The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q4 2024 Earnings Call Transcript

The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q4 2024 Earnings Call Transcript February 11, 2025

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 Fourth Quarter and full year 2024 earnings call for The Bank of N.T. Butterfield & Son Limited. At this time, all participants will be in a 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. Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield’s fourth quarter and full year 2024 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 fourth quarter and full year 2024 results. The press release, along with a slide presentation that we will refer to during our remarks on this call, is 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 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.

Michael Collins: Butterfield had strong financial and operating performance in 2024 as we improved our customer propositions and increased shareholder value through our diversified fee income, low-risk density balance sheet, and effective capital management. We finished the year with excellent fourth quarter results that were supported by higher non-interest income, lower funding costs, and a stable net interest margin. Butterfield benefits from its long-standing market-leading banking businesses in Bermuda and the Cayman Islands, with a growing retail banking presence in the Channel Islands. Our comprehensive wealth management offerings include trust services, private banking, asset management, and custody in Bermuda, the Cayman Islands, and the Channel Islands.

The bank also provides specialized financial services in the Bahamas, Switzerland, Singapore, and the UK, where we cater to high-net-worth clients with mortgages on properties in Prime Central London. I will now turn to the full year highlights on page five. Butterfield’s strong performance in 2024 produced net income of $216.3 million and core net income of $218.9 million. This resulted in a core return on average tangible common equity of 24% for 2024. During the year, net interest margin decreased to 2.64% from 2.80% in 2023, with the cost of deposits rising to 183 basis points from 140 basis points in 2023. However, on a quarterly basis, we have recently seen net interest margin stabilize as market rates and deposit costs decrease. Tangible book value per common share grew, increasing 12.5% to end the year at $21.70.

Active capital management remains a priority, with total quarterly cash dividends declared representing 37% of earnings for the year, in addition to the repurchase of approximately 4.5 million shares at a total value of $155.3 million. On December 9th, the Board approved a new share repurchase of up to 2.7 million common shares. Bermuda and Cayman have experienced improved visitor numbers as travelers continue to see both locations as premier destinations. Bermuda’s tourism high season finished in October and will recommence in May, while Cayman is busy during the winter and spring months. In addition, international financial services business, primarily reinsurance in Bermuda and asset management in Cayman, continued to grow in 2024 as measured by incorporations, jobs created, and assets under management.

Tourism and international financial services continue to drive economic development for both jurisdictions, and we expect growth to continue in 2025 and beyond. I will now turn the call over to Craig for details on the fourth quarter.

Craig Bridgewater: Thank you, Michael, and good morning, everyone. I will begin with the fourth quarter highlights on page six. Butterfield reported strong financial results in the fourth quarter of 2024, with net income and core net income of $59.6 million. We achieved core earnings per share of $1.34, with a core return on average tangible common equity of 25.2% for the fourth quarter of 2024, an increase of 270 basis points over the third quarter. Net interest margin was 2.61%, stable from the prior quarter, driven primarily by a decrease in the cost of deposits, which dropped to 173 basis points from 191 basis points in the prior quarter, and an increase in the yield on investments from 2.39% to 2.51%. Deposit costs decreased across all of our banking jurisdictions as fixed-term deposits rolled into lower rates.

The Board has again approved a quarterly cash dividend of $0.44 this year, whilst we continue to repurchase shares during the quarter with buybacks totaling 1.3 million shares at an average price of $37.42. On Slide seven, here we provide a summary of net interest income and net interest margin. In the fourth quarter, we reported net interest income before provision for credit losses of $88.6 million, an increase over the $88.1 million in the prior quarter. Lower deposit costs, higher investment yields, and increased interest-earning assets benefited net interest income this quarter, which was partially offset by the impact of lower loan and treasury rates following Central Bank rate cuts. Average interest-earning assets in the fourth quarter of $13.5 million was up compared to the previous quarter, driven by higher deposit volumes.

Investment volumes expanded by $218.1 million or 4% to $5.5 million as excess liquidity in the form of cash and short-term securities maturities and paydowns were deployed into medium-term U.S. Treasury and Agency MBS securities. Average loan balances saw a slight increase overall due to growth in the Channel Islands and UK segments, which was partially offset by the impact of mortgage amortization outpacing new originations in Bermuda and the Cayman Islands. The yield on interest-earning assets decreased 17 basis points to 4.28% from 4.45% in the prior quarter, due to lower yields on cash and short-term securities as well as loans. Yield on treasury assets during the quarter was 4.25% versus 4.66% in the prior quarter, and the yield on loan balances was 6.43% versus 6.22% in Q3.

The investment portfolio yielded 2.51% in the quarter, which was 12 basis points higher than the prior quarter. Slide eight provides a summary of non-interest income, which totaled $63.2 million for Q4, up 12.9% versus the prior quarter due to the expected fourth-quarter seasonal increases in card services, incentive revenues, and transaction volumes. Higher foreign exchange volumes as well as the strength of the tourism activity in the Cayman Islands. Bank fee income also benefited from receipt of increased cross-border card volume incentives. Non-interest income continues to be a stable and capital-efficient source of revenue, with a fee income ratio of 41.7% for the quarter. Excluding seasonal factors, we would expect non-interest income to stabilize around the mid-$50 million per quarter.

On slide nine, we present core non-interest expenses. Total core non-interest expenses were $89.6 million, a 2.2% increase compared to $88.6 million in the prior quarter. The higher core non-interest expense was primarily attributable to increased marketing expenditures related to events and sponsorships for our credit card products, and professional and outside services costs. Looking into 2025, we expect expenses to be slightly elevated versus last year due to inflationary pressures on salaries and the continued investment and support for technological system specialist roles. We expect to continue to position appropriate non-client-facing staff in lower-cost service centers. Technology expenses are now accelerated as cloud IT solutions are now amortized typically over shorter five-year license terms.

Overall, we expect a quarterly core expenses run rate of between $90 million to $92 million in 2025. I will now turn the call over to Michael Schrum to review the balance sheet.

Michael Schrum: It shows that Butterfield’s balance sheet remains liquid and conservatively managed. Period-end deposit balances held steady at $12.7 billion versus the prior quarter. We continue to see elevated period-end balances, and the average deposit balance of $12.5 billion versus $12.4 billion in the prior quarter demonstrates this. We continue to hold some deposits marked to flow out, and as a result, the expectation continues to be for the average deposits to settle into a range of around $11.5 billion to $12 billion. Butterfield’s low-risk density of 32% can be attributed to the lower risk-weighted residential mortgage loan portfolio, which now represents 68% of our total loan assets. On Slide eleven, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is comprised of 99% AA-rated U.S. Government-guaranteed agency securities.

Credit quality in the loan book improved and remained strong, with non-accruals of 1.7% of gross loans. We also continue to see a low charge-off ratio of four basis points. On Slide twelve, we present the average cash and securities balances with a summary of interest rates. Asset sensitivity remains modest, and unrealized losses in the AFS portfolio included in the OCI increased during the quarter to $163.3 million, up from $117.1 million at the end of the third quarter, but consistent with the $163.9 million as at the end of the fourth quarter of 2023. We continue to estimate an OCI burn-down of 25% over the coming twelve months, and 45% over the coming twenty-four months. Slide thirteen summarizes regulatory and leverage capital. Butterfield’s capital levels continue to be conservatively above regulatory requirements.

We also expect to transition to the updated Basel IV capital guidance in 2025 for the group, which will likely improve capital adequacy ratios further due principally to the low loan-to-value ratios in our residential mortgage book. I will now turn the call back to Michael Collins.

Michael Collins: Thank you, Michael. I’m very pleased with Butterfield’s performance throughout 2024. We continued to position the bank for success with a secure and conservatively managed balance sheet, a strong culture around operating efficiency, active capital management, and the pursuit of acquisitions of fee businesses. Our efforts to find the right deal are ongoing. We continue our focus on growing organically where possible, given market share opportunities in the Channel Islands retail banking business and the continued build-out of the Singapore Trust business, as well as continued market growth in the Cayman Islands. In 2025, we continue to pursue sustainable growth in a rate environment. We are closely managing expenses with continued emphasis on our Canadian service center, in addition to our sustained focus on improving operational efficiency and returning excess capital to shareholders.

I would also like to thank all of our customers and colleagues for their continued support, which has led to a successful 2024. And with that, we would be happy to take your questions. Operator?

Q&A Session

Operator: Please pick up your handset before pressing the keys. The first question comes from David Feaster with Raymond James. Please go ahead.

David Feaster: Good morning, everybody.

Michael Collins: Morning, David.

David Feaster: Maybe just start on the deposit side. You guys have done a great job. You know, we’ve been expecting some of these transitional deposits to flow out, but that doesn’t seem like it’s been occurring. And, you know, exclusive of currency, I mean, you continue to grow deposits. I mean, could you just talk about what you’re seeing on the deposit front and, you know, maybe the timeline that you are expecting to get back to that $11.5 billion and $12 billion asset or deposit range? Then just any commentary on the deposit cost side. You guys have done a great job. So just wanted a broad question on deposits.

Michael Schrum: Yeah, David. Thanks. It’s Michael Schrum. So I’ll kick off. I mean, it’s really a BAU kind of story here. Obviously, we’re subject a little bit to exchange fluctuations. We’ve seen a strengthening dollar during the fourth quarter. And so I think we put that in our appendix as well. In terms of the sort of temporary deposits, all call contractual funding really is, you know, a couple of clients, you know, and a couple of hundred million that are one, that’s in the Channel Islands, that’s has done an RFP process and is in progress of moving their overall banking relationship to another service provider. So we kinda know that that’s coming. Then we have one in Bermuda, a couple hundred million dollars of sort of liquidation money that’s been sitting around pending court’s direction.

And then that will be distributed sometime probably in the first half of this year. I mean, the overall deposit levels have remained elevated, but although I would say post even more recently, we’ve seen that much posted to the twelve level. So we continue to expect that range, obviously, at stable FX rates, which can also impact, but that gives you a little bit of a flavor for it. But it’s really a BAU story. It’s just these couple of big sort of deposits that are sitting around.

Michael Collins: Yeah. I say we feel like the deposit base is a little less concentrated. I think some of the outflows in 2023 weren’t a bad thing. So I think it’s a little less concentrated and we feel like it’s stickier. But, yeah, I think we still feel like twelve is about the right number.

David Feaster: Okay.

Michael Schrum: But I was gonna say, David, a good reference point also is looking at the average deposits during the quarter as well. So we do see quite a bit of fluctuation again, kind of normal business flows during the quarter. At the period end, it was kinda it was back to similar levels than it was in Q3. But if you look at the average deposit level, it’s very similar quarter to quarter, which kind of tells more of the story in regards to, you know, kind of a positive level. And also some seasonal.

David Feaster: Okay. And then could you I was hoping you could maybe touch on the margin trajectory. Right? Obviously, there’s some pretty material repricing tailwind in the securities book. You guys got some opportunity to deploy some excess liquidity. You did that a bit in the quarter, some opportunity to further reduce deposit costs for some of those more floating rate deposits. I’m just curious, you know, the levers you’re pulling to help defend the margin and drive expansion. Just how do you think about the margin structure going forward? You’ve done a great job keeping it stable, you know, in spite of the asset sensitivity. So wanted to get a sense of what you’re thinking.

Michael Schrum: Yeah. David, I guess, if we consider again, again, kinda the existing interest rate environment kind of assuming rates are where they are now. We would expect to, over the next couple of quarters, start to see kind of a slow expansion of NIM. As you’ve seen on the quarter, we’ve been able to get the cost of deposits kinda down. And that’s really through active management in each jurisdiction looking at deposit rates. We benefited from the changes in base rates in the UK as well as kind of in the US as well. So there’s been some benefits. And as you said, you know, we’ll continue to deploy paydowns and maturities as well as excess liquidity into the investment portfolio. And we’re investing at rates that are kinda, you know, around 480 to 500 basis points, which is a significant pickup from the existing kind of portfolio yield we’re at 250, 251 now.

And if we continue on, you know, that’s kinda again and the BAU made that’s kinda entering back into the portfolio at higher rates. Assuming that, you know, kind of rates stay very stable and the ten-year has kind of been pretty stable. Over the last kind of two quarters, you’ve seen it kinda stay elevated and that’s gonna be to our benefit. So assuming that, again, which they where they are, we can continue to control the cost of deposits, not a back end to your portfolio. Then I don’t think we must still start to see some slow expansion of maybe the next couple of quarters.

David Feaster: Perfect. Terrific. And then I just wanted to touch on capital priorities. Obviously, you guys have been really active with the buyback. You got the new program you just announced. We got a nice pop in the stock, some catch-up, I think, in the share price. How price sensitive are you on the buybacks? And then just on M&A conversations, you know, how are those going coming out of the analyst day that we had and, you know, with maybe some increased appetite and willingness to compete on pricing to some degree. Just kinda curious how those M&A conversations are going.

Michael Schrum: Yeah. Thanks, David. It’s Michael Schrum. So I mean, a couple of priorities are still number one. Obviously, retaining the dividend rate that we have today and keeping that secure and then over time, we can hopefully find the right deal that will expand our fee income and provide sort of a base level of earnings that would over a longer period of time lead to, you know, some discussions about increasing the dividend. But for right now, you know, there’s still some asset sensitivity on the balance sheet. And then secondly, obviously, we are a domestically systemically important bank both in Cayman and Bermuda. So we need to make sure that we’re able to support any loan growth in our local markets as well as credit migrations should they occur.

We’re not seeing anything there, but that’s a priority as well. And then thirdly, obviously, M&A. If we can find the right deal, I think, you know, we have ample capacity in the layers of the capital stack to complete certainly any deal that we’ve looked at so far. So, you know, but we’re not sort of hoarding capital for an imminent deal. And then fourthly, the buyback and the way we think about that is your normal regression. Obviously, you know, we’ve been trading below two times per book, and so and a pretty modest PE ratio. So we feel pretty good at it’s a risk-free trade for us. But we do look at our own back obviously and TBD dilution as part of that equation as well. So that’s really how the capital priorities are kinda stacking up.

David Feaster: Perfect. Thanks, everybody. Great quarter.

Operator: The next question comes from Timur Braziler with Wells Fargo.

Timur Braziler: Hi. Good morning.

Michael Schrum: Morning, Timur.

Timur Braziler: Line of questioning around the capital basis. The buyback announced for 2025 is roughly half of what you guys did in 2024. And I’m just wondering kind of the rationale for maybe ratcheting that down a little bit and maybe how does that correlate to a higher likelihood or greater possibility of maybe, you know, an M&A transaction hitting in 2025? Are those two related? Or maybe just talk through why the buyback authorization was routed down in 2025, if not.

Michael Schrum: Yeah. Hi, Timur. It’s Michael Schrum again. So I would just say we’ve just had our board meetings. The board is extremely supportive of the current capital strategy that we’re deploying, and we had obviously, as always, very good conversations about the returns to shareholders and mining all stakeholders. The current authorization was set in December, you know, just post the election, there was a lot of volatility. But I think you shouldn’t correlate that to other uses of capital. The board’s very supportive. You know, if we don’t find a deal to be up as and when that is required and we will do that as appropriate as we have done in prior years. So that isn’t necessarily related to that. And I think just in terms of the level of buyback, obviously, you know, I talked a little bit about that before, but we use the standard sort of regression lines and these were some, you know, from that regression line to kinda come up with something reasonable and obviously, if we start trading at a higher level, then we would expect to kind of pare that back a little bit.

Michael Collins: Yes. Michael is right in terms of the board’s support for returning excess capital. We’re completely focused on getting it back to shareholders. And if we need to do a new authorization, midyear or later in the year, we’ll do the same thing we did in the last year. As Michael said, it doesn’t really mean anything at this point. But we will, you know, if we do have, you know, good M&A discussions and we are in dialogue with a lot of different parties, if we see something that starts to become likely, we would start to pare it back. But that’s not the case right now.

Timur Braziler: Got it. Okay. And then, you know, I think the highlight of 2024 was just your ability to defend the top line given the asset-sensitive balance sheet. And I’m just wondering as we go into 2025, you get some color around margin, extension. I’m just looking at net interest income. Does that follow suit with margin? Were you getting a little bit of stability and maybe some expansion as the year goes on? Or the fact that maybe the balance sheet is still a little bit bloated from some of these deposits that might migrate away. There could be some interim pressure on the top line. How are you guys thinking about NII versus NIM here?

Michael Schrum: Yeah. So I think in actually, in quarter four, we were beneficiaries of not any changes in yield as I talked about earlier. But as you said, the continued volume of the balance sheet, the size of the balance sheet as well, which is a bit inflated. So again, you know, we’re to invest, and get yield on. So if the deposits do settle around $12 billion as we expect them to, you know, that would have some downward pressure on net interest income as well. So yeah, to your point, we have benefited from kind of both kind of changes in yield on the asset or the investable assets that we do have as well as the kinda elevated volume or size of the balance sheet.

Michael Schrum: Yes. And Timur, I would just add, sorry, it’s Michael Schrum. Just as you’ve seen the quarter over quarter, NII obviously was suffering a little bit from the front end of the curve, but generally speaking, we haven’t seen too much movement or pull through to the long end. So that’s still benefiting from asset repricing. But the short end obviously did the short-term treasuries is gonna be a bit of a headwind for NII.

Timur Braziler: Okay. And then just last for me, if you could just remind me what the remaining impact is for the Bermuda resi book from the rate cuts. Is that fully baked into those yields now, or is there still some pull through that’s gonna hit in the first quarter?

Michael Schrum: Yeah. So in the first quarter, we would expect the impact of that. So we last kind of adjusted the Bermuda base rate in September when the Fed adjusted rates for the rent, we decreased our base rate by 25 basis points. And as you know, that’s got a 90-day lag on it. So we would actually see that. Yep. Putting through in this quarter. And obviously, on the UK, but even though we have a significant amount of fixed-rate loans under books, which wouldn’t be expected to move as part of this, but you’ve just seen the Bank of England reducing rates, which is our reference rate for UK LIBOR.

Operator: Thanks. Our next question comes from Tim Switzer with KBW. Please go ahead.

Tim Switzer: Morning, Tim. Good morning.

Tim Switzer: My first question is on the expense trajectory with your guide of $90 to $92 million of quarterly expenses. Does it kind of move up to the higher end of the range over the course of the year and, you know, maybe, like, above that in the back half of the year, do you expect to be in that range every quarter?

Michael Schrum: Yeah. The expectation is that we’ll be in that range every quarter. As was said in the formal comments, you know, we are kinda facing inflationary pressures when it comes to salaries. We are very focused on continued expense management. I guess, where we can move kind of non-client-facing roles, we’ll do that to our service center in Halifax. But I guess against that is also looking out and looking for specialist roles in technology and, you know, risk management, etcetera. That we think is important for the business, to manage our risk and to kind of measure our client portal. And, you know, as you can imagine, these roles tend to be more expensive than, you know, kinda operational roles. So very focused on having the right people in the right places, and kinda, you know, where necessary, you know, we’re gonna have to incur additional expense because of inflation as well as specialist roles, to make sure that we’re attracting, you know, good talent.

That’s beneficial to you. Right? Tim, I would just add that we are continuing to assess both of the new languages, you know, and updated functionality for our customers as well as new ATM estate for people to be able to access their cash and some various other enhancements that we’ve been rolling out on a new platform. So I think that should be good from a client experience point of view.

Michael Collins: Yeah. So we think that range is right. I mean, we are looking at some tactical bigger bang for the buck is the movement of roles to Halifax, and we’re up to about 250 positions in Halifax. It’s been a very successful service center for us, but it does take time to reorganize how we process things and then move the function to Halifax. So over time, that will continue to keep expenses, you know, with a lid, but it takes some time.

Tim Switzer: Great. Got it. Thank you. And I have a similar question on the non-interest income guide that you guys gave for the mid-$50 million range that kind of implies for the full year. No. Stable to slightly lower fee income year over year. Is that kind of a guide more for the first three quarters and you’re above that Q4? How should we think about that?

Michael Schrum: Yeah. So as every year, if you look back in our history, Q4 is, you know, kinda elevated compared to the other quarters. And as was again said in the comments, that’s really around seasonal factors. So, you know, Christmas shopping, etcetera, has a higher credit card volume kind of volume incentives. Kind of being crystallized, etcetera. But on a kind of quarter-to-quarter basis, we think around $55 million is the right number. We don’t anticipate significant increases in fee income. We kinda normally plan, you know, around kinda, you know, rates of inflation, on fee incomes of around 2%. We already have last year, we had baked in the additional credit revenue from Credit Suisse assets that we acquired. So that’s, you know, kind of be a BAU level.

So that kind of that came through over the last two years as we onboard one of those clients, and I think revenue kinda coming through. So we think that, you know, that line of them is pretty much stable at this point. That’s that number.

Tim Switzer: Okay. Got it. That’s helpful. And the last question I have, if you could kind of provide an update on the drivers of the lower NPLs this quarter. I think, like, you guys had a good resolution and a residential mortgage loan in the Channel Islands. And then any update you have on that legacy hospitality facility. I believe it was the sale inspector.

Michael Schrum: Yes. Thanks, Tim. It’s Michael Schrum. Great question. You know, slightly lower non-accruals really came from the full repayment of a facility that had gone over the 90 days. And so that was a satisfactory outcome. They actually sold the property and paid us back. So that’s how it should work. So I think I’ve mentioned the last couple of quarters, we’re sort of a little bit elevated in terms of past due and accruing facilities and some of that is due to the London market kind of freezing up before the election, and then there was a number of new rules announced changes to rules in the UK. So that created quite a lot of money on the side, even though it’s a stored wealth market. And we’ve seen that sort of starting to pick up now with some hallmark transactions, you know, just closer to year-end.

So I think that’s a good sign for the underlying valuations that we have on the book there. And in terms of the Bermuda legacy hospitality, which is going through a liquidation process, we had originally anticipated that would resolve either in Q4 or into Q1. It’s on track to get resolved, you know, then the liquidators have to go through that process before we distribute proceeds, etcetera. But we’re hoping to close that certainly here in the first quarter. So that should be a very positive story as well for that. And then we have a couple of other sort of commercial loans that are in various stages of getting resolution. So but we’re highly focused on ensuring that our credit metrics are pristine and will continue to work hard at that.

Tim Switzer: Great. Thank you. Appreciate all the help. Thanks.

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

Michael Collins: Have a great day.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.