Jason J. 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 second quarter 2023 earnings call.
Let's dive into the financial results for the quarter starting on Page 4. This morning, we reported second quarter net income of $332 million, earnings per share of $1.56 and our return on average common equity was 12.4%. Currency movements had an immaterial impact on our revenue and expense growth in both periods. Our second quarter results were impacted by two notable items. We recognized a $38.7 million pre-tax severance charge, impacting both our compensation and outside services line items. We recorded a $25.6 million pre-tax charge associated with the write-off of an investment in a client capability. Notable items from previous periods are listed on this slide. Excluding notable items in all periods, revenue was up 1% on a sequential quarter basis and down 1% over the prior year. Expenses were down 1% on a sequential quarter basis and up 5% over the prior year. This reflects an expense to trustee ratio of 116%, down from 120% in the first quarter and 122% in the fourth quarter of last year.
Pre-tax income was up 13% sequentially, but down 9% over the prior year. Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion, which reflected a 3% sequential increase, but a 4% decrease as compared to last year. All other non-interest income was flat sequentially but down 10% over the prior year. Net interest income, on an FTE basis, which I'll discuss in more detail in a few moments, was $525 million, down 4% sequentially, but up 12% from a year ago. We had a $15 million credit reserve release in the second quarter due to improved credit quality on a small number of larger loans, which was offset in-part by expectations for higher future economic stress in the commercial real-estate market.
Turning to our Asset Servicing results on Page 5. Assets under custody and administration for asset servicing clients were $13.5 trillion at quarter-end, up 2% sequentially and up 5% year-over-year. Asset Servicing fees totaled $621 million, which were up 3% sequentially, but down 3% year-over-year. Custody and fund administration fees, the largest component of fees in the business, were $427 million, up 3% sequentially, but down 1% year-over-year. Custody and fund administration fees increased on a linked-quarter basis for the second consecutive quarter due to solid new business activity, higher transaction activity and favorable markets. The decrease from the prior year quarter, primarily due to unfavorable markets. Assets under management for Asset Servicing clients were $990 billion, up 3% sequentially and up 4% year-over-year. Investment management fees within Asset Servicing were $134 million, up 6% sequentially, but down 10% year-over-year. Investment management fees increased sequentially, primarily due to asset inflows and favorable markets. The decrease from the prior year quarter, primarily due to asset outflows and unfavorable markets.
Moving to our Wealth Management business on Page 6. Assets under management for our Wealth Management clients were $376 billion at quarter-end, up 2% sequentially and up 7% year-over-year. Trust, investment and other servicing fees were $475 million, up 3% sequentially, but down 5% compared to the prior year. Sequentially, the increase in fees in the regions was driven primarily by favorable markets. Sequentially, the increase in GFO fees was driven by net inflows. Relative to the prior year, the decrease in fees in the regions was primarily due to unfavorable markets and product-related asset outflows. Within GFO, the decrease in fees was due largely to unfavorable markets.
Moving to Page 7 and our balance sheet and NII trends. Our average balance sheet decreased 1% on a linked-quarter basis, primarily due to lower client deposits, partially offset by higher leveraging activity. Earning assets averaged $134 billion in the quarter, down 1% sequentially and down 4% versus the prior year. Money market assets primarily absorbed the decrease. Client liquidity continued to grow during the second quarter. While we saw a decline in average deposits, it was more than offset by increases in other categories. Relative to the first quarter, our money market funds were up $8 billion or 6% and our CDs were up 29%. Average deposits were $106 billion, down $6.6 billion or 6% sequentially, but remained consistent with late April levels.
We experienced a $2.6 billion sequential decline in non-interest bearing deposits, mostly within the institutional channel as clients continued to shift to higher-yielding alternatives. This reduced the mix of non-interest bearing deposits to 17%. At quarter-end, operational deposits comprised approximately two-thirds of institutional deposits. These tend to be the stickiest deposits as clients use them to operate their businesses. Approximately three-quarters of our average deposits are institutional, with the remainder related to wealth clients, including GFO.
Shifting to the asset side of the balance sheet. Average securities were down 2% sequentially, reflecting the natural run-off, which we've seen to reinvest at the short end of the curve. Our $50 billion investment portfolio consists largely of highly-liquid U.S. treasury, agency and sovereign wealth fund bonds, and it's split approximately evenly between available-for-sale and held-to-maturity. The duration of the securities portfolio continued to edge-down in the second quarter to 2.1 years. The total balance sheet duration is now less than a year. Loan balances averaged $42 billion and were up 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. Our liquidity remains strong, with cash held at the Fed and other Central Banks up 9% to $43 billion. More than 45% of our overall balance sheet is comprised of cash, money market assets and available-for-sale securities. This translates to $73 billion of immediately available liquidity and more than 60% of the total deposit base.
Net interest income on an FTE basis was $525 million for the quarter, down 4% sequentially, but up 12% from the prior year. NII reflected the impact of several dynamics. We saw continued client migration out of deposits and into higher-yielding alternatives, non-interest bearing deposits that, as a percentage of total deposits, slid to 17%, and deposit costs increased, with our interest-bearing deposit beta during the quarter reaching 88% and our cumulative beta for the cycle at 68%. The net interest margin on an FTE basis was 1.57% for the quarter, down 5 basis points sequentially, but up 22 basis points from a year ago. The sequential decline reflects the impact of higher funding costs, partially offset by higher short-term market rates. Our NII in the third quarter will continue to be driven by client behavior, which has been less predictable, given the speed and velocity of the cycles' rate hikes. Our average client deposits thus far in the quarter are approximately $106 billion. Deposit outflows are expected to continue, in-part, due to seasonality as August is typically our low point in the year as European activity slows materially. The pace of the outflows is expected to moderate.
Turning to Page 8. As reported, non-interest expenses were $1.3 billion in the second quarter, 4% higher sequentially and 9% higher than the prior year. Excluding charges in both periods is noted on the slide. Expenses in the second quarter were down 1% sequentially, but up 5% year-over-year. I'll hit on just a few highlights. Compensation and technology expense continued to be the areas of highest spend. Compensation, expense excluding severance charges, was down 5% sequentially, but up 4% compared to the prior year. It was down sequentially due to the payment of our annual retirement-eligible incentives in the first quarter. This was partially offset by the impact of this year's base pay adjustments, which were granted in the second quarter. The year-over-year growth in compensation expense largely reflects the impact from inflationary wage pressures, and last year's employee expansion, partially offset by lower incentives. Excluding charges, non-compensation expense was up 3% sequentially. Primary driver of the increase was growth in the outside services line, which was up 9% sequentially. The increase is largely due to timing, as we reported a sequential decline in outside services of 9% in the first quarter due to delays and technical services projects. With our heightened focus on expense control, we expect our operating expenses to grow more modestly and our expense to trustee ratio to show further improvement.
Turning to Page 9. Our capital ratios remained strong in the quarter and continue to be well above our required regulatory minimums. Our Common Equity Tier 1 ratio under the standardized approach was flat to the prior quarter at 11.3%, despite continued common stock repurchases. This reflects a 430 basis point buffer above regulatory requirements. Our Tier 1 leverage ratio was 7.4%, up slightly from the prior quarter. We returned $257 million to common shareholders in the quarter through cash dividends of $158 million and common stock repurchases of $99 million.
And with that Jenny, please open the line for questions.
