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The Bank of N.T. Butterfield & Son Limited (NYSE:NTB)
Q4 2020 Earnings Call
Feb 11, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Year End 2020 Earnings Call for The Bank of N.T. Butterfield & Son Limited. [Operator Instructions]

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

Noah Fields -- Head of Investor Relations

Thank you, operator. Good morning, everyone and thank you for joining us. Today, we will be reviewing Butterfield's fourth quarter and year end 2020 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. Yesterday afternoon, we issued a press release announcing our fourth quarter and year end results. The press release, along with the slide presentation that we will be referring 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 26 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 these 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 during the call today. I will begin our discussion with a look back at the full year and provide some observations on the Bank's experience in 2020 and then provide an update on COVID-19. I will then turn the call over to Michael Schrum, our CFO to provide a detailed review of the fourth quarter financials.

Turning now to slide 4. As a whole for 2020, I am very proud of Butterfield's performance and the resilience of the business model. In the near-zero interest rate environment, we produced net income of $147 million or $2.90 per share and core net Income of $155 million or $3.04 per share, which equates to a core return on average tangible common equity of 17.3%. NIM finished the year at 2.42% with an average cost of deposits of 21 basis points for the year. We continued with the $0.44 per share quarterly cash dividend and completed a 3.5 million share repurchase program with the most activity during the second and third quarters. We also improved our capital profile with $100 million 5.25% qualifying subordinated debt offering in June.

Butterfield's business model, which focuses on maximizing returns while closely managing credit and operational risk proved successful during this period of uncertainty. The global pandemic tested us across all jurisdictions and the Bank continued to perform well. Our technology and collaborative culture allowed us to maintain safe and uninterrupted services for our clients by decisively moving between the office and remote working environments as conditions required. Our conservative credit profile consists of 65% residential mortgages with relatively low LTVs, no out of market lending, a loan to deposit ratio of just 39% and an investment portfolio consisting of 97% US government and federal agency securities. Historically low interest rates in 2020 also provide a renewed focus on improving efficiency.

As a result, we implemented a Bankwide restructuring program to lower headcount as well as moving non-client facing positions to lower cost service centers wherever possible. We are very pleased to complete the integration of ABN AMRO Channel Islands acquisition this year. The Channel Islands continue to represent a growth opportunity for us, both organic and through potential acquisitions. In 2021, we are launching retail lending products to complement our UK mortgages business and to activate a portion of our sterling deposits over time. We expect this business to be similar in underwriting standards and character to our loan portfolios in Bermuda and Cayman. We plan to develop the book organically and anticipate it could grow to around $500 million over the next four to five years.

Finally, I would like to recognize the additions to our executive management team during 2020 which now benefits from fresh perspective and deep experience to the role in trust, compliance and operations, risk communications and human resources. I am proud and confident in our management team and believe we have the right people in place to grow Butterfield and reach it's potential.

Turning now to slide 5. Here we've provide some context and an overview of our core markets and how the Bank continues to manage through the pandemic. Bermuda, Cayman and the Channel Islands continued to have active domestic economic activity. However, much of the travel and tourism industry is operating well below historical norms. The vaccine rollout is progressing well, and all jurisdictions have active government sponsored vaccination programs. We expect that visitor numbers will continue to improve as we move through the summer and follow tourism seasons in 2021. As we discussed last quarter, following the mortgage assistance programs, we had implemented a calling program in Bermuda to better understand borrowers' status and the ability to restart payments.

I am pleased to say that the actual customer payment rates have exceeded the indications from the program. At this point, we are seeing short term delinquency of less than 1% of the total residential loan book and continued to work closely with customers to determine the best way forward. While we are encouraged by these initial results, we recognized that the pandemic continues to impact customers and will maintain close monitoring of the mortgage books in Bermuda and Cayman. Our commercial lending book remains solid and has not been significantly impacted by COVID-19 related issues. Direct hotel and restaurant lending continues to be limited, well underwritten and performing loans.

I will now turn the call over to Michael Schrum to provide a detailed review of the fourth quarter.

Michael Schrum -- Group Chief Financial Officer

Thank you, Michael. I'll begin on slide 7, which provide some highlights from the fourth quarter. We ended 2020 with the most profitable quarter for the year with net income of $42.1 million, core net Income of $42.9 million, or $0.86 per share, and core return on average tangible common equity of 19%. The net interest margin was 2.25% for the quarter and the average cost of deposits improved to 12 basis points.

Turning to slide 8. Net interest income continued to be impacted by lower market rates and particularly the reinvestment book yields of securities are lower than maturities. Prepayment speeds in our investment portfolio moderated slightly in the fourth quarter compared to the third quarter. However, they were still elevated with $329 million of paydowns compared to $339 million in the prior quarter. Investment yields were down 15 basis points in the fourth quarter compared to the prior quarter. New money yields averaged 1.46% in the fourth quarter or 4.7 basis points higher than the prior quarter. During the fourth quarter, the blended rate for loan originations was 3.66% for $201 million of new loans, down from 3.93% for $156 million of originations in the prior quarter.

On slide 9, you can see that non-interest income was up 1.9% compared to the prior quarter due to improving economic activity across our jurisdictions and increases across asset management, banking, FX and trust business lines [Phonetic]. The Bank's contribution from fees continues to represent stable and capital efficient earnings. For the fourth quarter, fees were 38% of total revenue.

Slide 10 provides a summary of core non-interest expense, which improved by 2.6% in the fourth quarter compared to the prior quarter. Expenses fell as we start to experience the benefits of the cost restructuring program in the third quarter, which achieved the expected reduced run rate. In addition, lower technology costs and indirect taxes improved which was partially offset by higher marketing spend that increased along with improving economic activity. We continued to target a through cycle cost income ratio of 60% and we expect to remain in the mid '60s during this ultra-low part of the rate cycle.

Slide 11 summarizes regulatory and leverage capital levels that continues to be in an excellent capital position with capital ratios well in excess of regulatory requirements. We have been pleased to note that our tangible book value per share has also increased to 8.8% over the past calendar year. Capital management remains an important value driver for the Bank. We continue to manage capital with an emphasis on protecting the sustainable quarterly cash dividend rate at $0.44 per common share. In addition, we maintain capital levels to support organic growth in our core markets as well as M&A opportunities. Share repurchases subject to market conditions also continues to be part of the planned EPS growth and the Board of Directors has authorized a new share repurchase program for up to 2 million shares for the coming 12 months period.

Turning now to slide 12. Butterfield continues to manage a strong conservative and highly liquid balance sheet. At the end of the fourth quarter, the loan portfolio represented only about 35% of total assets, whereas liquid assets were just over 60% of total assets. Deposit balances ballooned to $13.3 billion at the end of the fourth quarter from $11.9 billion at the end of the previous quarter. We do expect some of the increase will be temporary and the deposit balances will normalize over the next few quarters. The Bank has maintained a low risk density with risk-weighted assets to total assets of 34.4% down from 36.7% last quarter.

On slide 13, we show the Butterfield's asset quality remains exceptionally high with limited credit risk in its investment portfolio that is 99% comprised of AAA rated US Government guaranteed agency securities. Non-accrual loans were down slightly versus the prior quarter at $72.5 million or 1.4% of gross loans. The net charge off ratio ticked higher due to the secondary market sale of one commercial loan that crystallized the loss of provision previously recorded under the CECL model and the overall NCL ratio remains very low. The implementation of the CECL accounting standard was well managed for our Bank and has resulted in improved credit quality overall. For Butterfield, the model has been responsive to portfolio performance and varying macroeconomic forecasts as expected.

On slide 14, we discussed the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Butterfield's weighted average life of around 4.1 years continues to offer some income protection against the impact of near to medium term low interest rates. The unrealized mark-to-market gain on invested securities was $183.2 million at 31 December 2020. Similar to the past few quarters, Butterfield continues to expect a potential increase in net interest income in future periods in both up and down parallel rate scenarios.

I will now turn the call back to Michael Collins.

Michael Collins -- Chairman and Chief Executive Officer

Thank you, Michael. I am proud of Butterfield's performance during 2020 as we were able to achieve a core return on average tangible common equity of 17.3% during a global pandemic. And also a low interest rate environment and at a time when our home markets were facing economic contraction. It was with confidence in the strength of our business that we are also well positioned to contribute and support local communities at a time when many people faced great uncertainty. We are proud to offer the mortgage deferrals and offer our communities food security programs and other targeted charitable actions.

I would like to express my thanks to our clients, staff and business partners for all of your support and contributions throughout the past year. I believe Butterfield is well positioned to benefit from the anticipated economic recovery in 2021. We continued to focus on building the world's leading offshore bank and trust business and aim to maintain top quartile risk adjusted returns with meaningful non-interest income contribution, limited credit risk and emphasis on efficiency and shareholder conscious capital management.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Schiavone of KBW. Please go ahead.

Michael Schiavone -- Keefe , Bruyette & Woods -- Analyst

Hi, good morning, everyone.

Michael Collins -- Chairman and Chief Executive Officer

Good morning, Michael.

Michael Schiavone -- Keefe , Bruyette & Woods -- Analyst

So with the TC near the bottom of your target levels, but your regulatory capital very healthy, how should we think about the amount and the aggressiveness of your capital deployment strategy? And also on this point, can you just discuss your deployment priorities, and if you're seeing any opportunity for M&A?

Michael Schrum -- Group Chief Financial Officer

Yeah. Thanks, Michael. It's Michael Schrum. So I'll kick off just on sort of BAU side of it and Michael Collins can talk a bit about the M&A. So as you saw, we obviously measured both tangible as well as regulatory capital. So you're quite regulatory capital benefited from a slight mix shift in terms of getting our subordinated debt issued mid-year, which has obviously made the efficacy of the existing capital stock bit cheaper for us, but also allowed us to continue obviously with the buyback program goes fairly substantial last year particularly executed in Q2 and Q3. The priorities are I think as we stated a little bit earlier is to protect the dividend rate that we have at the moment, which is we view as very sustainable payout ratios in around 60% this year, but probably due to procyclicality of reserve builds from seasonal and obviously rates being much lower than in the beginning of last year.

Secondly, obviously to help the organic growth profile in our home markets, so that's Bermuda and Cayman where we see opportunities and also account for any risk migrations in risk-weighted assets on the regulatory side that might come from experiencing additional credit issues which so far we haven't. And then thirdly, obviously we look at M&A where that's accretive and the criteria are fairly strict, we really look just for banking assets in our home markets where we can get some synergies and also obviously private trust companies that provide stable capital efficient fee income at about reasonable multiples. And then fourthly, we look at share repurchases and we're pleased to see that the Board has approved another repurchase program for the next 12 months on 2 million shares or up to 2 million shares. And so that'll be executed obviously subject to market conditions. If you look at price to book at the moment, we are conscious obviously of tangible book dilution, relative to share repurchases. But we're still sitting at a fairly deep discount on the PE relative to peers.

So you know, I would say, look at the last couple of years of buybacks and obviously we'll execute that, as and when on the tangible you saw it come down to sort of in the bottom to the middle of the range at 6.1%, obviously ex cash, it's sort of higher, and that was probably driven by an OCI impact from post retirement medical expenses having actuarial loss on the annual valuation cycle. So we're monitoring that as well as part of the overall capital strategy. So nothing has really changed, the same priorities as last year and obviously, we now have the firepower to exercise that as well.

I'll let Michael just talk about M&A.

Michael Collins -- Chairman and Chief Executive Officer

So we are happy to finishing the integration of ABN AMRO last year, and if you remember, it provided us with three things. First, it was -- provides for the growth platform in jurisdiction where we have very low market share, obviously in Bermuda and Cayman we've got sort of 35%, 40% market share. So, it's harder to grow. Secondly, it reduced our concentration risk in Bermuda. And thirdly, it created relative balance sheet clarity among our three banking jurisdictions, so strategically that did a lot for us. Last year obviously conversations were pretty slow given the pandemic, we have a sense now that people were starting to get vaccines and starting to think about travel and starting to think about transactions more across our jurisdictions. So we are having some conversations, but we're always very cautious about thinking about whether they're going to come to fruition or the pricing is right or the AML is where we want it to be. So we are having conversations, that strategy is the same, so is trust companies across our existing jurisdictions and sort of overlap acquisitions with a particular focus on Singapore, we'd like to build scale there.

And secondly overlap acquisitions in our existing jurisdictions, whether it would be Bermuda, Cayman or more likely the Channel Islands, so we continue to have conversations, and we think this could be a good year to bring something to conclusion but we're always cautious because that we are very focused on due diligence in AML given where we operate. So we'll just continue to having those discussions.

Michael Schiavone -- Keefe , Bruyette & Woods -- Analyst

Great, thank you for all that color. And then my second question relates to the margin, should we expect a continuation of the slow creep downward, as your books mature -- continue to mature in this low rate environment? Or there -- are there any further opportunity to offset or at least stabilize the compression within 2021?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, great question. So I'm just trying to unpack that a little bit. Starting with loan assets, obviously there is a front book backlog, as you know we amortized all of our loans on balance sheets, so they manually underwritten full recourse loan. So you see that loan yield kind of stabilizing, even though I gave a little bit of detail around the most recent loan originations, which was 3.66% in the last quarter. So down a little bit on the front book side, but relatively stable overall, as we look at the whole -- at the loan book as a whole. We do expect some modest mix shift as we launched the residential lending opportunity in the Channel Islands, those are sterling loans, which would be at slightly lower rates. But again, that will take some time organically to come through there. And it would be activated out of our cash balances effect, so, that should be helpful to NIM.

In terms of cash, pretty much flow out there at 5 to 10 basis points. We're obviously watching the current discussions on sterling rates in terms of where they might go in the future. But that's probably reasonable there or that's been fully realized, if you were [Phonetic] at the short end of the curve. And then finally on investments, prepayment speeds obviously pretty elevated throughout 2020, so we're seeing approximately 5% of the total investment book rollover our quarter, which is almost double what we saw in prior years, combination there of a very, very flat forward yield curve.

And then obviously on the opposite side of that, we're deploying excess cash from the ABN AMRO into the securities book. So you see a volume -- the positive volume impact from that. So overall, I'm expecting some stabilization, as long there is a reasonable -- sort of 10 year and sort of normal sloping yield curve that we've seen more recently, but obviously the short end of the curve seems to be forward for a longer period of time. So medium term stabilization around where we are, I'd expect.

Michael Schiavone -- Keefe , Bruyette & Woods -- Analyst

Okay, very helpful. Thanks for taking my question.

Operator

The next question comes from Alex Twerdahl of Piper Sandler. Please go ahead.

Alex Twerdahl -- Piper Sandler -- Analyst

Hey, good morning, guys.

Michael Collins -- Chairman and Chief Executive Officer

Good morning, Alex.

Alex Twerdahl -- Piper Sandler -- Analyst

So first off, I was hoping you could give a little bit more color around the large deposit inflows that we saw in the fourth quarter and I guess what drove that and then why we expect those to move off balance sheet and sort of the timeframe for that to happen?

Michael Schrum -- Group Chief Financial Officer

Yeah, it's Michael Schrum. So I'll talk a little bit about it, you can see on the average balance, that it is pretty much to end -- toward the end of the quarter. We did a combination of retail deposits, but I would say, slightly unusual flows in the retail deposit base, in that it was driven partly by the deferrals that we put on mortgages here, where people were obviously keeping the payments and putting it into bank accounts, So again, over time, I would expect some of that to flow out. In Cayman, mostly driven by allowable pension withdrawals, which is kind of a one-off fiscal stimulus that was provided there. Again over time that could migrate into by the real assets, property or it could migrate back out, I think to some retirement portfolio. So again a little uncertain here, but they are [Phonetic] retail deposits, which is obviously very helpful.

And the other half roughly is related to sort of what I'd call cohort money, so hedge funds flows in Cayman and captive insurance deposits in Bermuda which typically follow sort of premium claim cycle at the end of the quarter and there is quite a lot of activity in the asset management space toward the end of the fourth quarter, but again, I'm not -- we're not banking on those deposits, I think some of that will flow out over the next couple of quarters.

Michael Collins -- Chairman and Chief Executive Officer

Yeah, it's difficult at year-end, obviously because we have our RMs talking to corporate clients encouraging them not to put a lot of deposits on our balance sheet over year-end, but it's difficult in a sense, these are good clients and you can't necessarily turn away deposits, but we've been reasonably successful. Will retain some of it, but as Michael said, we're not expecting to retain all of it.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay and then just thinking about -- I guess the amount that potentially could flow out and then going back to the strategy of laddering cash into investments. Has that changed at all in this rate environment? And is the goal there just to kind of consistently still put whatever it is a $100 million, $150 million of cash into securities per quarter, or is there a different target such as just aiming to keep NII flat over the next couple of quarters by deploying cash?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, I mean nothing's really changed in terms of the core balances. So as you think about what's the behavioralized [Phonetic] nature of the underlying deposits. We've been watching the ABN piece for over a year now and feel we have a good handle on those client relationships, obviously it is very key to integrate our systems and get them onto one platform there. So you will see that's continued throughout the fourth quarter. So over and above the maturities that we get from the investments which obviously would keep rolling into lower rates, we're also deploying the extra at that sort of clip of $150 million around that a quarter. So strategy hasn't really changed. Obviously as deposit base has increased quite a lot, we'll just have to wait and see if that sticks around and what we can do with that. It's been pleasing obviously to see 10-year a little bit higher lately. So that helps to slowdown prepayment rates and also helps to the reinvestment rates.

Alex Twerdahl -- Piper Sandler -- Analyst

Got it. And then in terms of the loan growth strategy in the Channel Islands $500 million over five years. Is it fair to assume that by the end of 2021, you will be around $100 million. Is it a pretty straight line ramp up? And just sort of how should we think about overall loan balances, when we consider that potential growth versus other loan categories that I know maybe a little inflated based on stimulus around the pandemic or other items that other loan balances that could actually potentially flow off the balance sheet.

Michael Collins -- Chairman and Chief Executive Officer

Yeah. So we had a lot of discussion. We're really just in the launch phase right now. So we lost month and a half or whatever, but it would be fair to probably think of that as a taper annual increase. We haven't really -- we're not really a loan growth story per se, but I think it's exciting that we are able to deploy some excess sterling, particularly as you look at the alternatives, the sterling at the moment whether it is secondary market or even gilts which pretty flat to zero, some of it will just depend on the reaction we get in the market and reception so far, obviously conversations are positive, seems to be some pent-up demand there. There are other players, high street banks in the market there as well and we're not sure exactly how it's going to actually filter in, but I think the -- so far so good.

Michael Schrum -- Group Chief Financial Officer

Yeah, Alex, the plan obviously is to turn the Channel Islands into a full-service bank on both sides of the balance sheet to look more like Bermuda and Cayman. And also to dampen a little bit the percentage, the UK, Central London loans, as the percentage of our portfolio, we wan to -- it's been a great, great portfolio, but obviously we don't want it to be 50% of our overall loan book, so growing in the Channel Islands will actually help quite a bit, but as Michael said, I think it will ramp up a little bit more slowly this year as we get into it.

Alex Twerdahl -- Piper Sandler -- Analyst

Okay, that's helpful. Is that a broker driven market the way the book in the UK is, or is it more of a originating branch type of a product?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, so it's number of buildings. It's not a broker market, it's a direct underwriting market, but it's -- there are a number of buildings -- traditional building societies and property brokers that operate as well as underwriters in that market. So there's quite a breadth of product available, we're obviously looking mostly at the same types of character underwriting that we do for Bermuda and Cayman, so be sort of in the whole loan underwriting.

Michael Schrum -- Group Chief Financial Officer

Yeah, it's a lot more like jumbo mortgages, I guess. And it actually interacts really well with our corporate management company relationships. So if you have captive managers or fund management companies or trust companies, we know a lot of the executives and all these companies and once you start launching mortgages, the corporate relationships often turn into mortgage relationships personally as well.

Alex Twerdahl -- Piper Sandler -- Analyst

Perfect. Thanks for taking my questions.

Michael Collins -- Chairman and Chief Executive Officer

Thanks, Alex.

Operator

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

Will Nance -- Goldman Sachs -- Analyst

Hi guys, good morning.

Michael Collins -- Chairman and Chief Executive Officer

Hi, Will, good morning.

Will Nance -- Goldman Sachs -- Analyst

Maybe just a follow-up on some of the growth initiatives, and just how to think about -- how that impacts the margin over time. I mean can you just give us a sense for kind of like the -- what are you paying on sterling deposits now? I heard you that the -- or charging, I heard that the reinvestment rates on gilts something close to zero. It just seems like a decent amount of money to be able to kind of lever out at some kind of incremental margin. And so just any thoughts on how that can impact the margin? And is that -- do you think that can be a net positive or is that going in your mind to kind of just largely offset declines in the securities portfolio and maybe run-off of some of the higher yielding loans and the legacy jurisdiction.

Michael Collins -- Chairman and Chief Executive Officer

Yeah, great question, Will. So it's a net positive, but it's almost too small to -- it's too small to offset over half-year period. So once we get to sort of a more of a portfolio basis, obviously that will be helpful in terms of stabilizing. I think front book sort of types of rates are more similar to prime Central London, so you're talking, in the 350 [Phonetic] gross sterling. So will be helpful to activate cash obviously due to current rates for secondary market assets and sterling is zero to 50 [Phonetic] -- I mean, it's super flat, it's almost like -- and then I'm talking about negative rate. So we are not paying up for sterling deposits, I would say, but obviously there are overall client considerations following ABN, there are some of funds that we have -- that we service both in Guernsey and Jersey that have both sterling and dollar deposits. So it's more of a relationship-based pricing, but you know, clearly it's challenging and I think it's a challenging environment in secondary market.

I think the residential lending program will definitely be accretive on the margin side, but if you look at the volumes, given that we're doing this organically, obviously, we were also talking to other players in the market, but we're pretty particular about the underwriting standards, I would say. So it's almost -- it's going to be too small, it's going to be helpful, but not totally offset, if that makes sense.

Will Nance -- Goldman Sachs -- Analyst

Yeah, no, that makes sense. And then just maybe a follow-up on the question on the strategic discussions earlier, I think you just mentioned that you'd like to take the Channel Islands to look more like the Bermuda and Cayman jurisdictions and sort of being like a full-service bank. I mean can you maybe just expand on what the vision is for the footprint there? How you thinking about like the pieces you haven't placed today. Do you need to acquire more in order to make that happen. Can you build it organically, can it be -- kind of brick and mortar light. I'm just curious to kind of entering a new market, wanting to take market share, what your thoughts are on like how to build that infrastructure over time?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, sure. So I'd say we've been the Channel Islands actually for years. So we've had a presence there for quite a long time. Jersey is a new market for us, but Guernsey, we've been there for decades. So we know the market very well. It is a market and corporate market very much like Bermuda and Cayman, so management companies Bermuda is more captive than reinsurance companies. Cayman's obviously hedge funds and captives and Guernsey and Jersey are both captives but more funds and trust company. But it's all the same sort of management company structure. So our systems and our -- all our ends are geared to servicing that business. So we understand it well and what we've done with ABN as I've said is to -- we've got to the point where we've actually balanced our balance sheet, so to speak our risk exposures across the three jurisdictions relatively evenly. It's not the same from an earnings perspective. So Cayman in 2020 made about 56% of our Core Net Income. Bermuda 31% and the Channel Islands 14%. And even though the balance sheet are of similar size, so that's simply because channel loans are much more competitive from a pricing perspective, so that all makes sense.

So I think we're kind of where we need to be to allow the Channel Islands to grow organically. So our focus right now is much more on the fee businesses on the trust side to try to build scale across our jurisdictions, but particularly in Singapore. Now that's not to say if there was a decent sized bank in Jersey that were to come up for sale again, there are not a lot of natural buyers. So I think we would be interested. But I think we've kind of got the platform where the channel loans can grow organically now and all three jurisdictions can grow together, so that we actually have a balanced portfolio and will not completely dependent on one island like Bermuda.

Michael Schrum -- Group Chief Financial Officer

And Will, the only thing I would just add to that is, exactly right, the reason why we're going on a product-by-product basis here, is we want to keep it bricks and mortar light. Right. So it's a bit of proved concept. We don't need lots of branches to do the residential lending platform, it could be a sleek online form filling, processing and we are aware, obviously of the competition there in terms of the true retail and merchant acquiring is driven by HSBC, Barclays, NatWest, Lloyd's, etc. So that's one of the reasons this isn't opening a whole bunch of branches at the moment, that's -- let's start with the stuff that's most accretive for us.

Will Nance -- Goldman Sachs -- Analyst

Got it. Super helpful. And if I could just squeeze on a housekeeping note, can you just kind of mark us to market on where we are on the fee income side, how depressed that is just from an environmental standpoint? And like -- is there -- if activity levels kind of normalize across the various jurisdictions, is there -- how much do we have to go, what's like the right run rate going forward?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, I mean it was great to see the fourth quarter increased obviously across the Board, mostly from domestic activity. So domestic activity, I would say is probably elevated in the fourth quarter, people are traveling, they are spending here, so you get a domestic Christmas shopping boost as opposed to an Amazon and shipping in kind of boost for Christmas, So that's been good. What's missing is obviously the tourism-related credit card fees that we normally get in the fourth quarter, particularly from Cayman, airlift and capacity has been severely reduced during COVID. So that's been muted, these few smaller positive items in the banking fees in the fourth quarter as well. But I would say you're probably going to see that run rate is a decent run rate, it was bit smaller under trust fees in terms of activity based fees, there was some recovery in that. But probably a bit smaller than we would see on the run rate side and you will probably see a substitution from domestic activity in the merchant acquiring side to credit card tourism-related and within the banking fees once the borders open and we get the vaccine passports.

Will Nance -- Goldman Sachs -- Analyst

Right super helpful. Thanks for taking all my questions.

Operator

The next question comes from Timur Braziler of Wells Fargo. Please go ahead.

Timur Braziler -- Wells Fargo Securities -- Analyst

Hi, good morning. I wanted to follow up on the M&A line of questioning, I guess -- and looking at the Channel Islands, if the presence there organically is good enough to launch kind of product by product. I guess what's the rationale for looking at some of these larger deals that they do come up, is that an expense story? I guess maybe the rationale for doing a larger deal in the Channel Islands right now.

Michael Collins -- Chairman and Chief Executive Officer

So first and foremost I think -- so, we talk about our market shares and pricing power in Bermuda and Cayman being market share is 35%, 40%. What's been attractive about both Guernsey and Jersey as we have a small market share, had, and still have a small market share in both jurisdictions. So we really can't grow organically where we can't as well in Bermuda and Cayman. So, even after the ABN acquisition our -- we estimated our market share in Guernsey and we're only on the corporate side and private banking and trust side would be about 15%. So there is a lot more banks obviously in the Channel Islands than I believe in Guernsey. So even at 15%, that gives us a platform where we can grow organically. But if we were to find them attractive acquisition that would be nice to be 30%, 40%. But what we're saying is that 15% in Guernsey is a platform, where last we can grow organically and we'll be opportunistic about whether there is an acquisition.

Jersey is even more interesting in the sense that I think our market share we're getting is about 1%. So there's about GBP120 billion in deposits. So it's a huge banking market and we only have a 1% market share. So I think Jersey would even be more interesting on the acquisition side, but I guess the point is, across both Guernsey and Jersey, we have enough market share that we can grow product-by-product organically, but if there were very attractively priced Bank that were to come up for sale, we definitely would be interested. So our point is we don't need to do it, but if that happen, we would look at it opportunistically.

Timur Braziler -- Wells Fargo Securities -- Analyst

Okay, that's good color. Thank you. Maybe looking at the reserve, this quarter, Michael Schrum, can you maybe just go through kind of what change quarter-on-quarter, how much of that $7 million decline was driven by the commercial loan sale? And I guess, as we look ahead, is this kind of a good foundation for the allowance or is there incremental opportunity to further release reserves?

Michael Schrum -- Group Chief Financial Officer

Yeah, great question. So yeah, a couple of things there, most of the -- so the CECL model reflects the improved obviously macro GDP outlook, which is sort of forecasting a V-shape recovery in Q2. I think we're being bit cautious and would like to see the vaccine programs obviously taking root and see what actually happens, is good news on. On the domestic side, obviously almost all borrowers resume normal payments in Q4. So it was great to see -- still obviously continuing to monitor that, we're till out of the pandemic yet. So I think we should think about CECL as opposed to the backward looking model more reflecting an improved sort of credit outlook and macro outlook.

The actual release was -- I would say about half and half. So you see a tick up in NCO which was the sale of the loan that crystallized a loss. It was a lower rated corporate loan. And we also had a small sovereign legacy loan from -- when we used to have a Barbados operation, this is kind of cleanup exercise. So as you think about the reserve going forward, the objective of CECL is obviously to reflect the future GDP outlook, in particularly the U.S. GDP outlook as well as the experience on the portfolio that feeds back into the model. It's been quite a year in terms of macro GDP forecast, which is causing more -- probably more volatility in the reserves, which was not the intent when CECL was implemented.

So it's sort of hard to predict, but I think we feel that the reserving battle maybe adequately reflects the underlying credit conditions and the current macroeconomic outlook to the extent that becomes better, that would result in obviously some release. But generally speaking, if you look at the coverage ratio, etc, we feel very comfortable that it reflects the underlying conditions of the loan book today. I know that wasn't direct question, but it's -- I'm sure that's -- it's a difficult thing to predict future obviously.

Timur Braziler -- Wells Fargo Securities -- Analyst

Right. No that's good color, I appreciate that. And one last one for me, just looking at the expense base, you guys did a good job kind of modeling that out or calling that out for the fourth quarter. Is the expectation here that we should continue to expect expenses to migrate lower over the course of the year or some of these new initiatives going the way into that trajectory?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, I mean I think we're sort of [Indecipherable] probably a appropriate run rate following the cost restructure program, that's a bit more of a staggered release benefit that's coming into Q1. But it's been a back hill coming into that as well. We do keep a sharp focus on expenses in this ultra-low part of the cycle. And I think mid-60s efficiency during this part is -- of the rate cycle is probably where we're going to stay, but it is also worth remembering that as we not subject to corporate income tax, we pay all of our taxes in the expense line which has that kind of 4% to 5% dilutive effect on the cost-income ratio. But we keep a sharp focus on it. It was obviously difficult to execute a cost restructuring program. But I think it was the right thing following the health crisis.

Michael Schrum -- Group Chief Financial Officer

Yeah. And our -- the full run rates in terms of our cost reductions will hit in Q2 this year. So, as you know we did substantial voluntary departures, early retirements, redundancies in 2020. I wouldn't see us repeating that in this year, because I think we obviously are very focused on operational risk and we don't want to cut into bone. But I would say, we will continue to focus on Halifax as our service center and continuing to move operational non-client facing positions to Halifax and that's been going for four or five years, we have 150 people up there now and it's a really good model, will continue to support and move positions from higher cost jurisdiction to Halifax.

Timur Braziler -- Wells Fargo Securities -- Analyst

Great. Thank you for taking my questions.

Operator

[Operator Instructions] The next question comes from David Feaster of Raymond James. Please go...

David Feaster -- Raymond James -- Analyst

Good morning, everybody. I just wanted to start on your asset sensitivity, clearly you're very asset sensitive at this point. You guys have demonstrated that, just curious how you the plan to manage your rate sensitivity, It looks like you're saying pretty short on the securities book, but just given your leverage to rising rates, does that maybe give you a bit more confidence to take some duration of the securities book to get some yield maybe drive accelerating NII growth?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, I mean it's -- it's been interesting to see as people start talking about negative rates and what potentially that impact could be in terms of us charging negative rates to customers and then now coming through, but I think again the strategy hasn't really changed, will keep laddering out what's maturing. The reason why the duration is pretty short. And I think, why we wanted to put weighted average life on there as well and the unrealized mark-to-market position, is that obviously we're fighting against the prepayment speeds which are very materially elevated, I would say probably fueled by refinancing rates and new originations in the US markets. So MBS prepayment speeds have just been very elevated.

In addition, also to the buyout options that have been offered into the securities, so we keep this laddering out what's maturing. And then I think the pace of laddering out the ABN is -- has not changed and really should match the behavioral duration of the underlying deposits as we grow the dataset around the ABN deposits. As we get into -- and again, we're not a mark-to-market shop. So we don't sort of speculate on the asset sensitivity just naturally occurs as because we have a very low loan assets to deposit ratio and loan asset to total asset ratio, and that's just a function of the markets that we're in. But you know to the extent that we are starting to see some creeping up in a more normal yield curve, obviously that does provide some opportunities for us to think a bit more tactically around the deployment. But for the time being and certainly over the last year, it's just been case of moderating the impact on reinvestment rates and prepayment speeds through the reladdering and we'll continue to do that. But we obviously constantly review the book, we're also looking at tactical opportunities.

David Feaster -- Raymond James -- Analyst

Okay, that's helpful. And then just -- it's great to see the increase in AUM in the quarter. Just curious how much of this growth was from market increases, an increase in underlying asset versus new client additions and maybe just kind of how that translate into asset management fees going forward?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, so about half -- so about half the book is on the AUM side is a money fund that we run in Bermuda, and that's really to allow some additional optionality for hot money in particular, our customers who want to balance the exposures for on-balance sheet to AAA rated money fund. So that's just fees that we generate from our asset management subsidiary. The other half is really in the discretionary bucket and brokerage fees. So that's responsive obviously to changes in market -- market valuation. So about 50%.

David Feaster -- Raymond James -- Analyst

Okay. And then could you just give kind of a pulse of the market in Bermuda. And I guess across your footprint, the health of your clients in the housing market and maybe where we are in the recovery?

Michael Collins -- Chairman and Chief Executive Officer

Yeah, sure. So starting with Bermuda, from the COVID perspective, we've got 10 active cases, so there was a bit of spike up around December. But it's come right down again. The testing is really efficient and it's worked really well. Yeah, it's a small place and is surrounded by miles of salt water. So they tend to be able to control it. So the curve is in good shape. The public sector fiscal position in Bermuda is elevated, I would say just in terms of national debt and deficit, some of it caused by COVID but we came into the crisis with a reasonable amount of national debt. So there's less government flexibility in terms of spending. I would say, as Michael mentioned, the local market has been pretty active because people are traveling. So just like everywhere else, people are getting out, going to restaurants outside that sort of thing. So that's kind of masks some of the underlying pain of not having tourists here. So I think when tourism comes up, we'll pick things up.

Surprisingly or maybe not surprisingly housing market has done quite well. So whether you're in Vermont or Bermuda and Cayman, people are looking for places that are safe and clean and have very few COVID cases, not just now, but for future pandemics. And so we've seen a lot of interest both locally and internationally in Bermuda real estate and Cayman real estate. So I'd say we're holding on our own [Phonetic] in Bermuda, but the recovery is going to be pretty tough.

Cayman is doing a bit better, simply because they came into the crisis with no national debt and much lower deficits. So their -- and their GDP has been growing more quickly than Bermuda. So I think they will come out of the crisis more easily. Same story in the housing market, housing in Cayman was doing really well even before the pandemic. So I think they continue to do well. They've got about 35 active cases to compared to Bermuda's 10. Channel Islands has 400 active cases, so a bit more obviously closer to UK, but they've also got 110,000 people in Jersey and 60,000 in Guernsey, so three times the size of Bermuda and Cayman together.

So, bit more cases Guernsey with bit more shutdown right now. Economically, again both Guernsey and Jersey are extremely well managed, both politically and economically. So no national debt. And so came into the crisis well from a fiscal position. GDP has done well before, the fund sector continues to do well. So, I think they're in a great shape. So across the Board, I think our jurisdictions have actually handled it pretty well. We do think that it's a bit of a fake spring in the sense that because there's so much domestic activity that has kind of masked some of the underlying issues that will come out as -- even as tourism sort of starts back up, but in some sense we feel like we may have missed a bullet a bit, but each island is different in terms of where its fiscal situation is, some can spend more than the others, each island has borrowed money to handle the pandemic in terms of incentive, spending and getting money out of the community and we've been pretty much part of all those facilities which has been great. So I would say looking back, I think in March, last year, we saw -- I think we would have thought it would have been much worse than it's actually been.

David Feaster -- Raymond James -- Analyst

That's great. Thanks for the color. Thanks, everybody.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Noah Fields for any closing remarks.

Noah Fields -- Head of Investor Relations

Thank you, Andrew. And thanks to everyone for joining us today. We look forward to speaking with you again next quarter. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Noah Fields -- Head of Investor Relations

Michael Collins -- Chairman and Chief Executive Officer

Michael Schrum -- Group Chief Financial Officer

Michael Schiavone -- Keefe , Bruyette & Woods -- Analyst

Alex Twerdahl -- Piper Sandler -- Analyst

Will Nance -- Goldman Sachs -- Analyst

Timur Braziler -- Wells Fargo Securities -- Analyst

David Feaster -- Raymond James -- Analyst

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