ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of the financial condition and results of operations (MD&A) of Northern Trust Corporation (Corporation) for the year ended December 31, 2023. The following should be read in conjunction with the consolidated financial statements and related footnotes included in this report. Investors also should read the section entitled “Forward-Looking Statements.”
BUSINESS OVERVIEW
The Corporation is a leading provider of wealth management, asset servicing, asset management and banking solutions to corporations, institutions, families and individuals. The Corporation focuses on managing and servicing client assets through its two client-focused reporting segments: Asset Servicing and Wealth Management. Asset management and related services are provided to Asset Servicing and Wealth Management clients primarily by the Asset Management business.
The Corporation conducts business through various U.S. and non-U.S. subsidiaries, including The Northern Trust Company (the Bank). The Corporation was formed as a holding company for the Bank in 1971. The Corporation has a global presence with offices in 24 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. Except where the context requires otherwise, the terms “Northern Trust,” “we,” “us,” “our,” “its,” or similar terms refers to the Corporation and its subsidiaries on a consolidated basis.
FINANCIAL OVERVIEW
TABLE 4: FINANCIAL HIGHLIGHTS
FOR THE YEAR ENDED DECEMBER 31,
PER COMMON SHARE
Cash Dividends Declared Per Common Share 3.00 2.90 2.80
SELECTED RATIOS AND METRICS
Return on Average Common Equity 10.0 % 12.7 % 13.9 %
Average Stockholders’ Equity to Average Assets 8.1 7.3 7.5
Net Income decreased $228.7 million, or 17%, to $1.11 billion in 2023 from $1.34 billion in 2022. Earnings per diluted common share was $5.08 in 2023 compared to $6.14 in 2022. Return on average common equity decreased to 10.0% in 2023 from 12.7% in 2022. Trust, Investment and Other Servicing Fees decreased 2% in 2023, as compared to a 2% increase in 2022.
2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenue increased $12.3 million to $6.77 billion in 2023 from $6.76 billion in the prior year, primarily driven by an increase in Net Interest Income of 5%, partially offset by a decrease in Foreign Exchange Trading Income of 29%.
Client AUC/A increased 13% from $13.60 trillion as of December 31, 2022 to $15.40 trillion as of December 31, 2023, primarily reflecting favorable markets. Client assets under custody, a component of AUC/A, increased 12% from $10.60 trillion as of December 31, 2022 to $11.92 trillion as of December 31, 2023. Client assets under custody included $8.01 trillion of global custody assets as of December 31, 2023, which increased 16% from $6.91 trillion as of December 31, 2022. Client AUM increased 15% to $1.43 trillion as of December 31, 2023 from $1.25 trillion as of December 31, 2022. The increase primarily reflected favorable markets, net inflows, and favorable currency translation.
The Provision for Credit Losses in 2023 was $24.5 million as compared to a Provision for Credit Losses of $12.0 million in 2022. For additional information, please refer to Provision for Credit Losses within the“Consolidated Results of Operations” section.
Noninterest Expense of $5.28 billion in 2023 increased $301.3 million, or 6%, from $4.98 billion in 2022, primarily reflecting increased Other Operating Expense, Equipment and Software, and Compensation. Please refer to Note 19, “Other Operating Expense” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to the $84.6 million FDIC special assessment.
The Provision for Income Taxes in 2023 totaled $357.5 million, representing an effective tax rate of 24.4%. The Provision for Income Taxes in 2022 totaled $430.3 million, representing an effective tax rate of 24.4%.
Northern Trust continued to maintain a strong capital position during 2023, with all capital ratios exceeding those required for classification as “well-capitalized” under federal bank regulatory capital requirements. For additional information, please refer to the “Capital Management” section.
CONSOLIDATED RESULTS OF OPERATIONS
The following information summarizes our consolidated results of operations for 2023 compared to 2022. For a discussion related to the consolidated results of operations for 2022 compared to 2021, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 Form 10-K), which was filed with the United States Securities and Exchange Commission on February 28, 2023.
Revenue
Northern Trust generates the majority of its revenue from Noninterest Income that primarily consists of Trust, Investment and Other Servicing Fees. Net Interest Income comprises the remainder of revenue and consists of Interest Income generated by earning assets, net of Interest Expense on deposits and borrowed funds.
Revenue in 2023 of $6.77 billion increased $12.3 million from $6.76 billion in 2022. Noninterest Income represented 71% and 72% of total revenue in 2023 and 2022, respectively, and totaled $4.79 billion in 2023, which decreased $82.5 million, or 2%, from $4.87 billion in 2022.
Noninterest Income in 2023 decreased primarily due to lower Foreign Exchange Trading Income and lower Trust, Investment and Other Servicing Fees, partially offset by lower investment securities losses compared to the prior year and higher Other Operating Income. Investment Security Gains (Losses), net reflected $169.5 million of losses in 2023 as compared to $214.0 million of losses in 2022. Both losses in Investment Security Gains (Losses), net in 2023 and 2022 were due to a repositioning of the available for sale debt securities portfolio. Other Operating Income of $228.7 million in 2023 increased $37.4 million, or 19%, from $191.3 million in the prior year, primarily due to higher income associated with a market value increase in supplemental compensation plans and higher banking and credit-related services fees. Trust, Investment and Other Servicing Fees of $4.36 billion in 2023 decreased $70.8 million, or 2%, from $4.43 billion in 2022, primarily due to net asset outflows and unfavorable markets, partially offset by lower money market fee waivers and favorable currency translation.
Net Interest Income on a fully taxable equivalent (FTE) basis in 2023 of $2.04 billion increased $106.7 million, or 6%, from $1.93 billion in 2022, primarily due to higher average interest rates, partially offset by an unfavorable balance sheet mix. The net interest margin on an FTE basis increased to 1.56% in 2023 from 1.39% in 2022, primarily due to higher average interest rates, partially offset by an unfavorable funding mix shift.Average earning assets decreased $8.0 billion, or 6%, from $138.8 billion in 2022 to $130.8 billion in 2023, primarily due to lower client deposits, partially offset by higher borrowing activity, the net of which resulted in lower funding of earning assets.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additional information regarding Northern Trust’s revenue by type is provided in the following table.
TABLE 5: REVENUE
FOR THE YEAR ENDED DECEMBER 31,
Noninterest Income
Investment Security Gains (Losses), net (169.5) (214.0) (0.3)
(1) Net Interest Income stated on a GAAP basis. Net Interest Income on an FTE basis includes FTE adjustments of $57.5 million, $45.6 million, and $35.6 million for 2023, 2022, and 2021, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.
Trust, Investment and Other Servicing Fees
Trust, Investment and Other Servicing Fees were $4.36 billion in 2023 compared with $4.43 billion in 2022, and are based primarily on the market value of assets held in custody, managed or serviced; the volume of transactions; securities lending volume and spreads; and fees for other services rendered. Certain market value calculations on which fees are based are performed on a monthly or quarterly basis in arrears.
Northern Trust voluntarily waived $8.8 million of money market fund fees in 2023 and $64.2 million of money market fund fees in 2022.
The components of Trust, Investment and Other Servicing Fees are provided in the following table.
TABLE 6: TRUST, INVESTMENT AND OTHER SERVICING FEES
FOR THE YEAR ENDED DECEMBER 31, CHANGE
Asset Servicing Trust, Investment and Other Servicing Fees
Wealth Management Trust, Investment and Other Servicing Fees
Asset Servicing
Asset Servicing Trust, Investment and Other Servicing Fees are primarily attributable to services related to custody, fund administration, investment management, and securities lending. Custody and Fund Administration fees, the largest component of Asset Servicing fees, are driven primarily by values of client AUC/A, transaction volumes and the number of accounts. The asset values used to calculate these fees vary depending on the individual fee arrangements negotiated with each client. Custody fees related to asset values are client specific and are priced based on month-end market values, quarter-end market values, or the average of month-end market values for the quarter. The fund administration fees that are asset-value-related are priced using month-end, quarter-end, or average daily balances. Investment Management fees are based generally on market values of client AUM management throughout the period. Typically, the asset values used to calculate fee revenue are based on a one-month or one-quarter lag.
2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Securities Lending revenue is affected by market values; the demand for securities to be lent, which drives volumes; and the interest rate spread earned on the investment of cash deposited by investment firms as collateral for securities they have borrowed. The Other fee category in Asset Servicing includes such products as investment risk and analytical services, benefit payments, and other services. Revenue from these products is based generally on the volume of services provided or a fixed fee.
Custody and Fund Administration fees decreased in 2023 from 2022 primarily due to unfavorable lagged markets. Investment Management fees in 2023 decreased from 2022 primarily due to asset outflows, partially offset by lower money market fund fee waivers.
The following tables provide a breakdown of the Asset Servicing assets under custody and AUM.
TABLE 7: ASSET SERVICING ASSETS UNDER CUSTODY
DECEMBER 31, CHANGE
TABLE 8: ASSET SERVICING ASSETS UNDER MANAGEMENT
DECEMBER 31, CHANGE
Cash and other assets deposited by investment firms as collateral for securities borrowed from custody clients are managed by Northern Trust and are included in assets under custody and under management. This securities lending collateral totaled $167.4 billion and $148.3 billion at December 31, 2023 and 2022, respectively.
Wealth Management
Wealth Management fee income is calculated primarily based on market values and is impacted by both one-month and one-quarter lagged asset values. Fee income in the regions decreased in 2023 from 2022 primarily due to product-related asset outflows, partially offset by favorable lagged markets. Global Family Office fee income was relatively flat primarily due to unfavorable lagged markets, partially offset by lower money market fund fee waivers and asset inflows. The following tables provide a summary of Wealth Management assets under custody and under management.
TABLE 9: WEALTH MANAGEMENT ASSETS UNDER CUSTODY
DECEMBER 31, CHANGE
TABLE 10: WEALTH MANAGEMENT ASSETS UNDER MANAGEMENT
DECEMBER 31, CHANGE
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Wealth Management regions shown are comprised of the following: Central includes Illinois, Michigan, Minnesota, Missouri, Ohio and Wisconsin; East includes Connecticut, Delaware, Florida, Georgia, Massachusetts, New York, Pennsylvania, and Washington, D.C.; West includes Arizona, California, Colorado, Nevada, Texas, and Washington. Global Family Office provides customized services, including but not limited to investment consulting, global custody, fiduciary, and private banking, to meet the complex financial needs of ultra-high-net-worth individuals and family offices across the globe.
Market Indices
The following tables present selected market indices and the percentage changes year-over-year to provide context regarding equity and fixed income market impacts on the Corporation’s results.
TABLE 11: EQUITY MARKET INDICES
DAILY AVERAGES YEAR-END
TABLE 12: FIXED INCOME MARKET INDICES
AS OF DECEMBER 31,
Barclays Capital U.S. Aggregate Bond Index 2,162 2,049 6 %
Barclays Capital Global Aggregate Bond Index 471 446 6
Client Assets
Northern Trust, in the normal course of business, holds assets under custody/administration and management in a fiduciary or agency capacity for its clients. In accordance with GAAP, these assets are not assets of Northern Trust and are not included in its consolidated balance sheets. AUC/A and AUM are a driver of our Trust, Investment and Other Servicing Fees. For the purposes of disclosing AUC/A, to the extent that both custody and administration services are provided, the value of the assets is included only once in this amount.
At December 31, 2023, AUC/A increased from December 31, 2022, primarily reflecting favorable markets. Assets under custody, a component of AUC/A, at December 31, 2023, increased from December 31, 2022 and included $8.01 trillion of global custody assets compared to $6.91 trillion at December 31, 2022.
The following table presents AUC/A by reporting segment.
TABLE 13: ASSETS UNDER CUSTODY/ADMINISTRATION BY REPORTING SEGMENT
DECEMBER 31, CHANGE
The following table presents assets under custody, a component of AUC/A, by reporting segment.
TABLE 14: ASSETS UNDER CUSTODY BY REPORTING SEGMENT
DECEMBER 31, CHANGE
Consolidated assets under custody increased from the prior year, primarily reflecting favorable markets.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the investment allocation of Northern Trust’s custodied assets by reporting segment.
TABLE 15: ALLOCATION OF ASSETS UNDER CUSTODY
DECEMBER 31,
AS WM TOTAL AS WM TOTAL AS WM TOTAL
Securities Lending Collateral 2 — 1 2 — 1 2 — 2
The following table presents Northern Trust’s assets under custody by investment type.
TABLE 16: ASSETS UNDER CUSTODY BY INVESTMENT TYPE
DECEMBER 31, CHANGE
The following table presents Northern Trust’s AUM by reporting segment.
TABLE 17: ASSETS UNDER MANAGEMENT BY REPORTING SEGMENT
DECEMBER 31, CHANGE
AUM at the end of 2023 increased from 2022. The increase primarily reflected favorable markets, net inflows, and favorable currency translation.
The following table presents the investment allocation of Northern Trust’s AUM by reporting segment.
TABLE 18: ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
DECEMBER 31,
AS WM TOTAL AS WM TOTAL AS WM TOTAL
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Noninterest Income
The components of Other Noninterest Income, and a discussion of significant changes during 2023 and 2022, are provided below.
TABLE 19: OTHER NONINTEREST INCOME
FOR THE YEAR ENDED DECEMBER 31, CHANGE
Investment Security Gains (Losses), net (169.5) (214.0) (0.3) N/M N/M
Foreign Exchange Trading Income
Northern Trust provides foreign exchange services in the normal course of business as an integral part of its global custody services. Active management of currency positions, within conservative limits, also contributes to foreign exchange trading income. Foreign Exchange Trading Income in 2023 decreased from 2022, primarily driven by lower volatility, a decline in client volumes, and an unfavorable impact from foreign exchange swap activity in Treasury.
Treasury Management Fees
Treasury Management Fees, generated from cash and treasury management products and services provided to clients, in 2023 decreased from 2022, primarily due to an increase in the earnings credit rate applied to client balances.
Security Commissions and Trading Income
Security Commissions and Trading Income, generated primarily from securities brokerage services provided by Northern Trust Securities, Inc., in 2023 decreased from 2022, primarily driven by lower equity commissions from lower equity trading volumes.
Other Operating Income
Other Operating Income in 2023 increased from 2022 primarily due to higher income associated with a market value increase in supplemental compensation plans and higher banking and credit-related services fees.
Please refer to Note 18, “Other Operating Income” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to Other Operating Income.
Investment Security Gains (Losses), Net
Investment Security Gains (Losses), net reflects a $176.4 million available for sale debt security loss arising from a repositioning of the portfolio during the fourth quarter of 2023 and a $6.9 million gain upon sale of certain available for sale debt securities in the first quarter of 2023. In the prior year, there was a $213.0 million loss related to an intent to sell available for sale debt securities also arising from a repositioning of the portfolio.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Interest Income
Net Interest Income is defined as the total of Interest Income and amortized fees on earning assets, less Interest Expense on deposits and borrowed funds, adjusted for the impact of interest-related hedging activity. Earning assets—including Federal Funds Sold, Securities Purchased under Agreements to Resell, Interest-Bearing Due from and Deposits with Banks, Federal Reserve and Other Central Bank Deposits, Securities, Loans and Leases, and Other Interest-Earning Assets—are financed by a large base of interest-bearing liabilities that include client deposits, short-term borrowings, Senior Notes and Long-Term Debt. Short-term borrowings include Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Other Borrowings. Earning assets also are funded by noninterest-bearing funds, which include demand deposits and Stockholders’ Equity. Net Interest Income is subject to variations in the level and mix of earning assets and interest-bearing funds and their relative sensitivity to interest rates. In addition, the levels of nonaccruing assets and client compensating deposit balances used to pay for services impact Net Interest Income.
Net interest margin is the difference between what we earn on our assets and what we pay for deposits and other sources of funding. The direction and level of interest rates are important factors in our earnings. Net interest margin is calculated by dividing annualized Net Interest Income by average interest-earning assets.
Net Interest Income stated on an FTE basis is a non-GAAP financial measure that facilitates the analysis of asset yields. Management believes an FTE presentation provides a clearer indication of net interest margins for comparative purposes. When adjusted to an FTE basis, yields on taxable, nontaxable, and partially taxable assets are comparable; however, the adjustment to an FTE basis has no impact on Net Income. A reconciliation of Net Interest Income on a GAAP basis to Net Interest Income on an FTE basis is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.
46 2023 ANNUAL REPORT | NORTHERN TRUST CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables present an analysis of average daily balances and interest rates affecting Net Interest Income and an analysis of Net Interest Income changes.
TABLE 20: AVERAGE CONSOLIDATED BALANCE SHEETS WITH ANALYSIS OF NET INTEREST INCOME (INTEREST AND RATE ON A FULLY TAXABLE EQUIVALENT BASIS)(1)
INTEREST-EARNING ASSETS
Debt Securities
AVERAGE SOURCE OF FUNDS
Deposits
Floating Rate Capital Debt — — — — — — 1.7 218.4 0.78
Interest Rate Spread — — 0.73 — — 1.19 — — 0.98
(1) Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source income and assets. Non-U.S. source income and assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision revenues, expenses and assets between U.S. and non-U.S.-domiciled customers. On the basis of averages, the percentage of total assets attributable to foreign activities was 17%, 18%, and 19% as of December 31, 2023, 2022 and 2021, respectively. On the basis of averages, the percentage of total liabilities attributable to foreign activities was 52%, 55%, and 58% as of December 31, 2023, 2022 and 2021, respectively. For additional information, refer to the Geographic Area Information section of Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”
(2) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(3) Includes the impact of balance sheet netting under master netting arrangements of approximately $29.1 billion and $3.6 billion in 2023 and 2022, respectively. Excluding the impact of netting, the average interest rate on Securities Purchased under Agreements to Resell would be approximately 5.27% and 2.23% in 2023 and 2022, respectively. Excluding the impact of netting, the average interest rate on Securities Sold under Agreements to Repurchase would be approximately 5.22% and 2.27% in 2023 and 2022, respectively. Northern Trust nets securities sold under repurchase agreements against those purchased under resale agreements when there is a legally enforceable master netting arrangement.
(4) Average balances include nonaccrual loans.
(5) Other Interest-Earning Assets include certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.
(6) Cash and Due from Banks and Other Central Bank Deposits includes the noninterest-bearing component of Federal Reserve and Other Central Bank Deposits on the consolidated balance sheets.
(7) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.
(8) Rate calculations are based on actual balances rather than the rounded amounts presented in the average consolidated balance sheets with analysis of Net Interest Income.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 21: ANALYSIS OF NET INTEREST INCOME CHANGES DUE TO VOLUME AND RATE(1)
Increase (Decrease) in Net Interest Income (FTE)
Debt Securities
Interest-Bearing Deposits
Floating Rate Capital Debt — — — (1.7) — (1.7)
(1) Changes not due solely to average balance changes or rate changes are allocated proportionately to average balanceandrate based on their relative absolute magnitudes.
Notes: Net Interest Income (FTE), a non-GAAP financial measure, includes adjustments to a fully taxable equivalent basis for loans, securities and other interest-earning assets. The adjustments are based on a federal income tax rate of 21.0%, where the rate is adjusted for applicable state income taxes, net of related federal tax benefit. Total taxable equivalent interest adjustments amounted to $57.5 million in 2023, $45.6 million in 2022 and $35.6 million in 2021. A reconciliation of Net Interest Income and net interest margin on a GAAP basis to Net Interest Income and net interest margin on an FTE basis (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section. Net interest margin is calculated by dividing annualized net interest income by average interest-earning assets.
Interest revenue on cash collateral positions is reported above within Interest-Bearing Due from and Deposits with Banks and within Loans and Leases. Interest expense on cash collateral positions is reported above within Non-U.S. Offices Interest-Bearing Deposits. Related cash collateral received from and deposited with derivative counterparties is recorded net of the associated derivative contract in Other Assets and Other Liabilities, respectively.
Net Interest Income in 2023 increased from 2022. Net Interest Income, stated on an FTE basis, increased from 2022, due to a higher net interest margin, partially offset by lower levels of average earning assets. Average earning assets in 2023 decreased from 2022, primarily due to lower client deposits, partially offset by higher borrowing activity, the net of which resulted in lower funding of earning assets.
The net interest margin in 2023 increased from 2022. The net interest margin on an FTE basis in 2023 increased from 2022, primarily due to higher average interest rates, partially offset by an unfavorable funding mix shift.
Federal Reserve and Other Central Bank Deposits averaged $31.2 billion in 2023, which decreased $5.0 billion, or 14%, from $36.2 billion in 2022, due to deposit outflows. Interest-Bearing Due From and Deposits with Banks averaged $4.3 billion in 2023 and $4.2 billion in 2022. Average Securities were $49.9 billion and decreased $5.1 billion, or 9%, from $55.0 billion in 2022. Average taxable Securities were $46.8 billion in 2023 and $52.4 billion in 2022. Average nontaxable Securities, which represent securities that are primarily exempt from U.S. federal and state income taxes, were $3.1 billion in 2023 and $2.6 billion in 2022.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans averaged $42.2 billion in 2023, which increased $1.2 billion, or 3%, from $41.0 billion in 2022, primarily reflecting higher levels of commercial real estate, commercial and institutional, and private client loans, partially offset by non-U.S. loans. Commercial real estate loans averaged $5.0 billion in 2023 and increased $549.4 million, or 12%, from $4.4 billion for 2022. Commercial and institutional loans averaged $12.4 billion in 2023 and increased $180.0 million, or 1%, from $12.3 billion for 2022. Private client loans averaged $14.0 billion in 2023 and increased $122.3 million, or 1%, from $13.9 billion for 2022. Non-U.S. loans averaged $3.4 billion in 2023 and decreased $101.8 million, or 3%, from $3.5 billion for 2022. Residential real estate loans averaged $6.4 billion in 2023 and was relatively unchanged from $6.4 billion for 2022.
Average Other Interest-Earning Assets include certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank stock, money market investments, and Federal Reserve stock of $899.2 million, $825.2 million, $364.6 million, $84.3 million, and $70.0 million, respectively, which are recorded in Other Assets on the consolidated balance sheets.
Northern Trust utilizes a diverse mix of funding sources. Average Interest-Bearing Deposits decreased $8.8 billion, or 9%, to $87.5 billion in 2023 from $96.3 billion in 2022. Interest expense for Interest-Bearing Deposits in the current year was driven by higher interest rates. Average Non-U.S. Offices Interest-Bearing Deposits comprised 69% and 68% of total average Interest-Bearing Deposits for the years ended December 31, 2023 and 2022, respectively. Average Total Interest-Bearing Liabilities increased $1.1 billion, or 1%, to $108.7 billion in 2023 from $107.6 billion in 2022. The balances within short-term borrowing classifications vary based on funding requirements and strategies, interest rate levels, changes in the volume of lower-cost deposit sources, and the availability of collateral to secure these borrowings. Average net noninterest-bearing funds decreased $9.1 billion, or 29%, to $22.1 billion in 2023 from $31.2 billion in 2022, primarily resulting from lower levels of Demand and Other Noninterest-Bearing Deposits. Average Demand and Other Noninterest-Bearing Deposits decreased $11.6 billion, or 40%, to $17.7 billion in 2023 from $29.3 billion in 2022. The average rate on total source of funds was 4.07% in 2023 and 0.70% in 2022.
Stockholders’ Equity
Stockholders’ Equity averaged $11.5 billion in 2023, compared with $11.1 billion in 2022. The increase in average Stockholders’ Equity of $415.4 million, or 4%, was primarily due to higher Retained Earnings. During the year ended December 31, 2023, the Corporation maintained its quarterly common stock dividend at $0.75 per share. During the year ended December 31, 2023, the Corporation, through common stock dividends and repurchase of 4,384,678 shares of common stock, returned $977.7 million in capital to common stockholders. During the year ended December 31, 2022, the Corporation increased its quarterly common stock dividend to $0.75 per share in the third quarter from $0.70 per share in the second quarter. During the year ended December 31, 2022, the Corporation, through common stock dividends and repurchase of 311,536 shares of common stock, returned $648.4 million in capital to common stockholders.
The Corporation’s current stock repurchase authorization to repurchase up to 25.0 million shares was approved by the Board of Directors in October 2021. Shares are repurchased by the Corporation to, among other things, manage the Corporation’s capital levels. Repurchased shares are used for general purposes, including the issuance of shares under stock option and other equity incentive plans. The repurchase authorization approved by the Board of Directors has no expiration date, thus the Corporation retains the ability to resume repurchases thereunder when circumstances warrant and applicable regulations permit. Please refer to Note 13, “Stockholders’ Equity,” provided in Item 8, “Financial Statements and Supplementary Data.”
Provision for Credit Losses
There was a $24.5 million Provision for Credit Losses in 2023, as compared to a Provision for Credit Losses of $12.0 million in 2022. The provision during 2023 was primarily due to a $16.5 million increase in the reserve evaluated on a collective basis, which relates to pooled financial assets sharing similar risk characteristics. The increase in the provision for loans was primarily seen in the commercial real estate portfolio, driven by an increase in the size and duration of the portfolio, weaker economic projections for the industry, methodology updates, and credit quality deterioration on a small number of loans. The release of credit reserves in undrawn loan commitments and letters of credit during the year ended December 31, 2023 is primarily in the commercial and institutional portfolio, reflecting a combination of credit quality improvements, an improved macroeconomic outlook for that segment, and methodology updates. The remainder of the provision was due to $5.0 million in charge-offs and a $3.0 million increase in the individual reserve. The prior-year provision primarily reflected an increase in the reserve evaluated on a collective basis, driven by weaker macroeconomic conditions at the time and portfolio growth, partially offset by improvements in credit quality. The increase in the collective basis reserve was primarily reflected in certain commercial portfolios.
Net charge-offs in 2023 totaled $5.0 million resulting from $8.7 million of charge-offs and $3.7 million of recoveries, compared to net recoveries of $4.2 million in 2022 resulting from $6.0 million of charge-offs and $10.2 million of recoveries. For additional discussion of the Allowance for Credit Losses, refer to the “Asset Quality” section.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Expense
Noninterest Expense for 2023 increased from 2022, primarily reflecting increased Other Operating Expense, Equipment and Software, and Compensation.
The components of Noninterest Expense and a discussion of significant changes during 2023 and 2022 are provided below.
TABLE 22: NONINTEREST EXPENSE
FOR THE YEAR ENDED DECEMBER 31, CHANGE
Compensation
Compensation expense, the largest component of Noninterest Expense, increased in 2023 from 2022, primarily reflecting higher salary expense, partially offset by lower incentives. Severance-related charges were $36.7 million in 2023 as compared to $30.4 million in 2022. Full-time equivalent employees totaled approximately 23,100 at December 31, 2023, down 2% from approximately 23,600 at December 31, 2022.
Employee Benefits
Employee Benefits expense in 2023 decreased from 2022, primarily due to a $44.1 million pension settlement charge in 2022.
Outside Services
Outside Services expense in 2023 increased from 2022, primarily reflecting higher technical services costs, partially offset by lower consulting services.
Equipment and Software
Equipment and Software expense in 2023 increased from 2022, primarily due to higher software amortization and higher software costs.
Occupancy
Occupancy expense in 2023 increased from 2022, primarily due to net rent increases and charges related to reducing Northern Trust’s real estate footprint.
Other Operating Expense
Other Operating Expense in 2023 increased from 2022 primarily reflecting an $84.6 million FDIC special assessment and a $25.6 million charge related to the write-off of an investment in a client capability.
In November 2023, the FDIC issued a final rule to implement a special assessment to recoup losses to the deposit insurance fund associated with bank failures in the first half of 2023. In conjunction with the special assessment, $84.6 million was recognized as an accrued liability and related expense in the fourth quarter of 2023. The final amount of the total special assessment incurred by Northern Trust may be adjusted as the FDIC's loss estimates change. The final rule becomes effective on April 1, 2024, with the first payment due on June 28, 2024.
Please refer to Note 19, “Other Operating Expense” included under Item 8, “Financial Statements and Supplementary Data,” for additional details related to other operating expenses.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Provision for Income Taxes
The 2023 Provision for Income Taxes was $357.5 million, representing an effective rate of 24.4%. This compares with a Provision for Income Taxes of $430.3 million and an effective rate of 24.4% in 2022.
See Note 20, “Income Taxes,” provided in Item 8, “Financial Statements and Supplementary Data,” for more information on income taxes.
REPORTING SEGMENTS AND RELATED INFORMATION
The following information summarizes our consolidated results of operations by reporting segment for 2023 compared to 2022. For a discussion related to the consolidated results of operations by reporting segment for 2022 compared to 2021, refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2022 Form 10-K, which was filed with the SEC on February 28, 2023.
Northern Trust is organized around its two client-focused reporting segments: Asset Servicing and Wealth Management. Asset management and related services are provided to Asset Servicing and Wealth Management clients primarily by the Asset Management business. The revenue and expenses of Asset Management and certain other support functions are allocated fully to Asset Servicing and Wealth Management.
Reporting segment financial information, presented on an internal management-reporting basis, is determined by accounting systems used to allocate revenue and expense to each segment, and incorporates processes for allocating assets, liabilities, equity and the applicable interest income and expense utilizing a funds transfer pricing (FTP) methodology. Under the methodology, assets and liabilities receive a funding charge or credit that considers interest rate risk, liquidity risk, and other product characteristics on an instrument level. Additionally, segment information is presented on a fully taxable equivalent (FTE) basis as management believes an FTE presentation provides a clearer indication of net interest income. The adjustment to an FTE basis has no impact on Net Income.
Equity is allocated to the reporting segments based on a variety of factors including, but not limited to, risk, regulatory considerations, and internal metrics. Allocations of capital and certain corporate expense may not be representative of levels that would be required if the segments were independent entities. The accounting policies used for management reporting are consistent with those described in Note 1, “Summary of Significant Accounting Policies.” Transfers of income and expense items are recorded at cost; there is no consolidated profit or loss on sales or transfers between reporting segments. Northern Trust’s presentations are not necessarily consistent with similar information for other financial institutions.
Revenues, expenses and average assets are allocated to Asset Servicing and Wealth Management, with the exception of non-recurring activities such as certain corporate transactions and costs incurred associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments not directly attributable to a specific reporting segment, which are reported within the Other segment.
Reporting segment results are subject to reclassification when organizational changes are made. The results are also subject to refinements in revenue and expense allocation methodologies, which are typically reflected on a prospective basis.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents the earnings and average assets for the Corporation.
TABLE 23: CONSOLIDATED FINANCIAL INFORMATION
FOR THE YEAR ENDED DECEMBER 31, CHANGE
Noninterest Income
Provision for (Release of) Credit Losses 24.5 12.0 (81.5) N/M N/M
Segment results are stated on an FTE basis which has no impact on Net Income. Net Interest Income on an FTE basis includes FTE adjustments of $57.5 million, $45.6 million, and $35.6 million for 2023, 2022, and 2021, respectively. A reconciliation of total consolidated revenue, Net Interest Income and net interest margin on a GAAP basis to revenue, Net Interest Income and net interest margin on an FTE basis, respectively, (each of which is a non-GAAP financial measure) is provided in “Supplemental Information—Reconciliation to Fully Taxable Equivalent” within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section.
Asset Servicing
Asset Servicing is a leading global provider of asset servicing and related services to corporate and public retirement funds, foundations, endowments, fund managers, insurance companies, sovereign wealth funds, and other institutional investors around the globe. Asset servicing and related services encompass a full range of capabilities including but not limited to: custody; fund administration; investment operations outsourcing; investment management; investment risk and analytical services; employee benefit services; securities lending; foreign exchange; treasury management; brokerage services; transition management services; banking; and cash management. Client relationships are managed through the Bank and the Bank’s and the Corporation’s other subsidiaries, including support from locations in North America, Europe, the Middle East, and the Asia-Pacific region. The following table summarizes the results of operations of Asset Servicing for the years ended December 31, 2023, 2022, and 2021 on a management-reporting basis.
TABLE 24: ASSET SERVICING RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, CHANGE
Noninterest Income
Provision for (Release of) Credit Losses 0.5 2.4 (33.8) N/M N/M
Percentage of Consolidated Net Income 61 % 57 % 41 %
(1) Non-GAAP financial measures stated on an FTE basis.
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Asset Servicing Net Income
Asset Servicing Net Income decreased in 2023 compared to 2022, primarily reflecting higher Noninterest Expense and lower Foreign Exchange Trading Income, partially offset by higher Net Interest Income and lower Provision for Income Taxes.
Asset Servicing Trust, Investment and Other Servicing Fees
For an explanation of Asset Servicing Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment, and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.
Asset Servicing Foreign Exchange Trading Income
Foreign Exchange Trading Income for 2023 decreased from 2022, primarily driven by lower volatility, a decline in client volumes, and an unfavorable impact from foreign exchange swap activity in Treasury that is allocated to Asset Servicing.
Asset Servicing Other Noninterest Income
Other Noninterest Income for 2023 increased from 2022, primarily due to higher Other Operating Income, partially offset by lower Treasury Management Fees.
Asset Servicing Net Interest Income
Net Interest Income on an FTE basis increased in 2023 from 2022, primarily due to higher average interest rates. Net interest margin on an FTE basis increased to 1.29% from 1.03%. Average earning assets of $92.5 billion, decreased $12.3 billion, or 12%, from $104.8 billion in the prior year. The earning assets in Asset Servicing consisted primarily of intercompanyassets and loans. Funding sources were primarily comprised of non-U.S. custody-related interest-bearing deposits, which averaged $60.0 billion in 2023 as compared to $65.0 billion in 2022.
Asset Servicing Provision for Credit Losses
There was a Provision for Credit Losses of $0.5 million for 2023 compared to a Provision for Credit Losses of $2.4 million for 2022. The 2023 Provision for Credit Losses was primarily due to credit quality deterioration on a small number of loans, offset by a better overall macroeconomic outlook. The Provision for Credit Losses during 2022 primarily reflected weaker macroeconomic conditions at the time.
Asset Servicing Noninterest Expense
Asset Servicing Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services, increased in 2023 from 2022. The increase primarily reflects higher expense allocations.
Wealth Management
Wealth Management focuses on high-net-worth individuals and families, business owners, executives, professionals, retirees, and established privately-held businesses in its target markets. In supporting these targeted segments, Wealth Management provides trust, investment management, custody, and philanthropic services; financial consulting; guardianship and estate administration; family business consulting; family financial education; brokerage services; and private and business banking. Wealth Management also includes Global Family Office, which provides customized services, including but not limited to: investment consulting; global custody; fiduciary; and private banking; family office consulting, and technology solutions, to meet the complex financial and reporting needs of ultra-high-net-worth individuals and family offices across the globe. Wealth Management is one of the largest providers of advisory services in the United States with AUC/A, assets under custody, and AUM of $1.04 trillion, $1.03 trillion, and $402.5 billion, respectively, at December 31, 2023. Wealth Management services are delivered by multidisciplinary teams through a network of offices in 19 U.S. states and Washington, D.C., as well as offices in London, Guernsey, and Abu Dhabi.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table summarizes the results of operations of Wealth Management for the years ended December 31, 2023, 2022, and 2021 on a management-reporting basis.
TABLE 25: WEALTH MANAGEMENT RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, CHANGE
Noninterest Income
Foreign Exchange Trading Income (Loss) (9.1) 7.6 13.6 N/M (44)
Provision for (Release of) Credit Losses 24.0 9.6 (47.7) N/M N/M
Percentage of Consolidated Net Income 66 % 60 % 61 %
(1) Non-GAAP financial measures stated on an FTE basis.
Wealth Management Net Income
Wealth Management Net Income decreased in 2023, primarily reflecting higher Noninterest Expense, lower Trust, Investment and Other Servicing Fees, lower Net Interest Income, and lower Foreign Exchange Trading Income, partially offset by a lower Provision for Income Taxes.
Wealth Management Trust, Investment and Other Servicing Fees
For an explanation of Wealth Management Trust, Investment, and Other Servicing Fees, please see the “Trust, Investment, and Other Servicing Fees” section within the Consolidated Results of Operations section of the MD&A.
Wealth Management Foreign Exchange Trading Income (Loss)
Foreign Exchange Trading Income for 2023 decreased from 2022, primarily due to an unfavorable impact from foreign exchange swap activity in Treasury that is allocated to Wealth Management.
Wealth Management Other Noninterest Income
Other Noninterest Income for 2023 increased from 2022, primarily due to higher Other Operating Income.
Wealth Management Net Interest Income
Net Interest Income on an FTE basis for 2023 decreased from 2022, primarily attributable to lower deposit balances. Net interest margin on an FTE basis decreased to 2.20% from 2.53%. Average earning assets of $38.3 billion in 2023, increased $4.3 billion, or 13%, from $34.0 billion in 2022. Earning assets and funding sources for the year ended December 31, 2023 were primarily comprised of loans and domestic interest-bearing deposits, respectively.
Wealth Management Provision for Credit Losses
There was a Provision for Credit Losses of $24.0 million for 2023 compared to a Provision for Credit Losses of $9.6 million in 2022. The Provision for Credit Losses during 2023 was primarily due to an increase in the reserve evaluated on a collective basis relating to the commercial real estate portfolio, driven by an increase in the size and duration of the portfolio, weaker economic projections for the industry, methodology updates, and credit quality deterioration on a small number of loans. The Provision for Credit Losses during 2022 reflected an increase in the reserve evaluated on a collective basis driven by weaker economic conditions at the time and portfolio growth, partially offset by improvements in portfolio quality. The 2022 increase in the collective basis reserve was primarily reflected in certain commercial portfolios.
Wealth Management Noninterest Expense
Wealth Management Noninterest Expense, which includes the direct expense of the reporting segment, indirect expense allocations for product and operating support, and indirect expense allocations for certain corporate support services,
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased in 2023 from 2022. The increase primarily reflects higher expense allocations, Compensation expense, and Other Operating Expense.
Other
Income and expenses associated with non-recurring activities such as certain costs associated with acquisitions, divestitures, litigation, restructuring, and tax adjustments are included within Other. The following table summarizes the results of operations of the Other segment for the years ended December 31, 2023, 2022, and 2021 on a management-reporting basis.
TABLE 26: OTHER RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, CHANGE
Noninterest Income (Loss) $ (188.4) $ (235.6) $ (21.3) N/M N/M
Net Interest Income(1) — — — N/M N/M
Income (Loss) before Income Taxes(1) (317.1) (310.3) (43.1) N/M N/M
Provision (Benefit) for Income Taxes(1) (18.0) (77.3) (10.7) N/M N/M
Percentage of Consolidated Net Income (Loss) (27) % (17) % (2) %
Average Assets $ — $ — $ — N/M N/M
(1) Non-GAAP financial measures stated on an FTE basis.
Other—Noninterest Income (Loss)
Noninterest Income (Loss) in 2023 primarily reflected an $176.4 million available for sale debt security loss and a $6.9 million available for sale debt security gain recognized in Investment Security Gains (Losses), net, where securities were sold in conjunction with a repositioning of the portfolio. In the prior year, there was a $213.0 million loss recognized in Investment Security Gains (Losses), net arising from an intent to sell available for sale debt securities in conjunction with a repositioning of the portfolio.
Other—Noninterest Expense
Noninterest Expense in 2023 increased from 2022, primarily reflecting an $84.6 million FDIC special assessment and higher non-allocated occupancy expense due to early lease exits on vacant space, partially offset by a $44.1 million pension settlement charge in 2022.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Management
Asset Management, through the Corporation’s various subsidiaries, supports the Asset Servicing and Wealth Management reporting segments by providing a broad range of asset management and related services and other products to clients around the world. Investment solutions are delivered through separately managed accounts, bank common and collective funds, registered investment companies, exchange traded funds, non-U.S. collective investment funds, and unregistered private investment funds. Asset Management’s capabilities include active and passive equity; active and passive fixed income; cash management; multi-asset and alternative asset classes (such as private equity and hedge funds of funds); and multi-manager advisory services and products. Asset Management’s activities also include overlay services and other risk management services. Asset Management operates internationally through subsidiaries and distribution arrangements and its revenue and expense are allocated fully to Asset Servicing and Wealth Management.
At December 31, 2023, Northern Trust managed $1.43 trillion in assets for personal and institutional clients, including $1.03 trillion for Asset Servicing clients and $402.5 billion for Wealth Management clients. The following table presents consolidated AUM as of December 31, 2023, 2022 and 2021 by investment type.
TABLE 27: CONSOLIDATED ASSETS UNDER MANAGEMENT BY INVESTMENT TYPE
DECEMBER 31, CHANGE
AUM increased at year-end 2023 from year-end 2022. The increase primarily reflected favorable markets, net inflows, and favorable currency translation. The following table presents activity in consolidated AUM by product during the years ended December 31, 2023, 2022 and 2021.
TABLE 28: ACTIVITY IN CONSOLIDATED ASSETS UNDER MANAGEMENT BY PRODUCT
Inflows by Product
Outflows by Product
Market Performance, Currency & Other
Total Market Performance, Currency & Other 141.1 (159.3) 148.9
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CONSOLIDATED BALANCE SHEET REVIEW
The following tables summarize selected consolidated balance sheet information.
TABLE 29: SELECT CONSOLIDATED BALANCE SHEET INFORMATION
Assets
Federal Reserve and Other Central Bank Deposits $ 34.3 $ 40.0 $ (5.7) (14) %
Interest-Bearing Due from and Deposits with Banks(1) 5.3 4.9 0.4 6
Securities Purchased under Agreements to Resell 0.8 1.1 (0.3) (27)
Other Interest-Earning Assets(2) 3.1 1.8 1.3 77
Liabilities and Stockholders' Equity
Total Interest-Bearing Deposits 93.3 98.6 (5.3) (5)
Demand and Other Noninterest-Bearing Deposits 22.8 25.3 (2.5) (10)
Securities Sold under Agreements to Repurchase 0.8 0.6 0.2 38
(1) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(2) Other Interest-Earning Assets includes certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.
(3) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.
TABLE 30: SELECT AVERAGE CONSOLIDATED BALANCE SHEET INFORMATION
TWELVE MONTHS ENDED DECEMBER 31,
Assets
Federal Reserve and Other Central Bank Deposits $ 31.2 $ 36.2 $ (5.0) (14) %
Interest-Bearing Due from and Deposits with Banks(1) 4.3 4.2 0.1 3
Securities Purchased under Agreements to Resell 1.0 1.1 (0.1) (11)
Other Interest-Earning Assets(2) 2.2 1.3 0.9 81
Liabilities and Stockholders' Equity
Total Interest-Bearing Deposits 87.5 96.3 (8.8) (9)
Demand and Other Noninterest-Bearing Deposits 17.7 29.3 (11.6) (40)
Federal Funds Purchased 5.1 1.4 3.7 N/M
Securities Sold under Agreements to Repurchase 0.4 0.4 — (7)
(1) Interest-Bearing Due from and Deposits with Banks includes the interest-bearing component of Cash and Due from Banks and Interest-Bearing Deposits with Banks as presented on the consolidated balance sheets.
(2) Other Interest-Earning Assets includes certain community development investments, collateral deposits with certain securities depositories and clearing houses, Federal Home Loan Bank and Federal Reserve stock, and money market investments which are classified in Other Assets on the consolidated balance sheets.
(3) Other Borrowings primarily includes advances from the Federal Home Loan Bank of Chicago.
Average balances are considered to be a better measure of balance sheet trends, as period-end balances can be impacted by the timing of deposit and withdrawal activity involving large client balances. Average earning assets decreased from the
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
prior year primarily due to lower client deposits, partially offset by higher borrowing activity, the net of which resulted in lower funding of earning assets.
Select Earning Assets. Average securities decreased from the prior year, reflecting the impact of repositioning. For additional discussion relating to the securities portfolio, refer to the “Asset Quality” section in this MD&A and to Note 4, “Securities” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data”.
Client Deposits. Average Interest-Bearing Deposits and Demand and Other Noninterest-Bearing Deposits decreased from the prior year as clients migrated into higher yielding products.
Short-Term Borrowings. Short-term borrowings includes Federal Funds Purchased, Securities Sold under Agreements to Repurchase, and Other Borrowings. Securities Sold under Agreements to Repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. Securities Sold under Agreements to Repurchase are held by the counterparty until the repurchase. See Note 24, “Commitments and Contingent Liabilities,” Note 26, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” and Note 27, “Offsetting of Assets and Liabilities” to the consolidated financial statements provided in Item 8, “Financial Statements and Supplementary Data” for additional information on Northern Trust’s repurchase and reverse repurchase agreements.
Stockholders’ Equity. The increase in average Stockholders’ Equity was primarily due to higher Retained Earnings.
During the year ended December 31, 2023, the Corporation declared cash dividends totaling $630.2 million to common stockholders and repurchased 4,384,678 shares of common stock, including 378,130 shares withheld to satisfy tax withholding obligations related to share-based compensation, at a total cost of $347.5 million ($79.26 average price per share). During the year ended December 31, 2023, the Corporation declared cash dividends totaling $41.8 million to preferred stockholders.
During the year ended December 31, 2022, the Corporation declared cash dividends totaling $613.0 million to common stockholders and repurchased 311,536 shares of common stock, all of which were shares withheld to satisfy tax withholding obligations related to share-based compensation, at a total cost of $35.4 million ($113.70 average price per share). During the year ended December 31, 2022, the Corporation declared cash dividends totaling $41.8 million to preferred stockholders.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Quality
Securities Portfolio
The following table presents the remaining maturity and average yield of Northern Trust's held to maturity (HTM) debt securities and available for sale (AFS) debt securities by security type as of December 31, 2023. Depending on market conditions, Northern Trust continuously seeks to optimize its securities portfolio, including through purchases and sales of AFS debt securities from time to time.
TABLE 31: REMAINING MATURITY AND AVERAGE YIELD OF HELD TO MATURITY AND AVAILABLE FOR SALE DEBT SECURITIES
($ in Millions) BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD BOOK YIELD
Held to Maturity Debt Securities
U.S. Government $ — —% $ — —% $ — —% $ — — % $ — —% 0 mos.
Available for Sale Debt Securities
Note: Yield is calculated on amortized cost and presented on a taxable equivalent basis giving effect to the applicable federal and state tax rates.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Northern Trust maintains a high quality debt securities portfolio. Debt securities not explicitly rated were grouped where possible under the credit rating of the issuer of the security. The following tables provide the fair value of AFS debt securities and amortized cost of HTM debt securities by credit rating.
TABLE 32: FAIR VALUE OF AVAILABLE FOR SALE DEBT SECURITIES BY CREDIT RATING
($ In Millions) AAA AA A BBB NOT RATED TOTAL
U.S. Government $ 3,622.2 $ — $ — $ — $ — $ 3,622.2
Obligations of States and Political Subdivisions 38.1 257.7 — — — 295.8
Commercial Mortgage-Backed 865.3 — — — — 865.3
Percent of Total 95 % 3 % 2 % — % — % 100 %
($ In Millions) AAA AA A BBB NOT RATED TOTAL
U.S. Government $ 2,747.4 $ — $ — $ — $ — $ 2,747.4
Obligations of States and Political Subdivisions 136.4 651.2 — — — 787.6
Percent of Total 90 % 6 % 4 % — % — % 100 %
As of both December 31, 2023 and December 31, 2022, the less than 1% of AFS debt securities not rated by Moody’s Investors Service, Inc. (Moody’s), S&P Global Ratings (S&P Global) or Fitch Ratings, Inc. (Fitch Ratings) consisted of corporate debt securities.
TABLE 33: AMORTIZED COST OF HELD TO MATURITY DEBT SECURITIES BY CREDIT RATING
($ In Millions) AAA AA A BBB NOT RATED TOTAL
U.S. Government $ — $ — $ — $ — $ — $ —
Government Sponsored Agency 9,355.3 — — — — 9,355.3
Commercial Mortgage-Backed 37.6 — — — — 37.6
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(In Millions) AAA AA A BBB NOT RATED TOTAL
U.S. Government $ 50.0 $ — $ — $ — $ — $ 50.0
Obligations of States and Political Subdivisions 926.8 1,638.5 — — — 2,565.3
Government Sponsored Agency 9,407.7 — — — — 9,407.7
Certificates of Deposit — — — — 35.9 35.9
As of both December 31, 2023 and December 31, 2022, 2% of HTM debt securities not rated by Moody’s, S&P Global or Fitch Ratings primarily consisted of certificates of deposit with a remaining life of less than six months, as well as investments purchased by Northern Trust to fulfill its obligations under the Community Reinvestment Act (CRA). Northern Trust fulfills its obligations under the CRA by making qualified investments for purposes of supporting institutions and programs that benefit low-to-moderate income communities within Northern Trust’s market area.
Net unrealized losses within the investment securities portfolio totaled $2.3 billion at December 31, 2023, compared to net unrealized losses of $3.2 billion as of December 31, 2022. Net unrealized losses as of December 31, 2023 were comprised of $20.1 million and $2.3 billion of gross unrealized gains and losses, respectively. Net unrealized losses as of December 31, 2022 were comprised of $9.1 million and $3.2 billion of gross unrealized gains and losses, respectively.
As of December 31, 2023, the $23.1 billion AFS debt securities portfolio had unrealized losses of $200.3 million, $105.8 million, and $100.0 million related to government sponsored agency, sub-sovereign, supranational and non-U.S. agency bonds, and other asset-backed, respectively, which are primarily attributable to lower yields and tighter spreads. As of December 31, 2022, the $26.7 billion AFS debt securities portfolio had unrealized losses of $351.6 million, $288.1 million, and $157.6 million related to government-sponsored agency, other asset-backed, and sub-sovereign supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in market interest rates and credit spreads since their purchase.
As of December 31, 2023, the $26.2 billion HTM debt securities portfolio had an unrealized loss of $1.0 billion and $294.9 million related to government sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to lower yields and tighter spreads. As of December 31, 2022, the $25.0 billion HTM debt securities portfolio had an unrealized loss of $1.1 billion and $436.1 million related to government-sponsored agency and sub-sovereign, supranational and non-U.S. agency bonds, respectively, which are primarily attributable to changes in overall market interest rates and credit spreads since their purchase.
HTM debt securities consist of securities that management intends to, and Northern Trust has the ability to, hold until maturity. During the year ended December 31, 2023, there were no securities transferred from AFS to HTM. During the year ended December 31, 2022, the Corporation transferred government sponsored agency and obligation of states and political subdivisions securities that had a fair value of $6.6 billion from AFS to HTM classification for capital management purposes, all of which were transferred in the third quarter of 2022. Upon transfer of a debt security from the AFS to HTM classification, the amortized cost is reset to fair value. Any net unrealized gain or loss at the date of transfer will remain in Accumulated Other Comprehensive Income (Loss) (AOCI) and be amortized into Net Interest Income over the remaining life of the securities using the effective interest method. The amortization of amounts retained in AOCI will offset the effect on interest income of the amortization of the premium or discount resulting from transferring the securities at fair value.
For additional information relating to the securities portfolio, refer to Note 4, “Securities,” provided in Item 8, “Financial Statements and Supplementary Data.”
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Loans
For additional information relating to the loan portfolio, refer to Note 5, “Loans,” and Note 7, “Concentrations of Credit Risk” provided in Item 8, “Financial Statements and Supplementary Data.”
The following table presents the remaining maturity of loans by segment and class as of December 31, 2023.
TABLE 34: REMAINING MATURITY OF LOANS
U.S.:
Commercial
Personal
Non-U.S.:
Note: Non-U.S. and Other U.S. loans primarily include short duration exposures related to custodied client investments.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 35: INTEREST RATE SENSITIVITY OF LOANS
Fixed Rate:
Commercial
Personal
Variable Rate:
Commercial
Personal
Nonaccrual Assets and 90 Days Past Due Loans
Nonaccrual assets consist of nonaccrual loans and other real estate owned (OREO). OREO is comprised of commercial and residential properties acquired in partial or total satisfaction of loans. Loans that are delinquent 90 days or more and still accruing interest can fluctuate widely at any reporting period based on the timing of cash collections, renegotiation and renewals. For additional information relating to nonaccrual loans, refer to Note 5, “Loans,” provided in Item 8, “Financial Statements and Supplementary Data.”
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table presents nonaccrual assets and loans that were delinquent 90 days or more and still accruing interest at December 31, 2023 and 2022.
TABLE 36: NONACCRUAL ASSETS
Nonaccrual Loans
Commercial
Commercial and Institutional $ 16.3 26 % $ 17.4 38 %
Commercial Real Estate — — 10.2 22
Personal
Private Client $ 20.3 32 % $ — — %
Total Nonaccrual Loans 63.6 45.9
Other Real Estate Owned 1.5 —
Total Nonaccrual Assets $ 65.1 $ 45.9
90 Day Past Due Loans Still Accruing $ 20.1 $ 54.2
Nonaccrual Loans to Total Loans 0.13 % 0.11 %
Allowance for Credit Losses Assigned to Loans to Nonaccrual Loans 2.8 x 3.1x
Nonaccrual assets as of December 31, 2023 increased from December 31, 2022, primarily due to one new private client nonaccrual loan and two new residential real estate nonaccrual loans, partially offset by one commercial real estate nonaccrual loan upgrade to accrual status and one commercial real estate nonaccrual loan pay-down/charge-off. In addition to the negative impact on Net Interest Income and the risk of credit losses, nonaccrual assets also increase operating costs due to the expense associated with collection efforts. Changes in the level of nonaccrual assets may be indicative of changes in the credit quality of one or more loan classes. Changes in credit quality impact the allowance for credit losses through the resultant adjustment of the allowance evaluated on an individual basis and the quantitative and qualitative factors used in the determination of the allowance evaluated on a collective basis within the allowance for credit losses.
Allowance for Credit Losses
The Allowance for Credit Losses—which represents management’s best estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. A financial asset is measured individually if it does not share similar risk characteristics with other financial assets and the related allowance is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of allowance for credit losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts.
The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Financial Risk Management, Treasury, Corporate Finance, the Economic Research Department, and each of Northern Trust’s reporting business units.
As of December 31, 2023, the Allowance for Credit Losses related to loans, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $178.7 million, $26.9 million, $12.7 million, and $0.9 million, respectively. As of December 31, 2022, the Allowance for Credit Losses related to loans, undrawn loan commitments and standby letters of credit, HTM debt securities, and other financial assets, was $144.3 million, $38.5 million, $16.0 million, and $0.8 million, respectively. For additional information relating to the Allowance for Credit Losses and the changes in the Allowance for Credit Losses during the years ended December 31, 2023 and 2022 due to
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charge-offs, recoveries and provisions for credit losses, refer to Note 6, “Allowance for Credit Losses,” provided in Item 8, “Financial Statements and Supplementary Data.”
The following table shows the net recoveries (charge-offs) to average loans and leases by segment and class at December 31, 2023, 2022, and 2021.
TABLE 37: NET RECOVERIES (CHARGE-OFFS) TO AVERAGE LOANS AND LEASES
Net Recoveries (Charge-Offs) to Select Average Loans and Leases(1)
Commercial
Commercial and Institutional — % — % 0.01 %
Lease Financing, net(2) — (61.3) —
Total Commercial (0.03) (0.02) —
Personal
Private Client — — 0.01
Net Recoveries (Charge-Offs)
Commercial
Commercial and Institutional $ 0.2 $ 0.1 $ 0.9
Commercial Real Estate (5.2) 2.2 (0.3)
Lease Financing, net — (4.9) —
Total Select Commercial(3) (5.0) (2.6) 0.6
Personal
Private Client 0.4 — 1.3
Residential Real Estate 1.3 6.8 4.4
Total Net Recoveries (Charge-Offs)(3) $ (3.3) $ 4.2 $ 6.3
Average Loans and Leases
Commercial
Lease Financing, net — 8.0 11.2
Personal
(1) The table excludes the Other and Non-U.S. average loan segments.
(2) The ratio reflects a charge-off in the third quarter of 2022 in association with a sale of the last lease remaining in Northern Trust’s lease portfolio. As of December 31, 2022, there were no leases outstanding.
(3) As ofDecember 31, 2023, there was a $0.5 million net charge-off in other commercial which was not reflected as the segment is excluded from the table above.
Net recoveries (charge-offs) for the Non-U.S. segment was zero and therefore the ratio of net recoveries (charge-offs) to average loans and leases was excluded from the above table. Total average loans and leases for all loan portfolio categories were $42.2 billion, $41.0 billion, and $37.2 billion for the years ended December 31, 2023, 2022, and 2021, respectively.
The following disclosure has been prepared in compliance with the SEC requirement to disclose the Allowance for Credit Losses that is applicable to international operations; however, the amounts disclosed should not be construed as being the only amounts available to cover future non-U.S. loan charge-offs, since the entire Allowance for Credit Losses assigned to Loans is available to absorb losses on both U.S. and non-U.S. loans. In addition, these amounts are not intended to be indicative of future charge-off trends. Please refer to Table 38 in the following section for the non-U.S. allowance balances.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table provides the allowance evaluated on an individual and collective basis for the loans portfolio by segment and class at December 31, 2023 and 2022.
TABLE 38: ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
DECEMBER 31,
Evaluated on an Individual Basis $ 13.4 — % $ 10.4 — %
Evaluated on a Collective Basis
Commercial
Personal
Other — 2 — 1
Total Allowance Evaluated on a Collective Basis $ 192.2 $ 172.4
Total Allowance for Credit Losses $ 205.6 $ 182.8
Allowance Assigned to:
Undrawn Commitments and Standby Letters of Credit 26.9 38.5
Total Allowance for Credit Losses $ 205.6 $ 182.8
Allowance Assigned to Loans to Total Loans 0.38 % 0.34 %
Allowance Related to Credit Exposure Evaluated on an Individual Basis: The individual allowance is determined through individual evaluations of loans and lending-related commitments that have defaulted, generally those with Borrower Ratings of 8 and 9, that are based on expected future cash flows, the value of collateral, and other factors that may impact the borrower’s ability to pay.
The allowance evaluated on an individual basis for Loans increased $3.0 million from $10.4 million at December 31, 2022 to $13.4 million at December 31, 2023, primarily attributable to a net increase in outstanding loans in the private client portfolio and commercial portfolio.
Allowance Related to Credit Exposure Evaluated on a Collective Basis: Expected credit losses are measured on a collective basis as long as the financial assets included in the respective pool share similar risk characteristics. If financial assets are deemed not to share similar risk characteristics, an individual assessment is warranted.
The allowance evaluated on a collective basis for loans increased $31.4 million to $165.3 million at December 31, 2023, compared with $133.9 million at December 31, 2022, primarily seen in the commercial real estate portfolio, driven by an increase in the size and duration of the portfolio, weaker economic projections for the industry, and methodology updates. The remainder of the provision was due to charge-offs. The allowance evaluated on a collective basis for undrawn loan commitments and letters of credit decreased $11.6 million to $26.9 million at December 31, 2023, compared with $38.5 million at December 31, 2022, primarily in the commercial and institutional portfolio, reflecting a combination of credit quality improvements, an improved macroeconomic outlook for that segment, and methodology updates.
Overall Allowance: The reserve evaluated on an individual and collective basis resulted in a total Allowance for Credit Losses of $220.4 million at December 31, 2023, compared with $200.9 million at the end of 2022. The allowance of $178.7 million assigned to Loans, as a percentage of total Loans, was 0.38% at December 31, 2023, which increased from a $144.3 million allowance assigned to Loans, representing 0.34% of total Loans at December 31, 2022. Allowances assigned to undrawn loan commitments and standby letters of credit totaled $26.9 million and $38.5 million at December 31, 2023 and 2022, respectively, and are included in Other Liabilities on the consolidated balance sheets.
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Capital Expenditures
Capital expenditures in 2023 included continued investments in public cloud technologies and to enhance Northern Trust’s software capabilities, as well as renovation and relocation projects to reduce our real estate footprint and modernize our existing offices for new ways of working. Capital expenditures for 2023 totaled $675.8 million, of which $559.3 million was for software, $56.4 million was for computer hardware, $56.0 million was for building and leasehold improvements, and $4.1 million was for furnishings. These capital expenditures principally support, enhance, and protect Northern Trust’s investment management, asset servicing and wealth management systems and capabilities, with focus on delivering secure, highly available and innovative solutions to better serve our clients. Additional capital expenditures committed for technology platforms will result in future expense for the depreciation of hardware and amortization of software. Software amortization and depreciation on computer hardware are charged to Equipment and Software expense. Depreciation on building and leasehold improvements and on furnishings is charged to Occupancy expense and equipment expense, respectively. Capital expenditures for 2022 totaled $723.5 million, of which $594.9 million was for software, $84.0 million was for computer hardware, $35.5 million was for building and leasehold improvements, and $9.1 million was for furnishings.
Deposits
The following table provides the scheduled maturity of total time deposits in denominations of $250,000 or greater at December 31, 2023. For additional information, refer to Note 11, “Deposits,” provided in Item 8, “Financial Statements and Supplementary Data.”
TABLE 39: REMAINING MATURITY OF TIME DEPOSITS $250,000 OR MORE
U.S. OFFICE NON-U.S. OFFICES
(In Millions) CERTIFICATES OF DEPOSIT OTHER TIME TOTAL
Deposits not insured by the FDIC as of December 31, 2023 and 2022 totaled $109.9 billion and $116.1 billion, respectively. These deposit amounts are derived by adding estimated U.S. office uninsured deposits as allowed by Federal Financial Institutions Examination Council instructions to all non-U.S. office deposits. Estimated uninsured U.S. office deposits are determined by calculating and totaling the deposits in excess of the deposit insurance limit on an individual account basis.
Short-Term Borrowings
Securities purchased under agreements to resell and securities sold under agreements to repurchase are accounted for as collateralized financings and recorded at the amounts at which the securities were acquired or sold plus accrued interest. To minimize any potential credit risk associated with these transactions, the fair value of the securities purchased or sold is monitored, limits are set on exposure with counterparties, and the financial condition of counterparties is regularly assessed. It is Northern Trust’s policy to take possession, either directly or via third-party custodians, of securities purchased under agreements to resell. Securities sold under agreements to repurchase are either directly held by, or pledged to the counterparty until the repurchase. Northern Trust nets securities sold under agreements to repurchase against those purchased under agreements to resell when the requirements to net are met. See Note 24, “Commitments and Contingent Liabilities,” Note 26, “Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase,” and Note 27, “Offsetting of Assets and Liabilities” provided in Item 8, “Financial Statements and Supplementary Data” for additional information on our repurchase and reverse repurchase agreements.
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Geographic Area Information
Northern Trust’s non-U.S. activities are primarily related to its asset servicing, asset management, foreign exchange, cash management, and commercial banking businesses. The operations of Northern Trust are managed on a reporting segment basis and include components of both U.S and non-U.S. source assets. Non-U.S. source assets are not separately identified in Northern Trust’s internal management reporting system. However, Northern Trust is required to disclose non-U.S. activities based on the domicile of the customer. Due to the complex and integrated nature of Northern Trust’s activities, it is difficult to segregate with precision assets between U.S. and non-U.S.-domiciled customers. Therefore, certain subjective estimates and assumptions have been made to allocate assets between U.S. and non-U.S. operations.
The following tables present selected average assets and liabilities attributable to non-U.S. operations (based on the obligor’s domicile) and the percent of those balances to total consolidated average assets. For additional information refer to Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”
TABLE 40: SELECTED AVERAGE ASSETS AND LIABILITIES ATTRIBUTABLE TO NON-U.S. OPERATIONS
Non-U.S. Outstandings
As used in this discussion, non-U.S. outstandings are cross-border outstandings as defined by the SEC. They consist of loans, securities, interest-bearing deposits with financial institutions, accrued interest and other monetary assets. Not included are letters of credit, loan commitments, and non-U.S. office local currency claims on residents. Non-U.S. outstandings related to a country are net of guarantees given by third parties resident outside the country and the value of tangible, liquid collateral realizable outside the country. However, transactions with branches of non-U.S. banks are included in these outstandings and are classified according to the country location of the non-U.S. bank’s head office.
Short-term interbank time deposits with non-U.S. banks represent the largest category of non-U.S. outstandings. Northern Trust actively participates in the interbank market with U.S. and non-U.S. banks.
Northern Trust places deposits with non-U.S. counterparties that have strong internal (Northern Trust) risk ratings and external credit ratings. These non-U.S. banks are approved and monitored by Northern Trust’s Capital Markets Credit Committee, which has credit authority for exposure to all non-U.S. banks and approves credit limits. This process includes financial analysis of the non-U.S. banks, use of an internal risk rating system and consideration of external market indicators. Each counterparty is reviewed at least annually and potentially more frequently based on credit fundamentals or general market conditions. Separate from the entity-specific review process, the average life to maturity of deposits with non-U.S. banks is deliberately maintained on a short-term basis in order to respond quickly to changing credit conditions. Northern Trust also utilizes certain risk mitigation tools and agreements that may reduce exposures through use of collateral and/or balance sheet netting. Additionally, the Capital Markets Credit Committee oversees country-risk analyses and imposes limits on country exposure. For additional information refer to Note 31, “Reporting Segments and Related Information,” provided in Item 8, “Financial Statements and Supplementary Data.”
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STATEMENTS OF CASH FLOWS
The following discusses the statement of cash flow activities for the years ended December 31, 2023, 2022, and 2021.
TABLE 41: CASH FLOW ACTIVITY SUMMARY
FOR THE YEAR ENDED DECEMBER 31,
Net cash provided by (used in):
Effect of Foreign Currency Exchange Rates on Cash (89.8) (287.4) (159.6)
Operating Activities
Net cash provided by operating activities of $2.6 billion for the year ended December 31, 2023 was primarily attributable to period earnings and the impact of other operating activities, net.
For the year ended December 31, 2022, net cash provided by operating activities of $2.4 billion was primarily attributable to period earnings and lower net collateral deposited with derivative counterparties, partially offset by the impact of other operating activities, net.
Investing Activities
Net cash provided by investing activities of $4.8 billion for the year ended December 31, 2023 was primarily attributable to lower levels of deposits with the Federal Reserve and other central banks and net proceeds from available for sale debt securities arising from a repositioning of the portfolio, partially offset by higher levels of loans.
For the year ended December 31, 2022, net cash provided by investing activities of $25.9 billion primarily reflected lower levels of deposits with the Federal Reserve and other central banks and net proceeds from held to maturity debt securities, partially offset by higher levels of loans.
Financing Activities
Net cash used in financing activities of $7.2 billion for the year ended December 31, 2023 was primarily attributable to decreased levels of total deposits. The decrease in total deposits was primarily attributable to lower levels of savings, money market and other interest-bearing.
For the year ended December 31, 2022, net cash used in financing activities of $26.4 billion primarily reflected decreased levels of total deposits, partially offset by higher short-term other borrowings, proceeds from the issuance of 4.00% senior notes and 6.125% subordinated notes, and higher federal funds purchased. The decrease in total deposits was primarily attributable to lower levels of non-U.S. office noninterest-bearing deposits, non-U.S. office interest-bearing deposits, and demand and other noninterest-bearing deposits.
CAPITAL MANAGEMENT
One of Northern Trust’s primary objectives is to maintain a strong capital position to merit the confidence of clients, counterparties, creditors, regulators and stockholders. A strong capital position helps Northern Trust execute its strategies and withstand unforeseen adverse developments.
Senior management, with oversight from the Capital Governance Committee of the Board of Directors and the full Board of Directors, is responsible for capital management and planning. Northern Trust manages its capital on both a total Corporation basis and a legal entity basis. The Capital Committee is responsible for measuring and managing capital metrics against levels set forth within the Capital Policy approved by the Capital Governance Committee of the Board of Directors. In establishing the metrics related to capital, a variety of factors are taken into consideration, including the unique risk profiles of Northern Trust’s businesses, regulatory requirements, capital levels relative to peers, economic and market forecasts, and the impact on credit ratings.
Capital levels increased in 2023 as average stockholders’ equity increased $415.4 million, or 4%, to $11.5 billion. Total stockholders’ equity was $11.9 billion at December 31, 2023, as compared to $11.3 billion at December 31, 2022. Preferred dividends totaling $41.8 million were declared in 2023. During 2023, the Corporation maintained its quarterly common stock dividend at $0.75 per common share. Common dividends totaling $630.2 million were declared in 2023. During the year ended December 31, 2023, the Corporation repurchased 4,384,678 shares of common stock, including 378,130 shares withheld related to share-based compensation, at an average price per share of $79.26.
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In accordance with Basel III requirements, capital ratios are calculated using both the standardized and advanced approaches. As required by the Dodd-Frank Act, the lower of each capital ratio calculated under the standardized approach and the advanced approach serves as the effective ratio for purposes of determining capital adequacy. The following table provides a reconciliation of the Corporation’s common stockholders’ equity to total risk-based capital and its risk-based capital ratios, under the applicable U.S. regulatory rules as of December 31, 2023 and 2022.
TABLE 42: CAPITAL ADEQUACY
STANDARDIZED APPROACH ADVANCED APPROACH STANDARDIZED APPROACH ADVANCED APPROACH
Common Equity Tier 1 Capital
Additional Tier 1 Capital
Tier 2 Capital
Qualifying Allowance for Credit Losses 219.2 — 199.6 —
Common Stockholders’ Equity to:
Risk-Based Capital Ratios
Supplementary Leverage N/A 8.6 N/A 7.9
(1) Risk-weighted assets exclude, as applicable under each regulatory approach, amounts primarily related to goodwill, certain other intangible assets, and net unrealized gains or losses on securities and reflect adjustments for excess allowances for credit losses that have been excluded from Tier 1 and Tier 2 capital, if any.
(2) Adjusted average fourth quarter assets exclude amounts primarily related to goodwill, other intangible assets, and net unrealized gains or losses on securities.
As of December 31, 2023 and 2022, the Corporation’s capital ratios exceeded the requirements for classification as “well-capitalized” under applicable U.S. regulatory requirements.
Northern Trust is a Category II institution as defined by the Federal Reserve Board which requires us to adhere to regulatory capital standards. In adhering to these standards, Northern Trust engages in a range of reporting and activities with regulators to affirm our financial strength and stability, including but not limited to, capital adequacy reporting that deducts any unrealized losses related to AFS securities from reported capital, and stringent, annual company-run and supervisory stress testing in the form of Comprehensive Capital Analysis and Review (CCAR) exercises, which confirms our ability to remain solvent under severely adverse market conditions.
The results of the 2023 DFAST, published by the Federal Reserve Board on June 28, 2023, resulted in Northern Trust’s stress capital buffer and effective Common Equity Tier 1 capital ratio minimum requirement remaining constant at 2.5% and 7.0%, respectively, for the annual capital plan cycle, which began on October 1, 2023 and continues through September 30, 2024.
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On July 27, 2023, the U.S. banking regulators issued the Basel III Endgame Proposal, which would change how risk-based capital requirements are determined for banking organizations including Northern Trust. The proposal would eliminate the existing advanced approach methodologies for determining RWAs and replace it with a new expanded risk based approach. The new requirements would be phased in over a three year period beginning July 1, 2025. Based on our current understanding of the proposed rule, we estimate that, if the expanded risk-based approach had applied on a fully phased-in basis as of December 31, 2023, and in the absence of taking any actions to mitigate its impact, our expanded risk-based approach RWAs as of that date would have been approximately 5% to 15% higher than our actual standardized approach RWAs as of that date.
Further information regarding the Corporation’s and the Bank’s capital ratios and the minimum requirements for classification as “well-capitalized” is provided in the “Supervision and Regulation—Capital Adequacy Requirements” section of Item 1, “Business,” and Note 32, “Regulatory Capital Requirements,” provided in Item 8, “Financial Statements and Supplementary Data.”
CRITICAL ACCOUNTING ESTIMATES
Our significant accounting policies are described in Note 1, “Summary of Significant Accounting Policies,” provided in Item 8, “Financial Statements and Supplementary Data.” The use of estimates and assumptions is required in the preparation of financial statements in conformity with GAAP and actual results could differ from those estimates. The SEC has issued guidance relating to the disclosure of critical accounting estimates. Critical accounting estimates are those that require management to make subjective or complex judgments about the effect of matters that are inherently uncertain and may change in subsequent periods. Changes that may be required in the underlying assumptions or estimates in these areas could have a material impact on Northern Trust’s future financial condition and results of operations.
For Northern Trust, accounting estimates that are viewed as critical are those relating to the allowance for credit losses and pension plan accounting. Management has discussed the development and selection of each critical accounting estimate with the Audit Committee of the Board of Directors (Audit Committee).
Allowance for Credit Losses
The Allowance for Credit Losses—which represents management’s estimate of lifetime expected credit losses related to various portfolios subject to credit risk, off-balance sheet credit exposure, and specific borrower relationships—is determined by management through a disciplined credit review process. Northern Trust measures expected credit losses of financial assets with similar risk characteristics on a collective basis. The allowance for a financial asset that does not share similar risk characteristics with other financial assets is determined through an individual evaluation.
Management’s estimates utilized in establishing an appropriate level of Allowance for Credit Losses are not dependent on any single assumption. In determining an appropriate allowance level, management evaluates numerous variables, many of which are interrelated or dependent on other assumptions and estimates, and takes into consideration past events, current conditions and reasonable and supportable forecasts. Due to the inherent imprecision in accounting estimates, other estimates or assumptions could reasonably have been used in 2023 and changes in estimates are reasonably likely to occur from period to period.
The Allowance for Credit Losses consists of the following components:
Allowance Evaluated on a Collective Basis. Expected credit losses are measured on a collective basis as long as the financial assets included in the respective pool share similar risk characteristics. If financial assets are deemed not to share similar risk characteristics, an individual assessment is warranted.
The allowance estimation methodology for the collective assessment is based on data representative of the Corporation’s financial asset portfolio from a historical observation period that includes both expansionary and recessionary periods. The estimation methodology and the related qualitative adjustment framework segregate the loan portfolio into segments based on loan and obligor-specific factors, including loan type, borrower type, collateral type, loan size, and borrower credit quality. For each segment, the probability of default and loss given default are derived for each quarter of the remaining life of each instrument. For the first two years (the reasonable and supportable period), these factors are derived by applying quarterly macroeconomic projections using models developed from historical data on macroeconomic factors and loans with similar characteristics. For periods beyond the reasonable and supportable period, Northern Trust reverts to its long-run historical loss experiences on a straight-line basis over four quarters. The projected exposure at default for every quarter is based on contractual balance projections as of each quarter-end, with adjustments made for potential draws on off-balance sheet commitments.
Northern Trust utilizes a quantitative probability of default/loss given default approach for the calculation of its credit allowance on a collective basis. For each segment, the probability of default and the loss given default are applied to the exposure at default for each projected quarter to determine the quantitative component of the allowance. The quantitative allowance is then reviewed within a qualitative adjustment framework, through which management applies judgment by
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assessing internal risk factors, potential limitations in the quantitative methodology, and environmental factors that are not fully contemplated in the forecast to compute an adjustment to the quantitative allowance for each segment and class of the loan portfolio.
ASC 326-20-30 requires the use of projected macroeconomic factors. The Corporation uses multiple forecasts approved by Northern Trust’s Macroeconomic Scenario Development Committee (MSDC). The baseline forecast aligns with the Corporation’s latest thinking on macroeconomic projections for the next eight quarters. An alternative scenario is also considered, which reflects a recession that incorporates the experiences of a wider set of historical economic cycles. The forecasts are probability-weighted at each evaluation period and are management’s best estimate of future economic projections at that time.
The allowance estimate is sensitive to changes in portfolio composition, portfolio quality, and macroeconomic forecasts. Increases in the amount of borrowing and material downgrades to the quality of the lending portfolio will increase the reserve, all else equal. Similarly, deteriorating projections for macroeconomic conditions will increase the reserve. Macroeconomic factors that are particularly correlated to Northern Trust’s loan portfolio are equity market values, market volatility, corporate profits, residential and commercial real estate price indices, unemployment, and disposable income. To demonstrate the sensitivity to changes in macroeconomic conditions, Northern Trust applied a 100% probability weighting to downturn conditions, resulting in an increase to the collective component of the allowance for the loan portfolio of approximately $121.2 million. The investment security and other financial assets portfolios are less sensitive to macroeconomic factors in terms of overall reserve impact due to factors such as high credit quality, short duration, and low historical losses.
The commercial and institutional (C&I) portfolio utilizes Northern Trust’s internal borrower rating assessments to determine initial credit quality. A sensitivity analysis was performed to determine the impact of upgrades or downgrades by shifting the rating up or down by one rating class, assuming no changes to other factors, such as macroeconomic projections or qualitative adjustments. The analysis excludes defaulted loans and does not assume a default event; hence, borrowers at the lowest non-default rating were not downgraded. Similarly, those at the highest rating could not be upgraded. Assuming the final forecast probability weighting, the collective component of the allowance assigned to the C&I portfolio would increase by approximately $82.3 million if all C&I borrowers were downgraded by one performing rating class. The C&I collective allowance would decrease by approximately $32.4 million if borrower ratings were upgraded by one rating class (if possible).
The results of the credit reserve estimation methodology are reviewed quarterly by Northern Trust’s Credit Loss Reserve Committee, which receives input from Financial Risk Management, Treasury, Corporate Finance, the Economic Research Department, and each of Northern Trust’s reporting business units. The Credit Loss Reserve Committee determines the probability weights applied to each forecast approved by MSDC, and also reviews and approves qualitative adjustments to the collective allowance in line with Northern Trust’s qualitative adjustment framework.
Allowance Evaluated on an Individual Basis. The individual allowance is determined through individual evaluations of financial assets that have defaulted, based on expected future cash flows, the value of collateral, and other factors that may impact the borrowers’ ability to pay. For defaulted loans for which the amount of allowance, if any, is determined based on the value of the underlying real estate collateral, third-party appraisals are typically obtained and utilized by management. These appraisals are generally less than twelve months old and are subject to adjustments to reflect management’s judgment as to the realizable value of the collateral.
Analysis and Controls. The quarterly analysis of the individual and collective allowance components and the control process maintained by Financial Risk Management and the lending staff are the principal methods relied upon by management for the timely identification and estimation of individual expected credit losses. In addition to Northern Trust’s own experience, management also considers regulatory guidance. Control processes and analyses employed to determine an appropriate level of allowance for credit losses are reviewed at least annually and modified as considered appropriate.
Management believes that the Allowance for Credit Losses adequately considers these uncertainties and has been established at an appropriate level. Actual losses may vary from current estimates and the amount of the provision for credit losses may be greater or less than actual net charge-offs in any particular period.
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Pension Plan Accounting
Northern Trust maintains a noncontributory defined benefit pension plan covering substantially all U.S. employees (U.S. Qualified Plan) and a U.S. noncontributory supplemental pension plan (U.S. Non-Qualified Plan). Certain European-based employees also retain benefits in local defined benefit pension plans, of which the majority are closed to new employees and to future benefit accruals. Measuring cost and reporting liabilities resulting from defined benefit pension plans requires the use of several assumptions regarding future interest rates, asset returns, compensation increases, mortality rates, and other actuarial-based projections relating to the plans. Due to the long-term nature of this obligation and the estimates that are required to be made, the assumptions used in determining the periodic pension expense and the projected benefit obligation are closely monitored and reviewed annually for adjustments that may be required. Pension accounting guidance requires that differences between estimates and actual experience be recognized as other comprehensive income in the period in which they occur. The differences are amortized into net periodic pension expense from accumulated other comprehensive income over the average remaining service period of eligible participants. As a result, differences between the estimates made in the calculation of periodic pension expense and the projected benefit obligation and actual experience affect stockholders’ equity in the period in which they occur but continue to be recognized as expense systematically and gradually over subsequent periods.
Northern Trust recognizes the significant impact that these pension-related assumptions have on the determination of the pension obligations and related expense and has established procedures for monitoring and setting these assumptions each year. These procedures include an annual review of actual demographic and investment experience with the pension plans’ actuaries. In addition to actual experience, adjustments to these assumptions consider observable yields on fixed income securities, known compensation trends and policies, as well as economic conditions and investment strategies that may impact the estimated long-term rate of return on plan assets.
In determining the pension expense for the U.S. Qualified Plan and for the U.S. Non-Qualified Plan in 2023, Northern Trust utilized a discount rate of 5.22% and 5.15% as of December 31, 2022, respectively. For both plans, the rate of increase in the compensation level is based on a graded schedule from 9.00% to 2.50% that averaged 5.56%. The expected long-term rate of return on U.S. Qualified Plan assets was 7.25% as of December 31, 2022.
In evaluating possible revisions to pension-related assumptions for the U.S. pension plans as of Northern Trust’s December 31, 2023 measurement date, the following were considered:
•Discount Rate: Northern Trust estimates the discount rate for its U.S. pension plans by applying the plan specific projected cash flows for future benefit payments for each plan to the Aon AA Above Median yield curve as of the measurement date. This yield curve is composed of individual zero-coupon interest rates for 198 different time periods over a 99-year time horizon. Zero-coupon rates utilized by the yield curve are mathematically derived from observable market yields for AA-rated corporate bonds. This yield curve model referenced by Northern Trust in establishing the discount rate resulted in a rate of 5.03% and 4.95% at December 31, 2023 for the U.S. Qualified and U.S. Non-Qualified Plans, respectively.
•Compensation Level: Based on a review of actual and anticipated salary experience, the compensation scale assumption is based on a graded schedule from 9.00% to 2.50% that averages 5.56%.
•Rate of Return on Plan Assets: The expected return on plan assets is based on an estimate of the long-term (30 years) rate of return on plan assets, which is determined using a building block approach that considers the current asset mix and estimates of return by asset class based on historical experience, giving proper consideration to diversification and rebalancing. Current market factors such as inflation and interest rates are also evaluated before long-term capital market assumptions are determined. Peer data and historical returns are reviewed to check for reasonability and appropriateness. As a result of these analyses, Northern Trust’s rate of return assumption for the U.S. Qualified Plan will continue to be 7.25% for 2024.
•Mortality Table: Northern Trust had adopted the aggregate Pri-2012 mortality table with a 2012 base year, which was released by the Society of Actuaries in October 2019. Northern Trust’s pension obligations reflect proposed future improvement under scale MP-2021, which was released by the Society of Actuaries in October 2021. As was the case in 2022, no change to these assumptions was made in 2023 since the Society of Actuaries did not release any updates to its mortality tables and improvement scales in 2023.Mortality assumptions on lump sum payments remain static and continue to be in line with the IRS prescribed table for minimum lump sums in 2024.
The net pension expense in 2024 is expected to slightly increase, primarily driven by higher amortization of prior year’s asset losses, offset by the positive effects of the cash contribution made to the U.S. Qualified Plan at the beginning of 2024.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In order to illustrate the sensitivity of these assumptions on the expected U.S pension plans’ 2024 periodic pension expense and the projected benefit obligation as of December 31, 2023, the following table is presented to show the effect of increasing or decreasing each of these assumptions by 25 basis points.
TABLE 43: SENSITIVITY OF U.S. PENSION PLANS ASSUMPTIONS
(In Millions) 25 BASISPOINT INCREASE 25 BASISPOINT DECREASE
Increase (Decrease) in 2024 Pension Expense
Discount Rate Change $ (2.9) $ 3.0
Compensation Level Change 2.3 (2.3)
Rate of Return on Plan Assets Change (4.0) 4.0
Increase (Decrease) in December 31, 2023 Projected Benefit Obligation
Discount Rate Change (32.7) 34.3
Compensation Level Change 9.1 (8.9)
Pension Contributions. The deduction limits specified by the Internal Revenue Code for contributions made by sponsors of defined benefit pension plans are based on a “Target Liability” under the provisions of the Pension Protection Act of 2006. There were no contributions to the U.S. Qualified Plan for the 2023 plan year. $200.0 million was contributed to the U.S. Qualified Plan for the 2024 plan year at the beginning of 2024.
The minimum required contribution to the U.S. Qualified Plan is expected to be zero in 2024. The remaining 2024 maximum deductible contribution, after considering the cash contribution of $200.0 million, is estimated at $220.0 million.
RECENT ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS
In March 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method—a consensus of the Emerging Issues Task Force” (ASU 2023-02). The amendments in ASU 2023-02 permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the income tax credits and other income tax benefits received and recognizes the net amortization and income tax credits and other income tax benefits in the income statement as a component of income tax expense (benefit). In addition, ASU 2023-02 requires specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method in accordance with Subtopic 323-740. ASU 2023-02 is effective for interim and annual periods beginning after December 15, 2023. Northern Trust adopted ASU 2023-02 as of January 1, 2024 using the modified retrospective method. The adoption of ASU 2023-02 is not expected to impact significantly Northern Trust’s consolidated balance sheets or consolidated statements of income.
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures” (ASU 2023-07). ASU 2023‐07 significantly expands disclosures about a public entity’s reportable segments, primarily through more frequent and enhanced disclosures about significant segment expenses. ASU 2023-07 does not change how a public entity identifies its operating segments, aggregates those operating segments or applies the quantitative thresholds to determine its reportable segments. ASU 2023-07 is effective for annual periods beginning after December 15, 2023, and interim periods within annual periods beginning after December 15, 2024. Early adoption is permitted. Upon adoption, the impact of ASU 2023-07 will be limited to certain enhancements within the notes to the consolidated financial statements and therefore is not expected to have an impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
In December 2023, the FASB issued ASU No. 2023-08, “Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets” (ASU 2023-08). ASU 2023-08 requires entities to subsequently measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period. In addition, ASU 2023-08 requires the presentation of crypto assets separately from other intangible assets on the face of the balance sheet and changes in fair value of crypto assets separately from changes in the carrying amount of other intangible assets on the statement of income. ASU 2023-08 also requires enhanced disclosures about in-scope crypto assets and respective activities. ASU 2023-08 is effective for interim and annual periods beginning after December 15, 2024, although
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early adoption is permitted. Upon adoption, ASU 2023-08 is not expected to have a significant impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (ASU 2023-09). ASU 2023-09 enhances disclosures by further disaggregating existing annual income tax disclosures related to the effective tax rate reconciliation and income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024, although early adoption is permitted. Upon adoption, the impact of ASU 2023-09 will be limited to certain enhancements within the notes to the consolidated financial statements and therefore is not expected to have an impact on Northern Trust’s consolidated balance sheets or consolidated statements of income.
RISK MANAGEMENT
Risk Management Overview
Northern Trust employs an integrated risk management framework to enable a risk informed profile and support its business decisions and the execution of its corporate strategies. The framework provides a methodology to identify, manage, report and govern both internal and external risks to Northern Trust, and promotes a culture of risk awareness and good conduct across the organization. Northern Trust’s risk culture encompasses the general awareness, attitude and conduct of employees with respect to risk and the management of risk across all lines of defense within the organization. Northern Trust cultivates a culture of effective risk management by defining and embedding risk management accountabilities in all employee performance expectations and provides training, development and performance rewards to reinforce this culture.
Northern Trust’s risk management framework contains three inter-related elements, designed to support consistent enterprise risk identification, management and reporting: a comprehensive risk inventory, a static taxonomy of risk categories and a dynamic taxonomy of risk themes. The risk inventory is a detailed register of the risks inherently faced by Northern Trust. The risk categories and risk themes are classification systems used for classifying and managing the risk inventory and enabling different risk profile views. All identified risks inherent in Northern Trust’s business activities are cataloged into the following risk categories: credit, operational, fiduciary, compliance, liquidity, market, and strategic risk. All material risks are also dynamically cataloged into various risk themes which are defined groupings that share common characteristics, focus on business outcomes and span across risk categories.
Northern Trust implements its risk management framework through a “three lines of defense” operating model, embedding a robust risk management capability within its businesses. The model, used to communicate risk management expectations across the organization, contains three roles, each with a complementary level of risk management accountability. Within this operating model, Northern Trust’s businesses are the first line of defense for protecting it against the risks inherent in its businesses and are supported by dedicated business risk management teams. The Risk Management function, the second line of defense, sets the direction for Northern Trust’s risk management activities and provides aggregate risk oversight and reporting in support of risk governance. Audit Services, the third line of defense, provides independent assurance as to the effectiveness of the integrated risk framework.
Risk Governance and Oversight Overview
Risk governance is an integral aspect of corporate governance at Northern Trust, and includes clearly defined accountabilities, expectations, internal controls and processes for risk-based decision-making and escalation of issues. The following diagram provides a high-level overview of Northern Trust’s risk governance structure, highlighting oversight by the Board of Directors and key risk-related committees.
TABLE 44: RISK GOVERNANCE STRUCTURE
Northern Trust Corporation Board of Directors
–Cybersecurity Risk Oversight Subcommittee
Global Enterprise Risk Committee (GERC)