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 & Son Limited. . 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.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's first quarter 2021 financial results. On the call, I'm joined by Butterfield's 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.

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 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 long-standing, significant and stable market shares. We also delivered trust and wealth management services through our offices in Singapore, Switzerland and the Bahamas. In the United Kingdom, we offer mortgages to high net worth clients with properties in prime Central London. As you will see on Slide 4, Butterfield continues to report strong results with net income and core net income of $41.6 million or $0.83 per share and a return on tangible common equity of 19.3%. We had stable net interest income and fees with improving expense trend. Based on an improved economic forecast and steady loan performance, we had a 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 a provision of $5.2 million in the first quarter of last year.

Thank you, Michael. I'll start on Slide 6 with a summary of net interest income and NIM. In the first quarter, we reported NIM of 2.09%, which was 16 basis points lower than the prior quarter due to 3 primary contributing factors. Firstly, continued loan yields on the short end of the curve. Secondly, elevated prepayment speeds and reinvestment yields that are below running book yields in the investment portfolio. And thirdly, the most important significant contributor was the level of customer deposits and cash balances, which remained at historic high levels throughout the first quarter. Loan yields were down 5 basis points due to a jurisdictional mix shift in the first quarter. During the quarter, Bermuda had a modest increase in commercial loans while Cayman 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, the net average balance in the investment portfolio increased approximately $500 million or 10% as we put new money to work in the U.S. agency, MBS securities portfolio. New money yields averaged 1.62% in the first quarter of 2021 or 16 basis points higher than the 1.46% in the prior quarter. During the first quarter, the blended rate for loan originations improved to 4.15% for $212 million of new loans from 3.66% for $201 million of originations in the fourth quarter of 2020. Turning to Slide 7. Noninterest income was stable at just over $47.5 million. 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 and capital-efficient fee business with a fee-to-income ratio of 38.4% in the first quarter of 2021.

Thank you, Michael. I remain confident in Butterfield's 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 are 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 ROEs in the mid- to high-teens with the recurring fee income, low-cost deposits, a manually underwritten loan book with low LTVs, a 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.

. Our first question comes from Alex Twerdahl with Piper Sandler.

First off, I just wanted to ask a little bit about the management of the balance sheet. You guys put on a good chunk of securities this quarter. Where are you in the process of laddering cash into securities? I know you expect some 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?

It's Michael Schrum. So I mean, you can see from the cash position that it's still very elevated, and it's obviously driven by -- partly by inflow in retail and inflow in commercial. So it's about half and half. Some of that is probably search deposits as we've seen elsewhere in the financial system. And so we do expect some of that to be temporary in nature. We still do have some capacity from the ABN acquisition to ladder further out on a net new. So we're just continuing really with our -- as we discussed previously, about $150 million net new quarter. But we did take the opportunity here as we saw rates kind of backing up in the quarter to lock in a bit of the asset sensitivity.

Okay. So $150 million per quarter is still a good rate to assume for the next few quarters?

Yes. I mean, we want to monitor, obviously, deposit levels. As you can see, that's had an impact, obviously, with the OCI on the TCE ratio as well. So we continue to monitor. We're not quite at the point we can behavioralize those new deposits. As I think we've talked about before, we expect positive growth in the GDP growth range across our home markets. And clearly, what we've seen is well in excess of that, which is positive, but we also want to make sure that that's kicking around.

Perfect. And then, as I look at the TCE level, which I know is the capital ratio that you guys manage to and just being below 6%, does that limit your appetite for share repurchases until that TCE ratio goes above 6%? And does it also impact your ability to do M&A in the near term?

Yes. Good question as well. I mean, capital management really has remained the same. So we support dividend rate that we currently have and have announced again, plus organic growth in our home markets. So obviously, then, we look for accretive acquisitions. There's clearly been a bit more dialogue in that space. And then, thirdly, obviously, buybacks subject to market conditions. But as we saw the long-term rates starting to increase and deposit levels continuing in the first quarter at the sort of elevated level, we looked at the impact on leverage capital ratios and throttle back a bit on the repurchase activity. Share repurchases remain an important part of the overall capital return priorities, but it's just being a bit more conservative as the M&A dialogue is picking up as well. So I don't -- I wouldn't put a hard limit on it. We're still active in the market. I think on a PE basis, we're still good value in the market. So our price support clearly has seen a bit of a pickup, but we're just being a bit more conservative given the TCE and given the M&A dialogue. So it's still part of the overall capital deployment.

Great. And then just final question for me. We have some potential tax changes in the U.S. coming down the pike, maybe changing from a regional to a global tax system -- I guess, going back to a global tax system. Can you just remind us, is that something that would have a meaningful impact on the economies of Bermuda or Cayman or Channel Islands?

It's Michael Collins. I mean, any U.S. tax changes actually would have some impact on Bermuda, Cayman and even the Channel Islands. I'd say, going back to when we had the new bill, which really changed the way reinsurers were able to transfer risk from their U.S. entities to Bermuda, I think the fear was that would shut down the industry, and it really didn't.

Our next question comes from Timur Braziler with Wells Fargo.

Maybe first for Michael Schrum. How big was that loan that repaid, have paid down in the Channel Islands that you mentioned?

About £30 million.

Okay. And then, looking...

You can see that in the segment note. Some of that was made up by the new mortgage rollout in the Channel Islands as well, but it was sizable and profitable. Again, we're not a big loan growth story. So pretty stable asset quality and stable balances.

Okay. Yes. And then that kind of dovetails to my second question. So the launching of the retail products. I guess, when can we start seeing that make more of an impact on the balance sheet? And it looks like the deposit growth out of the Channel Islands has been quite strong over the past couple of quarters, especially this quarter. Is that a corollary to what's to come on the lending side? Any color on that would be great.

Yes. 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, what we're trying to do is make Channel Islands a full service bank on both sides of the balance sheet like Bermuda and Cayman. We started off with 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 worth of residential mortgages in the Channel Islands over 5 years, and we're on pace to achieve that.

Okay. And then just the last question for me. Looking at the deposit book and how healthy those balances were in the first quarter, maybe if you can just quantify what your expectations are for deposit outflows. And is that a 2Q event? Or is your borrowing base still -- or your customer base still in liquidity buildup mode at this point?

Yes. Great question. Difficult to say, really. I mean, 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 cycle on -- as you know, the insurance market is hardening quite significantly, so premiums are going up. And we have more premium inflows for captive insurance companies, the beginning of the quarter, and that's really kind of stuck around. So the half of the deposit increase that relates to retail is, as a reminder, just is sort of onetime pension withdrawals, particularly in Cayman and Bermuda and general retail flows, some of which will stick around. On the commercial side, we're still expecting that to flow out 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 problem to have. But obviously, that means a little bit more conservative management and clearly an impact on NIM from average deposits in the quarter as well.

Our next question comes from Will Nance with Goldman Sachs.

Maybe I could start on just some of the moving pieces 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're seeing and whether the decline in yields that we saw this quarter is a good run rate, if there's anything impacting that and just how to think about what mix shift will do to the loan yields, all else equal as we kind of look out.

Yes. Great question. There's quite a lot of -- some more detail on the balance sheet on the segment reporting as well. As you know, the Cayman mortgages new -- so the front book, both in Cayman and Bermuda, obviously, at lower rates than the back book. And Cayman, in particular, is tied to U.S. prime. So with more Cayman resi, obviously, that pressure is still on NIM, although on yields overall on the total book. And then, obviously, as we've talked about before, the Channel Islands, sterling rates are in the gross rates of 350-ish. So again, below Bermuda and Cayman rates on mortgage originations. So -- but over time, that will pressure the yield a little bit on the loan book. But I mean, it was a handful of basis points. There's still a large back book. And so although amortization continues both in the Bermuda and Cayman book, it shouldn't -- it's not too much of an impact, if that makes sense.

Got it. Appreciate that. And then just on the securities reinvestments that you're making. I heard you on the average security yield in the quarter. Wondering if maybe like the exit run rate, given the kind of backup in yields over the course of the quarter, if the exit run rate was a little better than that. And the follow-up would be, if that is the case, can we start to see the securities yield leveling off in the near term?

Yes. Yes is the answer. The exit yield was probably in the 1.85 or 1.90, so higher than the average, for sure, and a lot closer to the running book yield in the investment portfolio. So obviously, that's helpful. We focus a lot more on NII, obviously, given the search deposits and the impact that it has on the NIM overall, but we should see stabilization there. And certainly, we would expect prepayment speeds to start slowing down as well. We haven't seen that yet, but we're expecting that with a higher rate environment as well. And obviously, the maturities really have been impacted quite significantly by the PPP program in terms of almost 1/3 of our prepayments comes from lift outs, and that's really sort of accelerated the NIM decline in the MBS book. But we're getting a lot closer to the round book deal now.

Got it. That's helpful. And then if I could squeeze in 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 provide? And are you thinking about any ways that you can maybe hedge that out in case we do see some further backup in yields over the next couple of quarters?

Yes. Yes. So we've seen, obviously, almost an elimination of AFS OCI gains. We still have a gain in our book. And obviously, we're booking about 50-50 of new money between AFS and HTM, which is not necessarily a hedge, but certainly gets different accounting treatment. We still have significant gains in the overall unrealized mark-to-market on the HTM as well. And I would say, it's not -- OCI is not a regulatory capital impact for us, but it is a leverage capital impact. So we're booking longer-dated maturities, obviously, in the HTM book as we would expect more of the shorter date maturities in AFS. So that should provide some natural flow in the books and cushion the impact on AFI -- AFS in the rising rate environment, or also looks at OCI paybacks and TCE paybacks from high yields and are certainly very comfortable about the payback period that we're sitting at the moment.

. Our next question comes from Andrew DeFranco with KBW.

This is Andrew DeFranco . I'm stepping in for Mike today. So I was just wondering, it was good to see expenses tick down after some of the actions you guys took last year. Any updated thoughts on where that trends near term? Or is there still some upward pressure potential as things return to normal regarding travel and maybe some other items?

Yes. So just touching on the last year, obviously, we reduced headcount by about 10% of the workforce or about 130 positions. Clearly, that's not something we can do again this year. We're very focused 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, a onetime shot, but we can't replicate it every year. What we are doing though is continuing to focus on our Halifax service center. So we're continuing to automate as much as we can in Bermuda and Cayman and then transfer those roles and functions to Halifax. We've got about 150 people up there now. So we finally have sort of a 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 se compared to Bermuda and Cayman. But then you also have currency fluctuations as well. But it's a great quality workforce and will save us money over time. But I'll let Michael talk specifically about where we think this year will go.

Yes. And just on the restructuring, there's a bit more to come in terms of benefit. As we talked about before, this was a phased approach where we wanted to make sure, certainly during year-end. We had folks in place in key control roles. And as we are transferring their responsibilities either to Halifax or to replacements, there's a bit more relief coming on the expense side. I do expect that to be broadly picked up by additional T&E expenses in the second half this year. I mean, there are -- post-pandemic, there is a need for us to come out and see clients and go and see our colleagues in other jurisdictions. So I think the 80, 81 level is probably what we previously said, we were thinking it's going to end up, and that's probably still a good number.

Has the pandemic noticeably changed the competitive landscape in any of your markets? Have any banks pull back any further? Or any new entrants looking to diversify away from ?

Not noticeably changed any competition. Just to give you a quick summary, Bermuda looks like is going to open up or the government announced on June 26. And it looks like the Channel Islands, early July. And then although the gaming government, which they just had election hasn't announced it probably September. So everyone's trying to kind of open up into their high tourist seasons. So Bermuda now has 4 banks. That's very high barriers to entry in this market and the banks are pretty -- HSBC and Butterfield have sort of equal market shares, and we don't see that changing. Cayman is a bit more competitive with 6 banks and some Canadian banks, but I don't think the competitive landscape has changed dramatically. And then the Channel Islands is much more competitive with all the U.K. banks and European banks. So no, I think everyone and particularly we feel proud that we're able to operate so efficiently from home, and we're still doing that to some extent, but no noticeable changes. But we've been really pleased in terms of how much local activity, as you can see in our fee income in the last year, was a bit surprising in terms of how that held up, but no noticeable change in competition.

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.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.