Bank of N T Butterfield & Son Ltd
NYSE:NTB
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Bank of N T Butterfield & Son Ltd
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Good morning. My name is Sade, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Third Quarter 2024 Earnings Call for The Bank of N.T. Butterfield & Son Limited.
I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's third quarter 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 third quarter 2024 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. Butterfield's third quarter operational performance and profitability continued to be strong. The bank's success is a result of our client-focused products and services, a solid balance sheet, a focus on efficiency, capital management and experienced management team. In addition, our island-based deposit funding and diversified revenue streams continue to be resilient.
Butterfield is a market leader for banking and private trust in Bermuda and the Cayman Islands, with an expanding mass affluent bank and private trust offerings in the Channel Islands. We also provide specialized financial services in the Bahamas, Switzerland, Singapore and the United Kingdom, where we provide high-end mortgage lending in Prime Central London.
I will now turn to the third quarter highlights on Page 4. Butterfield reported strong financial results in the third quarter with net income of $52.7 million and core net income of $52.8 million. We reported core earnings per share of $1.16 with a core return on average tangible common equity of 22.5% in the third quarter. The net interest margin was 2.61% in the third quarter, a decrease of 3 basis points from the prior quarter, with the cost of deposits rising 2 basis points to 191 basis points from the prior quarter. The net interest margin was marginally lower than the prior quarter due to smaller deposit cost increases, which outpaced asset repricing slightly.
The Board has again approved a quarterly cash dividend of $0.44 per share. We also continued to repurchase shares during the quarter, purchasing a total of 1 million shares at an average price of $37 per share.
I will now turn the call over to Craig for details in the third quarter.
Thank you, Michael, and good morning. On Slide 6, we provide a summary of net interest income and net interest margin. In the third quarter, we reported increased net interest income before provision for credit losses of $88.1 million. During the quarter, net interest income benefited from increased average interest-earning assets, partially offset by elevated deposit costs and a decline in treasury yields due to monetary policy easing.
Net interest margin was 3 basis points lower at 2.61% in the third quarter of 2024. Customers continued yield-seeking activity, resulting in some continued mix shift to term deposits, and therefore, a modest increase in the cost of deposits. The yield on treasury assets was lower as market interest rates declined over the quarter, while investment yields increased as we continue to invest the proceeds from maturities and some excess liquidity into higher-yielding assets.
Average interest-earning assets in the third quarter of $13.4 billion was sequentially higher by $114 million or 0.9% than the prior quarter, driven by increased average deposits, which were higher primarily due to the FX translation of a stronger British pound. Treasury yields were 12 basis points lower at 4.66%, while average investment yields were 9 basis points higher at 2.39%. During the quarter, the bank continued to reinvest into a mix of U.S. Agency MBS securities and medium-term U.S. Treasuries. Average investment balances increased by $66.6 million to $5.24 billion compared to the prior quarter as we continue to deploy excess liquidity.
Slide 7 provides a summary of noninterest income, which totaled $56 million, a modest increase versus the prior quarter, primarily due to increased card volume and loan repayment fees, as well as higher income from asset management. Noninterest income continues to be a stable and capital-efficient source of revenue through the cycle with a fee income ratio of 39.2% in this quarter.
On Slide 8, we present core noninterest expenses. Total core noninterest expenses were $88.6 million, a 1.8% decrease compared to $90.3 million in the prior quarter as we anticipated. The decrease is primarily due to lower professional services costs. Core noninterest expenses were within our quarterly expectations and we continue to estimate a similar level of core expenses for the remainder of 2024.
As we communicated during our call last quarter, our expense run rate includes incremental increases over last year due to the amortization and servicing of our new cloud-based IT investments in core banking system and branch upgrades as well as the cost of our new colleagues servicing the acquired book of trust assets. We are also continuing to benefit from the Group-wide cost restructure announced in the third quarter of 2023.
I will now turn the call over to Michael Schrum to review the balance sheet.
Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively positioned. Period-end deposit balances increased to $12.7 billion from $12.5 billion in the prior quarter end and $12 billion at the end of 2023. This continues to demonstrate the diversified nature of Butterfield's markets and deposit base.
As mentioned previously, and as can be seen from this quarter average versus period end deposit levels, there can be significant deposit movements from quarter-to-quarter due to the large trust and fund clients managing their normal commercial flows. In addition, this quarter, the strength of the pound versus the dollar contributed to an elevated period end balance sheet. Butterfield's low risk density of 33.2% 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% comprised of AA or higher-rated U.S. government-guaranteed agency securities. Butterfield's loan asset quality continues to be adequate. We remain well collateralized and continue to work closely with clients to help them meet their obligations. The net charge-off rate of 3 basis points and nonaccrual loans of 1.9% of gross loans remains low, along with an allowance for credit losses coverage ratio of 0.6%.
As discussed last quarter, we do expect that past due and accruing loans will continue to be somewhat elevated over the next few quarters due to a sizable legacy hospitality facility in Bermuda working through a receivership and sale process, which we expect to conclude late this year. As a reminder, Butterfield's loan portfolio continues to include 69% of full recourse residential mortgages, of which 80% have loan-to-values below 70%.
On Slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity. Asset sensitivity increased slightly in the third quarter after recent monetary policy easing while duration remains stable. We continue to expect improvement with additional burndown of OCI over the next 12 to 24 months. Net unrealized losses in the AFS portfolio included in OCI were $117.1 million at the end of the third quarter, an improvement of $59.7 million or 34% over the prior quarter.
Slide 12 summarizes regulatory and leverage capital levels. Butterfield's capital levels continues to be conservatively above regulatory requirements. We also continue to see tangible book value per share accretion and during this quarter, we saw an increase of 9.3% to $21.90 as market interest rates declined and unrealized losses improved.
I will now turn the call back to Michael Collins.
Thank you, Michael. We continue to believe we are located in the best-in-class offshore financial jurisdictions with opportunity to selectively grow through M&A and organic business development. Our balance sheet and liquidity levels are well suited for our business and regulatory needs. Our capital-efficient fee businesses provide leading products and services and are tailored to meet the needs of our Ireland-based clientele. We continue to focus on enhancing efficiency and expect to strategically manage expenses as interest rates decline.
Capital management has been an important tool for us as we continue to generate significant earnings which can support the cash dividend and organic growth, finance potential acquisitions and repurchase common shares. We remain well positioned to profitably grow and meet the needs of all stakeholders while supporting value for shareholders. Thank you.
And with that, we'd be happy to take your questions. Operator?
[Operator Instructions] Our first question is from David Feaster from Raymond James.
I wanted to start on the deposit side. We've talked in the past about these transitory deposits that you've been expecting to move out. I'm curious where we are in that? I mean, deposit balances have held up much better than we expected. Obviously, currency was a tailwind. But again, the deposit balances have been much stronger than we had expected. Just kind of curious where are we on those transitory deposits and where you're having success driving core deposit growth? Obviously, the Channel Islands has been pretty strong but just kind of curious what you're seeing on that front.
David, it's Craig. So I'll start out. So I think we still kind of have those deposits that we considered at risk of leaving the bank. That has kind of taken a bit longer to leave, particularly that one particular facility that we had or customer that we had, that's in kind of liquidation over its dealership. So that's going to be still scope to lead at some point.
But I think what we saw over the quarter, we actually saw quite a bit of movement in deposit balances over the quarter. If you compare kind of period end balances to what the average is, you can see there's quite a bit of a difference. So we do kind of a dip down close to kind of the high end of our range. At quarter end, we had some funds going on that have since been deployed by those customers. So we do have some customers that are activating their assets as well as we go along.
So another good example is we have a start-up company that's in Cayman that had some capital that came in that came in on our balance sheet and then subsequently has been deployed in order to fund the operations of that start-up company. So we continue to see kind of deposits kind of float in and out and be activated by clients over time. But having said that, we still do have some deposits that we are tracking, and we do expect to leave at some point.
Okay. So some of these deposits, you wouldn't expect much in the way of -- maybe we see the balance sheet actually shrink from where -- or kind of remained relatively steady quarter-over-quarter? I'm just kind of curious how do you think about that with those deposits flowing out.
Yes. That's the expectation. We think that -- I think the guidance that we gave is still valid, depending on what these customers do. I guess kind of just to answer your question from earlier in regards to kind of deposit gathering activity, particularly in Channel Islands, they are having some successes there. So you can see deposits have increased, though a bit of that or much of that is also attributable to the strengthening of the British pound as well in the Channel Islands segment. But having said that, the underlying volumes are increasing and the pipeline that they have there is increasing as well. So we are seeing some success in that market.
Okay. Okay. That's great. And then you touched on credit a bit. We have seen some credit migration. I'm just kind of curious what you're hearing and seeing from your mortgage borrowers and the health of the housing market in your jurisdictions and the strategy for workouts' for these borrowers? I know we've done a decent amount of moving to fixed rate, but does down rates kind of solve this issue for a lot of these folks, and this is kind of the worst it's going to get? Will 50 to 100 basis points a cut start giving some of these guys reprieve and improve the credit quality for them and cash flow?
Yes. Thanks, David. It's Michael Schrum. So yes, I mean, you're right. I mean I think what we're seeing across all our lending markets is the pipeline remains solid, and we'd certainly expect some additional lending opportunities as our rate set start to moderate. So that's more around the front book. We remain consistently conservative in terms of our underwriting standards across all the markets.
In terms of the back book or the credit aging migration, as you mentioned, that's kind of coming from the existing book. And particularly in Bermuda, as we mentioned, we continue working through a legacy hospitality facility. But we expect that to conclude with the sale this quarter, and that would result in a full repayment to the bank.
And then in our prime Central London resi book, we've had a couple of sort of sizable facilities, which were expected to be repaid following either refinancing or sale of the property. And some of these are delayed a little bit and we continue to work with the borrowers and remain really well collateralized in all cases because the underwriting in London is 60, 65 LTV and are sort of 3- to 5-year facilities. So there's some good plans in place there.
I think overall, we expect this to be more of a timing issue. And there remains some uncertainty around the changes being proposed by the new U.K. government in the upcoming budget here on the 30th of October. So I think summarizing, we continue to expect sort of some past due to be somewhat elevated this quarter again, but then sort of normalize into 2025.
And David, I would just -- in terms of valuations, property valuations in all 3 islands, I think it's fair to say for different reasons, all 3 islands have -- jurisdictions do has shortages. So not enough supply, a lot of demand, Bermuda reinsurance is still going well. So a lot of expats running houses, so house prices are pretty steady to climbing a bit. Cayman's population has increased to 87,000, 88,000. So they're running hard just to keep the condo stock up to be able to provide a combination for people. So that's happening well in Guernsey and Jersey, it's always been a tough housing market. So islands all have limited supply of land. And if you have sort of booming industries and all jurisdictions, it holds valuations up. So we're very comfortable where our LTVs are.
That data is correct. Sorry, just want to touch on one thing you kind of alluded to it is around just this customers potentially in any financial difficulty. So that's -- again, we're not seeing any kind of huge increases in customers under financial difficulty. I mean if you look in the financials, you would see kind of this elevated balance, but that's a particular facility that is currently being worked out and we don't expect to have a lowest there.
But overall, kind of the financial difficulty, as we kind of talked about in previous calls, hasn't been kind of -- hasn't increased significantly as one would expect, given the high interest rate environment. But I guess, to your point, there is -- customers will be happy to see rates coming down, and it's going to provide some relief. But again, we're not seeing that systemically coming through our book.
That's great. And then maybe just last one, I wanted to touch on a pretty solid quarter in the trust business with AUM and AUC pretty solid. Kind of curious what you're seeing there, where you're having success and just kind of how you think about the trust line as we look forward?
Yes, sure. I think it's a multi-jurisdictional business that focuses on mobile wealth around the world, so globally wealthy families. And whenever there is a strike anywhere in the world or whenever there is political dissonance in different locations, I think people start to plan and manage their assets. I think a lot of what we're proud about is how Singapore has gone in terms of the Credit Suisse acquisition. It's really bedded down very quickly. Michael Schrum and I were just out there meeting with the team and intermediaries and trust clients. The team is very settled. We're a top 5 trust company in Singapore now, and we're making decent money for the first time there.
So I think we chose the right jurisdiction. We also visited our trust clients in Hong Kong, but clearly, Singapore is the place to actually have the company today. So that's going very well. And I think that will -- that part of the business will continue to drive the global growth of our trust operation.
The next question comes from Will Nance from Goldman Sachs.
Just had a question on kind of deposit cost and margin dynamics. It seems like getting pretty close to a peak here and deposit costs were relatively stable sequentially. So just how are you kind of thinking about the flow through of sort of whatever is left of back book term deposit repricing versus pricing actions you guys expect to take over the next couple of quarters? And just how do you think about the trajectory of overall deposit costs from here?
Thanks, Will. As you pointed out, we've actually seen a slowdown in the increase of the cost of deposits. So you can see that it's kind of moved 2 basis points over the last quarter. So it's good to actually see that slowing down. And we have been very focused on the appropriate costing or pricing of deposits as well over the last quarter. So we did do kind of a market review. We always will continue to see looking at the market, kind of what we're paying, what our competition is paying, making sure we're in the right ballpark when it comes to pricing of deposits. So we actually did a review prior to the cut in the Fed funds rate and then immediately after the Fed funds rate, we also incorporated that into our pricing as well.
So overall, we're kind of seeing a decrease in pricing of deposits. Obviously, we'll kind of look at individual relationships if it needs enhanced pricing. But overall, published rates for deposits is coming down. And that's kind of been quite effective. It's been kind of well received. I think as we kind of get into the kind of downward cycle, customers will be kind of changing their expectations around the yield they're expecting on deposits and we'll be following along with that as well. So we are seeing some good results coming from that, and we'd expect it to continue to be on a downward trajectory.
Will, it's Michael Schrum. Just on -- I mean, if you put that together with the asset repricing, we don't have very much in terms of the fixed or floating repricing coming up in the next sort of 3 to 4 quarters here. There's a few facilities that are expected to reprice. But generally speaking, there's going to be a lag in loan asset repricing from fixed to -- either new fixed or floating, which is obviously very accretive to NIM. The investment assets are trending up in terms of margin that we're getting on those and yield to maturity.
So if you put it all together, we're still asset sensitive, a little bit elevated this quarter because of the large cash inflows on the balance sheet. But we should -- we will expect some NIM compression if we get a down 100 over the next year. But that's part of the business cycle, I guess, and will drive our focus on expenses and very much focus on healing the back book on the credit side to make sure we balance that out.
Got it. That all makes sense. And just a question on capital allocation. The TCE ratio is continuing to kind of tick up over time. You mentioned the burn down of AOCI, which should be a help there, too. So just what -- how are you guys kind of thinking about the potential to get more aggressive on capital return? And just maybe if you could touch on the M&A environment right now. are you thinking it's appropriate to keep more dry powder in the near term? Or would you look to get kind of more aggressive in deploying the capital base?
Sure. Thanks. So I think, yes, obviously, we -- in terms of sequence dividends first and then acquisitions. And then if we can't find good acquisitions, then obviously, you see us today buying back a lot of stock. So we bought back 1 million this quarter and depending on price and valuation, we'll continue to buy back shares. We have gone through an extensive process with a potential trust acquisition. But at the end, it came down to we weren't comfortable with one of the particular jurisdictions from a risk appetite perspective.
So we did quite a bit of work there. and we continue to having constructive conversations across the board. And as I said, with the Credit Suisse acquisition, obviously, we're getting more and more inbound inquiries because we're, again, one of the few buyers in the market today. So that will continue nothing immediate on the horizon. So that's why you're seeing us buy back shares, but maybe Michael can add to that.
Yes. I mean, as Michael said, we have -- it hasn't really changed. I know we're sort of at the high end of our range on the TCE, on the leverage capital. Obviously, deposits have been flowing in and off the balance sheet here. We're not expecting a lot of capital consumption from organic growth or credit migration. And so we're in a fortunate position here where we do have a little bit of excess.
Obviously, our combined payout ratio is kind of up there with the cash dividend and the share buyback. And so that's been a very helpful tool during this quarter. If we do get a sizable trust acquisition, we expect that we would be able to fund it with excess capital at the moment. So that's a positive. And there are some targets out there that we've been pursuing for quite a while. So it's kind of a wait and see. Nothing to report at the moment, but good dialogue going on.
The next question comes from Tim Switzer from KBW.
I have a quick follow-up on kind of your last comments on potential acquisitions. Are there any jurisdictions that you have your eye on places you'd like to expand into? And are there any of your current jurisdictions where you see a lot of room for you to grow and maybe would want to expand your assets there through an acquisition?
Sure. I mean, obviously, we've been in offshore banking a long time, and so we have very strong views about the differentiation between offshore jurisdictions. So we're very comfortable banking in Bermuda, Cayman and Guernsey and Jersey. I would doubt you would see us go beyond that footprint because we need to know the markets that we're banking and they're all very different. And we know if we were to be interested in Singapore, and it was a banking market, we couldn't compete in that market there. The banks are excellent.
So I think we're in those 4 jurisdictions in banking. And I think on the trust side, we're also very comfortable in Bermuda, Cayman, Bahamas, Guernsey, potentially Jersey, Geneva and certainly Singapore. So those are the markets we'll continue to focus on. As I said, we'd like to continue to grow trust in Singapore. We are quite big in Bermuda already. We could -- there's room for expansion in trust in Cayman and the Channel Islands so we'll keep focused on that.
But just to differentiate between other jurisdictions, we're not interested in jurisdictions like Vanuatu and that sort of stuff, where we know we're good. And these are all English common law jurisdictions that go to the Privy Council, which is why they exist and the legal framework that we understand and are comfortable with. So I would say expansion on the trust side, Singapore and hopefully in the Channel Islands.
Okay. Great. That makes sense. And for your expense outlook, it sounds like you're projecting expenses to be pretty similar in Q4 as well in Q3. But what's sort of the outlook for 2025? And what are sort of the investment needs and areas you'd like to invest after you had a good amount of investment in the first half of this year?
Yes. Tim, it's Craig. So you're right, I think we're expecting expenses to come in kind of at similar levels as we saw this quarter. Having said that, we still see, like everybody else, we still see some headwinds when it comes to inflation in both kind of services as well as salaries as well. So we're working hard to monitor that and continuing our strategy around making sure we have the right people in the right jurisdictions and if it's not client-facing, put it into our service centers. So we'll continue to monitor that. But I can see us happening continued kind of pressure on expenses as well.
And if we roll forward into 2025, I don't see that changing. We actually are going through our annual operating pending process at the moment. So when me have our Q4 call, we can give some more guidance around that and where that's coming out, but we're putting that together. But if I had to look at kind of big picture, it's going to still be around kind of inflation around salaries, making further investments into our technology capabilities. As you know, we've kind of invested significantly into technology, kind of new core banking system, et cetera. Now we are talking internally about how do we leverage that new software to be able to give a better client experience. So that's where we will be making our investments.
And then we've talked about it before, much of this is now software-as-a-service as opposed to on-prem. So just kind of seeing the geography of where these expenses are lending. So there's not a long amortization period of 7 to 10 years now. We're looking at now, on a regular basis, 5-year kind of service contracts, which changes things a bit. So that's going to be another headwind coming through this, how we're able to treat these expenses from a P&L perspective. And -- but we're going to make those investments to enhance the client experience, enhance efficiencies and also kind of have people working in the right jurisdictions when it comes to servicing our clients.
Ladies and gentlemen, that concludes our question-and-answer session. I would now like to turn the conference back over to the management for any closing remarks.
Thank you very much, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Hope everyone has a great day.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.