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The Bank of N.T. Butterfield & Son Limited (NYSE:NTB)
Q1 2020 Earnings Call
May 1, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Butterfield First Quarter 2020 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]

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

Noah Fields -- Head of Investor Relations

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'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.

Yesterday afternoon, we issued a press release announcing our first quarter results. Press release along with the 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 a 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 relevant to the implications of COVID-19 for the Bank. Additional information regarding risks can be found in our SEC filings.

I will now turn the call over to Michael Collins.

Michael Collins -- Chairman and Chief Executive Officer

Thank you, Noah. And 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 Schrum for additional details on COVID-19 from a credit perspective and comments on the first quarter results.

Turning now to Slide 4 of the earnings deck, we reported net income of $40.3 million or $0.77 per share and core net income of $40.8 million and $0.78 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 build 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 4 basis points to 2.63% compared to the last quarter, and our cost of deposits dropped 8 basis points to 42 basis points.

Turning now to Slide 5. 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 no 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 their 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 wellbeing of our customers and employees, including our ability to continue providing central 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 home 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 US 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 loss interest income. We also are seeing significantly decreased card services fees with no tourism and subdued domestic economic activity.

Over the coming periods, we may also see increased prepayment speeds in our investment portfolio as US home borrowers seek to refinance home loans in the 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 rate would combine to compress NIM. This could, ultimately, alter the earnings profile of the Bank and would result in an 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 $0.44 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.

Michael Schrum -- Group Chief Financial Officer

Thank you, Michael, and good morning, everyone. Before I give an overview of the first quarter results, I wanted to provide some information on some specific credit exposures. As you can see on the bottom left of Slide 5, we have fairly limited direct credit exposure to hotel and restaurant lending sectors, which is primarily in Bermuda and Cayman. Hotel operators and construction loans represent our biggest direct commercial COVID-related credit risk. However, given the structure of the deals generally at below 50% pre-crisis LTVs and the underlying financial strength of the borrowers, we are not currently expecting significant losses from this area.

If the crisis lingers several more quarters, one of the emerging areas where customers could start to see challenges maybe in the part of the residential book with borrowers who currently work in tourism-related businesses. Finally, we do not have any direct exposure to the oil exploration or production sector.

Turning now to Slide 7 and some details regarding the first quarter results. On Slide 7, we provide a summary of net interest income and NIM. In the first quarter, NIM of 2.63% increased 4 basis points as the cost of deposits, particularly term deposits, decreased from rollovers, which more than offset the decrease in interest income. Lower rates were partially passed along to borrowers with yields on variable rate loans being 15 basis points lower in the quarter. Average loans increased during the first quarter as we had the benefit of a full quarter of lending to the Bermuda and Cayman governments, which were drawn late in the fourth quarter.

On Slide 8, we provide an overview of average customer deposit balances by location, currency, and contractual nature. Deposits at March 31, 2020 were $11.8 billion, a decrease of 5.5% from the end of the year. The decrease is a result of the expected attrition of euro balances in the Channel Islands, which is consistent with previous guidance on the ABN deal. Overall, the cost of deposits is down 8 basis points, due to lower term deposit pricing on rollovers. It is also worth noting that during the '08, '09 financial crisis, overall customer deposit levels did not reduce significantly, and at this point, we continue to see stability in deposit levels.

Looking now at Slide 9, non-interest income was down 4.3% compared to the prior quarter, due primarily to lower card services fees, which were negatively impacted by reduced volumes as economic activity stalled in March due to government lockdowns.

On Slide 10, we provide an overview of core non-interest expense. As we discussed last quarter, first quarter expenses returned to the expected range after being elevated in the fourth quarter. The improvement was due to reduced headcount in the Channel Islands, lower marketing expenses, travel expenses, and client event costs. We continue to target a through-cycle efficiency ratio of 60%.

Looking now at Slide 11, we provide a summary of regulatory and leverage capital levels. Butterfield continues with our conservative capital management philosophy that balances regulatory requirements with shareholder returns. Tangible book value per share increased 4.6% in the first quarter, due to contributions from earnings and OCI related to the unrealized gains in investment portfolio.

We continue to view the dividend as the most direct and efficient way to translate the high ROE of the business to investor return. The dividend coverage ratio remains around 2 times, and we believe the current dividend rate is sustainable. Our capital management priorities have not changed and continue to support the dividend organic loan growth, share repurchases in appropriate market conditions and maintaining flexibility to pursue M&A deals when the right opportunities arise.

Turning now to Slide 12. During the first quarter, the balance sheet was broadly stable, except for the continued decline in the euro-denominated deposits in the Channel Islands, as expected. End-of-period loan balances were down almost 3%, due to the lower dollar value of pound sterling-denominated loans in the Channel Islands and the UK. With the significant fall in US interest rates, total net unrealized gains in the investment portfolio were $155 million at the end of the first quarter compared to $61 million at the year-end.

On Slide 13, we continue to emphasize low credit risk in our investment portfolio with the majority of investments in AAA-rated US government guaranteed agency securities. Loans are mostly residential and full recourse with 75% of the portfolio in the below 70% LTV bucket. In light of COVID-19 and its potential future impact on particularly unsecured loans, we have increased our reserve estimate by $5.2 million and the total reserve under CECL is now 72 basis points of gross loans reflective of the collateral-backed residential lending platforms built over the last decade.

On Slide 14, we discuss the average cash and securities balance sheet with a summary interest rate sensitivity analysis. The structural asset sensitivity of the balance sheet has now been entirely realized by the reduction in front-end rates. Therefore, the downside 100 basis points scenario would start to increase in NII, if the Bank passes negative rates on to customers by increasing spread on demand deposits. The assumption on negative US dollar deposit rates would be similar to what we've seen in Europe. In the upside 100 basis point scenario, the Bank starts to increase net interest income with a positive differential between deposit and market rates. Additionally, reinvestment rates would improve, thereby improving net interest income also.

I'll now turn the call back to Michael Collins.

Michael Collins -- Chairman and Chief Executive Officer

Thank you, Michael. Butterfield's integration in the Channel Islands is progressing well and into its final stages. We now expect the full operational integration to be completed in the third quarter of 2020, as most clients are also working remotely and it is practically much safer to upgrade their banking systems once customers are back in their offices sometimes in the second quarter of 2020.

Following the success of the Channel Islands, we remain committed to exploring potential acquisitions in banking and trust with most opportunities in the Channel Islands for banking and trust. For the trust network, we would also seek to build on the potential in Asia with a larger trust presence in Singapore. While we do not have any specific communications on this at the moment, these discussions are still continuing.

The effect of this health crisis on Butterfield will depend on uncertain factors, including the length and depth of the pandemic and associated government lockdowns, how that impacts domestic economic activity in tourism, how quickly communities recover, as well as the interest rate environment. Our communications with regulators, rating agencies, and governments remain constructive and supportive.

The Bank continues to have a strong and flexible capital position with a very liquid balance sheet. Learning from the financial crisis a decade ago, Butterfield's credit underwriting has been conservative, and as a result, our exposure to potentially problematic sectors is limited and should place the Bank in a strong position to emerge from the current crisis. As a final note, I would like to take this opportunity again to thank our employees, particularly those in the front line in retail branches continuing to welcome customers and helping them and us through a difficult period.

Thank you. And with that, we'd be happy to take your questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Timur Braziler with Wells Fargo. Please go ahead.

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi, good morning. Maybe just starting...

Michael Collins -- Chairman and Chief Executive Officer

Good morning, Timur.

Timur Braziler -- Wells Fargo Securities -- Analyst

Maybe just starting around broader CECL assumptions, many of the US banks use the Moody's model and coming up with their CECL assumptions. I'm just wondering, do you guys use a third-party to help you formulate CECL impact? And if you could just talk through some of the broader economic assumptions you use in coming up with your CECL impact.

Michael Schrum -- Group Chief Financial Officer

Yeah. Thanks, Timur. It's Michael Schrum. It's a good question. A lot of work has gone into CECL over the last year, obviously building the model. We don't use a third-party service provider to provide data as all of our loans are primarily manually underwritten. And so, we use part of our own history, repayment history obviously and local market conditions in -- where we operate. We do use, of course, external data in the model, including primarily unemployment forecasts as well as GDP forecasts, and for that, we use a combination of service providers, including Moody's and Bloomberg. The underlying assumptions for the model going into this year, obviously changed a lot since the end of the year, which is driving the additional reserve build in this quarter. So overall, we've landed on a negative 3% GDP -- US GDP forecast for this year, which is one of the central assumptions. Obviously, that has a big shock in the second quarter to economic activity of double-digits and then, sort of a -- more of a U-shaped recovery into Q4.

Again, the model is somewhat sensitive obviously to the external variables, but I would say, because most of the loan book is residential and manually underwritten, we have more of a straight line to realizing collateral in a troubled situation. So it mostly impacts the loan buckets that are -- what debt service coverage is really cash flow-based, so that would be the sort of C&I book and the credit card book, but again, those are relatively small in the overall scheme of things. So hopefully, that helps a bit.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay. That's a good color. Thank you. And then, just your commentary around mortgage deferrals, are you deferring payments on the entire book, or I guess, what portion of the mortgage book is currently in deferral status?

Michael Collins -- Chairman and Chief Executive Officer

So we're deferring payments, principally the interest on the residential mortgage book. Obviously, those customers or clients or borrowers who are in default or had trouble previously were making exceptions of putting those to the side. And we took an approach where we did it automatically.

And if you want to come in our call and basically say you want to continue paying for this 90-day period, then you can, and we are getting some of that where people don't want to stretch the term of the mortgage, but it's pretty much across the residential book.

On the commercial side, we're working with all of our commercial customers daily trying to find out how they're doing and figuring out where we can help. So that's obviously very specific discussions individually as opposed to any broader program. We're going to look at in three months on the residential side to see where we are. There is some chance we could extend it for an additional period, but obviously everything's so fluid right now. We're just going to wait and see. And it did really -- I think people reacted quite well in all -- in Bermuda and Cayman, because it did put a lot of money back into the economy, which we're all trying to do.

Michael Schrum -- Group Chief Financial Officer

Yeah, and I would say, just in terms of the portion, there was about $1.4 billion between Bermuda and Cayman on the resi side that was included. So these are obviously customers in good standing and about sort of 10% to 15% of them opted out of the automatic deferral. So they're continuing on the existing payment terms.

Michael Collins -- Chairman and Chief Executive Officer

Yeah. And we were very careful from the coupon lending perspective to make it very clear that this was extending the term of the mortgage, so you're going to pay more interest over the life of the mortgage. And so, I think people understood that.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay. Thank you. And then, just lastly for me, just looking at your hotel exposure, appreciate the color that at origination or pre-crisis, it was 50%-ish LTVs. if I remember correctly, I think a portion of that is backed by the Bermuda government as well, I think $25 million on the St. George's project. Is that still the right number? Has that guaranteed portion been reduced? And maybe, you can just talk through some of the guarantees on that hotel portfolio.

Michael Collins -- Chairman and Chief Executive Officer

Yeah. So as you can see on Page 5, we have a total of $214 million of hotel and restaurant exposure out of $5.2 billion book, so only about 4%. I mean, interestingly, restaurants are about $7 million, which is obviously really contained. In terms of the hotel book, we have a couple of big hotel loans that are currently in operation, two or three. We think they're well underwritten, and they have sort of broader context. So one of them, as an example, has a large condominium project that's been running for years associated with it, so a big part of our repayment actually comes from expats living in these condos as opposed to the hotel itself.

One of the other operating loans is a wealthy relationship that we have a far broader, deeper relationship and have real clear line of sight in terms of the family's wealth. So it's a hotel -- it's secured by a hotel, but it's really a much, much broader relationship than that.

And then on the hotel construction, you hit it on the head. I mean, we have the St. George's hotel that's really being built and is well on its way. The plan is to open up next year, which is hopefully not too bad timing given the fact it will be summer next year. We'll have some time to see how this all plays out. And on that loan, the Bermuda government has guaranteed $25 million out of our $60 million commitments and lots of equity, lots of equity upfront, completely different underwriting than the Bank did pre-financial crisis. So we feel pretty comfortable about both the total size relative to our total credit portfolio and also the individual credits within it. So we think it's pretty contained.

Timur Braziler -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

Our next question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey, good morning.

Michael Collins -- Chairman and Chief Executive Officer

Hi, Alex.

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey, so first off, I was wondering if you can just kind of fill us in, I think most of us on the call probably know all the stimulus programs in the United States, but can you maybe fill us in on some of the stimulus programs that might be impacting Bermuda, Cayman, and the Channel Islands and maybe even the UK as well, just so we can sort of put some rate comparisons together?

Michael Collins -- Chairman and Chief Executive Officer

Yeah. Sure. So I'll just give you a sense of where the different governments are projecting GDP for 2020. Bermuda's projections -- government projection is minus 7.5% to 12.5%; Cayman is minus 15%. That's actually a Chamber of Commerce projection as opposed to government. Guernsey is minus 15% and Jersey is minus 6%, but it's -- everyones is sort of just trying to figure out where it's going. Obviously, Cayman has a bit more tourism exposure. So their 25% of GDP is tourism, while Bermuda is only 17% and the Channel Islands is very little. Guernsey has got some. So I'd say it's fair to say it's going to be double-digit declines in 2020, maybe lower to mid-double-digit, but obviously this is uncharted territory. So we should see how that goes.

In Bermuda, there has been a few small stimulus step so far, so really small, just sort of a $12 million small business government guaranteed program. Bermuda set up unemployment insurance for the first time and has put out close to $20 million, a few thousand people are getting unemployment. Weekly checks are processed with the banks, direct credit for the first time ever. So that's really the stimulus. I think the Ministry of Finance will come out in the near term and come up with a broader program, but at this point, Bermuda hasn't really stated exactly what the Bermuda stimulus is going to be. But we do know that there is going to be some more borrowing in Bermuda to support it.

Cayman has a surplus, has some reserves they can use. They're talking about potentially borrowing a few hundred million, Guernsey and Jersey as well. So they are all in different stages of thinking about using their reserves and the other three islands and figuring out what sort of amount they want to borrow. And I'd say it's sort of 10% of GDP. It's pretty much across the board, so a few hundred million maybe up to $500 million. And we want to be as helpful as possible in all our jurisdictions from a credit perspective. We know these economies better than anybody. So it's a good time to be able to support the government.

So mixed stimulus. It's sort of evolving. The UK obviously is in a different situation, much broader programs, but I think the Islands actually are going to be somewhat contained in terms of throwing money at it. So that's sort of where it is now.

Alexander Twerdahl -- Piper Sandler -- Analyst

That's very helpful. And then, just in terms of the deposit balances and cash balances, I know a lot of those are part of the planned run down of the book acquired with ABN AMRO, where are you in that process of running off deposits and kind of how much more could we expect to potentially leave the Bank. Is there a way to sort of ring-fence that?

Michael Schrum -- Group Chief Financial Officer

Yeah. Alex, it's Michael Schrum. And obviously, the great environment has changed quite dramatically over the last quarter. So I think we're in a stage where we're continuing obviously with the ABM repricing, but also being quite aggressive on deposit pricing particularly term rollovers, etc. And so in essence, if you look at the euro balances or other currency balances on the slide, you'll see that, that's where most of the attrition is coming from and that will continue for another quarter or so. I would expect just again trying to land the strategically important relationship even those who have euro balances providing that they also do other business with us, but obviously, we can't activate those euro balances in the form of loans and so, they didn't need to be priced at market.

In terms of what's left in that bucket, I would quantify it around $200 million to $300 million, most of it again ABN. We haven't really seen any -- we've seen great stability across the other platforms and actually in Cayman, we're a bit up in terms of deposit levels since year-end. So the rest of the Banks is really, fairly stable, but there is still a bit to go on the euro balances in the Channel Islands.

Alexander Twerdahl -- Piper Sandler -- Analyst

Great. And then just final question back to the loan modifications, is the BMA and other regulators, do they have a similar view in terms of these loan modifications in the time of crisis such that you're able to modify them, they don't become TDR, you have a lot of flexibility to work with your borrowers, etc.?

Michael Schrum -- Group Chief Financial Officer

Yeah. I mean, the prudential supervision here also, we have obviously ongoing dialogs with all the regulators, again very supportive of the steps that the Bank has taken to put money back into people's pockets, in particular, that may then be passed on -- part of that may be passed on to rents, etc., which can alleviate some of the pressures from unemployment or temporary unemployment in the jurisdictions.

The treatment of TDRs is really an accounting question. So it really comes from the US GAAP accounting side and not necessarily from the potential side. So we obviously take the guidance from FASB on that, which is sort of broadly stated that, as you know, the TDRs up to six months, providing the customers good standing shouldn't necessarily become a TDR or loan modification, if it's a forbearance that's granted on that basis. And that's clearly the approach that we're taking as well with PWC here.

Alexander Twerdahl -- Piper Sandler -- Analyst

Fantastic. Thanks for taking my questions.

Michael Schrum -- Group Chief Financial Officer

Thanks, Alex.

Operator

Our next question comes from Michael Perito with KBW. Please go ahead.

Michael Perito -- KBW -- Analyst

Hey, good afternoon guys. Glad to hear everyone is doing well. Thanks for taking my questions.

Michael Collins -- Chairman and Chief Executive Officer

Sure, thanks, Mike.

Michael Perito -- KBW -- Analyst

I wanted to spend a few minutes on a couple of items here, one on the residential mortgage book. I was wondering if you guys had any additional kind of context of what -- I imagine the historical loss rates over a long period of time and that book really, really low, but just in terms of any periods where there is stress on tourism on Ireland, I mean have you guys have really seen any pickup in loss rates in mortgages, is that something that's been experienced in the past or not quite at this point?

Michael Collins -- Chairman and Chief Executive Officer

I'll start off, post financial crisis, we did get some strain in the residential mortgage book and did a lot of work getting our debt collection capability up to speed. We've really -- if you go back to sort of 2011, '12, we really didn't have much of that because we never had losses, and property purchases in Bermuda and Cayman has never really gone down. So we did take -- property prices went down depending on whether it's a condo or a property 20% to 40%, and we did get some pressure, but again as you can see the net charge offs today and even back then never got too high. So we have had experience and I say that positively in the sense that I think we have a debt collection capability that's really good at this point, which we didn't have 10 years ago. So we understand how to do it.

Michael Schrum -- Group Chief Financial Officer

The other characteristic -- that's a couple of characteristics of small island property markets, which tends to happen during periods of stress is that supply tends to withdraw because LTVs are very low. And so, we get a lower number of transactions occurring for a period of time until prices sort of recover. And then, the second thing is people -- there is a great deal of sort of social cohesion like people know when they buy a property in Bermuda that they don't really want to lose it and so, they have uncles and aunts and family members kind of helping out during periods of stress where to share the burden. And I think that's kind of helped a lot through the post financial crisis in terms of keeping the mortgage book current and not having too many TDRs.

Michael Collins -- Chairman and Chief Executive Officer

And then if you look back in 2007, '08, Bermuda, as an example, had about 700 property transactions per year. It's been hovering around 200 for the last five to seven years, and that's partially because Bermuda still had a lot of indigenous wealth that's on the island. And so, when property prices fall, families just hold on to it as opposed to try to recoup some equity, so it just slows down basically. But I think as we said, we don't have a lot of exposure on the tourism side, but we -- directly, but we do obviously indirectly through mortgages, and we're going to have to watch that very carefully.

Michael Perito -- KBW -- Analyst

That's helpful. Thank you. And then on the deposit side, it seems like a bit of the quarter-over-quarter drop was in term deposit, which I imagine was kind of pricing related, but just on the transactional reduction, I mean you priced a little bit more color on the drivers there and it seems like based on your prepared remarks that deposits are pretty stable at this point. I mean, is that something you expect on the business side as well, if volatility kind of persists globally from the COVID-19 pandemic?

Michael Schrum -- Group Chief Financial Officer

Yeah, maybe I'll start. I mean, the other piece of this is obviously if you look at average deposit balance versus this period end, there is that GB -- that sterling weakness that's causing the translation difference of about $150 million...

Michael Perito -- KBW -- Analyst

Was that the entire piece, Michael, on the transactional side, or was there any other kind of...

Michael Schrum -- Group Chief Financial Officer

Sorry.

Michael Perito -- KBW -- Analyst

Was that the entire -- the majority of the step-down on the transactional deposits or was there anything else that was within that?

Michael Schrum -- Group Chief Financial Officer

Normal commercial movements, but I wouldn't call anything specific out. I mean, it actually Cayman went up a little bit during the quarter. So obviously, we have a cycle of captive insurance companies receiving premiums and paying out claims, etc. and then hedge funds in Cayman obviously during the -- post the financial crisis a decade ago, we did see some redemption and further boosting of cash balances prior to them being paid out to investors from funds. So we are tuned to kind of movements on the balance sheet, but it's been what I would call normal commercial movements at this point.

Michael Perito -- KBW -- Analyst

Okay. Helpful. And then lastly on non-interest income, I believe the vast majority of your trust fees really are not impacted by the market at all, I guess one, can you just confirm that and two, maybe provide a little bit more context about how you expect some of the fee items to be impacted next quarter, whether it's by lower global market values or kind of less transactional volume?

Michael Schrum -- Group Chief Financial Officer

Yeah. No, absolutely can do that. I can certainly confirm all the trust fees are being billed on as part of an annual fee and then there is some activity fees when trust restructure, etc., that we charge and/or enhanced tax reporting that we have to do under the common reporting standards or FATCA, etc.. So those drive some activity-based fees, but they're not really related to an underlying market driver, if you will. It's more on a time spent basis again. So they're very capital efficient, very stable fees and if you look over a period of -- since we went public, the only thing that's moved that fee number has been either acquisitions or sort of changes in underlying structures -- trust structures where the last beneficiaries passed away, etc. So those are very stable.

Asset management, obviously, is impacted by underlying valuations. So we would expect those to be impacted and have been impacted. So you can see that over the quarters. Banking fees in particular is impacted through cost services fees and merchant acquiring fees, so about a third of the banking fees is in that bucket, and we would -- we've seen sort of leading indicators that seem to suggest maybe been an 80% drop in economic activity from debit card transactions, etc. during this period of stalled economic activity or government lock downs that we've had in both Bermuda and Cayman where you've got curfews and people have only been allowed to shop twice a week, etc. That's just driven down obviously not necessarily the number of transactions, but the value of the transactions. So certainly in the short term, I would expect that to be impacted quite significantly.

FX has actually been up due to the volatility in currency pairs, particularly the dollar/sterling. We've seen a lot of fund activity in the Channel Islands, which had a record quarter in terms of FX. So it's more volatility driven as opposed to -- obviously, it's all FX commissions. There's no proprietary positions in there. So it really will just depend on what happens in the FX markets. And then the other are pretty small. Custody is pretty stable, it's a couple of basis points on -- as we would expect.

Michael Perito -- KBW -- Analyst

So net-net, there could be some near-term pressure on the $47.5 million of core non-interest income in the first quarter, it sounds like that's reasonable?

Michael Schrum -- Group Chief Financial Officer

Yeah, I would expect asset management fees to be impacted by lower valuation, lower market values of underlying AUMs, and I would expect banking fees to be impacted in the short term from merchant acquiring card services volumes, but again then as we get through this and with Bermuda and Cayman are coming out of lock down -- full lock down over the weekend, we will probably see a pickup certainly in just domestic economic activity and will just depend on consumers reactions then at that point.

Michael Collins -- Chairman and Chief Executive Officer

Yeah. I think, I mean, I think we'll see a sharp hit in fees, particularly debit card transactions in April, it will get a little bit better in May because domestic economies are opening back up this weekend, but it will still be subdued until we actually open up the airports, which is anyone's guess to late May and into June and July. So that's sort of the way it's going to play out.

Michael Perito -- KBW -- Analyst

Very good. Thank you guys and stay well.

Michael Collins -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

Our next question comes from Will Nance from Goldman Sachs. Please go ahead.

Will Nance -- Goldman Sachs -- Analyst

Hey guys, good morning.

Michael Collins -- Chairman and Chief Executive Officer

Good morning, Will.

Will Nance -- Goldman Sachs -- Analyst

I was wondering -- I appreciate all the color that you guys have given on credit. I was wondering maybe you could spend a little bit more time on some of the PPNR dynamics over the next several quarters. I appreciate some of the comments in the prepared remarks about the impact of lower interest rates on the net interest margin. I was wondering if you could walk us through some of the moving pieces given a lot of the portfolio is floating rate. Just what are some of the moving pieces in the portfolio, what are some of the actions that you've taken on the back of US rate cuts, and are there any ameliorating factors that could kind of lessen the decline in your loan yields relative to what kind of US benchmark rates have done?

Michael Schrum -- Group Chief Financial Officer

Yeah. Great question. Will, so I'll kick off. It's Michael Schrum. So yeah, let's start with the March '18 actions that we took. It's obviously -- in Bermuda, we took resi down by 50 basis points for the 45-day lag, so you would expect to see 50 basis points on the floating part of that book, which is 80% of that book coming through in Q2.

UK, we've sort of more or less seen a 25 basis points reduction. Again, that's mostly a floating book. It does have a flow of 50 basis points on it. So we're not expecting any further compression on the UK book. But I would expect to see a full quarter following the Central Bank, Eastman [Phonetic] in the UK as well.

In Cayman, most of the book is floating. It's about 20% fixed. Again between commercial and resi, we should expect the US prime full impact of that, which will be around 100 basis points obviously, a little bit into Q1. But most of that will come through in Q2. And then on the investment side or the loan asset side on cash and short-term securities, those are mostly repriced. You'll recall that we have a sort of -- we manage our own liquidity and we have a sort of three-month T-Bill ladder, which tends to be set ahead of any Fed funds obviously. So we've seen most of the impact there, but it could be another 15 basis points to 25 basis points on cash and short-term securities.

On the investment portfolio, some of that will depend on reinvestment rates. But I would expect some premium amortization and to some extent, will depend on the CPT as well, which could be as anyone's guess really, but we haven't seen accelerated prepayments yet, but it could be 5 basis points to 15 basis points, call it, 10 basis points on the investment portfolio over the next couple of quarters.

And then offsetting that obviously, we would expect a continued decline on the cost of deposits, not as much from demand because we're not yet charging negative rates on dollar deposits, but certainly on the term side, I would expect a further rollover benefit coming through the next couple of quarters most of that term money is really sitting in three, six months, so it'll rollover into lower rates and probably generate an offset of about 10 basis points to 15 basis points on the cost of deposits.

So if you put all that together over the next couple of quarters, you could see sort of a 25 basis points to 35 basis point NIM compression. It will depend to some extent on loan demand in the market, both from what Michael spoke about in terms of government lending, will also depend on where the 10-year is, currently reinvestment rates in the $150 million range on MBS, and then obviously the prepayment rates on MBS, so we're currently getting about $150 million to $200 million a quarter in maturities coming off that book.

Again if that obviously continues for a long period of time, that will start to impact investment yields more meaningfully. But at the moment, we obviously bought that book to protect against interest rate risk and the banking book. We have an unrealized position now of $150 million in there that will certainly help come through the coupons on the MBS securities over the next couple of years and that was precisely why it's there in the first place.

Will Nance -- Goldman Sachs -- Analyst

Thank you for all the details. That's very helpful. And then maybe on the expense side, the expense levels came in a lot lower than I think most people were expecting this quarter. I would have guessed that may be given the delay in some of the integration in the Channel Islands that there may be -- the risk might be to the upside there, but it seems like you've taken some pretty good cost actions in the near term.

I guess, can you just kind of walk us through near-term expectations on expenses, what sort of environmental impacts from the health crisis we might see on the expense line, what kind of cost cuts we could see, and then maybe any kind of tail impact of the integration of the Channel Islands deal in the third quarter, what impact that might have? I know there's a lot of moving pieces there.

Michael Collins -- Chairman and Chief Executive Officer

Yeah. So I think, I mean our focus obviously right now next quarter or two is just making sure everyone is safe and operating well and being supported, so lot's of communication I would say it's remarkable how we've been able to operate working remotely which is really interesting part of the model today. So today across our 1500 employees, we mentioned 70% are working remotely 15% are at home not work

Michael Schrum -- Group Chief Financial Officer

Okay. Yeah, sure. Let me deal with the short-term first. Obviously, travel's completely ceased as a corporate travel policy in mid-March. So that's one big expense item, when you operate these banks across multiple jurisdictions. Obviously, there's a lot of travel, which is great and obviously, client entertainment has also completely ceased at the moment or it's gone virtual at the moment, which obviously a lot less expensive. So we've seen a lot of benefit in the second part of March. And we would expect for that to continue to come down in the discretionary bucket. But again, that will be a short-term benefit. Coming out of lock down obviously, we'll start to gear up again. We are a relationship bank. And so, it's important to -- for us to stay in touch with our customers, not just virtually, but also to spend time with them and understand what their business plans are.

On a more strategic side, obviously, we've taken action and deferred some of the capital spending programs, particularly around buildings, around brand rollout, resequenced that into a much slower burn rate at this point. We think we'd still obtain substantially the same benefits but over a longer period of time. So people are not automatically getting new business cards. They're using the existing ones. We're not replacing the whole bins on the credit and debit cards. We're doing that gradually as cards expire, etc. We're keep investing in the front line side of the business, so the branch refurb in Bermuda will still go ahead, which I think would be great, but some of the back office capital programs have been put on hold or being reevaluated as you would expect.

Finally, I think amortization as we talked about in the past as well, Butterfield built a very expensive system about 10 years ago, $120 million, which is the amortization is running off at the end of this quarter. And so, moving into Q4, we would expect that to start helping. Effectively, that's $10 million annualized cost saving a year, of which we will put two to three back in, I expect, as part of normal system upgrades, etc. So, net of $7 million there and then obviously depending on how long this goes on, we'll need to look again more on a zero-based budgeting basis about -- I think it's been a bit of a reset for us, how many people do we need in the buildings, what do we really need to operate this business, etc., and so, I'll just let Michael tune in on that.

Michael Collins -- Chairman and Chief Executive Officer

Yeah. So I think -- I mean our focus obviously right now next quarter or two is just making sure everyone is safe and operating well and being supported. So lot's of communication, I would say it's remarkable how we've been able to operate working remotely, which is really interesting part of the model today. So today across our 1,500 employees, we mentioned 70% are working remotely; 15% are at home, not working; 15% are in the office. So if you just take Bermuda as an example, we're operating full retail services where the operations with 59 people in the office out of about 500 and similar ratios across the different jurisdictions.

So I think we are stepping back and we're thinking about what the model should be and what the cost structure should be assuming that we're going to be in an zero interest rate environment for the long term. And so, I think that has implications for a bank like Butterfield, its deposit led and we understand that. So we're focused on what could the model look like as we come out of the pandemic. We have to be a little bit careful because while we are working remotely and things are operating very well, few client complaints at all, we have to recognize that volumes are way down as well. So we've got sort of back test that to see how we could operate, but I think it is a real indication of a new working model that for a bank like Butterfield and very expensive jurisdictions, multiple currencies, multiple regulators, we are a pretty complex bank, and I think we're just going to do the work over the next quarter or two to see what a potential new cost structure model could look like. But first and foremost, the focus right now is do the work in the background. But at this point, we're here to support our employees as they service our client base.

Will Nance -- Goldman Sachs -- Analyst

Got it. That's very helpful. And then maybe lastly, just on the strategic front, you mentioned that this could catalyze large banks exiting kind of offshore jurisdictions and potentially create some opportunities for you guys, how are you thinking about -- it seems like Butterfield is relatively well positioned versus some of the other peers globally that might have kind of more severe credit exposures, maybe in more kind of capital preservation mode at this time. So I guess how are you thinking about your ability to kind of serve as almost like a strategic acquirer at a time when a lot of global banks maybe looking to exit and potentially raise capital?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, I think we obviously learned a great deal from the financial crisis and what Butterfield did in the past in terms of lending and our entire model has been focused on just in-market lending, no out-of-market lending, no credit exposure in the investment portfolio. So that's really positioned us quite well. That's not to say we won't have some residential mortgage issues here as the economy slowly starts to open up.

But from a broader perspective, we positioned ourselves from a credit perspective for this sort of event. So I think we feel pretty confident on that side and I think you're right, it's a little obviously right now given the environment, no one's really doing much of anything in terms of necessarily near-term corporate development, but I think we do really believe that things will open up as market start to operate again. And as we said, we're a decent-sized bank in Guernsey at this point, so 10%, 15% market share or 1% or 2% Jersey. We do think there is still going to be some opportunities there as UK bank start to strategically reposition.

And Singapore, which is more or less shut down right now, but luckily it's a trust company as opposed to a bank, is still a great market for us and we just really need to find some scale. So we do think there's going to be opportunities, but I would temper it just by saying in the next few months, people are just trying to get through the situation they are in, but I think going into the summer things, discussions may open up at that point. But to your point, we are -- have a really healthy balance sheet and we're strategically positioned to execute the strategy we've been talking about for years.

Will Nance -- Goldman Sachs -- Analyst

Got it. Thank you for taking all my questions. Stay safe.

Michael Collins -- Chairman and Chief Executive Officer

Thanks.

Operator

[Operator Instructions] Our next question comes from Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich -- Citigroup -- Analyst

Yeah, I was wondering if you talk a little bit about the behavior of your global trust clients in this environment. I know you said that the trust fees don't really change that much. But do you -- is there a change in some of the large deposits? Is there kind of a change in -- just in terms of the activity that they would typically bring through the Bank?

Michael Collins -- Chairman and Chief Executive Officer

I would say, what we're seeing pretty much across the board is a lot of state planning and financial planning for obvious reasons. I think people are pretty nervous. We actually are seeing some more interest in our jurisdictions from an estate planning perspective. Again, it's driven by a handful of lawyers in New York, London, and Miami. So we're seeing actually some really good inward connections in terms of possibly new trust.

I think existing trust, it's I think really people focusing on making sure that the structures make sense. The beneficiaries are right, that sort of thing. So it's sort of a day-to-day stuff we do anyway but probably enhanced today. You could see some deposit weakness. So we have some very large trust clients and I think as not so much pulling money out necessarily to sort of put in a box somewhere, it's really I think people are seeing real investment opportunities. And so, I think people -- I think some of the larger trust clients will put some of that money to work. But we also expected to sort of flow in and out. So there could be a little bit of weakness, but I think we've talked about in the past, we've had a handful of chunky clients, but the rest is pretty evenly spread.

Arren Cyganovich -- Citigroup -- Analyst

Okay. Thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the call back over to management for any closing remarks.

Michael Collins -- Chairman and Chief Executive Officer

Thank you, Brandon, and thanks everyone for dialing in today. We look forward to speaking with you again next quarter. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 55 minutes

Call participants:

Noah Fields -- Head of Investor Relations

Michael Collins -- Chairman and Chief Executive Officer

Michael Schrum -- Group Chief Financial Officer

Timur Braziler -- Wells Fargo Securities -- Analyst

Alexander Twerdahl -- Piper Sandler -- Analyst

Michael Perito -- KBW -- Analyst

Will Nance -- Goldman Sachs -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

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