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DATE
Tuesday, July 29, 2025 at 2:00 p.m. ET
CALL PARTICIPANTS
Chief Executive Officer — Michael Collins
Chief Financial Officer — Craig Bridgewater
Group Chief Risk Officer — Michael L. Schrum
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TAKEAWAYS
Net Income: Net income for fiscal Q2 2025 (period ended June 30, 2025) was $53.3 million, with core net income for the same period at $53.7 million.
Core EPS: Core earnings per share for fiscal Q2 2025 were $1.26.
Core Return on Average Tangible Common Equity: Core return on average tangible common equity was 22.3% in fiscal Q2 2025.
Net Interest Income: Net interest income before provision for credit losses for fiscal Q2 2025 was $89.4 million, driven by higher average interest-earning assets, partially offset by lower treasury yields.
Average Interest-Earning Assets: Average interest-earning assets for fiscal Q2 2025 were $13.6 billion.
Non-Interest Income: Non-interest income for fiscal Q2 2025 was $57 million, down $1.4 million sequentially, linked to seasonal reductions in transaction volumes and lower custody/administration fees, partially offset by increased trust revenue.
Non-Interest Expenses: Core non-interest expenses for fiscal Q2 2025 were $91.4 million, reflecting FX and incentive accruals, offset by lower payroll taxes.
Period-End Deposits: Period-end deposits for fiscal Q2 2025 were $12.8 billion, driven by a $260 million FX impact, partially offset by a $30 million decrease in actual customer deposits.
Non-Performing Loan Ratio: Improved by 30 basis points to 2% as commercial loan recoveries concluded.
Loan Book Composition: As of fiscal Q2 2025, 70% of the loan book consisted of full recourse residential mortgages. Additionally, 81% of residential mortgages had loan-to-value ratios below 70%.
Net Unrealized Losses in AFS Securities (OCI): Net unrealized losses in AFS securities (OCI) were $120 million at the end of fiscal Q2 2025; management expects further improvement of 33%-42% over the next twelve to twenty-four months.
Dividend Increase: The quarterly cash dividend was raised 14% to $0.50 per share. Board approved the new rate.
Share Repurchases: The company repurchased 1.1 million shares at an average price of $40.69; new 1.5 million share repurchase authorization to commence after the current program ends.
Regulatory Capital: The CET1 ratio was noted as closer to 26% as of fiscal Q2 2025, compared to 17%-20% pre-pandemic; with capital expected to gradually decline toward the mid-20% range over the next few years as excess capital is deployed.
M&A: Management highlighted ongoing M&A discussions, especially in private trust, with a disciplined approach to valuation and capital deployment.
Board Changes: Sonia Baxendale departed; Andrew Hinton appointed, bringing experience in governance, private equity, and investment banking.
SUMMARY
The Bank of N.T. Butterfield & Son Limited(NTB 2.77%) delivered solid profitability, with rising tangible book value and a higher dividend, reflecting management’s emphasis on shareholder returns and prudent capital strategy. Deposit growth was primarily FX-related, while non-interest income and margin were pressured by seasonal factors and market-driven lower treasury yields. Operating expenses grew as expected, influenced by currency movements and incentive accruals, but remain within management’s guidance range. The company continued to maintain conservative credit standards and a low-risk asset profile, resulting in improved asset quality and stable loss reserves.
CEO Collins said, “The increased dividend and new share repurchase authorization reflect the strength of our business over the past few years and our efforts to increase long-term value for our shareholders.”
Management indicated the adjusted capital return strategy involves a slightly higher dividend payout with a modest reduction in share repurchase authorization, balancing M&A optionality and capital returns.
CFO Bridgewater highlighted that the capital-efficient fee revenue ratio remained consistent at 39%.
Michael L. Schrum stated excess capital enables the company to “do a sizable deal without having to come back to existing shareholders to ask for more capital,” underscoring flexibility for future acquisitions.
INDUSTRY GLOSSARY
LTV (Loan-to-Value): Ratio of loan amount to appraised value of collateral property, used to assess credit risk in mortgage lending.
AFS (Available-For-Sale): Investment securities intended to be sold in the future, marked to market through other comprehensive income (OCI).
CET1 (Common Equity Tier 1 Capital): Core capital measure of a bank's financial strength from common equity and disclosed reserves, key under Basel III/IV regulation.
Full Conference Call Transcript
Michael Collins: Thank you, Noah, and thanks to everyone joining the call today. I am encouraged by our strong second quarter results, which continue to demonstrate our focus on sustainable profitability and creating shareholder value. Performance was driven by solid net interest income, diversified fee revenue, prudent expense management, and a strong stable balance sheet. The Butterfield franchise continues to generate long-term value in a dynamic external environment. Butterfield stands as a market leader in offshore banking and wealth management, with universal banking models in Bermuda and The Cayman Islands, complemented by an expanding retail presence in the Channel Islands.
Our comprehensive suite of wealth management solutions spans trust services, private banking, asset management, and custody, tailored to meet the sophisticated needs of clients in these island jurisdictions. Our tailored wealth management services are also available to customers in The Bahamas, Switzerland, and Singapore. We provide high net worth mortgage lending for properties located in prime Central London. I will now turn to the second quarter highlights on Page four. Butterfield reported high-quality financial results in the quarter with net income of $53.3 million and core net income of $53.7 million. We reported core earnings per share of $1.26 with a core return on average tangible common equity of 22.3% in the second quarter.
The net interest margin of 2.64% in the second quarter was a modest decline of six basis points from the prior quarter, with the cost of deposits falling four basis points to 156 basis points from the prior quarter. During the second quarter, the bank completed the early redemption of its $100 million subordinated debt, which resulted in the immediate recognition of $1.2 million of unamortized issuance costs and a two basis point one-time negative impact on NIM. With the redemption of the subordinated debt, we also took the opportunity to review the bank's overall capital levels and capital return strategy.
Over the past five years, we have increased stable fee revenue through M&A and significantly reduced the number of shares outstanding following our share repurchase programs. As a result, we are now rebalancing our capital return strategy with a 14% increase to the quarterly cash dividend rate to $0.50 per share. The Board has approved this increase in the dividend rate as well as a new share repurchase authorization of 1.5 million shares to commence following completion of the current program. During the second quarter, we continued to repurchase shares with a total of 1.1 million shares in the second quarter at an average price of $40.69 per share. Finally, we had a few board composition changes during this quarter.
We would like to take a moment to thank Sonia Baxendale for her commitment and guidance during her five-year tenure on Butterfield's Board of Directors. Due to other time commitments and opportunities, Sonia has chosen not to stand for reelection at the bank's AGM this past May, and we wish her all the best in her future endeavors. Yesterday, we also announced the appointment of Andrew Hinton to the Board of Directors. Andrew has been serving as Director for Butterfield's subsidiary banking business in the Channel Islands. I'm very pleased to welcome him to the group board. Andrew brings extensive knowledge of governance, private banking, private equity, and investment banking to Butterfield, and I look forward to his continuing contributions.
I will now turn the call over to Craig for details on the second quarter.
Craig Bridgewater: Thank you, Michael, and good morning. On Slide six, we provide a summary of net interest income and net interest margin. In the second quarter, we reported increased net interest income before provision for credit losses of $89.4 million. The increase was primarily due to an increase in average interest-earning assets, partially offset by lower yields on treasury assets. The net interest margin decreased modestly, settling at 2.4% compared to 2.7% in the prior quarter. This decline is largely attributed to lower treasury yields, which declined by 27 basis points directly in line with decreased short-term market interest rates, as well as the accelerated amortization of unamortized sub-debt issuance costs contributing to a one-time two basis point contraction in NIM.
Average loan balances were slightly higher compared to the prior quarter, predominantly driven by the impact of foreign exchange translation from the strengthening of the pound sterling against the U.S. Dollar. Absent the FX translation impact, loan volume decreased by $55 million as we recovered the full outstanding loan balances from a large legacy hospitality facility that was under receivership in Bermuda. Average interest-earning assets in the second quarter increased $166.7 million to $13.6 billion. Treasury yields were 27 basis points lower at 3.71%, loan yields were comparable at 6.31%, whilst average investment yields were one basis point lower at 2.67% due to the day count effect.
During the quarter, the bank maintained its conservative strategy of reinvesting the proceeds of investment maturities and paydowns into a mix of U.S. Agency MBS securities and medium-term U.S. Treasuries. Slide seven provides a summary of non-interest income, which totaled $57 million, a decline of $1.4 million linked quarter, resulting from a number of underlying movements. First, fees were lower due to the seasonal reduction in merchants and international money transfer volumes, partially offset by an increase in card volumes. Similarly, a seasonal reduction in volumes led to a decrease in foreign exchange revenue. Custody and other administration fees saw a decline as transaction volumes and assets under custody trended lower.
We are pleased to report offsetting positive contributions from an increase in trust revenue attributable to annual fee increases, the repricing of acquired business relationships, new client onboarding, and an increase in special and time-based fees. The capital-efficient fee ratio was consistent with the prior quarter at 39%, continuing to compare favorably to historical peer averages. On slide eight, we present core non-interest expenses. Total non-interest expenses were at $91.4 million, higher than the $90.3 million in the prior quarter, continuing to be within our expectations. This increase was due to several factors, including the FX impact of a strengthened pound sterling relative to the U.S.
Dollar, and increased performance-based incentive accruals, in addition to lower staff healthcare costs recorded in the prior quarter. Offsetting these increases was a decrease in payroll taxes, which are classified as indirect taxes. In terms of our expense expectations, we continue to think that a quarterly core expense rate of between $90 million and $92 million for the remainder of the year is appropriate but continue to monitor inflation and FX fluctuations across the franchise. I will now turn the call over to Michael Schrum to review the balance sheet.
Michael L. Schrum: Thank you, Craig. Slide nine shows Butterfield's balance sheet remains liquid and conservatively positioned. Period-end deposit balances increased to $12.8 billion from $12.6 billion at the prior quarter end. This movement was due to a $260 million effect from the strengthening British pound, which was partially offset by a decrease in actual customer deposits of $30 million. Butterfield's low-risk density of 28.6% continues to reflect the regulatory capital efficiency of the balance sheet. On Slide 10, we show that Butterfield continues to have a strong overall asset quality with low credit risk in the investment portfolio, which is 100% AA or higher rated.
The non-performing loan ratio improved by 30 basis points to 2% as we fully recovered a couple of commercial loans in Bermuda, and the allowance for credit losses coverage ratio of 0.6% remained consistent with prior quarters. As mentioned previously, Butterfield's loan portfolio continues to be 70% full recourse residential mortgages, of which 81% have loans to values below 70%. We remain focused on our conservative credit posture with a preference for residential mortgage lending in Bermuda, The Cayman Islands, and The Channel Islands. On Slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity. Duration decreased slightly for the AFS book.
Net unrealized losses in the AFS portfolio included in OCI were $120 million at the end of the second quarter, an improvement of $11.4 million or 8.7% over the prior quarter. We continue to expect improvement with additional burn down of OCI over the next twelve to twenty-four months of 33-42%, respectively. Slide 12 summarizes regulatory and leverage capital levels. As Michael Collins mentioned earlier, the Board of Directors has approved an increase in the quarterly dividend rate to $0.50 per share. In addition to the increased quarterly cash dividend rate and new share repurchase program, the bank continues to evaluate potential acquisitions as part of our continued growth priorities.
Finally, our tangible book value per share continued to improve this quarter by 3.6% to $23.77 as unrealized losses on investments improved. I will now turn the call back to Michael Collins.
Michael Collins: Thank you, Michael. During the second quarter and now into the third quarter, we've seen encouraging signs of economic growth in our island jurisdictions. Bermuda is currently in its high tourism season, and by all accounts, it is shaping up to be a good year. Bermuda continues to be a premier tourist destination with headline events such as the Butterfield Bermuda Championship, a PGA event, the Bermuda Triple Crown Billfish International Fishing Tournament, the Sail GP 2026 Series, and the biennial Newport To Bermuda sailing race. The reinsurance industry continues to perform well with added growth and interest in the life reinsurance sector.
In Cayman, we continue to see sustained growth across the board, including strong business performance in tourism, real estate, and international business sectors. Jersey and Guernsey are both doing well and continue to be recognized as choice locations for international business. Butterfield has benefited from this environment through the provision of banking, private trust, custody, and fiduciary services. We are also seeing growth in the retail business as we focus on our competitive local credit card offering as well as local banking services. Butterfield continues to be a responsible steward of capital by consistently returning excess funding to shareholders through a quarterly cash dividend and share repurchases when appropriate.
In addition, I would like to emphasize that we continue to pursue M&A fee growth, particularly in private trust. The increased dividend and new share repurchase authorization reflect the strength of our business over the past few years and our efforts to increase long-term value for our shareholders. Thank you. And with that, we would be happy to take your questions.
Drew: Operator? We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 2. To assemble our roster. The first question comes from David Pipkin Feaster with Raymond James. Please go ahead.
David Pipkin Feaster: Hi, good morning everybody.
Michael Collins: Good morning, David.
David Pipkin Feaster: You maybe on the start out, you touched on the impact of the treasury market in the press release on the margin this quarter. I know you're really disciplined about laddering the book. I was hoping maybe you could touch on your bond investment strategy just given the shape of the curve and whether that's changed at all. And whether your approach has adjusted just given the prospect of declining short-term rates perhaps later this year?
Michael L. Schrum: Yes. Good morning, David. It's Michael Schrum. Great question to kick off. I think at the moment we are just reinvesting maturities from the bond portfolio. So we obviously get both HTM and AFS maturities coming back at around 30 to 35 a month. A million, and it's going into a blend of sort of primarily fifteen-year mortgage-backed securities. And sort of 50% of that and then 50% into a TPO ladder or US treasury medium-term ladder. So two, three, five years. We're obviously looking for kinks in the curve. There is quite a lot of movement in the market. As you know, we've seen kind of a gradual steepener. There's definitely downward pressure on short rates.
So it's definitely an active conversation in terms of all the excess liquidity that's sitting on the balance sheet. Then you have the whole Fed decisions coming up next year. We're definitely looking at it at the moment. You know, we feel very comfortable with where the strategy is. It's gradually shortening the overall duration of the investment portfolio. And we're obviously able to reinvest at higher rates. But it is a slow process. And there's a lot of movement in the market. So it's definitely top of mind at the moment.
David Pipkin Feaster: Okay.
Michael L. Schrum: Helpful. And I'll just add, David. I mean, as Michael said, we're continuing to invest at higher rates. So investing somewhere around kind of three eighty basis points and around a three-year duration. So three or three point one-year duration, so bring your duration in. But as you said, we're very focused on it, looking at any excess liquidity that we have, you know, kinda seeing if it makes sense to kinda invest some of that or pre some of that given that we're looking at a potentially downward interest rate?
David Pipkin Feaster: Requirement.
Michael L. Schrum: Okay. That's helpful. And then, you know, the last couple of quarters, we talked about some transitory, maybe temporary deposits that might be rolling out. In the prepared remarks, I didn't hear anything. I may have missed it, but just kinda curious an update there. Whether anything has changed with those. Have they flown out? Just kind of curious how you think about that as we think about the size of the balance sheet.
Michael L. Schrum: Yes. I mean, I think we still kind of feel that there are some deposits that are subject to leaving the bank or kind of might be looked at as hard money. The fund that we talked about for quite a few quarters, that's in liquidation, and we still this fund is still here with us. But we still expect those to flow at some point given the legal process that's going through. Some of the other maybe some larger deposits in kind of wealth management space have flowed out and come in put to put to work. But at the same time, I've also had some deposits coming in as well to replace those.
But we don't really kind of behavioralize a lot of that. I mean, it's about 200 or just over 200. It comes to refund as a receivership, and it's somewhere around 7 to 800 of funds that are above on those. So can we consider not necessarily sticky at this point and may lead the bank. So we have to see how those act at the time. Which kinda gets us back to we think deposits may settle over the long term over the medium term. Yes. And I think, David sorry, it's Michael.
Just in our prepared remarks, I mean, it's tough to see when you have the sterling moving at such a rapid pace or dollar weakening and it's obviously due to rate differentials between the markets. As we see divergence between the different rate paths and central banks, so we tried to point out, and you can see a slide in the appendix that points out that the actual customer outflows that we're seeing on normalization in customer behavior is somewhat masked by a weakening dollar or strengthening pound. That's particularly pronounced this quarter both on the loans loan asset side when it comes to period-end balances as well as the deposits.
David Pipkin Feaster: Yeah.
Michael L. Schrum: It's a good point. And then last one, you know, I just wanna touch on the capital side. You know, Michael, you touched on it a bit in your prepared remarks. You've already got a really strong balance sheet. Got the dividend increase, we got the increase from purchase authorization, but in the you talked about rebalancing your capital return strategy. I was hoping you could maybe elaborate that. Has there been any shift in your focus? You know, reading the press release, it kinda read, like, maybe M&A may be a bigger priority today. I'm just kinda curious know, if you could elaborate on your capital priorities today.
Michael Collins: Yeah. Sure. It's Michael Collins. So we first and foremost, dividend is priority and then obviously M&A and then share buybacks. We've been in a number of discussions on the M&A side. I will continue to say that we're quite disciplined on pricing and there is still competition from private equity, tries to roll up trust companies and private equity funds pay for some of these franchises because we probably know them a bit better. But so we're still very disciplined. But I can say we are in discussions, and we have been, but we're gonna take our time. So in terms of the dividend, we have increased dividend in six years.
We got down to 34 you know, today we're 34% payout ratio. This will take us to 36%. We're trying to do is we bought back a lot of shares. I mean, you can see the share count has gone back gone down quarter after quarter. So we've been very successful at that, which obviously is great for EPS and the share price. But we just felt that we need to rebalance in terms of just paying a bit more on the dividend side as opposed to doing 70% of it on share buybacks. So that's really what it's about. It's not something that we're gonna look at every quarter. It's something that, we just occasionally review.
And as you see, it's been six years. We still have an extremely healthy dividend payout ratio and yield. So we're happy with that. And, you know, I'll give it to Michael Schrum, but I think, you know, we wanna be a little bit over a 100% payout ratio over time.
Michael L. Schrum: Yes. So David, it's Michael Schrum. So as you can also see, our buyback authorization, the Board is very supportive of the strategy here in terms of the overall capital deployment. You know, so we're trying so the share buyback authorization maybe is a little bit smaller than we had in the past, and we try and look at sort of a combined payout ratio between the actual activation of retained earnings through cash dividends plus the amount that we authorize in terms of values still wanna have room to grow. We still wanna have room for M&A.
So that authorization is probably scaled down a little bit, but with the of that board is very supportive, we can come back anytime. But obviously, share buybacks are always, subject to market conditions. So that's really what the rebalancing is there. A little bit higher cash dividend, a little bit smaller share authorization with the proviso that we can come back and ask.
David Pipkin Feaster: Okay.
Michael L. Schrum: That's helpful. Thanks, everybody.
David Pipkin Feaster: Thanks. Thanks, David.
Drew: The next question comes from Timur Felixovich Braziler with Wells Fargo. Please go ahead.
Timur Felixovich Braziler: Hi, good morning everyone. Back on the capital question, CET1 is now closer to 26%. Was down somewhere between kind of 17-20%. Pre-pandemic. I guess the, you know, lender of last resort and the need to hold additional capital. But even that statement seems a little excessive for you guys. I guess, how are you thinking about your level of capital here? And what is ultimately the right level that we should think about that getting to over time?
Michael L. Schrum: Yeah. Sorry, Tim. Yes, it's Michael Schrum. It's Greg. Another great question. I think we're burning down a little bit more than we're earning at the moment. So we'll take a few years to get down into the sort of mid-20s. As you know, we have had Basel IV implementation gave us a red cap boost. You know, some of that, if you wanna think about it that way, was recycled into an improvement in the quality of the capital stack by redeeming the subordinated debt and putting more of the interest earnings to the bottom line effectively by not having the interest expense on that. That was coming up to a five-year reset to floating and tapering cap relief.
Anyway. And so that seemed to make sense to us to use some of that benefit. And some of our excess to return to common shareholders. So it'll take a few years. We still would love to conclude a fair value, an M&A transaction that would be accretive, to shareholders because I think that would ultimately help stabilize our earnings over time through stable fee income and make us less reliant maybe on net interest earnings. So, you know, that's still in the background in keeping that excess capital. It's not a war chest, but it's enough that we could do a sizable deal without having to come back to existing shareholders to ask for more capital.
And finally, there's always the opportunity for us to come back to the subordinated debt market. It's just that these rate levels just didn't make any sense for us to reissue at this point. So ongoing conversations, as you know, most of the deals have been sort of sub $30 million outlay in terms of consideration. So that there's room for a couple of deals in the excess capital layer. Ultimately, we want to 25% break cap, it's questionable whether additional capital would solve any problems. Yeah. And I think, you know, I think you're like, Michael titted on M&A, so we don't wanna you know, reduce capital substantially and then need capital for something that comes up.
But I'll also think, you know, we're looking at the long term and you know, we've got a 22% ROE or mid-20% ROEs throughout the cycle with, you know, 35% loans to deposits. So it's a pretty good model. And right now, with everything going on, geopolitically and tariffs and with The US and where inflation going and what's the Fed doing. I think it's probably a decent time to just hold a little capital and see where it plays out. And, you know, as Michael said, it's not a war chest, but, you know, we probably will find something at some point in the future. So we're pretty comfortable where it is.
But, we want a payout ratio that sort of 108, 110% so that we start to get down to the low twenties in terms of total capital as opposed to where we are today.
Timur Felixovich Braziler: Yeah. It's a high-class problem, for sure. On the deposit side,
Michael L. Schrum: Yeah. Maybe it hasn't It's exhausting, Timur.
Timur Felixovich Braziler: Again, you know, I think surprising on the ability to bring the cost down given the really low starting point I think when we spoke last quarter, it didn't seem like there was all that much room to go, and then, you know, here we are with another pretty good result. And where are we at this point in the ability to drive deposit costs lower x any future rate cuts?
Michael L. Schrum: Yes. We benefited from we talked about it in prior quarters is I guess, of reduction in the duration of deposits. So in addition to having the ability to reduce the actual rates that were offering and signing on it deposits for particularly in the fixed term. Duration is also coming in as well. So where it was at the December, you know, you've kinda it's a lot more on demand or kind of seven days at this particular point in time. So went kind of about 65% that was kind of demand to about kind of 70%. So that's kind of helped with the course of deposit as well.
So but to answer your question, given that movement in duration and the fact that we've able to drive the cost of deposits down over time. I think we still can get some reduction, but it's going to be at a slower rate kind of as we go forward. And of course, that's kind of based on the current kind of interest rate environment. Yes. Jim, sorry, it's Michael. You can see on the asset sensitivity slide, we're still modestly asset sensitive, but we are obviously exposed to it down 100. So that means we're kinda getting to a flattening NIM where we can't push deposit cost below zero, obviously.
Maybe a little bit more exposed on that side than the peer group generally. And that is really from because of where the starting point is. I think my colleagues and I have both been in island banking for, you know, over twenty-five years and a NIM sort of two seventy-five, three is kind of is kind of like where normally where it tops out through rate cycles. Every cycle is different, but, you know, there's a number of different dynamics going on there.
Timur Felixovich Braziler: Perfect. Thanks for the color, guys.
Drew: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Noah Fields for any closing remarks.
Noah Fields: Thank you, Drew, and thanks to everyone for dialing in today. Look forward to speaking with you again next quarter. Have a great day.
Drew: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.