Bank of N.T. Butterfield & Son Limited (The)

Good morning and welcome to the Butterfield First Quarter 2020 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Noah Fields, Butterfield's Head of Investor Relations. Please go ahead.

Thank you. Good morning everyone and thank you for joining us. Today we will be reviewing Butterfield's first quarter 2020 financial results and providing an update regarding how Butterfield is addressing the COVID-19 health crisis. On the call I am joined by Butterfield's Chairman and Chief Executive Officer Michael Collins and Chief Financial Officer Michael Scrum. 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. Press release 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.butterfieldgroup.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 in evaluating the company's performance. For reconciliation of these measures to US 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 23 of the presentation, we have also included a list of potential factors Thank you, Noah.

Thanks to everyone joining the call today. While we are pleased with the bank's results in the first quarter, our current focus is on addressing the new realities developing from the COVID-19 health crisis. I will begin today's discussion with a quick review of the highlights from the first quarter and then provide an update regarding the bank's COVID-19 related actions and potential exposures. I will then turn the call over to Michael Scrum for additional details on COVID-19 from a credit perspective and comments on the first quarter results. Turning now to slide four of the earnings deck, we reported net income of $40.3 million or 77 cents per share and core net income of $40.8 million and 78 cents per share. In the first quarter net income was 8% lower than the previous quarter due to seasonal fee income and a $5.2 million CECL reserve bill for future expected credit losses. Our core return on average tangible common equity was 18.6% down from 21.1% in the prior quarter. Net interest margin was up four basis points to 2.63% compared to the last quarter and our cost of deposits dropped eight basis points to 42 basis points. Turning now to slide five. As we operate across small island communities, Butterfield has an important role to play as an essential service provider, a domestic systemically important bank, an employer, a source of working capital for companies in need, and an active corporate citizen supporting our communities. We have a particularly strong sense of responsibility to balance the needs of all stakeholders during this time. The COVID-19 virus is evident in and impacting all of our operating jurisdictions. The number of infections and deaths in our various locations have been consistent with the statistics we're seeing globally. For Bermuda, there have been over 100 cases identified and, sadly, six deaths. Cayman Islands have identified over 70 cases with one known death, and between Guernsey and Jersey, there have been hundreds of confirmed cases with known deaths as well. At this point, we only have One confirmed employee case in our Swiss office who is expected to make a full recovery. We would like to express our deepest sympathies to anyone who has been directly affected or lost a loved one to the virus. We remain hopeful that the current shelter-in-place and social distancing practices will continue to slow the spread of the virus so the local economies and tourism can start to recover. When the severity of the crisis and health implications became known, The bank's initial focus was on the well-being of our customers and employees, including our ability to continue providing essential banking services. We quickly began mandating social distancing, providing protective equipment for staff, implementing split team and building strategies, and establishing broad remote working conditions through our virtual desktop interface. We have remained operational as permitted, with just over 70% of employees working from and providing all necessary equipment and services to support our employees and customers. To help ease the financial impact on the communities, we have temporarily deferred residential mortgage payments, reduced fees, and increased our direct contributions to urgent care programs supporting the most vulnerable people. In the short term, we are working with clients to assess their needs and provide support. In Bermuda and Cayman, where tourism is an important contributor to local activity, as well as exports, We are closely monitoring the situation and maintaining frequent engagement with clients. In our estimation, the duration of the temporary shelter-in-place lockdown conditions is one of the most critical factors which will determine the return of economic activity and ultimately the future impact on Butterfield. The bank keeps significant sources of liquidity available, primarily $3 billion of cash and short-term securities. as well as $4.5 billion of U.S. agency MBS. Together, this represents just under two-thirds of all customer deposits. The current interest rate environment will impact our interest earnings from short-term securities as well as our variable rate loans, while lower deposit rates are unlikely to entirely offset the lost interest income. We also are seeing significantly decreased card services fees with no tourism and so due to domestic economic activity. Over the coming periods, we may also see increased prepayment speeds in our investment portfolio as U.S. home borrowers seek to refinance loans in a lower interest rate environment. As we think about the medium and longer term implications in the three to five year time frames, a sustained long term ultra low interest rate environment could likely erode profitability over time. The bank has historically benefited from lower-cost deposit funding. However, in an ultra-low interest rate environment, the value of those deposits reduces significantly and lower agency reinvestment rates would combine to compress NIM. This could ultimately alter the earnings profile of the bank and would result in increased reliance on fee businesses. If interest rates fall further to negative rates, we could be in a position to charge negative interest rates on deposits As we have witnessed in Europe. We would also need to become more efficient through accelerated cost reductions. On the capital side, we are pleased to continue at the current quarterly dividend rate of 44 cents per share, which represents a strong yield at recent share prices and remain active on share repurchases. We continue to believe the dividend rate is sustainable and continues to be a capital management priority. It is possible that M&A opportunities could become available as larger onshore financial institutions with banking and trust operations in our current operating jurisdictions may decide to focus on their core businesses and may want to sell less strategically important assets. I'll now turn the call over to Michael Schrum to provide additional information on the bank's credit portfolio and potential COVID-exposed areas and then some additional details regarding the first quarter results including a discussion on the bank's capital position and management.