Q1 2023 The Bank of N.T. Butterfield & Son Limited Earnings Call
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Good morning, My name is and I'll be your conference operator today.
This time I'd like to welcome everybody to the first quarter of 2023 earnings calls with bank of M. P. Barfield.
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After today's presentation, we opportunity to ask questions. Please note that this event is being recorded.
I would like to turn the call over to Mr. Noah fields Parkfields head of Investor Relations at this time. Please go ahead sorry.
Thank you good morning, everyone and thank you for joining US today, we will be reviewing Butterfields first quarter 2023 financial results on.
On the call I'm joined by Michael Collins, Butterfield, 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 answer session.
Yesterday afternoon, we issued a press release announcing our first quarter 2023 results.
A 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 Dot Butterfield group Dot 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 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.
Now ill turn the call over to Michael Collins.
Thank you.
Thanks to everyone joining the call today I am pleased with our first quarter performance and the continued strength of our balance sheet and deposit franchise.
Our fuel remains a long standing and growing provider of banking and private trust products and services with operations in highly regarded offshore jurisdictions.
Our banking business benefits from leading market positions in Bermuda, The Cayman Islands.
Growing presence in the channel Islands, and the Bahamas, Switzerland, Singapore, we provide specialized financial services. In addition to our prime Central London mortgage offerings available to high net worth borrowers.
And came in Bermuda, we continue to see a strong post pandemic recovery and signs of tourism.
<unk> had a really strong winter season, and Bermuda is showing much improved occupancy rates for our approaching busy seasons.
Airlift has improved for both jurisdictions, which is expected to improve economic activity levels in 2023.
I will now turn to the first quarter of 2023 highlights on page four.
Brookdale had a great start to the year with net income and coordinated income of $62 $2 million, we reported a core return on average tangible common equity of 35% for the first quarter of 2023 with core earnings per share of $1 24.
Net interest income continued to rise in the quarter, while the seasonally higher fee income in the prior quarter resulted in lower normalized noninterest income levels quarter on quarter.
Tangible book value per common share improved by eight 8% to $17 and 32 in the first quarter helped by lower OCI marks in net income.
The net interest margin increased by nine basis points to 288% in Q1 with the cost of deposits rising to 110 basis points from 78 basis points in the prior quarter.
Our business in the channel Islands, which has a higher proportion of corporate banking customers continues to be the most competitive market segment.
As.
<unk>, our TCE to Ta ratio has improved and we are now within our targeted range of between six and six 5%.
As a result in addition to our quarterly cash dividend, we have restarted our share buyback program at a modest level and expect to continue repurchasing shares throughout 2023 subject to market conditions.
I'm also pleased that we completed the first closing of the acquired Credit Suisse Trust book of business.
This initial tranche consisted of 180 trust structures associated with just under $2 million in annualized trust fee revenue and we welcomed six new trust colleagues in Singapore to our client service teams.
Currently expect the second close at the end of June to be more substantial with the deal fully completed by the end of this year.
As it stands currently in total we would expect to add between $8 million to $10 million in annual trust fees from the deal in 2024, I will now turn the call over to Craig for more detail on the quarter.
Thank you Michael and good morning, everyone.
Looking now at slide six here, 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 $97 4 million, an increase of 3% versus the prior quarter.
The increase was due mainly to continued asset yields which was partially offset by higher deposit costs predominantly in the kind of items.
Net interest margin rose nine basis points benefiting from rising earnings weren't known and treasury assets, which outpace increasing deposit costs.
The average liquidity balances were up $405 $5 million during the quarter to $4 $9 billion, driven by increased average customer deposit levels and investment portfolio maturities, which were being reinvested in short term T bills.
Average loan balances were broadly flat.
Overall loan yields were up 44 basis points during the first quarter, primarily due to the continued flow through of rate increases on the floating book.
We had new loan originations of $125 million and an average yield of 7.08%, whereas it was $204 million at 548% in the fourth quarter of 2022.
Turning to slide seven.
Noninterest income normalize in the first quarter as card services banking fees decreased sequentially by $3 9 million athletes after a seasonally elevated prior quarter.
Noninterest income continues to be a stable and capital efficient source of revenues with a fee income ratio of 34, 2%.
Slide eight provides a summary of core noninterest expenses totaled.
Total core noninterest expenses were $84 1 million and slightly lower than $84 5 million in the prior quarter.
The lower expenses are primarily attributable to severance costs incurred in the prior period.
The core efficiency ratio was 56% and remains below our through cycle target of 60%.
As previously mentioned with our core banking system upgrade and new branch coming online in the second and third quarters, we expect core noninterest expenses to increase by $2 million to $5 million per quarter as we enter the second half of this year for these investments.
We are also adding resources to serve as a newly acquired credit Suisse business, which is expected to add approximately $6 million to core expenses annualized in 2024. In addition to some deal expenses over the coming quarters.
I will now turn the call over to Michael Schrum to review of the balance sheet.
Thank you Craig Slide nine shows the Butterfield <unk> balance sheet remains conservatively managed with a high degree of liquidity.
And deposit balances decreased by approximately $600 million to $12 $3 billion versus the prior quarter round.
The change in deposits is the result of normal unexpected client activity, but the majority of deposit balance reductions taking place in January and February .
On a field tends to experienced deposit inflows in the fourth quarter, coinciding with corporate insurance renewal premiums for captive insurance companies and this reverses in the first quarter each year with the claim settlement cycle.
We continue to expect to see post pandemic stabilization of total deposit levels in the range of $12 billion to $12 5 billion.
Auto feels low risk density of 33, 5% continues to reflect the regulatory capital efficiency of the balance sheet with the low risk weighted residential mortgage loan portfolio, which now represents 70% of total loan assets.
Turning now to slide 10.
This quarter, we provide more detail on our deposit composition by segment.
Auto feels deposits remain diversified across jurisdictions with Bermuda holding the highest deposit levels followed by came in and then the channel Islands.
We continue to offer them promote term products for clients seeking additional yield and we've seen stabilization.
In the deposit mix with noninterest bearing deposits around holding around at $3 billion Mark.
Turning to slide 11, we provide new and additional details on loans by type business segment and rate type.
In the top left chart, you will see them at the mix of residential mortgages by geographic segment has remained fairly consistent since 2019.
And the chart on the bottom left we show the increased volume of loans in Cayman and the channel islands compared to Bermuda, which has seen a relative decrease.
On the bottom right you can see the increase proportion of fixed rate loans.
In 2022, and the first quarter of 2023.
We expect that the high amount of fixed rate loans will be helpful. In mitigating any potential that's servicing issues as we reached the top of the interest rate cycle.
And has significantly decreased overall asset sensitivity over the past four quarters.
Turning to slide 12, we displayed two charts that demonstrate the conservative nature Butterfields balance sheet.
A high degree of liquidity is always required for Butterfield as our banking entities to not have access to a central bank repository or fed window.
Butterfield has significant holdings of cash and cash equivalents into bank deposits and short dated sovereign securities as well as liquidity facilities with correspondent banks.
And it feels loan to deposit ratio remains low at 41% as we have conservative lending standards and only offer credit products in our core markets.
On slide 13, we show the Butterfield continues to have a strong asset quality with low credit risk in the investment portfolio, which is comprised of 95% Triple a rated U S government guaranteed agency securities.
Credit quality in the loan book also continues to remain robust with nonaccrual loans down slightly to 1.1% of gross loans and a de minimis charge off rate of one basis point.
On slide 14, we present, the average cash and securities balance sheet with a summary interest rate sensitivity analysis.
The duration of the investment portfolio was slightly down during the quarter to five three years.
We continue to expect asset sensitivity to result in some improving and I with higher market rates.
Butterfields interest rate sensitivity has moderated due to a higher proportion of fixed rate loans and continued higher sensitivity of customer deposits to market rates and the channel Islands.
Slide 15 summarizes regulatory leverage capital levels.
Capital levels continue to be significantly above regulatory requirements.
Our tangible leverage capital ratio improved to six 3%.
And it's now back within our target range of 6% to 6.5%.
We have therefore recommenced share repurchases at a modest pace.
I will now turn the call back to Michael Collins.
Thank you Michael two weeks ago. The planned upgrade of Butterfields banking system went live in Bermuda, which will improve functionality simplify future software upgrades and enhanced user experience.
Core banking system conversion went well overall with a few challenges and I am thankful for the patients of our customers and the extra effort from our colleagues as we work through the implementation.
The Singapore Trust asset deal is expected to increase stable fee income in addition to yielding a modest earnings accretion.
Asset deal structure is also intended to minimize any legal entity legacy issues and we continue to seek out new trust fee business acquisition opportunities to help the continued expansion of the franchise.
Expense management is also becoming an increasing focus as we start to see the peak in the current rate cycle, and we will be looking to manage expense loads to help maintain operating leverage.
Butterfield <unk> balance sheet remained strong liquid and conservatively manage our group deposit composition is diversified with approximately 40% comprised of retail clients, 30% mid market corporate clients consisting of law firms audit firms captives fund management companies and life insurers.
The last 30% of our deposits come from local private banking and international Trust clients and family offices.
In terms of individual concentrations, our top 20 clients hold approximately 20% of deposits.
In our top 50 clients represented approximately 30%.
From a liquidity perspective, 30% of our demand deposits are held in a short term T bill ladder and another 10% could be available to refocus entities if needed.
In summary, I remain optimistic about the prospects for Butterfield and expect that our conservative and highly liquid balance sheet. We will continue to demonstrate the benefits of our differentiated business model to all stakeholders. Thank.
Thank you and with that we'd be happy to take your questions operator.
Okay.
Thank you well now begin the question and answer session.
Glass you May Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
Your question. Please press Star then two.
We will pause momentarily to assemble the roster.
Okay.
First question will be from Alex at all Piper Sandler. Please go ahead.
Hey, good morning, guys, it's Justin Crowley on for Alex.
Wondering to start off.
I appreciate the detail on the revenue and expense impact just tied to the new clients brought over from from credit Suisse.
You know I guess my question is are there any aspects of that transaction that could potentially change just given the UBS takeover that we should be aware of.
Hi, It's Michael Collins, I should start off by saying, we're having island wide telephone problems I don't want to engender sort of an island stereotypes.
The call dropped three or four times. So we will try to get through and if we drop I apologize will come right back and but now in terms of the UBS acquisition of credit Suisse. Nothing has changed the working teams that were involved with every day is still focused on getting a getting it done I think and in whatever strategy the combined <unk>.
He is going to have going forward.
It wouldn't change their desire to to sell their trust company to us. So we've had the first closing in Singapore as I think I mentioned 180, new long term client relationships are the only a couple million of revenue, but with the subsequent closings coming up this year in Singapore. During June the Bahamas will get a total of about $8 million to $10 million of <unk>.
New revenue and we're really pleased with the quality of.
The clients were seeing so nothing nothing's going to change.
Going forward. So we're good to go.
Okay got it I appreciate that.
And then could you expand a little bit on what you saw in terms of deposit flows in the quarter.
And you know pressures across geographies.
Any areas that reacted to the turmoil and U S banks back in March.
Yes.
Yeah, So maybe I'll just start.
You know, we've talked quite a bit about our differentiated deposit base. So just start off by pointing out that and I think I mentioned before a 40%.
Retail, 30% mid market corporates are not the big reinsurance companies are hedge funds and 30% trust and private banking.
So we're we're diversified across sector were diversified across jurisdictions and as importantly, we're diversified across currencies, so sterling and euro operate differently than Bermuda. So it's very different in the U S Regional bank and.
And we haven't we haven't gotten a lot of concern the deposit.
Deposit weakness in Q1 was before March.
March eight and the channel Islands, Bermuda, and Cayman, where pretty much absolutely flat throughout the quarter. So we had a lot of competitive pressure pressure in the channel Islands.
That showed up with a five drive sort of the five four or five 5% decline in deposits, Bermuda, and Cayman, where flat some questions from captives, but nothing nothing serious in terms of credit sensitivity.
Once we explained our both our liquidity and the diversification of our deposit base.
Okay, Great and then I guess, just shifting gears a little you know, there's a decent pickup in loans past due but still.
L. A crewing I'm just curious if you're able to provide any color on that.
Yeah. Thanks for the question, it's Michael Schrum, so really sort of a handful of borrowers.
Primarily in London.
In the Guernsey or channel Islands market.
Just a little bit of you know.
Sort of.
Downtick in and.
Instead of a posture, but no real credit concerns you at all.
Very well secured.
Loans, but obviously, we are monitoring our credit metrics that you would imagine a pretty strictly so we would expect sort of a continued well.
An improvement in that in fact, one of the properties has since been solved.
There's just a handful of sort of non credit related issues, but clearly.
Number I'm watching pretty carefully I don't know if you want to add anything Greg.
I think Michael Michael just about covenant like I said, they're all the collateral values exceed the extent outstanding loan balances and.
Again, a handful of loans that have kind of unique circumstances.
In regards to properties in the process of being sold kind of personal circumstances around divorce, whatever the case might be but we don't expect to incur any losses on those loans.
Okay got it so no real commonality as far as industry or geography.
Within those credits.
No.
To be noted.
Okay, perfect Alright, I will leave it there thanks for taking my questions.
Thank you.
Thank you our next question.
It will be from Eric Specter of Raymond James. Please go ahead.
Hey, good morning, everybody. This is Eric Spector on the line for David.
Appreciate you guys, taking the question just wanted to follow up on the deposit side.
Obviously, a lot of the outflows are primarily attributed to the channel Islands, you guys spoke to.
You alluded to being activated for other investments just curious where you saw those deposits.
Banks or was it the bond market or other investments and it was the bond market and how much were you able to retain your trust and wealth management.
Sure.
Oh man.
As Michael mentioned.
In came number related deposit franchise, it's been relatively flat.
Over the last kind of month or so since the crisis.
Again and channel Islands, we.
The composition of the loan book is mainly corporates.
So it was kind of other asset managers, obviously always looking to manage their business and their asset yield.
So we did see them our.
Withdraw deposits and put that money to work essentially in their in their businesses and in other portfolio of assets.
And so again kind of what we see as a normal business flows.
Half that have occurred in the channel Islands, Yes, I would just I would just add to that I mean, we.
We werent getting commentary about credit sensitivity in the channel Islands are it was sort of putting money to work and if you remember we bought a b and banking business in Guernsey and Deutsche Bank in Jersey, and those are institutional management company.
Thanks.
Longer term medium longer term plan is to start to move well into retail. So we've got a couple of hundred million Sterling mortgages.
We're taking sterling deposits now we're blowing our credit card. Shortly so we're really going to become much more retail bank. So the plan to fix the price sensitivity in the 10 months I think the line may have dropped Hello can you hear us.
If I can say I can tell you yes.
Okay alright, thank you.
So the price sensitivity in the channel as a way to address that has obviously become more of a full service retail bank like Bermuda and Cayman with a much less expensive funding and we're well on our way to do that but this is this was our first experience in the channel islands with that.
Competitive environment with rates going up that quickly so it looked a little bit like no other.
Other banks, but but Bermuda and Cayman didn't have any of that sensitivity at all so so we were flat.
Okay, and then just kind of going off that but the decline is coming from the channel island and that being the higher cost jurisdiction.
Like we talked about 90% deposit betas I guess would you just like when do you expect deposit betas to slow going forward.
And would you expect to see continued NIM expansion.
And just as securities continued to reprice higher at a faster pace than deposits. Just curious if you have any color on Beethoven.
NIM going forward.
Yeah.
Hi, It's Michael Schrum, So I think we you know.
Specifically in the channel Islands, I think where we back tested obviously our betas.
We're fine with where they are but it is a lot more competitive and is driving most of the deposit cost through the cycle really.
I think more broadly as we think about NIM expansion in the current rate environment, we're sort of nearing the end of that we do have another 90 day lag loan repricing in Bermuda on the resi side still to come through.
But the exit run rate for the quarter was 290, <unk>, so pretty close to the average really.
And I think yeah, you're right, we would likely see continued expansion from the short term treasury liquidity book.
And also from rolling over the investment portfolio into higher yielding securities.
But any further low NIM expansion is likely to sort of be consumed offset by the higher.
Higher deposit betas, as we kind of roll over the term deposits.
That's where you already have on the books.
I appreciate the color and then just wanted to touch on.
The loan side you saw some declines this quarter its pretty broad base. Just curious your thoughts on the lending environment and growth declines are function of clients paying down higher cost debt or maybe less appetite.
Given the uncertain environment any color there would be helpful.
Yeah, I mean, I think with everything thats happening economically.
Economically globally with inflation I think people are pulling back a bit I mean, we we see that in terms of construction projects may be cleaned out a little bit and came in if you look at Bermuda and Cayman Bermudez GDP last year was a 2022 was three 5% and the prediction is two 5% for this year came in was 4% last year in there.
Looking at about two 5% again. So it is it is slowing down a bit but we were just down and came in for amateur golf event hosted by the P. J that we sponsor every year and you know honestly you couldn't get a hotel room. The places just booming Bermuda, a little less but again I think the recovery from the pandemic in both places has been <unk>.
But we're we're really selective on the credit side I mean, we talked.
<unk> talked to all our people constantly about the fact that we don't need to.
One every train and came in and Theres a lot of projects going on so we see.
10% to 15, and maybe we support one of them. So we're just very cautious.
Whereas treasury's short term treasuries, where there are there's no need to reach for yield so.
Some of it is pretty predictable at this stage.
Okay. Thank you for taking the questions and I'll step back.
Thanks.
Thank you again, if you have a question. Please press Star then one.
Yeah.
This time, there's no further questions I will turn the call back to management for closing remarks. Thank you.
Well, thank you and thanks to everyone for dialing in today, we look forward to speaking with you again next quarter have a great day.
Thank you.
France has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.