The Bank of N.T. Butterfield & Son Limited (NTB) Q2 2025 Earnings Report, Transcript and Summary

Good morning. My name is Drew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second 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.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's second quarter 2025 financial results. On the call, I'm 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 second 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 encouraged by our strong second quarter results, which continue to demonstrate our focus on sustainable profitability and creating shareholder value. Performance was driven by solid net interest income, diversified fee revenue, prudent expense management and a strong stable balance sheet. The Butterfield franchise continues to generate long-term value in a dynamic external environment. Butterfield stands as a market leader in offshore banking and wealth management, with universal banking models in Bermuda and the Cayman Islands complemented by an expanding retail presence in the Channel Island. Our comprehensive suite of wealth management solutions spans trust services, private banking, asset management and custody tailored to meet the sophisticated needs of clients in these island jurisdictions. Our tailored wealth management services are also available to customers in the Bahamas, Switzerland, Singapore while we provide high net worth mortgage lending for properties located in prime Central London. I will now turn to the second quarter highlights on Page 4. Butterfield reported high-quality financial results in the quarter net income of $53.3 million and core net income of $53.7 million. We reported core earnings per share of $1.26, with a core return on average tangible common equity of 22.3% in the second quarter. The net interest margin of 2.64% in the second quarter was a modest decline of 6 basis points from the prior quarter, with the cost of deposits falling 4 basis points to 156 basis points from the prior quarter. During the second quarter, the bank completed the early redemption of its $100 million subordinated debt which resulted in the immediate recognition of $1.2 million of unamortized issuance costs and a 2 basis point onetime negative impact on NIM. With the redemption of the subordinated debt, we also took the opportunity to review the bank's overall capital levels and capital return strategy. Over the past 5 years, we have increased stable fee revenue through M&A and significantly reduce the number of shares outstanding following our share repurchase programs. As a result, we are now rebalancing our capital return strategy with a 14% increase to the quarterly cash dividend rate to $0.50 per share. The Board has approved this increase in the dividend rate as well as a new share repurchase authorization of 1.5 million shares to commence following completion of the current program. During the second quarter, we continued to repurchase shares with a total of 1.1 million shares in the second quarter at an average price of $40.69 per share. Finally, we had a few Board composition changes during this quarter. We would like to take a moment to thank Sonia Baxendale, for our commitment and guidance during her 5-year tenure in Butterfield's Board of Directors. Due to other time commitments and opportunities, Sonia has chosen not to stand for reelection at the bank's AGM this past May, and we wish her all the best in her future endeavors. Yesterday, we also announced the appointment of Andrew Henton to the Board of Directors. Andrew has been serving as a Director for Butterfield subsidiary banking business in the Channel Islands, and I'm very pleased to welcome him to the group Board. Andrew brings an extensive knowledge of governance, private banking, private equity and investment banking to Butterfield, and I look forward to his continuing contributions. I will now turn the call over to Craig for details in the second quarter.

Thank you, Michael, and good morning. On Slide 6, we will provide a summary of net interest income and net interest margin. In the second quarter, we reported increased net interest income before provision for credit losses of $89.4 million. The increase was primarily due to an increase in average interest-earning assets partially offset by lower yields on treasury assets. The net interest margin decreased modestly settling at 2.64% compared to 2.7% in the prior quarter. This decline is largely attributed to lower treasury yields, which declined by 27 basis points directly in line with decreased short-term market interest rates as well as the accelerated amortization of unamortized sub debt issuance costs, contributing to a onetime 2 basis point contraction in NIM. Average loan balances were slightly higher compared to the prior quarter predominantly driven by the impact of foreign exchange translation from the strengthening of the pound sterling against the U.S. dollar. Absent the FX translation impact, loan volume decreased by $55 million as we recovered the full outstanding loan balances from a large legacy hospitality facility that was under receivership in Bermuda. Average interest-earning assets in the second quarter increased $166.7 million to $13.6 billion. Treasury yields were 27 basis points lower at 3.71%. Loan yields were comparable at 6.31%. Whilst average investment yields were 1 basis point lower at 2.67% due to day count effect. During the quarter, the bank maintained its conservative strategy of reinvesting the proceeds of investment maturities and paydowns into a mix of U.S. agency MBS Securities and medium-term U.S. treasuries. Slide 7 provides a summary of noninterest income, which totaled $57 million, a decline of $1.4 million linked quarter, resulting from a number of underlying movements. First, banking fees were lower due to the seasonal reduction in merchant and international money transfer volumes, partially offset by an increase in card volumes. Similarly, a seasonal reduction in volumes led to a decrease in foreign exchange revenue. Custody and other administration fees saw a decline as transaction volumes and assets under custody trended lower. We are pleased to report offsetting positive contributions from an increase in trust revenue attributable to annual fee increases, the repricing of acquired business relationships, new client onboarding and an increase in special and time-based fees. The capital-efficient fee ratio was consistent with the prior quarter at 39%, continuing to compare favorably to historical peer averages. On Slide 8, we present core noninterest expenses. Total noninterest expenses were $91.4 million higher than the $98.3 million in the prior quarter, but continuing to be within our expectations. This increase was due to several factors, including the FX impact of a strengthened pound sterling relative to the U.S. dollar and increased performance-based incentive accruals in addition to lower staff health care costs recorded in the prior quarter. Offsetting these increases was a decrease in payroll taxes, which are classified as indirect taxes. In terms of our expense expectations, we continue to think that a quarterly core expense rate of between $90 million and $92 million for the remainder of the year is appropriate, but continue to monitor inflation and FX fluctuations across the franchise. I will now turn the call over to Michael Schrum to review the balance sheet.

Thank you, Craig. Slide 9 shows the Butterfield's balance sheet remains liquid and conservatively positioned. Period-end deposit balances increased to $12.8 billion from $12.6 billion at the prior quarter end. This movement was due to a $260 million effect from the strengthening British pound, which was partially offset by a decrease in actual customer deposits of $30 million. Butterfield's low risk density of 28.6% 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. Overall, credit quality of the loan and mortgage portfolio improved during the quarter as the net charge-off rate was negligible. Nonaccrual loans as a percentage of gross loans decreased 30 basis points to 2% as we fully recovered a couple of commercial loans at Bermuda, and the allowance for credit losses coverage ratio of 0.6% remained consistent with prior quarters. As mentioned previously, Butterfield's loan portfolio continues to be 70%, full recourse residential mortgages, of which 81% have loan to values below 70%. We remain focused on our conservative credit posture with a preference for residential mortgage lending in Bermuda, the Cayman Islands and the Channel Islands. 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. Net unrealized losses in the AFS portfolio included in OCI were $120 million at the end of the second quarter, an improvement of $11.4 million or 8.7% over the prior quarter. We continue to expect improvement with additional burn down of OCI over the next 12 to 24 months of 33% and 42%, respectively. Slide 12 summarizes regulatory and leverage capital levels. As Michael Collins mentioned earlier, the Board of Directors has approved an increase in the quarterly dividend rate to $0.50 per share. In addition to the increased quarterly cash dividend rate and new share repurchase program, the bank continues to evaluate potential acquisitions as part of our continued growth priorities. Finally, our tangible book value per share continued to improve this quarter by 3.6% to $23.77 as unrealized losses on investments improved. I will now turn the call back to Michael Collins.

Thank you, Michael. During the second quarter and now into the third quarter, we've seen encouraging signs of economic growth in our island jurisdictions. Bermuda is currently in its high tourism season, and by all accounts, it is shaping up to be a good year. Bermuda continues to be a premier tourist destination with headline events such as the Butterfield Bermuda Championship, a PGA event, the Bermuda Triple Crown Billfish international fishing tournament, the SLGP 2026 series and the biennial Newport to Bermuda Sailing Race. The reinsurance industry continues to perform well with added growth and interest in the life reinsurance sector. In Cayman, we continue to see sustained growth across the board, including strong business performance in tourism, real estate and international business sectors. Jersey and Guernsey are both doing well and continue to be recognized as choice locations for international business. Butterfield has benefited from this environment through the provision of banking, private trust custody and fiduciary services. We're also seeing growth in the retail business as we focus on our competitive local credit card offering as well as local banking services. Butterfield continues to be a responsible steward of capital by consistently returning excess funding to shareholders through a quarterly cash dividend and share repurchases when appropriate. In addition, I would like to emphasize that we continue to pursue M&A fee growth, particularly in private trust. The increased dividend and new share repurchase authorization reflects the strength of our business over the past few years and our efforts to increase long-term value for our shareholders. Thank you. And with that, we would be happy to take your questions. Operator?

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

Maybe I want to start out. You touched on the impact of the treasury market in the press releases on the margin this quarter. I know you're really disciplined about laddering the book. I was hoping maybe you could touch on your bond investment strategy just given the shape of the curve and whether that's changed at all and whether your approach has adjusted just given the prospect of declining short-term rates perhaps later this year.

David, it's Michael Schrum. Great question to kick off I think at the moment, we're just reinvesting maturities from the bond portfolio. So we obviously get both HTM and AFS maturities coming back at around $30 million to $35 million a month, million, and it's going into a blend of sort of primarily 15-year mortgage-backed securities and sort of 50% of that and then 50% into a T-bill ladder or U.S. Treasury medium-term ladder, so 2, 3, 5 years. We're obviously looking for kinks in the curve. There is quite a lot of movement in the market. As you know, we've seen kind of a gradual steepener and there's definitely downward pressure on short rates. So it's definitely an active conversation in terms of all the excess liquidity that's sitting on the balance sheet. And then you have the whole Fed decisions coming up next year. So we're definitely looking at it at the moment, we feel very comfortable with where the strategy is. It's gradually shortening the overall duration of the investment portfolio and we're obviously able to reinvest at higher rates. But it is a slow process, and there's a lot of movement in the market. So it's definitely top of mind at the moment.

Okay. That's helpful.

Just add, David. Yes, I mean, as Michael said, we're continuing to invest at higher rates. So investment somewhere around kind of 380 basis points and around a 3-year duration, so 3 or 3.1 year duration, so bringing duration in. But and as I said, we're very focused on it, looking at any excess liquidity that we have and kind of seeing if it makes sense to kind of invest some of that or preinvest some of that, given that we're looking at a potentially downward interest rate.

Okay. That's helpful. And then the last couple of quarters, we talked about some transitory, maybe temporary deposits that might be rolling out. In the prepared remarks, I didn't hear anything. I may have missed it, but just kind of curious, an update there whether anything has changed with those? Have they flown out? Just kind of curious how you think about that as we think about the size of the balance sheet.

Yes. See -- I mean, I think we still kind of feel that there are some deposits that are subject to leaving the bank or kind of might be looked at as hard money. The fund that we talked about for quite a few quarters that's in liquidation and it's still -- those fund is still here with us, but we still expect those to flow at some point given the legal process, and that's going through. Some of the other -- maybe some larger deposits in kind of wealth management space have flowed out and kind of put to work. But at the same time, I have also had some deposits coming in as well to replace those. We don't really kind of behavioralize a lot of that. I mean it's about 200 or just over 200 when it comes to the fund as an receivership and it's somewhere around [ 700 to 800 ] of funds that are above on those. So can we consider not necessarily sticky at this point and may leave the bank. So we have to see how those act over time, which kind of gets us back to we think deposits may settle over the long term -- over the medium term.

Yes. And I think, David -- sorry, it's Michael. Just in our prepared remarks, I mean, it's tough to see when you have the sterling moving at such a rapid pace or a dollar weakening and is obviously due to rate differentials between the markets as we see divergence between the different rate paths and central banks. So we try to point out, and you can see a slide in the appendix that points out that the actual customer outflows that we're seeing on normalization and customer behavior is somewhat masked by a weakening dollar or strengthening pound. And that's particularly pronounced this quarter, both on the loan asset side when it comes to period-end balances as well as the deposits.

Yes. That's a good point. And then last one, I just want to touch on the capital side. Michael, you touched on it a bit in your prepared remarks. You've already got a really strong balance sheet. You have the dividend increase. We got the increased repurchase authorization. But in the -- you talked about rebalancing your capital return strategy. I was hoping you could maybe elaborate that. Has there been any shift in your focus? Reading the press release, it kind of read like maybe M&A may be a bigger priority today. I'm just kind of curious if you could elaborate on your capital priorities today.

Yes, sure. It's Michael Collins. So we -- first and foremost, dividend is a priority and then, obviously, M&A and then share buybacks. We've been in a number of discussions on the M&A side. I will continue to say that we're quite disciplined on pricing, and there is still competition from private equity, which tries to roll up trust companies and fund admin companies offshore and then take the public or sell it. So we're not going to pay the prices that private equity funds pay for some of these franchises because we probably know them a bit better. But we're still very disciplined. But I can say we are in discussions and we have been, but we're going to take our time. So in terms of the dividend, we have increased dividend in 6 years. We got down to 34%, today we're a 34% payout ratio. This will take us to 36%. What we're trying to do is we bought back a lot of shares. I mean, you can see the share count has gone back, gone down quarter after quarter. So we've been very successful at that, which obviously is great for EPS and the share price. But we just felt that we needed to rebalance in terms of just paying a bit more on the dividend side as opposed to doing 70% of it on share buybacks. So that's really what it's about. It's not something that we're going to look at every quarter. It's something that we just occasionally review. And as you can see, it's been 6 years. We still have a extremely healthy dividend payout ratio and yield. So we're happy with that. And I'll give it to Michael Schrum, but I think we want to be a little bit over 100% payout ratio over time.

Yes. So David, it's Michael Schrum. So as you can also see, our buyback authorization, the Board is very supportive of the strategy here in terms of the overall capital deployment. So we're trying -- so the share buyback authorization maybe is a little bit smaller than we had in the past, and we try and look at sort of a combined payout ratio between the actual activation of retained earnings through cash dividends plus the amount that we authorized in terms of values. We still want to have room to grow. We still want to have room to -- for M&A. So that authorization probably scaled down a little bit. But with the proviso of that, the Board is very supportive, we can come back any time. But obviously, share buybacks are always subject to market conditions. So that's really what the rebalancing is there, a little bit higher cash dividend, a little bit smaller share authorization with the proviso that we can come back and ask.

[Operator Instructions] The next question comes from Timur Braziler with Wells Fargo.

Back on the capital question, CET1 is now closer to 26%, was down somewhere between kind of 17% and 20% pre-pandemic. I get the lender of last resort and the need to hold additional capital. But even that statement seems a little excessive for you guys. I guess how are you thinking about your level of capital here? And what is ultimately the right level that we should think about that getting to over time?

Yes. Sorry, Tim. Yes, it's Michael Schrum. It's great -- another great question. I think we're burning down a little bit more than we're earning at the moment. So it will take a few years to get down into the sort of mid-20s. As you know, we've had Basel IV implementation, gave us a red cap boost. Some of that, if you want to think about it that way, was recycled into an improvement in the quality of the capital stack by redeeming the subordinated debt and putting more of the interest earnings to the bottom line effectively by not having the interest expense on that. That was coming up to a 5-year reset to floating and tapering capital relief anyway. And so that seemed to make sense to us to use some of that benefit and some our access to return to common shareholders. So it will take a few years. We still would love to conclude at a fair value and M&A transaction that would be accretive to shareholders because I think that would ultimately help stabilize our earnings over time through stable fee income and make us less reliant maybe on net interest earnings. So that's still in the background in terms of keeping that excess capital. It's not a war chest, but it's enough that we could do a sizable deal without having to come back to existing shareholders to ask more capital. And finally, there's always the opportunity for us to come back to the subordinated debt market. It's just at these rate levels just didn't make any sense for us to reissue at this point. So ongoing conversations, as you know, most of the deals have been sort of sub-$30 million outlay in terms of consideration. So there's room for a couple of deals in the excess capital layer. But ultimately, we want to -- at 25% rate cap, it's questionable whether additional capital would solve any problems with.

Yes. I think I figured like Michael hit it on M&A. So we don't want to reduce capital substantially and then need capital for something that comes up. But I also think we're looking at the long term and we've got a 22% ROE or mid-20% ROEs throughout the cycle with 35% loans-to-deposits. So it's a pretty good model. And right now with everything going on geopolitically and tariffs, and with U.S. and where is inflation going and what's the Fed doing? I think it's probably a decent time to just hold a little capital and see where it plays out. And as Michael said, it's not a war chest, but we probably will find something at some point in the future. So we're pretty comfortable where it is. But obviously, we want a payout ratio that's sort of 108%, 110% so that we start to get down to the low 20s in terms of total capital as opposed to where we are today.

Yes, it'a high-class problem for sure.

It's exhausting, Timur.

On the deposit side, again, I think, surprising on the ability to bring costs down given the really low starting point. I think when we spoke last quarter, it didn't seem like there was all that much room to go and then here we are with another pretty good result. Where are we at this point and the ability to drive deposit costs lower ex any future rate cuts?

Yes. Look while we benefited from kind of talked about it in prior quarters is, I guess, kind of the reduction in the duration of deposits. So in addition to having the ability to reduce the actual rates that we're offering and signing on the deposits particularly in the fixed term, duration is also coming in as well. So where it was at the end of December, we've got to -- it's a lot more on demand or kind of 7 days at this particular point in time. So we went kind of from about 65% that was kind of demand to about kind of 70%. So that's kind of helped with the cost of deposits as well. So -- but to answer your question, given that movement in duration and the fact that we've been able to drive the cost of deposits down over time, I think we still can get some reduction, but it's going to be at a slower rate kind of as we go forward. And of course, that's kind of based on the current kind of interest rate environment.

Yes. Tim, sorry, it's Michael. You can see in the asset sensitivity slide, we're still modestly asset sensitive, but we are obviously exposed to it down [ 100 ]. So that means we're kind of getting to a flattening NIM where we can't push deposit costs below 0, obviously, maybe a little bit more exposed on that side than the peer group generally, and that is really from -- because of where the starting point is. I think Mike Collins, I have both been in Island Banking for over 25 years, and that NIM sort of 2.75%, 3% is kind of, is kind of like we normally where it tops up through rate cycles. Every cycle is different, but there's a number of different dynamics going on there.

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

Thank you, Drew, 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.