation. We will also continue to evaluate the possibility of further stock buybacks, as we always do, based on the alternatives available to us.

Okay, great. And can you also update us on your expectations regarding ability and timing to dispose of the Class B visa shares and would that potentially have any impact on capital and buybacks outlook?

Yes, so just for people who don't follow it as closely, we own just over 4 million Visa B shares, and the current exchange rate shows that translates to about $1.7 billion. And there's a proposal that it can be voted on next week I think that would enable the B shareholders to monetize half of the holdings. So what are we planning to do? One, at this point, there's nothing to do. The proposal is still outstanding, and we've got to wait and see what the shareholder vote looks like. Even assuming it passes, there are timing restrictions to it. But that said, this is not a strategic asset for Northern Trust. And so, you should read into that. It's not something that we're saying we're going to hold on to beyond what the restrictions would enable us to do. And we're discussing all the options. There's likely going to be a combination of a few tools that we'll take, but early to give details on that at this point.

We'll go next to Brian Bedell with Deutsche Bank.

Hey, Brian.

Great. Thanks. Hey, good morning. If I could just clarify, Jason, a couple things you gave guidance on earlier, just to make sure I heard it right. The incremental NII from the two portfolio security sales is $30 million annualized, and that comparison period is 1Q versus 4Q. Is that correct?

Yes, you broke up a bit, but I think I understand you. The November repositioning contributed approximately $6 million this quarter, and it should continue to be beneficial going forward with an expected impact of around $15 million per quarter. The January repositioning, which we mentioned recently, is expected to contribute about $15 million per quarter as well.

$15 million per quarter. Regarding total expense growth, you mentioned that compensation expenses would increase by $50 million to $55 million in the first quarter compared to the fourth quarter due to retirement-eligible options, and employee benefits would rise by $10 million compared to the fourth quarter. Please correct me if I'm mistaken. In terms of overall expense growth for the year, there are various factors to consider. Is the goal to improve upon the 3% expense contribution from a total growth perspective, or should we anticipate expense growth to be better than 5%, lower than 5%, but potentially above 3%? Can you enhance the expense to trust fee ratio in 2024 compared to 2023?

There are a few points to address. First, I can confirm that the numbers for the first quarter and the increase are accurate. Both are fully seasonal. The increase in the first quarter is primarily due to the booking of our retirement-eligible equity grants, which accounts for most of that increase. Additionally, we experience higher payroll tax in the first quarter as we reach the caps at that level. However, both of these factors will decrease in the second, third, and fourth quarters. In the second quarter, we need to factor in the base pay adjustments we mentioned, totaling $65 million, which will also apply to the third and fourth quarters. Overall, our aim is to exceed the roughly 5% growth we achieved this year. The 3% we noted is not intended to be a minimum, but the drop from 5% to 3% is significant. We're leveraging productivity to strive for better than 5%, but starting with 3% in the base makes it challenging. Lastly, we are anticipating organic growth, targeting specific growth rates for each of our three businesses. It's crucial for us to remain a growth company, which involves associated expenses based on our revenue expectations. As a result, it's difficult to be precise and say growth will be between 3% and 5%. If our organic growth isn’t as strong, we’ll need to explore other strategies to ensure we achieve positive operational leverage.

We'll go next to Jim Mitchell with Seaport Global.

Good morning, Jim.

Hey, good morning. Maybe just follow up on that last comment, just maybe a little more detail. It seems like organic growth in 2023, it's a tough environment, a little mixed. So it seems like you're more optimistic across the board. So you can kind of just give us a little more thoughts, detail on the organic growth prospects this year.

Sure, Jim, it's Mike. I'll start off. You're absolutely right. We've experienced a period where organic growth has been strained and lower than our historical levels, and there are several factors contributing to this that we've discussed in previous earnings calls. These relate to client activity and some outflows in the asset management business, which obviously impact wealth management and asset servicing. We're optimistic about the future of organic growth because some of those trends have turned around. We're seeing good inflows into asset management, which will positively affect our organic growth. We’re focusing on a few areas, particularly the portfolio of our growth. Historically, asset servicing has contributed most of our organic growth, but going forward, we aim to shift that focus toward more scalable parts of our business, mainly wealth management and asset management. This doesn’t mean asset servicing will stop growing; rather, we’ll focus on areas within that business that are more scalable and profitable. For instance, much of our success with asset owners in the Americas involves custody and related services, which are more scalable. While we'll still work with asset managers in fund services, some of those areas are resource-intensive, so we'll be disciplined about the types of business we take on that require hiring and investment in technology. Finally, I should emphasize that our businesses are collaborating more closely in how we approach the market. We’re adopting what we call "one Northern Trust," meaning when we engage with clients or prospects, we offer multiple services across our businesses, particularly in asset management and asset servicing, as part of a comprehensive bundle for clients, which includes wealth management as well. You may have noticed that the advisory fee component of wealth management has been growing steadily throughout the year, and we believe it can continue to grow. The more we can enhance product offerings for our clients, such as helping them transition from short-term treasury investments to fixed income funds, represents a significant opportunity for us. We're actively working on several initiatives to drive organic growth.

That's really great color Mike. And maybe just a quick follow-up on deposit pricing. Jason, you talked about still some pressure on overall deposit cost. Is that lag still on pricing or is that an assumption of a negative mix shift out of NIBs? What's kind of driving further pricing pressure and deposits?

There were delays, and in the fourth quarter, we reached some agreements on pricing that will have a greater impact in the first quarter than they did in the fourth quarter, which did not boost deposit volumes in the fourth quarter. As we refine our predictions for the first quarter, we've taken that into account. We anticipate that costs will be higher, which is one reason we expect to be flat or slightly down in the first quarter, despite finishing at $501 million, as December performed better than November and October. This is largely due to the pricing aspect. Generally, we believe that as the Federal Reserve lowers rates, we will engage in discussions with our clients about it. While we don't set prices, we are committed to ensuring that our clients keep their deposits with us.

We'll go next to Robert Wildhack with Autonomous Research.

Hi, Rob.

Good morning, guys. One more question on expenses. I'm curious how you would approach a hypothetical year where revenue growth comes in a lot better than expected and what that might mean for expense growth? I guess the core question is, what takes precedent, your expense to fee ratio or the absolute level of expense growth this year?

I'll start. Mike may want to add to it. Historically, we'd say, well, we want to grow, but we have talked about ensuring that we were committed to more than absolute number in terms of the expenses and we've also committed to more scalable growth. And so we're already having conversations internally about ensuring that we’re highly disciplined on bringing on business that is scalable. And so, I think that is a change relative to how we've thought about it before where there was more of a desire to bring on business, always at attractive margin, but our commitment to scalable growth is going to be, is higher at this point. And that means that the expenses shouldn't be as volatile with anticipation or even line of sight on new business coming on that brings with it high degree of expense.

So I agree with Jason said. Just to add to your point, we’re outside of our range on expense to trust fee ratio. So we're trying to drive that into the range. And so, as Jason is indicating, we're leaning towards trying to get into that range sooner rather than later.

Okay, thanks. And then on NII, I would just love to get your thoughts on the sensitivity there as it relates to different scenarios from the Fed. What's the impact of, say, one or two Fed cuts this year as opposed to, say, six Fed cuts?

Yes, those are the scenarios we're considering, but ultimately it will depend on our ability to maintain the spread. It has been highly variable, and our ability to predict it over the last couple of quarters has been quite challenging. However, I feel optimistic about the volume that has remained stable. Thus, our approach has been effective, but it will lead to less predictability. This is in contrast to our previous discussion about expenses, where we aim to be more predictable to achieve our desired expense to trustee ratio. In terms of deposits, there's greater flexibility and a willingness to adapt to market changes to ensure we retain client assets.

We'll go next to Mike Mayo with Wells Fargo.

Good morning, Mike.

Hey, good morning. This is Rob Ruschow for Mike. I wanted to delve deeper into the custody commentary. We found that your fees under custody decreased by about 5% year-over-year. You mentioned client outflows, so how much of that can be attributed to a risk-off environment versus actual pricing pressures? What was the new business generated this year and what is the outlook for pricing pressures compared to new business as we look ahead to 2024?

Yes, I'll start and then Jason, you can fill it out. But first of all, I just think you need to take into account that we are compensated sometimes on the asset level sometimes on the transaction levels and transaction volumes were lower during the year, so that drove some of the weakness in the custody fees there. From a pricing perspective I would say nothing in particular as far as the competitive environment that is driving custody pricing to much lower levels if you will, I would say, it's relatively stable on the pricing front there.

And as I look at just the underlying details of how we did, I think you're leaning more toward the asset servicing business. The net new business for the year was positive. And I'm just thinking year-over-year for the quarter. And asset servicing hit its mark on net new business. The issue with the company is some of the other things happening as we get into transactions and then what we referenced earlier in our clients going through their asset levels declining. But much less of a repricing story relative to prior years and the business is winning. If we just look at their win rate in the market, it is strong. So a lot of this year the impact came from these other dynamics of lower transaction volumes and same number of clients, but less assets.

Okay, thanks. And if I could follow up on wealth, I guess, can you talk about the competitive dynamic there, and especially in global family office, you saw a little bit of deceleration in the growth rate. Any changes or any areas that you're looking to grow, either inside the U.S. or out?

You’re right to point out that GFO experienced a significantly lower growth rate this year compared to the past couple of years, which have been very successful for that business. This year was weaker, but we often mention that it’s the most variable business we have. A small amount of client activity can result in substantial changes, and what occurs in investment management can greatly affect business performance. However, we have made significant investments in that area. They have achieved notable advancements in technology, particularly with their wealth passport and overall technology platform, which we believe are industry-leading. The way they interact with clients from this platform, allowing for multiple accounts, reporting, and client asset movement—all cloud-enabled—shows our strong market position. We are committed to ongoing investments in technology for that business, and we are optimistic about its future growth over the next few years.

This does conclude the question-and-answer portion of today's call. I would like to turn the call back over to Jennifer Childe for any closing comments.

Thanks, Ruth. And thanks, everyone for joining us today. We look forward to speaking with you again soon.

This does conclude today's conference call. Thank you for your participation. You may now disconnect.