Northern Trust Corporation

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 Child, Director of Investor 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 Gray, our Chairman and CEO, Dave Fox, our Chief Financial Officer, John Landers, our controller, and Trey 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 22nd 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 22nd. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements 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 Mike 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 discipline 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 pre-tax margin expanded by nearly 200 basis points, and our earnings per share grew 14%. Each is compared to the prior year and excluding notable items. Return on equity reached 14.8%, and year-to-date, we've 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've 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 and 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 standalone single-family offices supported by our GFO business to virtual and outsource 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've 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 and 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 a transition in leadership, appointing Mike Hunstead, 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 11th consecutive quarter of positive flows. We expanded our global money market fund platform in the quarter with the launch of a U.S. dollar treasury liquidity strategy for European clients, building on the success of our onshore U.S. treasury instrument strategy, which has already amassed more than $6 billion since its launch in June of 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 one-but-not-funded business. This included continued success in the LTF and LTAF space, highlighted by a marquee win in the U.K., 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 U.S. 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 pre-tax margins. We're also selectively allowing non-core 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'm deeply encouraged by the progress we've 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 percent in the third quarter and returned nearly 100 percent 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 by 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 percent sequential increase and a 6 percent increase compared to last year. Net 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 non-interest 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. We 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 pre-tax 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 6. 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 and 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 GFO, trust fees were up 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 pre-tax profit increased 11% over the prior year period, and the pre-tax margin expanded 250 basis points to 40.5%. Moving to asset servicing results on page 7. Our asset servicing business delivered another strong quarter. As expected, transaction volumes normalized from elevated second quarter levels. Capital markets activities remain 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 pre-tax profit grew 14% over the prior year period, and the asset servicing pre-tax margin was up 150 basis points year-over-year to 24.7%. This reflected the benefit from favorable markets that pivoted 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, The 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, NAI was unfavorably impacted by the lower deposit levels but this was partially offset by favorable deposit pricing actions we've 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 non-interest-bearing deposits decreased by 3%, but remained at a 14% of the overall mix. Turning to our expenses on page 9, 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 remain strong in the quarter, and we continue to operate at levels well above our required regulatory minimums. Our common equity Tier 1 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 1 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. We 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 1 on your telephone 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 Ibrahim Poonawalla with Bank of America.

Ibrahim Poonawalla Hey, good 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 the runoff was more than we expected. What are you seeing in terms of growth outlook and the mixed shift in deposits going forward? And how should we think about the asset sensitivity of the balance sheet if 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. I'm 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, maybe less than you had anticipated, but I think generally in the area 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 going to 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 guidance a bit to mid- to high-single digits in NII. which would imply, frankly, that would be about flat to marginally 1% 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 rate cuts built into our projections. We're 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 we're going to be rolling off in that quarter, in the various quarters in 26. So when you do the puts and takes, we feel that NII in 2026 should be flat up 1% to 2%. Got it.

That's helpful. And I'm not sure if I caught this in your prepared remarks when talking about when you're going through sort of wealth management and 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 on that front and what are the actions you're taking to kind of get that back on track?

Sure, Abraham. 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 the products 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 a very narrow market, as you well know, it's difficult for those active managers 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 that 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 a good comment. Thanks, Mike. Sure.

We will take our next question from Ken Huston with Autonomous Research.

Thanks.

Good morning. Just wanted to ask you to talk a little bit about just some of 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 outflows. So is that just kind of the normal state of kind of getting some wins and some losses every quarter? Or just an odd dynamic for this quarter that you saw just relative to the market strength that we saw? Thanks, guys.

Yeah, I would say that if you take a look at the AUCA growth, there were 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 two-thirds, I think, of the degradation in the AUC. You have to remember that not all AUC is created equal. not all IUC creates the same level of fees. And in this particular case, the vast majority was a restructuring that an asset manager made, moving from mutual funds through a like-kind conversion into a CIT structure that's less expensive to the participants. And so we didn't lose clients, we lost assets. And that happens, as you mentioned, 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 when you add it all up in terms of impact, the total AUC that we're talking about is the fee realization on that AUC is going to be less than 10% of what we would normally see on a normalized AUC. And so you have to just take into consideration the type of business that is. And so if you want to translate that into dollars All combined, all the degradation that we saw won't amount to more than $3,000 to $40,000 a month of fee changes, fee decreases. But some of that could be earned back by the next quarter. So, yeah, I think it's a lot of ebb and flow in the asset manager space is the way I would put it.

Great. 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 incremental thing we should think about as we go forward? I know you're going to 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 hone that messaging around the expense base, any new thoughts about where you can kind of 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 Q4 and for the full year. So I think we feel very good about that. Nothing in particular that I would really cite. We're just starting to think about 2026. We're just getting into the planning of that. And one thing I would say is that, you know, we continue to bend the cost curve down on expenses. 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? And we're not done. I think the message there is we're not done bending that cost curve down. The productivity that we are going to realize in 25 is great, but 26 will probably be greater. And so I think that we're just we're still seeing some opportunity there to keep grinding that expense curve down going forward.

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 seems, and you spoke to that aiding growth. Is that growth comment like an indication that it's going to 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 going to be able to make it up for it in the sort of better unit economics on each of the new businesses that you're focused on. Can you help me maybe think through some of that?

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 at one point kind of like 22%, moved up to 23, saw this quarter moving up closer to 25%. And that's a combination of, 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 to your point, that can have an impact on the gross top line growth that you're going to get. But in our view at this point, again, we want to see greater profitability and growth in profitability. Second, I would say is in 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, uh, or, uh, 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, uh, to transition that, that business out. Uh, and so that's the second piece of it, which again, uh, 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. And so I talked in my comments as well, Brendan, about our client-centric capability operating model. You know, everything around that 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'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 more aligned both between operations and technology to drive the scalability and efficiency that's necessary to see that continued improvement and profitability.

Great. Thanks for that, Mike. And then there's a lot of movement in the markets. You already spoke a bit to GFO and some of the changes that happened within some portfolios. 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 did you guys see fee rate pressure in some of the other businesses this quarter as well? Or was it just around the math in how you bill and how much the market's 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 an extremely strong pipeline, and they're going to produce a record year of new business off 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. The other thing I'd say about GFO is they're less exposed, at least at Northern, to fixed income and equity movements. They are very cash-focused, and so unlike the regions, they're not as influenced as much by the overall equity markets. A better way to look at the business like a GFO business would be to look at their year-to-date fees. So year-to-date fees are up 5% and revenues are up 9%. And then the GFO had – yeah.

I'm sorry. I'm sorry. I probably worded my question poorly. I was looking at the businesses aside from GFO. Like I get that GFO had some of those moves. I mean like in the servicing business and the investment management business. We saw a little fee rate pressure there too. So I was just curious about whether that was just the math. you know, in markets or whether there was actually some, you guys experienced some fee rate pressure.

Sure. 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, you 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 bring down the fees on an investment management product to make it more competitive. On the servicing side, I would say, once again, there's always, it's a competitive marketplace, but there's nothing that transpired in the quarter that necessarily resulted in a reduction in fee levels. And in fact, if anything, Brennan, to your first question, we're trying to be very disciplined around pricing and economics to make sure that the business we're bringing on is at those accretive margins.

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

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

Hi. I just want to make sure I understand the big picture correctly. So I think you're running asset management and wealth, especially GFO, for growth. and you're running asset servicing relatively more for profitability. And to get there, you're letting some low margin business run off. Did I get that correctly? Yes. Okay. So, I guess the question is, you know, under what circumstances would you say, you know what, the custody business, you know, maybe you should downsize even more or disinvest? And I know this is an old question, and I think you usually said, look, you might not have scale in absolute terms, but you have scale where you want to compete. I think that's kind of where you've been. But does that still hold, and under what circumstances would that change?

Yeah, so it absolutely still holds. And if anything, Mike, I would say, you know, 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 when we talk about 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. First of all, when you think about digital assets, tokenization, and even stable coins, the whole idea there is around greater efficiency in the marketplace. And so as that happens, again, that leads to more straight through activities, more liquidity in those markets and those products, et cetera. And we're certainly making sure that we have the capabilities to do that. With AI, it's about automating processes and taking things that right now maybe not be so straight through. If you take an example like private capital and the processing of private capital for our clients, so thinking where they're LPs and they're invested in literally hundreds of funds and a lot of that activity is still paper-based, 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 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 an 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, the one-liner, why someone of your size can compete with the Goliaths of the industry. I mean, it's always skill versus scale, the argument. Why can you win in tech and AI when you don't spend as much money?

Yeah, it's, uh, first of all, it's differentiation, right? So our strategy is focused on delivering a unique value proposition to our clients. Uh, and in doing so that requires greater focus for us. So as I think you pointed out in one of your earlier comments, you know, we're not looking to compete in every segment, uh, across the globe. We're picking areas like asset owners in the United States, like pension funds in the UK. like Global Family Office, like hedge fund services, where we believe that that value proposition, that differentiation resonates because it's still about the overall package. What do they get when it comes to 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. 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.

All right. Thank you. Sure.

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

Hi. Good morning.

Good 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.

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 some idea, because how it's being utilized is different, and maybe the results, yes, they may vary in different groups, but the applicability is basically across the board. So we talked about operations there. I talked a little bit about 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 arguably a very high level that you'll get. I'm going to do another easy one, which is within technology, utilizing GitHub and other types of AI. We're seeing, I'm going to call it about 20% improvement in the programming, the engineering part of technology there. And I think, again, still in 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. So 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 the calls, summarize them, 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 advisors much better and much more efficient because in advance, well, first of all, in thinking about where the opportunities might be and prospecting. AI is enabling that process to happen in such a way that it's highlighting 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, 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 advisors essentially to be able to tap into 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. When 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 will still have plenty of doom, but they'll be using better tools to be able to do it better and faster. So, you know, cuts across, 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 stable coin. Do you issue your own? Do you get involved with the industry consortium? As we move towards 24-7 trading, having a stable coin cash leg is going to be critical. So I want to understand how you're thinking about that dynamic as we roll forward here. Thank you.

Sure. So I think that what's happening in the digital asset space, there are four key drivers from my perspective. innovation, regulation, client demand, and then interoperability. And on the innovation front, to your point, whether it's stable coins 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 probably leading. What's been lagging is more on the regulation front. And obviously now with 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 our clients don't want to have to, I'll say, operate in two worlds. They want to be able to utilize, whether it's stable coins or a tokenized assets, with their other assets. And so we're just making sure that our platform can do both of them. Now, specifically to stablecoin, I would say stablecoin will find the areas that have the greatest friction. And a lot of that, as you know right now, is probably cross-border or outside the U.S. And I'll say we'll have the ability to 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. So thinking about a tokenized money market fund, 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 direction that we see.

Thank you so much. And yeah, tokenized money market fund is a type of fund

stablecoin cash lake too so exactly appreciate that thank you sure we will take our next question from glenn shore with evercore hi there hi um hello uh small but interesting one uh regarding the uh deposit rate paid on savings money market um and other deposits so So after going down for a four-quarter 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 interesting. I'm more thinking about the go forward. But what caused that saving in the money market rate to go up in a quarter when there's a rate cut? And I know you gave us your thoughts on next year, so I appreciate that. I'm just curious what's going on on these deposits.

Yeah, well, deposits are also multi-currency. They're not just U.S. dollar, right? So there may be some differences there that you might want to take a look at. But we could certainly get more granular with you. But on the top of it, I can't say in particular. I'd have to look at each currency and each particular investment that we made to kind of give you that read.

No worries. We can move on to 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 50 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 on the asset servicing side as well. Thanks.

Sure, Glenn. So 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 institutionally as well. Specifically, what happened 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 the best of the best funds where access is often an issue, but through our relationship and by having the diligence done, we're able to offer it to our wealth clients. And so this was one of the, I'll say, high-performing venture funds that was offered to wealth clients in the quarter. And then you said to the broader picture there, I'll say just first of all, on the wealth front in 50 South, once again, an area of a lot of innovation. And again, I think 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 funds, but then also private capital administration for other private equity funds, private capital funds, but then specifically around the vehicles, the LTAF and the LTIF 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 well positioned to be able to provide those capabilities for the asset managers.

Okay, thanks very much.

Sure.

We will take our next question from Stephen Alexopoulos with TD Cowan.

Hey, good morning, everyone. Morning. I wanted to start, so I know on the pre-tax 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 given for 4Q in 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, even if the Fed's cutting rates?

So to your point, Steve, there's certainly the impact of markets 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 pre-tax margin on an ongoing basis. So you have a quarter like this where we got there somewhat because of the environment, but also because of the provision release. So that bumped it up a little bit. All the same, the longer term trend, longer term meaning over the last couple of years, has been an improvement in the pre-tax margin. So when you look at The year-to-date margin is closer to kind of 29%. And, yes, we expect to move into 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 objective is to stay above that 30%. Got it.

That's helpful. And then going back to all the commentary on AI and productivity gains, In 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 come?

Yeah, so it's a great question because 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 point, it's difficult if somebody's, I'll say, 3% more efficient as a result of it. Well, how does that actually affect your financials and your need for resources? And so that's why we've also been very disciplined around headcount, around span of control, around how we're organized, so that it's a way to capture that. So that as you go forward and as you add new business and you grow, you're not adding more 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 we talked about GitHub and with the programmers. Those are the areas, Steve, where I'd say, yes, we're getting savings now, but to your point, it's still in the earlier days of capturing the efficiencies that you're going to get.

That's a great color.

Thanks for taking my questions. Of course.

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

Good morning. Good morning.

Is there any more color you can offer on the relative strength in FX trading and securities commissions and 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 this strength you feel like is a result of share gains and other things that are more a result of things that were in your control as opposed to just simply benefiting from broader market volumes being healthy. Thank you. Sure.

Sure. So 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 the strategy part specifically, what the team has been doing there over the last several years is building out a more durable capital markets business. And what I mean by that is Yes, historically, the business has performed well when the markets and volatility are strong, but then has gone down when it's not there. And what they've tried to do is turn it into more of a service, if you will, in the activities 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 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 brokerage commissions as a result of that. On the FX front, 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 a transactional business. So that has also built up over time. And then also from a liquidity perspective, we've expanded our liquidity capabilities. Certainly we talk all the time about deposits and money market funds and being able to be on that side of it. The other side is at times they need overnight liquidity the other direction. So not only securities lending, but also thick repo has been 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. Sure.

We'll take our next question from Gerard Cassidy with RBC.

Good morning, Dave. Good morning, Mike. Morning. Kind of different questions for you guys. I always like to get the perspective from folks like you because you don't have a big exposure to this area. There's been a lot of talk this quarter about loans to non-depository financial institutions. And of course, you're 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, et cetera. How do you guys look at that NDFI category?

Yeah, that's a good question, and 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 NFDI category. And so when you look at Northern, 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 private credit fund, right? There's also sometimes loans to management companies that we do. But in that case, you've got 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 want to say around 30%. Those could have some private credit funds in them, but they're highly diversified across their entire private equity portfolios. We don't lend against one particular fund. So that's sort of how Northern has looked at that business. I'll let Mike talk broader about the industry in terms of what's going on. But we don't have any of the similarities, as you pointed out, to what's going on with everybody else. Correct.

Thank you.

I would agree, Jared.

And then as a follow-up question, the IMF has come out, as well as the Bank of England, with reports in the last couple of weeks saying citing, I hate to use the word bubble, but really inflated asset prices. And they point out that we've got to 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 managing wealth management should a big correction come or just your view on how you approach it with your clients.

Sure. So to your point, you can never say time the markets or predict the markets. There's going to be volatility. Valuation is, you know, one one person may say it's a bubble. Another person say, you know, there's still tremendous upside to that. And as a result, 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 platform that is utilized with those clients where up front 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 do not get into a liquidity situation, not get into a situation where you don't have the funds necessary for achieving what your objectives are? And 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 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, Michael.

Sure.

And there are no further questions in the queue at this time. I will now turn the conference back over to Jennifer Child 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.