Bank of N.T. Butterfield & Son (NTB) Q3 2025 earnings call transcript

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's third quarter 2025 financial results. On the call, I am joined by Michael Collins, Butterfield's Chairman and Chief Executive Officer, Michael Scrum, President and Chief Financial Officer, and Jody Feldman, Managing Director of Bermuda. 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 2025 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 the 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 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 our strong third-quarter results, which continue to demonstrate our ability to drive long-term value. Our financial performance was supported by solid net interest income, disciplined capital management, and a conservative and stable balance sheet. We delivered higher non-interest revenue and improved efficiency across the organization, underpinning our continued profitability and growth.

Waterfield is a leading offshore bank and wealth manager with franchise-level market shares in Bermuda, and the Cayman Islands, and a growing retail banking presence in the Channel Islands. We offer our full suite of services from trust and private banking to asset management and custody, tailored to meet the needs of our clients across these markets. We also serve international private trust clients in the Bahamas, Switzerland, and Singapore, and provide high-net-worth mortgage lending for prime London properties from our London office.

I will now turn to the third quarter highlights on page four. Butterfield reported net income of $61.1 million and core net income of $63.3 million. We reported core earnings per share of $1.51 with a core return on average tangible common equity of 25.5% in the third quarter. The net interest margin was 2.73% in the third quarter, an increase of nine basis points from the prior quarter, with the cost of deposits falling nine basis points to 147 basis points from the prior quarter.

We again are announcing a quarterly cash dividend of $0.50 per share. During the quarter, we continued to repurchase shares, with a total of 700,000 shares at a cost of $30.3 million. We continue our active capital management and plan to return excess capital that we do not require to support the business and growth initiatives. I will now turn the call over to Jody for an update on our Bermuda and Cayman markets and businesses.

Thank you, Michael. During the third quarter, Bermuda's business environment remained stable with continued expansion of international business and the local economy showing signs of growth. The government is forecasting its first budget surplus in over two decades, and with corporate income tax introduced this year, there are expectations this will generate meaningful revenue that could help ease cost of living and business pressures while reducing sovereign debt over time. Overall, the outlook is positive for Bermuda's fiscal position, with solid performance and growth continuing in the international business sector, particularly in reinsurance.

Tourism in Bermuda had a good 2025 season, supported by improved hotel occupancy rates. Average daily rates were up 10% August year-to-date, with occupancy levels remaining stable. Air arrivals are steady, and visitor expenditure is up 2%, despite a lower overall room inventory.

Looking ahead, airlift capacity and hotel inventory are expected to benefit from ongoing foreign direct investments in the island's hospitality infrastructure. The 593-room Fairmont Southampton is currently projected to reopen in summer 2026, while Grotto Bay Beach Resort has announced expansion plans. Additionally, the announced complete redevelopment of Elbow Beach Resort, expected to commence in 2026, reflects overall investor confidence in the long-term prospects for Bermuda's hospitality sector.

Bermuda will also gain visibility from major international events, including the PGA Tour Butterfield Bermuda Championship and SailGP, a high-speed global professional sailing league set to return in May 2026, further reinforcing the island's position as a premier tourism and event destination. The Cayman Islands continues to enjoy steady population and financial services growth, with a 2.5% GDP increase expected in 2025. a number of major residential and mixed-use projects nearing completion reflect sustained demand and confidence across the property market Financial services and tourism remain key pillars of the economy representing approximately 50 and 35 of GDP respectively Through adherence to its fiscal responsibility framework, the government maintains discipline that keeps the budget generally close to balance.

Looking ahead, growth is expected to continue at a measured pace following several years of rapid expansion. I will now turn the call over to Michael Scrum for more detail on the quarter. Michael?

Thank you, Jody, and good morning. On slide six, 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 $92.7 million, an improvement of $3.3 million, or 3.7% from the prior quarter. The net interest margin increased nine basis points to 2.73% compared to 2.64% in the prior quarter.

This increase is largely due to lower cost of deposits and the redemption of the subordinated debt during the second quarter. Average loan balances were slightly lower compared to the prior quarter, predominantly driven by lower originations relative to amortization and, to a lesser extent, the impact on foreign exchange translation from the weakening of the pound sterling against the U. S. dollar. Average interest-earning assets in the third quarter decreased $132.3 million to $13.5 billion.

Treasury and loan yields were seven basis points lower, while average investment yields were unchanged at 2.67%. During the quarter, the bank continued to pursue its conservative strategy of reinvesting the paydowns of investment maturities into a mix of U. S. agency MBS securities and medium-term U. S. treasuries. Slide 7 provides a summary of non-interest income, which totals $61.2 million, an increase of $4.2 million over the last quarter. This was due to higher banking fees, which benefited from growth in card volumes and incentive programs.

Foreign exchange revenues also rose as volumes increased in the third quarter. The fee-income ratio increased to 39.9% compared to the prior quarter, continuing to compare favorably to historical peer averages. On slide 8, we present core non-interest expenses. Core non-interest expenses decreased compared to the prior quarter from lower performance-based incentive accruals included within core salaries and benefits. Property expenses also declined, benefiting from a consolidation of premises in the Channel Islands.

In addition, indirect taxes were lower, reflecting reduced payroll taxes and work permit fees. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively positioned. Period and deposit balances were in line with prior quarters. Butterfield's lowest density of 28% continues to reflect the regulatory capital efficiency of the balance sheet. On slide 10, we show that Butterfield's asset quality remains very strong. The investment portfolio carries low credit risk consisting entirely of AA or higher rated U. S. treasuries and government-guaranteed agency securities. Credit performance in our loan and mortgage portfolios was stable this quarter. net charge-offs were negligible, non-accrual loans held at 2%, and our allowance for credit losses stayed at 0.6%. Our loan broke remained 70% full recourse residential mortgages, with nearly 80% having loan-to-values below 70%.

We continue to take a conservative underwriting approach, focusing on high-quality residential lending across our Bermuda, the Cayman Islands, and the UK and Channel Islands segments. On slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity.

Net unrealized losses in the FS portfolio included in OCI were $101.5 million at the end of the third quarter, an improvement of $18.5 million over the prior quarter. Interest rate sensitivity has reduced slightly against the prior quarter, driven by a reduction in short-term investments that were deployed into fixed-rate investments.

We continue to expect improvement with additional burndown of OCI over the next 12 to 24 months of 31% and 37%, respectively.

Slide 12 summarizes regulatory and leverage capital levels. The Board of Directors has once again approved a quarterly dividend of $0.50 per share.

TCE to TA continues to be conservatively above our targeted range of 6% to 6.5%. Finally, our tangible book value per share continued to improve this quarter by 5.4% to $25.06 as unrealized losses on investments improved. I will now turn the call back to Michael Collins.

Thank you, Michael. Butterfield's presence in leading international financial centers provides a strong foundation for continued growth, both through disciplined M&A and organic business development. Our balance sheet and liquidity position remain conservative and fully aligned with business model and regulatory frameworks. Our capital-efficient, fee-based businesses continue to deliver differentiated products and services to meet the needs of our clients.

As we move forward, we remain focused on enhancing operational efficiency and maintaining prudent expense discipline. Capital management remains a core component of our strategy. The strength of our earnings generation allows a balanced approach, funding sustainable cash dividends, supporting organic growth, pursuing strategic and accretive acquisition opportunities, and repurchasing common shares. Our field is well positioned to support our clients and create long-term value for our communities and shareholders.

Morning, David. I just wanted to start – curious how you think about the margin trajectory as we move forward. There are a lot of puts and takes here right now. You've got the likelihood of Fed cuts. You've got also a pretty substantial repricing tailwind as well. and then you've got the lagging impact of repricing on deposits. I was hoping you could help us think about the margin trajectory, you know, and maybe where we could bottom out if the forward curve does come to fruition.

Yeah, good morning, David. It's Michael Scrum. So, yeah, there are a lot of moving parts. I think, you know, we saw deposit costs come down this quarter. You know, just starting off, like I think the exit run rates of the quarter were brought in line, at a margin of $271,000 and cost deposit is $145,000.

As we look forward, you know, we do have some room on the deposit side. There's about $10 billion of interest-earning deposits. So, you know, we could see in the short – and these are relatively short deposit, three to six months term deposits and some demand interest-bearing. So we can obviously see some of that being beneficial to us.

And then as we look at the investment securities, you know, we're sort of thinking at the moment, certainly for the quarters, about a 150 or 150 base point uplift on reinvestment. Over the coming sort of 12 months, we have about a billion of AFS and HTM assets, you know, that are going to reprice. So that's going to be, again, very beneficial, and that's something that we're clearly focused on. And then finally, on the loan side, this quarter we've sort of seen broadly a 100 basis point uplift between the fixed rate resetting loans and the new lending that we've put into the book.

So over the next about 12 months, we have about $400 million of loans resetting as well. Obviously, some of that will depend on customer preference. We've seen a little bit of a makeshift into floating over the last quarter, last couple of quarters. So we're now at 54% floating and where we used to be more like a 50-50.

And then finally, the yield curve, if we get a steepener, obviously that's going to be very beneficial. If we get a sort of lag in short rates going down, that's going to dampen the impact on the negative effect on the margin. So I think, you know, within a handful of basis points, we could probably see the next or the current outlook would be for them to be relatively stable, maybe expanding a little bit as we get this tailwind of asset repricing.

I think we describe ourselves as a slow follower, watching closely. We're not getting a lot of pressure from clients. I mean, just in terms of maybe in terms of custody and that sort of thing for digital assets. Stablecoin is obviously something we're watching closely. But I think the approach we would take is to piggyback off our correspondent banks. So Bank of New York, obviously, is heavily analyzing and participating in this sector of the market, and we would piggyback off that, which actually provides us with a lot of safety and cover. It's not something that we would take the lead on in any sense. But you're right. The fee income lines are really well diversified. So we've got trust, foreign exchange, banking fees, you know, custody.

but foreign exchange, I think, is what makes us pretty unique compared to U. S. regional banks, and we had a very good quarter there. And we're continuing to look for acquisitions on the fee income side, so very focused on private trust in the jurisdictions in which we already operate. And we're having constructive discussions, nothing to announce at this point, but our goal is to try to continue to increase our fee income ratio as rates start to change. So we're watching, but I would say we're very conservative. We've talked about in the past we have no lender of less resort.

We are not going to take the lead in these sorts of things, but we will piggyback off our correspondent banking relationships.

Yeah. No, thanks, David. It's Michael Scrum. So, obviously, great, great quarter this quarter. We did have some non-core expenses in this quarter related to some of the retirement of Xena executives. And I think, you know, we've said before, we're sort of thinking if we can stave off the inflationary pressures in the system with some of those expense initiatives, moving back office functions to Halifax, that would be great as we are starting to see, you know, some pickup in pipeline on loans and interest net interest income seems to be relatively stable So you know really it the same thing We obviously gone through a lot of investments into our infrastructure So we did a cloud migration of our core banking system last year, and we're just catching up on the patch sets of those.

So while that's truncated the expense run rate a little bit higher because we're using software as a service, we're gradually exiting some of the older or out-of-date systems that we've been using. So I think, broadly speaking, it was a little good improvement this quarter. We should be thinking about the $90 million run rate as a good sort of estimate for the future, at least for the near to medium term, and then as some of the things that we're thinking about is exactly continuing to move back office functions to Halifax.

Thanks.

Good morning, Tim. Good morning, Tim.

Yeah, thanks, Tim. Yeah, so banking has been very strong, continues to be obviously, you know, a really solid and very capital efficient line for us. The combination of banking really is sort of recurring of periodic fees, which are sort of account maintenance fees, and then a combination of that plus the card services fees or transaction-related fees, and we've really seen an uptick in volumes. And that uptick in volumes on our card product really has also driven some incentive accrual increases this quarter.

So there wasn't really anything to call out particularly. Obviously, tourism-related card services fees, We're both an acquirer and an issuer.

Has just benefited us quite tremendously over the summer. Bermuda has had a pretty good tourism season. So that's been an uptick there. And by all means, Cayman looks to be in decent shape for this upcoming tourism season as well.

FX is we don't take any proprietary positions, as you know. But these are really commission-based FX exchange revenues, and I think clients have just taken the opportunity to rebalance a little bit, as we've seen some movements in foreign exchange rates. And so that's driven volume in there. There were a couple of sizable deals that we did for some private trust clients in the FX side, but nothing really to call out. It may be a little bit seasonal, but we're pretty constructive on the outlook.

Yeah, maybe I'll start on deposits, and Jody can just comment on loan pipelines, et cetera. I mean, deposits continue to be a little bit elevated for us. I think we have certainly seen some significant movements. It's netted out to be not very much movement this quarter, but we have seen some sizable client inflows, which are probably masking a little bit of the outflow. So we continue to expect that deposit levels will sort of come down a little bit. I think Bermuda has certainly seen the most growth in the deposits, and normally in the fourth quarter we would see a little bit of a seasonal increase in Cayman as funds kind of rebalance their cash held in the fund and cash held with us as an intermediary.

So really that's it on the sort of mid-market corporate side. I think deposit levels have been increasing in the Channel Islands as well, as we've sort of pivoted a little bit more to a retail growth strategy there. And I think that's great to see more sticky deposits and a better composition of deposits in that segment. But it is, as you know, with retail clients, it's a pretty slow growth, you know, in terms of the impact overall. And I'll let Jody just cover loan pipelines.

Sure. Hey, Tim, it's Jody Feldman. I would just comment quickly on loans. I mean, as you know, we're not a loan growth story at Butterfield, and we're not going to be stretching for credit at this point. Obviously, we maintain a low risk density balance sheet, and we're very conservative with our underwriting, and that's not going to change. That being said, we are seeing some encouraging signs in the loan pipeline, particularly in Cayman, a slight pickup in Bermuda due to kind of macro backdrop, which is encouraging.

But I think it's pretty consistent from, you know, previous times.

Thanks.

Thanks, Debbie, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.