Q2 2021 Bank of N T Butterfield & Son Ltd Earnings Call
Good morning, My name is Chuck and I'll be your conference operator today at this time I would like to welcome everyone to the second quarter 2021 earnings call for the bank of N T. Butterfield and son limited all participants will be in a list of listen only mode should you need assistance. Please signal conference specialist by pressing.
That's our key followed by zero after today's presentation there'll be an opportunity to ask questions to ask a question. You May Press Star then 1 on your Touchtone phone and to withdraw. Your question. Please press Star then to I would now like to turn the conference over to Mr. Noah fields Butterfield head of Investor Relations. Please go ahead Sir.
Thank you.
To everyone and thank you for joining US today, we will be reviewing Butterfield second quarter of 2021 to financial results on the call I'm joined by Butterfield, Chairman and Chief Executive Officer, Michael Collins, and Chief Financial Officer, Michael Scrum for.
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 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 <unk> Dot com.
Before I turn the call over to Michael Collins, I would like to remind.
And 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.
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.
Field continues to produce strong finish.
Accounts during the second quarter of 2021, with a profitable and long standing core banking and wealth management businesses in Bermuda, The Cayman Islands, and the channel loans as.
As well as Singapore, the UK, Debarment, and Switzerland, where we offer a variety of specialized financial services and products.
All of our.
<unk> jurisdictions fared reasonably well during the pandemic.
Despite the closure of airports and sea borders, which is a testament to the resilience and strong domestic economies of the small island nations, where we operate.
International business is in our jurisdictions were largely unaffected due to the success of remote working model.
Operating backdrop has aided us in our efforts to keep banking services open and available and to continue to produce long term growth.
I will now turn to slide 4 where we provide a summary of second quarter highlights Butterfield reported net income for the second quarter of $39.6 million or.
For 79.
For diluted common share and coordinate income of $40.1 million.
Or <unk> 80 per diluted common share.
This resulted in a core return on average tangible common equity of 18, 7% despite of sustained low interest rate environment.
Our credit portfolio has performed well and in the second.
We had a credit provision release of $1 million <unk>.
Primarily due to an improved economic forecast.
The board of Directors again declared <unk> 44 per share dividend, which is in line with our target through cycle dividend payout ratio of approximately 50% with flexibility around share buybacks depending on marketing.
Quarter and potential M&A opportunities.
We continue to evaluate potential acquisition targets and private trust wealth management and banking.
As we have stated previously from the point of initial discussions these deals can take 9 months to a year before they are announced.
I cannot offer a specific timeline at the moment, but can say.
Of that M&A growth remains a priority for us and we are committed to pursuing deals that meet our strategic and financial goals.
I will now turn the call over to Michael scrum to provide more details on the second quarter.
Thank you Michael.
I will start on slide 6 with a summary of net interest income and NIM.
In the second.
Quarter, we reported net interest income of $74.7 million.
Which was in line with the prior quarter as higher volumes, mostly offset lower yields.
NIM of 2.0% to 1% was 8 basis points lower than the prior quarter due to continued deposit growth and elevated MBS.
Pay downs that were similar to the prior quarter at around $350 million, which in turn resulted in redeployment of assets at market rates below the current book yield.
Lower deposit cost helped offset some of the NIM decline.
Loan yield.
Yields were down 9 basis points in the second quarter due to jurisdictional mix shift for our portfolio of balances were stable.
During the second quarter, the blended rate for loan originations was 3.5% to 7% for $234 million of new loans down from 4.1.
Yes.
For $212 million of originations in the first quarter of 2021.
During the quarter.
Net.
<unk> balance in the investment portfolio increased $307 million as we continue to put new money to work in U S Agency MBS Securities and U S treasuries.
5 <unk>.
New money yields averaged to 166% in the second quarter of 2021 of <unk>.
Basis points higher.
Then to 162% in the prior quarter.
Turning to slide 7.
Non interest income increased $1.3 million to.
$8.8 million compared to the prior quarter.
Higher credit card volumes and higher credit facility fees drove the growth in banking revenues is to first quarter tends to see less transaction activity.
The bank's higher non interest income resulted in an increased fee income ratio.
To 40 to 9.4% in the second quarter of 2021.
Slide 8 provides a summary of core noninterest expense, which increased to 30 to $83.4 million in the second quarter of 'twenty to 'twenty, 1 compared to the prior quarter.
The increase in core expenses.
<unk> was a result of a number of factors some of which are not expected to repeat in future periods.
We had of 1 time voluntary opportunity for our colleagues to receive payment for a portion of unused holidays during the pandemic.
And competitive business locations market.
Salary adjustments were also implemented for retention purposes.
We saw some insurance renewal cost increase.
As well as increased client engagement and consulting cost.
Due to return to normal more normal business activity levels.
As we continue to work out.
Out of the pandemic period, we expect core noninterest expense to settle back into the $82 million to $83 million range per quarter.
Slide 9 summarizes regulatory and leverage capital levels Butterfield.
<unk> to maintain conservative capital levels.
<unk> to exceed.
Our regulatory requirements.
The continued growth in deposit levels kept our TCE to ta ratio below our targeted range of 6% to 6.5%.
We expect us to build back over the coming quarters.
Turning now to slide 10, Butterfield balance sheet continues.
These strong and conservatively managed with a very high degree of liquidity.
Deposit levels have continued to grow this quarter and we will monitor to duration of these deposits and offer complimentary off balance sheet investment products for transitory flows.
As deposits season.
We continue.
<unk> to blow of liquidity in the second quarter through growth in the investment portfolio.
On slide 11, we show the Butterfield asset quality remains exceptionally high with low credit risk in the investment portfolio, which continues to be 99% comprised of triple a rated U S government guaranteed agency securities.
To we've been pleased with the performance of the loan portfolio. So far despite the challenges presented to borrowers over the past 18 months.
As a reminder, 2 thirds of our loans consist of manually underwritten.
Full recourse residential mortgages, and Bermuda, Cayman and the U K.
We are also seeing increased.
Demand for our residential mortgage products in the channel Islands.
The underwriting in those markets is similar to those of Bermuda and Cayman.
And that will allow us to activate our sterling deposits.
We continue to expect that book to grow to as much as $500 million.
Over the next 4.
For years to 5 years.
Non accrual loans have improved marginally down to 1.3% of gross loans from 1.4% in the prior quarter.
We continue to actively monitor credit with outbound calling programs and are working with any customers who may experience difficulty.
Increased on slide 12, we discuss the average cash and securities balance sheet.
With a summary interest rate sensitivity analysis.
Butterfield weighted average life in the RFS investment portfolio declined to 5 points areas from $6, 1 year's last quarter due to lower.
Market yields, which increased prepayment speeds in our portfolio.
Consistent with prior quarters Butterfield continues to expect a potential increase to net interest income in both up and down rate scenarios.
I will now turn the call back to Michael Collins.
Thank you Michael.
On July 1 to 132 countries and jurisdictions agreed to join our new to pillar of plan to reform of international tax rules.
Under pillar, 1 taxing rights of more than $100 billion of profit are expected to be reallocated to market jurisdiction to each year, excluding regulated financial services and extractive industries.
Such as mining oil and gas.
Under pillar to there is a proposed global corporate income tax with a minimum rate of 15%.
After much speculation it is helpful to know understand the initial framework, which has an ambitious timeline for implementation with a net expected effective date of 2 <unk>.
<unk> 23, and with significant further work in negotiation to come.
All of Butterfield key operating jurisdictions have joined the agreement.
And are actively participating in discussions highlighting their important role in global capital flows for insurance and reinsurance as well as the international hedge fund industry.
All of our.
Location to a blue chip financial centers with track records of transparency and adapting to new regulatory requirements in.
In summary, I am proud of Butterfield financial and operational performance and the proven resilience of our business model to a very challenging environment. We have consistently produced high returns even through the pandemic with it.
<unk> cost model characterized by low credit risk substantial liquidity and capital strong fee income and favorable competitive dynamics, we have been able to generate of consistent 15% to 25% core return on average tangible common equity throughout the interest rate cycle, while only lending at our.
Business rate and investing excess deposits and U S government treasuries and agencies as their economies fully opened in the second half of 2021 and into 2020 to I have confidence in Butterfield long term value proposition and growth prospects and I look forward to updating you in the coming quarters. Thank you and.
With that we'd be happy to take your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone and if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to you and at this time, we'll pause momentarily to assemble our.
Home of R&D first question will come from Alex Tour at all with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
First off just wanted to ask for a little bit more color on what's driving of the deposit inflows that you guys are seeing in your jurisdictions and then I think you touched on.
Looking at some opportunities to move some of those deposits to off balance sheet items, maybe you can elaborate a little bit more on what that could actually do for deposit balances over the next couple of quarters. Please.
Sure.
Alex we've seen a significant amount of deposit inflows over the last couple of quarters really starting.
In Q4.
As of the balance sheet is really kind of ballooned with some of the surge deposits about 50% of the deposits are of retail between Bermuda and Cayman.
It's driven by some of the fiscal stimulus and those to jurisdictions, which is.
Really consistent.
Of pension withdrawals.
And Thats put on.
To our balance sheet as.
As well as in <unk>.
In particular to was transaction whereby the local electricity company was sold and that was all of local investors and they they put that into onto our balance sheet.
The other half really is quite transitory.
Good term surge deposits they are.
They're very temporary debt transaction related and they come from the fund to fund businesses in Cayman and some of the legal intermediaries that we're dealing within kaman.
As well as some of the captives in Bermuda and so we see those coming in and out.
They seem to always be replaced with more deposits.
<unk> coming in.
So thats really in those 2 categories.
The channel Islands, we also see some some deposit flows, particularly from <unk> funds around quarter end, but they tend to be very transitory in nature.
In terms of the.
Money fund.
We are obviously talking.
Clients about you know not parking large sums of deposits onto our balance sheet when they want to clean up their own balance sheets.
And so a total of clients about the availability of the money fund on a selective basis.
To ensure that they have access to the money fund as well as us.
On balance sheet products.
Where we see clients sort of.
Repeatedly parking money on our balance sheet.
We try and encourage them very strongly to to filling application forms and and to help us manage our balance sheet and their balance sheet as well.
Now neither of which is.
None of those very accretive I would say for the client at the moment, but obviously, we also want to be careful that we keep our core clients happy during this period and I think it's really something that everybody is seeing across the industry and we did see.
Further deposit growth this quarter, but it wasn't at the pace that we saw in Q4 and Q1.
Okay. So as you kind of look out of a second half of the year.
I mean do you have a way of.
Yeah sort of modeling deposits of really what I'm getting at is that deposits to keep growing that TCE ratio is going to be hard to get that about 6%, which is going to I would think limit your desire of your appetite to want to do things like buybacks.
And so maybe you can sort of.
Tackled both sides of that question and I wanted to sort of the balance sheet size and then to is that going to be prohibitive.
Prohibitive to to stock repurchases and other capital actions later this year.
Yeah, I mean, I think we've said.
We expect those deposits to be temporary.
Nature, but but I think how long is temporary as to question really that we're facing at the moment.
Certainly in Q4, we were expecting to transactional flows to kind of not necessarily repeat in Q1, but actually we had stronger flows coming in.
Into Q1, and so to the extent that we can avail ourselves.
Perry and all of the clients can avail themselves of of our money fund obviously, that's going to alleviate some of the pressure that you know that that is an ongoing discussion I would say we've seen some stabilization in deposit levels.
More recently, but.
It's just hard to say you know how long it's.
It's going to be around for because the it seems like.
You know the market is flushed with liquidity and everybody's.
Everybody is searching for a place to put them.
So I think it's good to have the tools in the toolbox.
I also agree with you that you know.
If we're below the target range, although it.
All of this explainable.
Directly associated with deposit growth.
It is it is hard to to contemplate other capital actions.
So, but we are building back.
About $400 million of.
Organic capital.
To support deposit growth per quarter as well.
So.
I don't think it's going to continue for a lot longer in terms of growing it so we shouldn't be catching up.
But it's just hard to say really.
Got it and then can you.
Just on the expense.
Thanks for this quarter, there's a couple of items that seem like maybe there are non core non repeatable, including.
Hanging out of the vacation days that you alluded to in the questions can you break out the exact.
Amount that's associated with that.
Yes, I mean, they were probably just to.
A bunch of a combination of some smaller individual items.
We I think called out.
The non core severance cost and of Mauritius office as we transferred the remaining banking operations functions to Guernsey in Halifax.
And so that that was to 1.4 million of non core expenses there.
And then we have some contracted cost of associated with the transfer of those business is obviously, we wouldn't expect us to to repeat.
Pete.
Correct the vacation buyback I think it was a good engagement driver for us and we're really trying to avoid a problem later on in the year, where we've had people working on shifts in teams and of accrued vacation haven't been able to travel.
Trying to avoid of probably around Christmas, where we don't have adequate coverage et.
And so this was an opportunity really for for them to to sell back a portion of that.
I think to total cost was probably in the half of million dollars range. Some of that was obviously of crude and carried forward from from prior year and some of it was.
This year's vacation days and then we have some consultant cost.
For a couple of small projects in Guernsey and came in which are now wrapping up so again, we're not expecting that to to repeat.
And then we have to be adjustments to staff incentive accruals for 'twenty to 'twenty, 1 obviously that that will continue through the year.
Michael salary adjustments few offices, where we've seen increased turnover so that.
That's more of a permanent thing so I think overall, we should be getting back in to 80 to 83 range.
For the remainder of our quarterly range for the remainder of 2021.
But I can sort of hopefully it gives you some color around the items in a sense of why we believe some of those are actually not repeatable.
Right and then you know as you look forward into 2020 to if I remember correctly, a range of just a little bit below that of the law.
Last quarter. It is up to 82 to 83 of its that kind of the rate level to be using kind of permanently going forward or are there. Some other projects like the moving of the Mauritius office I think is at least new to me.
Is there some more things.
Contemplate any of that could actually pushed that expense level of little bit lower as we look forward into next year.
Yeah, Yeah, there are so.
You talked about maybe a year or 2 ago, you know, we're coming up to.
At the end of the amortization period for the core infill.
Infrastructure.
The 1 Butterfield system.
And that's starting to abate in Q4. This year. So as we look forward into 2020 to that should put push to run rate down a little bit.
However, we also.
Upgrading systems, and so that will probably offset of recapture some of the cost savings effectively but it.
Sort of being self funded just over a shorter amortization period.
But I think we will come back and give some more guidance.
In the coming quarters around expense levels, but I think that's right you know a little bit lower than in 2020 to but then probably coming back up and maybe just to clarify in Mauritius.
We ceased doing.
As for this.
Some activities there in terms of operational banking and brought that back into Guernsey to just was much more efficient to do it do it out of Guernsey, but we still have.
Decent sized team there does that does trust financial statements.
Not to banking side, so we will retain at this time.
<unk>.
Mauritius and we're still working on Halifax, So we've got a good team up there of about 150 people and we've added 37 new positions.
This year, which will save us about $1.5 compared to having those positions.
More expensive jurisdictions, and obviously, we reduce head count.
In Bermuda, Cayman and the channel Islands, as we bought a house acts of that'll that'll help but it is gradual.
We will take some time.
Got it thanks for taking my questions.
Thanks, Alex Thanks, Alex.
Again, if you have a question. Please press star then.
Our next question will come from Timur.
With Wells Fargo. Please go ahead.
Hi, good morning, everyone.
Good morning humor.
Maybe just following up on the last commentary, what's the total number of folks in Halifax now.
So.
So it's roughly 150.
Okay.
Okay and then.
I think last we spoke.
I think well.
What kind of capacity and Halifax is around 200.
Is that still the right way to think about it and the how.
Aggressive or how fast are you looking to kind of bill of Mt.
Have a plan for capacity.
So it's not I wouldn't say there is there isn't a real upper limit on capacity I mean, there is plenty of office space. We've got excess office space I think our feeling is to grow it gradually because as we put to you know if.
Account opening.
In Ala facts from Bermuda, and Cayman, we want to make sure that's working before we add a new function. So we really have the majority of our compliance.
KML and alert monitoring people up there. So so that's been good I would say the experienced in Halifax has been fantastic it's of great workforce.
All young coming out of University.
Thrilled to be working for Butterfield.
It's gotten a little more difficult because it's a really hot market. So post pandemic of lot of Canadian companies have moved to operational processing centers. There. So there is a bit of competition and wage pressure.
For the students coming out of the universe.
Diversity, but we will continue to grow it.
And I would think we will we will get above 200 at some point, but it's going to it's going to take some time.
And then.
Going back to the deposit conversation I think you guys have been.
Likelihood so fairly conservative modeling deposit assumptions.
Cost you're willing to put those to work in.
Especially recently it seems like the deposit flows have been very strong.
I know the reinvestment environment.
Great is that as you're looking at.
In the future.
Future rate potential of current asset sensitivity profile is there anything you reconsider.
Youre doing with some of the on balance sheet cash or is conservative still of the name of the game and kind of that 125 million net deployment of its done the right way to think about it.
Yes.
To bit more aggressive this quarter as we put a little bit more of them that the appetite of $1.50 to work and obviously.
Given where rates are today it seems seems like.
It seems like that was a good decision we are sitting on a lot of cash or to think some of it is a lot of it is temporary if you think about the underlying business that we're in it.
Retail of mid market corporate banking.
We are in jurisdictions, where.
<unk> is probably on average growing.
2% to 3% Bermuda, 4% to 5% came in so that's kind of of what we would expect from loan balances and deposit balances. So it leads me to think that what we're seeing at the moment is.
Okay.
The same trend that we're seeing in for for.
For most of the other markets in that central banks of printing money.
Money and it's sitting on our balance sheet and part of it is fiscal stimulus et cetera.
But I think at some point in of pension balances have to go back in to pensions and.
So to them then that means.
Probably won't necessarily accounts count that cash and later it out.
So I think as we sit here today, we're kind.
We're comfortable where we are with the reinvestment rates are pretty close to our <unk> portfolio of running book yields at the moment, we'll just keep pace.
And continuing to be conservative.
And obviously, if there is an opportunity where the tenure of goes back to the 175 or 90 level to.
We'll grab that opportunity and bank some of that.
Okay. Thank you and then just last for me maybe for Michael.
And in looking at the proposed international.
Oh tax rule change and any preliminary thoughts on what that can do to some of your jurisdiction because it's still a corner to earn this honor.
The lack of an impact of that would be of ma'am you made a team of about 2023.
Of that and rollout of its quite ambitious maybe talk to.
Talk to that.
National to actually think of something that could be.
Sure. So all of our jurisdictions actually joined the agreement.
So we're trying to be as helpful as possible.
Pillar 1.
<unk> is really targeted at of tech companies, which we don't have.
Generally offshore that's not going to affect us to or.
To in terms of the 15% minimum tax may have some impact.
But we still think to tax differential between offshore and onshore will be good enough to keep companies here.
Thanks for the question.
Yeah. Thanks. Thanks to this concludes our question and answer session I would like to turn the conference back over to management for any closing remarks. Please go ahead.
Thank you Chuck I know, it's a busy morning for call of today. So thanks to everyone for dialing in and we.
Look forward to speaking with you again next quarter. Thank you very much and to have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yes.
Okay.
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