Q3 2021 Bank of N T Butterfield & Son Ltd Earnings Call
It has increased by $342 2 million or two 3% compared to the prior quarter.
Yeah.
Net interest margin of 197% was four basis points lower than the 2.0% to 1% in the prior quarter due to lower yielding interest earning assets.
Loan yields were down six basis points in the third quarter due to lower yields on new loan originations due in part to lower yielding production volumes in the channel Islands.
During the third quarter, the blended rate for loan originations was 342% for $278 million of new loans down from 3.57% for $234 million of originations in the second quarter of 2021.
During the third quarter, the net average balance in the investment portfolio increased $271 million as we continue to put new money to work in U S Treasuries and agency Securities.
New money yields averaged 113% in the third quarter of 2021, or 53 basis points lower than the 166% in the prior quarter.
As we added around $400 million of two and three year treasuries.
And so we expect longer term rates to rise over the medium term, we made a decision to invest in shorter term treasuries.
To retain some flexibility and add some protection from unrealized marks in the available for sale portfolio.
Turning to slide seven.
Noninterest income continued to show stability with a modest increase to $49 million compared to $48 8 million in the prior quarter.
Banking fees and foreign exchange revenues grew during the quarter as we continue to see improved economic activity.
The bank's higher noninterest income resulted in our fee income ratio of 39, 3% in the third quarter of 2021.
Which continues to represent a stable and capital efficient revenue stream for the bank.
Slide eight provides a summary of core noninterest expense, which increased to $84 2 million in the third quarter of 2021 compared to $83 4 million in the prior quarter.
The slight increase in core expenses was made up of a relative relatively small value items.
In particular, there was an increase in technology and communications cost as we've upgraded our desktop access platform during the quarter.
In addition, we saw increased professional and outside services fees supporting some longer term strategic initiatives, including some spend on our broader ESG strategy.
Finally, there continues to be some additional costs associated with the three year non prosecution agreement with the U S Department of Justice as we continue to meet the ongoing terms of the agreement.
We do expect core noninterest expense to settle back in the $82 million to $83 million range per quarter over the next few quarters, which is already evident from the exit run rate this quarter.
Slide nine summarizes regulatory and leverage capital levels.
To field maintains conservative regulatory capital levels that continued to be well above statutory requirements.
The bank's elevated deposit levels kept our TCE to Ta ratio.
At five 8% slightly below our targeted range of six to six 5%.
We continue to expect this to build back over the coming few quarters.
Turning now to slide 10.
Butterfield <unk> balance sheet continues to be strong and conservatively managed with a high degree of liquidity.
Posit levels have stabilized with a slight reduction to $13 $9 billion. This quarter from $14 2 billion in the second quarter.
We were able to continue to deploy excess liquidity during the third quarter into 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.
Consistent underwriting continues to result in two thirds of the loan assets and full recourse residential mortgages in Bermuda, Cayman and the U K.
We've also made a great start in our first year of our residential mortgage offering in the channel Islands and expect that book to continue to build to around $500 million over the next four to five years.
Nonaccrual loans have improved further and are now down to one 2% of gross loans.
We remain vigilant and continue with outbound calling programs and are actively.
Working with any borrowers who may experience difficulty.
On slide 12, we discuss average cash and securities balance sheet with a summary interest rate sensitivity analysis.
Butterfield is a weighted average life in Es Hff's investment portfolio increased to five three years from 5.0 years last quarter due to a moderately slower prepayment speed.
Consistent with prior quarters Butterfield continues to expect a potential increase to net interest income in both up and downgrade scenarios.
I will now turn the call back to Michael Collins.
Michael This September marked the fifth anniversary of Butterfield, the IPO and listing on the New York Stock Exchange.
Since our listing we've been clear about our strategy to be a leading independent offshore Bank and Trust company with limited credit exposure consistent noninterest income generation prudent expense management and high risk adjusted returns.
We have achieved growth organically and through acquisitions, including the 2016 purchase of Hsbc's Trust and asset management operations in Bermuda.
In 2018, we successfully acquired Deutsche Bank's Global Trust solutions business, which helped US establish a license trust operation in Singapore as well as the mid market corporate banking business in Jersey.
In 2019, we completed the acquisition of ABN Amro Channel Islands, which expanded scale to banking operations in Guernsey and Jersey.
We have grown significantly since the IPO in September of 2016, with a compounded annual growth rate of 7% for deposits and 6% for customer load.
During this time, we have managed through varied economic and interest rate conditions, while maintaining quarterly core returns on tangible common equity in the range of 15% to 25%.
We have also improved tangible book value per share by a compounded annual growth rate of 6% and created significant shareholder value paying out over $400 million in cash dividend and repurchasing a total of seven 3 million shares representing approximately a 14% concentration and share count.
Butterfield is well positioned to continue to grow and remain on this path. Our success is anchored in our strong balance sheet capital efficient fee businesses prudent expense control balanced capital management, low credit risk relevant products and excellent customer service, which yields consistent with.
Turned in long term growth.
We greatly appreciate the support of our shareholders. The board of directors customers colleagues and all the stakeholders, who have helped contribute to the bank's journey thus far.
Thank you and with that we'd be happy to take your questions operator.
Thank you we will now begin the question and answer session to ask a question Press Star then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble our roster.
Yeah on the first question comes from Tim Switzer with <unk>. Please go ahead.
Hey, good morning, I'm on for Mike Perito, Thanks for taking my question.
You guys had.
You guys had a little bit of NIM pressure on both the asset and liability side. This quarter. It looked like and you talked about kind of the new money yields in the securities portfolio being a little bit lower.
Due to shorter duration that makes sense could.
Could you talk about what Youre seeing on maybe the loan yield side that is resulting in more pressure and then also what's kind of driving the higher deposit cost as well.
Yes, Thanks, Tim It's Michael Schrum.
So just starting with the loan yields.
As you know we saw a modest growth in period end balances.
But most of the new originations shifted from actually from Bermuda, where we saw.
More more paydowns and more new originations came on in the channel Islands. So the channel Islands.
As a lower yielding activation of deposits in the sort of $3 25 to $3 50 range and it comes really from our new mortgage products that we've launched this year in the channel islands, and so that sort of mix shift between dollars and Sterling and jurisdictional mix shift kind of caused that.
Modest compression in the NIM on the loan side in terms of the investment yields.
As you know they continue to decline we've had elevated obviously prepay speeds, there and I think we.
Moderated while they moderated somewhat during the quarter so the repayments.
Actually came down to about $300 million in the quarter.
Sure.
And so we took a look in February.
Where rates are right now.
<unk> go into a little bit shorter duration to give us some flexibility while we wait for a set of clear indications of where and when longer term rates are coming out.
This will give us some more flexibility to redeploy or re ladder over the next year or so.
And then finally on the deposit cost.
It remains stable at 12 basis points, while interest bearing demand deposits were actually negative three basis points.
We've obviously taken a look at our longer term fixed deposit offerings, there, but I think we're sort of broadly in line with with that market.
Where we operate with slightly higher deposit cost in the channel Islands, Bermuda and Cayman.
But bearing in mind that that was sort of a growing bank in the channel Islands, we want to remain somewhat competitive there. So I think.
They probably won't have much further to go than the 12 basis points, which is still relatively cheap source of funding for us.
Yeah, no that makes sense and if I could follow up on the investment portfolio strategy.
I understand waiting for higher yields to come.
You would think we'd begin now.
I guess, how patient are you willing to be given your elevated cash levels or do you. I mean would you continue just deploying into short term securities or is there.
Any kind of.
Macro environment that would maybe change your mind, indicating the longer term, even though at that.
Without a substantial increase in yields.
Yeah. Thanks, Thanks for that maybe I should have been a little bit more clear we did redeploy most of the runoff actually back into agency MBS. So you can see a duration extension there.
But net new money, we put into two and three year, so about $400 million.
Went into two to three year and about $2 50 went back into agency MBS at a average right around 125.
Okay I got you.
Yes in terms of the launch in terms of the longer.
The broader question around is there anything that would change our thinking obviously.
I mean, there is a lot of there's been a lot of volatility in the rates market at the moment, we are still very asset sensitive.
So I think we're just being patient getting a bit of running book yield, but retaining some flexibility while we see we're tapering in longer term rates end up shaking out.
Yes, that's certainly it seems like the right approach right now okay. Thank you.
Yeah.
The next question comes from Timur <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
Maybe circling back to the channel Islands.
Loan balances at quarter end.
Yes, So I think we have the end of period balances in note 12.
The financial segment reporting.
But I think the new when we think about the net new product balances. So the channel islands as both the UK and the channel Islands, which includes Dx ABN book.
And that new mortgages. This year I think we're around 50 million pounds at the end of at the end of Q3, and we continue to expect that to grow to maybe.
$5 billion or so.
In four to five years, so it's a cautious approach, but I think.
Not a dial mover, but clearly accretive from our perspective.
Do you remember this was our plan to get turn with channel islands into more of a full service retail bank and actually we were able to jumpstart the mortgage volume pretty quickly because we used are a lot of our people in our London office.
Murphy with mortgages limited so we have a good team there is focused on central London mortgages, but they were able to really help with the channel Islands mortgage book and probably the first new residential lender there.
Sort of a generation and it's been a really good start so we're pretty excited about it.
Okay. So I guess looking at the disclosure for U K.
Loans does that imply that the central London book has been growing in 'twenty, one as well or has that been.
Relatively flat after taking last year.
Yes, it's been relatively flattish as you remember these are Io so three to five year duration, so kind of running fast to keep the balance flat obviously.
Obviously, London.
As just started opening up so people are actually able to show properties again.
It's a broker introduced market there.
So it's been relatively flat up until now but.
But the market overall is fairly vibrant with a pretty good pipeline.
Okay. Thank you and then maybe switching over to the deposit side.
The third quarter decline I guess, how much of that was planned transitory exit and then as you look ahead, what type of visibility do you have for deposit balances.
Couple of quarters.
Yes, great Great question so.
It's been quite a bit of time, obviously looking client by client on deposits for anything thats over really over $10 million of deposits and flowing on and off balance sheet.
Our classified the outflow as part of the surge deposits that we have starting in December last year, and these are sort of intermediaries coming from law firms and some buildup from from.
Hedge fund cash balances in Cayman.
As we head into the fourth quarter, we normally get a bit more seasonally seasonal increases in cayman up towards year end.
And we are obviously continuing to dialogue with customers about how long these deposits staying or interested in term deposits off balance sheet items.
But yes. The outflow was released the search deposit outflow and I think we should expect some of that to continue.
That will obviously alleviate pressure on the TCE ratio.
We're also doing a better job on directing some of the bigger clients with transitory money into our money fund. So the sweep was more effective this quarter than previous quarter. So I think it's starting to come off of that but I also think we're just managing the flows better.
Okay.
And then on.
Yes.
A corollary to the deposit question and the pressure, that's adding to TCE ratio.
And kind of lower level of buyback activity as TCE still under 6%.
I guess does that absolute TCE level also impact your ability to do M&A or are those two kind of.
Non binding to each other.
Yeah, Great question. So if we were buying a fee business, which is some of the some of the opportunities. We've been looking at more closely obviously that doesn't impact the TCE ratio, if youre buying a bank our balance sheet.
It could be either accretive depending on.
What youre buying.
Duties TCE ratio, but.
I think certainly the quality of the regulatory capital stack is very high with a very high component of set one.
So there's other opportunities.
Funding or capital funding, if we found a larger.
A larger transaction, particularly in the fee businesses, we've talked about before.
So I wouldn't really say, it's a major constraint.
Okay and then one last one for me if I can just looking at the fee businesses.
Business in particular.
It seems like fees within trust have been fairly stable over the last couple of years.
I guess, what's the organic outlook for the existing trust business and you've obviously been looking for a trusted now for a little bit.
That really the next step to start seeing higher trust fees is through M&A or are there levers to pull where you can start seeing some increased utilization from the organic platform.
Yes.
We see increased fees and trust it really is inorganic so it really is about M&A. So I think we've said in the past the trust business really.
Is very stable fee income.
But it doesn't really grow so in a normal year or are you basically will take.
Take on about 1% to 2% additional fee income through New trust because it takes a long time.
To set up these very complex family trusts and then you lose one or 2% is as that learners.
Move on and the money is distributed down to the beneficiary. So really is a flat business. It doesn't grow much on its own so it will be through acquisition.
Still having constructive discussions.
As we've said in the past it takes a long time and probably the most important gating factor is really our own risk appetite from an AML perspective. So we are really stringent about what we will take on and that often.
And having to structure.
The trust acquisitions in various ways, which can be complex and time consuming so it's still having constructive discussions, but as I said, it's a long lead time.
Okay, great. Thank you for taking my questions.
Thanks.
We still have time for questions. We have a question from Jeffrey <unk> with Piper Sandler. Please go ahead.
Good morning.
Good morning.
I was wondering.
If you could give us an update on the M&A strategy I know you gave some helpful commentary on sensitivity of M&A.
Two the capital levels, but can you give us a broader update on what you guys are looking for right now.
Yes, sure so it hasnt changed its been consistent that.
Our existing banks, and particularly Bermuda and Cayman produce produce a lot.
Capital.
Which.
We have slow growing markets, obviously, so it's very difficult to invest back into and to Bermuda and Cayman. So the strategy has been to use that capital generation to do two things one is to acquire.
Private trust companies, which which we've shown we can do in the past to increase the size of that business.
Usually at our existing jurisdictions and then the second part of the strategy is opportunistically to acquire banks in the channel Islands either.
Current year Jersey, there really isn't much overlap acquisition possibilities in Bermuda and Cayman, So thats, where we would grow I would say one of the strategies was to try to balance our exposures and our risk profile across the three jurisdictions.
Which we have substantially achieved at this point from a balance sheet perspective, so we feel like we're more diversified but those are the two pieces of the strategy Trust acquisitions and banks in the channel Islands.
Thanks.
And I appreciate the commentary on the channel Islands mortgage operation progress going into the <unk> are there any other dynamics around loan growth that we should be aware of similar to the repayment of the government facility that we saw in <unk>.
No.
I think obviously, we are continuing to monitor it there are a number of as we come out of Covid.
The discussions with some of the larger facilities that we put in place for particularly the Cayman government in New Jersey, a commitment that we made to.
The states of Jersey.
Now to be.
Not utilized and so they are obviously evaluating that.
Do they need due to need the fiscal stimulus capacity.
Originally that we had signed up for at the beginning of the pandemic and I think some of them it is reevaluating and reducing their exposure.
But I think we should.
Hopefully see more activity in central London in terms of transactions and refinancing.
The pipeline is quite good there and channel islands is well underway.
<unk> continues to be a lot of cash buyers and so there's not much leverage put in demand is.
Relatively sluggish I would say it came in.
Is growing very fast.
And we're just taking our time, making sure we stick with our risk appetite there. So I think you know what.
You've seen the last couple of quarters, maybe a slight.
Slightly better better growth outlook then.
Then we had.
During the pandemic suddenly.
That's all for me. Thank you for taking my question.
Thank you.
We still have time for questions. If you would like to ask a question Press Star then one to join the queue.
I have a follow up question from Timur <unk> with Wells Fargo. Please go ahead.
Alright, thank you.
Maybe just looking at net interest margin I guess looking at the dynamics for both loans and securities are those new money yields coming on below the portfolio yield.
Some catch up on the average is relative comparative analysis is the thesis that there is some incremental NIM compression coming in the following quarters or.
Is there anything that I'm missing there that could kind of spend more.
Yes, I mean, we are continuing to deploy as you can see cash balances, but obviously, we are quite cautious around a surge deposits and the duration of those deposits. So we are in the process of updating behavioral behavioral analysis on the deposits as well.
I think with the way the balance sheet is right now.
We tend to focus more on net interest income then the NIM.
And sort of keeping that up to 75 level pending what happens in the rates market. Obviously, if we continue to be very asset sensitive.
As a reminder, just two thirds of that sensitivity is sitting at the front end of the curve and one third is kind of at the at the back end of that curve.
So we have seen a slightly more constructive.
10 year recently certainly.
And I think we're just being we're just saying there.
Stuart Little staging here in the two to three year. It does close NIM compression, but running book yield. So it's a good trade off from our perspective to just kind of keep that 75 level on net interest income and I think the NIM will be dictated by the.
Potential reduction in deposits normalization of deposits.
That really is coming sort of giving us a trajectory out of there without incurring a huge mark on the investment portfolio, So just having that flexibility.
Okay, and then as we think about deploying excess cash into securities I know the number before had been around 150.
Quarter.
Are the trends in the third quarter kind of indicative of what your plan is going forward or is there a unique opportunity.
Given the runoff there to reinvest some of those yields I guess, how should we be thinking about putting cash to work in the securities book going forward.
Yeah.
<unk>.
I think when we see opportunities as we did.
In the second quarter to kind of lock some of that in.
We did we did put 400 out in the second quarter into MBS Securities and Thats one of the reasons why we still have gains in that security Securities book today.
And obviously, there's quite a bit of volatility in the 10 year right now, but I would expect us to two.
We now have a platform, where we have two two and two and three years later and so we can stem the sort of.
NII compression really from additional volume in the investment portfolio and shorter duration.
It doesn't it looks like.
Bigger NIM compression, but it does give us that flexibility.
We are grateful for the guidance for the market.
Got it thank you.
Thanks.
This concludes our question and answer session I will turn the conference back over to management for any closing remarks.
Thank you Tom and thanks to everyone for dialing in today I know, it's a busy morning for calls for everyone. We look forward to speaking with you again next quarter have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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