Northern Trust(US:NTRS)2024-02-27 22:23Part I Item 1. Business Northern Trust provides wealth management, asset servicing, and banking solutions and is subject to extensive global regulation Business Overview The business centers on Asset Servicing and Wealth Management segments, supported by its Asset Management business Key Business Segment Metrics (as of December 31, 2023) | Segment | Key Services | Assets Under Custody/Administration (AUC/A) | Assets Under Management (AUM) | | :--- | :--- | :--- | :--- | | Asset Servicing | Custody, fund administration, investment operations outsourcing for institutional investors | $14.36 trillion | $1.03 trillion | | Wealth Management | Trust, investment management, custody, private banking for high-net-worth clients | $1.04 trillion | $402.5 billion | | Total Managed Assets | - | - | $1.43 trillion | - The company operates globally with offices in 24 U.S. states and Washington, D.C., and across 22 international locations17 Supervision and Regulation The company is regulated as a Category II banking organization, subject to enhanced prudential standards and Basel III capital rules - The Corporation is classified as a Category II banking organization, subjecting it to enhanced prudential standards such as annual capital plans, supervisory stress tests, and enhanced risk management and liquidity requirements34 Corporation Capital Ratios (as of December 31, 2023) | Capital Ratio | Standardized Approach | Advanced Approach | Minimum Required Ratio | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 11.4% | 13.4% | 4.5% | | Tier 1 Capital | 12.3% | 14.5% | 6.0% | | Total Capital | 14.2% | 16.5% | 8.0% | | Tier 1 Leverage | 8.1% | 8.1% | 4.0% | - The 2023 DFAST results kept Northern Trust's stress capital buffer at 2.5% and its effective Common Equity Tier 1 minimum at 7.0% for the capital plan cycle beginning October 1, 202360 - Proposed rules, including the Basel III Endgame Proposal and a long-term debt requirement, could significantly impact capital and funding requirements, with the Endgame Proposal estimated to increase RWAs by 5% to 15%355053 - The company is subject to U.S. liquidity standards, including the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), and was in compliance with both as of December 31, 20236162 Human Capital Management The human capital strategy focuses on talent management, total rewards, and DE&I for its 23,100 global employees - As of December 31, 2023, Northern Trust employed approximately 23,100 full-time equivalent employees, with 42% in Asia-Pacific, 41% in North America, and 17% in EMEA110 Board and Executive Officer Diversity (December 31, 2023) | Group | Female | Male | White | Black | Hispanic | Asian | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Board of Directors | 25% | 75% | 59% | 25% | 8% | 8% | | Executive Officers | 33% | 67% | 84% | 8% | 8% | —% | - The company's talent management strategy includes targeted recruitment, continuous learning through Northern Trust University, and annual talent planning processes111112114115 Item 1A. Risk Factors The company is exposed to significant market, operational, credit, liquidity, regulatory, and strategic risks Market Risks Earnings are vulnerable to market volatility, interest rate changes, and macroeconomic conditions due to a fee-based revenue model - A majority of revenues are from fee-based businesses, which are tied to the market value of assets and are negatively impacted by market downturns138 - Changes in interest rates can negatively affect earnings, as rapid rate increases in 2022-2023 impacted investment securities values, while low rates compress net interest margin140141 - The company's large investment securities portfolio experienced losses in 2023 and early 2024, negatively impacting capital, liquidity, and earnings147 Operational Risks Risks stem from technology system failures, cybersecurity threats, human error, and reliance on third-party vendors - The business is highly dependent on information technology systems, and failures or security breaches could disrupt operations and cause liability claims153 - Cyber-attacks are a significant risk, with threats like malware and ransomware potentially leading to theft of sensitive information and reputational damage157158 - Global operations, which accounted for 32% of revenue in 2023, expose the company to risks from political instability and complex regulatory environments170 - Geopolitical conflicts, such as the one involving Russia and Ukraine, have restricted access to client assets and increased credit exposure to subcustodians174 Credit Risks Credit risks arise from the potential failure of borrowers or counterparties to meet their financial obligations - Failure to accurately assess credit repayment prospects or maintain an adequate allowance for credit losses can result in increased provisions that reduce earnings176 - The company is exposed to significant counterparty risk due to extensive interconnections among financial institutions178 Liquidity Risks Effective liquidity management is crucial, with risks related to funding levels, reliance on subsidiary dividends, and credit ratings - The Corporation is a separate legal entity that relies heavily on dividends from the Bank to meet its obligations, which are subject to regulatory limitations183 - A downgrade in credit ratings could adversely affect borrowing costs, capital access, and liquidity186187 Regulatory and Legal Risks The company operates in a highly regulated environment where non-compliance can result in significant penalties and reputational harm - The company is subject to extensive and evolving government regulation, and proposed rules like Basel III Endgame could increase compliance costs and capital requirements190192 - Complex and evolving data privacy laws globally (e.g., GDPR, CCPA) increase compliance costs, risks, and potential liability for breaches193 - The trust, custody, and investment management businesses are subject to the risk of litigation, particularly during periods of market volatility199 Strategic Risks Strategic risks threaten the company's objectives, including competition, talent retention, and reputational damage - The company's success depends on its ability to attract, retain, and motivate talented personnel in a highly competitive environment209 - Intense competition from a wide range of financial institutions could negatively affect pricing and profitability212 - Reputation is critical for attracting and retaining clients and can be damaged by operational failures, legal issues, or negative publicity213214 - Climate change presents both physical and transition risks that could adversely impact operations, clients, and asset values220221 Item 1B. Unresolved Staff Comments There are no unresolved staff comments - None233 Item 1C. Cybersecurity Cybersecurity risk is managed via a comprehensive program based on the NIST framework, with no material incidents identified - Cybersecurity oversight is provided by the Board's Business Risk Committee and a dedicated Cybersecurity Risk Oversight Subcommittee234 - The company's cybersecurity and technology risk management program is based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework235 - The company utilizes external third-party security teams for regular assessments, operates a global security operations center, and maintains a Cybersecurity Incident Response Plan236237 - To date, no cybersecurity threats or incidents have been identified that have materially affected or are reasonably likely to materially affect the company240 Item 2. Properties The executive offices are in a company-owned Chicago building, with most other global locations being leased - The main executive offices are located at 50 South La Salle Street, Chicago, in a Bank-owned building241 - The majority of the company's offices, both domestic and international, are leased241 Item 3. Legal Proceedings This section incorporates by reference the information on legal proceedings from Note 24 of the Financial Statements - Information regarding legal proceedings is incorporated by reference from Note 24, "Commitments and Contingent Liabilities"244 Supplemental Item – Information About Our Executive Officers This section provides biographical information for the Corporation's key executive officers, including the CEO and CFO - Michael G. O'Grady, age 58, serves as Chairman of the Board, Chief Executive Officer, and President248 - Jason J. Tyler, age 52, serves as Executive Vice President and Chief Financial Officer259 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (NTRS) performance, repurchase activity, and remaining authorization are detailed Common Stock Repurchases (Q4 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | October 2023 | 316,100 | $64.51 | | November 2023 | 1,010,300 | $74.21 | | December 2023 | 609,500 | $80.68 | | Total Q4 | 1,935,900 | $74.66 | - As of December 31, 2023, approximately 21.0 million shares may yet be purchased under the company's share repurchase program263 - The five-year cumulative total return on Northern Trust's common stock ($118) lagged behind the S&P 500 Index ($207) and the KBW Bank Index ($132)266 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, net income decreased 17% to $1.11 billion due to higher expenses, despite flat revenue and growth in client assets Financial Overview Net income for 2023 fell 17% to $1.11 billion, driven by higher expenses that outpaced a modest rise in net interest income Financial Highlights | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $6,773.5 M | $6,761.2 M | +0.2% | | Net Income | $1,107.3 M | $1,336.0 M | -17% | | Diluted EPS | $5.08 | $6.14 | -17.3% | | Return on Avg. Common Equity | 10.0% | 12.7% | -270 bps | - Client Assets Under Custody/Administration (AUC/A) increased 13% to $15.40 trillion, and Assets Under Management (AUM) increased 15% to $1.43 trillion, primarily due to favorable markets274 - Noninterest Expense increased by 6% ($301.3 million), mainly due to an $84.6 million FDIC special assessment, higher equipment costs, and compensation276 Consolidated Results of Operations In 2023, flat revenue, a 6% rise in expenses, and a 29% drop in foreign exchange income drove lower profitability Revenue Breakdown (in Millions) | Revenue Component | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Trust, Investment and Other Servicing Fees | $4,361.8 | $4,432.6 | -2% | | Foreign Exchange Trading Income | $203.9 | $288.6 | -29% | | Net Interest Income | $1,982.0 | $1,887.2 | +5% | | Total Revenue | $6,773.5 | $6,761.2 | ~0% | - Net Interest Income on a fully taxable equivalent (FTE) basis increased 6% to $2.04 billion, driven by a higher net interest margin of 1.56%282 Noninterest Expense Breakdown (in Millions) | Expense Component | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Compensation | $2,321.8 | $2,248.0 | +3% | | Employee Benefits | $405.2 | $437.4 | -7% | | Outside Services | $906.5 | $880.3 | +3% | | Equipment and Software | $945.5 | $838.8 | +13% | | Other Operating Expense | $472.9 | $359.3 | +32% | | Total Noninterest Expense | $5,284.2 | $4,982.9 | +6% | - Other Operating Expense increased significantly, primarily due to an $84.6 million FDIC special assessment and a $25.6 million charge for a client capability write-off346347 - The provision for credit losses was $24.5 million, mainly due to an increased reserve for the commercial real estate portfolio336 Reporting Segments and Related Information Both Asset Servicing and Wealth Management segments saw net income decline due to higher expenses, while AUM grew 15% Net Income by Reporting Segment (in Millions) | Segment | 2023 Net Income | 2022 Net Income | % Change | | :--- | :--- | :--- | :--- | | Asset Servicing | $674.8 | $762.4 | -11% | | Wealth Management | $731.6 | $806.6 | -9% | | Other | ($299.1) | ($233.0) | N/M | - Asset Servicing revenue increased 1%, but a 6% rise in noninterest expense led to an 11% decline in net income360362 - Wealth Management revenue decreased 2% and noninterest expense grew 4%, resulting in a 9% drop in net income372373 - Consolidated Assets Under Management (AUM) increased 15% to $1.43 trillion, reflecting favorable markets and net inflows of $43.9 billion388389 Consolidated Balance Sheet Review Total assets decreased 3% to $150.8 billion, driven by lower client deposits, while stockholders' equity grew 6% Select Average Balance Sheet Items (in Billions) | Item | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $142.6 | $152.6 | -6% | | Total Earning Assets | $130.8 | $138.8 | -6% | | Total Loans | $42.2 | $41.0 | +3% | | Total Debt Securities | $49.9 | $55.0 | -9% | | Total Deposits | $105.2 | $125.6 | -16% | | Total Stockholders' Equity | $11.5 | $11.1 | +4% | - The decrease in average earning assets was primarily due to lower client deposits as clients migrated to higher-yielding products393395 - In 2023, the Corporation returned $977.7 million to common stockholders through dividends and share repurchases334398 Asset Quality The company maintained a high-quality asset portfolio, with improved unrealized losses and a low nonaccrual loan ratio - The debt securities portfolio is high quality, with 95% of AFS securities and 97% of HTM securities rated 'A' or higher406762 - Net unrealized losses in the total investment securities portfolio improved to $2.3 billion at year-end 2023 from $3.2 billion at year-end 2022409 Nonaccrual Assets and Allowance for Credit Losses | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Nonaccrual Assets | $65.1 M | $45.9 M | | Nonaccrual Loans to Total Loans | 0.13% | 0.11% | | Total Allowance for Credit Losses | $219.2 M | $199.6 M | | Allowance for Loans to Total Loans | 0.38% | 0.34% | - The increase in the Allowance for Credit Losses was primarily driven by the commercial real estate portfolio432 Capital Management The company maintained a strong capital position, with all ratios exceeding 'well-capitalized' regulatory requirements Corporation Capital Ratios (Standardized Approach) | Ratio | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Common Equity Tier 1 | 11.4% | 10.8% | | Tier 1 Capital | 12.3% | 11.8% | | Total Capital | 14.2% | 13.9% | | Tier 1 Leverage | 8.1% | 7.1% | - The company's capital ratios as of December 31, 2023, exceeded the requirements for being classified as 'well-capitalized' under U.S. regulatory rules454 - The 2023 DFAST results maintained Northern Trust's stress capital buffer at 2.5%, resulting in an effective CET1 minimum requirement of 7.0%456 Risk Management An integrated risk management framework based on a "three lines of defense" model governs seven key risk categories - The risk management framework is structured around a "three lines of defense" model: 1) business units, 2) the Risk Management function, and 3) Audit Services489 - Key risk governance is provided by the Board of Directors and its committees, with executive oversight from the Global Enterprise Risk Committee (GERC)491 Net Interest Income Sensitivity (as of Dec 31, 2023) | Interest Rate Change (Ramp over 12 months) | Estimated Impact on NII | | :--- | :--- | | +100 bps | +$43 million | | +200 bps | +$82 million | | -100 bps | -$63 million | | -200 bps | -$150 million | - The company actively manages liquidity risk and satisfied both the U.S. Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements during 2023557558 Item 8. Financial Statements and Supplementary Data This section contains the audited consolidated financial statements, supplementary data, and the independent auditor's report Consolidated Financial Statements The statements show a financial position with $150.8 billion in assets and $1.11 billion in net income for 2023 Key Consolidated Financial Data (Year-End 2023) | Metric | Amount (in Millions) | | :--- | :--- | | Balance Sheet: | | | Total Assets | $150,783.1 | | Total Loans, net | $47,424.7 | | Total Deposits | $116,164.0 | | Total Liabilities | $138,885.2 | | Total Stockholders' Equity | $11,897.9 | | Income Statement (Full Year): | | | Total Revenue | $6,773.5 | | Net Income | $1,107.3 | | Cash Flow (Full Year): | | | Net Cash from Operating Activities | $2,625.6 | | Net Cash from Investing Activities | $4,784.1 | | Net Cash from Financing Activities | ($7,182.6) | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, fair value, credit loss allowance, and regulatory capital - Note 1 outlines significant accounting policies, including the basis of presentation, use of estimates, and revenue recognition638 - Note 6 details the Allowance for Credit Losses, which increased to $219.2 million in 2023 from $199.6 million in 2022798 - Note 24 discloses off-balance sheet commitments, including an $84.6 billion guarantee to the FICC and details on the company's holding of 4.1 million Visa Class B common shares937947957 - Note 32 provides a detailed breakdown of regulatory capital ratios, confirming the Corporation's 'well-capitalized' status1029 Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end 2023 - Management concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 20231039 - Management concluded that the Corporation maintained effective internal control over financial reporting as of December 31, 2023, a conclusion supported by an unqualified opinion from KPMG LLP1041 Part III Items 10-14 Information for these items is incorporated by reference from the company's 2024 Proxy Statement - Information required for Part III (Items 10-14) is incorporated by reference from the company's 2024 Proxy Statement105410551056 Part IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K - This section lists all financial statements and exhibits filed with the Form 10-K, including the consent of the independent registered public accounting firm and CEO/CFO certifications10601061 Item 16. Form 10-K Summary No Form 10-K summary is provided - None1067