Q1 2020 Earnings Call

Good morning, and welcome to the Butterfield first quarter 2020 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press star than one on your touchtone phone or your question, please press * then two, please note this event is being recorded. I will now like to turn the conference over to know a Fields Butterfield's head of investor relations, please go ahead.

Thank you. Good morning, everyone and thank you for joining us today. We will be reviewing Butterfield's first quarter 2020 Financial results and providing an update regarding how Butterfield is addressing the covid-19 crisis on the call. I'm joined by Butterfield's chairman and chief executive officer Michael Collins and she Financial Officer Michael scrum following their prepared remarks. We will open the call up for a question-and-answer session.

Yesterday afternoon. We issued a press release announcing our first quarter results, press release along with a slide presentation that we will refer to during our remarks on this call are available on the investor relations section of our website at ww.w Butterfield group.

before

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 or reconciliation of these measures wage Gap. Please refer to the earnings press release and slide presentation.

Please 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. I'm on slide twenty-three of the presentation. We have also included a list of potential factors relevant to the implications of covid-19 for the bank additional information regarding risks can be found in our SEC filings. I will now turn the call over to Michael Collins. Thank you. Noah thanks to everyone joining the call today while we are pleased with the banks results from the first quarter are correct focus on addressing the new realities developing from the covid-19 Health crisis and will begin today's discussions with a quick review of the highlights from the first quarter and then provided updates regarding Banks covid-19 related actions and potential exposures. Well, then turn the call over to Michael scrum for additional details on covid-19 from a credit perspective and comments in the first month.

Turning now to slide four of their earnings deck. We reported net income of 40.3 million dollars or seventy seven cents per share and coordinated income of 40.8 million dollars and seventy eight cents per share in the first quarter. Net income was 8% lower than the previous quarter due to seasonal fee income and a five point two million dollar Cecil Reserve belt off for future expected credit losses. Our core return on average tangible. Common Equity was 18.6% down from 21.1% in the prior quarter off that interest margin was up four basis points to 2.63% compared to the last quarter and our cost of deposits dropped eight basis points to 42 basis points.

Turning now to slide v as we operate across small island communities Butterfield has an important role to play as an essential service provider a domestic systemically important bank and employer a source of working capital for companies and need and inactive corporate citizen supporting our communities. We have a particularly strong sense of responsibility to balance the needs of all stake holders during this time. The covid-19 virus is evident in an impacting all of our operating jurisdictions, the number of infections and deaths in our various locations have been consistent with the statistics. We're seeing globally we're Bermuda there have been over a hundred cases identified and sadly six deaths Cayman Islands have identified over seventy cases with one known death and between grungy and Jersey there have been hundreds of confirmed cases with known death as well at this point. We only have one confirmed employee case in our Swiss office wage.

Is expected to make a full recovery?

We would like to express our deepest sympathies to anyone who has been directly affected or lost a loved one to the virus. We remain hopeful that the current shelter in place and social distancing practices will continue to slow the spread of the virus. So the local economies and tourism can start to recover.

When they said bury the crisis and health implications became known the banks initial Focus was on the well-being of our customers and employees including our ability to continue providing essential banking services off. We quickly began mandating social distancing providing protective equipment for staff implementing split team and building strategies and establishing broad remote working conditions through our birth virtual desktop interface.

We have remained operational as permitted with just over 70% of employees working from home and providing all necessary equipment and services to support our employees and customers.

To help ease the financial impact on the communities. We have temporarily deferred residential mortgage payments reduced fees and increased our direct contributions to Urgent Care programs supporting the most vulnerable people.

In the short term we're working with clients to assess their needs and provide support and Bermuda and came in were tourism is important contributor local activity as well as exports. We're closely monitoring situation and maintaining frequent engagement with clients in our estimation. The duration of the temporary shelter in place lockdown conditioned is one of the most critical factors which will determine the root of economic activity and ultimately the future impact on Butterfield the bank keeps significant sources of liquidity available primarily three billion dollars of cash and short-term Securities as well as 4.5 billion dollars of US agency MBS together. This represents just under two-thirds of all customer deposits.

The current interest rate environment will impact or interest earnings from short-term short-term Securities as well as our variable rate loans while lower deposit rates are unlikely to entirely offset the lack interest income. We also are seeing significantly decreased Card Services fees with no tourism. And so do domestic economic activity over the coming. We may also wage increase prepayment speeds in our Investment Portfolio as us home borrowers seek to refinance loans in the lower interest rate environment.

As we think about the medium and longer-term implications in the three to five-year time frames a sustained long-term ultra low interest rate environment could likely erode profitability over time. The bank has historically benefited from low lower cost deposit funding. However, in an ultra low interest rate environment the value of those deposits reduces significantly and lower agency reinvestment rate would combine to compress name.

This could ultimately alter their earnings profile the bank and would result in increased Reliance on fee businesses. If interest rates fall further two- rates, we could be in a position to charge negative interest rates on deposits as we have witnessed in Europe.

So need to become more efficient through accelerated cost reductions on the capital side. We are pleased to continue at the current quarterly dividend rate dividend rate of $0.44 per share of which represents a strong recent share prices and remained active on share repurchases.

We continue to believe the dividend rate is sustainable and continues to be a Capital Management priority.

It is possible that m&a opportunities could become available as large or onshore financial institutions with Banking and Trust operations in our current operating jurisdictions may decide to focus on their core services and may want to sell less strategically important assets. Well now turn the call over to Michael Scrump to provide additional information on the banks credit portfolio and potential covid-19 exposed areas and then some additional details recording the first quarter results, including a discussion and the bank's Capital position and management.

Thank you, Michael and good morning everyone before I give an overview of the first quarter results. I wanted to provide some information on some specific credit exposures.

As you can see on the bottom left of Slide Five, we have fairly limited direct credit exposure to Hotel and restaurant lending sectors, which is primarily in Bermuda and Cayman BRAC Hotel operators and construction loans represent our biggest Direct commercial covid-19 credit risk, however, given the structure of the deals generally at below 50% pre-crisis TVs and the underlying Financial strength of the borrowers. We're not currently expecting significant losses from this area.

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

Turning now to slide seven and some details regarding the first quarter results.

157 we provide a summary of net interest income in in in the first quarter of 2.63% increase for basis points as the cost of deposits particularly term. It's decreased from rollovers, which more than offset the decrease in interest income.

Lower rates for partially passed along to cut boroughs with yields on variable rate loans being fifteen basis points lower in the corner.

Average loans increased during the first quarter as we had the benefit of a full quarter of lending to the Bermuda and came and governments which were drawn late in the fourth quarter.

A slight 8 we provide an overview of average customer deposit balances by location currency and contractual nature.

Deposits at March Thirty One twenty twenty four eleven point eight billion dollars a decrease of 5.5% from the end of the year.

Decrease is results in the expected attrition of Europe balances in the Channel Islands, which is consistent with previous guidance on the AVN deal.

Overall, the cost of deposits is down eight basis points do to lower term deposit pricing on rollovers. It is also worth noting that during the 809 financial crisis overall customer deposit levels did not reduce significantly and at this point we continue to see stability in deposit levels.

Looking now. It's 599 interesting was down 4.3% compared to the prior quarter due primarily to lower Card Services fees, which were negatively impacted by reduced volumes as economic activity stalled in March due to government lockdowns.

It's like 10:00. We provide an overview of corn on interest expense as we discussed last quarter first quarter expenses return to the expected range after being elevated in the fourth quarter off. The Improvement was due to reduced headcount in the Channel Islands lower marketing expenses travel expenses and client event costs. We continue to Target a through cycle efficiency ratio of 60%

Looking out at 11. We provide a summary of regulatory and leverage Capital levels Butterfield continues without conservative Capital Management philosophy that balance is regulatory requirements with the returns tangible book value per share increased 4.6% in the first quarter due to contributions from earnings and Eli related to the unrealized gains in Investment, Portfolio.

We continue to view the dividend as the most direct and efficient way to translate the hi Ori of the business to invest a return the dividend coverage ratio remains around two times and we believed that current dividend rate is sustainable.

all Capital Management priorities have not changed and continue to support the dividend organic loan growth share repurchases inappropriate market conditions and maintaining flexibility to pursue Eminem When the Right opportunities arise

turning now to slide 12th.

During the first quarter the balance sheet was brought a stable except for the continued decline in the Euro denominated deposits in a Channel Islands as expected end up. Loan balances were down almost 50% due to the lower dollar value of Pound Sterling denominated loans in the Channel Islands and the UK.

With a significant fall in US interest rates total net unrealized games in the Investment Portfolio 155 million dollars at the end of the first quarter compared to six million to all those at the end.

I'm sorry 13, we continue to emphasize a little credit risk in Investment Portfolio with the majority of investments in aaa-rated US Government guaranteed agency Securities life a mostly residential and full recourse with 75% of the portfolio in the below 70% LTV bucket.

Covid-19 and its potential future impact particularly unsecured loans. We have increased our Reserve estimate by 5.2 million and it will Reserve under Cecil is now seventy two basis points of gross loans reflective of the collateral back presidential lending platforms built over the last decade.

once like fourteen we discussed the average cash and securities balance sheet with a summary interest rate sensitivity analysis, the structural asset sensitivity of the balance sheet has now been entirely realized by the reduction in front end rates there for the downside 100 basis points scenario would start to increase in our I if the bank past is negative rates on to customers but in Boston spread on demand deposits,

Assumption of negative u.s. Dollar deposit rates would be similar to what we've seen in Europe.

in the upside 100 basis-point scenario the bank starts to increase net interest income with a positive differential between deposit and Market rates additionally reinvestment rates would improve that by improving that interest income also,

I'm not trying to call back to my cards. Thank you. Michael Butterfield's integration. And the Channel Islands is progressing. Well and into its final stages. We now expect the full operational integration to be completed in the third quarter of 2020 as most clients are also working remotely and it is practically much safer to upgrade their banking systems once customers are back in their offices sometimes in a second quarter of 2020 following the success of the Channel Islands. We remain committed to exploring potential Acquisitions in Banking and Trust with most opportunities in the Channel Islands for Banking and Trust God for the trust Network. We would also seek to build on the potential in Asia with a larger trust presence in Singapore while we do not have any specific Communications at on this at the moment these discussions wage continuing

The effect of this Health crisis on Butterfield will depend on on certain factors including the length and depth of the pandemic and Associated government lockdowns how that impacts domestic economic activity and Thursday how quickly communities recover as well as the interest rate environment or Communications with Regulators rating agencies and governments remain constructive and supportive.

The bank continues to have a strong and flexible Capital position with a very liquid balance sheet learning from the financial crisis is decade ago. Butterfield's credit underwriting has been conservative and not result or exposure to potentially problematic sectors is limited and should place the bank in a strong position to emerge from the current crisis.

As a final note, I would like to take this opportunity again to thank our employees particularly those in the front line and Retail branches continuing to welcome customers and helping them and us through difficult. Thank you. We'd be happy to take your questions operator.

Thank you.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing keys to withdraw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

Our first question comes from teemer braziller with Wells Fargo, please go ahead.

Hi, good morning.

Maybe hurting maybe just starting around broader Cecil assumptions many of the u.s. Banks used the Moody's model and and coming up with assumptions and just wondering if you guys use a third-party to help you formulate Cecil impact and if you could just talk through some of the broader economic assumptions used in in coming up with your diesel impact.

Yeah, thank steamer. It's Michael Strahan. So good question. A lot of work has gone into winter season over the last year obviously building the model. We don't use a third-party service provider to provide data package as all of our loaners are primarily manually underwritten and so we use part of our own history. We payment history obviously and and local market conditions in where we operate. We do use of course external data in the model including primarily unemployment forecasts as well as GDP forecast and for that we could use a combination of of service writers including Moody's and Bloomberg the underlying assumptions for the model going in to this year, you know, obviously changed a lot since the back end of the year, which is driving the additional Reserve build in this quarter. So overall we landed on a -3 GDP GDP forecast for this year, which is wage.

The central assumptions obviously that has a big shock in the in the second quarter to economic activity of of a double digits and then sort of a or a u shaped recovery in into life. Again, the the model is somewhat sensitive obviously to the external variables, but I would say because most of the loan book is residential and a name on the written. We have more of a straight line to to realize in collateral in a in a trouble situation. So it mostly impacts the off the loan Pockets that are debt service coverage is really cash flow-based. So that would be your the the sort of seeing a book and a credit card book. But again, there's a relatively small overall scheme of things. So hopefully that helps a bit.

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

So we're deferring payments principal and interest on the Residential Mortgage book, obviously those customers or clients or bars who are in default or had had trouble previously were were making exceptions of putting those to the side and we took an approach where we did it automatically and if you want to come in and or call and fax you say you want to continue paying for this 90-day. Then you can and we are getting some of that where people don't want to stretch the term of the mortgage but it's pretty much across the residential book commercial side, you know, we're working with all of our commercial customers, you know daily trying to find out how they're doing and figuring out where we can help. So that's obviously very specific discussions individually as opposed to any other program. We're going to look at it in three months and the residential side see where we are. There is some chance we could extend it for an additional. But obviously everything so fluid right now. We'll just going to wait and Thursday.

And it did really I think people reacted quite well in all of in Bermuda and came in because it did put a lot of money back into the economy which were all trying to try to do.

I would say just in terms of the portion, you know, there was about one point four billion between Bermuda and came in on the roadside that was included. So he's obviously customers in good standing about sort of ten to fifteen percent of them opted out of the automatic deferral. So they're continuing on the on the on on the existing payment terms. Yeah. We were very careful from the truth of nineteen perspective to make it very clear that this was extending the term of the mortgage. So you're going to pay more interest over the life of the mortgage. And so I think people understood that

Okay, thank you. And then just lastly for me just looking at your hotel exposure appreciate the color that you know at origination a crisis of 50% dish ltvs. If I remember correctly. I think a portion of that is is is backed by The Bermuda government as well. I think twenty-five million on the Saint George's project. Is that still the right number has that guaranteed portion been reduced and maybe you can just talk through some of the guarantees on that hotel portfolio.

Yeah, so as you can see on page five, we have a total of 214 million of hotel and restaurant exposure on five fifteen million bucks. So only about four percent. I mean interestingly restaurants are about seven million, which is obviously really contained in terms of the hotel booked. Uh-huh have a couple of big hotel loans that are currently in operation two or three. We think they're well underwritten and they have sort of broader context of one of them an example has a large condominium project that's been running for years associated with it's a big part of a repayment actually comes from expats living in in these condos as opposed to the hotel itself off. One of the other operating loans is a wealthy relationship that we have abroad for broader deeper relationship and have real clear line of sight in terms of the families wage.

So it's a hotel. It's

Hotel, but it's really a much much broader relationship than that and then on the hotel construction and you hit it on the head. I mean we have the Saint George's hotel that's uh really being built and as well on its way we'll plan is open up next year, which is you know, hopefully not too bad timing given the fact that will be summer next year. We'll have some time to see how this all plays out. And on that loan for me to God has guaranteed 25 million out of our sixty million commitment and lots of equity lots of equity upfront completely different underwriting than they did free financial crisis. So we we feel pretty comfortable about both the the total size relative to our total credit portfolio and also the individual credits within it so we think it sucks contained

Great. Thank you.

Our next question comes from Alex stordahl with Piper Sandler, please. Go ahead.

Good morning.

Alex

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

Yeah, sure. So I just give you a sense of where the different governments are projecting GDP for 2020 Bermuda a projection government action is minus 7.5% to 12.5% came in is minus 15% That's actually a chamber of commerce projections opposed to government currencies - 15% off and jerseys - 6% But I you know, it's everyone's sort of just trying to figure out where it's going obviously came in has a bit more tourism exposure. So they're 25% of GDP wage or ISM Wahlberg. It is only 17% and the Channel Islands is very little she's got got some so I I'd say it's fair to say it's going to be double-digit declines in 2026, maybe lower to Mid double-digit. But obviously, this is Uncharted Territory. So what you see see how that goes in Bermuda, there's been a few small stimulus steps so far so really small.

Sort of a a $12 small business government guarantee program bring it to set up unemployment insurance for the first time and just put put out close to twenty million, uh, you know, a few thousand people are getting unemployment weekly checks process through the banks direct credit for the first time ever. So that's really the stimulus package. I think the Ministry of Finance will come out in the near-term and and come up with a a broader program. But at this point for me to hasn't really stated exactly what the birth stimulus is going to be but we do know if there's going to be some more borrowing in Bermuda to support it came in has a surplus has some reserves that can use they're talking about potentially boring a few hundred million grooms in Jersey. Well, so they're all in different stages of thinking about using their reserves and the other three islands and and figuring out what sort of amount they want to borrow and and I'd say it's it's sort of birth.

Percent of GDP is pretty much across the board.

Works or a few hundred million maybe up to 500 Lane and we want to be as helpful as possible in all jurisdictions from a credit perspective. You know, we know these economies better than anybody so it's a good time to be able to to support support the government's so mixed stimulus. It's a sort of evolving the UK obviously is in a different situation, you know much broader program, but I think the islands actually are going to be somewhat contained in terms of throwing money at it. So it's sort of where it is.

That's very helpful. And then just in terms of the deposit balances and and cash balances, you know, I know a lot of those are part of the plant rundown of the of the book up with ABN Amro, where are you in that process of running off deposits and kind of how much more could we expect to potentially leave the bank, you know, is there a way to sort of ring fence that

Yeah, Alex. It's so it's Michael and obviously the the great environment has changed quite dramatically over the last the last quarter. So I think we're we're in a stage where we are continuing with the ABM repricing but also being quite aggressive on deposit price and particularly term rollovers et cetera. And so in essence if you if you look at the Euro balances are the correct balance is on the slide, you'll see that that's where most of the attrition is coming from and that will continue for another quarter. So I would expect just again trying to land the strategically important role ship even those who have your balance is providing that they also do other business with us, but obviously we can't activate those Euro balances in the form of loans. And so they really need to be priced at it in terms of what's left in that bucket. I would qualify it around two to three hundred million most of it again, and we haven't really seen any dead.

You know, we've seen great stability across the other platforms and actually came and we're a bit up in terms of deposit levels since you ran so so the rest of the banks really very stable job. There is still a bit to go on the under your balances in in in the Channel Islands.

Great, and then just final question back to the the loan modifications is the the VMA and other Regulators. Do they have a similar view in terms of these loan modifications and The Time Of Crisis such that way you're able to modify them. They don't become TDR. You have a lot of flexibility work with your borrowers Etc.

Yeah, I mean the the Prudential supervision here. Also, you know, we have we have obviously ongoing dialogues with with all the Regulators again, very supportive of the steps that the bank has taken to put money back into people's pockets in particular as that may then be passed on part of that may be passed on to rent et cetera, which can only be a couple of the pressures from unemployment or temporary unemployment in in the jurisdictions. The treatment of of tedious is really an accounting question. So really comes from from The Gap accounting side and and not necessarily from the potential side. So we obviously take the take the guidance from from Fez beyond that which is sort of broadly stated that as you know, the tdi's up to six months providing the customers good standing shouldn't necessarily become a a t r or the modification if it's a forbearance that's granted wage.

On that basis and that that's clearly the approach that we have taken as well with PWC here.

Fantastic. Thanks for taking my questions.

No question comes from Michael perrito with KBW, please go ahead.

Hey, good afternoon, guys. I'm glad to hear everyone's doing well. Thanks for taking my call.

Sure. Thanks, Mike.

I wanted to spend a few minutes on a couple of items here one on the the Residential Mortgage book. I was wondering if you guys had any additional kind of context of what you know, I imagine that historical offer is overwhelmed at the time and I prefer really really low, but just in terms of any periods where there's stress on tourism on island, I mean have you guys ever really seen a pick-up in Las fresas mortgages? Is that something that's been experienced in the past or or not quite at this point?

I'll start off post financial crisis. We did get some some strain in the Residential Mortgage book and did a lot of work getting our debt collection capability up to speed. We really, you know, get back to sort of 2011-12 really didn't have much of that cuz we never had any losses and property prices in in Bermuda and came in it never really gone down. So we did take you know, property prices went down depending on whether it's a condo or or or a property, you know twenty to forty percent and we did get some pressure off you can see the net turned off today and even back then never never got too high. So we have had experience and I say that positively in the sense that I think we have a debt collection capability that that's really good at this point, which we didn't have ten years ago. So we we understand how to do it.

Yeah, the other characteristic that's a couple of characteristics of small island property markets, you know, which tends to happen during periods of stress is that Supply tends to withdraw because life is a very low and so you know, we get a lower number of transactions occurring for a period of time until prices sort of recover a.m. And then the second thing is is people there is a great deal of sort of social cohesion, like people know when they buy a property in Bermuda that they they don't really want to lose it and so they took calls and aunts and family members kind of helping out during periods of stress where to share the burden and I think that's a that's that's kind of helped a lot through the post office financial crisis in terms of keeping the mortgage book current and not having too many tears. And I think if you look back in 2007-8 Bermuda as an example had about 700 property transaction.

Per year, it's been hovering around two hundred for the last five to seven years and that's partially because Bermuda still has a lot of indigenous wealth that's on the island. And so we're property prices fall families. Just hold on to it as opposed to to try to recoup some Equity. So it just slows down basically, but you know, I think as we said we don't have a lot of exposure the tourism side, but we that directly but we do obviously indirectly through mortgages and uh, we're going to have to watch that very carefully.

That's helpful. Thank you.

Then on the deposit side seems like a a bit of the quarter of a quarter drop was in term deposit which I imagine what kind of pricing related but just on the transactional reduction. I mean, he provides a little bit more color on on the driver's there and it seems like based on your prepared remarks that deposits are pretty stable at this point. I mean, is that something you expect on the business side as well as if volatility kind of persists off globally from the covid-19 pen.

Yeah, so maybe I'll stop in the other the other piece of this is obviously if you look at average deposit balance. And is that a weakness that's causing the translation difference of about that was actually Michael on the transactional side or was there any other kind of was that the entire the majority of the step down on the transaction deposits or was there anything else that would within that?

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

Okay helpful, and then lastly on on non-interest income from I believe the vast majority of your trust. These thoughts are not impacted by the market at all. I guess one. Can you just confirm that into maybe probably a little bit more context about how you expect some of the items to be impacted next quarter whether it's by lower Global Market, dog. What kind of lesson transactional volume

Yeah, no absolutely can do that. I can I can certainly confirm all the trustees are being built on as part of an annual fee. And then there's some some activity fees when life structure et cetera that that we charge or and or you know enhance tax reporting that we have to do Under the common reporting standards or fabric cetera. So those drives some activity base, but they're not really related to an underlying Market driver. If you will it's more on a time spent bases again, so they're very Capital fish and very stable fees. And if you look over a period of you know, since we've been publishing the only thing that's moved that fee number has been either Acquisitions or or sort of, you know changes in other language structures trust structures where you know, the last beneficiaries passed away. I said, there's a very stable Asset Management obviously has impacted by underlying valuations. So we would expect those to be impacted, you know in have been impacted so

We can see that over the quarters banking fees in particular is impacted through car services fees and Merchant acquiring fees. So about a third of of the banking fees is a bucket and we would we seen sort of

Leading indicators that that seemed to suggest, you know, maybe been an eighty percent drop in in in economic activity from debit card transactions et cetera during this period of of of stalled economic activity and lock down. So we've had in in in bo3 Grand Cayman where you tighter fuse and people have only been allowed to shop twice a week etcetera and that's just driven down. Obviously. I'm not the necessary number of transactions but the value of the transactions, so certainly in the short term, I would expect that to be impacted quite significantly FX is actually been up due to the volatility encouraging has practically $2 Sterling. We've seen a lot of fun activity in the Channel Islands, which had a a record quarter in terms of FX. So it's more volatility driven as opposed to bring obviously, it's FX commissions. There's no proprietary positions in there. So it really will just depend on on what happens in the FX markets and in the others a a pretty small custody wage.

Stable it's a couple of basis points on as you would expect.

So nothing that there could be some near-term pressure on the 47th and half million of corn on interest income in the first quarter. It sounds like that's reasonable.

Yeah, I would I would expect Asset Management fees to be impacted by lower valuation the market values of underlying and I would expect banking fees to be impacted in short from requiring cut Services volumes. But again, then as we get through this and we you know, put me too and came in coming out of lockdown full lockdown over the weekend off probably see a a pick up Suddenly in in just a master key economic activity, you know, and we'll just depend on on on consumers reactions then at that point. Yeah, I think I mean, I think we'll see how long our pit and seems particularly debit credit card transactions in April. It'll get a little bit better in made because the domestic economies are opening back up this weekend, but it'll still be sick dude until we actually open up the airports, which is anyone's guess too late late May and two into June and July. So that's that's sort of the way it's going to play out.

Very good. Thank you guys and stay well.

it's like

Our next question comes from will Nance from Goldman Sachs, please. Go ahead.

Hey guys. Good morning.

pretty well

I was wondering I appreciate all the color that you guys have given on credit. I was wondering if maybe we could spend a little bit more time on some of the Dynamics over the next several quarters. I appreciate some of the comments about prepared remarks about the impact of lower interest rates on the net interest. Margin. I was wondering if you could walk us through some of the moving pieces given a lot of the portfolio is floating rate. Just what are some not moving pieces in the portfolio. What are some of the actions that you've taken on the back of us rate cuts and are there any ameliorating factors that could kind of lessen the decline in your loan yields relative to what kind of Benchmark rates have done?

Yeah.

Great question. Well, so I'll I'll kick off some Michaels, So I yeah, let's start with you know, the March eighteen actions that we took to obviously in Bermuda. We took resy down by fifty basis points for the Forty five-day lag. So you would expect to see fifty basis points on the floating part of that book, which is 80% of that of that book coming through in Q2. You can be sort of more or less seen it at twenty five basis points reduction again, that's mostly floating book. It does have a floor fifty basis points on it. So we're not expecting any further compression on a book but I would expect to see a full quarter following the the Central Bank, you know, in in in in the UK as well in Cayman is floating. It's about 20% fixed again between commercial and and resy we should expect the US Prime, you know, full full impact of that which will be around a hundred years.

This points obviously a little bit in interview one. But but most people come through and include two and then on the investment side of the loaner set aside on cash and short-term securities does mostly reprise you recall that we have a sort of we manage our liquidity and we have a sort of three month t-bill ladder which tends to be set ahead of wage aside funds obviously. So we've seen most of the impact there, but it could be another 15 to 25 basis points on cash or short-term Securities on the Investment Portfolio. Some of that will depend on reinvestment rates, but I would expect you know, some premium amortization and and to some extent well to pay will depend on the CPT as well. You know, which could be is anyone's guess Thursday. We haven't seen accelerated prepayments yet, but it could be five to Fifteen basis points called Ten basis points Investment Portfolio of the next couple of quarters and then offsetting that obviously we would expect a contrived

Or decline and and the cost of deposits not as much fun demand cuz we're not yet charging negative rates on dollar deposits, but certainly on the on the term side. I would expect further rollover benefit coming through the next couple of quarters. Most of that money is really sitting in 3 6 months. So the roll over into lower rates and probably generate an offset of about ten or fifteen basis points on the cost of deposits. So if you put all that together over the next couple of quarters, you could see sort of a 2535 basis-point a new age pression will depend to some extent on demand in in in the market both from Michael spoke about in terms of government lending will also depend on where the tenure is off and reinvestment rates in the 150 range on MBS and then obviously the payment rates on on MBS, so we currently getting about $152 a quarter in maturities come off.

Kind of thought obviously continues for for a long period of time that will start to impact investment yields more meaningfully. But you know at the moment we obviously bought that birth to protect against interest rate risk in in the banking book, you know, we have an unrealized position now hundred fifty million in there that will certainly help come through the the coupons in Securities over the next couple of years. And that was precisely why it's there in the first place.

Thank you for holding. That's very helpful. And then maybe on the expense side. The expense levels came in a lot lower than I think most people were expecting this quarter. I would have guessed that maybe given birth the delay and some of the integration and the Channel Islands that there may be uh, you know, the the risks might be to the outside there but it seems like you've taken some pretty good cost actions in the near-term. I guess we can you just kind of walk us through near-term expectations on expenses what sort of environmental impacts from the Health crisis. We might see on the expense line. What kind of Cost Cuts we could see and then maybe any kind of pale impact of the integration of the Channel Islands deal in the third quarter of what impact that might have. I know there's a lot of moving pieces there.

Okay. Yeah. Sure. Let me let me deal with the short-term first obviously travel is completely ceased as a corporate travel policy in mid-march. So, you know, there's one big expense item. When when when you operate these Banks across multiple jurisdictions, obviously, there's a lot of travel which is which is great and obviously client entertainment is also a completely dead sea set the moment always come virtual at the moment which obviously a lot less expensive. So we've seen a lot of benefit in in the second part of of March and we would expect for that to continue to come down in the discretion a bucket. But again, that would be a short-term benefit, you know coming out of lockdown obviously will start to gear up again, we our relationship bank and so it's important to for us to stay in touch with our customers not just virtual also to spend time with them and understand what I'm sorry on a more strategic side. Obviously we've taken action and the first some of the capital spending programs particularly around dead.

You know buildings around brand roll out of sequence that into a much slower burn rate at this point. We think we still obtain this substantially the same benefits but over a longer period of time so people are not automatically getting new business cards. They're using the existing ones. We're not replacing the whole pins on the credit and debit cards. We're doing a gradually is at Scott's expire excetera. We're we keep investing in in the in the front line side of of the business. So, you know, the branch refurb in in Bermuda was still going down which I think would be great. But some of the some of the back offers, you know, Capital programs have been put on hold or are being re-evaluated as you would expect them. Finally, I think amortization as we talked about in this in the past as well, but I feel built up a very expensive system about ten years ago and from 20 million dead.

Which is the organization is is running off at the end of this quarter and so moving into Q4.

Or we would expect you know that to stop helping effectively that's ten million annualized cost-saving a year of which we will put two to three back in exchange as part of normal system upgrades et cetera. So another seven there and then obviously depending on how long this goes on for will need to look again more on a zero zero zero based budgeting basis about I think it's been a bit of a reset for us. You know, how many people do we need in the building's what do we really need to operate this business office cetera? And so I'll just set Michael training on that. Yeah. So I think I mean our our Focus obviously right now next quarter to is just making sure everyone's safe and you know operating well and being supported so lots of communication I would say it's remarkable how we've been able to operate working remotely which is which is really interesting job.

Part of the model today. So today across our 1500 employees. We mentioned 70% or working remotely 15% or at home not working fifteen years in the office. So you can just take me to an example were operating full retail services. Um, we're operations with fifty nine people in the office out of five five hundred and similar wage ratios across the different jurisdictions. So I think you know, we are stepping back and we're thinking about what the model should be and what the cost structure should be assuming that we're going to be in a zero interest rate environment for the long-term. And so I think that has implications for a bank like Butterfield that's deposit lead and we we understand that so we're focusing on you know, what could the model look like as we come out of the pandemic we have to be a little bit careful because while we're working remotely and things are operating very well few client complain.

At all, we have to recognize that volumes the way down as well. So we've got a sort of back test that to see see how we could operate but I think it is it is a real dedication of the new working model that for a bank like Butterfield and very expensive jurisdictions, um, multiple currencies multiple Regulators. We are a pretty complex bank and I think we're just going to do the work over the next quarter or two to see what a potential new cost structure of model could look like but first and foremost the Focus right now is, you know do the work in the background, but at this point we're off to support or our employees as they service our client base.

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

Yeah, I think you know, I think we obviously learned a great deal from the financial crisis. And you know what Butterfield did in the past in terms of lending and and our entire model has been phone just in Market lending. No out-of-market lending no credit exposure in the Investment Portfolio. So that's really position does quite well, that's not to say we won't have some Residential Mortgage issues here as as the economy slowly start to open up but from a broader perspective we position ourselves from a credit perspective for this sort of event. So I think we feel pretty confident on that side and I think you're right. It's it's a little obviously right now given the environment no one's really doing much of anything in terms of necessarily near-term corporate development, but I think we do really believe that things will open up as as Market start to operate again. And as we said, you know, we're you know, we're a dog

Size bank and currently at this point. So ten fifty percent market share one or 2% Jersey. We do think there's still going to be some opportunities there as as UK bank store to strategically reposition off and Singapore which is more or less shut down right now, but luckily it's a trust company as opposed to a bank is still a great market for us and we just really need to find some scale. So we do think there's going to be opportunities, but I would temper it just by saying in the next few months, you know, people are just trying to to get through the the situation they're in but I think you know going to the summer things discussions me open up at that point but to Europe we are really healthy balance sheet and we're strategically positioned to execute the strategy. We've been talking about four years.

Got it. Thank you for taking all my questions that one I safe.

It's as a reminder. If you would like to ask a question, please press * then 1 our next question comes from Aaron with City. Go ahead. Yeah, I was I was wondering if you talk a little bit about the behavior of your your Global trust clients in in this environment. I know you said that the trust fees don't really change that much but do you is there a change in some of the large deposits? Um, is there kind of a change in just in terms of the activity that they would typically walk through the bank?

I would say what we're seeing pretty much across the board is a lot of State planning and financial planning for obvious reasons. I think people are pretty nervous. We actually are sick some some more interest in in our jurisdictions from an estate planning perspective. You know, again, it's driven by a handful of lawyers in in New York London in Miami. So we're seeing actually some really really good in in word Connections in terms of possibly new trust. I think existing trust. It's I think really people focusing on making sure that the structures make sense that the beneficiaries of that sort of thing. So it's sort of the day-to-day stuff we do anyway, but probably enhanced today, you know, you could see some deposit weakness. So we have some very large stress clients and I think often as not so much pulling money out necessarily to sort of put in a box somewhere. It's really I think people are seeing real investment opportunities. And so I think people I think some of the larger tours

All right, we'll put some of that money to work. But we also expect it to sort of float in and out so there could be a little bit weakness.

But I think we've talked about in the past. We've had a a handful of chunky clients, but the rest is pretty evenly spread.

Thank you.

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

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

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

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