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

Thank you, Maddie, and good morning, everyone. Welcome to Northern Trust Corporation's first 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 first 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 April 16th 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 May 17th. 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 first quarter 2024 earnings call. We're off to a good start for the year. Our results for the quarter reflect both strength in underlying equity markets and the solid progress we're making against our strategic priorities of optimizing growth, driving productivity, and strengthening resiliency. We generated organic growth relative to both the prior period and prior year and saw healthy momentum inflows across our businesses. Within Wealth Management, we continue to see solid growth in client advisory fees and product level fees increase due to favorable markets. Our Global Family Office performed particularly well in the first quarter, adding several high-profile client relationships. The launch of our book, Secrets of Enterprising Families and the nationwide events created around it have generated significant client engagement and proven to be an attractive source of new lead flow. Asset Servicing generated solid new business growth at attractive margins in the first quarter. As we've discussed, our goal is to generate new business that is scalable. This means, a greater proportion of new mandates that require lower levels of incremental costs. There were several notable wins in the quarter. Northern Trust was appointed to provide a full suite of asset servicing solutions to True Potential, a rapidly growing UK-based wealth management firm, supporting approximately $33 billion in assets under management. Our open architecture approach, derivatives expertise, and consultative manner were key factors in helping us secure this win. We were also appointed as the sole asset servicing provider for Sanlam Asset Management's $9 billion of funds domiciled in Ireland. The award builds upon an existing relationship with Sanlam Investments UK, an integrated trading solutions client. This win shows how increasingly our capital market solutions are becoming leading products for us, bringing new clients…

Thank you, Mike. And let me join Jennifer and Mike in welcoming you to our first quarter 2024 earnings call. Let's dive into the financial results of the quarter starting on Page 4. This morning, we reported first-quarter net income of $215 million, earnings per share of $0.96, and our return on average common equity was 7.3%. As noted on the slide, our reports -- our reported results included a $189 million loss on the sale of securities related to a repositioning of the portfolio we completed in January. They also included a $12.5 million FDIC special assessment, which is in addition to the $85 million we recognized in the fourth quarter. Our assets under custody and administration and assets under management were up sharply on both a sequential and year-over-year basis. Strong equity markets coupled with favorable client flows drove most of the improvement in both periods. Excluding notable items in all periods, revenue was up 6% on a sequential quarter basis and 5% on a year-over-year basis. Expenses were up 4% sequentially and up 6% over the prior year. Trust, investment and other servicing fees totaled $1.1 billion, a 5% sequential increase and a 7% increase compared to last year. Excludable note -- excluding notables in both periods, all other non-interest income on an FTE basis was up 11% sequentially and up 16% over the prior year. We experienced good momentum in our capital markets businesses, particularly FX trading where we saw strong client volume levels. Bond underwriting referral fees were also unusually strong, recognized within securities commission and trading income. Net interest income on an FTE basis was $535 million, up 7% sequentially and down 2% from a year ago. Overall, credit quality remains very strong. Our allowance for credit losses declined 9%, reflecting a reserve release…

Thank you. [Operator Instructions]. We will take our first question from Alex Blostein with Goldman Sachs. Mike O’Grady: Good morning, Alex.

Hey, good morning, Jason, Mike, [John and everybody] (ph). So I wanted to start maybe with NII guidance down 3% to 5% for the second quarter. Sounds like the biggest driver there is your assumptions around deposits. So maybe give us a sense of kind of where deposits stand today, perhaps what was the source of upside that you saw over the course of the quarter? And then just curious on within that guide, do you guys assume any benefits from the Visa proceeds that I'm guessing is going to be at least temporarily parked in cash?

Yep. So, I'll go through a couple of dynamics there. One, just going back to first quarter and what happened that we saw really nice improvement in deposit levels, and it was across both asset servicing and wealth management. And the overall base increased nicely, but that end of quarter level of $124 billion, there's some very chunky large clients that we always have in place and that sometimes can have -- lead to significant increases. That was definitely the case at the end. So we have seen deposits come down, and in the first couple of weeks of the quarter. And -- but that said, the run-up we had at the end of the quarter, that wasn't really the driver of the average. It happened very late in the quarter. So the end of first quarter in general was good. As we look out into second quarter, we've got to remember that things like the buildup that we have in April for tax payments. which, frankly, was part of the dynamic of where we ended the quarter, that starts to go away as tax payments get made and so deposits come down. That's one of the factors. And so we could even at this point, be at a peak for the quarter. And then you asked about Visa. No significant lift from that in the quarter. You're right, it's going to be parked at least in the short run. We've got ideas on what to do there. But in the very short run, would be parked in cash but not a significant lift. The impact is more from a capital and leverage perspective more than NII in the short run. And just in general, you got to remember, this has just been -- it has been very hard to predict deposit levels. And it's not us driving it. We're -- we did a lot of work with clients to make sure they know that we want deposits and feel like we did a really good job on that. But this has been the most difficult area of the income statement to predict.

I got you. Yeah, and all makes sense. I guess as a follow-up to that, so we'll stick with the NII related questions. You guys saw a pretty meaningful pickup in cash as you highlighted, so $10-ish billion sequentially. How are you guys thinking about redeploying that over time? Should we generally expect the cash balances on the asset side of the balance sheet to remain fairly elevated, especially given the sort of uncertain rates backdrop and perhaps higher for longer or at what point do you feel comfortable extending that into securities?

Yeah. It's another dynamic that feeds into your first question, actually. We brought duration [on] (ph) the securities portfolio. And more importantly, which feeds into your question, the duration of the balance sheet is very short right now. That was strategic. We felt like that was the right thing to do. That's a big part of why we did the repositioning of the balance sheet. But at a point, we also might take the opportunity to extend a little bit. Usually, the rate curve means that, that would be helpful. But in this rate curve environment, you might end up giving a little bit -- giving up a little bit on NIM. And so you're right that cash, very elevated part of that is because of the chunky nature of some of the deposits. And you just want to stay very short there. And -- but part of it has been strategic as we've let a lot of maturities just roll and then obviously, the repositioning was done intending to come to the shorter part of the yield curve. But where we are now and our anticipation of -- our view of the yield curve, we're more at a neutral point right now. And depending on what we see in the economy might take an opportunity to step out.

I got you. All makes sense. Thanks very much, Jason.

Sure. Thanks.

We will take our next question from Ebrahim Poonawala.

Good morning, Ebrahim. How are you?

Good morning, Jason. How are you? So I guess maybe moving on expenses. I just want to make sure we heard you right. Comp expense is down about 35% to 40% sequentially. And then I think you counted services and equipment and software both up 10% to 15% quarter-over-quarter?

That's right.

So does that imply relatively flat expenses in 2Q? And I guess the question is, just give us some visibility around -- you've talked previously about the focus in terms of flexing expenses lower, bringing the expense growth below last year's 4.8%. Just give us a sense of the work that's being done, your level of confidence in terms of hitting some of those targets around the expense to trust fee asset ratio?

Yeah. So first of all, that goal of 5% or below, that is still the goal. And secondly, it's early in the year. And we got through first quarter and a little bit above that. But at the same time, we're still working very hard to get expenses down. And the numbers that we gave in the opening give a sense of some of the bigger line items. But there are other areas where we're continuing to push and even on those items, we're continuing to push hard. We're constantly trying to find opportunities to get expenses down. Enormous focus inside the company. And you're right to confirm the numbers that we had there in things like outside services where we've got tech services and even cloud migration and consulting, those are all areas where we've seen some elevation, all for strategic reasons, but we've got to find productivity and make sure we're finding efficiencies to get expenses where we want them to be early in the year, and we're still pushing for that 5% or better.

Got it. And just I guess one follow-up to...

Yeah, one thing, just sorry to interrupt, Ebrahim. Yeah, I think as we think about the first quarter of the year, I think people should also appreciate how much the lift in markets had an impact on our expenses. And so when you think about things anywhere from market data to third-party advisory fees to sub-custody and referenced it quickly earlier on, but even something like the market's impact on our supplemental benefit plans has significant impact on expenses. But for that supplemental benefit plan expense, there's an offsetting increase in revenues. There's no impact to profitability. So we got to put that aside a little bit. And -- but the lift in markets definitely has an impact. And so a lot of the work that we've done in the first quarter and over the last year, it masked a little bit, but that's just something we should all keep in mind as we've gone through this period of the S&P being up 25% year-over-year, 10% to 12% on a sequential quarter basis. That plays into expenses as well.

That's helpful. Thanks for that. And just one quick follow-up. I appreciate that it's very hard to sort of handicap deposit behavior, but just give us a sense of pricing competitively? Have things stabilized, gotten better today versus three or six months ago? Thank you.

Pricing specifically and [what’s here] (ph) in deposits. Yeah. We did see -- one of the biggest benefits we had in the quarter was that pricing came through better than we anticipated. We actually were up a couple of basis points in NIM and had anticipated that to go in the opposite direction. And so -- and we've been a broken record saying we're not a price maker or a price taker in this, but I think a lot of the work that we did, communicating with clients and bringing on high-quality deposits, it helped. And so it appears that, that pricing pressure that we were experiencing very significantly in third quarter in particular, it has abated things, less pressure on that dynamic right now.

Got it. Thank you.

You bet.

We will take our next question from Ken Usdin with Jefferies.

Good morning, Ken. How are you doing? Ken, if you are talking, you are muted.

Hey guys, this is Mokshith on behalf of Ken. Could you just talk about your servicing pipelines and just your wealth management growth? Just some more color on that would be fantastic.

Sure. Mike O’Grady: Sure. I'll start off with wealth management. So we did see nice organic growth in the first quarter, and we expect that to continue as we go forward. As was mentioned in the commentary there, I continue to see it on the advisory fee side of the equation. And also, we've gone through a number of quarters where the product level fees in wealth management have been more of a headwind just related to flows in some of the specific asset categories, and we saw that subside in the first quarter. So we expect that to also be a positive going forward. And you heard our family office business growing at a higher rate in the first quarter, also seeing strength in ultra-high net worth, which -- those are the two segments that we're primarily focused on. And I would say in asset servicing, the growth has been relatively broad-based, certainly seeing strength with asset owners in North America, but also in Europe as well. So that has been a positive. And we're seeing it outside of, I'll say, core asset servicing with the capital markets area being an area where with integrated trading solutions, we're seeing that as a, I'll say, an increasingly utilized area for us to generate new relationships and then broaden them out from there. So I feel good about the breadth of the organic growth in that business as well.

Got it. Just another question on just flow of client assets between cash and fee generating and where that stands?

Yeah. So the -- overall, the cash has been obviously a positive story, not just in deposits, but also in our money market mutual fund complex, which is up meaningfully sequentially and year-over-year. And that complex is very important to us. It's highly profitable. it's large. So our most sophisticated clients see it as a good opportunity to invest there with good yield with the benefits of being in a collective fund but at the same time, not having significant concentration. And so the overall liquidity and cash in the investment management business, but also in the broader financial model has played very significantly into the strength of the quarter.

Thanks for taking my questions.

Of course.

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

Hi, good morning.

Good morning, Betsy. Nice to hear you. Welcome back.

Good, thanks. Just wanted to make sure you could hear me. So I guess two questions. One on capital. And I realize that your business model is one that is capital rich. And just wanted to understand how you think about capital -- levels of capital accretion and when is the right time to start leaning in more to buybacks given the excess capital that you have.

So the -- you're right that the capital levels are strong. And even with where we are right now at 11.4% in CET1, I'd argue that that's a little artificially low right now. We talked about the fact that loans were elevated because of the operational dynamics at the end of the quarter. And so we expect -- RWA is already down as a result of loan volumes, which we mentioned earlier coming back more to normal levels. Plus, we've got $700 million in AOCI, pulling the par, plus we've got Visa, and plus we're still returning on an operating basis at a good level. And so those are all good. They're also -- and you're right to note that we like having strong capital levels and still able to develop good returns at these levels. And we also are always looking at where our peers are to make sure that when we say strong, it's not just absolute, but relative. Now all that said, particularly with Visa coming online, you can imagine likely going to have an upward impact on the trajectory of share repurchase. It's not like we're going to do something enormous right away, but it goes into our capital framework and with capital levels being higher as a result of that and even in anticipation of it, it obviously will have an upward lift, all other things equal.

Okay. Great. And then, separate question just on -- I think you mentioned earlier about opportunities to extend duration in the book -- in the securities book at some point, and maybe you could just give us some context and color as to how you're thinking about that, given the fact that typically you have a very, very short duration. So when you say longer duration, what are you thinking about in terms of how long is long? Thanks.

Yeah. That’s a good focus and everything is relative. So we had gotten out to about two years on the securities portfolio a couple of years ago and now being meaningfully under one year, it gives you at least some sense of range. But I also think it's important to note everybody should take a lesson from what we've seen in the markets over the last couple -- in banking over the last year that deposits have a shorter duration than anybody anticipated. And so on bias, we're going to be shorter relative to history than what we have been before but we're quite short right now. And particularly as deposits seem to be leveling off in general and a little bit more predictable, it gives us an opportunity and more confidence and then we have to test, do we see the investment opportunities? And does the yield curve indicate to us that it makes sense to go out. And that's part of the reason that we've been shorter. We felt like it was -- that it was going to be better to be at the short end of the curve over the last year that led to that repositioning work that we did. And so it's not going to be dramatic, but given the way the shape of the yield curve is right now, any step-out protects us nicely from significant declines in short-term rates, but it gives up a little bit in short-term NII.

Yeah, got it. Okay. Thank you. That's very clear.

Great.

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

Good morning, Brennan.

Good morning. Thanks for taking my questions. Hey, how are you, Jason? Got a couple of follow-ups. One on the deposit front. Jason, you commented how deposits have declined, but it seemed like you were commenting more on an EOP basis than versus the average. We saw the average balances of above that $100 million to $110 million range that you had previously talked about, we saw some stability in noninterest bearing. So when we think about the go forward on an average basis, have we hit a level where now things should be relatively stable comparing it to where we were on an average basis? I appreciate that you said this is the hardest part of the balance sheet to predict. So I recognize I'm asking a challenging question.

Yeah. I think I said our overall financial results to predict. It's been really hard. That's -- you're right to point out that the comments I made were relative to the $124 million. We have seen, obviously, balances come down. We naturally do the first couple of weeks of the quarter. But this dynamic of tax payments is one that can have an impact. And also just the fact that clients may be doing exactly what we were talking about a minute ago with Betsy's question of thinking about redeploying out of cash into different types of securities and maybe buying treasuries, that has a dynamic as well or maybe moving into money market funds to pick up, even if it's not six months or two years of duration, taking up 45 days. And so, all those dynamics have a downward impact on average deposits. And we just want to make sure we're prepared for that as we think about the scenarios. We're trying to give you guys a reasonable estimate of the upside downside that we feel. And -- but that -- having deposits down meaningfully in the quarter, that's inside our expectation of what could happen. Mike O’Grady: And, Brennan, it's Mike. Just to add at a very macro level, if you just look at deposits starting back pre-pandemic and then quantitative easing obviously had a very meaningful impact on those deposit levels going up. And then we saw the reverse with quantitative tightening. And so some of this will depend on just the broader macro impact of tightening and when the Fed and other central banks decide to stop bringing down the size of their balance sheet. And I think then we'll reach a new level of normalization of deposit levels. And right now, we're, I would say, well above the pre-pandemic quantitative easing levels. So to the extent that we're closer to the end of quantitative tightening, the expectation would be that we start to settle out somewhere in this neighborhood.

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

Good morning, Brian.

Great. Thanks. Good morning, good morning. If I can ask my first question on NII. So just looking at the second half and of course, everything is difficult to predict with deposits and everything. But if you can just talk about how Visa might work its way, I think there's a couple of stages of deployment, so it's more of a 3Q and 4Q lift versus 2Q. I think you said it was pretty minimal for the 2Q guide. Maybe just talk about the timing of that? And then I guess, do you see a scenario in which you might actually have positive net interest revenue growth in '24 versus '23 given the really strong start to the year?

Sure. So just on timing of Visa, you're right. We'll be able to get a portion of it done here in the second quarter, but some of it will bleed over into third quarter. And if you're just correlating to what's the impact on NII, obviously, that -- it doesn't have that much lift just because we're not getting as much timing from it. But you're right, there will be some lift. But I’ll come back to the -- the biggest benefit of Visa is more on its capital and our liquidity. If you think about the most simplest component of putting those dollars at the Fed at IOER or IORB, then you don't get a dramatic lift beyond what would happen with a $0.5 billion or $700 million deposit coming in. And so at no cost, but it's not that dramatic of an impact. And so the real help is a little bit longer term and us being able to think about strategic ways to deploy that and ensuring that we get a good return on it. So we're trying to keep a lot of different paths open. But -- and again, this is also half of the position that we're talking about this year. there's still another half to come, hopefully, next year and some of that may bleed further.

And then on the possibility for NII growth in '24, given the start?

Yeah. I think it's -- you started with it. It's so early in the year to predict that and to predict where things go. We're still getting some lift from different components of maturities coming in and other elements. And so there are some tailwinds that we have, but it's very difficult to predict that far out.

Yep. And then just on expenses, the second quarter, the numbers you gave, obviously, there was just the biggest categories that looks to me like that [Technical Difficulty] guidance that you gave, not including other things. Just I guess if you can confirm if that's accurate. And then based on your comments of working harder on expenses and getting some of this -- looks to be some of that seasonal lift in the second half, kind of getting pulled forward, should we maybe less expense build in the second half versus the second quarter that we typically see on the seasonal lift? And then putting that all together is -- I know you're targeting obviously positive operating leverage on fees. But if you actually have a good NII backdrop, maybe we actually potentially see positive operating leverage inclusive of NII, so on total revenue.

Yeah. So I'm going to hit the second and third parts of that. You broke up on the first. I'm going to ask you to repeat it when I go through part of it. On the second half lift in expenses, absolutely right. Second quarter is a big step-up. It's a big step-up in both outside services and equipment and software, not seeing those types of increases in the second half at all. Not saying they're going to be flat, but definitely not -- that's not the trajectory that we will be on. And we're working very hard to find productivity and a lot of that can be inside this year. And so still work to be done there. And then as we think about fee operating leverage, that's what we focus a lot on. I mean the NII is unpredictable, and it's less correlated from a management perspective to expenses. And so the real focus is on fee operating leverage. And so -- and that's how we think about the financial model and ensuring that we're being disciplined about the expenses relative to what we're bringing on. Mike talked about bringing on more scalable business that has -- that improves our chances of getting good fee operating leverage, but I wouldn't comment on overall operating leverage given the volatility and lack of controllability in NII. But tell me what we missed on the first part of your question.

It was just a technical on the guidance you gave for 2Q. I think it implies expenses down like $10 million to $15 million versus 1Q, just on at least the categories that you talked about and the three different ranges that you put out there. I just want to make sure that was -- I want to confirm that was accurate.

Yeah. Let me -- I can go through the chunks that we talked about really quickly. So the implication would be that compensation would be down $35 million to $40 million and equipment, software and outside services each up $10 million to $15 million.

Yep. Okay, great. Thank you very much.

You bet.

We will take the next question from David Smith with Autonomous Research.

Hey, David.

Good morning. Just speaking a bit more about balance sheet positioning, setting aside the somewhat artificial nature of the 10-K asset sensitivity disclosures everyone has, can you give us your best real-world guess right now for the incremental NII impact of more versus fewer Fed cuts, putting both pricing and balance sheet volume dynamics together?

Yeah. It's assuming -- you're right to point to the supplemental disclosures have the sensitivities to it. But if you're thinking more about -- those are more stressed, up 100 basis points, 200 basis points and more. If you're thinking more about single or double rate cuts, then it's difficult to -- it's actually difficult to tell. And you can see just assuming what's more likely of a 25 basis points or 50 basis point decline. We're going to be following the market and what happens there. And there are scenarios in which you could see banks trying to hold on to deposits and others saying that they want to hold on to margin. And so even on the way up, it was not a linear exercise for us. The betas were very low at the beginning of the increase. And then at the end of the increasing cycle, the betas were very, very high, in some instances, over 100%. And so it's just difficult to predict right now. There's no science. We debate internally even what the most likely impact is for these first couple of cuts on the way down.

Okay. And then one other NII follow-up. Do you think you're done with securities repositions at this point? Or could we see another one later in the year?

Unlikely we'll see another one. We got a lot of the -- a lot of what we did, a lot of the very low-yielding securities. And remember, there's real benefit from a capital perspective as well and being able to take some of the securities that had negative RWA treatment and reinvest those in cash at a point in the yield curve where we felt that's where we wanted to be incrementally from a strategic perspective, from an investment perspective and also have improvement from the capital perspective. That trade, each time we've done it, that component of the repositioning has lessened an impact. And so it is much less likely, but that's just given the current state of the yield curve and how we feel about the economic environment.

And lastly, anything you can do to help us think about using the Visa proceeds for organic versus inorganic investment opportunities?

Yeah. It's -- we're obviously looking really hard at ways internally to make sure we're investing anywhere we can to grow at attractive capital levels. Our return on capital is -- targets are 10% to 15%, and we're putting that same type of framework in place as this capital comes in. And to the extent, the best thing we can do is grow with our existing types of businesses and with our existing clients. That said, we have not been short capital before. And so it's not like there are things we could do, but we couldn't afford it from a capital perspective. And so it's -- it's not like there's a laundry list of things we can say, now we can go get this done. And so we're going to be prudent and patient, but at the same time, not hesitate to reflect our capital framework, which at this point would indicate, all other things equal, a little bit bias heavier on share repurchase.

That's helpful. Thank you.

Sure.

We will take our next question from Steven Chubak with Wolfe Research.

Hey, good morning. This is actually Sharon Leung filling in for Steven this morning. Just a quick follow-up on non-interest bearing deposits. They seem to have stabilized this quarter and are now about 15% of the total. Do you think that this is kind of like a good trough level, even if you see continued deposit pressures related to QT, et cetera?

They -- it's definitely flattened out in terms of even the percentage decline despite the fact that we had an overall increase in deposits. And so non-interest bearing deposits performed well relative to what we would have expected and definitely seemed to have flattened out. Didn't grow as much as the rest of the base, but performed well in the period. So not predicting a significant movement down at this point.

Okay, great. And then just to follow up on AUM and AUC growth, saw healthy expansion, but can you talk about what maybe drove some of the pressure on fee rates across your business this quarter?

Yeah, the fee rates, I think, is -- I always caution to focus on that when we apply it to our asset levels, whether it's on assets under management or assets under custody, because only a portion of the business, roughly half is even tied to asset levels and then a lot of the contracts that we have get to transaction volumes and then there's significant mix shift. Areas like our family office business are going to have a lower overall yield on assets relative to the regions in wealth management, for example. And then there's other components in asset servicing that are very similar. And so we actually don't do a lot of analysis on -- as we're unpacking the quarter or the year, we're not looking at those rate changes as the biggest indicators of what's happening in the business. We're looking more granularly at what's happening with our clients, the mix within different products and what's happening in the regions and family office, et cetera.

Great. Thank you.

Sure.

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

Thanks, operator, and thanks everyone for joining us today. We look forward to speaking with you again in the future.

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