The Bank of N.T. Butterfield & Son Limited (NTB) Q3 2025 Earnings Report, Transcript and Summary

Good morning. My name is Debbie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2025 Earnings Call for The Bank of N.T. Butterfield & Son Limited. [Operator Instructions] 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 Third Quarter 2025 Financial Results. On the call, I'm joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer; Michael Schrum, President and Chief Financial Officer; and Jody Feldman, Managing Director of Bermuda. 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 third 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 the 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.

Thank you, Noah, and thanks to everyone joining the call today. I am pleased with our strong third quarter results, which continue to demonstrate our ability to drive long-term value. Our financial performance was supported by solid net interest income, disciplined capital management and a conservative and stable balance sheet. We delivered higher noninterest revenue and improved efficiency across the organization, underpinning our continued profitability and growth. Butterfield is a leading offshore bank and wealth manager with franchise-level market shares in Bermuda and the Cayman Islands and a growing retail banking presence in the Channel Islands. We offer a full suite of services from trust and private banking to asset management and custody tailored to meet the needs of our clients across these markets. We also serve international private trust clients in the Bahamas, Switzerland and Singapore and provide high net worth mortgage lending for prime London properties from our London office. I will now turn to the third quarter highlights on Page 4. Butterfield reported net income of $61.1 million and core net income of $63.3 million. We reported core earnings per share of $1.51 with a core return on average tangible common equity of 25.5% in the third quarter. The net interest margin was 2.73% in the third quarter, an increase of 9 basis points from the prior quarter with the cost of deposits falling 9 basis points to 147 basis points from the prior quarter. We again are announcing a quarterly cash dividend of $0.50 per share. During the quarter, we continued to repurchase shares with a total of 700,000 shares at a cost of $30.3 million. We continue our active capital management and plan to return excess capital that we do not require to support the business and growth initiatives. I will now turn the call over to Jody for an update on our Bermuda and Cayman markets and businesses.

Thank you, Michael. During the third quarter, Bermuda's business environment remained stable with continued expansion of international business and the local economy showing signs of growth. The government is forecasting its first budget surplus in over 2 decades. And with corporate income tax introduced this year, there are expectations this will generate meaningful revenue that could help ease cost of living and business pressures while reducing sovereign debt over time. Overall, the outlook is positive for Bermuda's fiscal position with solid performance and growth continuing in the international business sector, particularly in reinsurance. Tourism in Bermuda had a good 2025 season, supported by improved hotel occupancy rates. Average daily rates were up 10% August year-to-date with occupancy levels remaining stable. Air arrivals are steady and visitor expenditure is up 2% despite a lower overall room inventory. Looking ahead, airlift capacity and hotel inventory are expected to benefit from ongoing foreign direct investments in the island's hospitality infrastructure. The 593-room Fairmont Southampton is currently projected to reopen in summer 2026, while Grotto Bay Beach Resort has announced expansion plans. Additionally, the announced complete redevelopment of Elbow Beach Resort expected to commence in 2026, reflects overall investor confidence in the long-term prospects for Bermuda's hospitality sector. Bermuda will also gain visibility from major international events, including the PGA Tour Butterfield Bermuda Championship and SailGP, a high-speed global professional sailing league set to return in May 2026, further reinforcing the island's position as a premier tourism and event destination. The Cayman Islands continues to enjoy steady population and financial services growth with a 2.5% GDP increase expected in 2025. A number of major residential and mixed-use projects nearing completion reflects sustained demand and confidence across the property market. Financial services and tourism remain key pillars of the economy, representing approximately 50% and 35% of GDP, respectively. Through adherence to its fiscal responsibility framework, the government maintains discipline that keeps the budget generally close to balance. Looking ahead, growth is expected to continue at a measured pace following several years of rapid expansion. I will now turn the call over to Michael Schrum for more detail on the quarter. Michael?

Thank you, Jody, and good morning. On Slide 6, we provide a summary of net interest income and net interest margin. In the third quarter, we reported net interest income before provision for credit losses of $92.7 million, an improvement of $3.3 million or 3.7% from the prior quarter. The net interest margin increased 9 basis points to 2.73% compared to 2.64% in the prior quarter. This increase is largely due to lower cost of deposits and the redemption of the subordinated debt during the second quarter. Average loan balances were slightly lower compared to the prior quarter, predominantly driven by lower originations relative to amortization and to a lesser extent, the impact on foreign exchange translation from the weakening of the pound sterling against the U.S. dollar. Average interest-earning assets in the third quarter decreased $132.3 million to $13.5 billion. Treasury and loan yields were 7 basis points lower, while average investment yields were unchanged at 2.67%. During the quarter, the bank continued to pursue its conservative strategy of reinvesting the paydowns of investment maturities 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 $61.2 million, an increase of $4.2 million over the last quarter. This was due to higher banking fees, which benefited from growth in card volumes and incentive programs. Foreign exchange revenues also rose as volumes increased in the third quarter. The fee income ratio increased to 39.9%, compared to the prior quarter, continuing to compare favorably to historical peer averages. On Slide 8, we present core noninterest expenses. Core noninterest expenses decreased compared to the prior quarter from lower performance-based incentive accruals included within core salaries and benefits. Property expenses also declined, benefiting from a consolidation of premises in the Channel Islands. In addition, indirect taxes were lower, reflecting reduced payroll taxes and work permit fees. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively positioned. Period-end deposit balances were in line with prior quarters. Butterfield's low-risk density of 28% continues to reflect the regulatory capital efficiency of the balance sheet. On Slide 10, we show that Butterfield's asset quality remains very strong. The investment portfolio carries low credit risk, consisting entirely of AA or higher rated U.S. treasuries and government-guaranteed agency securities. Credit performance in our loan and mortgage portfolios was stable this quarter. Net charge-offs were negligible. Nonaccrual loans held at 2% and our allowance for credit losses stayed at 0.6%. Our loan book remains 70% full recourse residential mortgages with nearly 80% having loan-to-values below 70%. We continue to take a conservative underwriting approach, focusing on high-quality residential lending across our Bermuda, the Cayman Islands and the U.K. and Channel Islands segments. On Slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity. Net unrealized losses in AFS portfolio included in OCI were $101.5 million at the end of the third quarter, an improvement of $18.5 million over the prior quarter. Interest rate sensitivity has reduced slightly against the prior quarter, driven by a reduction in short-term investments that were deployed into fixed rate investments. We continue to expect improvement with additional burn down of OCI over the next 12 to 24 months of 31% and 37%, respectively. Slide 12 summarizes regulatory and leverage capital levels. The Board of Directors has once again approved a quarterly dividend of $0.50 per share. TCE/TA continues to be conservatively above our targeted range of 6% to 6.5%. Finally, our tangible book value per share continued to improve this quarter by 5.4% to $25.06 as unrealized losses on investments improved. I will now turn the call back to Michael Collins.

Thank you, Michael. Butterfield's presence in leading international financial centers provides a strong foundation for continued growth, both through disciplined M&A and organic business development. Our balance sheet and liquidity position remain conservative and fully aligned with business model and regulatory frameworks. Our capital-efficient fee-based businesses continue to deliver differentiated products and services to meet the needs of our clients. As we move forward, we remain focused on enhancing operational efficiency and maintaining prudent expense discipline. Capital management remains a core component of our strategy. The strength of our earnings generation allows a balanced approach, funding sustainable cash dividends, supporting organic growth, pursuing strategic and accretive acquisition opportunities and repurchasing common shares. Butterfield is well positioned to support our clients and create long-term value for our communities and 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.

I just wanted to -- I wanted to start -- curious how you think about the margin trajectory as we look forward. There are a lot of puts and takes here right now. You got the likelihood of Fed cuts. You've got also a pretty substantial repricing tailwind as well. And then you've got the lagging impact of repricing on deposits. I was hoping you could help us think about the margin trajectory and maybe where we could bottom out if the forward curve does come to fruition?

Yes. David, it's Michael Schrum. So yes, there are a lot of moving parts. I think we saw deposit costs come down this quarter. Just starting off, like I think the exit run rates for the quarter were broadly in line at a margin of 2.71% and cost of deposits is 1.45%. As we look forward, we do have some room on the deposit side. There's about $10 billion of interest-earning deposits. So we could see in the short -- and these are relatively short deposits 3 to 6 months term deposits and some demand interest-bearing. So we could obviously see some of that being beneficial to us. And then as we look at the investment securities, we're sort of thinking at the moment, certainly for the quarter is about a 150 or 150 basis point uplift on reinvestment. Over the coming sort of 12 months, we have about $1 billion of AFS and HTM assets that are going to reprice. So that's going to be, again, very beneficial, and that's something that we're clearly focused on. And then finally, on the loan side, this quarter, we've sort of seen broadly a 100 basis point uplift between the fixed rate resetting loans and the new lending that we put into the book. So over the next about 12 months, we have about $400 million of loans resetting as well. Obviously, some of that will depend on customer preference. We've seen a little bit of a mix shift into floating over the last quarter, last couple of quarters. So we're now at 54% floating and where we used to be more like a 50-50. So -- and then finally, the yield curve, if we get a steepener, obviously, that's going to be very beneficial. If we get a sort of lag in short rates going down, that's going to dampen the impact on the negative effect on the margin. So I think within a handful of basis points, we could probably see the next -- or the current outlook would be for NIM to be relatively stable, maybe expanding a little bit as we get this tailwind of asset repricing.

That's extremely helpful color. And then, Michael Colin, you talked about some of the unique products and services that you've got in the fee income lines. In the Trust and Asset Management business, you've obviously opened some unique and differentiated assets. I'm just curious, how do you think about crypto or stablecoins? Is that something that's on your radar? Is that something your clients are even asking about? Just curious your thoughts on that as some of the larger U.S. companies seem to be exploring it to some degree.

I think we describe ourselves as a slow follower, watching closely. We're not getting a lot of pressure from clients. I mean, just in terms of -- maybe in terms of custody and that sort of thing for digital assets. Stablecoin is obviously something we're watching closely. But I think the approach we would take is to piggyback off our correspondent banks. So Bank of New York, obviously, is heavily analyzing and participating in this sector of the market, and we would piggyback off that, which actually provides us with a lot of safety and cover, it's not something that we would take the lead on in any sense. But you're right, the fee income lines are really well diversified. So we've got trust, foreign exchange, banking fees, custody. But foreign exchange, I think, is what makes us pretty unique compared to U.S. regional banks, and we had a very good quarter there. And we're continuing to look for acquisitions on the fee income side. So very focused on private trust in the jurisdictions in which we already operate, and we're having constructive discussions, nothing to announce at this point, but our goal is to try to continue to increase our fee income ratio as rates start to change. So we're watching, but I would say we're very conservative. We've talked about in the past. We have no lender of last resort. We are not going to take the lead in these sorts of things, but we will piggyback off our correspondent banking relationships.

That's great color. And then just last one, just you guys have done a great job managing expenses. We moved more back office to Halifax. We had the early retirement, consolidated some back office space in the Channel Islands, I believe it was. Just curious what other initiatives are on the horizon? And just how do you think about expenses going forward and your ability to continue to drive positive operating leverage?

Yes. No, thanks, David. It's Michael Schrum. So obviously, a great quarter this quarter. We did have some noncore expenses in this quarter related to some of the retirement of senior executives. And I think we've said before, we're sort of thinking if we can stave off the inflationary pressures in the system with some of those expense initiatives, moving back-office functions to Halifax. That will be great as we are starting to see some pickup in pipeline on loans and interest -- net interest income seems to be relatively stable. So really, it's the same thing. We've obviously gone through a lot of investments into our infrastructure. So we did a cloud migration of our core banking system last year, and we're just catching up on the patch sets of those. So that -- while that's truncated the expense run rate a little bit higher because we're using Software as a Service, we're gradually exiting some of the older or out-of-date systems that we've been using. So I think broadly speaking, it was a little -- good improvement this quarter. We should be thinking about the $90 million run rate as a good sort of estimate for the future, at least for the near to medium term. And then as some of the things that we're thinking about is exactly continuing to move back-office functions to Halifax.

[Operator Instructions] The next question is from Tim Switzer with KBW.

You guys have already touched on this a little bit, but really strong momentum across your fee income businesses here. Could you provide just a little bit more commentary on what drove the pretty significant upside in banking here quarter-over-quarter and year-over-year, very strong. And then are you able to kind of give us an idea of where there any kind of like nonrecurring revenues in there, kind of one-offs? And I know Q4 is usually seasonally strong, but will be maybe not quite as strong just given the performance in Q3 on like a relative basis?

Yes. Thanks, Tim. Yes. So banking has been very strong, continues to be obviously a really solid and very capital-efficient line for us. The combination of banking really is sort of recurring of periodic fees, which are sort of account maintenance fees and then a combination of that plus the card services fees or transaction-related fees, and we've really seen an uptick in volumes. And that uptick in volumes with -- on our card product really has also driven some incentive accrual increases this quarter. So there wasn't really anything to call out, particularly, obviously, tourism-related card services fees were both an acquirer and an issuer has just benefited us quite tremendously over the summer as Bermuda has had a pretty good tourism season. So that's been an uptick there. And by all means, Cayman looks to be in decent shape for this upcoming tourism season as well. FX is -- we don't take any proprietary positions, as you know, but these are really commission-based FX exchange revenues. And I think clients have just taken the opportunity to rebalance a little bit as we've seen some movements in foreign exchange rates. And so that's driven volume in there. There were a couple of sizable deals that we did for some private trust clients in the FX side, but nothing really to call out. It may be a little bit seasonal, but we're pretty constructive on the outlook.

Okay. Great. That was really helpful. And then I appreciate the kind of overview you gave across your different jurisdictions and the growth there. Which jurisdictions are you expecting to be driving the most growth from a loan and deposit perspective over the next year or so? And what are like some of the loan categories that you have the most opportunity in?

Yes. Maybe I'll start on deposits, and Jody can just comment on loan pipelines, et cetera. I mean deposits continue to be a little bit elevated for us. I think we've certainly seen some significant movements. It's netted out to be not very much movement this quarter, but we have seen some sizable client inflows, which are probably masking a little bit of the outflow. So we continue to expect that deposit levels will sort of come down a little bit. I think Bermuda has certainly seen the most growth in the deposits. And normally in the fourth quarter, we would see a little bit of a seasonal increase in Cayman as funds kind of rebalance their cash held in the fund and cash held with us as an intermediary. So really, that's it on the sort of mid-market corporate side. I think deposit levels have been increasing in the Channel Islands as well as we've sort of pivoted a little bit more to a retail growth strategy there. And I think that's great to see more sticky deposits and a better composition of deposits in that segment. But it is, as you know, with retail clients, it's a pretty slow growth in terms of the impact overall. And I'll let Jody just cover loan pipelines.

Sure. Tim, it's Jody Feldman. I would just comment quickly on loans. I mean, as you know, we're not a loan growth story at Butterfield, and we're not going to be stretching for credit at this point. Obviously, we maintain a low-risk density balance sheet, and we're very conservative with our underwriting, and that's not going to change. That being said, we are seeing some encouraging signs in the loan pipeline, particularly in Cayman, a slight pickup in Bermuda due to kind of macro backdrop, which is encouraging. But I think it's pretty consistent from previous times.

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

Thanks, Debbie, 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.