The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q4 2023 Earnings Call Transcript
The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q4 2023 Earnings Call Transcript February 13, 2024
The Bank of N.T. Butterfield & Son Limited isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Nihugi and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2023 Earnings Call for The Bank of N.T. Butterfield & Son Limited. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations. Please go ahead. Sir.
Noah Fields: Thank you. Good morning, everyone and thank you for joining us. Today, we will be reviewing Butterfield's fourth quarter and full year 2023 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 2023 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 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: Thank you, Noah, and thanks to everyone joining the call today. I am pleased with Butterfield's performance in 2023 as we completed a number of important projects including the implementation of our upgraded core banking system in Bermuda and Cayman, the onboarding of trust assets acquired from Credit Suisse, and executed a significant cost reduction program which should improve operating efficiencies and help offset inflationary pressures and the expected impact of lower market interest rates on net interest income. Butterfield continues to benefit from leading bank market shares in Bermuda and Cayman Islands with an expanding retail banking presence in the Channel Islands. Wealth management services in Bermuda, the Cayman Islands and the Channel Islands include trust, private banking, asset management and custody.
The bank also offers specialized financial services in the Bahamas, Switzerland, Singapore and in the U.K. where we provide mortgages to high-net-worth clients with properties in prime Central London. I will now turn to the full year highlights on Page 4. Butterfield had an excellent year with net income of $225.5 million and core net income of $231.5 million. This resulted in a core return on average tangible common equity of 27% for 2023. The bank earned higher net interest income in an elevated market interest rate environment as well as increased noninterest earnings. The strong revenues were somewhat offset by higher expenses, which trended higher due to inflationary pressures, the investments in our core banking system and branches, and costs associated with the Credit Suisse asset acquisition.
The net interest margin increased to 2.80% from 2.41% in 2022, with the cost of deposits rising to 140 basis points from 34 basis points in 2022. We have continued to carefully balance the cost of deposits with a competitive landscape in our banking jurisdictions and we continue to see mixed shift to higher cost term products while our core noninterest bearing deposit franchises remain somewhat insulated. Tangible book value per common share increased by 21.2% to end the year at $19.29. This was due to an improved OCI position, normalization to a smaller balance sheet post-COVID, as well as retained earnings for the year. We remain committed to actively managing our capital and throughout the year, we have paid out approximately 38% of earnings in quarterly dividends.
In addition, during 2023, the bank repurchased just over 3 million shares at a total value of $88 million. On December 5, the Board approved a new share repurchase authorization for 2024 of up to 3.5 million common shares, which came into effect on December 15th. As anticipated, during the fourth quarter, we completed the acquisition of trust assets from Credit Suisse. I'm very happy with the quality of business that we have successfully onboarded and have been impressed with talented new colleagues that have also come across to Butterfield. I will circle back at the end and walk through some of the highlights of the deal. 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 now turn to the fourth quarter highlights on Page 6. Butterfield reported strong financial results in the fourth quarter of 2023 with net income of $53.5 million and core net income of $55.3 million. We reported core earnings per share of $1.15 with a core return on average tangible common equity of 25.4% for the fourth quarter of 2023. The net interest margin was 2.73% in the fourth quarter, a decrease of three basis points sequentially from the prior quarter with the cost of deposits rising to 172 basis points from 152 basis points in the prior quarter. Deposit costs continued to increase at a modest pace across all of our banking jurisdictions as fixed term deposits rolled into higher rates as well as a mixed shift in deposits from demand deposits to term deposits.
The Board has again approved a quarterly cash dividend of $0.44 per share. We also continue to repurchase shares during the quarter with buybacks totaling 1.2 million shares at an average price of $28.20 per share. Turning to 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 $86.9 million, a decrease of 3.8% versus the prior quarter. The lower net interest income resulted from a decrease in the volume of interest-earning assets and higher deposit costs, which were partially offset by improved asset yields. Average interest-earning assets in the fourth quarter of 2023 of $12.6 billion were sequentially 2.5% lower driven by a decrease in average deposit levels.
The yield on interest-earning assets increased 17 basis points to 4.39% from 4.22% in the prior quarter as investment portfolio runoff continued to be invested at the shorter end of the yield curve and increases in rates on loans produced improved interest income. The yield on treasury assets during the quarter was 4.72% versus 4.47% in the prior quarter and the investment portfolio yielded 2.16%, which was 10 basis points higher than the third quarter. In addition, the yield on loan balances also increased by 17 basis points to 6.68%. Average investment balances decreased by $204.4 million, or 3.7% to $5.29 billion compared to the prior quarter, mainly due to pay downs and maturities, the proceeds of which were invested in short-term treasury assets.
Since year-end, we have recommenced using proceeds from maturities and paydowns as well as some excess liquidity to ladder out in the investment portfolio investing in a mix of U.S. agency MBS securities and medium term U.S. treasuries. Slide 8 provides a summary of noninterest income, which totaled $60 million, up 15.4% versus the prior quarter due to expected fourth-quarter seasonal increases in card services, incentive revenues and transaction volumes, and higher foreign exchange volumes. Trust fees increase as revenues were earned from the clients acquired from Credit Suisse during the year. Noninterest income continues to be a stable and capital-efficient source of revenue with a fee income ratio of 41.3%. In the coming quarters, we expect the levels of noninterest income to return to a quarterly run rate in the $52 million to $53 million range.
On Slide 9, we present core noninterest expenses. Total core noninterest expenses were $90.4 million, a 7.2% increase compared to $84.3 million in the prior quarter. The higher core noninterest expenses are primarily attributable to the completion of the recent IT infrastructure and core banking upgrades and the timing of property maintenance activities across the group, as well as performance-based remuneration incentive accruals associated with strong earnings. We expect the quarterly run rate for expenses to stabilize around $88 million in the second half of 2024. This incorporates the expected uplift in expenses from the amortization of our new cloud-based IT investments and core banking system and branch upgrades, as well as recently onboarded colleagues servicing the client book of trust clients are also taken into consideration the expected benefit of the group-wide cost restructure announced in Q3.
I will now turn the call over to Michael Schrum to review with the balance sheet.
Michael Schrum: Thank you, Craig. Slide 10, shows that Butterfield's balance sheet remains liquid and conservatively managed. Period end deposit balances increased slightly to $12.0 billion from $11.9 billion at the prior quarter end, and this reflects further stabilization in the deposit base. Butterfield's low risk density of 34.0% continues to reflect the regulatory capital efficiency of the balance sheet with the lower risk weighted residential mortgage loan portfolio, which now represents 69% of our total loan assets. On Page 11, we provide additional detail on our deposit composition by segment. Compared to the prior year, Butterfield's deposits remain well diversified across our banking jurisdictions, with noninterest-bearing demand deposits representing 22% of total group deposits.
Client deposit activity levels remain generally as expected with the bank seeking to balance deposit volumes against cost of funds for each market. Turning to Slide 12, we provide annual measures for loans by type, business segment and rate type. The chart on the top left breaks out the residential loan portfolios by location, which has remained stable. On the bottom right, fixed rate loans now represent 51% of total loans as the three to five year fixed rate product in the rising rate environment has been popular with clients. Turning to Slide 13, the two charts demonstrate the conservative nature of Butterfield's balance sheet and versus peers. Butterfield maintains a high degree of liquidity due to the nature of our markets and as a result of not having access to a central bank or a fed window.
We continue to have significant holdings of cash and cash equivalents, interbank deposits and short-dated sovereign securities in addition to liquidity and repo lines with correspondent banks. Butterfield's loan to deposit ratio remains at 40% with conservative lending standards. On Slide 14, 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 also continues to be strong, with nonaccrual loans standing at 1.3% of gross loans and a low charge-off rate of 8 basis points. On Slide 15, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis.
Asset sensitivity did increase in the fourth quarter due to a lower investment portfolio duration and higher levels of cash and cash equivalents. Unrealized losses in the AFS portfolio, including OCI was $163.9 million at the end of the fourth quarter, an improvement of $71.4 million, or 31% from the prior quarter. Slide 16 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory minimum requirements. While not of regulatory ratio, our TCE to TA has also increased above our target range of 6% to 6.5% this quarter and is indicative of the health of our overall capital levels. I will now turn the call back to Michael Collins.
Michael Collins: Thank you, Michael. Before we conclude our prepared remarks, I would like to provide a summary of highlights from our recently completed Credit Suisse trust asset acquisition. On Slide 17, of the presentation, we have provided information to help frame the deal. As you will see from the timeline at the top of the page, after our initial announcement in September of 2022, there have been seven distinct closings. The deal was structured as an asset purchase rather than an entity purchase, which has given us the flexibility to review and select each client to help us take only the clients that are consistent with our risk tolerance. This process has been time-consuming but has resulted in a high-quality book of business.
Of significance, the deal increases Butterfield's presence in Singapore, where we continue to expect significant growth in the private trust market. We are pleased to have more than 20 new colleagues join Butterfield to help service the 560 new trust clients we have now onboarded. New assets under administration total approximately $24 billion. We expect annual fees from the new business to total approximately $9 million, with new annual expenses of around $6 million. We also expect to continue to grow this book over time. In total, we recognize a new intangible asset of $27.3 million, with around one-third of the total consisting of deal and onboarding expenses. I look forward to continuing our business development efforts and our search for other trust and banking M&A opportunities to help continue our profitable growth.
The turmoil in the regional banking space last year allowed us to demonstrate the benefits of Butterfield's strong market positioning, conservative balance sheet and liquidity management, and client relationship banking model. This model continues to demonstrate strength and resilience from a high fee to income ratio, limited credit risk in our investment portfolio, a 40% loan to deposit ratio, a high degree of liquidity, and a robust deposit base diversified across jurisdictions, sectors, and currencies. We are well positioned for the future and expect growth to be both organic and driven by potential M&A. In 2024, we will build on the successes of 2023 with a strong focus on client experience and continuing to create shareholder value. Thank you.
And with that, we would be happy to take your questions. Operator?
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