管理層發言
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 notables, 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 benefits of the pivot in our strategy fully, 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 in welcoming 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. 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 of 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 as expected, we realized a very strong deposit beta on institutional accounts relative to the recent rate cuts. 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, 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.
It was also flat sequentially. 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 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.
分析師問答
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 please repeat your question a bit louder?
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 the 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 at least the next 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 in 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 would like to follow up on expenses and the leadership changes announced in September. Mike and Jason, could you share your thoughts? I've sensed some frustration from investors regarding the lack of bottom-line results despite the focus on operational efficiency. Should we interpret these leadership changes and realignments as an unusual approach to improving operational efficiency moving forward? Additionally, how should we consider the incremental expense spending? I noted your previous comments, Jason, but I'm curious if this is included in the expense base as we approach the fourth quarter, or will there be more expenses and investments for 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 some positive news in the NII results. Although deposits appeared to be flat, we experienced significant exits of some very large, low-yielding deposits that we anticipated would leave this quarter, which contributed to our expectations of a decline in deposits. However, we were pleasantly surprised to find that other areas of the organization replaced those deposits with much more attractively priced ones. Additionally, we did not observe the usual seasonal drop in August, particularly. Therefore, not only are the deposit levels stable, but the quality of the deposits has improved. Looking ahead to the fourth quarter, we expect rate cuts. While we are optimistic about the current strength of our deposit book, it is challenging to fully offset the deposits. Thus, an increase from this point seems unlikely. We are projecting an NII level of 550 to 560 for the fourth quarter, which remains solid but would represent a slight decline.
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 you highlighted.
Sure. Let me address this in reverse order. Regarding deposits at the launch point, I believe this is a favorable level. When considering the third quarter, we have core asset and liability pricing, along with other factors such as FX swap activity, FHLB dividends, premium AM, FTE adjustments, and repo activity, among other elements. While these don’t contribute significantly on their own, most of them moved in our favor this quarter, resulting in that $10 million to $15 million increase. Your question is insightful because we do not anticipate all these factors to disappear in the next quarter. The current environment and rates provide us with opportunities for more FX swaps and other activities that contribute to net interest income. Therefore, we do not expect that increase to completely decline. This explains why we observed the increase from the second to third quarter. The projected range of 550 to 560 mainly reflects some of these items returning to more normalized levels, as well as the effects of rate changes by various central banks that will impact 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 expense-to-trust fee ratio for this quarter and year-to-date still exceeding our target range of 105% to 110%. We aim to lower that into the target range. Additionally, from a margin viewpoint, our pretax margin target is in the low 30s. That's one of our main goals. To reach this, we have experienced strong revenues this year, which have allowed us to obtain this leverage. However, we cannot always rely on market strength and a favorable rate environment to sustain this. Therefore, we need to further reduce the absolute growth rate of our expenses. This will be our objective heading into 2025, to achieve that operating leverage and increase the likelihood of hitting our targets by lowering our expense growth rate below its 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. I have a couple of questions. First, Mike, you mentioned that deepening relationships is a key focus for growth moving forward. Can you clarify how this change is being implemented? Is this different from your previous approach? Are you focusing on hiring more resources or on delivering more products? Additionally, where in the organization do you see the greatest opportunities? Is it in asset servicing, asset management, investment management, or the wealth platform? Please help us understand where you believe the most significant opportunities lie for deepening relationships.
Sure. To address your question, our One Northern Trust strategy focuses on ensuring that all business segments within the company collaborate effectively to achieve the best results for our clients and other stakeholders. From the client's viewpoint, this involves several elements. Initially, it's about the businesses collaborating from the outset, particularly in market opportunities. For instance, combining asset servicing and asset management to provide a comprehensive solution for clients rather than initially offering one service and later attempting to cross-sell another. Opportunities exist primarily between asset servicing and asset management, but I also want to emphasize Wealth Management. We've made significant efforts to strengthen the connections between these two areas and consider the needs of our Wealth Management clients when developing new investment management products.
This year, we launched several new funds based on research addressing the specific needs of our clientele. We will continue this approach to ensure we deliver the right solutions for them. Regarding the capabilities we offer, as you mentioned, it involves introducing new products or services. For example, we recently provided Artemis with a new capability in outsourced trading, which is part of our integrated trading solutions that we launched years ago and have since expanded. This capability is now effective for clients like Artemis, indicating significant potential in this area 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 effect on profitability, not just the expense line. As you consider your goals and the opportunities presented by this shift, how do you envision this impacting 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 recognize that we have 135 years of exceptional private banking relationships and the One Northern Trust initiative along with various other developments. However, I also notice that our stock price has lost its advantage compared to Trust bank peers and even trades three points lower than Morgan Stanley. I'm curious about how much of this situation can be attributed to our business mix, the broader environment, and our execution. I understand the concept that strategy influences structure, which then impacts execution and ultimately results, including stock price. I'm trying to grasp why the same individuals in our organization can achieve better organic growth in their new roles. The recent press release announcing changes to the CFO, COO, Head of Wealth, Head of Asset Servicing, and Head of Family positions all at once is quite unprecedented and has caught my attention. Mike, I believe you have a significant perspective on this. Could you share your thoughts on why you believe these changes will lead to a positive outcome? Thank you.
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 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 quite a bit recently and have a good understanding of the business, having spent time in L.A., New York, and Texas over the past few weeks. I'm looking forward to attending a client event tonight in San Francisco. I believe there’s potential for us to grow further. One way to approach this, Mike, is to consider the markets and segments we operate in, focusing on areas where we can enhance our specialization and offer more solutions to our clients. As you know, we have an outstanding client base and talented team across the organization. It’s clear that we can accomplish more, and using this framework will help us identify initiatives to accelerate business 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 appreciate the opportunity to ask a question. I’d like to revisit the topic of expenses. I recognize the commitment to achieving operating leverage and reducing fees. However, based on the guidance for the fourth quarter, my calculations indicate that we might exceed 6% in expense growth for 2024. Jason, in your last comments as CFO before the press release, you mentioned a commitment to keep expenses under 5% for 2025. With a new CFO in place, does that commitment still stand? How should we approach this issue? I understand that operating leverage is important, but expense growth has been a significant concern, especially in recent years with inflation adding to the problem. How do you plan to manage this effectively so that we can maintain a consistent pace of operating leverage without setting the expectations 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 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 will begin by emphasizing our commitment to investing more aggressively at the higher end of the market. We excel with our larger clients, as evidenced by the growth we’ve seen in the GFO business, which has outpaced the overall Wealth sector. A closer look at the regions shows we are outperforming at this level, reinforcing our value proposition. We are confident that we can make substantial investments in revenue-generating professionals and support for these clients to enhance their experience. While many RIAs boast of having one or two app tech fellows, we have 15 to 20, enabling us to handle more complex state planning effectively. This success extends to investment advising and banking as well. Our focus on investing at the upper end of the market is where we anticipate better returns. Recently, we launched a distinct ultra-high net worth group, dedicating professionals to engage with clients at the highest end of Wealth advisory, collaborating closely with our family office business to enhance our traditional Wealth offerings. We are excited about the growth potential in this area and the talented professionals we are bringing on board, which we believe will contribute to the expansion of our client base.
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 has gone up. We’ve had or offered front office solutions, which looks across the entire portfolio that we’ve been very successful with. 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. 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. 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. 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. To do that, we need to see that collaboration between the businesses. That then flows into our financial performance overall when you add into it the markets and the impact from that. Ultimately, you're going to see it in the financial performance. 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. 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 misnaming Northern One as One Northern Trust, but thank you. Jason, returning to your comments on the net interest income expectations for the fourth quarter, you mentioned that the entire balance sheet duration is about a year and that the securities portfolio is slightly longer. If the forward curve holds and we anticipate a Fed funds rate around 3.5% by the end of next year, while the long end of the curve remains above 4%, we would see a positive slope. I'm not asking for a specific guidance number for '25 NII, but generally, would this be a favorable environment for net interest income for your team, or could you provide some insight on that?
We fell short on the securities portfolio for various reasons, but the rest of the balance sheet remains stable. The cash position is as it is, and we haven't strategically altered the duration of our loan book. The duration of the balance sheet and net interest income largely depends on our management of the securities portfolio. We experienced a shortfall, but it turned out to be beneficial for us due to several factors, including our outlook on the yield curve. However, looking ahead, the current yield curve suggests potential challenges for next year, especially with the possibility of multiple rate cuts. Our risk tolerances, philosophy, and approach to managing the balance sheet will remain unchanged despite this headwind. On a positive note, we are more confident in the stability of our deposit levels, which enables us to consider using more non-HQLA. Additionally, if we observe an increase in our deposit base, that would also be beneficial. There remains a small advantage for next year from reinvesting maturing securities, although not as significant as previously expected. These factors illustrate the complexities we are navigating. It's still too early to provide guidance, but it's important to recognize the various influences at play, both positive and negative.
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 on the organizational changes. I have a question for you, Jason, and perhaps Mike can also weigh in. Regarding your comments on organic growth, I appreciate everything you've discussed during the Q&A. In the Wealth segment, I understand the focus is on organic revenue growth instead of asset growth. Can you confirm that? Do you anticipate that more of this organic growth will come from internal sources, such as selling more Northern Trust investment managed products and enhancing capabilities within the Wealth segment, rather than acquiring new customers? Are you expecting to see a greater portion of your organic revenue growth arising from these internal efforts? Additionally, what organic growth rate do you aim for in the Wealth segment over time?
Let me start by saying that we are aiming for around a 3% level of organic growth for the overall business. Historically, we have expected a higher contribution from asset servicing and a slightly lower contribution from Wealth. It’s important to maintain a balanced expectation, so a medium-term target of 2.5% to 3% for Wealth seems reasonable. When we consider the sources of this growth, it will come from both acquiring new clients and expanding our services with existing clients. Within our current client base, there are various categories to consider, and I’ll highlight a few areas of focus. Our approach is less about increasing product utilization aggressively and more about enhancing our wallet share with clients by exploring different solutions. For clients at the higher end of the market, as they shift toward us, their growth will become our growth. We view this as organic growth when new flows come into the company, rather than relying solely on market growth. Alongside this, our efforts to attract new clients will also contribute to achieving our organic growth targets.
Super helpful. I have a couple of follow-up questions. First, regarding loan pricing, it appears that the yields have increased. Is that due to the lag? If I'm not mistaken, about three-quarters of the book is priced within three months, which is variable rate, and there is a portion that is priced over a longer period. Can you discuss the pricing in relation to rates within that book? Secondly, thanks for the insights on expenses. I have one question about expense growth, which seems to be at 6% this year. You aim to reduce that if you experience a robust revenue year and achieve positive operating leverage on total revenue while your expense Trust fee approaches your goal. Is it still possible for expense growth to reach 6% or higher in that scenario?
First, regarding the lags, you correctly noted the month lag. However, it's important to remember that a small portion of both businesses operates on a daily basis, particularly when clients have more mutual funds. This is a minor factor. Generally, you are right about the month lag. As for expense growth, Mike may want to add to this. One point we discussed last year was our goal to separate the idea that strong revenue growth should automatically result in higher expense growth. While some expenses come with business growth, we've discussed how market performance affects expenses. Overall, we aim to shift away from connecting higher revenue growth with tolerating higher expense growth. Instead, expenses should be assessed on an absolute basis. That's why we approached this year with confidence in achieving 5% or less expense growth. Looking ahead to next year, our confidence is even stronger.
Agreed.
Again, same framework that we've talked about, Brian.
Thank you for that. Regarding pricing, I was referring to the variable rate loans, not the market. It seems that about three-quarters of the loans are variable rate and reset within three months during the quarter resets. The lag is what caused the yield to increase this quarter.
No, it would overdraft a little bit higher; we're a little bit higher. That's what drove the yield up. Thanks. I really appreciate you clarifying that. It's about 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, you've increased the buybacks, and the capital ratios are quite high, as you mentioned, remaining well above the minimum. Should we anticipate maintaining this level for the near term as profitability rises and rates remain stable? Can you sustain this buyback level, or is this the peak for now?
It's not definitively either way. It is elevated, but it might remain elevated for a while. If we examine the components, about one-third of our net income is currently allocated to dividends. We discuss a target range of 30% to 50% over time, and we are currently around one-third. When considering the equity investment and the Visa situation, our CET1 at 12.5% or 12.6% is at the higher end of our historical range. We are comfortable at this level, although it is the upper limit. The monetization with Visa has provided significant liquidity for share repurchase, and we are gradually utilizing that. We can continue this approach and maintain approximately the 12.5% level, with a possibility of a slight decrease. We accept this because we expect additional Visa tranches in the next year or two, which will yield comparable benefits. It's acceptable for us if our CET1 dips slightly from 12.6%. We are carefully analyzing this and plan to take a measured approach over several quarters, avoiding any overly aggressive actions.
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 should let Mike or someone else address that as we're discussing such a distant future.
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. 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 and Jason, you mentioned that the additional spending for resilience and modernization is what has contributed to your expense growth reaching 6%. How much has that added to the growth rate this year, perhaps a couple of hundred basis points? If that spending ceases in three quarters, would that lower your growth rate to around 4% or below in the second half of next year? Could you provide any clarification or additional details on this?
It's challenging to attribute the 6% growth and predict it moving forward. However, one sign of growth in the areas I mentioned is reflected in the increased growth rate in equipment and services. Most of the technology spending will come from there, but that alone doesn't account for the entire 6%. As Jason has previously explained, there are various factors contributing to the overall growth, including our reliance on market fluctuations impacting both revenue and expenses. This dynamic influenced our growth rate to reach 6% this year. Looking ahead, we aim to reduce that rate. We plan to invest in technology and other areas to achieve our broader objectives.
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. 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 period, 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 period, 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. There will be plenty of opportunities to be able to do that.
Thank you.
Sure.