The Bank of N.T. Butterfield & Son Limited (NTB) Q1 2025 Earnings Report, Transcript and Summary

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. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

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 a 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.

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 quarter as we successfully executed a group-wide voluntary early retirement program resulting in a moderate reduction in future expense load. 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 UK, 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 four. 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 2.7% in the first quarter, an increase of nine 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 continued 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 on the first quarter.

Thank you, Michael, and good morning. On Slide six, we provide a summary of net interest income and net interest margin. In the first quarter, we reported increased net interest income before provision credit losses of $89.3 million. During the quarter, NII benefited from a lower cost of deposits as we experienced a positive mix shift deposits to demand from term 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 a conservative strategy of reinvesting maturities into a mix of U.S. Agency MBS securities, and medium-term U.S. Treasuries. Slide seven provides a summary of noninterest 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 expanded mandates with an existing client, as well as special project fees. Noninterest income continues to be a stable and capital source of revenue through the cycle with a fee income ratio of 394% this quarter. On slide eight, we present core noninterest expenses. Total core noninterest expenses were $90.3 million, which is slightly lower than $90.6 million in the prior quarter. The largest relative movement 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 that 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, noninterest 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.

Thank you, Craig. Slide nine 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. 2.3% of gross loans along with an allowance for credit losses coverage ratio of 0.6% remained 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 are also pleased that a legacy loan for a sizable hospitality facility in Bermuda has been fully resolved following a period of receivership. On April 9, the buyer announced the close and the 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 twelve to twenty-four months of 31-55% respectively. Slide 12 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory requirements. On January 1, 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.

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 Q2 2025 season in Bermuda and Cayman remain robust. Butterfield's strong balance sheet is supported by capital-efficient and recurring noninterest 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 help create value for our shareholders. Thank you. And with that, we would be happy to take your questions. Operator?

We will now begin the question and answer session. The first question comes from David Feaster with Raymond James. Please go ahead.

Hi, good morning everybody.

Hey, good morning, David.

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

Yeah. Good morning, David. It is Michael Schrum. So I would say it is really focused, good question. It is really focused around two 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 are seeing valuations kind of coming through on the OREO side, sales are kind of picking up. So not really worried about the LTV profile. It is 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 has been in receivership for a while and obviously has was still accruing. So that is going to impact NII a little bit going forward, but sizable hospitality is coming out. And then there are 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 is 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 has happened there is demand has really dried up a little bit. There have been a lot of conversations about people, upping from the Prime Central London market and moving, you know, other places like Monaco, Switzerland, etcetera, because they are no longer able to live there for long periods of time and not pay taxes on overseas earnings. And so there has been, I think, less turnover in that market. Now remember that market is three to five-year revolving. So there is a certain amount of refinancing that is going on. But I think valuations are still holding up broadly. We have seen some good sales but there are also some sizable facilities there that have gone into non-accrual really, you know, nothing systemic, but divorces post-COVID and business sales being delayed, etcetera. And so there is also repayment for those who are mainly either the sale of the property or the refinancing. And they have 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.

Yeah. That is good color. And then maybe just staying on the market side. I mean, you know, in the prepared remarks, you talked about growing the retail presence in the Channel Islands. I know that has been a big focus. We have also had the expansion into Singapore. Was hoping you could just touch on the reception in those markets, where you are having success, and then, you know, maybe other markets you are expanding into and just again, how that plays into the M&A landscape and what you are seeing.

Sure. Yeah. So we are doing quite well in the Channel Islands. So we actually got a good, good mortgage loan book now, fully supported by local deposits. Our credit card product is being taken up quite well. So we are pretty excited about how that has been going. No concerns there. So the growth is good. And corporate deposits and everything are holding up. As you know, our, I mean, our plan is to try to make it look more like Bermuda and Cayman. So the funding is stickier than corporate funding. And, you know, we are over getting close to 10,000 new local clients in across Guernsey and Jersey. So that is going quite well. And Singapore, the Credit Suisse integration is also going well. We are actually working quite well with UBS in terms of referrals and transfer some other business. So that is going well, and we are making decent money there now. We are up to over $10 billion in assets under trust in Singapore alone. So we are pretty excited about that. So both the retail expansion, the Channel Islands, and the integration of Credit Suisse in Singapore are in good shape.

Maybe I will just add to that, David. It is Michael Schrum. Just on the M&A side, as you know, we are particularly focused around fee businesses and in particular private trust businesses. So good conversations, but we are also a little bit picky in terms of, you know, any new jurisdictions or anything like that. So where we have franchise level conversations, that can sometimes be jurisdictions that we do not want to be in. But overall, I mean, you know, so we are kind of sticking with our existing trust jurisdictions and obviously, we would always look at banking overlap in our existing jurisdictions as well.

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

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

Hi, David, it is Craig. So I mean, kind of over the last quarter and we have seen a bit of kind of stabilization in regards to kind of rates on deposits and on loans. We have actually seen rate cuts as kind of said in the prepared comments. We have seen some of the rate cuts from last quarter actually now kind of coming in and taking a and take making an impact. So that has had a kind of downward draft impact on kind of the treasury, what we are seeing on kind of short-term cash balances as well as what we are receiving on loan balances as well. So I mean, as you are aware, you know, kind of came in as well as the kind of CI UK book moves directly as a result of moving to the Fed funds rate for Cayman or The US prime. And then for the kind of UK book, directly in regards to changes in the bank of England, and we have seen decreases in both of those over the last quarter. So that is impacting kind of the loan yields as we would expect. Guess we continue to have kind of positive yield pickup on the investment book. We continue to reinvest proceeds from any maturities or pay downs back into the investment book. Investing in MBS securities, so kind of medium-term US treasuries. Given the volatility in the market, it will be the last couple of months, Sorry. Months, I should say. We have kind of been putting more leaning more towards kind of medium-term US treasuries. Kind of gives us a bit more certainty around, you know, the yield that we are going to get over these the life of those treasuries and not be Yield is, you know, you know, very much high is high above the existing portfolio yields. So we are investing, you know, somewhere in three d kind of three ninety basis point range. Compared to the portfolio yield, which is sub lower than that. So you will continue to get pickup there. But I guess if, you know, kind of the rate environment stays as it is, then, you know, that is very constructive for NIM as well as for our balance sheet. Having said that, as Michael said, some of these larger facilities that we are now kind of getting some resolution on you know, those were at, you know, kind of I guess, rates that are quite favorable to the bank. And as those get resolved, then, you know, we should see some headwinds on the yield on the portfolio. It might be loan portfolio. So to sum it all up, I think there was 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.

Okay. That is helpful. Everybody for the color. Thanks. And your next question will come from Timur Braziler with Wells Fargo. Please go ahead.

Hi, good morning.

Morning, Timur.

Maybe circling back on M&A discussion, I am 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 changes at all?

Yes, good question. I do not think that necessarily that 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, multiple jurisdictions. So we have seen quite a lot of this uncertainty play out in FX. Whether it is the sterling as you can see on our balance sheet or, you know, or euro or any other currency. So it is kind of moving things around quite a bit, and we go through these discussions. And obviously, it has an impact both on the underlying business, we are talking about in terms of the earnings profile and so does and also ultimately on valuation of things. So I think that is probably the main thing. The FX piece is probably more important to this than, you know, than the trade situation really.

Got it. And maybe keeping to that same line of questioning, just looking at the fee side, does all of this uncertainty I am assuming it pulled forward maybe some of the fees into 1Q, to your comment on FX. I am 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 kind of on a prolonged basis and not so much on a pull forward basis?

Yes. Mean, that is yes, That is a very kind of insightful question. And I think kind of what we saw and it is probably similar to some of our kind of counterparts as well. What we saw in the first quarter is a result of a lot of the volatility in markets, we saw some benefit of that both in terms of kind of FX revenue as well as asset management revenue. So normal volumes were up in both of those lines. revenues we are earning. And obviously, that is positive for this for the activity there and the So if that continues, then we would expect to see people keeping a close eye on kind of foreign exchange balances and also kind of how they are positioning their as we go forward as well. We have a lot of other customers that are actually looking it for further years and trying to manage liquidity or go into liquid positions as a result just to kind of get some stability in their portfolios. And, you know, the banks and kind of many, many banks have been the beneficiaries of that. But I think again going forward, a large part of the FX is kind of currency pairs between Bermuda and US dollars as well as Cayman and US dollars. And that is quite stable over time. But so it is really the fluctuation in kind of foreign currency that people will be looking to position themselves. To other protect themselves or take advantage of movements in foreign crisis. Yes. I think in terms of the jurisdictions and the impact on the trade discussions, talked about there is 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 is a bit of scare early on, but both Bermuda came in and KeriCom, you know, talked to The US, and, we were able to get exemptions. So we will not be impacted by that, but we will be impacted by higher cost of living. Just because US goods will be more expensive. But it was a good example of I think, a situation where, you know, there was a reasonable full decision because obviously, no one wants small island jurisdictions to suddenly, you know, triple the cost of food coming in. That turned out quite well. I think finally, Timur, it is Mike Schrum. Just on the broader FX question, obviously FX is pet currency, most of it is related to tourism activity on the island. So if there was a GDP kind of 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.

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 charged off in the past? Is there any reserves set aside against Could you just kind of talk us through the moving pieces for Butterfield as that loan is resolved? Or that property is resolved?

Yes, sure. I mean, there is not the biggest piece is really in our past due disclosures in note six. Of the loans that has been sitting around. It is a legacy facility that was washing his face while interest rates were low because were getting rental income on a residential part of the part of the hotel development, and that was covering basically all the outgoings during a lower interest rate environment. Rates went up, there was an equity ask, I think we all decided were going to put that into some receivership, and I think that has been a benign and a sales that is now completed. So, essentially, it will be a significant reduction in our past in our ninety days past due. It was an accruing facility. At penalty rates. And so from that perspective, NII, you know, 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 ninety days plus two bucket is going to move then you will see a drop, obviously, in loan assets on the balance sheet.

But I just want to add, is there maybe an unclear. Yeah. So to be clear, there is, kind of no kind of lowest content in there. So we expect to get, you know, fully repaid on the outstanding principal and interest. There was there was there is no provision that has been set aside for that. And we do not expect any losses coming through as a result of settling that.

Okay. And any lending opportunity to the Lauren Group as part of the sale? Or is that not anticipated?

Yeah. I mean, because of the receivership, we were pretty clear, and it was a competitive bidding process. That we would not we were not first out of the gates to be lending into the initial transaction. But I think there are certainly opportunities. We will see what the plans are. As I said, we are not a big hospitality lending, bank. You know, we do not really stretch for credit in that space or least the ones that we have done have been a very different structure. To just a land build. So we will see what happens and what their plans are. Certainly, we will be able to support maybe parts of that. As we move forward. It has been a very good relationship. Over many years, and hopefully, we will continue.

Great. Thanks for all the color.

Thanks.

Our next question comes from Emily Lee with KBW. Please go ahead.

Hi, everyone. This is Emily stepping in for Tim Switzer. Thank you for taking my question.

Sure. Good morning.

Good morning. 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 is in The U.S. or more broadly?

No. 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, of our different industries, so Bermuda's reinsurance came in and capped us for came in as Captis and hedge funds, are all invested and, you know, involved in different businesses and different geographies. So there may obviously, there will be impacts there individually and by industry, but it is 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, you know, obviously, 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 is really drilling direct, but I think we are pretty happy that we are sort of under the radar at this point.

That is great. Very helpful. Thank you. One more question I have was in the case of a potential economic downturn, if, say, loan growth or revenue does not come through as strong as expected, what levers do you have to pull on the expense or the noninterest income side to kind of hit your earnings target?

So expenses, we have just completed a voluntary early retirement program. Which was quite successful actually. A number of people took it up and it has two impacts basically. It 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 have 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 is sort of 60% of the cost of Bermuda and Cayman in terms of employee. We are up to 250 people. So it is 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 plays really to build Halifax. And just have all processing and operations, you know, compliance, alert monitoring in a jurisdiction that is a little less expensive. So it is a combination. But we have in the past when we sense, that we are going to have some revenue, troubles down the road. We will take tactical action to reduce expenses, and we can do that.

Great. Thanks so much for taking my questions.

Thank you.

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

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.

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