Monday 19 October, 2020

Butterfield discusses the financial hit it took due to COVID-19

The Bank of N.T. Butterfield & Son Limited has announced financial results for the second quarter ended June 30, 2020.

Butterfield's net income fell by 11 per cent over last year, to $34.3 million, amid the difficult economic environment of COVID-19. Net income also decreased in the second quarter of 2020 versus the prior quarter due principally to a lower interest rate environment and decreased non-interest income.

The impact of COVID-19 related economic slowdown also resulted in lower non-interest income (down $6 million or 12.4 per cent sequentially) due to lower transactional volumes, particularly in card and merchant services fees and foreign exchange commissions.

During the shelter in place period, the bank was able to offer qualifying residential mortgage holders automatic loan and mortgage repayment deferrals and offer deposit repricing and tactical cost initiatives. According to the Earnings Presentation, Butterfield plans to evolve its business model for a lower interest rate environment in the medium to long term.

Michael Collins, Butterfield's Chairman and Chief Executive Officer, commented, "I am proud that Butterfield was able to help support local economies and offer relief to borrowers in Bermuda and Cayman through loan deferrals and other community based support programs. We continue to be in regular communication with customers and are closely monitoring our loan book for signs of credit deterioration, and we have seen a slight increase in non-performing loans this quarter. Our latest credit performance estimate is reflected in the second quarter reserve build, bringing our total credit reserves to 79 basis points of total loans. I am also pleased to confirm that the Bank's balance sheet and capital ratios improved and remain strong.

"We have also started adjusting to the potential long-term implications of the changing economic landscape, and the associated extended period of low interest rates. As we work to further mitigate the impact of lower yields, we anticipate a greater emphasis on our stable fee businesses and focus on costs to improve operating efficiencies. Through this period of increased uncertainty, Butterfield remains well positioned for continued profitability and growth."

Butterfield's Earnings Presentation reveals the following short- and medium/long-term pandemic-related variables that will impact Butterfield's liquidity and results of operations:

  • The duration and scope of the pandemic and related economic fallout,
  • The pace and magnitude of the economic recovery in the jurisdictions in which it operates
  • The continuation of a low interest rate environment, or further reductions in interest rates, over the medium or long term, which would adversely impact its net interest income and net interest margin, as well as increase its reliance on fee businesses
  • A decrease in tourism in Bermuda and Cayman, with the timing of any recovery being uncertain, which would adversely affect revenues, including fee income, as well as increase credit exposure
  • Increased unemployment and decreased business in the jurisdictions in which it operates
  • An increase in defaults on residential mortgage loans
  • Ratings downgrades, credit deterioration and defaults in many industries, including the hotel/restaurants/hospitality sector, financial services and commercial real estate
  • A decrease in the rates and yields on US Government guaranteed securities and increased pre-payments in mortgage backed securities it holds, which may lead to a decrease in the quality of the investment portfolio  
  • Significant draws in credit lines, as customers and clients seek to increase liquidity
  • Volatility of market conditions and increased demands on capital and liquidity, leading the Bank to cease repurchases of its common shares
  • A reduction in the value of the assets under administration for the trust and custody businesses, which may affect related fee income and/or demand for these services
  • Heightened cybersecurity, information security and operational risks as a result of remote working arrangements implemented for staff
  • Actions that have been, or may be taken in the future, by governmental authorities in response to the pandemic, such as a suspension of mortgage and other loan payments and foreclosures
  • Heightened risk of litigation and governmental and regulatory scrutiny as a result of the effects of COVID-19 on market and economic conditions and actions governmental authorities take in response to those conditions
  • An increase in provisions for credit losses under CECL due to changes in the macroeconomic environment, including as a result of COVID-19

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