Northern Trust Corporation (NTRS) Earnings Call Transcript & Summary

Good morning. I'm Mike O'Grady, and it is my pleasure to welcome you to Northern Trust's 2021 Annual Meeting of Stockholders, which I hereby call to order. Thank you for joining us virtually this morning. We hope that you and your families are staying well, and we greatly appreciate your participation. Before we begin, a few housekeeping matters. 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 the web portal through which you accessed 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 following: 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, whom I will also introduce to you in a few moments; and John Rodi, [Jim Letty] and Andrew Sparks, who are representatives of KPMG LLP and 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 22, 2021. Susan has informed me that notice of the meeting and proxy materials were mailed on or about March 9 to stockholders of record on the record date. Mark Bette has been appointed as inspector of election for this meeting. He has inspected the proxies and reported that at least 187,724,733 shares of common stock are represented by proxies at this meeting, making up 90.3% of the 207,917,100 shares outstanding on the record date. Accordingly, a quorum is present, and the meeting is duly constituted. It is 10:32 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 their 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 the 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 LLC; Susan Crown, Chairman and Chief Executive Officer; Owl 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 Mehta, retired President and Chief Executive Officer, TransUnion; Jose Luis Prado, Chairman, Tropicale Foods Group and Vice Chairman, Evans Food Group Limited; Tom Richards, retired President, Chief Executive Officer and Executive Chairman, CDW Corporation; Martin Slark, retired Chief Executive Officer, Molex LLC; David H. B. Smith Jr., Executive Vice President, Policy and Legal Affairs and General Counsel, Mutual Fund Directors Forum; Don Thompson, Founder and Chief Executive Officer; Cleveland Avenue, LLC and retired President and Chief Executive Officer, McDonald's Corporation; Charles Tribbett, Vice Chairman, Russell Reynolds Associates. I also would like to introduce Lord Charles Powell, who serves as an advisory director to the Board. Lord Powell is a non-party 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. Bob Brown, Executive Vice President and Chief Investment Officer; Pete Cherecwich, Executive Vice President and President, Corporate and Institutional Services; Steve 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, Europe, Middle East and Africa; Tom 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; and Jason Tyler, Executive Vice President and Chief Financial Officer. Before moving on, I would like to recognize Bob Brown, who, after more than a decade of service, will be retiring from his role as Chief Investment Officer at the end of May. We are grateful to Bob for his many contributions to Northern Trust and the meaningful value he has helped create for our clients, partners, shareholders and community. So thank you, Bob, and we wish you all the best in your future endeavors. Turning back to today's agenda. 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 2021. 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. [Voting]

Seeing no questions, 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. Since there is no further business on the agenda, the voting portion of our meeting is over. It is 10:38 a.m., and the polls are now closed. I'd now 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 94.8% 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 appointment for KPMG LLP received the affirmative vote of approximately 97.3% of 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 will provide a brief report on Northern Trust businesses and our primary organizational priorities for 2021. Before I begin, let me remind you that this presentation may include forward-looking statements like those described on this slide. Our 2020 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. I would like to begin today by providing a brief overview of the corporation. Although 2020 was a year like none other, we continue to hold strong to our unwavering principles of service, expertise and integrity, which have remained constant for over 130 years and guided Northern Trust evolution as a multifaceted global financial services provider. Over the last year, Northern Trust has shown that we can successfully work in new and different ways. We pivoted seamlessly to a virtual environment, proactively engaging with clients to meet their needs in a time of crisis. Throughout the pandemic, when our clients needed us the most, Northern Trust 3 businesses, wealth management, asset management and asset servicing continued to provide our clients with the exceptional service and solution expertise that they have come to expect from us. While the pandemic demanded even more from Northern Trust, our ability to respond was never more evident and never more important to the fundamental health of our clients' portfolios, businesses and operations, demonstrating true service. As the global dynamic rapidly shifts around us, Northern Trust continues to strive to serve our clients most -- as our clients' most trusted financial partner, while also supporting our communities. Our wealth management business, with $355 billion in assets under management and $916 billion in assets under custody as of March 31, 2021, is a leader in holistic advice, particularly for ultra-high net worth and family office clients that have more complex requirements. Our holistic approach embraces collaboration with clients and their advisers. Our strategy starts with thoroughly understanding our clients and their goals. We then architect, integrate and optimize financial solutions across banking, investment management, planning, fiduciary, family business, family office and other needs with a multigenerational mindset. During 2020, we introduced the Northern Trust Institute, which brings together the insights our wealth management team has developed from advising generations of wealthy families and serving the client base that includes more than 1/4 of the Forbes 400 wealthiest Americans. Through the differentiated work of the Northern Trust Institute, our clients are better positioned to achieve optimal wealth outcomes for their personal circumstances. Our asset management business with $1.4 trillion in assets under management as of March 31, 2021, provides investment management solutions for our personal, institutional and intermediary clients that span across asset classes. We purposely combine rigorous capital markets research, expert portfolio construction and comprehensive risk management to deliver efficient investment solutions. During the past year, we have seen considerable market share gains within our liquidity products, which we have strategically positioned over time. We've also experienced growth in our sustainable investment strategies with assets under management of approximately $139 billion, as of March 31, 2021, where our strong capabilities position us for future growth. Our asset servicing business is a global leader with $13.9 trillion in assets under custody and administration as of March 31, 2021. Our whole office strategy is a combination of products and capabilities organized to support our clients' entire investment cycle in any client business model. The whole office approach allows us to combine powerful proprietary partnered and third-party solutions to support client needs that have historically been siloed into front, middle and back-office functions. This enables us to create solution bundles for the clients that meet any or all of their needs. Because each client's investment process can vary greatly, whole office prioritizes an open-architecture approach with optionality, flexibility and interoperability. Our whole-office strategy is engineered with capabilities so that we can offer a spectrum of solutions instead of a 1 size fits all solution. By designing our architecture with this kind of optionality in mind, we can offer clients true flexibility to reflect their investment process. Now let's turn to our financial performance. 2020 brought challenges for all of us across the globe. But amidst this turbulence, we were able to support our clients' liquidity needs. Deposits grew 32% to $144 billion, and our loans increased 7% to $34 billion. We also continued to grow our business with assets under custody or administration, up 21% to $14.5 trillion and assets under management up 14% to $1.4 trillion. Revenue was flat compared to 2019 as we saw an increase of 6% in noninterest income, offset by a decline in net interest income of 14%. Total noninterest expense increased 5% year-over-year as we continue to invest in people and technology to support our clients and grow our business during the COVID-19 pandemic. Return on average common equity declined to 11.2%, and diluted earnings per share declined 18%, reflecting lower interest rates, increased operating expenses and a higher provision for credit losses. During 2020, we temporarily suspended the repurchases of common stock under our share repurchase program. Prior to the suspension, we had repurchased 3.2 million shares of common stock at a cost of $297 million. We also maintained our quarterly dividend of $0.70 per share throughout the quarter, totaling $592 million. This morning, we released our first quarter financial results which generated earnings per share of $1.70 and a return on equity of 13.7%. On a year-over-year basis, our revenue was flat, with our trust fees growing 6% and net interest income declining 17%. Net income and earnings per share were up 4% and 9%, respectively. I want to take a few moments to highlight the importance of serving our communities. For over 130 years, Northern Trust and its employees have strived to make our communities stronger. In 2020, we built on that heritage, introducing a new, highly-focused philanthropic strategy that concentrates our volunteerism and contributions on 4 key areas of fundamental impact: educational excellence, food security, accessible healthcare and affordable housing. To support this strategy, we launched the Northern Trust Foundation with a $20 million commitment. The foundation aims to create more equitable opportunities for long-term financial success for those who too often face unfair hurdles because of their race, ethnicity, gender, geography or socioeconomic conditions. While this philanthropic strategy extends globally, it is tailored to local needs of our global offices. Programs we supported in 2020 are now providing shelter for children in India and ensuring health services for vulnerable populations in London. Finally, as we move forward in 2021, we remain focused on our key priorities. First, we're focused on sinking our historical high-touch service with digital data-driven delivery tailored to our clients' needs; second, we're dedicated to growing organically by delivering innovative solutions to new and existing clients; third, we're leveraging our diverse workforce by equipping employees with skills for the future; fourth, we're committed to continually driving productivity through a sustainable, scalable operating model; and lastly, we're building upon our foundational strength with a strong, conservative balance sheet and a globally respected brand. In closing, as we continue to operate in resiliency mode, we are also exploring how to best evolve all aspects of our foundation. I am confident that we will create a more dynamic environment. One that allows us to deliver efficiently on our strategic priorities in both good and challenging times. The management team extends its sincere thanks to you, our shareholders, as well as to our clients, our employees, and all of our other stakeholders. We are grateful for the trust 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.

First question, what is the Board of Directors doing to bring executive compensation at par with Japan and Europe from the current ratio of compensation?

For all Northern Trust employees, including senior management, pay rate reflects many factors, including the competitive market for that job, skills, experience, performance, the compensation levels of other employees doing the same job and budgetary considerations. When determining executive pay, the compensation and benefits committee and the Board consider how the recommending compensation levels were compared to the median compensation for comparable roles among peer group companies. The committee also recognizes that the compensation levels may vary from market median compensation levels based on our performance or specific individual circumstances, including tenure, the nature of the responsibilities and individual performance. For 2020, compensation decisions across the organization reflected our 2020 financial performance, which was adversely impacted by low interest rates and unprecedented challenges related to the COVID-19 pandemic. With respect to our CEO pay ratio, looking across our peers, I believe our ratio is near the median. And when compared to other large bank ratios, ours is one of the lowest. With respect to the references to compensation levels in Japan and Europe, I would only note that comparisons across different geographies can often be difficult to make due to a wide variety of factors.

Next question, what action is the company taking to eliminate direct and indirect political bias when company executives, directors and employees speak or take action? This includes any political contribution to any political party, organization, politician, including political candidates.

Generally speaking, prior to speaking on behalf of Northern Trust, our policies and procedures require that employees have their messaging appropriately vetted. Beyond that, employees are free to engage in the political process as they see fit. And with the exception of certain roles that are restricted from doing so by applicable regulation that may include political contributions.

The next question, is the company considering virtual meetings in the future for those shareholders who cannot attend in person?

While we were disappointed that we weren't able to host an in-person meeting to meet with you at all this year, we've been pleased with the rapid evolution of the tools available to continue to hold productive, efficient and interactive meetings for our shareholders, and we're excited about the increased accessibility they can provide. With respect to the format of future meetings once the pandemic has subsided, like so many other aspects of our business and life in general, in the current environment, we expect to remain flexible and adaptive, and we'll make that decision after careful consideration of all appropriate factors, including feedback from our shareholders such as yourself. I will note that for many years, prior to the pandemic, we broadcasted the audio of our annual meetings live on our website. And regardless of the format of next year's annual meeting, virtual or in person, we would expect to continue that practice.

Mr. Chairman, the topic of stakeholder capitalism as an alternative to shareholder capitalism has received considerable attention recently. As long-term pension fund investors, the Carpenter Funds appreciate the sentiments embodied in the stakeholder capitalism perspective but feel that execution could be complicated. Could you discuss the Board's perspective on the concept of stakeholder capitalism and what principles the board would use to balance the interest of varied stakeholders as it develops and implements the company's long-term business strategy. Thank you, Mr. Chairman.

Well, there's been a great deal of discussion on stakeholder capitalism in the recent years and how to reconcile that philosophy with the more traditional focus on stockholders under state law. We actually view the 2 as relatively complementary to one another. And at Northern Trust, we have always strived to take into account the interest of all our various stakeholders. So clients, employees, regulators, suppliers, stockholders, and as I talked about in my presentation, communities. We believe that over the long term, the interest of the shareholders and stakeholders are aligned. And accordingly, in the long-term interest of each of the stakeholder groups. And so our focus is on executing our strategy as a company. And as a result, generating value for all of our stakeholders over the long term.

Mr. Chairman, the Carpenter Union pension funds have a collective ownership position of 182,430 shares of the company's common stock. As long-term investors, we believe the executive compensation plan should be designed to drive the successful execution of the company's long-term strategic business plan. We appreciate the design of the long-term compensation plan with the majority of incentive compensation delivered in performance stock units over a 3-year performance period. Could you or the compensation committee chair speak to the rationale for the 4-year ratable vesting schedule for the restricted stock units versus a long -- longer vesting schedule? Thank you.

As with all elements of our compensation program, the compensation and benefits committee of the Board works closely with its independent compensation consultants, Meridian Compensation Partners. In determining the general structure and terms and conditions of our incentive compensation, including with the restricted stock units, which you're inquiring about. And the goal is to make sure that they are appropriate and responsible and incenting the right type of behavior and execution on the part of management. We believe that it's important to look at all the elements of our compensation program together, and that is the case with our Comp and Benefits Committee, which they do. That said, with respect to our RSUs, the committee, together with the compensation consultant, looks at the ratable vesting over a 4-year period as appropriate for our organization, our objectives and relative to market practice.

No further questions at this time.

Thank you, Mark. Seeing no further questions, we will now bring this meeting to a close. Once again, thank you for attending the 2021 Annual Meeting of Stockholders.