NORTHERN TRUST CORP annual report, FY2023

Northern Trust Corporation — 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter report. Northern Trust provides asset servicing, wealth management, asset management and banking services; most revenue comes from fees tied to client assets and activity.

Financial performance and position

Metric	2023	2022	Change
Total revenue	$6.77 billion	$6.76 billion	Up $12.3 million; essentially flat
Net interest income, GAAP	$1.98 billion	$1.89 billion	Up 5%
Net interest margin, FTE	1.56%	1.39%	Up 17 basis points
Net income	$1.11 billion	$1.34 billion	Down 17%
Diluted earnings per common share	$5.08	$6.14	Down 17%
Net income return on average common equity	10.0%	12.7%	Down 2.7 percentage points
Net cash from operating activities	$2.63 billion	$2.39 billion	Up $233 million

Revenue mix and drivers: Noninterest income was $4.79 billion, 71% of revenue, down 2%. Trust, investment and other servicing fees fell 2% to $4.36 billion, while foreign-exchange trading income declined 29% to $203.9 million. Higher interest income offset much of the fee decline.
Profitability and costs: Noninterest expense increased 6% to $5.28 billion; provision for credit losses rose to $24.5 million from $12.0 million. The effective tax rate was 24.4% in both years.
Client assets: Year-end assets under custody/administration rose 13% to $15.40 trillion and assets under management rose 15% to $1.43 trillion, principally due to favorable markets; AUM also benefited from net inflows and currency translation.
Balance sheet and funding: Total assets were $150.8 billion, down 3%; total deposits were $116.2 billion, down 6%. Loans were $47.6 billion, up 11%. Total stockholders’ equity was $11.9 billion, up 6%.
Debt and borrowings: Senior notes were $2.77 billion and long-term debt was $4.07 billion at year-end. Other borrowings were $6.57 billion, federal funds purchased $3.05 billion, and repurchase-agreement liabilities $785 million. Long-term debt included $2.0 billion of new FHLB advances.
Liquidity and capital: Cash, central-bank deposits, short-term money-market assets and investment securities together represented 59% of total assets. The Bank had $39.0 billion of unencumbered securities and more than $34.7 billion of securities and loans available as discount-window collateral. The Corporation and Bank reported compliance with LCR and NSFR requirements. Corporation standardized CET1 capital ratio was 11.4%; all reported capital ratios exceeded applicable well-capitalized thresholds.
Cash flows: Investing activities provided $4.78 billion, while financing activities used $7.18 billion, mainly reflecting lower deposits. Cash and due from banks increased $137 million to $4.79 billion.

Material changes and unusual items

Net income declined despite nearly flat revenue, as expenses rose and fee and foreign-exchange income weakened. FTE net interest margin improved with higher rates, partly offset by funding mix and lower average earning assets.
The company recorded $169.5 million of net investment-security losses in 2023, largely from a fourth-quarter portfolio repositioning; 2022 losses were $214.0 million. The year-end portfolio had approximately $2.3 billion of net unrealized securities losses, versus $3.2 billion a year earlier.
Other operating expense included an $84.6 million FDIC special assessment accrued in the fourth quarter and a $25.6 million write-off of an investment in a client capability. The FDIC assessment is payable beginning in 2024 and its final amount may change.
In January 2024, Northern Trust sold additional available-for-sale securities and recognized a $189.4 million loss in first-quarter 2024, disclosed as a subsequent event.
Asset Servicing net income fell 11% to $674.8 million, as higher expenses and lower foreign-exchange income outweighed higher net interest income. Wealth Management net income fell 9% to $731.6 million, with lower fees and net interest income and higher expenses.
Common dividends declared were $3.00 per share for 2023. The company repurchased 4.38 million shares at an average $79.26 per share and returned $977.7 million to common shareholders through dividends and repurchases.

Outlook, risks and contingencies

The filing provides no specific consolidated revenue, earnings or margin guidance. Management identifies interest rates, deposit levels and funding costs, market values and client activity as important earnings drivers. Management expects 2024 pension expense to increase slightly; the company contributed $200 million to its U.S. qualified pension plan in January 2024.
Proposed U.S. Basel III Endgame rules could increase fully phased-in risk-weighted assets by an estimated 5%–15% versus actual standardized-approach RWAs at year-end 2023, before mitigating actions. The proposal was not final in the filing.
Key risks include market-driven fee volatility, deposit outflows and funding costs, investment-security valuation and realized losses, commercial real estate credit deterioration, counterparty and operational risks, cybersecurity, vendor dependence, regulatory change, litigation and geopolitical events.
Commercial real estate exposures contributed to higher credit reserves. Nonaccrual assets rose to $65.1 million from $45.9 million; the allowance assigned to loans was $178.7 million, or 0.38% of loans.
Cash balances related to Russian securities were subject to restrictions; ruble cash held for certain clients totaled $722.2 million at year-end. The filing notes potential counterparty and access risks while restrictions persist.
The company estimated aggregate reasonably possible losses on certain legal and regulatory matters at zero to approximately $25 million; other matters could not be reasonably estimated. A French appellate court verdict concerning a subsidiary’s trust administration case was expected in March 2024.
The company reported no cybersecurity incident identified to date as materially affecting, or reasonably likely to materially affect, its business, results or financial condition. It cautions that undetected incidents cannot be ruled out.

Important facts for investors to verify

Whether deposit trends, deposit pricing and borrowing costs sustain or reverse the improvement in net interest margin.
How recurring servicing-fee revenue and foreign-exchange income respond to market levels, client flows and trading activity.
The timing, rationale and cumulative earnings and capital effects of securities portfolio repositioning, including the $189.4 million loss recognized in first-quarter 2024.
Whether commercial real estate credit quality, nonaccrual loans and the allowance for credit losses continue to deteriorate.
The final FDIC special assessment, implementation of proposed capital and long-term debt rules, and resulting effects on capital distributions and funding costs.
The scale and potential liquidity implications of off-balance-sheet exposures, including the $84.6 billion FICC sponsored-member guarantee, for which the filing says collateral mitigates exposure.