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 & Son Limited. . I would now like to turn the conference over to Mr. Noah Fields, Butterfield's Head of Investor Relations. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's second 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. Butterfield continues to produce strong financial results during the second quarter of 2021 with profitable and long-standing core banking and wealth management businesses in Bermuda, the Cayman Islands and the Channel Islands, as well as Singapore, the U.K., the Bahamas and Switzerland, where we offer a variety of specialized financial services and products. All of our operating 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 businesses in our jurisdictions were largely unaffected due to the success of remote working models. This 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 $0.79 per diluted common share and core net income of $40.1 million or $0.80 per diluted common share. This resulted in a core return on average tangible common equity of 18.7% despite a sustained low interest rate environment. Our credit portfolio has performed well. And in the second quarter, we had a credit provision release of $1 million, primarily due to an improved economic forecast. The Board of Directors again declared the $0.44 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 market conditions and potential M&A opportunities.

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 2.01% was 8 basis points lower than the prior quarter due to continued deposit growth and elevated MBS paydowns 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 costs helped offset some of the NIM decline. Loan yields were down 9 basis points in the second quarter due to jurisdictional mix shift, while portfolio balances were stable. During the second quarter, the blended rate for loan originations was 3.57% for $234 million of new loans, down from 4.15% for $212 million of originations in the first quarter of 2021. During the quarter, the net average 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. New money yields averaged 1.66% in the second quarter of 2021 or 4 basis points higher than the 1.62% in the prior quarter. Turning to Slide 7. Noninterest income increased $1.3 million to $48.8 million compared to the prior quarter. Higher credit card volumes and higher credit facility fees drove the growth in banking revenues as the first quarter tends to see less transaction activity. The bank's higher noninterest income resulted in an increased fee income ratio of 39.4% in the second quarter of 2021. Slide 8 provides a summary of core noninterest expense, which increased $83.4 million in the second quarter of 2021 compared to the prior quarter. The increase in core expenses was a result of a number of factors, some of which are not expected to repeat in future periods. We had a onetime voluntary opportunity for our colleagues to receive payment for a portion of unused holidays during the pandemic. In 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 costs due to return to more normal business activity levels. As we continue to work our way out of the pandemic period, we expect core noninterest expense to settle back into the $82 million to $83 million range per quarter.

Thank you, Michael. On July 1, 132 countries and jurisdictions agreed to join a new 2-pillar plan to reform international tax rules. Under Pillar 1, taxing rights of more than $100 billion of profit are expected to be reallocated to market jurisdictions each year, excluding regulated financial services and extractive industries, such as mining, oil and gas. Under Pillar 2, there is a proposed global corporate income tax with a minimum rate of 15%.

. And the first question will come from Alex Twerdahl with Piper Sandler.

First off, just wanted to ask for a little bit more color on what's driving 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. And you're right, Alex, we've seen a significant amount of deposit inflows over the last couple of quarters, really starting in Q4. So the balance sheet's really kind of ballooned with some of the surge deposits. About 50% of the deposits are retail between Bermuda and Cayman, and it's driven by some of the fiscal stimulus in those 2 jurisdictions, which is really consistent on pension withdrawals that's put on to our balance sheet. As well as in Bermuda, in particular, there was a transaction whereby the local electricity company was sold, and that was all local investors, and they've put that into -- onto our balance sheet.

Okay. So as you kind of look out over the second half of the year, I mean, do you have a way of sort of modeling deposits? And really what I'm getting at is that if deposits keep growing, that TCE ratio, it's going to be hard to get that above 6%, which is going to, I would think, limit your desire, your appetite to do things like buybacks. And so maybe you can sort of tackle both sides of that question, one, the sort of the balance sheet size. And then, two, is that going to be prohibitive to stock repurchases and other capital actions later this year?

Yes. I mean I think we've said we expect those deposits to be temporary in nature, but I think how long is temporary is the question really that we're facing at the moment. Certainly, in Q4, we were expecting the transactional flows to kind of not necessarily repeat in Q1, but actually, we had stronger flows coming into Q1. And so to the extent that we can avail ourselves or the clients can avail themselves of our money fund, obviously, that's going to alleviate some of the pressure. That is an ongoing discussion.

Got it. And then can you -- just on the expenses this quarter. There's a couple of items that seem like maybe they are noncore or non-repeatable, including paying out the vacation days that you alluded to in the press release. Can you break out the exact amount that's associated with that?

Yes. I mean there were probably -- there was just a bunch of -- or a combination of some smaller individual items. We, I think, called out in noncore severance cost in our Mauritius office as we transfer the remaining banking operations functions to Guernsey and Halifax, and so that was the $1.4 million of noncore expenses there. And then we had some contractor costs that were associated with the transfer of those businesses. Obviously, we wouldn't expect those to repeat. Correct, the vacation buyback, I think, 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 and teams and have accrued vacation, haven't been able to travel, trying to avoid a problem around Christmas, where we don't have adequate coverage, et cetera. And so this was an opportunity really for them to sell back a portion of that. I think the total cost was probably in the $0.5 million range. Some of that was obviously accrued and carried forward from prior year, and some of it was this year's vacation days. And then we have some consultant costs for a couple of smaller projects in Guernsey and Cayman, which are now wrapping up. So again, we're not expecting that to repeat. And then we had the adjustments to staff incentive accruals for 2021. Obviously, that will continue through the year. Market salary adjustments, a few offices, where we've seen increased turnover. So that's more of a permanent thing. So I think, overall, we should be getting back in the $82 million, $83 million range for the remainder of -- quarterly range for the remainder of 2021. But that sort of hopefully gives you some color around the items and a sense of why we believe some of those are actually not repeatable.

Right. And then as we look forward into 2022, if I remember correctly, your range is a little bit below that on the last quarter. Is that $82 million to $83 million, is that kind of the right level to be using kind of permanently going forward? Or are there some other projects like the moving in the Mauritius office, I think, is at least new to me. Is there some more things that are being contemplated that could actually push that expense level a little bit lower as we look forward into next year?

Yes, yes. There are. So as we've talked about maybe 1 year or 2 ago, we're coming up to the end of the amortization period for the core IT infrastructure, the One Butterfield system, and that's starting to abate in Q4 this year. So as we look forward into 2022, that should put -- push the run rate down a little bit. However, we're also upgrading systems, and so will probably offset or recapture some of the cost savings effectively. But it is fully self-funded, just over a shorter amortization period. But I think we'll come back and give some more guidance in the coming quarters around expense levels. But I think that's right, a little bit lower in 2022 but then probably coming back up.

And maybe just to clarify, Mauritius, we ceased doing some activities there in terms of operational banking and brought that back into Guernsey. Just was much more efficient to do it out of Guernsey, but we still have a decent-sized team there that does trust financial statements, just not the banking side. So we will retain, at this time, a presence in Mauritius. And we're still working in Halifax, so we've got a good team up there, about 150 people. And we've added 37 new positions this year, which will save us about $1.5 million compared to having those positions in more expensive jurisdictions. And obviously, we reduced headcount in Bermuda, Cayman and the Channel Islands as we build on Halifax, so that will help. But it's gradual and will take some time.

Our next question will come from Timur Braziler with Wells Fargo.

Maybe just following up on the last commentary, what's the total number of folks in Halifax now?

So it's roughly 150.

150? Okay. And then I think last we spoke, I think the kind of capacity at Halifax is around 200. Is that, a, still the right way to think about it? And b, how aggressive or how fast are you looking to kind of fill in that Halifax capacity?

So Todd, I wouldn't say there's a real upper limit on capacity. I mean there's plenty of office space. We've got excess office space. I think our feeling is to grow it gradually because as we put -- if you put account opening in Halifax from Bermuda and Cayman, we want to make sure that's working before we add new functions. We really have the majority of our compliance and AML and alert monitoring people up there. So that's been good. I would say the experience in Halifax has been fantastic. It's a 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, a lot of Canadian companies have moved operational processing centers there. So there is a bit of competition and wage pressure for these students coming out of universities. But we will continue to grow it, and I would think we'll get above 200 at some point, but it's going to take some time.

Okay. And then maybe going back to the deposit conversation. I think you guys have been, rightfully so, fairly conservative in modeling deposit assumptions and how fast you're willing to put those to work. And especially recently, it seems like the deposit flows have been very strong. I know the reinvestment environment isn't the greatest. But as you look at future rate potential, current asset sensitivity profile, is it making you reconsider what you're doing with some of the on-balance sheet cash? Or is conservative still the name of the game? And kind of that $125 million net deployment is still the right way to think about it?

Yes. I mean, we're a bit more aggressive this quarter as we put a little bit more than the advertised 150 to work. And obviously, given where rates are today, it seems like that was a good decision. We are sitting on a lot of cash. I do think some of it is -- a lot of it is temporary. If you think about the underlying business that we're in, it's retail and mid-market corporate banking. We're in jurisdictions where GDP is probably, on average, growing 2% to 3%, Bermuda; 4% to 5%, Cayman. So that's kind 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 probably the same trend that we're seeing for most of the other markets in that central banks are printing money, and it's sitting on our balance sheet, and part of it is fiscal stimulus, et cetera. But I think at some point, pension balances have to go back into pensions, and so then that means we won't necessarily count that cash and ladder it out. So I think, as we sit here today, we're kind of comfortable where we are with -- the reinvestment rates are pretty close to our AFS portfolio running book yields at the moment. We'll just keep pace and continue to be conservative. And obviously, if there is an opportunity where the tenure goes back to the 1.75, 1.90 level, we'll grab that opportunity and bank some of that.

Okay. And then just last for me, maybe for Michael Collins. In looking at the proposed international tax rule change, are there any preliminary thoughts on what that can be to some of your jurisdictions? Is it still kind of too early to see what some of the lasting impacts of that would be? And then you made it seem like the 2023 expected rollout is quite ambitious. Maybe talk to that and when you actually think something like this could be implemented.

Sure. So all of our jurisdictions are actually doing the agreement, so we're trying to be as helpful as possible. Pillar 1, I guess, is really targeted at tech companies which we don't have, generally offshore. So that's not going to affect us. Pillar 2, in terms of the 15% minimum tax may have some impact, but we still think the tax differential between offshore and onshore will be good enough to keep companies here.

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 calls today. So thanks, everyone, for dialing in, and we look forward to speaking with you again next quarter. Thank you very much, and have a great day.

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