Jason Tyler
Executive Vice President and Chief Financial Officer at Northern Trust
Thank you, Mike, and let me join Jennifer and Mike in welcoming you to our first quarter 2023 earnings call. Let's dive into the financial results for the quarter starting on Page 4.
This morning, we reported first quarter net income of $334.6 million. Earnings per share of $1.51, and our return on average common equity was 12.4%.
On a year-over-year basis, currency movements, unfavorably impacted our revenue growth by approximately 100 basis points and favorably impacted our expense growth by approximately 130 basis points. On a sequential basis, currency movements favorably impacted our revenue growth by approximately 70 basis points and unfavorably impacted our expense growth by approximately 90 basis points.
Our first quarter results were also impacted by two notable items. One, we recognized a $6.9 million pre-tax gain on the securities repositioning we announced last quarter and executed in January. We recorded -- two, we reported $9.8 million of pre-tax charges associated with various early lease terminations, actions taken to further optimize our global real estate footprint. Notable items from previous periods are listed on this slide.
Excluding the notable items in all periods, revenue was flat on a sequential quarter basis, and up 1% over the prior year. Expenses were flat on a sequential quarter basis, and up 6% over the prior year, reflecting an expense-to-trust fee ratio of 120%. Pre-tax income was down 2% sequentially and down 13% over the prior year.
Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1 billion and were down 9% from last year, but up 2% sequentially. Excluding notable items, we had year-over-year and sequential declines in all other noninterest income, which is primarily driven by lower foreign exchange trading income.
We saw significantly reduced volumes in the first two months of the quarter, with a modest pickup in March. Net interest income on an FTE basis, which I'll also discuss in more detail in a few moments was $544 million, up 40% from a year ago, down 1% sequentially. Our provision for credit losses was $15 million for the first quarter, reflecting growth in the size and duration of the commercial real estate loan portfolio.
Given the increased attention being placed on commercial real estate loans, we want to provide some details we felt would be of interest. Commercial real estate loans comprise 12% of our total portfolio, and commercial office loans comprise 2% of total loans. Approximately, 95% of commercial real estate loans are personally guaranteed and approximately 70% have a loan-to-value ratio of less than or equal to 70%.
Turning to our Asset Servicing results on Page 5. Assets under custody and administration for asset servicing clients were $13 trillion dollars at quarter end, down 9% year-over-year, but up 4% sequentially. Asset servicing fees totaled $603 million, which were also down 9% year-over-year, but up 3% sequentially. Custody and fund administration fees, the largest component of fees in the business, were $414 million, down 9% year-over-year, but up 2% sequentially.
Custody and fund administration fees decreased from prior-year quarter, primarily due to unfavorable markets and unfavorable currency translation. They increased sequentially due to favorable markets, favorable currency translation and solid new business activity, particularly later in the quarter.
Transactional activity, which comprises approximately 15% of our custody and fund administration fees, was generally weaker due to lower volumes and lower one time fees.
Assets under management for asset servicing clients were $962 billion, down 12% year-over-year, but up 7% sequentially. Investment management fees within asset servicing were $126 million, down 14% year-over-year, but up 2% sequentially. Investment management fees decreased from the prior-year quarter, primarily due to asset outflows and unfavorable markets, partially offset by lower money market fund fee waivers. Investment management fees increased sequentially due to favorable markets and favorable currency translation.
Moving to our Wealth Management business on Page 6. Assets under management for our wealth management clients were $368 billion at quarter end, down 7% year-over-year, but up 5% on a sequential basis. Trust investment and other servicing fees were $461 million, down 9% compared to the prior year, but up 1% sequentially.
Within both the regions and GFO, the year-over-year declines were primarily driven by unfavorable market impacts and product level asset outflows, partially offset by the elimination of money market fund fee waivers. Sequentially, the increase within the regions in GFO was primarily driven by favorable markets, partially offset by product level asset outflows.
The upturn we saw in our AUM occurred later in the quarter, and was not fully reflected in our trust fees. Importantly, we continue to see modest organic growth in our core advisory fees.
Moving to Page 7 and our balance sheet and NII trend. Given the attention being placed on balance sheet trends, we also thought you might be interested in some additional data points this quarter. We think about client liquidity in three categories, deposits, money market funds and short term treasuries. With that background, we can provide some color and data on what we saw throughout the quarter and through the first few weeks of April.
Most importantly, client liquidity was up meaningfully for the quarter and both Asset Servicing and Wealth Management, and it's continued to rise during the first three weeks of April. While we saw a decline in deposits through the quarter, it was more than offset by increases in money market funds as clients continued to migrate into higher yielding products. Relative to the fourth quarter, our money market funds are up $15 billion or 7%. As mentioned, average deposits were $112 billion, down 4% sequentially with Wealth Management deposits down 7% and institutional down 3%.
Approximately three quarters of our average deposits are institutional. Within this segment, approximately 68% are considered operational, the stickiest, as clients use these funds to run their ongoing operations. Across the organization, we experienced a $2 billion decline in noninterest bearing deposits as clients shifted to higher yielding alternatives. This reduced the mix of noninterest bearing deposits to 18%.
We actively manage our assets and liabilities considering a wide range of possible stress scenarios, including interest rate risks and how they may affect liquidity and capital. So, let's shift to the asset side of the balance sheet to see how investments are allocated.
Average cash held at the Fed and other central banks, was up 12% to $37 billion and we had $67 billion of immediately available liquidity, reflecting approximately 50% of average earning assets. Loan balances averaged $42 billion and were down 1% sequentially. Our loan portfolio is well diversified across geographies, operating segments and loan types. Approximately 75% of the portfolio is floating and the overall duration is less than one year.
Securities were down 3% sequentially, reflecting the impact of both our repositioning early in the quarter and the natural run-off which we've chosen to reinvest at the short end of the curve. Our $49 billion investment portfolio consists largely of highly liquid U.S. Treasury, Agency and Sovereign Wealth fund bonds. And it's split 50-50 between available for sale and held to maturity. In the aggregate, the securities portfolio has a duration of 2.3 years. The total balance sheet duration is 1.1 year.
Net interest income was $544 million for the quarter, up 40% from the prior year and down 1% sequentially. NII reflected the impact of several dynamics, many occurring late in the quarter. As mentioned, we saw continued improvement in deposits from our balance sheet to money market funds and treasuries. Deposit costs increased with our interest bearing deposit beta during the quarter at 85% and our cumulative beta for the cycle as of March 31, of 65%. And finally, we had the impact from two fewer days in the quarter.
Net interest margin was 1.62% in the quarter, up 57 basis points from a year ago, and roughly flat over the prior quarter. The sequential results reflect the impact of higher short term market rates, offset by higher funding costs. The prior year increase is primarily due to higher average interest rates. For the second quarter, our NII will continue to be driven by client demand, which is less predictable than it was 90 days ago. Our average client deposits thus far in the quarter are approximately $110 billion. And subsequent to tax season, we've observed an incremental typical decline of a few billion dollars.
Turning to Page 8. As reported, noninterest expenses were $1.3 billion in the first quarter, 7% higher than the prior year, but 3% lower sequentially. Excluding charges in both periods as noted on the slide, expenses in the first quarter were up 6% year-over-year, but flat sequentially. Overall, we are focused on reducing the rate of expense growth and controlling those costs that are most under our control.
I'll hit on just a few highlights. Compensation and technology expense continue to be the areas of highest spend. Compensation expense, excluding charges, was up 6% compared to the prior year and up 7% sequentially. The year-over-year growth largely reflects the annualization of last year's head count expansion, and inflationary wage pressure, partially offset by lower incentives. The sequential increase is due to our annual payment of retirement eligible equity incentives in the first quarter.
Equipment and software, largely reflecting our technology spend, was up 20% year-over-year, but up 1% sequentially. More than 50% of our spend is comprised of business driven investment, followed by spending on core infrastructure and modernization and to a lesser extent, spending on information security, risk and regulatory areas.
Turning to Page 9. Our capital ratios improved in the quarter and continue to be well above our required regulatory minimum. Our common equity Tier 1 ratio under the standardized approach was up 50 basis points from the prior quarter to 11.3% despite resuming common stock repurchases. This reflects a 430 basis point buffer above our regulatory requirements.
As a reminder, as a Category II institution under the Federal Reserve's framework, we already include unrealized losses on our available for sale securities in this calculation. Thus, mark to market losses occur immediately and our capital and capital ratios. Our Tier 1 leverage ratio was 7.3%, up 20 basis points from the prior quarter. Higher net income, improved accumulated other comprehensive income, the securities repositioning and lower loan balances were the primary factors in this quarter's increase in capital ratios.
We returned $259 million to common shareholders in the quarter through cash dividends of $159 million and after pausing meaningful share buybacks for the prior five quarters, we repurchased over $100 million of common stock.
And with that. Cynthia, please open the line for questions.
