Earnings Call Transcript - NTB Q2 2020

Operator, Operator

Good morning. My name is Eiley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2020 Earnings Call for the Bank of NT Butterfield & Son Limited. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Noah Fields, Butterfield's Head of Investor Relations.

Noah Fields, Head of Investor Relations

Thank you. Good morning, everyone, and thank you for joining us. Today, we will be reviewing Butterfield's second quarter 2020 financial results, as well as some information related to COVID-19 and the bank's operational activities and asset quality. 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 second quarter results. The press release along with a slide presentation that we will refer to during our remarks on this call are available on the Investor Relations section of our website. 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 U.S. 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 25 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, CEO

Thank you, Noah, and thanks to everyone joining the call today. The bank's second quarter results were strong despite some of the challenges associated with COVID-19. As an essential service provider, the bank was able to support its clients throughout the health crisis with strict adherence to all recommended health and safety guidelines. We are grateful to our frontline staff, who braved uncertainty to help keep our island economies operating and to our customers for their understanding as we temporarily transitioned to a remote working environment. I have been very impressed with the bank's operational resilience and our ability to quickly adjust to the new safety guidelines and social distancing rules relevant in each jurisdiction. As you can see in the summary results on page 4 of the presentation, we reported net income of $34.3 million, or $0.67 per share. In the second quarter, net income was 14.9% lower than the prior quarter, due primarily to the COVID-19-related economic slowdown. Our core return on average tangible common equity was 15.5%, down from 18.6% in the prior quarter. Net interest margin was down 15 basis points to 2.48% compared to the linked quarter and our cost of deposits dropped 28 basis points to 14 basis points. We believe our capital position and profitability remain strong. As a result, the Board approved a quarterly cash dividend of $0.44 per share, while we continue to repurchase shares throughout the quarter. During the quarter, we successfully issued $100 million of 5.25%, 10-year fixed to floating rate subordinated debt, which will mostly be used to replace existing debt. It is beneficial for the bank to be a known issuer in the debt capital market and the latest sub-debt issuance helps us to continue the dialogue with fixed income investors. Turning now to slide 5. Butterfield operates in 10 locations, with each jurisdiction managing through the health crisis relatively well at this point. In Bermuda, the Cayman Islands, Guernsey and Jersey, the suppression of COVID has overall been effective. Bermuda was just entering its tourism season when the pandemic struck, and the island entered a mandatory shelter-in-place period for the month of April. The island was essentially closed and has gradually reopened in May and June, with the airport opening on July 1. The number of flights is significantly below historical norms but is expected to increase in August and into the fall. The cruise ship season is effectively lost, which will cost the government passenger fees, and local businesses such as transportation companies, bars, restaurants and retailers will also miss out on significant revenue. With fewer flights to the island, hotels will also be impacted by the limited tourist season, which typically is most active through October. The timing of shutdowns in the Cayman Islands came toward the end of their 2019 tourism season, and they have been in their summer slow season, which has moderated the severity impact on their bare economy so far. They're hoping to open their airport in the next couple of months as they approach the traditional autumn and winter tourism season. The Channel Islands have had more COVID cases due to their proximity to the U.K. and France, but tourism is not a significant contributor to the economy compared to Bermuda and Cayman where tourism is approximately 17% and 25% respectively. We've been making significant strides to help support our communities through these challenging times. In addition to local community-based programs, we have offered residential mortgage deferrals to clients in good standing in both Bermuda and Cayman for up to six months, and three-month interest-only options to small- and medium-sized businesses. We are also working closely with larger corporate clients who may need to adjust terms of their loans and working capital requirements. We will continue to look at how we run our business in the near and longer-term, reviewing costs and potential for new fee-generating opportunities with less reliance on interest rate-sensitive revenue sources. Butterfield's exposure to hotels and restaurants remains limited with well-structured loans and collateral packages in place. The remaining mortgage referrals expire in September after six months and we will be keeping in close contact with clients and will continue to work with customers who may need assistance. I will now turn the call over to Michael Schrum to provide more details on the second quarter.

Michael Schrum, CFO

Thank you, Michael. Looking now to slide 7, we provide a summary of net interest income and NIM. In the second quarter, NIM of 2.48% was 15 basis points lower than the prior quarter, as global interest rates fell across the yield curve. Lower interest rates pushed down floating rate loans and resulted in loan yields of 4.53%, down 27 basis points. Lower deposit costs did partly offset the lower asset yields. Looking now at slide 8, non-interest income was down 12.4% compared to the prior quarter due primarily to slower temporary economic activity during government mandated lockdown periods. Banking fees fell as a result of lower card and merchant services fees. Foreign exchange commissions were also lower as activity was naturally subdued during the months of April and May. On slide 9, we provide an overview of core non-interest expense, which was down 6.5% in the second quarter compared to the prior quarter. While the first quarter of 2020 had some staff exit costs, including salaries and benefits, the second quarter benefited from lower costs related to consultants, travel, client entertainment and marketing. The core cost-to-income ratio was 66.7%, primarily due to lower COVID-19-related revenue generation. We continue to target a through-cycle efficiency ratio of 60%, and expense management will be an important factor in a lower-for-longer interest rate period. Slide 10 summarizes regulatory and leverage capital levels. We continue to maintain strong capital levels that are above regulatory requirements. Tangible book value per share increased 3.6% in the second quarter and is up 8.4% in the last two quarters. We view this as an important long-term value creation measure. In addition to the regular quarterly dividend, we have continued to repurchase shares during the quarter. As at the end of the second quarter, we had approximately 950,000 shares remaining in our 3.5 million share repurchase authorization from December 2019. In addition to supporting the dividend buybacks and organic growth, we also continue to evaluate M&A opportunities. Turning now to slide 11. Butterfield's balance sheet has stabilized following the expected deposit declines from the ABN AMRO Channel Islands acquisition; deposits at 30 June, 2020 were $11.6 billion, a decrease of 1.2% from the end of the prior quarter. The lower deposit levels resulted primarily from the attrition of euro deposits in the Channel Islands. Overall, the cost of deposits is down 28 basis points to 14 basis points due to term deposit rollovers and further downward alignment of customer deposit rates. The balance sheet continues to be conservative and highly efficient with a low risk density of 37.1% in terms of risk-weighted assets to total assets. On Slide 12, we provide more detail regarding residential mortgages by location, commercial loans by type and timeline of mortgage deferral participation levels. In general, the bank's loans are manually underwritten by professionals with significant local market experience. 63% of loans are residential and the majority of those in Bermuda, Cayman and Central London. Approximately 80% of the bank's residential loans have an LTV of below 70%, and our commercial loans have an origination standard of below 65% LTV. As Michael mentioned earlier, one of the ways we've tried to alleviate the economic impact of COVID-19 on our communities was to offer mortgage deferral plans which temporarily have put more money in people's pockets to assist recovery efforts. In the months of April through June, 85% of Bermuda and Cayman mortgage holders in good standing benefited from principal and interest payment deferrals, with 15% of borrowers electing to continue with principal and interest payments. From July 1, customers had to opt-in if they wanted to continue with another three months of payment deferrals, of which approximately 50% have opted to participate. We have also offered small and medium-sized businesses the option of interest-only payments for the three months starting on April 1. Overall, these assistance programs have been really well received by customers. As you can see on Slide 13, Butterfield emphasizes low credit risk in its investment portfolio with 99% of our securities comprised of AAA-rated U.S. government-guaranteed agency securities. Non-accrual loans did increase by $20 million in the quarter due to one C&I loan in collateral dispute litigation, and a dozen or so mortgages that were not eligible for deferral at the end of the first quarter. We continue to work with the customers in difficulty during this time. During the second quarter, we increased our CECL estimate by $4.4 million, primarily in the consumer and commercial lending books. The increase is based on lower general economic forecast in the quarter. The allowance for credit losses is now at $40.2 million or 79 basis points of total loans. On Slide 14, we discuss the average cash and securities balance sheet with a summary interest rate sensitivity analysis. Butterfield's duration and weighted average life of the securities portfolio has decreased in the second quarter due to lower U.S. interest rates which caused higher prepayment speeds in our agency securities book. The sensitivity of the book has increased in both rising and falling interest rate scenarios.

Michael Collins, CEO

Thank you, Michael. You may have seen in our recently filed AGM proxy statement that the bank is proposing to add two new Directors. The first is Leslie Godridge, who has over 40 years of financial experience and was most recently at U.S. Bancorp where she was Vice Chairman, Director U.S. Bank NA; and Co-Head Corporate and Commercial Banking following a number of years in senior positions at Bank of New York. The Board will also be joined by Jana Schreuder, who has recently retired as Chief Operating Officer of Northern Trust Corporation after a career which began at Northern Trust in 1980. I am delighted to be adding two highly experienced and competent financial professionals to our Board, which will now have 11 directors. These two new directors are on the slate for the scheduled AGM on August 12th. Due to travel restrictions and health concerns around large group meetings in this new normal, the Board has decided to hold a virtual Annual General Meeting for 2020. Participation details for shareholders will be sent out shortly. As we manage through this period of change and uncertainty, we will continue to review all aspects of our businesses, products and jurisdictions to determine where we can improve efficiency. This will strengthen the Butterfield franchise to benefit all stakeholders and continue to provide industry-leading returns. Thank you. And with that, we would be happy to take your questions.

Operator, Operator

Our first question today comes from Michael Perito with KBW.

Michael Perito, Analyst

Hi, good afternoon, guys. Thanks for taking the questions. I had a couple of things I wanted to address. I guess, first just on the expense side obviously a pretty nice sequential drop here. I was curious maybe if you can give us, Michael, you kind of alluded in the prepared remarks that there's some ongoing monitoring given the lower rate environment etcetera. But just curious maybe if you can give us a little bit more color on what some of the major drivers of the sequential decrease were and the sustainability of those items? And then also just more broadly what are some of the things I know you guys have been fairly proactive managing the expense base already. So just curious what some of the other areas you guys are potentially looking at that we should be mindful of moving forward?

Michael Schrum, CFO

Yes. Good morning, Mike. It's Michael Schrum. So maybe I'll start off just on the sequential debt and then Michael can sort of talk about the longer-term. So I think, looking at Q2 obviously there's some temporary reductions just because we're obviously not out meeting with clients and attending events etcetera. Travel clearly is very subdued at this point in time. And then tactically, we've also slowed down some of the brand rollout expenses to kind of lower the burn rate. You'll recall we redesigned the brand for Butterfield in 2019. That rollout schedule was originally quite compressed and we've sort of moved that out a bit to just use more internal resources really for that. If I look at sort of sequentially, if we wanted to normalize last quarter, we sort of landed the final bit on the staffing levels following the ABN acquisition. So there was some severance costs and staff exit costs included there. So it was probably sort of too heavy last quarter. It’s probably if I think about this quarter and trying to normalize that it's probably about $2 million light in terms of just temporarily reduced expenses on consultants travel and client entertainment etcetera. So if you were thinking about normalizing it's kind of that $84 million number that we've talked about in the past that's probably a good number to use.

Michael Collins, CEO

Yes. And Mike, I'd also say just the broader expense outlook. We're still focused completely on longer-term moving non-client-facing positions as we restructure Bermudan Cayman to Halifax. So we currently have about 150 employees in Halifax. It's worked really quite well even during the pandemic. So that's a great office and we're going to continue to build it. So that's longer term. Obviously, during this period it's very difficult to actually execute some of those plans. But longer-term that's still going to be our focus and it will continue to be a bigger office. Shorter-term, near-term much more tactical. So obviously Michael has mentioned we're not traveling no entertainment so that actually helps a bit. We don't think that's going to come back to where it was before. So we'll continue to save money there. Temps and contractors, we're all over that in all of our jurisdictions. When things are going well you tend to add quite a bit of project work and that's temps and contractors, so we're reducing that. And then structure and then unfortunately headcount across all our jurisdictions. We're assuming we're in a zero-interest rate environment going forward. And I don't think any organization can continue with the model they practiced before and we need to figure out how to operate more efficiently.

Michael Perito, Analyst

Thank you for your helpful insights. Switching to the non-interest income side, Michael Collins, you mentioned exploring fee opportunities. Can you share more details about the specific opportunities you are considering that could be significant moving forward?

Michael Collins, CEO

Sure. Our main focus remains on in-market lending, and we're pleased to enter this crisis with a solid balance sheet of $13 billion, with only $5 billion of loans in the market. Our investment portfolio is primarily agency-backed, minimizing risk, and we have $180 million in unrealized gains, putting us in a strong position. This experience has reinforced our strategy of steering clear of out-of-market lending over the past five to ten years. Besides acquisitions, we are considering opportunities in the Channel Islands. The acquisition of ABN added around $500 million in private banking and small managed company loans, which aligns with our goals. We see the Channel Islands, particularly Guernsey and possibly Jersey, as markets that could evolve into full-service banks like Bermuda and Cayman, focusing on high-end residential mortgages. We are still exploring this but believe there is a chance to expand in-market lending there and enhance our product offerings similarly to Bermuda and Cayman.

Michael Perito, Analyst

Great, thanks. Lastly, you mentioned that the mortgage deferral aimed to strengthen the balance sheet of your customers. Do you think your customers are feeling confident about their cash positions and outlook, or is the uncertainty in tourism, especially in Bermuda and possibly in Cayman, still affecting customer confidence and business outlook for many on the islands?

Michael Schrum, CFO

Yes, it's Michael Schrum. It's a challenging situation. We're pleased to see the drop in participation rates for the second round. There's a slight difference between Cayman and Bermuda, with Bermuda having a higher participation rate in this round. Generally, Bermuda has been slower to return to work according to government unemployment statistics. This has had the intended effect, and it's encouraging to see people feeling comfortable enough to stop payments. However, I anticipate that we will need to support customers even after the six months, especially those who may struggle as we head into winter. In particular, Bermuda customers have had difficulty servicing their loans, so we will need to explore different solutions with them. We still have strategies from the last financial crisis regarding troubled debt. While there is still some uncertainty, it is reassuring to see the progress we are making quarter-over-quarter.

Michael Perito, Analyst

Okay, great. Listen, thank you guys. Appreciate you taking the time. Stay well.

Michael Schrum, CFO

Thanks Mike.

Operator, Operator

Our next question comes from Alex Twerdahl with Piper Sandler.

Alex Twerdahl, Analyst

Hey, good morning guys.

Michael Schrum, CFO

Good morning, Alex.

Alex Twerdahl, Analyst

First off, I was wondering if you could just help me understand or help us understand a little bit more into the types of loans that migrated into NPL during the quarter. I think you mentioned one commercial loan and a couple of residential loans. But maybe help us figure out what the potential loss content could be from those types of NPLs, and put that in context of what you do with the reserve?

Michael Schrum, CFO

I’ll begin and then pass it to Michael. Overall, we had approximately $20 million allocated to NAL, which is a straightforward situation. Half of that is related to one commercial facility that operates as a private banking-type structured loan with ample collateral, although there are multiple parties pursuing that collateral. It’s over-collateralized, and while we need to manage this situation, we believe sufficient collateral remains. The other half of the $20 million involves several residential mortgages. I want to note that we do anticipate increases in both 30-day delinquencies and 90-day NALs for residential mortgages. With winter approaching and following a lack of tourism, particularly in Bermuda, we expect some challenges there, but not as much in Cayman or the Channel Islands. I mention this because we had an automatic deferral program during Q2, which typically yields a high cure rate. Our team has been effective in reaching out to clients; since it’s a small community, we know them and can persuade them to prioritize our payments over others. During Q2 and the lockdown, we did not reach out to clients, as it would have been inappropriate while they were unable to work. Some mortgages that were already facing 30-day delinquencies likely used the lockdown as an opportunity to skip payments. We need to consider the economic climate; Bermuda is experiencing a contraction, and we foresee some residential mortgage challenges. On the positive side, residential mortgages make up 63% of our portfolio. We entered this situation with minimal exposure to hospitality and tourism loans, with hotel loans well underwritten and only $7 million in restaurant loans. Our commercial loans are primarily secured by office buildings with backing from reinsurance company leases. While we expect some residential mortgage issues, they're manageable and granular.

Alex Twerdahl, Analyst

Can you remind us the LTVs?

Michael Schrum, CFO

Sorry, so yeah, we – I think we talked on that. Yes, in the remarks. So I'll just point you to like just Note 6, you can kind of see that migration that we talked about; it was around 50-50. So one C&I loan was 50% of that. Michael talked about that in detail. It's just collateral dispute that's caught up in the courts really. But we feel pretty good about it. All the actors are acting in the right way. The collateral is there. It's just going to kind of work its way through. On the resi side, really folks were already kind of 30 days past due. And you can see that in Note 6 if you look at the rating migration down the track there. We're obviously not expecting anything to come through next quarter just because of the deferral program. So ultimately, as Michael said in Q4 will be kind of when we know the fuller picture. Obviously, during the opt-in, we've collected notes from people that we've called and talked to during the opt-in. And so far most people look ready to come back and pay their mortgages. So some uncertainty but not a big concern I would say.

Alex Twerdahl, Analyst

Okay. Can you remind us about the loan-to-value ratios for the residential loans that are considered at-risk?

Michael Schrum, CFO

I believe that around 70% of our mortgages are below 70% LTV, which is the correct figure. We have shared this information previously. The overall portfolio is well established, with LTVs in the high-50s in Bermuda. There is also capacity, but it largely depends on the job market and whether people can return to work. Very few loans have an LTV above 90%.

Alex Twerdahl, Analyst

Okay. And then just a couple of clarification questions. When you're talking about the sort of desire to rejigger the efforts in the Channel Islands and grow loans there. Can you kind of talk a little bit about sort of the appetite to bring the loan-to-deposit ratio for the overall bank higher, if that's something that we should expect in the next couple of years as well as kind of the currency implications for funding the loans in the Channel Islands? Are those going to be sterling denominated? Euro denominated? And kind of how should we think about the sort of capacity on the balance sheet to actually fund the loan growth that we could potentially hope for?

Michael Collins, CEO

Well I think overall, I think we would still continue with our statement that it's not a loan growth story. It's going to spike up. Loans will spike up a bit because we're doing some slow burn lending in Cayman, Guernsey and Jersey. So, you'll see a bit of that. The initiative in the Channel Islands in terms of high-end private banking residential mortgages is organic. So, we hire a team. We understand the market we start slowly, so that will ramp up over time. I would just look at it. So, basically the London mortgages, which is about £1 billion in Central London now are funded from the sterling deposits in Guernsey and Jersey. And this is just another in-market lending opportunity for those two banks using their sterling deposits.

Michael Schrum, CFO

Yeah. So, we don't anticipate needing any kind of derivatives or anything. There's organic funding from the ABN acquisition in sterling. As you know, we've got both dollars and sterling. We've run-off pretty much the euros now. So we believe, with an organic growth profile over time that will just actually activate the deposits, because there's no secondary asset markets that are particularly attractive in the current rate environment.

Alex Twerdahl, Analyst

Okay, understood. And then, just another quick…

Michael Schrum, CFO

From the AB ratio, so I wouldn't expect for that to materially move up, because we're also obviously hoping that and planning to grow deposit levels with existing clients both in Jersey and Guernsey, following the Deutsche Bank and the ABN acquisition.

Alex Twerdahl, Analyst

Okay. Just a final clarification on expenses. You mentioned that $84 million is the normalized amount, with about $2 million less due to the COVID lockdown. Would it be reasonable to expect that expenses in the third quarter will also be lower, considering that much of the travel that typically occurs is likely still not happening in that period?

Michael Schrum, CFO

Yes, I would agree with you, Alex. I expect expenses to be light for now, but some of this is temporary. As a relationship-driven bank, we prioritize connecting with our customers and understanding their needs. This is not simply about leveraging AI; it's about fostering relationships, which means some of our usual interactions will return over time. However, you're correct that for the time being, we will likely see expenses remain on the lower side.

Alex Twerdahl, Analyst

Okay. Thanks for taking my questions.

Michael Collins, CEO

Thanks, Alex.

Operator, Operator

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

Timur Braziler, Analyst

Hi. Good morning.

Michael Collins, CEO

Hi, Timur.

Timur Braziler, Analyst

Maybe just circling back to the mortgages that migrated to non-performing this quarter, I guess how did these compare to the remainder of the mortgage portfolio? I guess what type of deterioration that you saw that warrant the migration to non-performing? And also the geography of these mortgages would be great.

Michael Collins, CEO

These mortgages are located in Bermuda. Currently, the Cayman region has less than 1% of 30-day delinquencies, indicating a different environment. Most of the mortgages in Bermuda were already experiencing struggles with 30-day delinquencies as we entered Q2, particularly when we implemented the automatic deferral. This group of mortgages fluctuates in and out of 30-day delinquencies. We are aware of who these borrowers are; they aren’t 90 days delinquent, as they typically receive 45 days of grace before making a payment after receiving some cash. They are not necessarily bad borrowers but are clearly facing challenges intermittently, often with only one or two people working. When we introduced the automatic deferral, it allowed them to realize that if no one else is paying, they might not pay either. However, we did not grant them the automatic deferral due to their 30-day delinquency status since they were already facing issues. While there may be other sections of the portfolio that could start to show difficulties, this is specifically about this group.

Michael Schrum, CFO

I would say that they have been the ones experiencing periods of being 30 days late over the last six quarters. Considering the risk categories, while they align with the overall portfolio in terms of loan-to-value ratios, they have been facing challenges from a debt service ratio standpoint due to various factors such as unemployment, life events, divorce, and so on. Therefore, we need to develop a structural solution for these issues. However, I wouldn't categorize them as being at the highest end of the risk scale regarding their ability to manage debt.

Michael Collins, CEO

And Timur, the reason they generally didn't go into 90-day non-accrual in the past is because we were all over them. So we called them. We called them. And it's a very high cure rate. So, we just weren't able to do that obviously during the lockdowns.

Timur Braziler, Analyst

Okay. That makes sense. Looking more broadly at the Bermuda residential portfolio, there won't be much clarity until we see a broader reopening. Is that a fair statement? Additionally, considering the current allowance ratio, is the internal thought that it will likely continue to increase, although probably at a slower pace than we experienced in the first two quarters?

Michael Schrum, CFO

Yes, it's a great question. There is still uncertainty until Q4, when we will know for sure. We are not expecting anything in the very near-term due to the opt-in. However, anecdotally when we contact clients, there is significant progress in terms of people being willing and able to pay for the second round, which is positive news. The only other comparison I have is from 2013-2014 when we had about 50 or 60 TDRs come through, and most of them are still performing well today. Clarity wise, I think it will take a couple of quarters and will primarily depend on how quickly people return to work and how many people return to work, as that will ultimately determine their ability to pay effectively.

Michael Collins, CEO

I think it's a fair way to describe Timur by saying it will continue to improve, albeit at a slower rate since these were the problematic mortgages from the outset. However, it will be a challenging winter in Bermuda. The positive aspect for Cayman is that they will keep their port closed until September, allowing them to launch right into their winter season, which is their peak period. Bermuda's timing is less advantageous. While we have daily Delta flights and an incoming British Airways flight, the daily visitor count of 60 to 100 people does not represent real tourism. I anticipate that the challenges will be in Bermuda, while Cayman and the Channel Islands will fare better.

Timur Braziler, Analyst

Okay. That's helpful. Thank you. And then switching over to margin. Quite impressive to see the magnitude of decline for deposit costs. Certainly that benefited NIM this quarter. But as we look out, I guess, how should we be thinking about incremental pressure on asset yields? And it looks like at this point much of that is going to flow through the margin. Is that the right way of thinking about it, or is there incremental room on the deposits?

Michael Schrum, CFO

If I could begin with the situation in Bermuda residential loans, the 50 basis point decline took effect on May 1. We can expect some additional pressure on residential loans in the next quarter, resulting from a full quarter impact of a few basis points. The performance of our investment portfolio will rely on the trends in prepayment speeds. Currently, we don’t have significant premium amortization in that portfolio. However, prepayment speeds are anticipated to be in the high-teens as we enter the second quarter, which marks a significant increase. This means we are experiencing more maturities with lower reinvestment rates, thus shortening the duration. On an annualized basis, considering the expected $180 million positive mark-to-market, this correlates to an asset yield on the investment side of about 20 to 30 basis points per year, assuming interest rates remain stable. Most of the impact on loan asset yield has already occurred this quarter. For the first quarter, our interest-bearing demand deposits yielded negatively, primarily due to strong balances and lower repricing of euros, resulting in a negative 12 basis points that lowered the average deposit cost. Rollover effects will materialize within a three to six-month timeframe, bringing additional benefits as these rollovers adjust to lower rates. In the near-term, we could see a range of five to 15 basis points. Eventually, it should stabilize. As we start transitioning the ABN deposits into investment securities, now that we have sufficient data from the past year, we can expect an improvement in the overall net interest margin of about 40 basis points. We plan to allocate approximately $100 million per quarter for the next six quarters, which will help mitigate some of the near-term compression and lead to a slight recovery.

Timur Braziler, Analyst

Okay. And then, just last one for me. Looking at the ABN deposits and I think there's a slide on it, and maybe you can just tell us the numbers that would be easier. But what's the remaining component that's euro based, that you're expecting to move off the balance sheet in the near-term?

Michael Schrum, CFO

We have around a couple hundred million left in the ABN book. I'm not certain it will change, but it has been adjusted to align with the market, so we're fine maintaining it as part of a larger relationship. Some of the funds involve sterling, dollars, and euros, leading to different segments of their investment offering to clients. They prefer to work with a single banking institution. As long as we are pricing them according to the market and can manage our capital costs on the euros, we retain the entire relationship, which is acceptable. Therefore, I do not anticipate significant attrition. Thanks, Timur.

Operator, Operator

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

Noah Fields, Head of Investor Relations

Thank you, Eiley. And thanks everyone for dialling in today. We know it's a busy day for calls. We look forward to speaking with you again next quarter. Have a great day.

Operator, Operator

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