Northern Trust Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; figures are unaudited. Northern Trust provides asset servicing, wealth management, asset management and banking services through its Asset Servicing and Wealth Management segments.
Financial results and key metrics
| Metric | Q3 2023 | Change vs. Q3 2022 | Nine months 2023 | Change vs. 2022 |
|---|---|---|---|---|
| Total revenue | $1.73 billion | Down 2% | $5.23 billion | Essentially flat |
| Net interest income | $456.2 million | Down 11% | $1.50 billion | Up 11% |
| Noninterest income | $1.27 billion | Up 2% | $3.73 billion | Down 4% |
| Provision for credit losses | $14.0 million | vs. $0.5 million | $13.5 million | vs. $7.0 million |
| Noninterest expense | $1.28 billion | Up 4% | $3.90 billion | Up 6% |
| Net income | $327.8 million | Down 17% | $994.2 million | Down 16% |
| Diluted earnings per share | $1.49 | Down 17% | $4.56 | Down 16% |
Returns and margins: Q3 return on average common equity was 11.6% (14.9% in Q3 2022); return on average assets was 0.93% (1.07%). Net interest margin was 1.45% on a fully taxable equivalent basis, down from 1.58%. For the nine-month period, FTE net interest margin increased to 1.55% from 1.32%.
Balance sheet and capital: At September 30, total assets were $146.3 billion, down 6% from December 31, 2022; deposits were $110.2 billion, down 11%; and stockholders’ equity was $11.8 billion, up 5%. Loans totaled $43.6 billion. Funding costs and mix shifted as average interest-bearing deposits fell while short-term borrowings rose. Senior notes were $2.7 billion, long-term debt $4.1 billion, other borrowings $6.9 billion and federal funds purchased $5.5 billion. Standardized capital ratios were 11.4% CET1, 12.4% Tier 1 and 14.5% total capital at the Corporation; management said capital remained above well-capitalized requirements.
Liquidity and cash flow: Cash held at the Federal Reserve and other central banks was $32.3 billion. Management reported that cash, money-market assets and short-term investment securities represented 60% of total assets. For the first nine months, operating cash flow was negative $177.6 million, investing cash flow was positive $9.6 billion and financing cash flow was negative $8.9 billion; the financing outflow primarily reflected lower deposits. Cash and due from banks increased $301.5 million over the period.
Client assets: Assets under custody/administration were $14.2 trillion, up 4% from year-end 2022; assets under custody were $11.0 trillion, up 4%; and assets under management were $1.33 trillion, up 7%. These balances declined from June 30, largely reflecting market and currency movements.
Material changes versus comparable periods
- Q3 earnings declined as lower net interest income and higher expenses more than offset growth in servicing fees. Q3 servicing fees rose 3%, helped by lagged favorable markets and currency translation, partly offset by lower transaction volumes.
- For the first nine months, net interest income benefited from higher rates, but servicing fees fell 4% and other noninterest income fell 8%; foreign-exchange trading income declined 31%.
- Funding pressure was evident: average interest-bearing deposits were down 10% year over year in Q3, while other average interest-related funding increased 77%. Management attributed the deposit decrease partly to migration into higher-yielding products.
- Noninterest expense growth reflected compensation, software and equipment costs, and other operating expense. Nine-month expense included $36.7 million of severance-related charges, a $25.6 million write-off of a client-capability investment, and $12.8 million of early lease-exit charges.
- Nonaccrual assets rose to $69.1 million from $45.9 million at year-end 2022; nonaccrual loans were 0.16% of total loans, versus 0.11%.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance is provided. The credit-loss forecast’s primary scenario anticipated continued slow but steady growth, with inflation, labor markets and interest rates stabilizing; an alternative scenario assumed recession. These are credit-model assumptions, not company guidance.
- Management cited new loans and renewals and deterioration in some commercial real estate (CRE) and commercial and institutional loans as drivers of the quarterly credit provision. It noted expectations of greater CRE stress, particularly in office CRE, partly offset by an improved overall macroeconomic outlook. CRE loans totaled $5.1 billion, including $1.0 billion of office mortgages.
- The securities portfolio had $3.4 billion of net unrealized losses at September 30, primarily attributed to higher interest rates. The HTM portfolio’s fair value was $22.4 billion against $24.9 billion amortized cost; management stated it intends and is able to hold these securities to maturity. AFS unrealized losses totaled $913.1 million.
- The FDIC proposed a special assessment to recoup losses related to certain bank failures. If finalized as proposed, Northern Trust estimated an approximately $80 million expense; timing and amount remained uncertain.
- Off-balance-sheet commitments totaled $254.7 billion, including $63.3 billion of standby letters of credit and financial guarantees. That total included a $61.4 billion guarantee to the Fixed Income Clearing Corporation under its sponsored-member program; the filing says related collateral mitigates exposure. Securities lent with indemnification totaled $141.4 billion.
- Legal matters: management reported no material accruals for pending litigation or regulatory matters, estimated an aggregate reasonably possible loss range of zero to approximately $25 million for a limited number of matters, and noted some matters could not be reasonably estimated. A French appellate court verdict in a fiduciary-services matter was expected in March 2024. Visa Class B share conversion and transfer restrictions also remain subject to unresolved litigation and other uncertainties.
- Regulatory capital rules may change: Northern Trust was evaluating the impact of the proposed Basel III endgame rules. Interest-rate sensitivity estimates showed a negative $63 million impact on next-12-month net interest income under a 200-basis-point upward rate ramp and a negative $1.27 billion impact on market value of equity under a 200-basis-point upward shock; management cautioned these estimates are model-based and not predictive of actual results.
Most important facts for investors to verify
- Whether deposit outflows and migration to higher-yielding products continue, and how the funding mix affects net interest margin.
- Whether fee growth, asset flows and market levels support servicing revenue, and whether foreign-exchange trading income recovers.
- CRE and office-loan performance, watch-list and nonaccrual trends, and changes to credit-loss allowances.
- The final FDIC assessment and its amount, timing and effect on expenses.
- The realization and capital implications of securities unrealized losses, alongside liquidity and regulatory-capital levels.
- Developments in the disclosed litigation, Visa-related matters and large off-balance-sheet guarantees, including collateral and potential exposure.