Bank of N.T. Butterfield & Son Limited (The)

Good day and welcome to the Butterfield Fourth Quarter 2025 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Noah Fields, Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's fourth quarter and full year 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 Brie Hidalgo, 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 2025 results. The press release and 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 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.

Thank you, Noah, and thanks to everyone during the call today. In 2025, Butterfield delivered strong financial results through disciplined execution. Net income improved versus the prior year with core net income per share growing 17.4% year on year to total $5.60 per share. Our strong relationship-led banking and trust businesses increased non-interest income while lowering deposit costs and asset redeployment boosted interest earnings. We maintained expense discipline and advanced our technology platform by adding new customer functionality and improved interface. Capital management remains an important value lever, which is reflected in our quarterly dividend increase last year and share repurchases, which resulted in a total combined payout ratio of 97% in 2025. Our M&A growth strategy remains on track, and we continue to have active dialogue with potential targets. Butterfield is a leading offshore bank and wealth manager with leading competitive positions in Bermuda and the Cayman Islands. and a growing retail banking business in the Channel Islands. We provide a range of services, including trust and private banking, asset management, and custody, which are designed to meet the needs of our clients. Beyond these core banking markets, we serve international private trust clients in the Bahamas, Switzerland, and Singapore, and from our London office, we offer high net worth mortgage lending for prime central lending properties. I will now turn to the full year highlights on page five. Waterfield generated solid net income of $231.9 million and core net income of $237.5 million. This resulted in a core return on average tangible common equity of 24.2% for 2025. During the year, net interest margin increased five basis points to 2.69% from 2.64% in 2024, with the average cost of deposits falling to 150 basis points from 183 basis points in 2024. Tangible book value per common share grew 21.7% in 2025, ending the year at $26.41. Balanced capital management continued to be a key driver for shareholder value. In addition to the increase in the quarterly cash dividend rate, the bank repurchased 3.5 million shares for a total value of $146.7 million in 2025. Finally, on behalf of the bank's board of directors, I am pleased to welcome Maury Park back to the board. Maury brings more than 30 years of distinguished public service, including senior leadership roles, at the Smithsonian Institution and the Central Intelligence Agency, where she oversaw governance, operations, and public accountability. Her proven ability to lead in complex environments, coupled with deep expertise in human resources, operations, technology, and cybersecurity, will add a meaningful voice to our board's deliberations. I will now turn the call over to Michael Scrum for details on the fourth quarter.

Thank you, Michael. Good morning, everyone. In the fourth quarter, Butterfield reported net income and core net income of $63.8 million. We reported earnings per share of $1.54 with a core return on average tangible common equity of 24.6% in the fourth quarter. The net interest margin of 2.69% in the fourth quarter was a decrease of 4% from the prior quarter. with the cost of deposits falling 10 basis points to 137 basis points from the prior quarter. The bank has again announced a quarterly cash dividend of 50 cents per share. During the fourth quarter, we continued to repurchase shares, acquiring and canceling 600,000 shares at a cost of $29.6 million. On December 8th, the board also approved a new share repurchase authorization for 2026 of up to 3 million common shares or $140 million. On slide seven, 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 $92.6 million, which is in line with the prior quarter. The net interest margin decreased four basis points to 2.69% compared to 2.73% in the prior quarter. This decline was as a result of lower treasury and loan yields following further cuts by central banks. Average investment volumes increased as the bank deployed assets into high-yielding available-for-sale investments. which helped increase average investment yield to 2.72% from 2.67% in the third quarter. Average loan balances continue to moderate compared to prior quarter, predominantly due to lower originations relative to amortization on existing loans. Average interest earning assets in the fourth quarter increased $199.4 million to $13.7 billion, with treasury and loan yields were 20 and 23 basis points lower, respectively. During the quarter, we maintained our conservative investment strategy with the reinvestment of maturities into a mix of U.S. agency MBS securities and medium-term U.S. treasuries. Slide 8 provides a summary of non-interest income, which totaled $66.3 million, an increase of $5.1 million over the last quarter. This was due to higher banking fees, which improved from seasonal growth in card volumes and incentive programs. Foreign exchange revenues also rose as volumes increased, as well as higher asset management revenues due to increased asset valuations. The fee income ratio increased to 41.7% compared to the prior quarter, continuing to compare favorably to historical peer averages. On slide nine, we present core non-interest expenses, which increased compared to the prior quarter due to external services fees, high incentive accruals, and increased event and sponsorship marketing-related costs. There were a number of costs during the quarter that we do not expect to repeat. I would anticipate that quarterly core expenses to be around $90 to $92 million over the next few quarters. I'll now turn the call over to Bree to go through the balance sheet and some risk highlights.

Thank you, Michael. Slide 10 shows that Butterfield's balance sheet remains liquid and conservatively positioned. Period-end deposit balances were consistent with prior quarters, although actual deposit outflows of $360 million were offset by foreign exchange translation gains of $310 million when compared to the fourth quarter of 2024, as shown in the appendix on slide 17. Waterfield's low risk density of 28.3% continues to reflect the regulatory capital efficiency of the balance sheet. On slide 11, 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, with no net charge-offs, non-accrual loans held at around 2%, and our allowance for credit losses remained at 0.6%. Our loan book remains 71% full recourse residential mortgages, with nearly 80% having loan devalues 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 12, we present the average cash and securities balances with a summary of interest rate sensitivity. Net unrealized losses in the AFS portfolio included in OCI were $89.4 million at the end of the fourth quarter, an improvement of $12.1 million over the prior quarter. Interest rate sensitivity has increased versus the prior quarter, driven by updates to deposit beta assumptions. We continue to expect OCI improvement with additional burndown over the next 12 months of 28%. Slide 13 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 of 7.5% 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 $26.41 as unrealized losses on investments improved. I will now turn the call back to Michael Collins.

Thank you, Brie. In 2025, Butterfield continued to produce top quartile returns relative to peers while maintaining a comparatively low ratio of risk-weighted assets to total assets of 28.3%. Our banking jurisdictions in Bermuda, Cayman, and the Channel Islands continue to perform well and provide stable non-interest income with solid core deposits and franchise-level market shares. We remain committed to actively pursuing trust and bank acquisitions, which would help improve the overall quality of earnings for our asset-sensitive banking franchise. Finally, I would like to thank our clients for their continued support in business. I would also like to express my gratitude to fellow directors for your guidance and governance. As we enter 2026, I look forward to continued collaboration and success across all of Butterfield. Thank you, and with that, we would be happy to take your questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. And at this time, we'll pause momentarily to assemble our roster. And our first question will come from Tim Switzer with KBW. Please go ahead.

Hey, good morning. Thanks for taking my questions. Hope you guys are doing well.

Yeah, good morning. How are you doing, Tim?

Good. I was looking for some clarification real quick on the expense guide you gave. I heard the 92. Did you say 90 to 92 million for quarterly expenses, or it broke up a little bit? So I was just looking for clarification.

Oh, yeah. Yeah. No, thanks for the question. Yeah, I mean, they were trending a little bit higher in quarter four. Obviously, you know, some of that was due to, you know, incentives, et cetera, and then there was some outside services fees. But I think Some of those will not be repeating in future quarters. So we're sort of thinking it's going to settle between 90 and 92 million.

Okay, got it. Is that a good run rate for the rest of the year? And, like, what's the trajectory there? Because I know there's a good amount of seasonality as we get into Q1.

Yeah, I mean, quarter four is normally, I mean, yeah, depending, quarter four is normally a little bit higher, as you will have seen from prior years as well. Q1 tends to be sort of on a low side, so, you know, by a couple of million. But nothing big expected to come through in terms of investments, et cetera, in infrastructure. So I think, yeah, some of the seasonal bets in Q4 will not be repeating in the following quarters. So I think that's a pretty good run rate. Okay.

and obviously very strong trends this quarter in your fee businesses. Can you talk about, it seems pretty broad-based, but can you talk about broadly what's kind of driving that and some of the investments you've made on the tech side, you know, has that helped drive some of this upside?

Yeah, great. Another great question. It's Michael Scrum again. So if I just go through the fee categories, so asset management fees, obviously, I mean, some of those are periodic fees, but most of them are driven by underlying valuations improving significantly in the fourth quarter and throughout 2025, actually, you know, driving the asset management fee that we then bill on those accounts, particularly on the discretionary side. Obviously, the money fund has also attracted – we have a AAA-rated money fund. It's also attracted additional volume in 2025. So that's been a net positive, and hopefully will continue in the future. As you know, banking is sort of seasonal in Q3 and Q4, where we get some volume incentives occurring from our CART fund. programs. So that probably will not be repeating in Q1 and Q2. So that's probably seasonally high in Q4. But underneath the banking fees, there's also transaction volume fees, standing orders, and periodic fees, such as bank account fees and statementing fees, etc., FX has been a real source of strength this quarter and throughout 2025, actually, and so we believe we're making some good progress there. You know, there's some new functionality that we're allowing clients to access, you know, credit lines for FX, et cetera. So I think that's helped a little bit get our name out there and drive some volume. And then, obviously, trust was particularly strong again this quarter and is – primarily related to the Credit Suisse asset acquisition that we have now completely integrated and we're starting to see good additional client volume coming through. And also our standstill on that contract on fees has now expired. And so we're just rebalancing those fees to the services provided there. So I think that probably will continue into 2026. So I think very strong performance in Q4 and throughout 2025 on a non-interest income.

Got it. That was very helpful. Appreciate all the color. One last one for me. NPA moved a bit lower this quarter. Can you maybe talk about some of the puts and takes there? What drove that and what your outlook is for just credit migration over the next year?

Yeah, I mean, obviously, sorry, it's Michael Scrum again. So we haven't put our financials out. They're coming out with the with the 20F when we furnish that, you know, in a little bit. But underneath the – I mean, we're not seeing systemic shifts in MPA migration or days past due migrations. It's really related to a few – yeah, a few commercial accounts sort of scattered throughout the network, really, mostly in Bermuda. liquidation of the Elbow Beach Hotel, which completed in Q2, Q3. And then we had some commercial litigation that we successfully completed in sort of Q3 as well. So it's not really anything systemic there, but we're certainly keeping an eye on it.

Got it. Very helpful. Thank you, Michael.

The next question will come from Liam Cohill with Raymond James and Associates. Please go ahead.

Hi. Good morning, everyone. Thanks for taking my question. Sure. So you've experienced some non-interest deposit growth on the Caymans this quarter. Could you remind us if there are any seasonal elements to those flows that we should be aware of?

Yeah. Hi, Liam. This is Bree Hidalgo. Yeah, we definitely saw a seasonal influx associated with reinsurance payments that drove that increase. It's Nothing more than that.

Okay, great. Thank you very much. And to circle back to your fee businesses, to take a higher level view, especially in your trust business, now that the CS business is integrated, where are you seeing the most opportunity for new clients and how is client retention trended given the movement to your current fee structure? Sure.

Thanks for the question. Actually, Credit Suisse is vetted down quite well now, so our Singapore office is actually in sort of a growth mode, so that's helpful. Generally, in the trust world, you organically grow like 2% a year, and you have a natural attrition of about 2% as trusts come to their natural end after 30, 40 years. So basically, there's not a lot of organic growth, So we generally focus on trust acquisitions to grow the book in our existing jurisdictions, and we're continuing to have those discussions. But we are very excited about the Singapore office. We're a top five private trust company in Singapore now, and there's great growth opportunities. But generally, growth in trust is going to come through acquisitions.

Great. You actually led right into my next question. It was great to hear that conversations on the M&A front have been continuing. Have you been focused on any particular geographies for those trust acquisitions and what other fee businesses interest you?

So we're really focused on our existing jurisdictions for trust or if we have an opportunity for bank overlap acquisitions, but we believe, you know, having trust companies in, you know, In Guernsey, Bermuda, Cayman, Switzerland, and Singapore, you know, those are the best trust jurisdictions. So I don't think necessarily we would go outside of that footprint. The issue with acquisitions, obviously, is, you know, we can't always get exactly what we want. So sometimes there will be one or two other jurisdictions that we'll have to take on, but generally we'll continue to focus on our existing jurisdictions because we think they're the best, and that's where most of the opportunities are.

That's very helpful. Thank you. I'll step back.

Again, if you have a question, please press star, then one. And this will conclude our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.