Bank of N T Butterfield & Son Ltd

NYSE:NTB

Earnings Call Transcript

[Operator]

Good morning. My name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2025 earnings call for the Bank of N.T. Butterfield & Son Limited. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations. Please go ahead.

[Noah Fields, executive]

Thank you. Good morning everyone, and thank you for joining us. Today, we will be reviewing Butterfield's first quarter 2025 financial results.

On the call, I am joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer; Craig Bridgewater, Group Chief Financial Officer; and Michael Schrum, President and Group Chief Risk Officer. Following their prepared remarks, we will open the call up for a question-and-answer session.

Yesterday afternoon, we issued a press release announcing our first quarter 2025 results. The press release and financial statements, along with a slide presentation that we will refer to during our remarks on this call, are available on the Investor Relations section of our website at www.butterfieldgroup.com.

Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures, which we believe are important in evaluating the company's performance. For reconciliation of these measures to U.S. GAAP, please refer to the earnings press release and slide presentation.

Today's call and associated materials may also contain certain forward-looking statements, which are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these risks can be found in our SEC filings.

I will now turn the call over to Michael Collins.

[Michael Collins, executive]

Thank you, Noah, and thanks to everyone joining the call today. I am really pleased with our strong first quarter results.

Butterfield continues to manage a conservative and highly liquid balance sheet that supports our low credit risk investment portfolio and disciplined loan book, as well as our relationship-led fee generating businesses.

Our ongoing dedication to efficiency was evident during the quarters, we successfully executed a group-wide voluntary early retirement program, resulting in a moderate reduction in future expense loads.

Butterfield is a market leading bank in Bermuda and the Cayman Islands, with a growing retail presence in the Channel Islands. We offer wealth management solutions across these island jurisdictions, including trust, private banking, asset management and custody.

We also provide specialized financial services in the Bahamas, Switzerland, Singapore, and the U.K., focusing on high net-worth individuals with mortgage needs for prime Central London properties.

I will now turn to the first quarter highlights on Page 4. Butterfield reported excellent financial results in the quarter, with net income of $53.8 million and core net income of $56.7 million. We reported core earnings per share of $1.30 with a core return on average tangible common equity of 24.2% in the first quarter.

The net interest margin was 2.70% in the first quarter, an increase of 9 basis points from the prior quarter, with the cost of deposits falling 13 basis points to 160 basis points from the prior quarter. This more than offset reductions in asset yields.

The Board has again approved a quarterly cash dividend of $0.44 per share. We also continue to repurchase shares during the quarter, purchasing a total of 1.1 million shares at an average price of $37.78 per share.

I will now turn the call over to Craig for details in the first quarter.

[Craig Bridgewater, executive]

Thank you, Michael, and good morning.

On Slide 6, we provide a summary of net interest income and net interest margin. In the first quarter, we reported increased net interest income before provision for credit losses of $89.3 million.

During the quarter, NII benefited from a lower cost of deposits as we experienced a positive mix shift in deposits to demand from term and repricing on rollovers.

Yields on new investments continue to be higher than expiring maturities, adding to the overall portfolio yields.

Central Bank cuts in overnight rates during the prior quarter resulted in lower loan and treasury yields during the first quarter of 2025.

Average interest-earning assets in the first quarter were flat compared to the prior quarter at $13.4 billion, despite some anticipated client outflows, partially offset by the impact of FX translation from a strengthening British pound versus the U.S. dollar.

Treasury yields were 27 basis points lower at 3.98%, and loan yields were 11 basis lower at 6.32%, whilst average investment yields were 17 basis points higher at 2.68%.

During the quarter, the bank maintained its conservative strategy of reinvesting maturities into a mix of U.S. agency MBS securities and medium-term U.S. treasuries.

Slide 7 provides a summary of non-interest income, which totaled $58.4 million, a decrease compared to the seasonally elevated fourth quarter, primarily due to lower transaction volume and incentive fees.

Fee income did see an increase in FX revenue and asset management fees, due to increased client activity, as well as an increase in trust income due to an expanded mandate with an existing client, as well as special project fees.

Non-interest income continues to be a stable and capital-efficient source of revenue through the cycle with a fee income ratio of 39.4% in this quarter.

On Slide 8, we present core non-interest expenses. Total core non-interest expenses were $90.3 million, which is slightly lower than $90.6 million in the prior quarter.

The largest relative movements in salaries and benefits, technology and communications, marketing and indirect taxes were a result of seasonal payroll taxes on the annual vesting of share-based compensation.

Salaries and benefits improved due to a better-than-expected experience in healthcare costs for the quarter, offset by the impact of annual salary reviews and promotions.

During the first quarter of 2025, we implemented a group-wide voluntary early retirement program, which will benefit the ongoing expense run rate and was contemplated in the expense guidance we have already provided.

At this point, we continue to expect a quarterly core expense run rate of between $90 million to $92 million in 2025, but we should caution that there are a number of inflationary risks that are emerging.

Overall, core non-interest expenses continue to be within our run rate expectations as discussed on previous calls.

I will now turn the call over to Michael Schrum to review the balance sheet.

[Michael Schrum, executive]

Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively positioned. Period-end deposit balances decreased to $12.6 billion from $12.7 billion at the prior quarter end.

During the quarter, we experienced volume outflows of $238 million, which was partially offset by a $110 million FX translation on the strength of the British pound versus the dollar.

We continue to expect some customer outflow over the coming quarters and expect average deposits to settle into a range of around $11.5 billion to $12 billion.

Butterfield's low risk density of 30% continues to reflect the regulatory capital efficiency of the balance sheet.

On Slide 10, we show that Butterfield continues to have a strong overall asset quality, with low credit risk in the investment portfolio, which is 100% AA, or higher rated U.S. treasuries and government-guaranteed agency securities.

The net charge-off rate was negligible and both non-accrual loans of 2.3% of gross loans, along with an allowance for credit losses coverage ratio of 0.6% remain within expectations.

As a reminder, Butterfield's loan portfolio continues to be 68% full recourse residential mortgages, of which 81% have loans-to-values below 70%.

We're also pleased that a legacy loan for a sizable hospitality facility in Bermuda has been fully resolved, following a period of receivership.

On the 9th of April, the buyer announced the close and a plan to redevelop the historic Elbow Beach Hotel property, and that is currently progressing. This event occurred after the current reporting period, and is expected to be reflected in the second quarter results.

On Slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity. Duration decreased slightly for the AFS book and increased for the HTM as a result of the increased spreads and elevated market rates.

Net unrealized losses in the AFS portfolio included in OCI were $131.4 million at the end of the first quarter, an improvement of $31.9 million or 20% over the prior quarter.

We continue to expect improvement with additional burn down of OCI over the next 12 to 24 months of 31% and 55%, respectively.

Slide 12 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory requirements.

On the 1st of January, we transitioned to the new Basel IV rules, which resulted in lower risk-weighted assets due principally to the banding of LTVs in our residential mortgage portfolio under the updated standardized approach. This change improved our regulatory capital ratio by 1.9% for this quarter.

Tangible book value per share also continued to improve this quarter and increased by 5.7% to $22.94 as unrealized losses on investments declined.

I will now turn the call back to Michael Collins.

[Michael Collins, executive]

Thank you, Michael. Recent U.S. trade discussions have created significant uncertainty around changes to global supply chains, taxes, inflation and interest rates.

At this point, we do not expect any significant direct impact on Butterfield's business as our small and stable operating jurisdictions have not been in direct scope.

Early indications are that hospitality bookings for the upcoming 2025 season in Bermuda and Cayman remain robust.

Butterfield's strong balance sheet is supported by capital-efficient and recurring non-interest income, disciplined expense management and net interest earnings.

Our capital management strategy focuses on delivering a sustainable quarterly cash dividend while supporting organic growth and the potential for select trust and bank acquisitions.

Butterfield remains highly profitable and stable, which consistently exceeds regulatory requirements as we provide clients with essential financial services and tailored services to the communities we serve, and helps create value for our shareholders.

Thank you. And with that, we would be happy to take your questions. Operator?

[Operator]

[Operator Instructions] The first question comes from David Feaster with Raymond James.

[David Feaster, analyst]

Maybe just starting one question on the credit side. We've seen continued migration within the resi mortgage book. I was hoping -- obviously, you talked about in the prepared remarks, like very conservatively underwritten, low LTV. I was hoping you could just touch on maybe where you're seeing some of this pressure and your approach to it? And just kind of any thoughts on the housing market broadly?

[Michael Schrum, executive]

Yes. David, it's Michael Schrum. So I would say, it's really focused -- good question. It's really focused around 2 markets, so a little bit in Bermuda and a little bit in the Prime Central London book.

Two different markets. I think Bermuda, less of a concern. We're seeing valuations kind of coming through on the OREO side and sales are kind of picking up. So not really worried about sort of the LTV profile. It's more of a DSR issue for the Bermuda book a little bit.

And obviously, we have a couple of commercial facilities there. I mentioned one earlier, Elbow Beach Hotel, which is -- has been in receivership for a while, and obviously, we're still accruing. So that's going to impact NII a little bit going forward, but sizable hospitality is coming out.

And then there's a couple of commercial facilities that have been in litigation for a while and some encouraging news to see some normalization in that over the next couple of quarters, I hope.

And in the London book, it's really been more impacted by sort of the government changes around res non-dom, stamp duty increases, inherent tax increases. As you know, we only underwrite 60% to 65% LTV in Prime Central London, so Knightsbridge, Chelsea, Kensington area.

And so what's happened there is demand has really dried up a little bit. There's been a lot of conversations about people upping from the Prime Central London market and moving other places like Monaco, Switzerland, et cetera, because they're no longer able to live there for long periods of time and not pay taxes on overseas earnings.

And so there's been, I think less turnover in that market. Now remember, that market is 3- to 5-year revolving. So there is a certain amount of refinancing that's going on. But I think valuations are still holding up.

Broadly, we've seen some good sales, but there's also some sizable facilities there that have gone into non-accrual, really nothing systemic, but divorces post-COVID, and business sales being delayed, et cetera. And so the source of repayment for those were mainly either the sale of the property or the refinancing.

And they've just kind of gone into hibernation a little bit in that market for the last couple of years. And seeing some encouraging signs, not really worried about credit content, as you can see on the provisions, but certainly something to watch there.

[David Feaster, analyst]

Yes. That's good color. And then maybe just staying on the market side. In the prepared remarks, you talked on about growing the retail presence in the Channel Islands. I know that's been a big focus. We've also have the expansion into Singapore. I was hoping you could just touch on the reception in those markets, where you're having success? And then maybe other markets you're expanding into and just, again, how that plays into the M&A landscape and what you're seeing?

[Michael Collins, executive]

Sure. Yes. So we're doing quite well in the Channel Island. So we've actually got a good mortgage loan book now, fully supported by local deposits. Our credit card product is being taken up quite well. So we're pretty excited about how that's been going. No concerns there.

So the growth is good and corporate deposits and everything are holding up. But as you know, our plan is to try to make it look more like Bermuda and Cayman. So the funding is stickier than corporate funding, and we are getting close to 10,000 new local clients in -- across Guernsey, New Jersey. So that's going quite well.

In Singapore, the Credit Suisse integration is also going well. We're actually working quite well with the UBS, in terms of referrals and transfer some other business. So that's going well.

And we're making decent money there now. We're up to over $10 billion in assets under trust in Singapore alone. So we're pretty excited about that. So both the retail expansion of the Channel Islands and the integration of Credit Suisse in Singapore are in good shape.

[Michael Schrum, executive]

Yes. Maybe I'll just add to that, David, it's Michael Schrum. Just on the M&A side, as you know, we're particularly focused around fee businesses, and in particular, private trust businesses. So good conversations, but we're also a little bit picky in terms of any new jurisdictions or anything like that.

So where we have franchise level conversations, there can sometimes be jurisdictions that we don't want to be in. But overall, so we're kind of sticking with our existing trust jurisdictions, and obviously, would always look at banking overlap in our existing jurisdictions as well.

[Michael Collins, executive]

Yes. And the one thing that we compromise on the trust acquisitions is obviously AML and fiduciary risk. We're willing to negotiate a bit on price, because we do have to compete with private equity occasionally. But the real sacrosanct part is AML has got to be really pretty pure. So that's why it takes so long. But as Michael said, we are having some good discussions.

[David Feaster, analyst]

That's great. And then just wanted to touch a bit on the margin side. There's a lot of moving parts in here, right? We've got the lag impacts on repricing from the recent rate cuts on both loans and deposits. And then we've got a ton of volatility in the bond market of late. I'm curious maybe how that volatility has impacted your securities investment strategy and how that plays into the margin? And then just help us think through about the -- again, the repricing side on both loans and deposits as that impacts the margin trajectory as we look forward.

[Craig Bridgewater, executive]

Yes. Hi David, it's Craig. So maybe kind of over the last quarter, and we've seen a bit of stabilization in regards to rates on deposits and on loans. We've actually seen the rate cuts, we said in the prepared comments, we've seen some of the rate cuts from last quarter actually now coming in and making an impact. So that's had a downward draft impact on the treasury, what we're receiving on kind of short-term cash balances as well as what we're receiving on loan balances as well.

So as you're aware, Cayman as well as the CI U.K. book moves directly as a result of moving to the Fed fund rate for Cayman or U.S. prime, and then for the U.K. book directly in regards to changes in the Bank of England rate, and we've seen decreases in both of those over the last quarter. So that's impacting the loan yields as we would expect.

I guess, we continue to have positive yield pickup on the investment book. We continue to reinvest proceeds from any maturities or paydowns back into the investment book, investing in MBS securities or medium-term U.S. treasuries.

Given the volatility in the market over the last couple of months -- sorry, months, I should say, we've been putting more -- leaning more towards medium-term U.S. treasuries, gives us a bit more certainty around the yield that we're going to get over the lifetime of those treasuries, and not be subject to prepayment risk that will come to MBS securities. But again, still high quality, all above rated. So no credit risk that we're getting as a result of acquiring the securities.

And again, the yield is very much -- is high above the existing portfolio yield. So we're investing somewhere in the 390 basis point range, compared to the portfolio yield, which is substantially lower than that. So you'll continue to get pick up there.

But I guess, if the rate environment stays as it is, then that's very constructive for our NIM, as well as for our balance sheet. Having said that, as Michael said, some of these larger facilities that we are now getting some resolution on, those were at kind of, I guess, rates that are quite favorable to the bank. And as those get resolved, then we should see some headwinds on the yield on the portfolio or -- it must be loan portfolio.

So to sum it all up, I think, we'll still continue to see some NIM expansion but at a slower rate than what we saw in Q1. So really driven by the pickup on the investment book. But again, the headwinds are on the fully loaded book.

[Operator]

And your next question will come from Timur Braziler with Wells Fargo.

[Timur Braziler, analyst]

Maybe circling back on the M&A discussion, I'm just wondering with all of this trade war noise, if the level of conversations have changed at all in recent months? And just maybe give me your thoughts on getting a deal done in this current backdrop, if it changes at all.

[Michael Collins, executive]

Yes, good question. I don't think that necessarily the trade situation really has an impact. If anything, it sort of creates more uncertainty and -- on part of the sellers, it creates sort of more impetus to get things done, given the market risk backdrop.

I think we operate in, as you know, on the trust side in multiple jurisdictions. So we've seen quite a lot of this uncertainty play out in FX, whether it's the Sterling, as you can see on our balance sheet or Euro, or any other currency. So it's moving things around quite a bit as we go through these discussions.

And obviously, that has an impact both on the underlying business that we're talking about in terms of the earnings profile and -- and also, ultimately on valuation of things. So I think that's probably the main thing. The FX piece is probably more important to this than the trade situation really.

[Timur Braziler, analyst]

Got it. And maybe keeping to that same line of questioning, just looking at the fee side, does all of this uncertainty, I'm assuming it pulled forward maybe some of the fees into 1Q to your comment on FX. I'm just wondering, if there is a slowdown in cross-border trade, does that negatively affect some of your fee lines or just how you guys participate there, just increased uncertainty can actually drive more business on a prolonged basis and not so much on a pull-forward basis?

[Craig Bridgewater, executive]

Yes, that is a very insightful question. And I think what we saw, and it's probably similar to some of our counterparts as well. What we saw in the first quarter is as a result of lot of the volatility in markets. We saw some benefit of that both in terms of FX revenue as well as asset management revenue. So overall volumes were up in both of those lines.

And obviously, that's positive for this -- for the activity there, and the revenue that we're earning. So if that continues, then we would expect to see people keeping a close eye on foreign exchange balances, and also how they're positioning their portfolios as we go forward as well.

A lot of customers are actually looking at their portfolios and trying to manage liquidity or go into liquid positions as a result, just to get some stability in their portfolios. And the banks and -- many banks have been the beneficiaries of that.

But I think, again, going forward, we -- a large part of the FX is the currency pairs between Bermuda and U.S. dollars, as well as Cayman and U.S. dollars. And that's quite stable over time. But it's really the fluctuation in foreign currency transactions that people will be looking to position themselves, to either protect themselves or take advantage of movements in foreign currencies.

[Michael Collins, executive]

Yes. I think in terms of the jurisdictions and the impact on the trade discussions, we talked about there's no real direct impact, but the indirect impact is cost of living in Bermuda and Cayman is already very high.

And so obviously, more expensive goods coming from the U.S. to both jurisdictions will drive our costs up. But the good news is both jurisdictions actually were exempted from the new legislation for Chinese-built ships for port fees. So they made an exemption for all voyages less than 2,000 miles, and for the smaller ships.

So there was a bit of a scare early on, but both Bermuda came in and CARICOM talked to the U.S., and we were able to get exemptions. So we won't be impacted by that. But we will be impacted by higher cost of living, just because U.S. goods will be more expensive. But it was a good example of, I think, a situation where there was a reasonable decision, because obviously, no one wants small island jurisdictions to suddenly triple the cost of food coming in. So that turned out quite well.

[Michael Schrum, executive]

I think finally, Timur, it's Michael Schrum. Just on the broader FX question, obviously, FX is peg currency. Most of it is related to tourism activity on the island. So if there was a GDP or an economic slowdown, obviously, we would see some spillover effect into our fees, both in terms of cross-border transactions and also FX flows coming in. But a little too early to say at the moment.

[Timur Braziler, analyst]

Great. And then just last for me on the Elbow Beach resolution, can you just remind us what that means for your numbers? You had mentioned maybe a little bit of a hit to NII. But was there any portion of that, that had been charge-offs in the past? Is there any reserve set aside, I guess? Can you just talk us through the moving pieces for Butterfield as that loan is resolved or that property is resolved?

[Craig Bridgewater, executive]

Yes, sure. I mean, there isn't -- the biggest piece is really in our past due disclosures in Note 6 of the loans that's been sitting around. It's a legacy facility that was washing its face while interest rates were low, because they were getting rental income on a residential part of the hotel development, and that was covering basically all the outgoings during a lower interest rate environment.

When rates went up, there was an equity ask, and I think we all decided we were going to put that into some receivership. And I think that's been a benign and a sales process that's now completed. So essentially, it will be a significant reduction in our 90 days past due. It was an accruing facility at penalty rates.

And so from that perspective, NII, we would expect to see some pressure on that going forward. So -- but effectively, most of the impact here is just going to be the 90 days past due bucket is going to move. And then you'll see a drop, obviously, in loan assets on the balance sheet.

[Timur Braziler, analyst]

And is there maybe an...

[Michael Collins, executive]

Yes. Just to be clear, there is no loss content in there. So we expect to get fully repaid on the outstanding principal and interest. There's no provision that's been set aside for that, and we don't expect any losses coming through as a result of settling that.

[Timur Braziler, analyst]

Okay. And any lending opportunity to the [ Laurent ] Group, as part of the sale? Or is that not anticipated?

[Michael Collins, executive]

Yes. Because of the receivership, obviously, we're pretty clear, and it was a competitive bidding process that we wouldn't -- we weren't first out of the gates to be lending into the initial transaction. But I think there's certainly opportunities. We'll see what the plans are.

As I said, we're not a big hospitality lending bank. We don't really stretch for credit in that space or at least the ones that we have done have been a very different structure to just a land build.

So we'll see what happens and what their plans are. And certainly, we'll be able to support maybe parts of that as we move forward. It's been a very good relationship over many years, and hopefully will continue.

[Operator]

[Operator Instructions] Our next question comes from Emily Lee with KBW.

[Emily Noelle Lee, analyst]

This is Emily stepping in for Tim Switzer. So just expanding on the last few questions surrounding economic uncertainty and tariffs, can you expand a little more on the impact of tariffs on your customer base? And more specifically, are there any jurisdictions that are especially impacted by tariff threats or a potential recession, whether that's in the U.S. or more broadly?

[Michael Collins, executive]

So I think -- again, I think there are not any direct implications for Bermuda, Cayman, Guernsey and Jersey. Quite honestly, we get overlooked sometimes during these geopolitical battles between the continents, which is not a bad place to be.

Obviously, all of our different industries, so Bermuda is reinsurance; Cayman has captives and hedge funds, are all invested and involved in different businesses and different geographies. So there may -- obviously, there'll be impacts there individually, and by industry, but it's pretty complex to try to figure out.

The real impact is cost of living. So both Bermuda, and -- Cayman, and the Channel Islands have huge international business and fund industries, which is fantastic, but that obviously has driven up the cost of living for the local population, which is a big issue of discussion.

So I think anything that increases the cost of a loaf of bread in the U.S., which is then shipped to Bermuda, including the tariffs on the loaf of bread plus the cost of the shipping to Bermuda is going to impact us.

So it really is mostly cost of living and people struggling and that could have some impact on mortgage payments as well, if all groceries go up as an example. So it's really drilling direct, but I think we're pretty happy that we're sort of under the radar at this point.

[Emily Noelle Lee, analyst]

That's great. Very helpful. One more question I have, was in the case of a potential economic downturn, if, say, loan growth or revenue doesn't come through as strong as expected, what levers do you have to pull on the expense or the non-interest income side to hit your earnings target?

[Michael Collins, executive]

So expenses, we've just completed a voluntary early retirement program, which was quite successful actually. A number of people took it up. And it has 2 impacts, basically, gives opportunities for younger employees to move up in the organization.

And we -- even if we backfill, we eliminate more expensive positions and take on less expensive positions, and actually set most of those up in Halifax, which is a less expensive jurisdiction. So we've just done that in Q1.

Every year, we look at that and we either do a round of redundancies or early retirement. And beyond that, we have been building the Halifax office, which including the Canadian dollar, sort of 60% of the cost of Bermuda and Cayman in terms of employee, we're up to 250 people.

So it's a combination of sort of immediate tactical cost reductions, which we will absolutely do if we see revenue starting to decline. But the longer-term cost play is really to build Halifax, and just have all processing and operations, compliance, alert monitoring in a jurisdiction that's a little less expensive. So it's a combination. But we have in the past, when we sense that we're going to have some revenue troubles down the road, we will take tactical action to reduce expenses, and we can do that.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

[Noah Fields, executive]

Thank you, Michael, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.