The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q3 2023 Earnings Call Transcript

The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q3 2023 Earnings Call Transcript October 25, 2023

Operator: Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter 2023 Earnings Call for The Bank of N.T. Butterfield & Son Limited. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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.

Noah Fields: Thank you. Good morning, everyone, and thank you for joining us. Today we will be reviewing Butterfield's third quarter 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 third quarter 2023 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.

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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 US 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 during the third quarter and believe that these results demonstrate our continued focus on a stable low-risk density balance sheet, while delivering consistent and growing noninterest income and balanced capital management. As a reminder, Butterfield has market-leading bank franchises in Bermuda and the Cayman Islands and a growing retail banking presence in the Channel Islands, with wealth management provided in all three jurisdictions. Banking services consist of deposit taking, cash management, and lending solutions for individual, business, and institutional clients. Wealth management services include trust, private banking, asset management, and custody.

The bank also provides specialized financial services offerings in the Bahamas, Switzerland, Singapore, and the UK, where we offer mortgages to high-net-worth clients with properties in prime Central London. I will now turn to the third quarter of 2023 highlights on Page 4. Butterfield reported positive results with net income of $48.7 million and core net income of $57 million. The non-core expenses of $8.2 million were associated with a groupwide restructuring program implemented in the quarter. We reported a core return on average tangible common equity of 26.1% for the third quarter of 2023 with core earnings per share of $1.16. The net interest margin was 2.76% in the third quarter, a decrease of 7 basis points, with the cost of deposits rising to 152 basis points from 127 basis points in the prior quarter.

Deposit pricing increased across all of our banking jurisdictions as there was a mix shift from demand deposits to term deposits and fixed-term deposits rolled into higher rates due to the rising market interest rates. Our TCE/TA ratio of 6.5% has held steady and continues to be at the conservative end of our targeted range of between 6% and 6.5%. As a result, we increased activity in our share buyback program with repurchases of just over 1 million common shares in the third quarter. The rolling integration of the Credit Suisse trust asset acquisition progressed as planned during the third quarter. Our third closing saw us acquiring assets in the Bahamas and the fourth closing incorporated a total of 50 trust structures, primarily in Guernsey, with an additional five in Singapore.

We are very pleased with the progress so far and the quality of clients onboarded in the deal and continue to expect a final closing of the transaction this quarter, and we are tracking towards the $8 million to $10 million in added trust revenues from the deal in 2024, along with an estimated $6 million of expenses. I will now turn the call over to Craig for more detail on the quarter.

Craig Bridgewater: Thank you, Michael, and good morning, everyone. Looking now at slide 6. Here we provide a summary of net interest income and net interest margin. In the third quarter, we reported net interest income before provision for credit losses of $19.2 million, a decrease of 2.5% versus the prior quarter. The decrease was mainly due to higher deposit costs and a decrease in average balance sheet volumes. During the quarter, the net interest margin decreased 7 basis points due to increased deposit costs which outpaced higher earned yields and Treasury margins. Average interest-earning assets decreased marginally by 1% to $12.95 billion due to deposit outflows as customers activated funds and sought higher-yielding asset classes.

The yield on interest-earning assets increased 12 basis points to 4.22% from 4.1% as investment portfolio runoff continued to be invested at the shorter end of the yield curve. The yield on Treasury assets during the quarter of 4.47% versus 4.06% in the prior quarter and the investment portfolio yield at 2.06%, which was consistent with the second quarter. In addition, the yield on loan balances increased by 9 basis points to 6.51%. Average investment balances decreased by $119.8 million, or 2.1% compared to the prior quarter, mainly due to the scheduled maturity of some US Treasury securities. We remain conservatively positioned in the near-term by placing portfolio runoff into cash and cash equivalents, which continue to offer an attractive return profile without the OCI risk.

Turning to Slide 7. Noninterest income was up 3.6% versus the prior quarter, with higher banking fees due to improved card volumes in Bermuda and Cayman, as well as some fees from loan prepayments. Trust fees also increased compared to the prior quarter as a result of new clients acquired in the Credit Suisse deal, as well as organic growth and higher activity-based fees. Noninterest income continues to be a stable and capital efficient source of revenue with a fee income ratio of 36.7%. Slide 8 provides a summary of core noninterest expenses. Total core noninterest expenses were $84.3 million, a small and expected increase compared to $83.6 million in the prior quarter. The higher expenses are primarily attributable to increased staff-related expenses and higher technology and communication costs related to the investment in IT infrastructure and the banking application upgrade in Bermuda.

Prior to consideration of expenses associated with the servicing of the newly onboarded trust clients, we continue to expect a quarterly expense run rate of between $85 million to $86 million over the next few quarters, given that changes from the restructuring will not be fully implemented until the end of Q2 2024, and we have the full impact of the new cloud hosting fees and the amortization of the upgraded banking application and banking branches to be incurred. We are in the midst of developing our annual operating plan for 2024 and will provide updated expense guidance when we report fourth quarter results. I will now turn the call over to Michael Schrum to review the balance sheet.

Michael Schrum: Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively managed. Period-end deposit balances decreased to $11.9 billion from the prior quarter end. Deposits ended the quarter down approximately 2.7% and is reflective of typical client activity with some added seasonality. We currently anticipate total deposits stabilizing in the range of between $11.5 billion to $12 billion as competition for deposits has increased, and we see more evidence of a higher-for-longer interest rate environment in the near term. Butterfield's low-risk density of 34.3% continues to reflect the regulatory capital efficiency of the balance sheet with the lower risk-weighted residential mortgage loan portfolio, which now represents 70% of the total loan assets.

Turning now to Slide 10. Here we provide additional detail on our deposit composition by segment. Butterfield's deposits remain well diversified across its banking jurisdictions, with an uptick in term deposits for the group, primarily driven by Cayman where competition has increased and some clients have moved funds out to term. While this increased the cost of deposits, it is encouraging to see some additional term funding on the balance sheet from regular client activity. Core noninterest-bearing deposits remained at approximately 22% of deposits and $2.6 billion at quarter-end. To date, client deposit activity has been broadly as expected, with the bank seeking to balance deposit volumes against the cost of funds for each market. Turning to Slide 11.

We provide details of loans by type, business segment, and rate type. The chart on the bottom left shows the loan volume movements across our lending jurisdictions, with Bermuda and the London loan portfolio showing net reductions as those portfolios amortized in addition to some increase in prepayments. On the bottom right, fixed rate loans now represent 50% of total loans as clients elected to fix their payments in a rising interest rate environment. Loans are typically fixed for three to five years and should help moderate any potential debt servicing issues. The higher proportion of fixed term loans has also lowered our asset sensitivity over the past six quarters. Turning to Slide 12, we display two charts that demonstrate the conservative nature of Butterfield's balance sheet versus peers.

Butterfield remains -- 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 lines with correspondent banks. Butterfield's loan-to-deposit ratio remains low at 40% with conservative lending standards, and we only offer credit products in our home markets. On Slide 13, 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. The rerating of the portfolio follows Fitch's August downgrade of the Long-Term Issuer Default Rating of the United States of America.

Credit quality in the loan book also continues to be strong, with non-accrual loans standing at 1.2% of gross loans and a small charge-off rate at 4 basis points. On Slide 14, we present the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Asset sensitivity has continued to decrease during the past couple of years and now suggest a more moderate NII response to changes in market rates. Unrealized losses in the AFS portfolio included in OCI was $238 million at the end of the third quarter, up from $207.3 million at June 30. At the current implied forward curve, we expect the OCI burn-down to be $65 million, or 27% of the total in the next 12 months, and a total decrease of $103 million, or 43% over the next 2 years.

Slide 15 summarizes regulatory capital and leverage capital levels. Butterfield's capital levels continue to be significantly above regulatory requirements. I will now turn the call back to Michael Collins.

Michael Collins: Thank you, Michael. As mentioned earlier, during the third quarter, we made a difficult decision to implement a groupwide restructuring program that will result in a 9% reduction of our global workforce. This is intended to mitigate inflationary and other expense pressures. The projected $13 million annualized cost savings, once the program is fully implemented, should partially offset earnings at risk from lower interest rates in the future and inflationary pressure on expenses. The restructuring plans considered operational risk mitigation and new business processes and incorporates the placement of some additional non-client-facing functions in our service centers. We expect to continue to operate in all of our jurisdictions without significant changes in products and service offerings.

I'm pleased to say that here in Bermuda, we are concluding a solid 2023 tourism season. In Cayman, which is just entering its high season, we are seeing strong bookings and enhanced airlift and expect significant [Technical Difficulty] coming months. While not directly a driver of our business, healthy visitor numbers increase credit and debit card activity, which is beneficial to the bank and our clients. Our strategy to augment growth through M&A remains important, and we continue to evaluate potential targets in both the banking and private trust sectors. We do not have any specific deals to comment on currently, and Butterfield remains well positioned to continue growing organically while generating top quartile risk-adjusted returns. Thank you, and with that, we'd be happy to take your questions.

Operator?

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