Northern Trust Corporation (NTRS) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for Northern Trust. Our host for today's call is Michael O'Grady, Chairman and CEO. [ Operator Instructions ] I will now turn the call over to your host, Mr. O'Grady, you may begin.

[Audio Gap] Along with an ability to innovate and adapt continuously to ensure we meet or exceed the needs and expectations of our various stakeholders. Thank you for adapting along with us today, and joining us in this virtual-only format in light of the current public health environment. We hope that you and your families are staying well during these trying times, and greatly appreciate your participation here this morning. Before we begin, a few housekeeping items. In accordance with the corporation's bylaws, I will act as Chairman of the meeting. The agenda and rules of conduct for this meeting are available in web portal through which you access the meeting. Please note that only validated stockholders may submit questions through the web portal. Questions about items on the agenda should be submitted at or before the time they are considered at the meeting. Following adjournment of the formal meeting, a question-and-answer session will be provided to address appropriate general questions regarding the corporation. Joining me this morning for today's meeting are the members of our Board of Directors whom I will introduce to you individually in a few moments. Susan Levy, our General Counsel and Corporate Secretary, who will act as Secretary of the meeting as well as the rest of our management group, who I will also introduce to you in a few moments. And John Rodi, Jim Liddy and Andrew Sparks, who are representatives of KPMG LLP, our independent registered public accounting firm. During the question-and-answer period later this morning, these representatives of KPMG will be available to respond to appropriate questions. The record date for this meeting was February 24, 2020. Susan has informed me that notice of the meeting and proxy materials were mailed on or about March 10 to stockholders of record on the record date. A supplemental notice was provided on April 1, announcing the change to this virtual-only meeting format. Mark Bette has been appointed as inspector of election for this meeting. He has inspected the proxies and reported that at least 191,272,054 shares of common stock are represented by proxies at this meeting, making up 91.4% of the 209,266,832 shares outstanding on the record date. Accordingly, a quorum is present and the meeting is duly constituted. It is 10:33 a.m., and the polls are now open for voting. All stockholders entitled to vote at this meeting have the ability to do so through the web portal. If you are a stockholder entitled to vote and have not yet done so or if you want to change your previously-cast vote, please do so via the web portal. Please remember that if you have already voted by proxy, it is not necessary to vote again. After voting has been completed on all matters on the agenda, we will close the polls, and the inspector of election will provide his preliminary report. I now turn to 3 items of business on the agenda, all of which are described in detail in the proxy statement. The first item of business is the election of 13 directors. I would like to introduce our current directors, each of whom is participating in the meeting this morning remotely, and along with me, is a nominee for election. Linda Walker Bynoe, President and Chief Executive Officer, Telemat Limited; Susan Crown, Chairman and Chief Executive Officer, Al Creek Partners, LLC and Chairman and Founder, Susan Crown Exchange Inc; Dean Harrison, President and Chief Executive Officer, Northwestern Memorial Healthcare; Jay Henderson, retired Vice Chairman, Client Service, Pricewaterhousecoopers LLP; Marcy Klevorn, retired Executive Vice President and President, Mobility, Ford Motor Company; Bobby Meta, retired President and Chief Executive Officer, Transunion; José Luis Prado, Chairman, Tropical Foods Group and Vice Chairman, Evans Food Group; Thomas Richards, retired President, Chief Executive Officer and Executive Chairman, CDW Corporation; Martin Slark, retired Chief Executive Officer, Molex LLC; David Smith, Executive Vice President, Policy and Legal Affairs and General Counsel, Mutual Fund Directors Forum; Donald Thompson, Founder and Chief Executive Officer, Cleveland Avenue, LLC and retired President and Chief Executive Officer, McDonald's Corporation; Charles Trivett, Vice Chairman, Russell Reynolds Associates. I also would like to acknowledge Lord Charles Powell, who serves as an Advisory Director to the Board, and unfortunately, is not able to join us here today due to a scheduling conflict. Lord Powell is a nonparty member of the House of Lords and former Private Secretary and adviser on foreign affairs and defense to Prime Ministers Margaret Thatcher and John Major. Lord Powell has served as an advisory director since 2015. I would like to thank our directors for their service and commitment to the success of Northern Trust. I now would like to introduce the officers who currently serve with me on Northern Trust Management Group, each of whom is participating in the meeting this morning, remotely as well: Robert Brown, Executive Vice President and Chief Investment Officer; Peter Sherich, Executive Vice President and President, Corporate and Institutional Services; Steven Fradkin, Executive Vice President and President, Wealth Management; Mark Gossett, Executive Vice President and Chief Risk Officer; Susan Levy, Executive Vice President, General Counsel and Corporate Secretary; Teresa Parker, Executive Vice President and President, Corporate and Institutional Services, Europe, Middle East and Africa; Thomas South, Executive Vice President and Chief Information Officer; Joyce St. Clair, Executive Vice President and Chief Human Resources Officer; Shundrawn Thomas, Executive Vice President and President, Asset Management; Jason Tyler, Executive Vice President and Chief Financial Officer. The second item of business is approval by an advisory vote of the named Executive Officer compensation disclosed in the proxy statement. This item is commonly referred to as a Say-on-Pay proposal. The Board of Directors recommends a vote for this proposal. The third item of business is the ratification of the appointment of KPMG LLP, as the Corporation's independent registered public accounting firm for 2020. The Corporation's Audit Committee made the appointment, and the Board of Directors recommends ratification of the appointment. I will now ask Susan to present a motion to nominate the slate of directors and approve each of the foregoing proposals.

Mr. Chairman, I move for nomination of the directors, approval of the Say-on-Pay resolution and ratification of the appointment of KPMG LLP. All of the foregoing motions have been seconded by proxy.

Please submit any questions or comments regarding any of the proposals through the web portal if you have not already done so. We will now proceed to vote on the items of business on this morning's agenda. Any stockholder who has not yet voted or wishes to change his or her vote, may do so through the web portal. If you have already voted, you do not need to vote at this meeting. [ Voting ] Since there is no further business on the agenda, the voting portion of our meeting is over. It is 10:39 a.m. and the polls are now closed. I'd like to call for a report from the inspector of election on the voting results.

Mr. Chairman, each of the Director nominees named in the proxy statement received the affirmative vote of a majority of the votes cast with respect to his or her election. Approximately 97% of the shares present and entitled to vote were voted in favor of approval of the named Executive Officer compensation disclosed in the proxy statement. The ratification of the appointment of KPMG LLP received the affirmative vote of approximately 96% of the shares present and entitled to vote.

Thank you, Mark. All nominees have been duly elected, and all proposals have passed. This concludes the formal portion of our meeting. Now I'll provide a brief update on Northern Trust businesses and primary components of our long-term strategy. Before I begin, let me remind you that this presentation may include forward-looking statements like those described in this slide. Our 2019 annual report and our periodic reports to the Securities and Exchange Commission contain information about specific factors that could cause actual results to differ from these statements. I urge you to read them. To start, I want to discuss how we are navigating the current difficult environment. The past several months have brought health and economic challenges on a global scale, not previously experienced. Our hearts go out to all that have suffered a personal loss during this pandemic. We want to also thank the heroic efforts of the health care workers, first responders, civil servants and the community-based essential workers who are serving on the front lines to get us through this crisis. At Northern Trust, our primary focus has been on the safety of our employees, serving our clients and supporting our communities. During this time, we have shifted our staff with more than 90% regularly working remotely. For critical functions that have required a small number of our staff to be in our offices, we are taking extra measures to ensure their safety throughout the duration of the crisis. For certain eligible employees, we are providing supplemental compensation to support them and their families during this difficult time. We are also offering increased flexibility for alternative work options due to mandated school closures and other impacts of the pandemic. Despite the pandemic, markets have remained open, and our clients have needed to make investment decisions and complete important transactions. Turbulent times such as these show the importance of a strong capital base and liquidity profile as well as robust technology and resiliency plans. We have been able to provide support to our clients and the exceptional service they have come to expect from us. We saw global transaction volumes increased 70% in March compared to February and 60% compared to 1 year ago. During the first quarter, in support of our clients, we saw deposit growth of over $22 billion and funded loan balances increasing by over $6 billion. In a short amount of time, our team created a solution to provide access to the Paycheck Protection Program, and we began processing applications. We are also mindful that we have a duty to serve our communities as well. We announced philanthropic support to several nonprofit organizations around the world, providing health care, food and other humanitarian relief. We also created a COVID-19 matching gift program to match contributions from Northern Trust employees, and created a virtual volunteer hub where employees can seek volunteer opportunities while sheltering in their homes. Northern Trust's core principles of service, expertise and integrity have remained constant for over 130 years, guiding our evolution as a multifaceted global financial services provider, and those principles are most assuredly shining through during these challenging times. Now turning to our update. Our mission is simple. To be our client's most trusted partner for wealth management, asset management, asset servicing and other financial services. We leverage the strength of our interconnected businesses to create competitive advantage and value to our key stakeholders. As of March 31, our assets under custody and administration were $10.9 trillion, while our assets under management totaled $1.1 trillion. Today, I will discuss the 4 primary components underpinning our long-term strategy, holistic solutions, organic growth, productivity and foundational strength. Let's delve a little deeper into each of these components. The first driver of our strategy is how we leverage our exceptional talent and technology to provide innovative, leading edge holistic solutions to meet our clients' needs. This client-centric strategy begins with having a deep understanding of our clients' current and importantly, future needs and goals. To accomplish this, our partners collaborate with each other, strategic technology partners and often directly with our clients. Using our expertise, along with technology, we are able to deliver solutions tailored to each of our clients' needs. Examples of this include our proprietary goals-driven wealth management platform and our front office solutions within our institutional asset servicing business. Within asset management, our acquisition of Emotomy, an open architecture digital investment advice platform, demonstrates our commitment to bringing best-in-class investment solutions to those we serve. We have been recognized by others for the quality of our service. In 2019, the Financial Times Group recognized Northern Trust as The Best U.S. Private Bank for the ninth time in 11 years, and the best global private bank for succession planning. We were also recognized as Global Custodian of the Year and Fund Administrator of the Year by industry publications, Global Custodian and Global Investors. Each of our businesses has meaningful opportunities to grow, which leads to the next component of our long-term strategy, organic growth. The wealth -- in wealth management, we are accelerating our organic growth by further penetrating existing client and market segments. We have seen strong growth in servicing the Family Office segment, which brings together our expertise across asset servicing, investment management and advisory capabilities. During 2019, our expansion in wealth management also included the opening of a new office in Philadelphia. Our asset management business' growth is fueled by offering products in the areas of greatest demand. For example, we have expanded our quality low volatility suite of strategies and also launched 5 sustainable fund strategies in Europe to enable institutional clients to expand their sustainable investment strategies. Our Corporate & Institutional Services business, already a leader in global asset servicing, has experienced growth with new capabilities such as currency management solutions and our outsourced front office trading service, which we call Integrated Trading Solutions. Continually improving our productivity by designing and leveraging a scalable operating model is critical to our success. During 2017, we began our Value for Spend program with the goal of realizing $250 million in annualized expense savings by 2020. With our earnings release earlier today, we announced that we have reached that goal. However, it is imperative that productivity and efficiency efforts are not only part of periodic programs but instead become part of our day-to-day activities. We have embedded a culture of disciplined investments to ensure every dollar we spend continues to deliver value. Turning to clients trust requires possessing the capabilities and expertise to solve their problems and help them meet their goals. It means reliably meeting their needs at any time, all of the time and overtime. And it means having the strength as measured by our capital base, liquidity profile and technology infrastructure to withstand turbulent conditions. Meeting just one criteria is insufficient. We must meet all of them consistently in order to earn our clients' trust fully. We need to look no further than the environment during the first quarter to see how our foundational strength benefits our stakeholders. As I mentioned in the beginning, this strength is what enabled us to provide continuation of service and balance sheet support for our clients throughout the pandemic. We do not take our foundational strength for granted. Instead, we work hard every day to maintain it through prudent financial decisions clear standards of employee conduct and the highest levels of cybersecurity and data protection. Now turning to our financial performance. In 2019, the company produced attractive returns for our shareholders with a return on equity of 14.9%. Revenues grew 2%, driven by trust-free growth of 3%. Total noninterest expense increased 3% year-over-year as we continued to instill strong expense discipline, while investing in people and technology to support our clients and grow our business. During 2019, we also returned a record $1.7 billion to common shareholders through dividends and the repurchase of 11.8 million shares. This morning, we released our first quarter financial results, which generated earnings per share of $1.55, and a return on equity of 13.4%. On a year-over-year basis, our revenue grew 7%, with our trust fees growing 8%. Our expenses were up 4%, generating positive fee operating leverage as well as total operating leverage. It is important to note that our results for the first quarter did not fully reflect the impact of the pandemic, and were a reflection of the momentum we carried into the year from 2019. The macroeconomic environment through the remainder of 2020 will most certainly present headwinds as central banks around the world have cut interest rates, resulting in short-term rates in the U.S. near 0 and negative in some countries. The rate environment will put pressure on our net interest income as we move forward. We have also seen global equity markets significantly decline during the quarter. Our fees are mainly priced on either a quarter-lag or month-lag basis. So the full impact of the declines in markets will begin to impact our fee levels as we move through the remainder of the year. The environment we are operating in now, with headwinds we will be experiencing on revenue, underscores the importance of our prudent management of our cost base through the productivity efforts I previously mentioned. In closing, even as the global dynamic rapidly shifts around us, Northern Trust constantly strives to be the most trusted partner for the world's most prestigious clients through our combination of unique capabilities, strategies and culture. The management team extends its sincere thank you to our shareholders as well as our clients, our employees, and all of our other stakeholders. We are grateful for the confidence you continue to place in Northern Trust. We will now have a brief question-and-answer period, during which I would be happy to answer any questions you may have. As a reminder, representatives from KPMG also are available to answer appropriate questions. Please follow the instructions provided in the web portal to submit questions and remain mindful of the related guidelines provided in the rules of conduct.

Mr. Chairman, the Carpenters Union pension funds with combined assets of $70 billion have a collective ownership position of 173,150 shares of Northern Trust Corporation common stock. We appreciate the positive and constructive actions Northern Trust is taking to address the impacts of the coronavirus and company stakeholders. Our question relates to the company's independent auditing firm, KPMG. Could you, or the KPMG representative, indicate when KPMG was first retained and briefly explain the lead partner rotation process every 5 years. Thank you, Mr. Chairman.

I'll take the question. First of all, there's a regular rotation in KPMG's engagement team in accordance with applicable requirements. For the lead partner, that's a 5-year rotation. KPMG has served as our independent registered public accounting firm since 2002. And John Rodi became the lead audit partner in 2017, replacing Chuck Fuller.

Mr. Chairman, the recent growth and the size of passive mutual funds, corporate ownership interest in U.S. corporations has been dramatic. The Carpenter funds believe the growing concentration of ownership raises important public policy and corporate governance issues. Currently, BlackRock holds 6.9%, and Vanguard holds 7.4% of the company's outstanding shares. Our review indicates that BlackRock is an investment manager of a portion of the assets of the company's cash balance pension plan. Does the Boards see this growing ownership concentration as a positive or negative development as regards to long-term corporate planning and performance? And also are there potential conflicts of interest when a 5% holder is managing company retirement plan assets? Thank you, Mr. Chairman.

With respect to the first part of the question, I would say that the company doesn't necessarily view that trend as positive or negative. And we don't necessarily have a preferred shareholder base, if you will. And importantly, we look to engage with all our shareholders. Whether those are large shareholders or small shareholders, active or passive or any particular type of approach that they may have. We look to get their input and appreciate their support as well. With regard to the second half of the question on potential conflicts of interest, as you would expect, we take and give very careful consideration to all potential conflicts of interest, not just with regard to shareholders, but every aspect of our business. And as you can imagine, with an organization with our size and history, we do go back to the 3 principles that I talked about of service expertise and integrity. And without a doubt, that integrity component is critical when it comes to conflicts of interest. And so the nature of the specific potential conflict that you raised is something that we certainly consider, but also believe that we can manage that appropriately. Seeing no further questions, we will now bring this meeting to a close. Thank you for attending the 2020 Annual Meeting of Stockholders.

This now concludes the meeting. Thank you for joining, and have a pleasant day.