The Bank of N.T. Butterfield & Son Limited
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Good morning and welcome to the Butterfield Q1 2017 Earnings Conference 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] Please note, this event is being recorded. I would now like to turn the conference over to Mark Johnson. Please go ahead.

[Mark Johnson:]

Thank you, operator. Good morning, everyone, and thank you for joining us today as we review Butterfield’s first quarter 2017 financial results. On the call, I’m joined by Butterfield’s Chief Executive Officer, Michael Collins; Chief Financial Officer, Michael Schrum; and Chief Risk Officer, Dan Frumkin. Following their prepared remarks, we will open up the call up for question-and-answer session. Yesterday, we issued a news release announcing our first quarter 2017 results. The release along with the slide presentation that we will refer to during our remarks on the call is available on the Investor Relations section of our website. Before I turn the call over to Michael Collins, I would like to remind everyone that today’s discussion will refer to certain non-GAAP measures, which we believe are important in evaluating the Company’s performance. For reconciliation of these measures to U.S. GAAP, please refer to the earnings press release. Today’s call may also contain certain forward-looking statements, which are subject to risks and uncertainties. Please refer to the forward-looking statement disclosure contained in our SEC filings for a full discussion of the Company’s risks factors. I will now turn the call over to Michael Collins.

[Michael Collins:]

Thank you, Mark, and thanks to everyone joining the call today. I’ll give you a brief overview of Butterfield strategy and highlights of our solid Q1 result. Michael Schrum and Dan Frumkin will then go into a further detail on our quarterly financial results. And then, we will summarize and take your questions. As many of you know, Butterfield is a leading full-service bank and trust company, focused on shareholder value and growth with compelling offerings in attractive core markets. We were found in Bermuda in 1858, and today we are a premier provider of banking services, composed of retail and corporate banking and wealth management, which consist of trust, private banking and asset management to high net worth and also high net worth individuals, family offices and institutional corporate clients. We have leading market share in six attractive global markets. In the Bahamas, Bermuda, Cayman Islands, Guernsey and Switzerland, we have a wealth management platform offering. In Bermuda and Cayman, we also offer a full range of retail and corporate services to individuals, local businesses, captive insurers, reinsurance companies, trust companies, and hedge funds. And in the United Kingdom, our recently launched Butterfield Mortgages Limited, we offer high net worth residential mortgages. Our capital generation and returns are strong and driven by a number of factors including significant fee income with historically low capital requirements, low-cost deposits, a high-yielding loan portfolio, a conservative capital-efficient securities portfolio and operations in corporate income tax neutral jurisdiction. And finally, we continue to maintain a conservative, efficient and liquid balance sheet with visible earnings. All of these attributes combined to help produce strong results, a solid first quarter of 2017 and excellent momentum. Turning to slide four. The first quarter saw two milestone events. First, we officially launched our residential property lending business in the UK, under a new brand name, Butterfield Mortgages Limited. You may remember, this is the planned result of the orderly wind-down of our London-based private banking business in 2016. Butterfield Mortgages is comprised of well network specialist experienced in assisting high net worth families obtain residential mortgages for unique UK properties, primarily highly desirable Central London. The business serves as a vehicle for lending against Sterling deposits received by our Guernsey bank. During the quarter, we successfully launched and completed a follow-on offering of our common shares. The offer is well-received by the market and the completion resulted in the Carlyle Group, which has been a shareholders since 2010, exiting their ownership position in the bank. Their support has been valuable and we’re pleased that two of our Board members originally nominated by Carlyle, James Burr and David Zwiener have agreed to stand for reelection at our upcoming annual general meeting. Looking to our first quarter 2017 financial highlights. Today, we reported another good quarter with increases in both net income and core net income of 1.4% and 3.7% respectively over Q4 2016. Compared to Q1 2016, net income increased 34% and core net income increased 6.5%. As you’ll see in the upper right hand quadrant, core net income has seen a steady and healthy increase over the last four quarters. Our core return on average tangible common equity or core ROE increased over 400 basis points from the fourth quarter of 2016 to 23.4%. As you can see from the graph on the lower left side, this is in line with our typically quarterly pattern. And in continuance of our dividend and shareholder return objectives, we declared a quarterly common dividend of $0.32 per share and so, on increase in core earnings per share to $0.70, up $0.03 over Q1 2016 and $0.08 over the prior year. I’ll now turn the call over to Chief Financial Officer, Michael Schrum for a more in-depth discussion of our financial results.

[Michael Schrum:]

Thank you, Michael, and good to everyone. I will now take you through some of the details of our financial results for the first quarter of 2017. Starting with net interest income on slide six. The first quarter increased by $1.1 million over the prior quarter to $67.9 million. This is a nice continuation of the improving trend over the last two years. The quarter-over-quarter increase in net interest income is due to both volume increases in the investment portfolio and net margin expansion. And first quarter net interest margin increased by 13 basis points to 2.58% compared to the fourth quarter of 2016, which was mainly driven by higher yields on new investments as we deployed additional liquidity early in 2017. The quarter-over-quarter comparison should also be looked at with an eye towards the 90-day re-pricing notice of the Bermuda residential mortgage book, which took effect late in the quarter. Turning now to slide seven. First quarter of 2017 non-interest income remained stable at $38.5 million. This represents a significant increase of $4 million year-over-year, which was driven by the successful integration and retention of the April 2016 trust, investment management and private banking acquisition in Bermuda. Our fee income ratio of 36.1% in the quarter remains stable and continues to represent very significant and capital-efficient revenue streams for the Bank. Turning to slide eight, we continue to make progress on expenses with first quarter non-interest expenses decreasing 1% to $71.2 million from the fourth quarter of 2016. This was driven by decreases in technology and communication costs, decreased property expenses, lower marketing costs, and lower indirect taxes. Our core efficiency ratio improved from the prior quarter and is turning down towards the 60% guidance levels. Turning to slide nine. Butterfield continues to generate significant capital and deliver on our commitment on attractive balance returns for shareholders. We continue to focus on generating capital efficient returns. Butterfield’s current Basel III total regulatory capital ratio for the quarter as of March 31, 2017 was 17.9%, up from 17.6% as at December 31st. We continue to maintain significant buffers to all regulatory requirements in all operating jurisdictions and peer banks in the U.S., which enables us to meet any planned regulatory capital requirements. The Bank’s leverage ratio has also increased from 5.9% in the prior quarter to 6.2%. We and the Board continue to be comfortable operating for those U.S. medium peer bank levels due to the relatively low credit risk density of the balance sheet. As we have indicated previously, we expect to remain in our target range of 6% to 6.5% during 2017. The Board declared a dividend of $0.32 per common share for the first quarter of 2017. This is the second successive dividend at this level since the IPO and preferred share capital redemption in the fourth quarter of 2016. As we have previously indicated, we continue to review potential trust and wealth acquisition opportunities in high-quality jurisdictions. The Bank and the Board will also continue to review current dividend levels with a view to provide a progressive returns to shareholders as we get closer to our leverage capital targets. Now, I’ll turn the call over to Dan Frumkin to talk about the balance sheet.

[Dan Frumkin:]

Thank you, Michael. Good morning, everyone. Slide 10 details the Bank’s highly liquid position at the end of the first quarter. Total assets of $10.9 billion is a slight decrease of $0.2 billion from the end of the fourth quarter 2016. During the quarter, we continued to maintain a highly liquid position with 52.9% of our total assets comprised of cash, demand deposits at banks, plus short and long-term investments excluding held-to-maturity investments. As you can see from the total assets graph and the upper right quadrant, investment balances increased slightly due to greater liquidity deployment, while loan balances in the quarter were flat due to growth in residential mortgages being offset by pay-downs in commercial lending. In addition, we continue to have an attractive and stable core deposit base. Average deposits were flat on the previous quarter at $10 billion with period-end customer deposits of $9.8 billion, down $0.2 billion from year-end 2016. The Bank’s deposit costs remain steady at 11 basis points. On slide 11, we focus on our high quality assets. The $3.6 billion loan portfolio as of March 31, 2017 is composed primarily of residential mortgages. It was flat from year-end 2016. As I noted on the previous slide, this is due primarily to commercial lending pay-downs being offset by growth in residential mortgages during the first quarter. Looking at our non-performing assets and non-accrual loans in the first quarter of 2017, we continue to proactively engage with clients experiencing financial difficulty. Non-performing loans, which include gross non-accrual loans and accruing loans past-due 90 days or more, totaled $57.8 million as of the 31st of March, which represents a slight increase from $57.6 million in the fourth quarter 2016. Gross non-accrual loans were $50.1 million in the first quarter or 1.4% of total gross loans. This is a slight increase from the prior quarter due primarily to $1.7 million of new commercial non-accrual loans. Net non-accrual loans at the end of the first quarter were $38.9 million or 1.1% of net loans, after specific provisions of $11.2 million. The net charge-off ratio decreased from 23 basis points at the end of the fourth quarter 2016 to 2 basis points at of 31st March 2017, due to a large charge-off in the fourth quarter of 2016 as a result of the movement of the commercial non-accrual loan to other real estate owned upon foreclosure. Our high-quality investment portfolio increased to $4.5 billion in the first quarter from $4.4 million at 31st December 2016. The increase is mainly due to a $0.2 billion increased in assets in our held-to-maturity portfolio due to the purchase of U.S. government and federal agency securities early in the first quarter. Of this portfolio, approximately 94% is invested in A minus or better rated securities with about 80% of the portfolio invested in AAA rated securities. Overall, we continue to be pleased with our asset quality and the strength of our balance sheet. Butterfield remains significantly more sensitive to interest rate increases versus our U.S. peers as you can see on slide 12. You can see from the graph at the upper right, a 100 basis-point increase in rate would generate an uptick in net interest of 5.5% versus 1.4% for U.S. banks and our peer group. Now, I’ll turn the call back over to Michael for closing remarks.

[Michael Collins:]

Thank you, Dan. In summary, the first quarter of 2017 was another successful quarter for the Bank with solid profit generation and returns. By continuing to adhere to our strategy of focusing on our core markets, maintaining our leading positions in Bermuda and the Cayman Islands and scaling our trust and asset management business, we were able to improve earnings movement, successfully complete our first follow-on offering and provide stable return to our shareholders. Looking forward, we’ll continue to execute our strategy with a focus on growth and shareholder returns. As part of this, we are still keeping a sharp eye after compelling acquisitions in wealth management and private trust and high quality restrictions we know well to complement our existing portfolio. As we have communicated before, we will only make acquisitions that fit within our strict criteria such as the agency HSBC Bermuda acquisition last year. As our asset sensitivity remains higher than our U.S. regional banking peers, we will continue to prudently manage the portfolio in order to execute our stated objective. With that, I’ll turn the call over to Mark to open for questions.

[Mark Johnson:]

Thank you, Michael. Operator, whenever you are ready, we will open up the lines for questions please.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instruction] The first question comes today from Timur Braziler of Wells Fargo. Please go ahead.

[Timur Braziler:]

Hi. Good morning, guys. Just looking at the net interest margin trends, I think the expectation there or the outcome there is a little bit better than what you guys had expected, at least on the prior call, and much of that impact was driven without any kind of meaningful influence from higher loan yields. As we get that re-pricing of the residential book in late March and subsequent again re-pricing later in the second quarter, should we expect this level of margin to be sustainable, given the tailwind you are going to be getting from better loan yields?

[Michael Collins:]

Yes. Thanks for the question. It’s Michael Collins. We think it is sustainable. As you said, we increased mortgage rates in December, so that hit in mid-March and we did again when the fed moved in March, so that will hit mid-June. I think we said from inception that we got a lot of pricing power and we will continue to use that in early part of the interest rate cycle. So, we can think a combination of having 94% floating rates loans within rising interest rate environment plus the fact that we are starting to continue to deploy our excess liquidity, primarily from the HSBC Trust acquisition that we think is definitely sustainable. But, I’ll let Michael.

[Michael Schrum:]

Yes. Thanks Timur, thanks for the question, good morning. If I can just decompose it a little bit into like looking at the investment securities, obviously we’ve seen rates back up little bit. We found some good entry points early in the quarter. And again in the fourth quarter, post-Trump, obviously rates backed up a little bit since then. So, we have been sort of patient in terms of coming into the second quarter. But again, we are looking for good entry points there and we are confident we’ll continue to find entry points throughout the year. So, little bit of inter-quarter timing in terms of when the volume is deployed and what the average balance is. But as Michael’s alluded to we have sort foreshadowed $200 million a quarter for the remainder of this year as we seize on those deposits and from the acquisition last year. In terms of the loan yield, absolutely, we would expect to continue to see that. As you rightly noted, we have the 90-day notice on the Bermuda resi book, whereas the rest of the book we sensed immediately. So, we will continue to expect to see that again timing wise, only two weeks in this quarter, but obviously we will start to see the full impact again two weeks in Q2 and end of that from the March reset, so.

[Timur Braziler:]

Okay. And then, just maybe looking at the liquidity that remains on the balance sheet relative to that kind of $1.5 billion to $2 billion number that was thrown out before. Is this a comfortable level, given the pullback in rates or some additional opportunity to maybe leverage some of that liquidity into the held-to-maturity bucket? And also for the HTM purchases during the quarter, what was the purchase yield there?

[Michael Schrum:]

So, we’re just over 3, I think early in the quarter. I think we talked about 314 was one of the [indiscernible] we got. So, those were very attractive to us. We kind of look at the 10-year 350, sort of 3 plus for attractive entry points. So, it remains a balance between obviously the carrying book, the running book yield and the reinvestment opportunities that are available there. In terms of the overall buckets, again you’re absolutely right, we’ve guided towards the $1.5 billion to $2 billion. We’ll get there by the end of this year with 200 a quarter, so it just remains the market-driven really in terms of timing.

[Timur Braziler:]

Okay. That’s great color. And if I could, just one more, looking at the recent strategic shift in the UK, what’s the potential that we should be looking for there on the resi side? And also I guess what’s the deposit base that’s in sterling and is there any kind of -- I know there is a little bit of loan generation capability there, but I guess what’s the capability or the runway that you have in the UK from the resi perspective?

[Michael Collins:]

Sure. It’s Michael Collins, again. So, obviously that was an outcome of our orderly wind-down of the London bank. So, we have Butterfield Mortgages Limited, which is high-end mortgage lender in Central London. And the strategy behind that is two-fold. One, it gives us an opportunity to increase our loan portfolio inn market we really understand and also supports our trust business and high net worth client base, and it also allows us to soak up our very inexpensive Guernsey Sterling deposits. So, the way we look at it, it’s really two sides of the same balance sheet. So, we think there is real opportunity there and we’ve had very good traction in the first quarter in terms of volume. But I’ll let Dan Frumkin give you some more detail.

[Dan Frumkin:]

Yes. Thank you, Michael. We think in the UK, the resi lending opportunity we have sort of high-end, golden postcode lending in Knightsbridge and Chelsea is still pretty significant. We have pretty good demand in the first quarter. We did about £57 million of new lending in Q1 out of the UK. We anticipate that it will continue to grow. I don’t think it’s endless, and I think it replaces some of the runoff we’re seeing in Bermuda and Cayman. So, I don’t think -- the messaging around loan going forward, I don’t think anybody should interpret that we’re headed to 4.5 billion of loans because the UK is going to grow so significantly. The reality is, is that it will continue to shift our assets from commercial to essential [ph]; it will continue to create a loan book with mainly floating rate, conservatively underwritten at 65% loan to value. So I don’t think this makes us it a loan growth engine story. But I think really high quality assets with a really good earnings profile at a relatively low risk weight that we’re quite pleased to be able to do and it will grow over time. But I don’t think it will fundamentally shift the loan story to a high growth loan story.

[Operator:]

Our next question will come from Fred Cannon with KBW. Please go ahead.

[Michael Perito:]

Hi. Good morning. This is actually, Michael Perito pitching in for Fred. Couple questions for you guys, thanks for the time. I think on the last quarter’s call when you guys were talking about the loan growth expectations that the thought was to keep balances relatively flat. As we’ve seen another few months at the start of the year here and the beginning of the UK initiative, any change in that outlook; any updates on the government lending or commercial pay-down outlook that could change the flat balance expectation three months ago?

[Michael Collins:]

It’s Michael Collins. No. I think as Dan Frumkin mentioned, I think our outlook is still the same on loans, so sort of $3.6 billion. I mean there are some moving parts there with some pay downs in commercial loans in Q1, but we made that up through new residential mortgage lending. I think we really want about two thirds of the book to be residential as opposed to commercial. There are lending opportunities in both Bermuda and Cayman. In Bermuda, we have got America’s Cup, two or three new hotels are starting to be built; and Cayman’s economy is growing quite fast with tourism as well as international business. So, there are some commercial opportunities. But I think as we said in the past, we are really liability-driven bank, lots of excess liquidity and deposits given where we are located. And that’s really the story, very inexpensive funding. And we are not going to find necessarily the loan growth in two or three finite island communities. And I think if you did see our loans growing very fast, probably wouldn’t be the best story. So, I think we are very clear that we can produce high risk-adjusted returns without taking a lot of credit risk.

[Michael Perito:]

Okay, fair. Thanks. And then just on the 60% efficiency target, with a couple of those one-time costs associated with the secondary behind you and that sounds like a better handle with a couple quarters, the trust transaction. Any update on how you are thinking about the timing of achieving that that 60% level?

[Michael Collins:]

So, I think we still think sort of Q4 with assuming that rates don’t continue to go up from here and we don’t do any acquisitions, we still think sort of Q4, Q1. We have some elevated expenses today because we are rolling out our investing in our Halifax services platform. So, we have about 35 people there today, we’ll have about 100 by the end of the year. So, there are some upfront costs associated with that and we are spending a lot of money on compliance, remediation and that sort of work. So we think that will start to alleviate as the years goes on and we will get towards 60%. So, I think that’s exactly how things going to happen.

[Michael Schrum:]

Yes. It’s Michael Schrum. I’ll just add to that. I think if you look at the some of the structural elements, I mean expenses, so we renegotiated the HP contract. We have a lower run rate on that now. I think this quarter was actually a reasonably good representation of what you would expect to see. As Michael said later on in the year, we will have some of these elevated expenses starting to alleviate that pressure.

[Operator:]

The next question will come from Alex Twerdahl with Sandler O’Neill. Please go ahead.

[Alex Twerdahl:]

Hey. Good morning, gentlemen. Just a couple questions. First off, just I wanted to hone in on the net interest margin and specifically loan yields. And it looks like from the earnings release that the consumer loan yields actually declined from the December quarter to the March quarter. Can you just give us a little bit more color on the dynamics that would have driven that decline?

[Michael Schrum:]

Yes. Thanks, Alex. I’ll take that. So, yes, you can see that obviously the detailed NIM table in the press release there. I mean, overall, the gross loan yield is broadly improving as we said and is trending aligned with expectations. The quarter-over-quarter decline in the consumer specifically related to relatively small adjustment in our purchase loan portfolio, modeling in Q4 in Cayman. So, we just aligned the accretion rates for performing loans, which amounted to approximately 10 basis points in that bucket in Q4. But we would expect for the yields to continue to behave as we’ve taken 25 bp action both in December and March of this year. And again, just as a reminder, the 90-day notice period on Bermuda resi. So, it was really a small Q4 adjustment for the accretion rates in Cayman quarter-over-quarter decline if you will, so.

[Alex Twerdahl:]

Okay. That’s extremely helpful. And so, we would expect that -- correct me if I’m wrong about $1.2 billion of residential loans in Bermuda, that should basically get that entire 25 basis-point impact in the second quarter and then again in the third quarter with the June adjustment? Is that correct?

[Michael Schrum:]

That’s absolutely correct.

[Alex Twerdahl:]

Great. And then, on your interest rate sensitivity table, what kind of deposit betas are you guys modeling?

[Dan Frumkin:]

Yes. So, Alex, it’s Dan. How are you? We’re still using 50% betas on the deposit side. Obviously, the beta so far has been zero along any of the rate increases on our deposit book, cost of deposits is still 11 bps. You’ll see from the graph, they’ve been broadly flat for long time. So, we’re still modeling 50% deposit betas in Bermuda and Cayman, slightly more sensitive Guernsey, we’re using 70% in Guernsey, because it’s slightly more competitive market. We still think that’s an outright. If anything it’s probably slightly conservative for the next move. But coming off the bottom, every bank’s wrestling with what the curve looks like and how you start to reward depositors and when you start to actually see movement. Our deposit book, again, as you can see from the numbers, is flat since last quarter. So, we’re not really seeing pressure in terms of deposit exits. So, at the moment, we haven’t passed along any of the rate rises, but we model the 50% of beta.

[Alex Twerdahl:]

Okay. Thanks for that. And then, just a final question. It looks like due to the valuation decreases in AUM and assets under trust, caused a pretty healthy decline sequentially. Is that something -- can you maybe just give us a little bit more color on what caused that magnitude of a decline in the trust assets specifically? And then, whether or not that client -- is that something that directly translates into those P&L items, those line items or is there maybe some other dynamics that maybe the fees are kind of associated with other things besides just the overall level of trust under custody?

[Dan Frumkin:]

So, listen, I think just a couple of things. So, let’s start with the most important bit. It doesn’t really bleed through into the fee revenue, as you would know it. So, this is -- we’re not sort of a bank in the workshop where really what that drop would be a lot of custodial assets and we lose the custodial fees. That’s not the nature of a lot of the AUA. A lot of the nature of the AUA is houses, ownership of companies. There is a bit of custodial stuff in there, as you can see. But not a significant amount. So, the reality is that it’s not necessarily going to bleed into the revenue line. The AUM is down slightly. That again would directly correlate. The majority of AUM drops actually out of our money market fund. We had a single large depositor who decided to deploy into PE, and they pulled off our balance sheet, and they pulled money out of the money market fund as well. So, we don’t make as nobody makes, very much money off of our money market funds. So again, not really all that impactful from an income perspective. The AUA, there is no -- I wish I could tell you there was a theme; there is not really a theme. It’s just the fact of the matter is that houses get sold, assets get moved. We haven’t lost a significant trust relationship. We haven’t changed the revenue profile of our trust business due to any meaningful outflow.

[Michael Collins:]

So, Alex, it’s Michael Collins. So, if we look at our AUA in terms of the trust business, so you take $100 billion or so, about a third of that is financial assets. And as Dan said, the rest of it is privately held businesses, houses or boats, things like that. So, it literally could be a couple businesses being. So, the way we price those relationships is really based on complexity and time spend as opposed two basis points on a certain AUA amount. So, as Dan said, it will flow through on AUM side in terms of asset management, but it’s really not correlated, necessarily on the trust side.

[Operator:]

The next question will be from Ravi Chopra with Azora Capital. Please go ahead.

[Ravi Chopra:]

I just want to make sure I understand the dynamics on the low yields. So, is the way to think about it that the fourth quarter was elevated from a one-time true-up on purchase accounting and would have been 10 basis points lower and so that’s the way I should think about the sequential change to the first quarter loan yield?

[Michael Schrum:]

That’s -- yes, in the consumer buckets.

[Ravi Chopra:]

In the consumer bucket?

[Michael Schrum:]

So, the 529 in Q4, if you will.

[Michael Collins:]

Ravi, Alex’s comment was the right comment. Over half of that consumer bucket, 1.2 of the 2.2 did repricing, so about March 14th, because we have given 90-day notice on the residential side. So, there is a basically quarter lag on the rate move.

[Ravi Chopra:]

I see. I guess all things being equal, as we sit here today, can you give us a sense of what you think the June quarter loan yields would look like for the Company?

[Michael Collins:]

So, I mean I think overall, I would think you’d see the commercial loan yield at that 449 you see, move because we have the rate move in March. So, you’ll get a full quarter effect of the rate move in March, so maybe that’s another -- I don’t know if you’ll see a full 25 basis-point move. But let’s call 10 or 15 on the commercial, depending upon mix. And then on the consumer side, off of the 510 you’ll pick up another again because you’ll have the full quarter of the 25 basis points on the 1.2 billion; you can pick up another 5 or 10 basis points on that. I think it’s a right way to think about it.

[Ravi Chopra:]

Okay, great. That’s helpful. And then on the expense side, it sounds like there was some elevation in expenses this quarter in the salaries line. Should we think about that as one time in nature or maybe better way to ask the question is how should we think about expenses sequentially in the second quarter versus the first?

[Michael Collins:]

So, I think overall, as I said, I think there is two things that we talked about that will cause somewhat elevated expenses in the first half of the year, and that’s as I mentioned, continuing work on compliance, which all banks are doing. And secondly, there has been a cost overlap in terms of building a Halifax service center. So, as we continue to move middle office functions to none-client facing departments and decisions to Halifax, obviously we have to staff up in Halifax before we start reducing expenses in Bermuda and Cayman. So, that’s really where the first half of the year is. I think as we get into the second half, we’ll continue to make progress, and we’ll see Halifax really kick-in and we’ll start to get those savings. The Halifax opportunity is really -- Bermuda and Cayman are very sensitive jurisdictions; Halifax is about 40% or 50% less expensive and also a very good talent pool. So, we’re very excited about that.

[Operator:]

[Operator Instructions] The next question comes from Keith Horowitz with Citigroup. Please go ahead.

[Eileen Shao:]

Hi. This is Eileen Shao filling in for Keith Horowitz. Just another question following up on the expenses. Where exactly are we going to see some of those cost savings? Is that more on the personnel side or is that going to hit almost everything?

[Michael Schrum:]

It’s Michael Schrum. So, I think what you’ve seen already is the renegotiation of the contract with outsourced IT provider, HP Enterprise. So, you see that continuing to come through both in the first quarter and that amounts around $4 million net cost saves annually. We’re on-boarding a few leased assets as part that to see a bit of mix there in terms of depreciation. In terms of the structural elements of the cost saves, it will come through primarily on salaries. Part of that will be reinvested into complex capabilities within the organization. So, sort of come through, maybe the salaries area really in the second half.

[Operator:]

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Mark Johnson for any closing remarks.

[Mark Johnson:]

Thanks Chuck. And thanks to everybody for dialing in today. We look forward to speaking with you next quarter. Thanks.

[Operator:]

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