Q3 2025 Earnings Call Transcript

Good day, and welcome to the Northern Trust Corporation Third Quarter 2025 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jennifer Childe, Director of Relations. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Northern Trust Corporation's Third Quarter 2025 Earnings Conference Call. Joining me on our call this morning is Michael O’Grady, our Chairman and CEO; David W. Fox, our Chief Financial Officer; John Landers, our Controller; and Trace Stegeman 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 22 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 22. Northern Trust disclaims any continuing of the information provided in this call after today.

Please refer to our Safe Harbor Statement regarding forward-looking statements in the back 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 Michael O’Grady.

Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our Third Quarter 2025 Earnings Call. Our third quarter results underscore the momentum and disciplined execution of our One Northern Trust strategy. For the fifth consecutive quarter, we delivered positive organic growth and operating leverage, demonstrating our ability to capitalize on a constructive market environment while advancing our transformation agenda. Supported by favorable equity markets and well-managed expense growth, third quarter revenue increased 6%. Our pretax margin expanded by nearly 200 basis points, and our earnings per share grew 14%, each as compared to the prior year and excluding notable items. Return on equity reached 14.8%, and year to date, we have returned 110% of earnings to shareholders, contributing to a 5% decrease in shares outstanding. Our strategy is firmly rooted in our mission to be our clients' most trusted financial partner, powered by a culture of high performance. Our enterprise growth program is driving steady improvement in organic growth, particularly within private markets, where our integrated solutions are gaining traction across all business lines. The transition to a client-centric, capability-driven operating model is already yielding measurable productivity gains. For example, in our enterprise COO organization, we have created approximately 40 capability teams, moving thousands of people from regional reporting structures to global capability reporting lines. This has enabled us to create a baseline for improving resiliency, process efficiency, and quality. AI is rapidly becoming a catalyst for innovation and efficiency. Our early investments, inclusive of providing all employees with access to Copilot, are already generating measurable results. Across the organization, AI is embedded in more than 150 use cases, enabling teams to more efficiently service client requests, automate workflows, analyze data, and digitize documents, saving our partners tens of thousands of hours and allowing them to focus on higher value initiatives. As we continue to deploy AI across the company, we expect it to accelerate these improvements, driving greater efficiency, further bending the cost curve, and unlocking additional capacity for reinvestment in growth initiatives. Let me turn to our businesses, starting with wealth management. We advanced key strategic priorities in the third quarter, adding experienced leadership and strengthening our geographic strategy. Our value proposition continues to resonate most with the highest wealth tiers, driving elevated win rates and client retention. Our deep expertise, institutional-grade capabilities, and high-touch service culture position us to offer services across the entire continuum of family office structures, from the largest stand-alone single-family offices supported by our GFO business to virtual and outsourced solutions offered by our new Family Office Solutions Group. This offering for ultra-high-net-worth families is most mature in the Central Region, where robust demand has translated into several high-profile wins this quarter. Building on this momentum, we see significant runway for future growth as we replicate our playbook across other regions. Client appetite for alternative investments within wealth management is accelerating, fueling both innovation and adoption. We continue to expand the number of third-party fund offerings in the quarter and are on pace to more than double the number of funds we have had in market within a calendar year. This builds upon the substantial amount of alternative assets raised by 50 South Capital this year, with wealth and GFO clients making meaningful commitments. Notably, 50 South Capital introduced a feeder fund structure in the third quarter, giving wealth clients direct and exclusive access to top-tier alternatives managers. Overall, new business activity remains brisk, contributing to healthy growth in core advisory fees. However, this positive momentum has been tempered by ongoing challenges at the investment product level. Moving to asset management. In September, we announced the transition in leadership, appointing Mike Hundstedt, a 25-year industry veteran and proven leader within Northern Trust, as President of NTAM. Under his leadership, NTAM will continue its focus on strengthening foundational core capabilities, including liquidity, indexing, and quant equity, while accelerating growth across alternatives, custom SMAs, and our ETF platform. The third quarter was marked by product innovation, including the launch of 11 new ETF strategies, eight of which are industry-first fixed income distributing ladder ETFs, developed in collaboration with wealth management investment leaders to address the needs of taxable clients seeking more tax and cost-efficient cash flow management. Liquidity continues to be a standout area, with NTAM reporting its eleventh consecutive quarter of positive flows. We expanded our global money market fund platform in the quarter with the launch of a US dollar treasury liquidity strategy for European clients, building on the success of our onshore US treasury instrument strategy, which has already amassed more than $6 billion since its launch in June 2024. Beyond liquidity, we saw positive flows in ETFs and custom SMAs, both key areas of focus, and fixed income, including two large high-yield mandates. And finally, moving to asset servicing. Our Asset Servicing business delivered strong results this quarter, executing on a disciplined strategy centered on scalable growth across key focus areas, including large asset owners, capital markets, and alternatives. Success with large asset owner clients continued, with year-to-date revenue from front office solutions increasing materially relative to the prior year period. This growth was driven by the strategic appeal of our integrated product offering, differentiated service model, and ability to deliver meaningful efficiencies for clients. Notable third quarter custody and fund administration wins included the $14 billion Sacramento County Employees Retirement System, a $16 billion Atlanta-based private foundation, and the $19 billion New Mexico Educational Retirement Board. Not-for-profit health care was another highlight, with strong third quarter wins bringing our coverage to 75% of the nation's top 50 not-for-profit health care systems, a clear testament to our competitive positioning and deep commitment to the space. Capital markets activity remains strong, with more than 100 new clients added year to date, primarily through cross-sell, driving significant growth in core brokerage and FX trading. Capitalized businesses that carry highly attractive margins. Momentum in the alternative space also remained robust, with our hedge fund services and private capital practices generating double-digit year-over-year increases in both reported revenue and won but not funded business. This included continued success in the LTIP and LTAPH space, highlighted by a marquee win in The UK, extending our market-leading position in this attractive high-growth area. Our commitment to exceptional client service was recognized with the Best Administrator Overall Service Award at the US Hedge Fund Management Service Awards. We were also honored as Custodian of the Year by the European Pensions Awards, our third win in six years, further validating our leadership and reputation in the industry. Our disciplined strategy to drive scalable, profitable growth continues to yield tangible results. While recent wins may be smaller in scale compared to some of our prior asset manager mandates, they remain meaningfully accretive to pretax margins. We are also selectively allowing noncore and underperforming business to roll off as contracts expire. Therefore, we expect to see a continued gradual trajectory of margin improvement and overall growth. To wrap up, as we enter the fourth quarter, our foundation is strong and our momentum is unmistakable. Nearly two years into our One Northern Trust strategic journey, I am deeply encouraged by the progress we have made and grateful to my Northern Trust partners for their hard work and dedication. This decisive, collaborative spirit that defines our organization is unlocking new opportunities to accelerate execution and fully capitalize on our core strengths. Looking ahead, we remain laser-focused on the disciplined execution of our strategy, which is positioning us to deliver consistently strong financial performance and create enduring value for our stakeholders, regardless of the broader economic environment. And with that, I'll turn it over to Dave to review the financials.

Thanks, Mike. Let me join Jennifer and Mike in welcoming you to our Third Quarter 2025 Earnings Call. Let's discuss the financial results of the quarter starting on Page five. This morning, we reported third quarter net income of $458 million, earnings per share of $2.29, and our return on average common equity was 14.8%.

Our third quarter results reflect another quarter of solid progress toward achieving our financial objectives and enhancing the durability of our financial model. We delivered positive operating leverage of 110 basis points, 120 basis points of year-over-year improvement in our expense to trust fee ratio, which was down to 112% in the third quarter, and returned nearly 100% of our earnings. Relative to the prior year, currency movements favorably impacted our revenue growth by approximately 50 basis points and unfavorably impacted our expense growth approximately 30 basis points. Relative to the prior period, currency movements were immaterial to both revenue and expense growth.

Trust and investment and other servicing fees totaled $1.3 billion, a 3% sequential increase and a 6% increase compared to last year. Interest income on an FTE basis was $596 million, down 3% compared to the prior period and up 9% year to date from a year ago. Excluding notables in the prior year, other noninterest income was up 10% year over year, largely reflecting stronger capital markets activities, particularly securities commissions and trading, and FX trading income, reflecting our focus on driving growth in these areas. Our assets under custody and administration were up 1% sequentially and up 5% compared to the prior year.

Our assets under management were up 4% sequentially and up 9% year over year. Overall, our credit quality remains very strong, with all key credit metrics in line with historical standards. We recorded a $17 million release of the credit reserve in the third quarter, largely reflecting changes in macroeconomic projections. On a year-to-date basis, our provision remained essentially unchanged.

Our effective tax rate was 26.1% in the third quarter, up 70 basis points over the prior period's rate as a result of higher tax impacts from international operations. Expect the full year's effective tax rate to be in line with the year-to-date effective rate. Relative to the prior year period and excluding notable items, revenue was up 6%, expenses were up 4.7%, our pretax margin was up 200 basis points, earnings per share increased 14%, and our average shares outstanding decreased by 5%. Turning to our wealth management business on page six.

Wealth management had a healthy quarter with particular strength in the regions. Assets under management for our wealth management clients were $493 billion at quarter end, up 11% year over year. Trust investment other servicing fees for wealth management clients were $559 million, up 5% year over year, primarily due to strong equity markets. Trust fees within the regions were up 7% year over year and are up 6% year to date, with strength mostly attributable to favorable equity markets.

Within 1% year over year and are up 5% year to date. Sequentially, GFO growth was muted by a combination of asset allocation changes and portfolio restructurings. Importantly, the underlying business remains very healthy. We generated positive flows of $2 billion in September alone, and new businesses on pace to break last year's record levels.

Average wealth management deposits were flat, and average loans were up 2%, both relative to the second quarter. Wealth Management's pretax profit increased 11% over the prior year period, and the pretax margin expanded 250 basis points to 40.5%. Moving to asset servicing results on page seven. Our Asset Servicing business delivered another strong quarter.

As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remained robust, on pace to beat 2024's record levels, and new business generation continues to be healthy and margin accretive. Assets under custody and administration for asset servicing clients were $17 trillion at quarter end, reflecting a 4% year-over-year increase. Asset servicing fees totaled $707 million, reflecting a 6% increase over the prior year.

Custody and fund administration fees were $483 million, up 7% year over year, largely reflecting the impact from strong underlying equity markets, net new business, and favorable currency movements. Assets under management for asset servicing clients were $1.3 trillion, up 9% over the prior year. Investment management fees with asset servicing were $160 million, up 5% year over year, due mostly to favorable markets. Average deposits within asset servicing declined 6% sequentially, while loan volume decreased by 7%, albeit off a small base.

Asset servicing pretax profit grew 14% over the prior year period, and the asset servicing pretax margin was up 150 basis points year over year to 24.7%. This reflected the benefit from favorable markets, that pivot in our new business approach, including our focus on cross-selling high-margin capital markets and other adjacent products and services, and our efforts to streamline operations. Moving to page eight and our balance sheet and net interest income trends. Our average earning assets were down 4% on a linked quarter basis, as softer deposit levels drove a decline in cash held at the Fed and central banks.

At the same time, we opportunistically added fixed price securities to the portfolio to provide downside protection. Fixed floating breakdown of the securities portfolio is now 54% to 46%, including the impact of swaps. The duration of the portfolio remained flat at 1.5 years, and the duration of our total balance sheet continued to be under one year. Net interest income on an FTE basis was $596 million, down 3% sequentially but up 5% as compared to the prior year.

Sequentially, NII was unfavorably impacted by the lower deposit levels. This was partially offset by favorable deposit pricing actions we have taken outside of rate cuts. The quarterly contribution from transactional and other one-time items normalized in the third quarter following elevated second quarter levels. Our net interest margin increased sequentially to 1.7%, reflecting the favorable deposit pricing actions taken, partially offset by unfavorable change in asset mix.

Deposits performed largely as we expected. Average deposits were $116.7 billion, down 5% compared to second quarter levels, reflecting typical seasonal patterns coupled with normalization from elevated second quarter levels. Within the deposit base, interest-bearing deposits declined by 5%, and noninterest-bearing deposits decreased by 3%, but remained at 14% of the overall mix. Turning to our expenses on page nine.

Expenses increased 4.7% year over year in the third quarter. There were no notable expenses in the current or prior periods. Excluding unfavorable currency movements, expenses were up 4.4%. Turning to page 10. Our capital levels and regulatory ratios remained strong in the quarter, and we continue to operate at levels well above our required regulatory minimums.

Our common equity Tier one ratio under the standardized approach increased by 20 basis points on a linked quarter basis to 12.4%, driven by capital accretion and a decrease in RWA. Our tier one leverage ratio was 8%, up 40 basis points from the prior quarter. At quarter end, our unrealized after-tax loss on available-for-sale securities was $437 million, and we returned $431 million to common shareholders in the quarter, through cash dividends of $154 million and common stock repurchases of $277 million, reflecting a payout ratio of 98%. Year to date, we returned over $1.3 billion, reflecting a 110% payout ratio, which puts us on track to return at least 100% for the full year.

Turning to our guidance. Continue to expect our operating expense growth to be below 5% for the full year, excluding notable items in both periods and regardless of currency movements. We now expect full year NII to grow by mid to high single digits over the prior year. And with that, operator, please open the line for questions.

Thank you. If you would like to ask a question, please signal by pressing star one on your tone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question.

We'll pause for just a moment to assemble the queue. We will take our first question from Ebrahim Poonawala with Bank of America.

Hey, good morning. Morning. I guess maybe this first Dave, where you ended on the NII outlook. The mid to high.

Maybe address it two ways if you could. One, on the deposit trends, it felt like this the runoff was more than we expected. Are you seeing in terms of growth outlook and the mix shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet the Fed were to cut three or four times in quick succession?

Does that put negative pressure on the NII? As we think about the first half of next year? Thanks.

Yeah. Sure. Happy to answer that. You know, deposits actually did perform pretty much in line with what we had previewed.

And they're actually up from last year at this time. So from that perspective, may be less than you had anticipated, but I think generally, in the area we we had anticipated. You know, we've already seen a slight pickup in deposits in Q4, and we ended, obviously, September at $135 billion. But we think that Q4 deposits are gonna be, I think, a little bit higher on average during the quarter.

You know, and since we've already posted a 9% year to date year over year NII growth, that's why we feel comfortable tweaking our our guidance a bit to mid to high single digits in NII. And then which would imply, frankly, that would be about flat to marginally one to 2% up in the fourth quarter. As far as 2026 is concerned, we have some mitigating factors that we can take going forward. We obviously have a rate cuts built into our in into our projections.

We not anticipating more than two rate cuts, in The US, next year, for example. We have carry in, that we've done in terms of our repricing initiatives that we've taken. We have deposit pricing initiatives as well. We have all the securities that we know are gonna be rolling off in in that quarter in the in the various quarters in '26. So when you do the puts and takes, we feel that NII in 2026 should be you know, flat to up one to 2%.

Got it. That's helpful. I'm not sure if I caught this when you were in in your prepared remarks when talking about when you go into sort of wealth management, then you talked about some of the challenges at the investment product level. I was wondering if you could just kind of elaborate on what the issues were when it on that front.

And what sort of what are the actions you're taking to kind of get that back on track?

Michael O’Grady: Sure, Ebrahim. It's, it's Mike. I'll take that. And so as you know, through NTAM, we offer a number of different, investment solutions and products to our wealth management clients. And we're also open architecture. So that we're offering, you know, the products of of other asset managers as well. And where we tend to focus is on those core foundational areas. So think about liquidity, index, quant, other areas like that. And the areas where we've seen pressure some of it on the index, where it can be a combination of just asset allocation, but also pricing pressure. Fee pressure, and that then, causes flows to lower fee products. And then second is asset allocation when it comes to areas of whether it's growth versus value. And on that front, we offer a multi manager platform solution and it tends to lean more towards the value side of the equation. And there where we've seen know, a very narrow market, as you well know, it's difficult for those active managers to to outperform. And so we've seen some flows out of that multi manager platform and so that's been a drag as well. Now as to what we're doing to, address that, in addition to just focusing on those areas and making sure the the products are not only performing but pricing, at the right level. Also, as we've talked about, focus on ETFs. SMAs, for the wealth management clients. But also alternatives. And that's an area as you heard, where we've, increased the number of offerings for our clients on the alternatives platform, for our wealth clients.

That's good color. Thanks, Mike.

We will take our next question from Kenneth Michael Usdin with Autonomous Research.

Thanks. Good morning. Just wanted to ask you to talk a little bit about just some of the the the moving pieces of this quarter. I know it might just be temporary, but, AUCA up 1%.

I know you're talking about new business wins. You saw also in the press release some some outflows. So is that just kind of a the normal state of kind of getting some wins and some losses every quarter? Just a a dynamic for this quarter that you saw just relative to the market strength that we saw?

Thanks, guys.

Yes. I would say that you take a look at the AUCA growth, there were you know, a number of individual clients that drove those, AUCA numbers. And had they not done that, we would have probably been on par with our peer group. These are asset management clients, and there was one client in particular that represented know, two thirds of, I think, of the degradation in the in the AUC.

You have to remember that not all AUC is created equal. You know, not all AUC creates the same level of fees. And in this particular case, the vast majority was a was a restructuring that an asset manager made you know, moving from mutual funds through a like kind conversion into a CIT structure that's less expensive to the participants. And so still we didn't lose clients.

We lost assets. And that happens, as you as you mentioned, the the the sort of puts and takes. Of the asset manager space. One other loss was really just a redemption by one large client as part of a fund.

That fund has actually started to fill back up again. And so you add it all up in terms of impact, the total AUC that we're talking about is is the fee realization on that AUC is gonna be less than 10%. What we would normally see on a normalized AUC. And so, you know, you have to just take into consideration the type of business that is.

And so you wanna translate that into dollars, all combined, all the degradation that we saw won't amount to more than 3 to $400,000. You know, a month of, of, you know, of of fee changes. You know, of fee decreases. Some of that could be earned back by the next quarter. So, yeah, I I think it's it's a lot of ebb and flow in the asset manager space is the way I would put it.

Great. That that's that's really great. Helpful, Dave. Second point, you're obviously firmly committed to that sub five.

We saw it again this quarter. And just as you're starting to think about looking forward, I know you've said that you're strongly committed to it inclusive of FX translation. I just any any any incremental thing we should think about, you know, that as we go forward just know you're gonna be thinking about positive operating leverage. We don't know what the markets will do from here.

They've obviously been a big helper. But as you continue to kind of, you know, hone that messaging around the expense base, Any new thoughts about, like, where you can kinda try to hold that level on expense growth overall? Thank you.

Yeah. So for fourth quarter, we're pretty locked in. We're not changing our expectations at all. We feel like we have the measures in place to flex if necessary.

And so I'm sticking very strongly to the below 5% growth number for for Q4 and for the full year. So I think we feel very good about that. Nothing nothing in particular that I would really cite We're just starting to think about 2026. We're we're just getting into the the the planning of that. And I one thing I would say is that, you know, we continue to bend the cost curve down on expenses.

If you if you look at where I started, I think we were coming off a 6% growth. Down to 5% or five and a half. It's been grinding down every quarter and without currency, we would have been closer to four than we are to five. Right?

So and we're not done. I think the message there is we're not done bending that cost curve down. The productivity that we have have are going to realize in twenty five, is great, but '26 will probably be greater. And and so I think that we're just know, we're we're still seeing some opportunity there to keep grinding that expense curve down going going forward.

Got it. Thanks, Dave.

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

Good morning. Thanks for taking my questions. Mike, I'd love to drill into a comment that you made in your prepared remarks where you talked about sort of allowing more marginal business to roll off So it's and you you you spoke to that aiding growth. Is that growth comment, like, an indication that it's gonna be more about profit growth than top line growth?

Do you expect that some of these efforts might result in more of a top line headwind, but you're gonna be able to make it up for it in the, you know, sort of better unit economics. On each of the new businesses that you're focused on? Can can you help me maybe think through some of that?

Michael O’Grady: Sure. So it is definitely a focus on profitability. So we have a great asset servicing business. But right now, the margins are below the level that we think the business should be performing at. We're seeing nice improvement in that So we were, you know, at one point, kind of, like, 22%. We moved up to 23. Saw this this quarter moving up, closer to 25%. That's a combination of, I'll I'll say, a number of factors. First is the new business that comes in. We're making sure that it's coming in at very accretive margins. And that to your point, that can have an impact on you know, the the gross top line growth that you're going to get. In our view at this point, again, we wanna see greater profitability and growth and profitability. Second, I would say is in the the business that we do have and the activities that we do have, just trying to look very carefully at those areas and see if, one, if we can improve on the situation, either the activity, or with the economics with the client. But to the extent that we're not achieving that, then it is something where, you know, we'll have to look over time to transition that that business out. And so that that's the second piece of it, which, again, will aid profitability. And then the third, you know, Dave touched on it a little bit just with his comments around expenses, but really, you know, focusing on the efficiency of our operations. I and so I talked to my comments as well, Brennan, about our client centric capability operating model. You know, everything around that is is trying to be organized in such a way that we can deliver our services in a way that is both resilient, but also efficient. And so that that's where a year ago, we reorganized in a way that brought a lot of those activities together, and centralized them under a COO organization. So that we could be, you know, more aligned both between operations and technology to drive the scalability and efficiency that's necessary to see that continued improvement in, profitability.

Great. Thanks for that, Mike. And then you you there's there's been a lot of movement in the markets. You you already spoke a bit to GFO and some of the changes that happened within some portfolios, but but we did see fee rates the way at least the way we're able to calculate them, and I know that that's sort of flawed given how you guys bill.

Because we don't have intra quarter visibility. But but did you guys see fee rate pressure in some of the other businesses this quarter as well. Or was it just around the mass in how you bill and how much the markets moved? If you could help maybe disentangle that a bit.

Thank you.

Yeah. So think about GFO, in particular, as resembling a little bit more of the asset servicing side of the business than the wealth management side of the business. They've got extremely strong pipeline, and and they're gonna produce a record year of new business. Off another a previous record year.

And so what you do see in GFO is large shifts in portfolio composition. And a higher sensitivity to cash. And so Q2 is pretty volatile, and then there's a lot of movement going in there. Other thing I'd say about GFO is they're much they're less exposed, at least at Northern, to fixed income and equity, movements.

They are very cash focused. And so unlike the regions, not as influenced as much. By the overall equity market. A better way to look at the business like a GFO business would be look at their year to date fees.

So year to date fees are up 5% and revenues are up 9%. And then, you know, GFO had

Yeah. Hey, I'm I'm I'm sorry. I'm sorry. I'm I'm probably boarded my question poorly.

I was looking at the businesses aside from GFO. Like, I I get that GFO had some of those I mean, like, in the servicing business and the investment management business, we felt a little fee rate pressure there too. So I was just curious about whether that was the mass, you know, in markets or whether there was actually some you guys experienced fee rate pressure.

Michael O’Grady: Sure. I what I would say, Brennan, is on the asset management side, you know, there's consistently, you know, persistent pressure on fees overall. Nothing, that I would note in the quarter. I did mention know, in a previous question just about making sure that our pricing is competitive for all of our clients but particularly within wealth management. So from time to time, yes, we will, you know, bring down the fees on an investment management product to to make it more more competitive. On the servicing side, I would say, you know, once again, there's always, you know, it's a competitive marketplace. But there's nothing that transpired in the quarter that necessarily you know, resulted in a reduction in fee levels. And in fact, if anything, Brennan, you know, to your to your first question, you know, we're we're trying to be very disciplined around pricing and economics to make sure that the the business we're bringing on is at those accretive margins.

Makes a lot of sense. Thanks for taking my questions.

Michael O’Grady: Absolutely.

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

Hi. Just want to make sure I understand the big picture correctly. So I think you're running you know, asset management and wealth, especially GFO, for growth. And you're running, asset servicing, relatively more for profitability. And to get there, you're putting some low margin business runoff. Did I get that correctly?

Michael O’Grady: Yes.

Okay. So I guess the question is, you know, under what circumstances would you say, you know what? The the custody business you know, maybe you should downsize even more or disinvest. And I know this is an old question, and you I think you've usually said, look.

You might not have scale in absolute terms, but you have scale where you wanna compete. I think that's kind of where you've been. But does does that still hold and under what circumstances? Would that change?

Michael O’Grady: Yeah. So it absolutely still holds. And if anything, Mike, I would say, you know, the both the market, if you will, and what we're doing it takes it even more that direction, I e, that we have the necessary, scale, to be able to deliver these services efficiently. And what I mean by the market part, first, of all, is just everything that's happening around both digital assets and AI make these activities more scalable. And and when we talk about, you know, our operating model, it's just trying to make sure that we're then organized in such a way to take advantage of those things. So of all, when you think about digital assets, tokenization, and even stablecoins, The whole idea there is around you know, greater efficiency in the marketplace. And so as that happens, again, that that leads to you know, more straight through activities, more liquidity in those markets, in those products, etcetera. And we're certainly making sure that we have the capabilities to do that. With AI, it's about, you know, automating processes and taking things that right now maybe not be so straight through. So if you take an example like you know, private capital and and the processing of private capital, for our clients. So thinking, you know, we're their LPs, and they're invested in literally you know, hundreds of funds, and a lot of that activity is still paper based. Mean, I would say we could estimate that right now, only maybe a quarter of that activity that we do for our clients on that front is straight through. What we're focused on is how do we turn that into, you know, 50%, 75% automated, and that's where we're utilizing AI. To be able to do that. So all of those things take us to a model that I think gives us the necessary scale, meaning that as you grow, the unit economics, improve. And to your point, you know, these are all measurable things both from a I'll call it, internal perspective, but also from a financial performance perspective. That if it's not, you know, proving to be the case there, you certainly have to look at it differently.

And then last follow-up. If the the one liner why someone of your size can compete with the the Goliaths of the industry, I mean, it's always skill versus scale, the the argument. Why can you win in in tech and AI if you don't spend as much money?

Michael O’Grady: Yeah. It's I first of all, it's differentiation. Right? So our strategy is focused on delivering a unique value proposition to our clients. I and in doing so, that requires greater focus for us. So as I think you pointed out in one of your earlier comments, we're not looking to compete in every segment across the globe. We're picking areas like asset owners in The United States, like pension funds in The UK, like Global Family Office, you know, like hedge fund services, where we believe that that value proposition, that differentiation resonates because there's still it's still about, you know, the overall package. What do they get when it comes to you know, not only the technology, but the service that goes with that and who that financial partner is. But then can we deliver it in an efficient way such that the value they're getting overall is more attractive relative to other alternatives. So there's no doubt in my mind that in the marketplace, that clients want differentiated, offerings, and we believe that that's what we offer. And we just focus on those areas where we think that we can be successful with it.

Alright. Thank you.

Michael O’Grady: Sure.

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

Hi, good morning.

Michael O’Grady: Morning.

So just one more question on this thread. Regarding AI. I know at the beginning you highlighted that AI is already generating measurable results with 150 plus use cases. Could you give us a sense as to where, you see AI helping the you know?

Well, let me put it this way. Is there any differentiation within the organization about how much AI will be helping out. In other words, do you expect to see it more in the servicing services side or wealth side or it's equal across the organization. I'm just wondering if the efficiency improvements coming from AI are different materially different between the different businesses that you run.

Michael O’Grady: Sure. So, Betsy, what I would say what's so exciting about this is it is impacting all of the areas of the company. And just to give you, you know, some idea because you know, how it's being utilized, is different, and and maybe the results yes, they may vary in different groups, but the applicability is basically across the board. So, you you know, we talked about operations there. I talked a little bit about know, what we're doing in the private capital space. So that gives you some idea, but think about so many processes that are involved in operations. It clearly lends itself there. And know, arguably a very high level. That you'll get. I'm gonna do another easy one, which is within technology. You know, utilizing GitHub and other types of, of AI, we're seeing you know, I'm gonna call it about 20% improvement in the the programming, the engineering part of technology there. And I think, again, still in the the earlier days of that. But as you move to the businesses, take asset management. That's an area where a lot of the activity can be automated. Think about what we're even doing here with you know, investor calls. We're already utilizing AI in our fixed income muni, area within asset management to essentially you know, summarize and analyze all the transcripts for all of the investor calls, where they have investments. And this is, you know, in the hundreds of calls that normally you know, an analyst has to listen to calls, summarize them, and and most importantly, take away the key points. Well, so much of that now has been automated, so it saves dramatic you know, time, but also provides better insights. Within wealth management, this is making, at this point, our advisers much better. And much more efficient. Because in advance well, first of all, in thinking about where the opportunities might be and prospecting, You know, AI is enabling that process to happen in such a way that it's highlighting, you know, where the best prospects are. But then from there, it's how to prepare for that. And so it can go in and it can pull the information both from our internal databases, but also what's publicly available about a particular, prospect and do so much more quickly than someone could do you know, say, on their own to be able to do that. And when they have a question, you know, once again, we're working on the ability for our advisers essentially to be able to tap in to proprietary databases that we have, like the Northern Trust Institute, to be able to immediately answer those questions. So it makes them better at serving the client. On that front. You think about risk, you know, again, and whether it's AML, KYC, whether it's fraud detection, these are all things right now where we have you know, hundreds of people who do this activity, and we'll still have plenty of doing, but they'll be using better tools to be able to do it better. And faster. So know, cuts across I I would say, the entire company. And I think at this point, we're still in the early days.

Okay. And then just to follow-up on the technology impacts on the business. Could you give us an update on how you're thinking about the outlook for how you would utilize a stablecoin? Do you your own?

Do you get involved with the industry consortium? As we move towards $24.07 trading? Having a stable coin cash leg is gonna be critical. So I wanna understand how you're thinking about that dynamic as we roll forward here.

Thank you.

Michael O’Grady: Sure. So I think that what's happening in the digital asset space there there are four key drivers from my perspective. Innovation, regulation, client demand, and then interoperability. And on the innovation front, to your point, you know, whether it's stablecoins or tokenizations, there's so many things that are coming out and the technology is getting much better, much more scalable. Things like blockchain becoming more scalable. Going from private blockchains to public blockchain. So the innovation front, I think, is you know, probably leading. What's been lagging is more on the regulation front. And, obviously, now with the the the Genius Act, this is going to change. And that is going to I think, significantly facilitate further demand on the client front. And then you get to the idea of interoperability. Which the point on that is you know, our clients don't wanna have to, I'll say, operate in two worlds. They wanna be able to utilize whether it's stable coins or a tokenized asset, with their other assets. And so we're just making sure that our platform can do both of them. Now specifically to Stablecoin, know, I would say stablecoin will, you know, find the areas that have the greatest friction. And a lot of that, as you know right now, is, you know, probably you know, cross border or outside The US. And I I'll say we'll we'll have the ability to you know, utilize stablecoin, but we're not planning to issue a Stablecoin on that front. Where we're more focused is on tokenization. Because we believe that that will impact multiple asset classes. And a good place to start would just be around money market funds. Thinking about a tokenized money market fund, know, that's an area where I'd say we would look to be an issuer of a tokenized money market fund. So that gives you some idea of the the direction that we see.

Thank you so much. And, yeah, tokenized money market fund is a type of stable coin cash like too.

Michael O’Grady: Exactly.

Appreciate that. Thank you.

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

Hi, there.

Michael O’Grady: Hi.

Hello. Small but interesting one, re regarding the deposit rate paid on saving money market. And other deposits. So so after going down for four quarters straight because rates have been coming down it was actually up six basis points, and we had a cut in the quarter, I think.

So it's just a it's interesting. I'm more thinking about the go forward. But what what caused the the that saving in money market rate to go up in a quarter when there's a rate cut. And I know you gave us the the your thoughts on next year, so I appreciate that.

I'm just curious what's going on on on these deposits.

Yeah. Well, deposits are also multicurrency. They're not just US dollar. Right? So may be some some differences there. You might wanna take a look at, but we could certainly get more granular with you. But on the top of it, I can't I can't say in particular. I'd have to look at each currency in each particular investment that we made to to kind of give you that read.

No worries. We can move on to the the bigger question. You've been talking about some of the initiatives that you've picked up pace on on private market side across wealth, asset management, and asset servicing. You dangled a little bit with your comment on the fifty South Feeder Fund.

I would love to know a little bit more about what that is, what's on it, and, what's in it. If it's a fund to fund structure, things like that. And then maybe you could also just complete the thought on what's going on in terms of the asset servicing side as well. Thanks.

Michael O’Grady: Sure, Glenn. So the the feeder fund, basically, as you know, 50 South, historically, was focused on fund to fund. And that business has performed very well and has been I'll say, a perfect fit for our wealth clients. And continues to be. And they've continued to expand their offering, both for our wealth clients, but then for other wealth platforms and and institutionally as well. Specifically, what happened in the in the third quarter is they have the relationships and have done the diligence and everything on hundreds of managers. And as a part of that, we're now using those relationships to be able to have specific single fund offerings for our wealth clients. And this enables us, I'll say, to pick, like, the best of the best, funds, where access is all often an issue. But through our relationship and by having, you know, the diligence done, we're able to to offer it to our wealth clients. And so this was one of the, I'll say, you know, high performing, venture funds that, that was offered to wealth clients in the quarter. And then to you said to the to the broader picture there, say, just first of on the on the wealth front in 50 South, once again, an area of a lot of innovation. And, I think you know, coming our direction when you think about evergreen funds and other things that just have greater liquidity, that only enables our clients to get more comfortable, I'll say, investing in, alternatives. And then on the asset servicing side, you know, there, you know, not only is it the work that we're doing with as I mentioned, hedge fund hedge funds, but then also private capital administration, for other private equity funds, private capital funds. But then specifically, around the vehicles, the LTAP and the LTIP vehicles. And I would say that, is a similar you know, trend phenomena, if you will, in the European markets where there's, the introduction of more vehicles that have greater liquidity. So that it allows for greater distribution and expansion of alternatives. So we think it's still kind of earlier days for those vehicles as well. But whether it's you know, The UK vehicle or the Luxembourg vehicle, we're we're well positioned to be able to provide those, capabilities for the asset managers.

Okay. Thanks very much.

Michael O’Grady: Sure.

We will take our next question from Steven Alexopoulos with TD Cowen.

Good morning everyone.

Michael O’Grady: Morning.

I wanted to start so I know on the pretax margin, and I know it bounces around quite a bit. But when you look at the revenue trajectory, expense trajectory, right, the guidance you're giving for 4Q and full year, you're bending the cost curve down. Do you guys think you could remain fairly comfortably above that 30% medium term target moving forward? And even if the Fed's cutting rates?

Michael O’Grady: So to your point, Steve, that there there's certainly the impact of of markets and and rates. And levels of liquidity in the marketplace. So there's lots of factors out there. But our view is that the financial model that we have definitely, should operate in that 30 plus percent pretax margin on an ongoing basis. So you have a quarter like this where you know, we we got there somewhat because of the environment, but also because of the provision release. That bumped it up a little bit. All the same, the the longer term trend longer term meaning over the last you know, couple years, has been an improvement in the pretax margin. So when you look at the year to date margin, it's closer to kind of 29%. And, we expect to move into to 30%. And then even though we're in that 30%, it doesn't mean that we're not still trying to drive positive operating leverage. We very much are. And so, yes, the the objective is to stay above that 30%.

Got it. That's helpful. And and then going back to all the commentary on AI and productivity gains, terms of the financial impact, so far, is this material Like, is this helping you this year keep expenses below 5%? Or is 99% of that benefit still to comp?

Michael O’Grady: Yeah. So it's a great question. Because it's it's what I call capture. So, you know, we have these efficiencies, and everybody's utilizing Copilot and other tools to become more efficient. How do we make sure that we're capturing that? And to your to your point, know, it's it's difficult if somebody's, I'll say, you know, 3% more efficient as a result of it, well, how does that actually affect your your financials and and your need for resources? And so that's why you know, we've also been, you know, very disciplined around head count, around span of control, around how we're organized. So that it's a way to to capture that. So that you know, as you go forward and as you add new business and you grow, you know, you're not adding more know, people, in order to service that, but instead you're capturing the efficiencies that you're getting from utilizing those tools. Some areas are easier to do than others. So know, we talked about GitHub and with the programmers. Like, those are the areas, Steve, where I'd say yes. We're getting savings now. But to your point, it it's still in the earlier days of capturing the the efficiencies that you're gonna get.

Got it. That's great color. Thanks for taking my questions.

Michael O’Grady: Of course.

We will take our next question from David Charles Smith with Truist Securities.

Good morning.

Michael O’Grady: Good morning.

Is there any more color you can offer on the relative strength in FX trading and securities commissions and what you're what you've been doing to drive this? You mentioned some initiatives to drive growth here. I wonder if you could just kind of help us frame how much of the strength you feel like is a result of share gains and other things that are more result of things that were in your control, as opposed to just simply benefiting from broader market volumes being healthy. Thank you.

Sure.

Michael O’Grady: Sure. So capital markets our capital markets business has performed extremely well. And it's a combination of both execution of their strategy and then also the favorable market conditions. But on on the strategy parts specifically, what the the team has been doing there over the last several years is building out a more durable capital markets business. So what I mean by that is yes, know, historically, the business has performed well when the the markets and volatility are strong, but then you know, has gone down when it's not there. What they've tried to do is turn it into more of a service, if you will, in the activities that they, that they pursue. And so what that means, for example, on the trading side, on the brokerage side, is being the outsource provider of trading for the asset manager. So instead of some of our asset manager clients having their own trading desk, they've outsourced that to us. And as a result, that's when I talk about adding a 100 clients A number of those clients are where they've outsourced, the trading to us. And that produces a more kind of recurring predictable stream of know, brokerage commissions as a result of that. On the FX front, we're you know, we've always, in that business, basically enabled our clients to hedge positions that they want in one currency or another. But it's in the past, done just on a transactional basis, where what we've, done over the last few years, several years, is to turn that more into a service again by providing currency management as a service where it becomes automated and it's just done over time. As opposed to, you know, a transactional business. So that has also built up over time. And then also from a liquidity perspective, we've expanded our liquidity capabilities know, certainly, we talk all the time about, deposits and and, money market funds and being able to be on that side of it. The other side is at times, they need over, overnight liquidity the other direction. So not only securities lending, but also, thick repo has been an an area where we've added capabilities. To be able to serve those clients, but then create a business that's, both, I would say, diversified from the other activities we have, but also attractive financial profile.

Got it. Thank you.

Michael O’Grady: Sure.

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

Good morning, Dave. Good morning, Mike. Morning. Kinda different questions for you guys.

I always like to get the perspective from folks like you because you know, I have a big exposure to this area. There's been a lot of talk this quarter about loans to nondepository financial institutions, and, of course, your in the top 20 banks. You're at the lowest. You've got the least amount of exposure.

Can you give us some color on what you know, I'm not asking you to talk about other banks, but these categories that are within this NDFI whether it's private equity or mortgage, credit intermediaries, etcetera, What how do you guys look at that NDFI category?

Yeah. That's a good question, and I'll I'll start, and then maybe Mike can talk about the broader, industry, issues. There was a reclassification in the reporting methodology implemented by the FDIC that moved some loans into other categories, that were into the n FDI category. So when you look at Northern you know, the vast majority of what we do are subscription lines to private equity firms.

And those are lines of credit backed by the LP's capital commitments. And on top of that, there's borrowing bases that reflect uncalled capital as well. And so that is not the same thing as lending directly to a you know, a private credit fund. Right?

There's also sometimes loans to management companies that we do. But in that case, you've got the the management fees that secure your loan. Right? And then thirdly, on the wealth side, we have, obviously, some NAV loans that we do.

The advance rates are extremely low. Like, I wanna say around 30%. Those could have some private credit funds in them, but they're highly across their entire private equity portfolios. We don't lend against one particular fund.

So that that's sort of how Northern has looked at that business. Individually. I'll let Mike talk broader about the industry in terms of what's what's going on. But we don't have we don't have any of the similarities as you pointed out to what's going on with everybody else.

Correct. No. I I would agree, Jared. The and then as a follow-up question, the IMF has come out as as well as the Bank of England with reports in the last couple of weeks citing I hate to use the word bubble, but really inflated asset prices.

And they point out then we've gotta be careful of some maybe serious corrections. Obviously, when you look at your wealth management business, it's not all equities. You've got fixed income and cash in there. Can you share with us how you guys approach you know, managing wealth management should a big correction come or or or just your view on how you approach it with your clients.

Michael O’Grady: Sure. So to your point, you can never you know, say, time the markets or predict the markets. There's gonna be volatility. Valuation is know, one one person may say it's a bubble, another person say, you know, there's still tremendous upside, you know, to that. And as a result True. That's why with our wealth clients, we take a different approach which is what we call goals driven wealth management. And that is it's not only an approach, but it's also a technology. It's a a platform that is utilized with those clients where upfront, we go through the process of really determining what their needs are going to be. Not just in the next year, but literally over their lifetimes and often cases then, you know, into next generations. And as a result of that, we can then back into what is the right asset allocation. As a part of that. And one of the most important components of it, Gerard, then is knowing that there will be drawdowns in the equity markets over time, how do you make sure that you have the right reserve capacity in essentially risk off assets? Such that you, you know, do not get into a liquidity situation, not get into a situation where you don't have the the funds necessary for achieving what your objectives are. Frankly, at that point, it's a lot easier also to have the conversation with the client. And make sure that, you know, they're they're able to digest what's happening in a volatile market and, you know, be able to stay focused on what their long term goals are. And not, I'll say, overreact which, again, the empirical you know, research would tell you that, you know, overreacting to market volatility is not the best long term strategy.

Great. Thank you for the insights, Mike.

Michael O’Grady: Sure.

And there are no further questions in the queue at this time. I will now turn the conference 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 soon.

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