Bank of NT Butterfield & Son Ltd (NTB) 2024 Q4 法說會逐字稿

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 4th quarter in full year 2024 earnings call for The Bank of NT Butterfield and 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 4th 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, are available on the investor relations section of our website at www.butterfieldgroup.com.

Before I turn the call over to Michael Collins, I would like to remind everyone that today's discussions will refer to certain non-GAAP measures which we believe are important in evaluating the company's performance.

For reconciliation of these measures to US GAAP, please refer to the earnings press release and slide presentation.

[Bas] 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.

Butterfield had strong financial and operating performance in 2024 as we improved our customer propositions and increased shareholder value through our diversifiedee income, low risk density balance sheet, and effective capital management.

We finished the year with excellent 4th 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 5.

Barfield'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've recently seen net interest margins 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 authorization for 2025 of up to 2.7 million common shares.

Bermudian Caymen 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 busiest during the winter and spring months.

In addition, international financial services business, primarily reinsurance in Bermuda and asset management came in.

Continue 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.

Thank you, Michael, and good morning, everyone.

I will begin with the 4th quarter highlights on page 6.

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% from 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 per share, whilst we continue to repurchase shares during the quarter, with buybacks totaling 1.3 million shares at an average price of $37.42 per share.

On slide 7, 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, high 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 billion was up compared to the previous quarter, driven by higher deposit volumes.

Investment volumes expanded by $218.1 million or 4.2% to $5.5 million as excess liquidity in the form of cash and short-term securities, and maturities and pay downs were deployed into medium-term US 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 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.

The 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 8 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 current services, incentive revenues, and transaction volumes.

Higher foreign exchange volumes as well as the strength of the tourism activity in the Cayman Islands.

Banking 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 9, we present core non-interest expenses.

Total core non-interest expenses were $190.6 million a 2.2% increase compared to $88.6 million in the prior quarter.

The higher core non-interest interest expense are primarily attributable to increased marketing expenditures related to events and sponsorships for 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 systems and 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 now amortized typically typically over shorter 5-year license terms.

Overall, we expect quarterly core expenses to 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.

Thank you, Craig.

On slide 10, it shows that Butterfield's balance sheet remains liquid and conservatively managed.

Period and deposit balances held steady at $12.7 billion versus the prior quarter.

We continue to see elevated period and 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 over the coming quarters, 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% continues to reflect the regulatory capital efficiency of the balance sheet.

With the lower risk rated residential mortgage loan portfolio, which now represents 68% of our total loan assets.

On slide 11, 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 US government guaranteed agency securities.

Credit quality in the loan book improved and remained strong with non-accrual of 1.7% of gross loans.

We also continue to see a low charge off ratio of 4 basis points.

On slide 12, we present the average cash and securities balances with a summary interest rate sensitivity analysis.

As sensitivity remains modest and unrealized losses in the EFS 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 OCI burn down of 25% over the coming 12 months and 45% over the coming 24 months.

Slide 13 summarizes regulatory and leverage capital levels.

Butterfield's capital levels continue to be conservatively above regulatory requirements.

We also expect to transition to the updated Basel 4 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.

Thank you, Michael.

I'm very pleased with Butterfield's performance throughout 2024.

It 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 continued to pursue sustainable growth and remain well positioned to benefit from the anticipated higher for longer interest rate environment.

We're 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.

We will now begin the question and answer session.

(Operator Instructions)

The first question comes from David Feaster with Raymond James.

Please go ahead.

Hi, good morning everybody.

(multiple speakers)

Maybe just start on the deposit side.

You guys have done a great job, we've been expecting some of these transitional deposits to flow out, but that doesn't seem like it's been occurring and, exclusive currency.

I mean, you continue to grow deposits.

I mean, if you just talk about what you're seeing on the deposit front.

And maybe the timeline that you are expecting to get back to that 11.5 and the 12 billion asset or deposit range and then just any commentary on the deposit cost side, you guys have done a great job.

So just wanted a broad question on deposits.

Yeah, David, thanks.

It's Michael Schrum, so I'll kick off.

I mean, it's really a EAU kind of story here.

Obviously we're subject a little bit to exchange fluctuations.

We've seen a strengthening dollar during the 4th quarter, and so we, I think we put that in our appendix as well.

In terms of the sort of temporary deposits or what we call contractual funding really is, a couple of clients.

In a couple of 100 millions that are one that's in the Channel Islands that has done an RP process and it is in progress of moving the overall banking relationship to another service provider, so we kind of know that that's coming.

And then we have one in Bermuda, a couple $100 million of sort of liquidation money that's been sitting around pending, the court's direction, and then that will be distributed, sometime probably in the 1st half of this year.

I mean, the overall deposits level have remained elevated and.

But although I would say, post, even more recently we've seen that much closer to the 12 level.

So we continue to expect that 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.

I'd say we feel like the deposit base is little less concentrated.

So I think some of the outflows in 2023, [200. 23] 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 12 is about the right number.

Okay, I think. (multiple speakers) 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 and it was kind of it was back to similar levels that it was in Q3, but if you look at the average deposit levels, it's very similar quarter to quarter.

Which kind of tells more of the story in regards to, kind of composite levels and also some seasonal.

Okay, and then could you, I was hoping you could maybe touch on the margin trajectory, right?

Obviously there's some pretty material re pricing tailing in the securities book.

You guys got, you 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, but I'm just curious.

The levers you're pulling to help defend the margin and drive expansion.

It just, how do you think about the margins trajectory going forward?

You've done a great job, keeping it stable, in spite of the asset sensitivity.

So just wanted to get a sense of what you're thinking.

Yeah, I guess, if we consider again, kind of the existing interest rate environments so 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 them, as you've seen during the quarter, we've been able to kind of get cost of deposits, kind of down and that's really through active management in each in each jurisdiction looking at.

Deposit rates, we've benefited from the changes in base rates, in the UK as well as kind of in the US as well, so that has been some benefit and as you said, we'll continue to deploy pay downs and maturities as well as excess liquidity into the investment portfolio.

And we're investing at rates that are kind of, around 480 basis points to 500 basis points, which is a significant pickup from the existing kind of portfolio yield, so we're at 250, 251 now, and if we continue on, just kind of again in the BAU way just kind of entering back into the portfolio at higher rates, assuming that, kind of rates stay very, stable and the 10 years kind of been pretty stable.

Over the last kind of two quarters, we, we've seen to kind of stay elevated and that's going to be to our benefit.

So, it's assuming that, again, we stay where they are, we can continue to control the cost of deposits, let them back into the portfolio, then I don't think we sort of start to see some slow expansion of them in the next couple of quarters.

Terrific.

And then I just wanted to touch on 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 ketchup, I think in the share price.

How price sensitive are you on the buybacks and then just on M&A conversations, how are those going coming out of the analyst day that we had and you know what maybe some.

Increased appetite, and willingness to compete on pricing to some degree.

Just kind of curious how those MA conversations are going.

Yeah, thanks, David.

It's Michael Schrum.

So I mean the couple priorities are still number one, obviously retaining the dividend rate that we have today and then 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, some discussions about increasing dividend, but for right now, there's still some mass sensitivity on the balance sheet.

And then, secondly, obviously, we are 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, we have ample capacity in the layers of the capital stack, to complete certainly any deal that we've looked at so far.

So, but we're not sort of hoarding capital for an imminent deal.

And unfortly to buy back and the way we think about that is your normal regression.

Obviously, we've been trading below 2 times and so, and a pretty modest P/E ratio.

So we feel pretty good at it's a risk free trade for us.

So, but we do look at earn back obviously and TPD dilution as part of that, equation as well.

So that's really how the capital priorities is kind of stacking up.

Perfect.

Thanks, everybody.

Great quarter.

Thanks very much.

The next question comes from Timur Braziler with Wells Fargo.

Please go ahead.

Hi, good morning.

(inaudible) maybe just following up on that line of questioning around the capital base, the buyback announced for 25 is roughly half of what you guys did in 24, and I'm just wondering kind of the rationale for for maybe ratcheting that down a little bit and maybe how does that correlate to.

A higher likelihood or greater possibility of maybe, an M&A transaction hitting in 25.

Are those two related or maybe just talk through why the buyback authorization was ratcheted down to 25 if not.

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 have obviously, as always, very good conversations about, the returns to shareholders and, mining all stakeholders.

The current authorization was set in December, 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, if we don't find a deal to re up as and when that is required and 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, I talked a little bit about that before, but we use the standard sort of regression lines and, these square sums.

From that regression line to kind of 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 and that's.

Yeah, Michael's right.

In terms of the board support for returning excess capital, we're completely focused on getting it back to shareholders, and if we need to do a new authorization mid-year or later in the year, we'll do the same thing we did in the last year.

So as Michael said, it doesn't doesn't really mean anything at this point, but we will, if we do have, 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.

Got it.

Okay.

And then, I think the highlight of 24 was just your ability to defend the top line given the asset sensitive balance sheet, and I'm just wondering as we go into 25, you can give some color around margin next 10.

I'm just looking at at net interest income.

Does that follow suit with margin where you're 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 that might migrate away there could be some interim pressure on the top line.

How are you guys thinking about NII versus NIM here?

Yeah, so I think in, well, actually in quarter 4, we were the beneficiaries of not not only changes in in yields as I talked about earlier, but as you said, kind of the, continued volume of the balance sheet and size of the balance sheet as well, which is is a bit inflated.

So again, we're expecting some outflows and deposits which is kind of obviously funding the the assets and what we have to invest.

And get yield on, so if the deposits do settle around 12 billion as we expect them to, 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 in yield, on the assets or the investable assets that we do have, as well as the kind of elevated volume of size of the balance sheet.

Yeah, and I'll just that, so it's just as you've seen a quarter of a quarter, and I 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 massive repricing, but the short end, obviously the the short term treasury is going to be a bit of a headwind, for NI.

Yeah, 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 the those yields now, or is there still some pull through that's going to hit in the first quarter?

Yeah, so, in the first quarter we would expect the impact of that.

So we last kind of adjusted [the Bermudaa dollar] base rate in September and when the Fed, adjusted rate so we went, we decreased our base rate by 25 basis points and as that's got a 90 day lag on it, so we would actually see that pulling through in this quarter.

And obviously in the UK but even though we have a significant amount of fixed rate loans on the 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 the UK loan book.

Great, thanks for the call.

Thanks.

(Opearator Instructions) Our next question comes from Tim Switzer with KBW.

Please go ahead.

Hey, good morning, guys.

Thank you for taking my question.

Morning Tim.

My first question is on the expense trajectory with your guide of $90 million 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, maybe like above that in the back half of the year, do you expect to be in that range, every quarter?

Yeah, the expectation is that we'll be in that range every quarter, kind of as was said in the formal, comments, we are going to 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 risk management, etc.

That we think is important for the for the business to manage our risks and to kind of measure our client offer and as you can imagine there, those roles come to be more expensive than, kind of operational roles.

So we're very focused on having the right people in the right places, and kind of, where necessary, we're going to have to incur additional expense because of inflation as well as specialist roles, to make sure that we're attracting, good talent, that's beneficial to the bank.

Yeah, I would just ask that we are continuing to pass both of Bermuda and, updated functionality for our customers as well as a new ATM estate, for, people to be able to access their cash and some various other, enhancements that we'll be rolling out on the new platform.

So I think that should be good from a client experience point of view.

Yeah, so we think that range is right.

I mean, we will, we are looking at some tactical reductions in the short term, but the 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 the expenses, with a lid, but it takes some time.

Great, got it.

Thank you.

And I have a similar question on the non non-interest income guide that you guys gave for the mid $50 million dollar range.

That kind of implies for the full year, stable to slightly lower fee income year to 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?

Yeah, so, as every year, if you're going to look back in our history, the Q4 is, kind of elevated compared to the the other quarters, and as is again was said in the comments, that's really around seasonal factors, so, Christmas shopping, etc. Is a higher credit card volume, kind of volume incentives kind of being crystallized, etc.

But on a kind of quarter to quarter basis we think around 55 is the right number.

We don't anticipate significant increases in in fee income.

We kind of normally plan, around kind of the rates of inflation, on or fee income, so around 2%.

We already have last year we had baked in the additional revenue from Cre Credit Suisse assets that we acquired, so that's kind of now, kind of be a BAU level, so that kind of that came through over the last two years as we were one of those clients and the revenue kind of coming through.

So we think that line item is pretty much stable at this point at that level.

Okay, got it.

That's helpful and the last question I have.

And if you could kind of provide an update on the drivers of the lower NPLs this quarter, it seems like, you guys have 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 that was where the sales.

Yeah, thanks, Tim.

It's Michael Scrum, great question.

The, slightly slightly lower non accruals really, came from, the full repayment of a facility that was that had gone over the 90 days and, so that was satisfactory outcome.

They actually sold the property and paid us back.

So that's how it should work.

So we, I think I've mentioned the last couple of quarters, we sort of have 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 or 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, just close, 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, then the liquidators have to go through their process before we can distribute proceeds, etc. But we're hoping to close that certainly.

Here in the first quarter, so that's, 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 we'll continue to work hard at that.

Great thank you appreciate all the colors.

Thanks.

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. (Operator Instructions)