Yahoo Finance The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q1 2024 Earnings Call Transcript
The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Q1 2024 Earnings Call Transcript April 24, 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 Dorwin and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2024 Earnings Call for The Bank of N.T. Butterfield & Son Limited. All participants will be in a listen-only mode. [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.
Noah Fields: Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's first 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 first 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 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 during the call today. Butterfield's first quarter 2024 results continue to benefit from our leading market positions and highly regarded international financial centers. As a reminder, we operate well-established banking and wealth management franchises in Bermuda, Cayman Islands and the Channel Islands. We also offer specialized financial services in the Bahamas, Switzerland, Singapore, and the UK where we provide mortgages to high net worth clients with properties in prime Central London. I will now turn to the first quarter highlights on page 4. Butterfield reported strong financial results in the first quarter, with net income of $53.4 million and core net income of $55 million.
We reported core earnings per share of $1.17 with a core return on average tangible common equity of 24.5% for the first quarter of 2024. The net interest margin was 2.68% in the first quarter, a decrease of 5 basis points from the prior quarter, with the cost of deposits rising to 178 basis points from 172 basis points in the prior quarter. The increase in deposit cost was primarily the result of continued mix shift from demand deposits to term products as well as term deposit rollovers. The board has again approved a quarterly cash dividend of $0.44 per share. We also continued to repurchase shares during the quarter totaling 1.2 million shares at an average price of $30.40 per share. Before I turn the call over to Craig, I would like to welcome Butterfield's new General Counsel and Group Chief Legal Officer, Simon Des-Etages.
Simon joins us following the planned retirement of Shaun Morris. Simon has over 30 years of legal experience in London, New York, and Bermuda with a majority of that time spent in the banking sector. I am confident Butterfield will benefit from his extensive experience advising banks on legal and regulatory matters. I will now turn the call over to Craig for details on the first quarter.
Craig Bridgewater : Thank you, Michael. And good morning. On slide 6, we provide a summary of net interest income and net interest margin. In the first quarter, we reported net interest income before provision for credit losses of $87.1 million, a small increase versus the prior quarter. The net interest income benefited from an increase in average interest earning assets, but was muted by lower NIM and one less day than the fourth quarter. Average interest earning assets in the first quarter of 2024 of $13 billion was 3.2% higher than the prior quarter, driven by an increase in average deposit levels. The yield on the interest earning assets was flat at 4.39%. The yield on treasury assets during the quarter was comparable to the prior quarter at 4.71%, and the investment portfolio yielded 2.23%, which was 7 basis points higher than the prior quarter, reflecting the runoff of low-yield securities and increased yields from more recent purchases.
Throughout the first quarter, the bank reinvested maturities, paydowns, and some excess liquidity into a mix of US agency MBS securities and medium-term US treasuries. The yield on loan balances decreased by 10 basis points to 6.58%, principally attributed to net paydowns and higher-yielding loans. Average investment balances decreased by $86.3 million or 0.07% to $5.2 million compared to the prior quarter, mainly due to maturities and changes in the fair value of the securities held. Slide 7 provides a summary of non-interest income, which totaled $55.1 million, down 8.1% versus the prior quarter, primarily due to seasonally higher card services fees included in banking revenue in the fourth quarter of the year. Trust fees declined as a result of lower activity-based fee income, while fees from asset management increased as a result of higher assets under management.
Net interest income continues to be a stable and capital-efficient source of revenue through the cycle, with a fee income ratio of 38.6%. On slide 8, we present core non-interest expenses. Total core non-interest expenses were $86.9 million, a 3.8% decrease compared to $90.4 million in the prior quarter. The decline in core non-interest expenses is primarily attributable to lower salary and benefit costs as performance-based incentive accruals decreased from the prior quarter. Expenses in the first quarter also benefited from incurring less technology and communications costs. We continue to expect a quarterly run rate for expenses to total about $88 million per quarter in the second half of 2024. As discussed previously, this contemplates the increased expenses resulting from the amortization of our new cloud-based IT investments and core banking system and branch upgrades, as well as calls for a new team servicing the acquired book of trust clients, all whilst taking into consideration the expected benefit of the group-wide restructure announced in the third quarter of 2023.
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 increased to $12.1 billion from $12 billion at the prior quarter-end, indicative of a stabilization in the deposit base. We continue to expect a medium-term deposit-level range between $11.5 billion and $12 billion with the understanding that deposit flows can be cyclical due to the nature of some of the trust and larger institutional depositors. Butterfield's low-risk density of 34.4% continues to reflect the regulatory capital efficiency of the balance sheet, with the lower-risk rated residential mortgages now representing 69% of our total loan assets. On slide 10, we show that Butterfield continues to have strong asset quality with low credit risk in the investment portfolio, which is now 100% comprised of at least double-A rated US government-guaranteed agency securities.
Loan asset quality also continues to be excellent with non-accrual loans remaining at 1.3% of gross loans, a net charge-off of 1 basis point, and our allowance for credit losses coverage ratio is consistent with prior quarter at 0.5%. In terms of credit trends, we have additional disclosures in Note 6 to the financial statements. I would just point out that our past due and accruing facilities are expected to 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 later this year. We remain well-secured and continue to expect full recovery of all past due and accruing loan assets. On slide 11, we present the average cash and securities balance sheet with a summary interest rate sensitivity.
Asset sensitivity increased in the first quarter of 2024 due to a lower asset duration with higher levels of cash and cash equivalents along with durations of investments and fixed rate loans trending lower. Unrealized losses in the AFS portfolio included in OCI was $178.2 million at the end of the first quarter, an unfavorable movement of $14.3 million or 9% from $163.9 million at 31 December 2023 due to an increase in long-term market interest rates. At current forward rates, AFS OCI is expected to improve by $52 million or 29% in the next 12 months and $83 million or 47% in the next 24 months, allowing for reinvestment in high yielding assets and tangible book value growth. Slide 12 summarizes regulatory and leverage capital levels. Butterfield's capital levels continue to be conservatively above regulatory requirements.
While not strictly a regulatory ratio, our TCE/TA ratio of 6.7% remains above our targeted range of 6% to 6.5% and is indicative of the health of our overall capital levels. I'll now turn the call back to Michael Collins.
Michael Collins : Thank you, Michael. The outlook for tourism in Bermuda and Cayman is very positive, with improved airlift and a good pipeline of cruise ships scheduled to visit the island. Bermuda continues to maintain its status as a world class jurisdiction to host high profile international events. Early next month, SailGP, an offshoot of the America's Cup Sailing Race, will be hosting televised races in Bermuda. Butterfield is a proud supporter of the event, as we were with the America's Cup. In November, the PGA will once again hold the Butterfield Bermuda Championship in Bermuda at the Port Royal Golf Course, where the event has been held since 2019 and is televised internationally. In Cayman, the peak season for tourism is winding down as we head towards summer after a great season.
Available visitor statistics show air arrivals heading back towards records with bed capacity continuing to increase. In addition to Bermuda and Cayman, the Channel Islands also benefit from strong economic contributions for international business. At the end of 2023, the Bermuda government tabled legislation on moving to a corporate income tax from 2025. The legislation will implement minimum corporate income tax of 15% on multinational enterprises with total global revenues in excess of €750 million in at least two of the previous four accounting periods and will fall within the scope of the Pillar Two global minimum tax rules. During the fourth quarter of 2023 reporting cycle, we saw a number of Bermuda reinsurers announce deferred tax assets in preparation for the expected implementation of a first ever corporate income tax in Bermuda.
We do not expect the tax to impact Butterfield directly in the near future, but we will be monitoring the progress closely. At this point, reinsurers are mostly planning to accept the changes and maintain their significant and economically important operations in Bermuda. In Cayman, the government has taken a less active approach legislatively with a wait and see position. Butterfield continues to benefit from capital efficient and recurring non-interest income, disciplined expense management, and net interest earnings. The bank has consistently maintained top quartile returns relative to US regional banks with operating returns on tangible equity in the range of 16% to 28% over the most recent economic cycle. Our strong returns require active capital management, which we deliver through regular quarterly cash dividends and share repurchases.
Additionally, capital is utilized to support organic growth and contemplates potential M&A activity. We remain committed to exploring growth opportunities through acquisitions and are regularly in contact with targets to assess potential prospects. We continue to look for accretive deals, primarily in private trusts, while also building organically from previous acquisitions and will remain disciplined to ensure M&A is consistent with our strategic and financial objectives. Thank you. And with that, we would be happy to take your questions. Operator?
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