Jason Tyler
Chief Financial Officer at Northern Trust
Thank you, Mike and let me join Jennifer and Mike in welcoming you to our third-quarter 2023 earnings call. Let's dive into the financial results for the quarter starting on page four. This morning, we reported third-quarter net income of $328 million. Earnings per share of $1.49 and our return on average common equity was 11.6%. Our assets under custody administration and assets under management were down modestly on a sequential basis, but up sharply on a year-over-year basis. Unfavorable markets and currency movements, more than offset positive asset inflows relative to the prior period.
Year-over-year levels benefited from favorable markets, currency improvements, and asset inflows. On a year-over-year basis, currency movements had an approximate 90 basis-point favorable impact on revenue growth, largely within our asset services division and 100 basis-point unfavorable impact on expenses. On a sequential basis, currency impacts were immaterial. Excluding notable items in all periods revenue was down 2% on both a sequential-quarter and year-over-year basis. Expenses were up 1% sequentially and up 5% over the prior year. This reflects an expense to trust fee ratio of 115%, down from 116% in the second quarter, but higher than the 112% we posted in the third-quarter of last year.
Pretax income was up 1% sequentially but down 20% over the prior year. Trust investment and other servicing fees, representing the largest component of our revenue totaled $1.1 billion, a 1% sequential increase and a 3% increase compared to last year. All other non-interest income was up 6% sequentially but down 3% over the prior year. Net interest income on an FTE basis was $469 million, down 10% sequentially and down 11% from year ago. Our provision for credit losses was $14 million in the third-quarter. Overall, our credit quality remains very strong with small net recoveries for the quarter, there was a modest increase in nonperforming loans.
Turning to our asset servicing results on Page five. Assets under custody and administration for asset servicing clients were $13.2 trillion at quarter-end, down 2% sequentially, but up 10% year-over-year. Asset servicing fees totaled $626 million. Custody and fund administration fees, the largest component of fees in the business were $428 million. Sequential performance reflects favorable markets and new business activity offset by weaker transaction volume. The year-over-year strength was due to solid new business activity and favorable market and currency impacts. They were partially offset by lower transaction volume. Assets under management for asset servicing clients were $963 billion, down 3% sequentially, but up 10% year-over-year.
Similarly, because a significant portion of our fees are billed on a lagged basis the sequential decline in AUM will impact our fouth-quarter trust fees. Investment management fees within asset servicing were $137 million. Moving to our wealth management business on page six. Assets under management for our wealth management clients was $370 billion. Trust administration and other servicing fees for wealth management clients were $486 million. Our average balance sheet decreased 4% on a linked-quarter basis, primarily due to lower client deposits. Client liquidity was essentially flat during third quarter. Average deposits were $102 billion down $4 billion or 4% sequentially, in line with our expectations for this seasonably weaker quarter.
The decline we've seen largely in the interest-bearing channel as clients continued to reallocate cash position. Noninterest-bearing deposits remained stable, down less than $1 billion sequentially and the mix held steady at 17%. In quarter-end operational deposits remained at approximately two-thirds of institutional deposits and institutional deposits comprised 75% to 80% of the total mix. Shifting to the asset side of the balance sheet. The duration of the securities portfolio reduced slightly to 1.9 years. The total balance sheet duration continues to be less than a year. Loan balances averaged $42 billion and were flat sequentially.
Our loan portfolio is well-diversified across geographies, operating segments, and loan types. Approximately 70% of the loan portfolio is floating and the overall duration is below one year. Our liquidity remained strong. Cash held at the Fed and other central banks was down reflecting the absorption of the deposit decreases but highly-liquid assets comprised more than 55% of our deposits and nearly 50% of total earning assets. Net interest income on an FTE basis was $469 million for the quarter, down 10% sequentially and down 11% from the prior year. NII reflected the impact of several dynamics. We saw some continued client migration into higher-yielding cash alternatives, but the pace moderated as we expected.
Deposit cost increases were slightly bigger factor with funding cost up 46 basis-points over the second-quarter. Due to the competitive environment we repriced a small number of meaningful products to ensure we're protecting deposit volumes. We're not price leaders. But we are vigorously defending our -- our deposits with an eye toward playing the long game. We expect to benefit from this strategy when rates decline. Client engagement also led to a combination of specific repricing on existing accounts and a shift to higher paying term deposits. There's no question that clients want to remain on our balance sheet, but sensing that the rate cycle is close to peaking, they've begun -- they've begun to stretch for duration.
Our NII in the fourth quarter will continue to be driven by client behavior, which has been less predictable, given the speed and extent of this cycles rate hikes. Our average client deposits thus far in the quarter are $100 billion. Modest outflows are expected to continue, due in part to client efforts to optimize returns and some known outflows related to M&A activity and other corporate needs. Pricing should remain under pressure with further NIM compression possible. We currently expect fourth-quarter NII to be in the range of $430 million to $440 million. Factors that can swing the outcome, include the pace of further deposit outflows, the level of price pressure, the extent to which we see -- we continue to see deposit mix-shift and the offsetting impact from the repricing of the securities portfolio. As we look out to 2024, there are wide range of scenarios under which net interest income could trend. Deposit pricing pressure, our securities maturity schedule, investment outlook, and other factors provide upside that's not upside that's not reflected in the current quarter.
Turning to Page eight. As reported, non-interest expenses were $1.3 billion in the third-quarter, down 4% sequentially, but up 4% as compared to the prior year. Excluding unusual items in both periods, including those noted on the slide, expenses in the third-quarter were up 1% sequentially and up over 5% year-over-year. I'll hit on just a few highlights. Excluding unusual items compensation expense was down 2% sequentially. This reflected reductions in incentive compensation and headcount actions taken year-to-date. The increase over the last year reflects 2023 base pay adjustments. Excluding unusual items in all periods non-compensation expense was up 3% sequentially. Our expense to trust fee ratio improved 100 basis-points sequentially to 115%, but remains higher than our targeted range of 105% to 110%.
As a reminder, we began the year expecting to take at least 200 basis-points off of our 2022 adjusted expense growth rate of 9%. Our first-quarter adjusted results were meaningfully better, up 5.8% year-over-year. Our second-quarter adjusted results were even better, up 5.3% year-over-year and our third-quarter results were in the same range, despite unfavorable currency impacts. For the fourth-quarter, we expect continued improvement. Compensation expense is expected to be up $5 million. Benefits expense should be our normal fourth-quarter lift that's $3 to $5 million. Outside services, likely to be up approximately $10 million. Equipment and software should be up approximately $10 million relative to adjusted third-quarter levels. Occupancy is expected to increase a few million dollars above adjusted third-quarter levels.
Other operating expense has many components, including market-driven categories that are not predictable. But it has tended to increase in the fourth-quarter. All in, this would put our full-year adjusted expense growth rate at approximately 5% or roughly 400 basis-points lower than 2022 levels. Our financial model is based upon mid-single-digit trust fee growth from a combination of organic growth and market appreciation. Against this backdrop, we hope to generate 100 to 200 basis-points in trust fee operating leverage in normal macro environment. Our capital levels and ratios remained strong in the quarter. We continue to operate at levels well above our required regulatory minimum. Our common equity Tier-one ratio under the standardized approach was up slightly from the prior quarter to 11.4% as capital accretion, more than offset the unfavorable impact from higher rates on our securities portfolio.
This reflects a 440 basis-point buffer above our regulatory requirements. Our tier-one leverage ratio was 7.9%, up 50 basis points from the prior quarter. At quarter end, our AOCI, was a negative $1.4 billion a slight improvement over second-quarter levels. We returned $159 million to common shareholders through cash dividends of $158 million and common stock repurchases of $1 million. We slowed our buyback activity in order to reserve for the anticipated FDIC special assessment. We're well-positioned to meet the proposed regulatory requirements that Mike referenced without significant changes to our operating model. With that Melissa, please open the line for questions.
