Q2 2025 The Bank of N.T. Butterfield & Son Ltd Earnings Call
Operator: I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2025 earnings call for the Bank of N.T. Butterfield & Son Ltd.
Operator: All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad.
Good morning. My name is Drew and I will be your conference operator. Today at this time I would like to welcome everyone to the second quarter 2025 earnings call for the bank of NT Butterfield and Son Limited
Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded.
All participants will be in listen-only mode. Should you need assistance? Please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions to ask a question. You may press star then 1 on your telephone keypad to withdraw your question. Please press star then 2
Noah Fields: I would now like to turn the call over to Noah Fields, Butterfield's Head of Investor Relations. Thank you. Good morning, everyone, and thank you for joining us.
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: Today, we will be reviewing Butterfield's second quarter 2025 financial results.
Noah Fields: 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.
Thank you. Good morning everyone. And thank you for joining us today. We will be reviewing Butterfield's second quarter, 2025 Financial results.
Noah Fields: Following their prepared remarks, we will open the call up for a question-and-answer session.
Noah Fields: Yesterday afternoon, we issued a press release announcing our second quarter 2025 results. 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.
On the call, I'm joined by Michael Collins Butterfield's, chairman and chief executive officer. Craig Bridgewater group Chief Financial Officer and Michael scrum, 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 second Corridor 2025 results.
Noah Fields: 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.
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.butterfield.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.
Noah Fields: 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.
For a Reconciliation of these measures to us gaap please refer to the earnings press release and slide presentation.
Noah Fields: Additional information regarding these risks can be found in our SEC file.
Michael Collins: I will now turn the call over to 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, and a strong Permanent Expense Management, and a strong, stable bank. The Butterfield franchise continues to generate long-term value in a dynamic external environment. Merchants Stand is 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.
Today's call and Associate 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 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 per and expense management and a strong stable balance sheet.
The Butterfield franchise continues to generate long-term value in a dynamic external environment.
Or if you'll stand as a market leader, in Offshore Banking and wealth management.
Michael Collins: 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, while we provide high net worth mortgage lending services.
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. While we provide High net worth mortgage lending.
Michael Collins: I will now turn to the second quarter highlights on page 4. Butterfield reported high-quality financial results in the quarter, with net income of $53.3 million. Coordinated 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.
For properties located in Prime Central London.
I will now turn to the second quarter highlights on page 4.
.3 million.
And coordinate income of 53.7 million.
We reported Court, earnings per share of $1.26 with their core return on average tangible common Equity of 22.3% in the second quarter.
Michael Collins: 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. 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've increased stable fee revenue through M&A and significantly reduced the number of shares outstanding following our share repurchase program.
The net interest margin of 2.64%. In the second quarter was a modest decline of 6 basis points from the prior quarter. With a cost of deposits falling for basis points, to 156 basis points from the prior quarter.
During the second quarter, the bank completed the earlier, Redemption of its 100 million dollar, subordinated debt, which resulted in the immediate recognition of 1.2 million of unadvertised issuance costs. And a 2 basis, point, 1 time, negative impact on Nim.
With the redemption of the support needed debt, we also took the opportunity to review the bank's overall capital levels and capital return strategy.
Michael Collins: 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. 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.
Over the past 5 years, we've 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 50 cents 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 $0.69 per share.
Michael Collins: Finally, we had a few board composition changes during this quarter.
Michael Collins: We'd like to take a moment to thank Sonya Baxendale for her commitment and guidance during her five year tenure on Butterfield's board of directors. Due to other time commitments and opportunities, Sonya has chosen not to stand for re-election at the bank's AGM this past May. We wish her all the best in her future endeavors.
Finally, we had a few board composition changes during this quarter.
We would like to take a moment to thank Sonia, baxendale for a commitment and guidance during our 5 year, 10 year in Butterfield's board of directors.
Due to other time, commitments and opportunities. Sonia has chosen not to stand for re-election at the bank's AGM. This past May
Michael Collins: Yesterday, we also announced the appointment of Andrew Henton to the Board of Directors. Andrew has been serving as director for Butterfield's subsidiary banking business in the Channel Islands, and I am very pleased to welcome him to the group board. Andrew brings an extensive knowledge of governance, private banking, private equity, and investment banking to Butterfield, and I look forward to his continuing contributions.
And we wish her all the best in her future endeavors.
Yesterday, we also announced the appointment of Andrew Henton to the Board of Directors.
Andrew has been serving as director for Butterfield subsidiary banking business and the channel Allen. And I am very pleased to welcome him to the group board.
Craig Bridgewater: I will now turn the call over to Craig for details on the second quarter. Thank you, Michael, and good morning. On slide 6, we will 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 2.64% 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 net assets.
Andrew Brinks 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.
Thank you, Michael, and good morning.
On slide 6, 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, selling at 2.64% compared to 2.7% in the prior quarter.
Craig Bridgewater: 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.
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 anattas sub. Debt issuance costs contributing to a 1-time 2 basis point contraction in Nim.
Craig Bridgewater: 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 billion to $13.6 billion. Treasury yields were 27 basis points lower at 3.71 percent. Loan yields were comparable at 6.31 percent, while average investment yields were one basis point lower at 2.67 percent due to day trading. During the quarter, the bank maintained its conservative strategy of reinvesting the proceeds of investment maturities and paydowns into a mix of U.S.
Average loan balances were a 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 US dollar.
Absent. The ASX 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 by $166.7 million to $13.6 billion.
Treasury yields were 27, basis points lower at 3.71%. Lower yields were comparable at 6.31% while average in investment yields were 1 basis. Point lower at 2.67% due to Day Count affect
Craig Bridgewater: agency MBS securities and medium-term U.S. treasuries.
during the quarter, the bank maintained its conservative strategy of reinvesting. The proceeds of investment maturities and paid outs into a mix of US agency, MBS Securities, and medium-term us. Treasuries.
Craig Bridgewater: Slide 7 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, banking fees were lower due to the seasonal reduction in merchant and intentional money transfer volumes, partially offset by an increase in card volume. 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.
Slide 7 provides a summary of non-interest income, which total of 57 million, a decline of 1.4 million linked quarter resulting from a number of underlying movements.
First, banking fees were lower due to the seasonal reduction in merchants and international money transfer volumes, partially offset by an increase in card volumes.
Revenue.
Craig Bridgewater: 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 For more information visit www.fema.gov The capital-efficient fee ratio was consistent with the prior quarter at 39%, continuing to compare favorably to historical peaks.
Custody and other Administration fees. So a decline as transaction volumes and assets on the custody trended lower,
we are pleased to report. All setting positive contributions from an increase in trust Revenue attributable, to annual fee increases. The repricing of a quiet 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.
Craig Bridgewater: On slide 8, we present core non-interest expenditures.
Craig Bridgewater: Total non-interest expenses were at $91.4 million, higher than the $98.3 million in the prior quarter. by continuing to be within our experience. 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 health care costs recorded in the prior quarter. Offsetting these increases with a decrease in payroll taxes, which are classified as indirect.
On slide 8, we present core non-interest expenses.
Total non-interest expenses were at 91.4 million higher than the 98.3 million in the prior quarter.
But continuing to be within our expectations.
This increase was due to several factors including the FX impact of a strengthened palm Sterling relative to the US dollar and increased Performance Based incentive approvals, in addition to lower staff healthcare costs recorded in the prior quarter.
All setting. These increases was a decrease in payroll taxes, which are classified as indirect taxes,
Craig Bridgewater: 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 financial system.
Michael Schrum: I will now turn the call over to Michael Schrum to review the ballot. Thank you, Craig. Slide 9 shows that Butterfield's balance sheet remains liquid and conservatively positioned. P&D balances increased to $12.8 billion from $12.6 billion at the prior quarter round. 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.
In terms of our expense expectations, to be continued to think that a quarterly core expense rate of between 19 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 scrum to review the balance sheet.
Thank you, Craig.
Slide 9 shows, the Butterfield's balance sheet, remains liquid and conservatively positioned.
Period and deposit balance is increased to 12.8 billion from 12.6 billion dollars at the prior quarter end.
This movement was due to a $260 million impact from the strengthening British pound, which was partially offset by a decrease in actual customer deposits of $30 million.
Butterfield's, love with density of 28.6% continues to reflect, the regulatory Capital efficiency of the balance sheet.
Michael Schrum: All higher-rated U.S. Treasuries and government-guaranteed agency securities. Overall, credit quality of the loan and mortgage portfolio improved during the quarter as the net charge-off rate was negligible. Nonaccrual loans as a percentage of gross loans decreased 30 basis points to 2 percent as we fully recovered a couple of commercial loans at 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 10, we show that Butterfield continues to have a strong overall asset quality with low credit risk in the Investment Portfolio which is a 100% double A
Or higher rated us. Treasuries and government guarantee agency securities.
Overall credit quality of the loan and mortgage portfolio. Improved during the quarter.
As the net charge-off rate was negligible, non-accrual loans as a percentage of gross loans decreased 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% remain consistent with prior quarters.
As mentioned previously.
Butterfield's loan, portfolio, continues to be 70% full recourse Residential Mortgages of which 81% have launched to values below 70%.
We remained focused on our conservative credit posture with a preference for residential. Mortgage lending in Bermuda, the Cayman Islands and the Channel Islands.
Michael Schrum: On slide 11, we present the average cash and securities balances with a summary of interest rate sensitivity.
On site 11, we present the average cash and securities. Balances with a summary of interest rate sensitivity.
Michael Schrum: 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 burndown of OCI over the next 12 to 24 months of 33% and 42% respectively.
Duration decreased slightly for the AFS book. Net unrealized losses in the fs portfolio included in oci.
We're $20 million. At the end of the second quarter and Improvement of 11.4 million or 8.7% over the prior quarter.
We continue to expect improvement with additional burndown of oci over the next 12 to 24 months of 33% and 42% respectively.
Michael Schrum: Slide 12 summarizes regulatory and leverage capital levels.
Michael Schrum: 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 Shared Repurchase Program, the Bank continues to evaluate potential acquisitions as part of our continued growth priority. Finally, our tangible book value per share continued to improve this quarter by 3.6 percent to $23.77 as unrealized losses on investments improved.
July 12th 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 50 cents per share.
In addition to the increase quarterly cash dividend rate.
And new share repurchase program. The bank continues to evaluate potential Acquisitions as part of our continued growth priorities.
Michael Collins: I will now turn the call back to 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 counts, it is shaping up to be a good year. RETA 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. SailGP 2026 Series, and the Biennial Newport to Bermuda Sailing. The reinsurance industry continues to perform well with added growth and interest in the life of reinsurance companies.
I will now turn the call back to Michael Collins.
Thank you, Michael during the second quarter. And now under 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 counts, it is shaping up to be a good year.
For me to continue 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 bi annual Newport to Bermuda sailing race.
The reinsurance industry continues to perform well with added growth and interest in the life of reinsurance sector.
Michael Collins: In Cayman, we continue to see sustained growth across the board, including strong business performance in tourism, real estate, and international business. Jersey and Guernsey are both doing well and continue to be recognized as choice locations for international Butterfield has benefited from this environment through the provision of banking, private trust, custody, and fiduciary services. We're also seeing growth in the retail business as we focus on our competitive local credit card offerings. as well as local banks. Butterfield continues to be a responsible store of capital by consistently returning excess funding to shareholders. to a quarterly cash dividend and share repurchases when appropriate.
In Cayman, we continue to see sustained growth across the board, including strong business performance in tourism, real estate, and international business sectors.
During the endurance year are both doing well and continue to be recognized as Choice locations, for international visits.
Butterfield is benefited from this environment through the provision of banking private trusts 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.
Or if you'll continue to be a responsible steward of capital by consistently returning excess funding to shareholders.
Michael Collins: In addition, I would like to emphasize that we continue to pursue M&A fee growth, particularly in private trusts. 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.
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.
Noah Fields: Thank you, and with that, we would be happy to take your questions. 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.
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 will be happy to take your questions, operator.
Operator: At this time, we will pause momentarily to assemble our roster.
David Feaster: The first question comes from David Feaster with Raymond James. Please go ahead. Hey, good morning everybody. Order There Maybe I want to start out, you touched on the impact of the treasury market and the press releases 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. Good morning, David.
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 speaker-phone, 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 at this time we will pause momentarily to assemble our roster.
The first question comes from David Furr with Raymond James, please go ahead.
Hey, good morning everybody.
You maybe I want to start out, you know, you touched on the impact of the treasury market in the press releases, uh, on on the margin this quarter. I know you're really disciplined about, um, latering the book. I was hoping maybe you could touch on, on your bond investment strategy, just given the shape of the curve and whether that's changed at all. And whether your approach has has adjusted, just given the prospect of declining, short-term rates perhaps later this year,
Michael Schrum: It's Michael Schrum. Great question to kick off. I think at the moment we're 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 million. And it's going into a blend of primarily 15-year mortgage-backed securities and 50% of that, and then 50% into a T-bill ladder or U.S. 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 a gradual steepener, and there's definitely downward pressure on short rates.
Michael Schrum: So, it's definitely an active conversation in terms of all the excess liquidity that's sitting on the balance sheet. And then you have the whole Fed decisions coming up next year. So, we're definitely looking at it. At the moment, 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. As Michael said, we're continuing to invest at a higher rate, so we're investing somewhere around 380 basis points and around a three-year duration, so three or 3.1-year duration, so bring the duration in.
Yeah, good morning, David it's uh, Michael's Crown great question. Uh, to kick off. Uh, I think at the moment we are, uh, just reinvesting maturities from, um, from the bond portfolio, so we obviously get both HDMI and AFS, uh, maturity is coming back at around 30 to 35 a month, uh, million. And it's going into a blend of, uh, sort of primarily 15 year mortgage back Securities. Um, and and so the 50% of that and then 50% into a, a, a a ladder or US Treasury uh, medium-term ladder. So, 235 years, uh, we obviously looking for um, you know, kinks in the curve. Uh, there was quite a lot of, uh, movement in the market. As, you know, we've seen kind of a gradual steepener, uh, and there's definitely downward pressure on short rates, uh, so it's definitely an active conversation in terms of all the excess liquidity that's sitting on the balance sheet. Um,
And then you have to hold Set uh, you know, decisions coming up next year. So we're definitely looking at it at the moment. Um, you know, we feel very comfortable with with where the strategy is, it's gradually shortening, the overall duration of the Investment Portfolio. Uh, and we're, we're obviously able to reinvest at at at higher higher, uh, rates. But it is, it is a slow Pro process. Uh, and there's, there's a lot of movement in the market, so it's definitely top of mind at the moment.
Okay.
Michael Schrum: But as I said, we're very focused on it, looking at any excess liquidity that we have and kind of seeing if it makes sense to kind of invest some of that or pre-invest some of that, given that we're looking at a potentially downwards interest rate.
David Feaster: That's helpful. In the last couple of quarters, we talked about some transitory, maybe temporary deposits that might be rolling out.
That's helpful. Um yeah I mean as Mike would say we're continue to invest at at higher rates so uh investing somewhere around kind of 380 basis points, and around a 3, 3 3 year duration, so 3 or 3.1 year duration. So bring the duration in. Um but as you said we're we're very focused on it. Looking at any excess liquidity that we have um and you know kind of seeing if it makes sense to invest some of our premium invest some of that given that we're looking at a potentially down downwards, um, interest rate.
Michael Schrum: In the prepared remarks, I didn't hear anything. I may have missed it. I'm just curious, an update there, whether anything has changed with those? Have they flown out? I'm curious what you think about that as we think about the size of the balance sheet. We still feel that there are some deposits that are subject to leave in the bank or might be looked at as hard money. The fund that we talked about for quite a few quarters that's in liquidation, those funds are still here with us, but we still expect those to flow at some point, given the legal process that's going through.
And then, you know, the last couple of quarters, I – 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 kind of curious an update there, whether anything has changed with those. Have they flown out? Just, um, kind of curious how you think about that as we think about the size of the balance sheet?
Yeah, I see. I mean, I think we still kind of feel that there are some deposits that are
Michael Schrum: Some of the other larger deposits in the wealth management space have flowed out and can be put to work, but at the same time have also had some deposits come in as well to replace those. We don't really behavioralize a lot of that. It's about $200 when it comes to the fund as a receivership, and it's somewhere around $700 to $800 of funds that are above on those, so can we consider not necessarily sticky at this point and may leave the bank. We have to see how those act.
Michael Schrum: Please see the video description for a link to the author's page. In our prepared remarks, it's tough to see when you have the sterling moving at such a rapid pace or a 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 try 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, a strengthening pound, and that's particularly pronounced this quarter, both on the loan asset side when it comes to period end balances as well as the deposit.
Subject to leaving the bank or kind of might be looked at as as hot money. Um the fund that we talked about for for quite a few quarters um that's in in in liquidation and we um it's still those funds are still here with us, um, but we still expect those to flow at some point, um, given the legal process and that's going through um, some of the other maybe some larger deposits in the kind of wealth management space have flown out and kind of been put to put to what to work. Um, but at the same time, have also, um, had some depositors come in as well to to replace those. Um, but we don't really kind of Behavioral a lot, a lot of that. I mean it's about 200 or less over 200 when it comes to the funders and receivership and it's somewhere around 700 to 800 of, you know, funds that are, you know, about, you know, our, our lows. So can we consider not necessarily sticky at this point? Um, and may may leave the bank, so we have to see how those, how those after the time.
Um, which kind of gets us back to Simply think about this may settle over the long term, over the medium term.
Yeah. 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, uh, at such a rapid Pace or a dollar weakening. And there's obviously due to rate differentials uh, between the markets.
Uh, as we see Divergence between the the different rate paths and central banks.
David Feaster: Yeah, that's a good point.
Um, so, you know, we tried to point out, um, and you can see slide in the appendix, that, that points out, that, you know, the actual customer outflows that we're seeing on normalization in customer, behavior is some somewhat masked by a weakening dollar or a strengthening pound and that's particularly pronounced this quarter both on the loan loan asset side when it comes to period. End balances as well as the deposits.
Michael Collins: And then last one, I just want to touch on the capital side. Michael, you touched on it a bit in your prepared remarks. You've already got a really strong balance sheet. You've got the dividend increase. We've got the increase for purchase authorization.
Michael Collins: But you talked about rebalancing your capital return strategy. I was hoping you could maybe elaborate that. Has there been any shift in your focus? Reading the press release, it kind of read like maybe M&A may be a bigger priority today. I'm just kind of curious if you could elaborate on your capital priorities today.
Yeah, it's a good point. Um and then and then last 1, you know, I just want to touch on the capital side, you know, Michael you touched on a a bit and you're prepared to Mark, you, you've already got a really strong balance sheet but the dividend increase. We got the increase for purchase authorization.
Michael Collins: Yeah, sure.
But in the real you you talked about rebalancing your Capital return strategy. Um, I was hoping you could. Maybe elaborate that, you know, has has there been any shifts in your focus, you know, reading the press release, it kind of read like, maybe m&a maybe a bigger priority today. I just kind of curious. Um, you know, if you could elaborate on on your Capital priorities today,
Michael Collins: It's Michael Collins. So, 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, which tries to roll up trust companies and fund admin companies offshore and then take them public or sell it. So, we're not going to pay the prices that private equity funds pay for some of these franchises because we probably know them a bit better. So, we're still very disciplined, but I can say we are in discussions and we have been, but we're going to take our time.
Yeah, sure. Uh, it's, uh, Michael Collins. So, uh, we, you know, first and foremost, uh, you know, uh, dividend is priority and then obviously m&a and then share BuyBacks, um, we we've been in a number of discussions on the m&a side,
Michael Collins: So, in terms of the dividend, we haven't increased dividend in six years. We got down to 34. Today, we're 34% payout ratio. This will take us to 36%. What we're trying to do is we've 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.
I will continue to say that we're quite disciplined on pricing um and there is still competition from private equity which you know tries to roll up, trust companies and fund admin companies offshore and then and then take them public or sell it. So we're we're not going to pay the prices that private Equity Funds pay. Uh, for some, some of these franchises because, uh, we we probably know them a bit better. But so we're still very disciplined. Uh, but I can say we are in in discussions and we have been, uh, but we're we're going to take our time. So in terms of the dividend, uh, we haven't increased dividend.
In in 6 years. Um we got down to 34. You know today we're 34% payout ratio this will, you know, take us to 36% what we're trying to do is we've bought back a lot of shares. I mean you can see the share count has gone back gone down quarter after quarter. Um
Michael Collins: So, that's really what it's about. It's not something that we're going to look at every quarter. It's something that we just occasionally review. And as you can see, it's been six years. We still have an extremely healthy dividend payout ratio and yield. So, we're happy with that.
So, we've been very successful at that, which obviously, is is great for APS and the share price, uh, but we just felt uh, that we needed to rebalance in terms of just paying a bit more on the dividend side, uh, as opposed to doing, you know, 70% of it on on share BuyBacks. Um, so that that's really what it's about. It's, you know, it's not something that
Michael Schrum: And I'll give it to Michael Scrum, but I think we want to be a little bit over 100% payout ratio over time.
Michael Schrum: Yeah, so David, it's Michael Schrum. So as you can, as you can also see, our buyback authorization, the board is very supportive of the strategy here in terms of the overall capital deployment. The share of 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. We still want to have room to grow. We still want to have room for M&A. So that authorization is probably scaled down a little bit, but with the proviso that the board is very supportive, we can come back any time, but obviously share buybacks are always subject to market conditions.
You know, we're going to look at every quarter. It's something that we just occasionally review. And as you can see, it's been 6 years, we still have a extremely healthy, um, dividend uh, payout ratio and and, uh, yield. So we're happy with that. Uh, and you know, I'll, I'll give it to Michael scrum, but I think, you know, we we want to be a little bit over 100% payout ratio, um, over time.
Yeah, sorry David. It's yeah it's Michael's Chrome. So as you can as you can also see our our buyback. Authorization, the board is very supportive of the strategy here in terms of uh the overall Capital deployment. Um,
Michael Schrum: 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.
And we try and look at sort of a combined payout ratio between the actual uh activation of of retained earnings through uh, cash dividends. Plus the amount that we authorize, uh, in terms of values, we still want to have room to grow. We still want to have room to, uh, for m&a. Um, so that authorization is probably scaled down a little bit, but with the Proviso that board is very supportive, we can come back uh anytime. But but obviously share BuyBacks are always subject to market conditions and um,
So that, 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 and, and ask.
David Feaster: Okay, that's helpful.
David Feaster: Thanks, everybody. Thanks. Thanks, David.
Okay, that's helpful. Thanks everybody.
Noah Fields: Again, if you have a question, please press star then 1.
Thanks. Thanks. David.
Timur Braziler: The next question comes from Timur Braziler with Wells Fargo. Please go ahead. Hi, good morning, everyone. Hawaii Pima Back on the capital question, CET1 is now closer to 26%. was down somewhere between 17% and 20% pre-pandemic. I get the 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?
Again, if you have a question, please press star then 1.
The next question comes from Teamwork, Brasília with Wells Fargo. Please go ahead.
Hi, good morning, everyone.
Morning.
Back on the capitol question.
Ct1 is now closer to 26%.
Was down somewhere between kind of 17 and 20% pre-pandemic. Um, I get the the, you know, lender of Last Resort and the need to 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 the right level that we should think about that getting to over time?
Michael Schrum: It's Michael Schrum. It's another great question. I think we're burning down a little bit more than we're earning at the moment, so it'll take a few years to get down into the mid-20s. As you know, we've had Basel IV implementation give us a red cap boost. Some of that, if you want to 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 capital 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.
Yeah, sorry. Tim I yeah, it's Michael scrum. It's great. Another great question. I think, you know, 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 mid 20s. As you know, we've had positive for implementation. Gave us a red cap, uh, boost. Um, you know, some of that if you want to think about it, that way, it was recycled into an improvement in the quality of the capital stack by redeeming, this coordinated debt and putting more uh, more more of the uh uh, more of the, you know, more of the interest earnings to the bottom line effectively by not having the interest expense on that, that was coming up uh to to a 5 year. Reset to floating and tapering Capital relief.
Michael Schrum: So it'll take a few years. We still would love to conclude at 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 that's still in the background in terms of 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.
Anyway. And so that seemed to make a a sense to us to to use some of that benefit and some of our access to um to return to Common shareholders.
Michael Schrum: 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. But ultimately, we want a 25% break cap. It's questionable whether additional capital would solve any problems for you. Yeah.
So, we'll take a few years. We still would love to, to conclude a at a fair value, um, and m&a transaction, that would be accretive, uh, to shareholders because I think that would ultimately help stabilize our earnings over time, through stable fee, income and and make us less Reliant maybe on, on that interest earnings. Um, so, you know, that's still in the background, uh, in terms of keeping that excess Capital. It's it's not a war chess, but it's, it's enough that we could do a sizable deal, um, without having to, to come back to, to existing, uh, shareholders to us more capital. And, and finally, there's always the opportunity for us to come back to the subordinate debt Market. Uh, it's just that these rate levels just didn't make, uh, didn't make any sense for us to reissue at this point. Uh, so ongoing conversations as you know, most of the deals have been
Michael Collins: And I think, like Michael pitted on M&A, so we don't want to reduce capital substantially and then need capital for something that comes up. But I also think we're looking at the long term and we've got a 22% ROE or mid-20% ROEs throughout the cycle with 35% loans to deposit. So it's a pretty good model. And right now with everything going on geopolitically and tariffs with the U.S. and where's 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 as Michael said, it's not a war chest, but we probably will find something at some point in the future.
Sort of sub 30 million outlay in terms of consideration. Um, so that, you know, there's room for a couple of deals in in the Access Capital layer but ultimately we want to, you know, the at 25% rate cap. Um, you know, it's it's questionable whether additional Capital uh, would would solve any problems with yeah. Yeah. And I think, you know, I think like Michael did it on m&a so we don't want to, you know, reduce Capital substantially and then uh need capital for something that comes up. But I also think, you know, we're looking at the long term and you know,
We've got a 22% re or mid 20% rise throughout the cycle, uh, with, you know, 35% loans to deposit. So it's a pretty good model. And right now with everything going on, you know, geopolitically, and, you know, tariffs and with the US and where it's inflation going. And what's the FED doing? I think it's probably a decent time to just, just hold the little capital.
And, uh, see where it plays out. Uh, and, and, and you know, as Michael said, it's not a war chest. But, you know, we probably,
Find something. Uh,
Michael Collins: So we're pretty comfortable where it is. But obviously, we want a payout ratio that's sort of 108, 110% so that we start to get down to the low 20s in terms of total capital as opposed to where we are today. Yeah, it's a high-class problem for sure.
In the future. So, we're, we're pretty comfortable where it is, uh, but obviously we want to pay out ratio, that's sort of 108 110% so that we start to get down to the low 20s and in terms of total Capital as opposed to where we are today,
Yeah, it's a high Platte High Class problems for sure. Um,
Michael Collins: It's exhausting, Timur.
Timur Braziler: On the deposit side, again, I think surprising on the ability to bring costs 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 here we are with another pretty good result.
Maybe it's it's it's exhaust it's exhausting Timber on the on the deposit side.
Michael Schrum: Where are we at this point in the ability to drive deposit costs lower x any future rate cuts? Yeah, what we benefited from, kind of we talked about it in prior quarters is, I guess, kind of reduction in the duration of deposits. So, in addition to having the ability to reduce the actual rates that we're offering and standing on the deposits for particularly fixed term, duration is also coming in as well. So, where it was at the end of December, it's a lot more on demand or kind of seven days at this particular point in time.
Ability to bring costs down given the really low starting point. Um, 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. Where are we at this point in the ability to drive deposit costs lower? Any future rate cuts?
Yeah. What what we benefited from kind of, we talked about it in in Prior quarters is
Michael Schrum: So, we went from about 65 percent that was kind of demand to about kind of 70 percent. So, that's kind of helped with the cost of deposits as well. So, to answer your question, given that movement in duration and the fact that we've been 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 as we go forward. And of course, that's kind of based on the current kind of interest rate environment.
Um, I guess going to reduction in the duration of the deposits. Um, so in addition to having the ability to reduce the actual rates that were offering, um, and, and, um, standing on the deposit for particularly, in the fixed terms, um, duration is also coming in as well. So it was at the end of December. Um, you know, you've kind of it's a lot more on demand or kind of 7 days at this particular point in time. So we went kind of from about 65%, um, that was kind of um, demand to about, um, kind of 70%. So that's kind of helped with the cost of deposit as well. So, but the answer to your question given that movement in duration and be the fact that we've been able to um, Drive the cost of deposits down over time, um, I think we still can get some reduction, but it's going to be at a, at a slower rate than as as we, as we go forward.
Michael Schrum: Yeah, sorry, it's Michael. You can see on the app sensitivity slide, we're still modestly app sensitive, but we are obviously exposed to it down 100. So that means we're kind of getting to a flattening NIM, where we can't push deposit costs below zero, obviously. You know, maybe a little bit more exposed on that side than the peer group generally. And that is really because of where the starting point is. I think Mike Collins and I have both been in island banking for over 25 years, and NIM sort of 275.3 is kind of like normally where it tops out through rate cycles.
But and of course, that's kind of based on the current um kind of interest rate environment.
Yeah, Chamber, sorry, it's Michael. You can see on the asset sensitivity slide, we were still modestly sensitive, but we are obviously exposed to it being down 100. So that means we're kind of getting to a flattening nim where we can't push deposit costs below zero, obviously.
You know, maybe a little bit more Exposed on that side than than, than the peer group generally. And that is really from because of where, where the starting point is, I think my comments and I have both been in in Ireland banking for, you know, over 25 years and a Nim sort of 2753 is kind of
Michael Schrum: Every cycle is different, but there's a number of different dynamics going on there.
Um, it's kind of like, where normally it tops up through rate cycles? Every cycle is different, but you know, there are a number of different dynamics going on there.
Timur Braziler: Perfect.
Timur Braziler: Thanks for the call, guys.
Perfect. Thanks for the caller, guys.
Noah Fields: This concludes our question and answer session.
Noah Fields: I would like to turn the conference back over to Noah Fields for any closing remarks. Thank you, Drew. And thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.
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.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Thank you, Drew, and thanks to everyone for dialing in today. We look forward to speaking with you again next quarter. Have a great day.
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