Good day, and welcome to the Northern Trust Corporation's Second Quarter 2024 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, ma'am.

Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's second quarter 2024 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 second 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 July 17th 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 August 17. 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 second quarter 2024 earnings call. Our results for the quarter reflect continued progress executing against our strategic priorities, boosted by strong underlying equity markets and favorable client activity levels. Trust fees were up a solid 6% over the prior year. Deposit levels proved resilient and our capital levels reached a multi-year high. In the quarter, we participated in the Visa Class B common stock exchange offer, positioning us to monetize 50% of our long-held stake in Visa. As a result, we recognized a pre-tax gain of nearly $900 million with another 50% of shares still to be monetized. We intend to use the Visa proceeds to fund additional share repurchases, contribute to our charitable foundation, and make investments in the resiliency of our business. Reported results also included approximately $200 million in restructuring charges and other notable items, reflecting our continued efforts to optimize our cost base, drive efficiencies, and effect change within the organization. Jason will discuss the details in a few minutes. Turning to the performance of the business units. Wealth Management generated 9% year-over-year trust fee growth and our new business momentum remains strong. We're continuing to generate interest from our Secrets of Enterprising Families national book tour, and we're seeing solid success from digital marketing initiatives. In May, we hosted our Annual Northern Trust Institute Symposium, attracting more than 1,500 influential estate planning attorneys, trust practitioners, and other wealth industry specialists who serve as key referral sources. We also celebrated the opening of our new office in New York City. Asset Management generated positive liquidity flows for the sixth consecutive quarter and delivered strong performance within active fixed income. We raised assets in the private equity space in the quarter, although index flows have otherwise been soft. NTAM continued to leverage our One Northern Trust strategy delivering clients the solutions and capabilities of the entire firm. Joint meetings between our asset management and asset servicing businesses accelerated in the second quarter, leading to more than 100 new business opportunities and 15 wins year-to-date. NTAM also launched seven new funds in the second quarter, expanding our global liquidity business and adding to our fixed-income solutions. Our asset servicing business performed well in the quarter. Transaction volumes were healthy, capital markets activities were up 16%, and new business growth continues to be booked at attractive margins. As we discussed, our goal was to generate new business that is scalable. We've shifted our sales focus to opportunities that require lower levels of incremental costs while emphasizing approaches with multiple points of connectivity. In addition to the bundled sales generated with NTAM, more than 140 existing asset servicing clients have expanded their relationships with us by adding services such as capital markets and data analytics. We're being disciplined on pricing and bidding on fewer opportunities. In spite of our new focused approach, asset servicing continues to realize momentum, particularly among asset owners. In the second quarter, Northern Trust was appointed as the new custodian and asset servicing provider for Nest Invest, the United Kingdom's largest workplace pension scheme. Initially an NTAM client, Nest supports 13 million members and has AUM of approximately $45 billion. Our ability to manage sophisticated strategies and the flexibility of our open architecture approach were the key factors that helped secure this highly competitive win. In North America, we've achieved more than 30 new wins year-to-date among asset owners. We entered the second half of the year with strong market tailwinds and good new business momentum, well-positioned to navigate the current macroeconomic environment and generate value for our stakeholders. And with that, I'll turn it over to Jason to review our financial performance for the quarter.

Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our second quarter 2024 earnings call. Let's dive into the financial results of the quarter, starting on Page 4. This morning, we reported second quarter net income of $896 million, earnings per share of $4.34 and our return on average common equity was 31.2%. Our reported results included an $878 million net pre-tax gain related to Visa and $196 million of restructuring charges and other notable items, which I'll discuss in more detail shortly. Our assets under custody and administration and assets under management were up modestly on a sequential basis and up sharply on a year-over-year basis. Strong equity markets drove the year-over-year improvement. Excluding notable items in all periods, revenue was up 5% on a year-over-year basis and 1% sequentially. Expenses were up 6.6% over the prior year and essentially flat sequentially. Trust, investment and other servicing fees totaled $1.2 billion, a 2% sequential increase and a 6% increase compared to last year. Excluding notables in both periods, all other non-interest income on an FTE basis was down 2% sequentially and up 9% over the prior year. We experienced good momentum in our FX trading business, where we saw another strong quarter of client volume. Net interest income on an FTE basis was $530 million, down 1% sequentially and up 1% from a year ago. Our credit quality remains very strong with no net charge-offs and non-performing loans representing 9 basis points of total loans. Turning to our asset servicing results on Page 5. 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, driven by both strong underlying equity markets and new business activities. Assets under management for asset servicing clients were $1.1 trillion. Investment management fees within asset servicing were $146 million, up 9% year-over-year due to favorable markets and strong flows into our institutional liquidity funds. Moving to our wealth management business on Page 6. Assets under management for our wealth management clients were $419 billion at quarter-end. Trust, investment and other servicing fees for wealth management clients of $516 million, up 8% year-over-year due primarily to strong equity markets and asset inflows within Global Family Office. Turning to Page 7 and our balance sheet and net interest income trends. Average deposits were $113 billion, up $1 billion or 1% from the first quarter, modestly better than our expectations. Deposit costs increased slightly due to a handful of large thinly priced deposits. Shifting to the asset side of the balance sheet, our average earning assets increased 1% on a linked-quarter basis, primarily due to higher deposit levels and the proceeds from the partial sale of our Visa shares. Our average liquidity levels remain very strong with highly liquid assets equal to 60% of our deposits and more than 50% of total earning assets on average. The duration of our securities portfolio is 1.7 years and the total balance sheet duration continues to be less than 1 year. Net interest income was $530 million and our net interest margin was 1.57%. Turning to Page 8. As reported, non-interest expense was $1.5 billion in the second quarter up 12% sequentially and up 15% as compared to the prior year. Excluding notable items in both periods as listed on the slide, expenses in the second quarter were flat sequentially. Now let's take a step back and discuss how we're approaching the Visa stake. This is an asset we held on the balance sheet at zero value since Visa went public over 15 years ago. Entering the quarter, the position was approximately $1.8 billion in value on a pre-tax basis. With the ability in the second quarter to liquidate half of our position at full value, the Visa transaction provides an opportunity to return more capital to shareholders while accelerating certain strategic priorities. With this first conversion of shares, we're taking the following steps, as Mike highlighted. First, a meaningful portion of the proceeds will be used to increase pacing in our share repurchases. We began that process within the second quarter and will continue elevated levels over the next several quarters. Second, approximately 10% of the after-tax proceeds will be contributed to our foundation. This pre-funds some of our community giving. That contribution is fully accounted for in the second quarter. Third, the Visa share conversion enables us to accelerate strategic investments over the next several quarters to modernize our technology infrastructure and enhance our resiliencies. This includes investments in refreshing our tech infrastructure, automating manual processes, enhancing risk management systems, reducing end-of-life platforms, strengthening our cyber defenses, and accelerating cloud migration. These investments will further strengthen service levels and enhance the client experience while reducing risk and generating efficiencies. This incremental modernization and resiliency spend is visible this quarter in the outside services line. We'll continue to update you on our progress. Separately, we also announced nearly $200 million in restructuring charges and notable expenses. The larger items included severance expense of $85 million associated with a significant reduction in force split between both compensation and outside services expense, various software write-downs and accelerations and the $70 million contribution to our foundation, I mentioned earlier. Now, let's go back and review our core expenses from the quarter, which exclude all notable items. Compensation expense was up a little less than 3% versus the prior year, moderately better than we anticipated. Some anticipated hiring was shifted into third-party consulting work in conjunction with the incremental modernization and resiliency spend visible within the outside services line. Full-time equivalent headcount was down 500 or 2% over the prior year and essentially flat sequentially. Outside services expense increased by 12% relative to the prior period, the bulk of which reflects the incremental modernization and resiliency spend. Equipment and software expense increased by 3% sequentially, slightly better than anticipated, reflecting higher software consumption and amortization from projects coming online. Excluding notable items, our expense to trust fee ratio improved by 200 basis points on a sequential quarter basis to 116%. As we look out to the third quarter, we expect our sequential expense growth adjusted for notable items to be up approximately 1%. Equipment and software expenses are expected to range between $270 million to $275 million, largely reflecting investments in technology and systems upgrades associated with the modernization and resiliency initiatives. We do not expect a material increase in outside services in the third quarter from the current elevated level. Turning to Page 9. Our capital levels and regulatory ratios remain strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Based on the 2024 CCAR results, our stress capital buffer will remain at the 2.5% minimum requirement. Our common equity Tier 1 ratio under the standardized approach increased 120 basis points to 12.6%. The decrease in RWA levels, the Visa transaction, and capital accretion drove the improvement. This reflects the 560 basis point buffer above our regulatory requirements. Our Tier 1 leverage ratio was 8%, up 20 basis points from the prior quarter. At quarter-end, our unrealized pre-tax loss on available-for-sale securities was $667 million. We generated $607 million in the quarter from the sale of Visa shares and expect to generate another $300 million in proceeds in early August. We returned $405 million to common shareholders in the quarter through cash dividends of $154 million and common stock repurchases of $251 million. And with that, Jessica, please open the line for questions.

Our first question comes from Betsy Graseck with Morgan Stanley.

Hi, good morning. Thank you very much. I have a two-part question. First, regarding the remaining embedded gains in Visa that you still hold, I understand you mentioned there is still some realization pending. Are you referring to the one-third portion expected in the third quarter, or are you indicating that you have more Visa shares and will have future opportunities to access those?

Yes, it's both. For those who may not be aware, this first tranche allows us to monetize half and convert half. This process involves selling it in three parts as you mentioned. Two of those parts have been completed, and one is still pending in August. Once that is finished, we will have half of the total pool remaining for future conversion and monetization.

Right. And that's a function of the Visa side and the B shares being opened up to monetize. That's there. It's not only your decision to do that?

Yes, that's correct. We've always maintained that Visa is not a strategic asset for us, which is why we haven't wanted to sell it at a significant discount in the private markets. We've preferred to wait and execute this in the public markets instead. This approach allowed us to sell without any discount, and we will likely follow a similar strategy when the remaining shares are available for conversion.

And then just a separate part is on the resiliency investments that you're making. What's your sense of the timeframe for the investments? I would think it's a multi-year timeframe, but be helpful to understand your point of view on that. Thank you.

Sure. I see it in two parts. First, there's increased spending right now as we accelerate the project, which is reflected in our outside services. As we allocate technology expenses and utilize some third-party assistance to execute certain tasks, this spending level in that category will likely remain steady for the next few quarters. Eventually, it will decrease once we complete the initial project work. At the same time, we expect to see a gradual rise in compensation as some of the work transitions into a more stable environment with actual full-time employees, though not at the same high level we see today. This is the overall perspective of how things should progress.

We'll go next to Ken Usdin with Jefferies.

Hey, it's Mokshith on for Ken. Just wanted to ask about just NII cadence for the rest of the year. What are you assuming on deposit levels, deposit rates, and where we can see that going forward? I just wanted some color on that.

Sure. Yes. So balances are much more stable than they were last year, obviously, and our client engagements worked well. At this point, the bigger factor definitely appears to be rates. So there's no estimate for us to share for the third quarter. But in that period, we do tend to see a slight seasonal decline in balances. And so there's a couple of puts and takes to keep in mind. One, the seasonal decline in balances, but then that could be offset by the fact that we still have a positive impact of reinvestment spread day count improvement and then some other factors.

Okay, fantastic. Can you provide more insights on servicing? What are you observing regarding pipelines and the flow of client assets in wealth management?

Sure. I'll start and Mike may add in. Regarding asset servicing, both Mike and I touched on it briefly. The overall activity in the business appears quite positive from a net new business perspective. This quarter, however, has been impacted by the exit of one client that we’ve been aware of for quite some time. We have longer visibility on the larger exits, which occurred during the quarter and resulted in a reduction of our trust fees by a few million dollars. Additionally, we anticipate a similar impact on our finances in the third quarter. Nonetheless, the overall activity volume is solid, and the business pipeline remains strong. Mike?

Yes. The only thing I would add is, as I mentioned, we've really focused our strategy on the opportunities that we think are most attractive for our value proposition. So those opportunities where we can be compensated for what we believe to be a higher service level for the clients that has meant being more disciplined around pricing. As I mentioned, in certain cases, it means not bidding on it if we believe it's going to be something that's low-cost-driven. And so far that hasn't really, I would say, reduced the overall momentum in the business and what we're seeing and the opportunities. And frankly, it's resulting in higher margins for the business that we are winning. So it's a more selective approach to it, but one so far I would say is going well.

And then I'll offer two headlines on wealth and then if Mike might add more. One is the regions, the net new business was relatively soft, but GFO in general continues to do well, bringing on new business from existing clients and then also some nice external names. There the connectivity they have with the largest asset owners is outstanding. And that business continued to do well and a lot of initiatives inside the more wealth advisory space, the regions. The second dynamic I'll mention within the business of different view is what our clients utilizing us for both the advisory fee, the advisory component of what our clients are doing with us is doing well. It's positive both in the regions and in GFO, but that's being offset by lower product utilization that tends to ebb and flow, and we look more closely at the advisory component. It's more of an indication of the base of business and that's trending positively in both businesses.

We will move next to Brennan Hawken with UBS.

Hey, how are you? Good morning, Jason. I was curious to know and I couldn't find a specific disclosure on this. So apologies if you have disclosed it separately, but could you tell me what percentage of your wealth management client assets are in advisory accounts? And if you know, what are the deposit costs for those accounts?

I understand most of that. I just want to clarify the last sentence; how much of it is what?

What the deposit costs on those accounts would be?

I'm glad I asked because I didn't hear that well. We have not historically disclosed the breakdown of our fees from product versus advisory. However, at a high level, almost all of our wealth in those regions has an advisory fee associated with them, and the majority also has product fees. Regarding deposit costs, we haven't specifically discussed those for that group, but you are correct that the deposit costs for that client base are significantly lower than on the institutional side. The GFO business has some clients that are comparable in size to our largest asset servicing clients, but most of that book is priced with lower deposit costs compared to the institutional side.

I wanted to bring to your attention that over the past week, three of the warehouses have announced increases in deposit costs on advisory relationships to match money fund levels. Wells and Bank of America implemented this in the second quarter, and just yesterday, Morgan Stanley indicated they plan to follow suit in the third quarter. Given that this trend is being adopted by some of the largest providers in the industry, I would like to know your thoughts and plans regarding alignment with this practice. If you do not intend to align, how do you plan to address any legal or risk management issues related to fiduciary responsibilities?

Yeah, Brennan, it's Mike. Within the business, it's true of all of our businesses, but just to be clear, within wealth management as well, it's a competitive marketplace for all the products that we offer. And so to your point, if other competitors or service providers in the space change their pricing on anything, frankly, but to your point on deposit levels, then we absolutely have to react to that. And so that's the first point. And it's dynamic. The second, I would say, is that it's also based on the holistic relationship that we have and the entirety of what we're offering for the client and as a result, the different needs that they may have. Point being, say, not every deposit is created equally. Almost as simple as just start with a checking account is different than a savings account and the terms and the nature and characteristics are different. And so the actual deposit cost, if you will, is going to be different based on that as well. But needless to say, if others are doing things in the market, we have to be able to respond in kind.

Yeah. Sure. Fair enough.

One other dynamic is our suite clients within the wealth business, they already have the option to sweep on to our money market platform.

That's a feature within the system where the advisor team or whatever could just adjust the sweep default and go into the money fund rather than deposits.

And to be clear, the client has the option to select what they would like to do.

In an advisory relationship, there is a different dynamic. I understand that. Given the focus on this, it might be beneficial to consider disclosing some of these details in the future. I know you mentioned you don't have them today, but it could be useful going forward. Thank you.

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

Hi, Jason, you mentioned the $200 million restructuring charge, part of that is severance. What were the underlying drivers for that charge? What might cause you to do that again? And what sort of future expense saves do you expect from that, including for OpEx?

Sure. The key factors relate to productivity, Mike. We frequently discuss this and need to constantly evaluate our business activities. We must assess whether we have the right skills and people, whether we are situated in the appropriate locations, and critically, we must examine our span of control and organizational layers. These analyses have led us to conclude that we should take specific actions. For instance, when considering spans and layers, we may implement some eliminations, but we might also eventually introduce a different skill set or a new leadership structure. Therefore, while we won't achieve full savings on these salaries, we expect to realize at least 50% savings. Overall, we anticipate that about half of the severance will affect our ongoing salary expenses. Although we are expanding in other sectors of the company, such as increasing headcount in wealth management and investing in resilience, we should see this kind of influence on salaries in the affected areas.

So a permanent reduction in salary equal to about half the severance, was some of that reinvested back in the firm where you're hiring elsewhere. Is that correct?

Now let me clarify. The total amount of impacted salary would be close to the severance amount, but we would reinvest about half of it. Therefore, we expect an improvement of around $40 million in the salary line.

And then just more generally, maybe Mike, you talked about productivity and the custody business. And it seems like you're committed in the custody business but not just for growth but for more profitable growth. You say, you're bidding less, you're being more selective, you're picking your spot. So how would you describe Northern's positioning in the custody business today versus the past?

So a couple of points to it, Mike. One is within, broadly speaking, asset servicing at a high level, you have the services that we provide to asset owners and then the services we provide to asset managers. Now there's a lot of hybrids within that as well and crossover of services. But largely speaking, those are the two big groups of clients, and within the asset owner part of the space, the nature of what we're doing there is more scalable in the sense of, to your point custody where adding on a new client requires less in the way of headcount addition and technology spend, if you will, to customize for what they're doing. Now, you've also heard us talk about certain things like front office solutions. That's a case where with an asset owner client, that we're looking to provide a higher differentiated level of capability for them and then correspondingly have a the associated fee that goes with providing that. So that's how I would say in the positioning there, we're trying to differentiate what we're doing, combination of capabilities like front office solutions, and with a higher level of service that is consistent, I would say, with our brand, with our culture, and the way that we approach the client across the company. And then I would say on the asset manager side, the asset manager services that we provide to them that has been a stronger source of growth for us over the last many years, but it is more resource-intensive. So when you look at the headcount growth that we've had over time, a lot of that is because it's supporting bringing on new business there that does require additional partners, meaning employees for us to provide that. And that's an area where I'd say we're trying to be much more selective about those relationships and the opportunities that we pursue there. So you heard me also talk about connectivity points. And the point on that, Mike, is that with an asset manager client, for example, if we're only going to do one thing for them, it's probably not going to be attractive for us, whereas if we can do a number of different things across the spectrum, that's where that type of client relationship provides the level of profitability that we're looking for. So that's where I would say that the focus is when you look at the business overall but then within the segments.

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

Maybe just one on the net interest revenue. Maybe, Jason, just your view on deposit betas across your franchise on the downside when the Fed cuts and if you could just differentiate between wealth and asset servicing? And I did see the interest-bearing deposit line on the average balance sheet. It's a smaller category, but that seemed to go down a lot. I just was wondering what was driving that. I think that's a 253 bps from 315 bps sequentially?

I want to make sure I get the last point. What were you referring to?

It's just on the average balance sheet, I think just the interest-bearing deposit with banks on the asset side, what seems to go down a lot. I didn't know if that's just noise or on the rate on that.

Got it. It might be. That might be thick repo. Oh, yes, the due from banks, and we can get back to you on that. I think that's just noise in the reporting on a small denominator. Generally speaking, regarding the betas, you observed the ECB reduction, and we achieved effectively 100% beta on that. At this point with rates at these levels, the betas are going to be very high. In that example, both the standard rate card and the negotiated rates decreased along with the Central Bank change, and even the negotiated rates typically follow a spread relative to Central Bank rates. Therefore, we believe that in this current rate environment, the spread should not change materially.

And just differentiating between wealth and the asset servicing business in terms of those deposit betas.

Yes, it’s similar. The institutional business often has very large deposits. This won’t change; it will have more of a mix impact rather than an impact from the Central Bank rate changes. Earlier, we mentioned the small number of large deposits that can come in at tight spreads to Central Banks. This will tighten spreads, but it's not related to the actual movements of the Central Banks, which I believe is the focus of your question.

So on the wealth side, do you see any changes across your franchise?

The wealth side has a higher percentage of deposits at standard rates, and with rates at this elevated level, we will be able to adjust in line with Central Bank movements.

Can you provide any comments on the full year expenses? Are you still aiming for a year-over-year improvement of 5% or more? It seems like a decline in the fourth quarter would be necessary to meet that goal. Can you hear me?

That's better.

Okay. Thanks. I have my handset. Expense is for the full year. So I know the 1% up in 3Q. Are you still targeting the 5% or better expense growth for the full year and which would imply, I guess, a downtick in 4Q? And are you still also targeting positive fee operating leverage and maybe might that even be possible if net interest revenue continues to hold up? Might it be possible to generate operating leverage on total revenue for 2024?

Yes. Regarding expenses, achieving a 5% growth year-over-year is going to be challenging. We are currently seeing increases in the 6% range in the first half of the year, primarily due to two factors. First, the markets improved significantly at the beginning of the year, which contributed an increase of $10 million to $15 million in the first quarter, translating to more than a 100 basis points increase year-over-year. Additionally, our decision to expedite resiliency efforts is also impacting our expenses. Therefore, while it will be tough to reach the 5% target this year, our long-term goal remains unchanged. We're confident that we can maintain 5% or less in the long run, despite the current challenges. One of the current dynamics is actually beneficial, as the higher market levels provide positive operating leverage. As for the operating leverage aspect, we anticipate achieving a fee operating leverage in the second half of the year due to increased fee rates and higher revenue, which gives us a solid position overall. The third quarter may be a bit more difficult based on current market conditions, but the fourth quarter looks more promising for achieving total operating leverage.

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

Hi, hey, Jason, Mike, good morning, everybody. So I wanted to follow-up on the questions Brennan was asking earlier just as far as the wealth dynamics go? And just I guess, a couple of questions around that. I guess, one, it sounds like you're evaluating still what the competitors have done. So is it just kind of a matter of time before you guys decide to kind of go through the same process? Or I guess if you choose not to and outside of competitive pressures, are there any other ramifications that might kind of force you and the industry to go down the same path? So like in other words, are you hearing anything from the regulators? Are you hearing anything from potential risk of litigation that could sort of ultimately force the industry to go in this direction? So that's the first question.

And you're talking specifically on deposits, Alex?

Yes. So the wealth deposits with advisory relationships where the firm has a fiduciary duty.

Yes, I just wanted to clarify. In that space, our reach has already penetrated the market. Clients and advisors collaborate to determine their selections from a suite perspective, and they can choose to invest in money market mutual funds or direct funds to our balance sheet. However, the dynamics we've observed do not reflect our client base or our platform.

Sorry, but I guess if the industry goes to 5% and you're saying you're at market, but the market is at 5% on deposits, does that mean you guys would have to go to the market rate at 5%?

No, we're closer to 5% now.

And then in terms of the sizing, I think in the past, you talked about I think about a quarter of the deposit base was wealth and the other 75% was institutional. So the quarter that is wealth, can you delineate like kind of what the U.S. deposit base is?

What is the realized deposit space? The 25% is approximately correct, though it's slightly lower than that, but it's in the right range. What else would you like to know?

Just like what's the U.S. piece of that is? Is there a way to delineate that?

The U.S. piece? Yes, that's virtually all of it. The Family Office business may have some non-U.S. deposits, but the overwhelming majority of deposits in the wealth division are U.S. denominated.

And then just my follow-up question is around expenses. So you guys are implementing incremental savings initiatives, so it kind of makes sense and that's causing maybe incremental technology spend this year. As you sort of think about long-term and we've talked about expenses to fee ratio for many years now, but given that it's still proven to be pretty sticky at this kind of 100% and sort of 15%-ish range. What's the goalpost as you kind of put this all through and maybe takes a year, two years, three years, but what are you driving towards and how long do you think it will take you to get there?

Yes, Mike, what do you want to discuss?

The goalposts haven't changed, Alex. I mean that when I say the timing, not even saying like how far out it is per se, but just as you know, the components of that calculation are going to move at different rates for different reasons, meaning markets and organic growth on the fee side. And then likewise, you're going to have time periods where the expense growth can be a little bit higher or a little bit lower on that part of the equation. And so the goalpost is still getting that to that 105% to 110%. We think that's our target operating range for that ratio. And as you've seen, we brought that down. Would we like it to go faster? Yes. But again, it's balancing off the things that we need to do in order to drive organic growth so that you get the benefit of that on the ratio. And then as Jason is saying, you make certain investments that you absolutely are looking to get greater efficiencies as a result of those going forward. So we have a lot of manual processes, for example, that we're automating across not only the operations of our business but also across other parts of the business that have to do with our risk and control. So a lot of opportunities there to, yes, improve the resiliency as we've mentioned a number of times, but also get efficiency out of it.

We'll go next to Vivek Juneja with JP Morgan.

Hi, thanks. A couple of questions. Just want to understand Mike and Jason, the severance charges you're taking, it's a much larger severance charge than we've seen you've taken many years. I guess the Visa gain gives you that opportunity. When do you expect to start to sort of have that show-up in the compensation line and over what period?

We mentioned that many of the actions have already been taken. Additionally, the program we instituted this time spans over 18 months, which means it will gradually be embedded during that timeframe.

But you've taken the charge right up front. Okay. And when you talk about the under 5%, I tell Mike, you said it's unlikely this year. So should this make it much more likely next year? Where do you see this going, especially considering the severance benefit that extends over the next 18 months?

It puts us in a better position for next year. The purpose of our resiliency spend is to accelerate some of the initiatives we've planned for the coming years. This is helpful, along with the productivity measures we are implementing. Although it is still early July and too soon to estimate what next year will look like, current indicators suggest we should maintain our outlook of 5% or better for next year. We believe we are well-positioned to achieve this based on the factors we've discussed.

And again, regarding Visa, I apologize if I missed anything because there are many earnings being reported this morning. You conducted some buybacks over a certain period; how much more should we expect to see and how soon, considering you've already used about a couple of hundred million? I understand that all of this is pre-tax.

The Visa situation is very beneficial, providing several hundred million dollars, which we estimate as half of the after-tax proceeds, available for buybacks. Given our current capital levels, there is no urgency for us to act immediately, allowing us to approach buybacks gradually and thoughtfully. We also need to stay aware of the regulatory environment and any potential Basel requirements regarding capital. However, we are in a strong position to maintain elevated levels of buyback activity.

We'll go next to Ebrahim Poonawala with Bank of America.

Hi, good morning and thank you. And I'm sorry, Jason, if I'm being repetitive, I just wanted to make sure we heard you correctly. The stock was down about 8% at one point, still down a lot. I just wanted to make sure that your messaging on NII is essentially saying you expect third quarter NII to be relatively flat given the decline in balances should be offset by the investment yields? Am I hearing that correctly? And you're not really seeing any impact from these sweep deposits that have impacted some of the other banks given where you already priced deposits for your customers.

Correct. We see third quarter NII at this point flat.

And from there on rate cuts if we get them in September should be a positive for the NII or negative?

It's unlikely to be positive, but we don't anticipate significant changes as long as rates remain at these levels. Even with the US rates in the fives, reductions of 25 to 50 basis points at this stage should not result in material spread degradation.

That's helpful and clear. And on the fee revenue side, apologies if you missed this. I think you mentioned, you lost a client that's going to have a few million dollars impact. I'm just trying to get a sense of what your expectations are for fee revenue all else equal as you think about the third quarter.

We don't have an estimate to provide. If you consider the few million dollars this quarter and the same next quarter, that totals around a $10 million decrease based on a quarterly trust fee base of over $600 million within asset servicing. We're focusing on how new business activity and growth will affect this figure, which is more significant from a percentage standpoint but less so regarding the overall fees in the business. It's essential to highlight these points. Overall, the business is performing well, and we are positive about the activity levels, pipeline, and prospects ahead.

If I could ask a quick follow-up about expenses, my impression is that the actions you took this quarter might lead to even better or lower expense growth for 2025. Is that the correct interpretation in relation to what you plan for 2024?

Yes, it is. There's no doubt that as some of the expenses that we put on now, again, it's an acceleration of what we planned and some of it we do believe will come down next year. I talked about the offset as we do some hiring in some of these spaces, but we also came into this year feeling very good about the 5%, but the markets moved early and so it does give an indication that when markets move and it can impact the expenses. Again, we have positive operating leverage in that. But at this point of mid-July, I'm hesitant to talk in too much detail about 2025. We'll certainly give an update later in the year. But the spirit of your question is right in that some of the spending now positions us for even better expense trajectory management going into next year.

We'll return to Brennan Hawken with UBS.

Hi, thanks for taking my follow-up. I just wanted to draw a specific understanding because it was a little unclear with Alex's follow-up to the question on the wealth deposits. Did you say that the advisory wealth deposits are currently priced at 5% or they have the option to elect for money funds that could yield 5%? I'm just trying to square all the commentary.

Sure. So it's the latter. They can sweep into our money fund complex, which is already priced in the fives. Our clients have the option to choose that deposit mechanism now, as long as they are sweeping.

So just to further add a little color to my question that the option to move into money funds was available at most of the wire houses too, and they made this move. Then my understanding, due to concerns about fiduciary obligation and whether or not just basically paying out that level would be just necessary from a legal perspective. So it sounds like from your answer, you guys don't have any plans to make any change at this stage, although as you said depending on competitive pressures, you may seek to make adjustments going forward.

I think that's a good summary.

And we'll return to Vivek Juneja with JPMorgan.

Thanks. I wanted to clarify a comment you made about rate cuts of 25 to 50 basis points, which should not lead to significant spread degradations. Does this mean that if we do experience rate cuts, your net interest margin and net interest income, given your asset sensitivity, would be negatively affected?

No, I'm saying that with the current rate cuts, we should be able to pass along those declines to clients through lower deposit yields in our standard rate cards and negotiated rates.

What did you see with the ECB 25 basis point rate cut that has come through? Have you cut those deposit rates by 25 basis points?

Yes, and I did comment on that really specifically earlier. We did see aligned reductions in deposit costs on the ECB change.

So that means you passed on the full 25 bps. Sorry, just as I said, there are too many earnings calls today and you were overlapping with others. So that makes it hard to keep up with all of them.

Thank you. And I will now turn the conference back to Jennifer Childe for any additional or closing remarks.

We'd like to thank everyone for joining us today. We look forward to speaking with you again soon.

Thank you. Ladies and gentlemen, that does conclude today's earnings release. We thank you for your participation. You may disconnect your phone line at this time.