Good day, and welcome to the Northern Trust Corporation's Third Quarter 2024 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Jennifer Childe, Director of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and welcome to Northern Trust Corporation's third quarter 2024 earnings conference call. Joining me on our call this morning is Mike O'Grady, our Chairman and CEO; Jason Tyler, our new President of Wealth Management and Former Chief Financial Officer; Dave Fox, our new Chief Financial Officer; John Landers, our Controller; and Grace Higgins from our Investor Relations team. Our third 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 October 23 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 November 23. Northern Trust disclaims any continuing accuracy of the information provided in this call 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 third quarter 2024 earnings call. As Jennifer mentioned, Dave Fox became our CFO on October 1, when Jason became President of our Wealth Management business. Jason will review our financial performance for the third quarter in a few minutes, and he and I will take your questions. Dave will take Jason's place on our fourth quarter earnings call, and many of you will have the opportunity to meet Dave in the coming weeks. We're grateful to Jason for his considerable contributions over the past five years as CFO, including successfully managing our balance sheet through a number of challenging events, including the COVID pandemic and the collapse of several financial institutions last year. I'm confident that Jason has the right skills, understanding of the business and vision to lead Wealth Management into its next chapter of growth. I also want to welcome Dave to the CFO Chair. Dave has a long track record of success in leading businesses and driving financial performance. Most recently, Dave ran our Global Family Office business. Under his tenure, GFO trust fees grew at a compound annual rate of 10%. Dave also served as Head of Asset Servicing for the Americas. Dave is a highly respected leader whose deep industry knowledge and strong financial acumen make him the right choice to serve as Northern's next CFO. Turning to our third quarter performance. Our results benefited from strong market performance, but also reflect continued positive momentum across our businesses. Relative to the prior year, Trust fees were up 8%, net interest income grew 21% and, excluding notable items, earnings per share grew 36%. Importantly, we generated positive Trust fee and total operating leverage while continuing to make significant investments in our business and infrastructure. We also returned $453 million to shareholders. Within Wealth Management, we generated strong year-over-year Trust fee growth of 9% and reached record AUM levels. Our new business momentum improved, reflecting the maturation of a number of initiatives started over the past 12 to 18 months. Global Family Office performed particularly well, generating mid-single digit organic growth, both in the third quarter and year-to-date. International relationships, which have been an area of focus in recent years, drove a healthy portion of this growth, including a marquee win sourced through collaboration with asset servicing, demonstrating the power of our One Northern Trust strategy. Asset Management generated positive liquidity flows for the seventh consecutive quarter and positive flows in tax-advantaged equities, active fixed income and alternatives. This translated into healthy organic AUM growth despite continued pressure on index products. Continued strong investment performance is supporting our organic growth, with active fixed income outperforming benchmarks over one, three and five-year time frames. NTAM's performance is also attributable to leveraging our One Northern Trust strategy to deliver clients solutions and capabilities of the entire firm. Year-to-date, NTAM has launched 13 new products, including a treasury-only money market fund that has generated nearly $2 billion in flows in less than six months, largely from GFO clients. Our Asset Servicing business performed well in the quarter. Transaction volumes were healthy, capital markets activities were up double digits for the second quarter, and new business growth continues to be booked at attractive margins. As we discussed, our goal is to generate new business that is scalable. We've shifted our focus to opportunities that require lower levels of incremental costs and to cross-selling products and services to existing clients. As an example, this week, we announced an expansion of our relationship with Artemis, a leading U.K.-based asset manager with more than $33 billion in AUM, wherein all trading activity for Artemis' equity funds and all OTC and exchange-traded derivatives will be outsourced to Northern. We will now support the complete life cycle of these investments from execution to custody, including fund administration, depository, global custody, and transfer agency services for its U.K. and Luxembourg domiciled funds. While it will take time to realize the whole benefits of the pivot in our strategy, it should lead to more profitable growth as our business mix shifts. During the third quarter, we proudly celebrated our company's 135th anniversary, the core principles of service, expertise, and integrity, upon which our company was founded, still guide us today. As we look forward, we’re taking steps to strengthen the foundation, position the firm for higher underlying growth, and enhance our operational efficiency, all while continuing to invest to meet the evolving needs of our clients and to create value for all our stakeholders for years to come. And with that, I’ll turn it over to Jason to review our financial performance for the quarter. Jason?

Thank you, Mike. And let me join Jennifer and Mike, and welcome you to our third quarter 2024 earnings call. Let's dive into the financial results of the quarter starting on Page 4. This morning, we reported third quarter net income of $465 million, earnings per share of $2.22, and our return on average common equity was 15.4%. Our reported results included a $68 million pretax gain on an equity investment and a $13 million escrow payment associated with our existing Visa swap agreements. Together, these two notable items boosted other operating income by $55 million pretax and $40 million after tax. Trust, investment and other servicing fees totaled $1.2 billion, a 3% sequential increase and an 8% increase compared to last year. Net interest income on an FTE basis was a record $569 million, up 7% sequentially and up 21% from a year ago. Our assets under custody and administration were up 5% sequentially and 23% as compared to the prior year. Our assets under management were up 6% sequentially and 22% year-over-year. And overall, our credit quality remains very strong. Excluding notable items in all periods, other non-interest income was down 5% sequentially and down 3% for the prior year. Revenue was up 3% sequentially and up 10% on a year-over-year basis. Expenses were up slightly less than 1% sequentially and up 6% over the prior year and earnings per share grew 36%. Turning to our asset servicing results on Page 5. Assets under custody and administration for asset servicing clients were $16.3 trillion at quarter end, reflecting a 23% year-over-year increase. Asset servicing fees totaled $667 million. Custody and fund administration fees were $453 million, up 6% year-over-year, reflecting the impact from strong underlying equity markets and a weaker U.S. dollar. Both comparisons were dampened by the client exits we discussed last quarter, which are now fully reflected in our run rate. Assets under management for asset servicing clients were $1.2 trillion, up 22% over the prior year. Investment management fees within asset servicing were $153 million, up a strong 11% year-over-year due to favorable markets and, to a lesser extent, new business activities. Moving to our Wealth Management business on Page 6. Assets under management for our Wealth Management clients were $444 billion at quarter end, up 20% year-over-year. Trust, investment and other servicing fees for wealth management clients were $530 million, up 9% year-over-year due primarily to strong equity markets. Moving to Page 7 and our balance sheet and net interest income trends. Our average earning assets were flat on a linked quarter basis as a decrease in loans was offset by an increase in securities. Our average liquidity levels remain strong with highly liquid assets comprising 62% of our deposits and more than 50% of total earning assets on average. The duration of our securities portfolio is 1.6 years, and the total balance sheet duration continues to be less than one year. Net interest income was $569 million, and our net interest margin was 1.68%. The strength was attributable to several factors: First, deposits came in modestly better than our expectations. Average deposits were $113 billion, down less than 1% from second quarter levels, and non-interest-bearing deposits remained stable at 15% of the mix. Second, deposit pricing improved. We had several large client deposits with very thin spreads roll off, and they were replaced by a similar level of more attractively priced deposits. And third, given especially conducive market conditions, we saw higher-than-average quarterly contributions from transactional and other items. In the aggregate, these items elevated third quarter NII by approximately $10 million to $15 million. Turning to Page 8. As reported, non-interest expense was approximately $1.4 billion in the third quarter, down 11% sequentially and up 6% as compared to the prior year. Excluding notable items in both previous periods, as listed on the slide, expenses in the third quarter were up approximately 1% sequentially and 6% year-over-year. Now, let's go back and review our core expenses from the quarter, which exclude all notable items. Compensation expense was up 5% over the prior year, reflecting the impact of this year's base pay adjustments, modest levels of hiring associated with our modernization initiative and underlying growth in the business and unfavorable currency movements. Compensation expense was flat sequentially. Outside services expense increased 12% relative to the prior year period, largely due to incremental modernization and resiliency spend. Equipment and software expense increased 14% year-over-year, mostly related to higher depreciation and amortization expenses. Sequentially, it was up 4%. Excluding notables, we generated over 100 basis points of Trust fee operating leverage, over 150 basis points of overall operating leverage, and our expense to Trust fee ratio improved by 200 basis points on a linked quarter basis. As we look out to the fourth quarter, we expect our total operating expenses to be up approximately 2% relative to the third quarter. Turning to Page 9. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimum. Our common equity Tier 1 ratio under the standardized approach remained flat at 12.6%, and its capital accretion was offset by a slight increase in RWA levels. Our Tier 1 leverage ratio was 8.1%, up 10 basis points from the prior quarter. At quarter end, our unrealized pretax loss on available for sale securities was $603 million. We returned $453 million to common shareholders in the quarter through cash dividends of $152 million and common stock repurchases of $301 million. Now before starting the Q&A portion of the call, on a personal note, I want to offer a quick thank you. It has been a joy and an honor to serve as CFO for Northern for the last five years. It's been a pleasure to work with the analyst community and the world-class investors we have as shareholders. I wish Dave Fox the very best as he takes on the new role. I've worked closely with Dave since he joined Northern 12 years ago. He's a strategic forward-thinking executive, and he's going to play a critical role in driving impactful change within the company and ensuring that it's positioned for long-term success. And with that, please open the line for questions.

Thank you. We will take our first question from Steven Chubak with Wolfe Research.

Hi. Good morning. This is Sharon actually filling in for Steven this morning. Jason, earlier this year, you had talked about the asset sensitivity across the different categories on the balance sheet. So cash 100% sensitive to short rates, loans and securities about a third floating. Can you give us a quick update on the floating rate mix just given that you've done a couple of securities repositioning actions since the last time we updated?

I'm sorry. I didn't hear that. Can you repeat your question a bit louder? I want to make sure I answer it accurately.

Yeah. Sure. Sorry. So earlier this year, you talked about the asset sensitivity across the different balance sheet categories, cash 100% sensitive to short rates and loans as well and securities book about a third floating. Just given some of the securities repositioning actions you've taken since that update, can you give us like a quick mark-to-market on the floating rate mix?

Yes. Floating is about 50% at this point.

Okay. Great. And then, as we look at our expense forecast beyond '24, can you just frame how much of this year's expense growth was inflated by investments in resiliency? When those investments should be completed and whether we should expect those investment dollars to fall to the bottom line or get redeployed elsewhere in the franchise?

Yeah. And just to clarify, you're asking about the expense investments in modernization and resiliency and how that's going to trend over time?

Yeah.

Yeah. So we do expect that, that will continue for the next at least two to three quarters. But at some point, likely late next year, we’ll start to see it decline. We don’t have any plans to dollar-for-dollar thematically redeploy that somewhere else. This is more of a distinct effort to try and address our desires to improve modernization and some other technology and automation efforts within the business.

Great. Thank you very much.

Sure.

We will take our next question from Ebrahim Poonawala with Bank of America.

Hey, good morning.

Good morning, Ebrahim. How are you?

Good morning and congratulations to Jason and David on your new roles. I’d like to follow up on expenses and the recent leadership changes announced in September. Mike and Jason, I sense some frustration from investors regarding the lack of progress in translating operational efficiency into positive bottom-line results. Can you share your thoughts on what these changes and realignments mean for operational efficiency moving forward? Additionally, how should we approach the topic of incremental spending? I understand your previous comments, but I’m curious whether this will all be accounted for in the expense base as we exit the fourth quarter, or if we can expect further expenses and investments related to enhancing resilience. Thank you.

Sure, Ebrahim. It's Mike. I'll start off. So I would say, we believe in structure following strategy. And so, the organizational changes that we announced in September reflect the strategy that we've put in place going back over a year ago, and we've tried to keep very straightforward, which is focused on strengthening the foundation, optimizing our growth and driving productivity. And we already mentioned the changes with Jason and Dave. But importantly, one of the other big changes was creating the role of a COO, Chief Operating Officer, which Pete Cherecwich will be the COO or is the COO company. And with Pete's decades of experience in managing both complex client relationships, but also global operations, he's really well-positioned to drive operational excellence, resiliency, and also scalable growth. So to your point, we are very much trying to align the organization in such a way that we can get greater scale and operating efficiencies and resiliency out of the company on that front. Teresa Parker took over the role of President of Asset Servicing for Pete, to work through that organizational transition to ensure that we do it in a way that we continue to be client-focused and differentiate ourselves in that way. And likewise, Steve Fradkin is a Vice Chair and importantly is focused on the One Northern Trust strategy and operationalizing all the things that we do on that front. So I feel very good about the organizational changes to help us drive the strategy.

Got it. And I guess, so if I may follow up on just the NII question, Jason, for you. It was a positive surprise this quarter, when we look at that $569 million in NII this quarter. If we get some gradual rate cuts, given the positioning of the balance sheet, if the deposit backdrop is stabilizing, should we expect NII continues to grow from the third quarter levels?

There is certainly some good news in the net interest income results. Although deposits appear to be flat, we experienced significant exits of some large, low-yield deposits, which we anticipated at the beginning of the quarter. This contributed to our expectation of a decline in deposits. However, we were pleasantly surprised to find that these were replaced by more attractively priced deposits in other areas of the organization. Additionally, we did not encounter the usual seasonal decline in August. Therefore, while deposit levels have stabilized, the quality and distribution of these deposits have improved significantly. Looking ahead to the fourth quarter, we expect rate cuts. While we are confident in the current strength of our deposit book, fully offsetting deposit declines will be challenging. Consequently, an increase in deposits from this point seems unlikely. We expect net interest income for the fourth quarter to be between $550 million and $560 million, which would still be strong, albeit slightly lower than the current quarter.

Thank you.

Thank you.

We will take our next question from Alex Blostein with Goldman Sachs.

Hey, Alex.

Hey. Good morning, everybody and congrats to the whole team on various moves. Just to level set the NII discussion, just one more time. So Jason, it sounds like Q3 had $10 million to $15 million of sort of elevated transactional activity. Do you expect that to basically fall off in Q4, and that's what's partially driving the kind of the sequential decline and maybe expand on kind of what those were? And on deposits, this is the right jumping off to use as far as cost of deposits go, right? And then obviously, deposit betas are likely to be fairly high from there, but I'm just kind of trying to level set on the go-forward potentially beyond the fourth quarter guidance that you have highlighted.

Sure. Let me address your question in reverse order. Regarding deposits at the launch point, I believe we are at a good level. As for the items from the third quarter, there’s core asset and liability pricing, but there’s also FX swap activity, FHLB dividends, premium AM, FTE adjustments, repo activity, and various other factors. While these don't contribute significantly on their own, many of them worked in our favor this quarter, resulting in that $10 million to $15 million increase. Your question is insightful because we don't anticipate these effects to completely disappear in the next quarter. The current environment, with interest rates where they are, provides us greater opportunities for FX swaps and other activities that will enhance net interest income. Therefore, we expect this boost to remain to some extent. This explanation clarifies why we observed an increase from the second to the third quarter. The range of 550 to 560 essentially reflects some of these items reverting to more normalized levels, along with the impact of rate decisions made by different central banks, which will weigh on the 569.

Got it. All right. Thank you for clarifying that. And then a question on expenses for you guys just with respect to maybe longer-term expense growth algorithm. And Mike, I heard your answer to the previous questions around the organizational changes that you guys have made, which are obviously substantial and hopefully can further align the growth in the business with the expense structure. But I guess in the past, you talked about maybe this 5%-ish bogey for expense growth over time, hoping to be below that. This year is obviously shaking out to be north of 6, and there are some market-related items and stronger revenues to come along with that. So it's good news. But maybe help us sort of summarize, given these changes where you expect the firm's kind of longer-term expense growth to be over the next couple of years?

So Alex, we are focused on achieving positive fee operating leverage and positive operating leverage, with our current expense-to-trust fee ratio for this quarter year-to-date remaining above our target range of 105% to 110%. We want to work on reducing that ratio to meet our target. From a margin perspective, we aim for a pretax margin in the low 30s as a target area. That is our primary goal. To accomplish this, we have experienced strong revenues this year, which have allowed us to achieve our current leverage. However, we cannot always rely on strong market conditions and a favorable rate environment. Therefore, we need to decrease the absolute rate of expense growth further. Our objective as we move into 2025 is to achieve that operating leverage and increase the likelihood of success by reducing our expense growth rate below the current level.

Got it. That’s helpful. Thank you, guys.

Thank you.

We will take our next question from Betsy Graseck with Morgan Stanley.

Hey, good morning. How are you doing?

Yeah. How are you?

Okay. So I have a couple of questions. First, Mike, you talked about strengthening relationships as a major growth focus moving forward. Can you clarify how this shift is being approached? Is it different from previous strategies? Are you allocating more resources for hiring or focusing on delivering more products? Additionally, where do you see the greatest opportunities within the organization? Is it in asset servicing, asset management, investment management, or the wealth platform? Please help us understand where you see the strongest opportunities for deepening relationships.

Sure. So Betsy, to your point, that is our One Northern Trust strategy, which is to ensure that all of the businesses and all of the groups within the company are working together to produce the best outcomes for our clients and likewise for other stakeholders. And from a client perspective, it is a combination of a number of things. So first, it is the businesses working more closely right from the beginning, if you will. So going to market and opportunities. So for example, with asset servicing and asset management providing an overall solution for clients as opposed to necessarily starting with one and then trying to cross-sell, if you will, the second opportunity on that front. As far as where the opportunities are? Definitely between asset servicing and asset management, but I would also highlight with Wealth Management as well. A lot of work has been done to ensure that the linkages between those two businesses are very strong and that we are thinking about the needs of our Wealth Management clients as we produce new investment management products. As I mentioned, we launched a number of new funds this year that were really off of the back of, I'll say, research that was done for some of the needs of our specific client base. We'll continue to do that in order to provide the right solutions for them. Also as far as the types of capabilities that we have to deliver, to your point, it is new products or new services. So I mentioned the Artemis example, that's just the latest client where we're providing a new capability to them of outsourced trading or what we call integrated trading solutions, which we launched a number of years ago, and we've built that business up and taken this to a level where that capability works for clients of size like Artemis. So a lot of opportunity on that front as well.

No, you finish up, sorry.

No. Go ahead, Betsy.

Thank you for those examples; they were very helpful. I'm curious about the overall impact on profitability as we consider not only the expense line. In light of your goals and the opportunities that come with this shift, how do you anticipate this will affect the return on tangible assets or return on common equity?

Yeah. So there's no question that to the extent we already have the client relationship that the incremental services that we provide to them are more scalable for us. And so that's where it translates into more profitability overall. The second thing I would mention, Betsy, on that front is in thinking about the type of business that we're pursuing the most. As we say, we want more scalable growth on that front. And what we really mean on that front is focusing on new opportunities that require less in the way of new resources. So to the extent that we can win the business that is, again, more scalable for us, areas where we’ve had a lot of success, for example, this year with asset owners in America, but also in Europe, where we’re providing custody to them in a way that the incremental resources required, both in people but also in technology, are less than if we are adding other services or to other segments that would require that. That translates into a higher level of profitability overall. So that’s the objective on that front.

Okay. Thanks so much. Really appreciate it.

We will take our next question from Mike Mayo with Wells Fargo.

Good morning, Mike.

Good. I see 135 years of outstanding private banking relationships, the One Northern Trust initiative, and everything else in progress. Yet, I observe a stock price that has lost its advantage compared to Trust bank peers and even trades 3 points below Morgan Stanley. So I'm curious about how much of this is due to our business mix, how much relates to the environment, and how much is tied to execution. I understand your point that strategy influences structure, which in turn affects execution and ultimately the results, including the stock price. I'm trying to figure out how or why the same group of people might achieve better organic growth in their new positions. The recent press release announced changes to the CFO, COO, Head of Wealth, Head of Asset Servicing, and Head of Family all at once, which I don't recall seeing before. So, Mike, I would appreciate your insight on why you believe this will lead to positive changes. Thanks.

Sure. So Mike, it's a combination of both putting people into the new roles where we can leverage their experience, but also we brought in talent from the outside. So just over about a year ago, 1.5 years ago, we brought in Daniel Gamba to run Asset Management. And so we want to have both the benefit of people who really understand everything you talked about as far as Northern Trust and how we're client focused, but also new blood and new ideas from the outside. And we'll continue to do that as we go forward. Also to drive it, it does come back to execution. I mean to where we're focused, and so that's what we're trying to drive, that's where we spend our time on that front. And that will then ultimately drive not only the earnings but also the multiple for the stock. I think that another big part of this is the strategy around where that growth comes from. So that's why when we talk about the One Northern Trust aspect of it and the type of growth, that also affects the stability and growth rate of the earnings as well. So it's not just the earnings themselves, but it's the quality, as you know. So that's what it's all directed at the ultimately create value through the earnings and the multiple to drive the stock price.

And then maybe just as one follow-up. So the incremental extra that we might be able to expect by that fresh perspective by the managers bring in their new roles. Maybe Dave, as it relates to the CFO function, or Jason is right next to you. But incrementally, what would you like to emphasize a little bit more, maybe it's already started. And Jason, would you like to emphasize a little bit more and well to take it to the next level? Thanks.

Yeah. So what I would emphasize with those two, and then I do think it's a good opportunity for Jason just to give his initial thoughts here. But it is around the more scalable parts of our company overall. So not just products or service but company. And that is our Wealth Management business and our Asset Management business. So we are trying to grow those businesses organically faster than we have in the past. And so that's the tilt or the push, Mike, on that front. And I think with Dave, you and others will quickly get comfortable with. His deep understanding of the business and the strategic approach to it and also understanding of value creation. But Jason, do you want to talk just a little bit about just some of your initial views?

Sure, Mike. I've been traveling a lot and have a solid understanding of the business. Recently, I spent time in L.A., New York, and Texas, and I'm attending a key client event tonight in San Francisco. I believe there are opportunities for us to expand further. One way to look at our business is by considering the markets and segments we're involved in, identifying areas where we can enhance our specialization and offer more tailored solutions to our clients. We already have an excellent client base and talented individuals throughout the organization. It's evident that we can do more, and I think using this framework will help us outline our initiatives for growth in the future.

All right. Thank you.

We will take our next question from Brennan Hawken with UBS.

Good morning, Brennan. How are you?

I'm good. Thanks for taking my question. I wanted to revisit the topic of expenses. I appreciate the commitment to achieving operating leverage and reducing expenses. However, based on the guidance for the fourth quarter, my calculations suggest that we might see expense growth exceeding 6% in 2024. Jason, as you prepare to transition from your role as CFO, you previously stated a commitment to keep expenses under 5% in 2025. With Dave being an internal candidate for the CFO position, does that commitment still stand? How should we approach this? While I understand the importance of operating leverage, expense growth has become a significant concern, amplified by inflation in recent years, and it's not a new challenge for Northern. How can you manage to control expenses effectively to ensure a more consistent progression of operating leverage without setting the bar too high?

Yeah. So Brennan, part of it is the organizational change. So just fundamentally, that will involve centralizing a number of operations that are now more distributed. And so it's more than just, I'll say, committing to it. It's actually making changes to do that. The other part of it is you have to make the investments, where they're required and when they're required. That's part of managing this for the long term. And in the environment that we've been in as far as just the, I'll call it, the level of volatility and risk that's in the broader environment, we felt that making these investments in the foundation is the right thing to do longer term. Now that does require or create some level of variability in what those are. But when we think about what we're doing on the technology front, for example, the modernization that Jason has mentioned, where it's quickly trying to move off of end-of-life platforms. Transitioning to the cloud, which definitely requires investment to do, increasing the automation of the changes we make within technology, ensuring we have redundancy to the extent that there are incidents. Doing more testing of all of those platforms to ensure that we have the stability on that front. Making sure that when we are working with third-party providers that we understand their resiliency as well. So there's a number of things that we've done and are doing to kind of harden and solidify that core because we think that's a good investment for us, not just from a, I'll say, risk and resiliency perspective but also from a client experience perspective and also from an efficient perspective. So that's why we've tried to be very clear on what we're doing and why we're doing it and why we think ultimately, not only is that good for the clients but it's good for shareholders as well. It's going to drive high-quality growth as we go forward, and that's the plan.

Okay. I look forward to getting some meat on those bones in the coming quarter. So that's great. If I could transition into the balance sheet, it looks like loans pulled back a decent amount this quarter. I don't think you touched on it. What caused that and how should we be thinking about loan growth or the outlook for growth or further decline in balances from here?

Sure. I've noted before, the loans and deposits can be very spiky. And the headline is there's nothing strategic or creating a trend that we see in what we experienced in the quarter. And then in terms of growth going forward, we've had initiatives in the past to specifically grow the loan book. We don't have that initiative right now. We're not trying to shrink it. And so you should think about growth in the loan book coming alongside growth in the overall client franchise. A lot of our lending, ironically, the deposits are more on the institutional side. The lending is on the wealth side of the business. And so the correlation will be more tied to growth in the Wealth business.

Okay. Thanks for that.

Sure.

We will take our next question from Glenn Schorr with Evercore.

Good morning.

Yeah. Maybe another question on the Wealth side. Like, we always want to grow Wealth. It's a great business, and you're great at it. You talked about the concept, maybe drill down a little bit more because I think you've been making some investments in people, products, and new geographies. Maybe talk a little bit about that and include maybe a comment about the Hamilton Lane collaboration that you had a press release on yesterday. Thanks so much.

I’ll begin by emphasizing that we are planning to invest more aggressively at the high end of the market, where we excel. This is evident in the progress Dave has made with the GFO business, which focuses on our larger clients and is growing faster than the overall Wealth segment. If you examine the regional performance, you'll find that we're also doing better at the higher end, which is where our strengths and value proposition are most evident. We’re confident in our ability to invest more significantly in professionals who generate revenue and attract clients, as well as in enhancing their experience. Many RIAs may boast about having only a few app tech fellows, while we have 15 to 20 highly respected experts. This allows us to better serve clients needing complex estate planning. We excel in this area, as well as in investment advising and banking. By investing more at the upper end of the market, we believe we will see greater returns. We recently announced a distinct ultra-high net worth group dedicated to working with clients at the very top of Wealth advisory, collaborating closely with the family office business to integrate those capabilities into our traditional Wealth offerings. There are many exciting opportunities ahead, and we are also pleased with the talented individuals we are bringing onto our team, which we believe will contribute to business growth and enhance our client franchise.

Okay. And Glenn, on Hamilton Lane, that is a partnership that we’re excited about, which is with our asset sourcing business to provide even better data and analytics on the private investments of our large institutional clients. As you know, as their asset allocators, portfolios have moved more and more to private markets and alternatives, the capabilities required to due diligence them, analyze them have gone up. And we’ve had our offering front office solutions, which looks across the entire portfolio that we’ve been very successful with. And this is an addition to that will provide even better, as I said, data analytics to it. So very positive and promising.

All right. Thanks so much for all that.

Sure.

We will take our next question from Gerard Cassidy with RBC.

Hey, Gerard. How are you?

Good. How are you? Congratulations, Jason. Mike, you touched on Northern One a number of times in your prepared remarks as well as your answers to questions. As outsiders, investors, how should we measure the success of what you're trying to achieve? Your peers are using similar types of programs as well or strategies. I was wondering if you could somehow point us to some metrics that we can review regularly just to measure your success in pursuing this strategy?

Sure, Gerard. So to your point, using One is not unique. The fact that it's One Northern Trust is what is unique about it because it's our business that we're focused on with it. And it's something that, Gerard, is really important, I'll say, within the company but also in the marketplace. Within the company, we want to make sure that we're breaking down silos and that everybody across the company, regardless of what business or group you're in, are working together in order to get the right outcomes. And that can be, certainly, as we've talked about on the client front, it can also be in ensuring that we're getting the right efficiencies across the businesses, so that cuts across that way. And then as I mentioned, certainly going to market and with the client, we're stronger as Northern Trust than we are as any one of our businesses alone. So that's what's behind it. To your point on measuring it, the way that we're doing it is, we start with the specific objectives of what we're trying to do. So thinking about specifically, I mentioned, okay, how many times did we go to market with a new opportunity where it involved two or all three of our businesses to do that. That's something that we can measure, granted it's an internal measurement or metric, but it has to start there if it's going to flow through to the KPIs that the key performance indicators that we're then looking at, which really then it's going to be in our organic growth rate. And so that's what we're trying to drive is a higher organic growth rate. And so to do that, we need to see that collaboration between the businesses. That then flows into our financial performance overall when you add in the markets and the impact from that. So ultimately, you're going to see it in the financial performance. And we can provide, I'll say, some KPIs as we go forward here, that's part of what I mentioned with Steve Franken, who as you know, has worked across all of these businesses in one way or another over his career. And that's why we're looking to not just say One Northern Trust, but actually ensure that we're doing it by operationalizing a lot of those activities.

Very good. I apologize for mispronouncing the name Northern One, but thank you. Jason, returning to your comments on the net interest income expectations for the fourth quarter, I believe you mentioned that the overall balance sheet is around a year in duration, with the securities portfolio being slightly longer. If the forward curve holds true and we see the Fed funds rate reaching approximately 3.5% by the end of next year, while the longer end of the curve stays above 4%, we should see a positive slope in the curve. I'm not looking for a specific guidance figure for 2025 net interest income, but generally, is this a favorable net interest income environment for your team, or could you provide some insights on that?

We experienced a shortfall in the securities portfolio for various reasons, while the rest of the balance sheet remains stable. Cash levels are consistent, and we haven't strategically altered the duration of our loan book. Therefore, the duration of our balance sheet and net interest income primarily correlates with the management of the securities portfolio. The shortfall actually benefited us due to several factors, including our perspective on the yield curve. Looking ahead, the yield curve suggests that challenges will arise next year, especially if we anticipate multiple rate cuts. However, we will maintain our risk tolerances, philosophy, and approach in managing the balance sheet despite these headwinds. On the upside, we are encouraged by the stability of our deposit levels, which allows us to consider utilizing more non-HQLA. We also foresee a potential increase in our deposit base, which is a positive indicator. Additionally, there will be some benefits next year from reinvestments of maturing securities, though not to the extent we have seen previously. It’s still early to provide guidance, but I wanted to highlight the various factors at play, which include both positive and negative influences.

Very good. And is it fair to say that I think you pointed out to us in your Q, when you give us the interest sensitivity table that you guys are asset-sensitive presently at the end of the third quarter? Is that a fair statement?

Yeah, and thanks for clarifying that. I should have mentioned that in my summary of where we are, Gerard. So there is slight asset sensitivity at this point, just largely coming from the actions we’ve taken in the balance sheet over the last couple of years.

Appreciate it. Thank you so much.

You bet.

We will take our next question from Brian Bedell with Deutsche Bank.

Good morning, and congratulations to everyone on the organizational changes. I have a question for Jason, and Mike may want to add as well. Regarding your comments on organic growth, I appreciate everything you've discussed in the Q&A. In the Wealth segment, I'm particularly interested in the focus on organic revenue growth rather than just asset growth. Can you confirm that? Are you expecting more of that organic growth to come internally, such as through selling more Northern Trust investment-managed products, doing more within the Wealth segment, or other internal strategies rather than acquiring new customers? Will more of the organic revenue growth stem from these efforts? Additionally, could you share what type of organic growth rate you are targeting for the Wealth segment over time?

Let me begin with the conclusion. We have indicated that we expect around a 3% level of organic growth for the business overall. Historically, we mentioned that asset servicing should provide a higher contribution, while Wealth might contribute slightly less. We should aim for a more balanced expectation in this regard. In the medium term, a target of 2.5% to 3% for Wealth seems reasonable. If we break this down, it should stem from both acquiring new clients and enhancing our relationships with existing clients. Within our existing client base, there are various categories to consider, and I want to highlight a couple to illustrate our focus. It's less about increasing product utilization, which we’ve discussed, and more about understanding how we can capture a larger share of our clients' spending with different solutions. Additionally, as our overall client base may shift toward higher-end clients, those clients continue to generate wealth, which translates into our growth. We consider this organic growth if they are bringing in new flows to our business, rather than just benefiting from the overall market growth, which we do not classify as organic. When you combine this with our potential for acquiring new clients, that's our strategy to achieve the organic growth target.

Super helpful. I have a couple of follow-up questions. First, regarding loan pricing, it appears that yields have increased. Is this related to a lag effect? If I'm correct, approximately a third of the book is pricing within three months at variable rates, while a portion prices over a longer duration. Could you discuss the relationship between pricing and rates in that book? Now, on expenses, I appreciate your insights on them. One question I have is about the expense growth, currently projected at 6% for this year. You're aiming to reduce that if you have a robust revenue year and achieve positive operating leverage. Given that your expense Trust fee is aligning with your targets, is there a possibility that expense growth could still reach 6% or more under those circumstances?

First, regarding the lags, you are correct about the month lag. However, there is a small part of both businesses that also operates on a daily basis, which relates more to the number of mutual funds clients have. It's a minor aspect overall. As for expense growth, Mike might want to add his thoughts here. One key point we discussed last year is our intention to separate the idea that strong revenue growth automatically leads to higher expense growth. While some expense increases are unavoidable with business growth, we've highlighted how market conditions can impact expenses. Overall, we are working to shift away from the expectation that higher revenue growth means we should accept higher expense growth as well. Instead, we want to focus on a more absolute measure. Therefore, we entered this year with confidence that we could achieve 5% or less in expense growth, and for next year, our confidence is even greater.

Agreed.

Again, same framework that we've talked about, Brian.

Thank you for that. Regarding the pricing, I was referring to the variable rate loans, not the market. I believe about three quarters of the loans were variable rate and reset within three months in the quarter resets. The lag is what contributed to the yield increase this quarter.

No, it would be slightly over-drafted. We're a bit higher, and that's what caused the yield to increase. Thank you for clarifying that. It's approximately 70% to 80% that’s floating in the loan book.

Got it. Thank you so much.

Thank you.

We will take our next question from Jim Mitchell with Seaport Global.

Hey, good morning.

Good morning.

Good morning, Jason. Regarding capital return, it seems you've been increasing buybacks, and your capital ratios remain quite strong, well above the minimum. Should we anticipate maintaining this buyback level in the near term as profitability improves and rates remain stable? Can you sustain this level, or is it a peak for buybacks?

It's possibly neither, and while it is elevated, it could remain elevated for some time. If we look at the components, currently, we have about a third of net income allocated to dividends. We aim for this to be between 30% to 50% over time, and it's around a third at the moment. This holds true even when considering the equity investment and the Visa situation. Our CET1 ratio is at 12.5% or 12.6%, which is the upper limit of where we've previously been. Although we've reached this level before and are comfortable with it, it is still the upper end. The monetization from Visa has provided significant liquidity for share repurchase, and we will be utilizing that over time. We can continue with our plans and still maintain this CET1 level around 12.5%, though it might decrease slightly. We are willing to tolerate some reduction as we anticipate more Visa tranches in the next year or two, which will offer a similar benefit. Therefore, it’s acceptable for our CET1 to dip from 12.6% a bit. We are carefully considering this and are not looking to be overly aggressive. Instead, we are adopting a measured approach over several quarters, avoiding any aggressive moves.

Right. Great. And then when you think about the monetization of the second half of the Visa shares, that's obviously a tailwind. Do you contemplate maybe longer-term, intermediate term of a lower than 12.5% CET1 given the exit I have? Can you take it to 12% or lower?

I think for such a long-term discussion, it would be best to let Mike address that.

As Jason is saying, 12.6% is a very strong level of capital, and that's fine, given the, I'll say, the broader environment and yet at the same time, yeah, absolutely are comfortable at lower levels as well. So we feel very good about the capital position and the higher level of repurchases that we had in this quarter and as we move into next year.

Okay. Great. Thanks for taking my questions.

Thanks, Jim.

We will take our next question from Vivek Juneja with JPMorgan.

Hi, thanks. Good morning. I have a couple of questions. Firstly, Mike, Jason, you mentioned the additional spending on resilience and modernization that's contributed to your 6% expense growth. How much has that added to the growth rate this year? Would you estimate it to be a couple of hundred basis points? If that spending decreases in three quarters, will that bring you down to 4% or below in the second half of next year since you won't need to fund it? Any clarification or additional insights on that would be appreciated.

It's challenging to attribute the 6% growth and predict that trend moving forward. However, one sign of growth is evident in the increased growth rates we are seeing in equipment and services, which will reflect most of the technology spending. That alone doesn’t account for the entire 6%. As Jason has explained before, there are other factors contributing to the overall growth, including our leverage to the market on both the revenue and expense sides. This is a key element in reaching the 6% this year. Moving ahead, we aim to reduce that figure, but we will continue to invest in technology and other areas to achieve our overall goals.

Separate question for you, Mike. There was a question earlier about the organizational changes. Why don't you use this opportunity where you're making such a lot of changes at one shot to bring in some more talent from the outside?

Yeah. Over time, Vivek, we continue to do a combination of both. And so there are a number of roles some of which we talked about here but other roles which we will go to market and bring in external talent. For some time, that has been the strategy on management. I mean, as you know as much as you might say, Jason or Dave or myself have been at Northern for some time, but we’d actually been in other places longer than we’ve been at Northern. So it’s a mix between promoting talent within because we think we have strong talent that we develop and having a strong talent development program, if you will, is a big part of what we want to do and at the same time, bringing in talent from the outside. So there will be plenty of opportunities to be able to do that.

Thank you.

Sure.

We will take our next question from Mike Mayo with Wells Fargo.

Hi. Thanks for my follow-up. So did I hear you right because you're targeting organic growth and Wealth 2.5% to 3%. How does that compare to the last few years? And when you benchmark that versus peers, how does that stack up when you see growth in the off-state private equity, some other brokers just seems like it's more than that, and maybe it's just the Sandbox where you compete? Thanks.

Sure. A few things to note. First, this target is higher than what we've seen over the past couple of years, which was lower. Previously, we were within that target range. We've achieved that before, and that's why we believe we can reach it again. For comparison, some firms are performing better while others are not. Our goal is to be a leader, ideally at the top end of the range. However, making comparisons can be challenging because some firms include banking in their figures, while others do not; some include product fees, and others exclude them. Our financial model also allows us to be more profitable compared to our peers with the same level of growth. The profitability of our Wealth business is robust, which contributes to its attractiveness. Our clients are well integrated, and this integration ensures that our growth translates into better returns for shareholders. Thus, we feel optimistic about the target and its implications for our shareholders.

Thank you.

Thank you.

We do not have any further questions. I would like to turn the call back to Jennifer Childe for closing remarks.

Thanks for your participation on today's call. We look forward to speaking with you again in the near future.

This concludes today's call. Thank you for your participation. You may now disconnect.