Q1 2021 Bank of N.T. Butterfield & Son Ltd Earnings Call
Good morning, My name is Sarah and I will be your conference operator today.
At this time I would like to welcome everyone to the first quarter 2021 earnings call for the bank of N T. Butterfield <unk> son Ltd.
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I would now like to turn the call over to Noah fields, Butterfield head of Investor Relations.
Thank you.
Good morning, everyone and thank you for joining US today, we will be reviewing Butterfield first quarter of 2021 financial results on.
On the call I'm joined by Butterfield, Chairman and Chief Executive Officer, Michael Collins, and Chief Financial Officer, Michael Schrum.
Following their prepared remarks, we will open the call up for a question and answer session.
Yesterday afternoon, we issued a press release announcing our first quarter results. The press release and financial statements along with a slide presentation that we will refer to during our remarks on this call are available on the Investor Relations section of our website at Www Dot Butterfield Green 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 for evaluating the company's performance.
Please note that in the first quarter of 2021, and we did not record any non core items as a result any references to prior period core results are comparable to U S. GAAP results in the first quarter of 2021.
For a reconciliation of any non-GAAP 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.
On slide 25 of the presentation. We have also included a list of potential factors relevant for the implications of COVID-19 for.
For the bank 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.
During the first quarter of 2021, Butterfield continued to achieve strong operating results and delivered high returns with an actively managed to low risk profile.
We provide market, leading financial products and services to clients seeking banking wealth management Trust and custody services in our primary markets of Bermuda, Cayman and the channel Islands, where we have longstanding significant and stable market shares.
We also delivered trust and wealth management services through our offices in Singapore, Switzerland in the Bahamas.
And then the United Kingdom, we offer mortgages to high net worth clients with properties in Prime Central London.
As you will see on slide four Butterfield continues to report strong results with net income and coordinate income of $41 6 million or <unk> 83 per share and a return on tangible common equity of 19, 3%.
We had stable net interest income and fees with improving expense trends.
Based on an improved economic forecast and steady loan performance, we had of credit reserve release of $1 $5 million in the first quarter of 2021 compared to a recovery of $2 $4 million in the prior quarter.
And of provision of $5 $2 million in the first quarter of last year.
We are encouraged by the improving economic and interest rate outlook across our operating jurisdictions.
We emerge from the COVID-19 pandemic.
We will continue to work with a small number of borrowing customers to help them find solutions to any challenges they may face.
So far our credit portfolios of shown a high degree of resilience during a difficult operating environment.
The board of directors again declared the 40 for cent per share dividend, which is consistent with our capital management philosophy of supporting of sustainable quarterly cash dividend with consideration for both organic and inorganic growth as well as share repurchases, we continue to target a through cycle dividend payout.
Ratio of approximately 50% with flexibility around share buybacks, depending on market conditions and potential M&A opportunities.
I will now turn the call over to Michael Schrum to provide more details on the first quarter.
Thank you Michael.
On slide six with a summary of net interest income on NIM.
In the first quarter, we reported NIM of 2.0 of 9%, which was 16 basis points lower than the prior quarter due to three primary contributing factors.
Firstly continued low yields on the short end of the curve.
Secondly, elevated prepayment speeds and reinvestment yields that up a little running book yields in the investment portfolio and.
And thirdly, the most important and significant contributor was the level of customer deposits on cash balances, which remained at historic high levels throughout the first quarter.
Loan yields were down five basis points due to jurisdictional mix shift in the first quarter.
During the quarter for immuno had a modest increase in commercial loans, while it came on and saw some residential loan growth. Although growth was mostly offset by an early repayment of a sizable commercial facility in the channel Islands.
During the quarter of net average balance in the investment portfolio of increased approximately 500 million or 10 per cent as we put new money to work in Europe, and the USA Agency MBS Securities portfolio.
New money yields average, 162% in the first quarter of 'twenty or 'twenty, one of 16 basis points higher than the one point for 6% in the prior quarter.
During the first quarter the blended rate for loan originations improved two for one five per cent for 212 million of dollars of new loans.
From 366% for $201 million of originations in the fourth quarter of 2020.
Turning to slide seven.
Noninterest income was stable at just over 47 on a half million dollars transaction volumes and foreign exchange increased which lifted foreign exchange commissions by $1 $9 million in the quarter and asset management also benefited from increased valuation based fees.
These offset the seasonal decline in debit and credit card fees due to the fourth quarter holiday shopping spending volumes.
The bank continued to benefit from diverse on capital efficient fee business with a feet to income ratio of $38 four per cent and of first quarter of 2021.
Slide eight provides a summary of of core non interest expense, which improved by one 8% to 80 points of $9 million in the first quarter of 2021 compared to the prior quarter.
The phase III structuring during the second half of last year has continued to improve run rates with salaries and benefit costs reduced for 3% over the prior quarter.
This was moderated by an increase in high indirect taxes, but the overall restructuring program savings run rate has now been achieved.
The cost to income ratio.
Improved sequentially by 80 basis points to 64, 8%, which is approximately where we expect to be at this point in the business and rate cycle.
Slide nine summarizes regulatory kind of leverage capital levels.
Butterfield continues to maintain capital levels conservatively above regulatory requirements.
During the quarter higher use of long term interest rates lowered OCI gains on the assets investment portfolio by 67 $2 million on this resulted in a TCE to ta ratio temporarily below our targeted range of six to six per cent.
We expect this to build back with normalized deposit levels supported by normal organic capital build over the coming quarters.
Turning now to slide 10.
Butterfield <unk> balance sheet continues to be strong and conservatively managed with very high degree of liquidity.
As discussed we continue to see historically high deposit balances due to government stimulus, one time pension withdrawals and various commercial customer activity.
We still expect that a portion of these deposits will be temporary in nature.
On slide 11, we show that Butterfield asset quality remains exceptionally high with low credit risk in the investment portfolio, which continues to be 99% comprised of triple a rated.
S government guaranteed agency securities.
We remain comfortable with our lending book profile with two thirds of loans comprised of manually underwritten full recourse residential mortgages in Bermuda, Cayman and the U K.
In the channel Islands, we are continuing the marketing of the residential mortgage products that will be similar in structure and underwriting too often you don't in Cayman loans and will allow us to activate of Sterling deposits.
The overall of residential loan to value profile remains conservative at approximately 53% in Bermuda and Cayman.
Our credit book continues to perform well with non accrual loans holding study of one 4% of gross loans.
Following an increase in the fourth quarter of 2020 related to one commercial loan net charge off ratio has settled back down to negligible levels.
We continue to actively monitor credit with outbound calling programs.
And not working with any customers who may be experiencing difficulty.
On slide 12, we discuss the average cash and securities balance sheet with a summary interest rate sensitivity analysis.
Butterfields weighted average life.
Can be MFS investment portfolio increase.
Increased to six one years from for two years last quarter due to the expectation of slower MBS prepayment speeds.
As long term rates continue to rise.
As mentioned, we also added approximately net $500 million of new money to lock in some of the benefit from higher rates during the quarter.
Consistent with prior quarters Butterfield continues to expect a potential increase in net interest income in the both the up and down rate scenarios.
I will now turn the call back to Michael Collins.
Thank you Michael I remain confident in Butterfield strong operating position and the potential for continued organic growth as well as any possible acquisitions.
We continue to examine potential acquisition targets and have seen an increase in the opportunity set that could be a good fit for butterfield.
Of particular interest of our private trust companies within our geographic footprint.
Pricing and due diligence will be key factors in progress on any possible deals with particular emphasis on customer documentation and evidence of robust compliance risk management.
Butterfield remains committed to the successful strategy that we initially listed with on the New York Stock Exchange in 2016.
We continue to generate our oes in the mid to high teens with of recurring fee income.
Low cost deposits of manually underwritten loan book with low Ltvs are capital efficient investment portfolio with limited credit risk strong risk management, and a disciplined expense and capital management approach.
We believe these attributes will continue to generate value for the bank and all of our stakeholders as we emerge into a post pandemic 2021 and for the long term.
Thank you and with that wed happy to take your questions operator.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Our first question comes from Alex for at all with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Okay Alex.
First off just wanted to ask a little bit about the debt.
Management of the balance sheet, you guys put on a good chunk of securities this quarter.
Where are you in the process of of flattering cash into Securities. I know you expect from deposit outflows, but are we going to expect should we expect some additional securities purchases over the next couple of quarters at a measured pace or are you pretty much done at this point.
Yeah. Good morning, Alex It's Michael Schrum. So I mean, you can see from a cash position that is still very elevated and it's obviously driven by you know probably buy and flow in retail and in floating commercial so it's about half and half.
Some of that is probably search deposits as we've seen elsewhere on our financial system and so if we do expect some some of that to be temporary of nature.
Still do have some capacity from the ABN Act.
Acquisition to latter further out on on a net new.
So you know, we're just continuing weighted with all.
As we discussed previously about 150 net new a quarter.
But we did take the opportunity here.
You know as we saw rates kind of kind of backing up in the quarter to lock in a bit of the asset sensitivity.
Okay. So of 150 per quarter is still a better other than rate to assume for the next.
A few quarters.
Yeah I mean.
We want to monitor obviously deposit levels because you can see that that's had an impact of obviously with the OCI.
On the TCE ratio as well so we continue to monitor when our quiet of department, we can behavior all of those new deposits.
And so I think we've talked about before we expect deposit growth in the end of GDP growth range across all of her markets clearly what we've seen is well in excess of bad.
Which is positive, but we also want to make sure of that that they are sticking around.
Perfect.
And then as I look at the TCE level, which I know is of capital ratio that you guys manage to and just being below 6% does that.
Limit your appetite for share repurchases until the net TCE ratio goes above 6% and does it also impact your ability to do M&A in the near term.
Yeah. Good question as well I mean capital management really where it has remained the same so we support dividend rate that we currently have.
And once again plus organic growth in our markets. Obviously, then we look for accretive acquisitions.
This is <unk> bin.
A bit more dialog announced in that space, and then thirdly, obviously buybacks subject to market conditions.
But as we saw the long term rates starting to increase on deposit levels continuing.
In the first quarter of T sort of elevated level, we looked at the impact on on leveraged capital ratios and throttle back a bit on our repurchase activity.
Share repurchases remain an important part of of the overall capital return priorities.
But it's just being a bit more conservative see M&A dialogue is picking up as well.
So I don't I wouldn't put a hard limit on it but we're still active in the market I think on a on a p/e basis with you know we're still.
Good value in the market so on.
On a price to book has seen.
A bit of a pick up.
We're just being a bit more conservative given the Tc and and given the M&A dialogue. So.
It's still still still part of the overall capital deployment.
Great and then just final question for me.
You know we have some potential tax changes in the U S coming down the Pike, maybe changing from bad.
A regional to a global tax system, and I guess going back to the global tax system can you just remind us as it is.
Is that something that would have a meaningful impact on the economies of Bermuda Cayman and of the channel Islands.
Hi, It's Michael Collins.
I mean any U S tax changes actually would have some impact on Bermuda Cayman of it and even the channel Islands.
I'd say going.
Going back to when we had the neo Bill we're truly change the way reinsurers were able to transfer of risk from the U S entities to Bermuda I think of fear was that would shut down the industry and and it really didn't.
I think U S tax changes in terms of increasing the corporate tax increasing.
Once again, the taxed at U S companies make on overseas earnings will have some impact but nothing directly I think is the biggest issue for US is we are watching very closely.
The discussion around a minimum of global tax that.
Europe has talked about Janet Yellen has talked about.
We think logistically, it's very difficult to would be very difficult to get that sort of agreement across <unk>.
Different a different countries, but it's something we need to keep an eye on but I'd say if you look at the kind of you know.
Companies that Didnt versions like Ingersoll Rand, Google had a company in Bermuda.
It looks like they may not have going forward.
A lot of those big multinationals didn't really do a lot of business with of banks and for me I mean, they have debt.
Italy incorporation of an account, but not a huge impact so you know.
There has been tax changes for the last 100 years, and Bermuda and Cayman have been impacted by it but so far we've been able to to adapt and you know companies are here for a lot more than tax I mean, we've got a great regulatory environment.
And you know we always talk about you know more.
More than half of foreign capital.
In U S hedge funds as basin came in funds in Bermuda.
For me to reinsurance industry reinsurers of about 60% of catastrophes in the U S and that's not going to go away.
Perfect. Thanks for the commentary I appreciate you taking my questions.
Our next question comes from Tim Burton Taylor with.
Wells Fargo. Please go ahead.
Hi, good morning.
Hi, Tamar.
Maybe first for Michael from how big was that loan debt repay debt pay down in the channel Islands you mentioned.
So about 33 million pounds.
And then so if you've been looking.
You can see that in a.
Segment note.
Some of that was made up by the new mortgage rollout and in the channel islands as well, but it was a sizable unprofitable, but again, we're not a big loan growth story, so pretty pretty stable asset quality and stable balances.
Okay, Yeah, and then that kind of dovetails to my second question. So the launching of the retail products.
When can we start seeing that make more of an impact on the balance sheet on.
And it looks like deposit growth out of the channel all of that's been quite strong over the past couple of quarters and especially this quarter.
Is that a corollary to what kind of on the lending side any color on that would be great.
Yeah, I think we've made a good start on the mortgage lending in the channel Islands and as we've talked about in the past, where we're trying to do is make the channel Islands of full service bank on both sides of the balance sheet by Bermuda and Cayman.
We started off with a staff lending, which actually is a big part of the Bermuda and Cayman residential mortgage book.
And that's gone quite well, so we're really keeping pace I mean, I think we've talked about 500 million dollars' worth of.
Residential mortgages in the channel island over five years, and we're on pace to achieve that.
Okay. Thank you and then just the last question for me looking at the.
Part of that book and how healthy of those balances were on the first quarter.
Maybe if you can just quantify what your expectations are for deposit outflows.
Is that a <unk> event or is your borrowing base, though on where your customer base still in liquidity buildup mode. At this point.
Yes, Greg Greg Great question.
Difficult to say really.
As we sat here I think after Q4, we definitely had some visibility around outflows.
Coming into Q1, which actually did happen, but were replaced by other commercial activities such as premiums are cycle on.
As you know the insurance market is happening quite significantly as of premiums of going out and we have more premium inflows for captive insurance companies.
Beginning of the quarter, and that's really kind of stuck around.
So the half to half of the deposit increase debt relates to retail as a reminder of just as sort of onetime pension withdrawal of those particularly and came in on Bermuda.
In general retail flows some of which will stick around.
On the commercial side was still.
Expecting.
That flow out.
So over time.
But it could be a couple of quarters.
Honestly I think we were probably not expecting those commercial deposits to be replaced by other temporary deposits in Q1, but that is what happened.
Good good problem to have but obviously that means and with more conservative management.
And on clearly an impact on NIM from average deposits in the quarter as well.
Okay. Thank you for taking my questions.
Thanks.
Our next question comes from will Nance with Goldman Sachs. Please go ahead.
Hey, guys good morning.
Hello.
Maybe I can start on just some of the moving pieces of the.
Of the net interest margin I think so one I think the consumer loan yields came down a decent amount in the quarter, if I'm seeing that right I'm. Just wondering if you could kind of speak to some of the mix shift between jurisdictions that you are seeing and whether the decline in yields that we saw this quarter is a good run rate. If there was anything impacting that and just how to think about.
<unk>, what mix shifts will do each of the loan yields all else equal.
As we kind of look out thank you.
Yeah, Great question.
Quite a lot of this.
For more detail on your on the balance sheet on the segment reporting as well as you know the Cayman mortgages, new Richard So the front book both on came in Bermuda, obviously lower rates than the back book.
<unk> came in in particular is tied to U S. Prime.
So with more came in Crazy, obviously, you got the pressure of the Standalone NIM.
Although on yields overall on the on the on the.
Total book and then obviously as we've talked about before the channel Islands Sterling rate shop.
And the gross rates of $3 50 years. So it was again below.
Bermuda and Cayman rate on mortgage origination so.
But over time that will pressure.
The big deals a little bit on the loan book, but I mean, it was a handful of basis points. There is still a large back book.
And so although amortization continues.
Both on the Bermuda and Cayman book.
It shouldn't it it's not it's not too much of an impact.
If that makes sense.
Got it appreciate that and then just on on the Securities Reinvestments that you're making I heard you on the average securities yield in the quarter.
Wondering if maybe like the exit run rate given the kind of backup of yields over the course of the quarter at the exit run rate was a little better than that and the follow up would be you know.
If that is the case can we start to see the securities yield leveling off in the near term.
Yeah, Yes is the answer of the exit.
The yield was probably a net 185 or 90, so higher than the average for sure.
A lot closer to sort of running book yield on the investment portfolio. So.
Obviously, that's that's helpful. We focus a lot more on NII, obviously, given that the surge deposits and the.
The impact out of house on the NIM overall.
But we should see stabilization there and certainly we would expect prepayment speeds to stop slowing down as well, we haven't seen that yet, but we're expecting that with the higher rate environment as well.
And I would say that.
The the maturities really have been impacted quite significantly by the PPP program and in terms of.
Almost a third of our prepayments comes from from lift outs and that's really.
Sort of accelerated.
The NIM decline.
And the MBS book, but we're getting a lot closer to their own book of you'll know.
Got it that's helpful and then if I could squeeze on one more just.
As you look at kind of capital management, and obviously, you're buying a lot of securities today.
How do you think about OCI risk going forward any kind of sensitivity you can provide and how are you thinking about any ways that you can maybe hedge that out of the case, we do see some further backup and yields over the next couple of quarters.
Yeah.
Yeah. So we've seen obviously you know almost on elimination of of.
OCR Gaines, who still of a game in that book and obviously, we're booking about 50 50 of new money between F. S. H T M, which.
Is not necessarily of hedge but suddenly gets different accounting treatment.
We still have significant gains in India overall unrealized mark to market on the HTM as well.
And I would say, it's not you know obviously.
OCI is not of regulatory capital impact for us, but it is of leverage leverage capital impact.
So we're booking longer dated maturities obviously in the in the HTM book as you would expect a more more of the shorter dated maturities.
So that should provide some natural.
Natural flow.
The books and not on.
And cushion the impact on ASI FX in a rising rate environment for also looks at OCI paybacks on Mtc paybacks from high yields.
On a constant suddenly very comfortable about the payback period that was sitting at the moment.
Got it thank you for taking on all of my questions.
Thanks.
Again, if you'd like to ask a question. Please press the Star then one at this time.
Our next question comes from Andrew <unk> with <unk>. Please go ahead.
Hi, guys. This is Andrew Frank on stepping in for Mike today, Thanks for taking my questions.
Sure Good morning, Andrew.
Morning.
So I was just wondering it was good to see expenses ticked down after some of the actions you guys took last year any updated thoughts on where that trend of near term or is there. A is there still some upward pressure of potential as things return to normal regarding travel on maybe some other items.
Yes, so just a.
Touching on the last year of obviously.
We reduced head count by about 10% of the work force of about 130 positions clearly that's not something we can do again this year, we're very focused on on.
Operational risk and making sure we've got enough people to have the controls that make us comfortable.
So that was I would say of one time shot but.
We can't replicate it over here what we are doing now is continuing to focus on of our Halifax Service Center. So we're continuing to automate as much as we can in Bermuda and Cayman and then transfer of those roles and functions to Halifax, We've got about 150 people up there now so we finally have sort of of scale and critical mass.
Where the teams are kind of supporting each other so we continue to see that growing and that will have a gradual impact on expenses over time.
Basically the cost is about 50% per FTE compared to Bermuda and Cayman, but then you also have currency fluctuations as well, but it's of great quality workforce.
We will save us money over time, but I'll, let Michael talk specifically about where we think this year will grow yes, just on the on.
On the restructuring there is a bit more to come in terms of benefit as.
As we talked about before this was a phased approach where we wanted to make sure of is suddenly during the year and we had.
Folks in place.
Key control of roles and as we are.
Tens of transferring their responsibilities either to Halifax on two replacements this fit more with.
He's coming on on the expense side I do expect that to be broadly picked up by.
Additional <unk> expenses in the second half this year I mean, there post post pandemic there is a need for us to come out and see clients in and currency our colleagues in other jurisdictions. So I think the 80 81 level is probably what we previously said.
It's going to end up and that's probably still a good number.
Okay.
Okay, and the pandemic noticeably changed the competitive landscape in your markets.
Have any bank pulled back any further or any new entrants looking to diversify away from Miami.
Not noticeably changed.
Any competition just to give you a quick summary.
Bermuda It looks like is going to open up or the government announced on June 26.
And it looks like the channel Islands for early July and then although the Cayman government, which are just they just had election Hasnt announced it probably September so everyone is trying to kind of open up into there there are of high tourist season.
So Bermuda.
For banks.
That's very high barriers to entry in this market and the banks are pretty.
HSBC and Butterfield heavy sort of equal market share and we don't see that changing came into a bit more competitive with six banks and some Canadian banks, but I don't think the competitive landscape has changed dramatically in the channel Islanders.
For more competitive with all of the U K banks and European Bank. So I know I think everyone and particularly we feel proud of we were able to operate efficiently from home.
Home and we're still doing that to some extent, but no no noticeable changes, but we've been really pleased in terms of how much of local activity as you can see in our fee income.
And the last year was a bit surprising in terms of how that held up but no no noticeable change in competition.
Great. Thanks for taking all my questions I appreciate all the color.
Thanks, Andrew.
This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Thank you Sarah and thanks to everyone for dialing in today, we look forward to speaking with you again next quarter have a great day.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.