Northern Trust Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022 unless otherwise noted. Northern Trust provides asset servicing, wealth management, asset management and banking services. The interim financial statements are unaudited.
Key financial results
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Total revenue | $1.745 billion | Up 2% from Q1 2022 |
| Net interest income | $531.2 million | Up 39% from $381.0 million |
| Net interest margin | 1.62% FTE; 1.58% GAAP | 1.05% FTE; 1.03% GAAP in Q1 2022 |
| Noninterest income | $1.213 billion | Down 9% |
| Provision for credit losses | $15.0 million | Compared with $2.0 million in Q1 2022 |
| Noninterest expense | $1.286 billion | Up 7% |
| Net income | $334.6 million | Down 14% from $389.3 million |
| Diluted earnings per common share | $1.51 | Down from $1.77 |
| Return on average common equity / assets | 12.4% / 0.92% | 14.2% / 0.97% in Q1 2022 |
| Cash flow from operating activities | $(164.9) million | $746.9 million provided in Q1 2022 |
Balance sheet, liquidity and capital
- At March 31, total assets were $151.1 billion, deposits $113.7 billion, loans $42.4 billion and stockholders’ equity $11.6 billion. Since year-end, assets declined 3% and deposits declined 8%.
- Period-end deposits fell $10.2 billion from December 31. Management attributed the broader deposit trend to clients migrating to higher-yielding products. Average deposits were down 19% year over year.
- Borrowings at March 31 included $11.4 billion of other borrowings, $4.5 billion of federal funds purchased, $2.8 billion of senior notes and $2.1 billion of long-term debt. Management said increased borrowings helped manage liquidity ratios and supported its net-interest-income strategy.
- The company reported that cash, money-market assets and short-term investment securities represented 63% of total assets. It said regulatory capital ratios exceeded applicable well-capitalized requirements. Corporation CET1 was 11.3% under the standardized approach and 11.7% under the advanced approach.
- Net cash used in financing was $4.6 billion, primarily reflecting deposit outflows, partly offset by increased short-term borrowings. Cash and due from banks increased $171.7 million during the quarter.
Material changes and management commentary
- Higher interest rates substantially lifted net interest income and margin, partially offset by lower average earning assets. Average earning assets declined 9% year over year, reflecting reduced deposit funding and lower securities balances, partly offset by higher loans.
- Trust, investment and other servicing fees fell 9% to $1.064 billion, attributed mainly to lagged market declines, asset outflows and unfavorable currency translation. Lower money-market fee waivers partly offset the decline.
- Foreign-exchange trading income declined 35% to $53.0 million, mainly due to unfavorable swap activity and lower client volumes.
- Expenses rose 7%. Equipment and software expense increased 20%, reflecting amortization and technology spending; occupancy expense also rose 20%, including a $9.8 million charge for early lease exits. Compensation expense increased 6% amid a tight labor market.
- Asset Servicing net income increased 1% to $174.6 million, while Wealth Management net income declined 22% to $172.1 million. Wealth Management was affected by lower fees, higher expenses and a credit-loss provision.
- Client assets improved sequentially but remained below year-ago levels: AUC/A was $14.2 trillion, up 4% from year-end and down 9% year over year; AUM was $1.33 trillion, up 6% sequentially and down 11% year over year.
Risks, contingencies and unusual items
- Credit and commercial real estate: The credit provision primarily reflected reserve growth associated with the size and duration of the commercial real estate portfolio, especially multifamily. CRE loans were $5.0 billion at quarter-end, including $1.55 billion in apartment/multifamily mortgages. Net charge-offs were $2.9 million; nonaccrual assets were $48.9 million.
- Investment securities and interest-rate exposure: The securities portfolio had $2.7 billion of net unrealized losses at March 31, largely associated with interest-rate changes. HTM securities had amortized cost of $24.7 billion and fair value of $22.8 billion. These valuation exposures may affect capital and reported equity; management describes the portfolio as highly liquid and predominantly high-rated.
- Interest-rate sensitivity: The modeled 12-month net interest income impact was +$15 million under a 100-basis-point upward ramp and +$29 million under a 200-basis-point upward ramp. These are scenario estimates, not forecasts, and exclude potential management actions. A 100-basis-point upward shock was estimated to reduce market value of equity by $569 million.
- Legal matters: Management estimated reasonably possible aggregate losses of zero to approximately $25 million for certain matters, while noting other matters could not be reasonably estimated. The French appellate retrial involving a subsidiary was scheduled to begin in September 2023. The Visa interchange-fee litigation and ultimate conversion terms for retained Visa Class B shares remain uncertain.
- Off-balance-sheet exposures: Reported standby letters of credit and financial guarantees totaled $31.1 billion, including a $29.4 billion FICC sponsored-member guarantee before related collateral. Securities lent with indemnification totaled $146.0 billion; management said such lending is fully collateralized and recorded no related liability.
- Restricted cash: Russian-ruble cash held for clients and subject to distribution restrictions was $529.1 million, up from $330.4 million at year-end, due to the continuing conflict and related sanctions.
- No specific financial guidance or earnings outlook is provided in the supplied filing text. Management identifies market volatility, deposit deployment and funding costs, expenses and inflation, credit quality, technology and operational risks, regulation, and geopolitical events among factors that could affect results.
Important facts for investors to verify
- Track whether deposit outflows and the shift to higher-yielding products continue, and the resulting cost and mix of funding.
- Assess sustainability of net interest income gains as rates, deposit pricing and average earning assets change.
- Monitor fee trends against market levels, client flows and currency movements, especially in servicing and wealth management.
- Review CRE exposure, particularly multifamily, and subsequent changes in provisions, criticized loans, delinquencies and nonaccruals.
- Evaluate unrealized securities losses, liquidity and capital sensitivity to interest rates, including the distinction between AFS and HTM holdings.
- Reconcile share repurchase disclosures: the filing reports 1,050,227 shares repurchased for $100.9 million in one section, including shares withheld for taxes, while the public-plan table reports 723,416 shares at an average $96.76. The distinction is not fully explained in the supplied text.
- Monitor developments in the cited litigation and contingent exposures, including the FICC guarantee and restricted Russian-ruble client balances.