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29 February 2012
Butterfield Reports 2011 Net Income of $40.5 Million

The Bank of N.T. Butterfield & Son Limited (“Butterfield”, “Group” or the “Bank”) today announced net income for the full year ended 31 December 2011 of $40.5 million compared to a reported loss of $207.6 million in 2010.

 

After deduction of dividends ($19.3 million) and the guarantee fee ($2.0 million) on Preference Shares,
the net income available to Common Shareholders was $19.2 million ($0.03 per Share) in 2011
compared to a reported loss of $225.6 million ($0.47 per Share) in 2010.

 

During 2011, the Bank continued to build on its core infrastructure, made progress in rightsizing the cost
base, and generated revenue growth of 9.8%. Contributing to the revenue growth was the 19.4%
increase in net interest income before credit losses, achieved via more effective deployment of liquidity, combined with disciplined deposit pricing.

 

During 2011, the Bank continued to focus on expense management primarily by enhancing operational efficiency through streamlining the organisational structure, which resulted in $7.9 million one-off staff costs incurred in 2011. Excluding the one-off costs incurred in 2011 and 2010, the Bank’s operating costs decreased by $1.4 million.  However, these improvements were partially offset by declines in non-     interest income as the recessionary environment continued to cause declines in transaction volumes.

 

In late 2011, the Bank completed a three-year project to convert its core banking systems in Bermuda
and the Cayman Islands to a new Oracle platform managed by HP. The new systems replace software
that was beyond its service life and provide the Bank with a state-of-the-art platform. The new systems
allow the Bank to improve stability, risk management, efficiency and customer service. The Bank
continues to implement improvements to the systems and thanks its customers for their understanding during the conversion process.

 

The Bank maintains a strong capital position relative to industry norms.  At 31 December 2011,
Butterfield had a total capital ratio of 23.5% and a tier 1 capital ratio of 17.7%.  Its ratio of tangible
common equity to tangible assets of 6.6% and tangible total equity ratio of 8.9% reflect the strength of
the Balance Sheet.
Bradford Kopp, Butterfield’s President & Chief Executive Officer, said, “The Bank generated respectable levels of profit in each fiscal quarter, contributing to net income for the year of $40.5 million.   Although,
by historical standards, that level of annual income is modest for Butterfield, when viewed against the backdrop of ongoing economic dislocation and low interest rates in our key markets, it is a positive achievement.  Our income was driven by the successful implementation of our strategy to improve operating efficiencies, strengthen credit quality and expand our interest margins.” 

 

Mr. Kopp continued, “We saw notable improvements in the overall performance of our lending business in
2011, even as we experienced increases in delinquencies on personal loans, credit cards and residential
mortgages of a magnitude commensurate with general economic difficulties.  By taking advantage of
opportunities in under-served sectors of the UK and Guernsey loan market, and the extension of
additional credit facilities to the Government of Bermuda, the Bank grew the loan portfolio during the
year, whilst reducing the overall percentage of non-accrual loans on our books.”

 

Brad Rowse, Butterfield’s Chief Financial Officer, said, “In late 2010, the Bank revised its investment
strategy in an effort to improve returns and largely implemented that strategy during 2011.  Based on
the provision of improved modelling and analytics, we were able to more effectively match the durations
of our deposits against investments for improved yield, without taking on excess risk.  As part of this
strategy, the Bank is now holding certain securities—issued primarily by US government agencies—in a Held To Maturity (“HTM”) portfolio.  These investments, combined with deposit pricing discipline, resulted
in an increase in net interest income of more than 19%.”

 

The Board declared $4.0 million of quarterly dividends on the Bank’s 8% Non-Cumulative Perpetual
Voting Preference Shares (“Preference Shares”) to be paid on 15 March 2012 to Preference Shareholders of record on 1 March 2012.  No Common dividend was declared.

 

In 2010 the Bank evaluated its performance on a reported as well as on a normalised basis.  In 2011,
the Bank believes its reported results better reflect normal, ongoing operations. 

 

Net income for 2011 increased by $25.7 million from $14.8 million normalised in 2010.

 

For the year ending 31 December, the following table states reported earnings for 2011 compared to normalised 2010 earnings:


 

 

(in $ millions)

2011 Reported

2010 Normalised

$ change

Non-interest income

135.2

139.6

(4.4)

Net interest income before provision for credit losses

213.7

178.9

34.8

Total revenue before provision for credit losses and gains and losses

348.9

318.5

30.4

Net gains and losses

4.3

0.0

4.3

Provision for credit losses

(14.3)

(10.1)

(4.2)

Total revenue

338.9

308.4

30.5

Total non-interest expenses

(298.5)

(292.0)

(6.5)

Net income before taxes

40.4

16.4

24.0

Income tax

0.1

(1.6)

1.7

Net income

40.5

14.8

25.7

Dividends and guarantee fee of Preference Shares

(21.3)

(18.0)

(3.3)

Net income (loss) / earnings attributable to Common Shareholders

19.2

(3.2)

22.4

Net income (loss) / earnings per Common Share




- Basic

0.03

(0.01)

0.04

- Diluted

0.03

(0.01)

0.04





 

 

 

Total revenue before provisions for credit losses and gains and losses for 2011 was up $30.4 million from 2010 normalised, driven by a $34.8 million increase in net interest income before provisions for credit
losses as a result of the efficient deployment of excess liquidity under our new investment strategy,
along with disciplined deposit pricing. Total 2011 non-interest income decreased by $4.4 million, primarily attributable to the discontinuation of revenue streams associated with our Hong Kong and Malta
businesses that were sold in 2010. 

 

  • Net gains and losses increased by $4.3 million primarily due to:
  • Realised gains on the disposal of US Agency securities of $1.8 million;
  • Realised gains on Subordinated debt repurchased of $1.1 million;
  • Gain realised on the disposal of the Bank’s equity interest in fund administrator Butterfield Fulcrum Group Limited (“BFG”) of $3.1 million in the second quarter of 2011; and
  • Equity pick-up loss on affiliates of $1.3 million in the first quarter of 2011.
    The $4.2 million increase in provisions for credit losses is primarily due to the impact of the continuing economic downturn, especially with respect to the historical non-core private banking business in the United Kingdom.

 

Non-interest expenses increased by $6.5 million, driven mainly by 2011 termination costs incurred and increased consultancy fees on 2011 projects designed to streamline the organisational structure and  enhance operational efficiency to yield long-term improvements in operating costs.


 

 

Balance Sheet

As at

(in $ millions)

31-Dec-11

31-Dec-10

Cash and cash equivalents

1,979.5

2,429.7

Investments

2,089.7

2,629.1

Loans, net of allowance for credit losses

4,247.3

4,043.4

Premises, equipment and computer software

276.1

262.0

Total assets

8,824.1

9,623.1

Total deposits

7,525.4

8,228.1

Subordinated capital

267.8

282.8

Shareholders' equity

829.7

809.3

Liquidation preference on Preference Shares

200.0

200.0

Common equity

629.7

609.3

Key Balance Sheet Ratios:

Book value per Share

$1.14

$1.10

Tangible book value per Share

$1.05

$0.99

Tier 1 capital ratio

17.70%

15.70%

Total capital ratio

23.50%

21.60%

Tangible Common equity ratio

6.62%

5.79%

Tangible total equity ratio

8.90%

7.88%




Income Statement

Year ended 31 December

(in $ millions)

2011

2010

Non-interest income

135.2

143.4

Net interest income

213.7

178.9

Other gains (losses)

4.3

(180.5)

Total net revenue before provision for credit losses

353.2

141.8

Provision for credit losses

(14.3)

(42.0)

Total net revenue after provision for credit losses

338.9

99.8

Total expenses

298.5

309.4

Total net income before taxes

40.4

(209.6)

Income tax

0.1

2.0

Net income

40.5

(207.6)


Dividends and guarantee fee of Preference Shares

(18.0)

(18.0)

Dividends on Contingent Value Convertible Preference Shares

(3.3)

-

Net earnings / (loss) attributable to Common Shareholders

19.2

(225.6)

Cash earnings (before amortisation of intangibles)

46.3

(202.0)

Net earnings / (loss) per Common Share

- Basic

$0.03

$(0.47)

- Diluted

$0.03

$(0.47)

Adjusted weighted average number of participating Shares (thousands)

554,650

477,225




Key Financial Ratios

Return on assets

0.43%

(2.17%)

Return on Common Shareholders' equity

3.03%

(44.32%)

Net interest margin

2.50%

2.03%

Efficiency ratio

83.90%

94.30%

Non-Accrual Loans/Gross Loans

2.84%

3.88%

Non-Performing Assets/Total Assets

1.70%

1.66%

 

 

 

COMMENTARY ON STATEMENT OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2011 (“2011”) COMPARED WITH YEAR ENDED 31 DECEMBER 2010 (“2010”)

 

Net Income

The Bank recorded net income of $40.5 million for 2011 compared to a net loss of $207.6 million in 2010.

 

 

The Bank’s total revenue before gains and losses increased by 19.4% as result of increased investments
in loans and higher yielding investments, reduced deposit interest and decreased credit losses required
as the Bank anticipated and subsequently provided for its hospitality industry exposure in 2010.

 

Operating expenses decreased by $10.9 million, from $309.4 million in 2010 to $298.5 million in 2011, which reflects the impact of 2010 and early 2011 reduced headcount and enhanced controls on corporate expenditures.

 

Net Interest Income

 

Net interest income before provisions for credit losses increased by $34.8 million to $213.7 million in
2011 due to increased investments in longer duration, low-risk investments, higher levels of lending and disciplined deposit pricing that resulted in a 47 basis point improvement in net interest margin to 2.50%.

 

The decrease in average interest-earning assets of $0.3 billion to $8.5 billion in 2011 was driven by the strategic loss of high-cost deposits which were deployed in lower yielding assets and therefore had a negative impact on the net interest margin. 

 

Credit provisions decreased by $27.6 million, from $42.0 million in 2010 to $14.3 million in 2011. The change was largely a reflection of the actions taken in 2010 to mitigate the Bank’s exposures to the hospitality industry, but also a reflection of the Bank having worked closely with its clients during difficult economic times to establish mutually agreeable and manageable repayment terms on outstanding credit facilities.

 

Non-Interest Income

 

Non-interest income of $135.2 million decreased by 5.7% from $143.4 million in 2010 primarily due to
the following:

 

  • Asset management fees decreased by $1.6 million due to the lost revenue generated by the Hong
    Kong subsidiary disposed in 2010, which was offset by the increase in fees in 2011 of $0.3 million, attributable to a change in the mix of services favouring higher margin offerings;
  • Banking fees were down 1.9% in 2011 to $33.3 million, compared to $33.9 million in 2010, primarily
    as a result of reduced volumes;
  • Foreign exchange revenues were down $1.0 million in 2011 due to reduced  foreign exchange transaction volumes, in line with the slowing economic conditions;
  • Trust revenues were $0.5 million lower, year on year, due to a one-time fee revenue recorded in
    2010;
  • Custody revenues decreased by $1.8 million during the year due to lower transaction volumes in the Bank’s custody business and a reduction in administered banking mandates;
  • Other non-interest income decreased by $2.6 million due to the write back of unclaimed balances and dividends amounting to $5.8 million in 2010, which was offset by increased equity pick-up income
    from investment in affiliates.

 

Non-Interest Expense

 

Total non-interest expenses decreased year on year by $10.9 million, or 3.5%, to $298.5 million as a
result of the following:

 

  • Salaries and other employee benefits of $150.8 million in 2011 represents a decrease of $8.3 million from 2010. Excluding the $12.0 million of non-recurring costs in 2010, salaries and other employee benefits increased by $3.7 million. However, during 2011 further staff reductions and the
    implementation of our new core banking system in Bermuda and the Cayman Islands resulted in
    additional one off costs of $7.9 million. The 2011 one off costs are made up of: $3.0 million in
    overtime and temporary employment services related to the systems implementation projects and
    $4.9 million in staff termination and redundancy costs. Net of one-off costs, salaries and other
    employee benefits declined by $4.2 million year over year. Salary cost reductions of $4.1 million, as a
    result of reduced headcount, which was down 135 from 1,519 at the end of 2010 to 1,384 by 2011,
    was partially offset by $1.5 million of annual merit increases.  A further $7.9 million of savings was
    realised from reduced staff benefit costs, of which $7.5 million relates to a reduction in post-
    retirement health care expenses as a result of the changes to the benefit plan made in 2010.  These savings were partially offset by a $6.3 million increase in staff incentive expenses, following several years of minimal incentive compensation awards, and also include the amortisation expense related to the previous year’s stock option and Executive long-term share plan awards;
  • Technology expenses increased by $1.0 million as the new core banking system was implemented in Cayman and Bermuda during the year;
  • Property expenses increased by $1.8 million, attributable to accelerated depreciation on certain premises totalling $1.6 million per year in additional depreciation for 2011;
  • Professional, outside services costs increased by $5.0 million, primarily due to additional expenditures on projects designed to enhance operational efficiency, increases in executive recruitment fees and increased investment advisory costs;
  • Total other expenses decreased by $9.8 million, driven mainly by the 2010 non-recurring fees of $7.4 million in connection with the CIBC liquidity facility, which was cancelled in early 2011.

 

Gains/Losses

 

Net gains and losses increased by $184.8 million, year on year, to $4.3 million in 2011. Excluding the
significant non-recurring transactions recorded in 2010 of $178.7 million ($167.5 million investment
losses, $7.4 million subsidiary disposal loss and $3.8 million of write downs on previously capitalised
technology expenditures), net gains and losses increased by $6.1 million due to the following:

  • $2.1 million gain realised on the disposal of US agency securities, certificates of deposit and corporate bonds;
  • $1.1 million gain realised on the repurchase of subordinated debt during 2011;
  • Net losses on trading securities of $0.9 million due to market movements on the trading portfolio;
  • Gain realised on the disposal of the Bank’s equity interest in fund administrator BFG of $3.1 million in
    the second quarter of 2011; and
  • Equity pick-up loss on affiliates of $1.3 million in the first quarter of 2011.

 

COMMENTARY ON BALANCE SHEET AT 31 DECEMBER 2011 (“2011”) COMPARED WITH 31 DECEMBER 2010 (“2010”)

 

Deposits

 

Average customer balances decreased by $0.4 billion to $7.7 billion at 31 December 2011, primarily due
to a strategic decision made in the UK to exit the unprofitable Self Invested Pension Plan (“SIPP”) deposit business and  lower cash balances held in Cayman by institutional hedge fund clients during the year. During 2011, core deposits remained flat. The Bank’s deposits ended 2011 at $7.5 billion, down from
$8.2 billion in 2010. 

 

Total Assets

 

The Bank’s total assets were $8.8 billion at 31 December 2011, down $0.8 billion from 2010, primarily attributable to the maturation and migration of non-core deposits to higher-interest deposit institutions.

 

The Bank maintained a highly liquid position during 2011 with cash and cash equivalents, short and long-
term investments representing 46.5% of total assets compared to 52.8% in 2010.

 

In the first quarter of 2011, a change in accounting policy resulted in:

 

  • Highly liquid investments with an initial term of less than three months being included in cash and cash equivalents rather than investments; and
  • Restricted demand deposits and term deposits with a maturity date greater than three months being reclassified to short-term investments rather than cash and cash equivalents.
    Prior periods have been restated accordingly.

 

Loans

 

The loan portfolio increased by $0.2 billion to $4.2 billion, due primarily to increased residential lending to high net worth individuals in Guernsey and United Kingdom and the extension of additional credit facilities to the Government of Bermuda, offset by full settlements and increased pay downs on commercial loans, including real estate, amounting to $20.8 million, received during 2011 as settlement for a commercial mortgage loan balance.

 

Allowance for credit losses at year-end 2011 totalled $61.4 million, a decrease of $5.4 million from 2010. The movement in the allowance for 2011 is the result of partial charge offs of $23.8 million recorded in 2011 offset by year-to-date additional provision charges of $14.3 million and recoveries of previously charged off loan balances of $4.1 million.

 

The loan portfolio represented 48.1% of total assets at the end of 2011, compared to 42.0% at year-end 2010, whilst loans as a percentage of customer deposits increased from approximately 49.6% at year-
end 2010 to 57.4% at the end of 2011.

 

Gross of allowance for loan losses, non-accrual loans represented 2.8% of total gross loans at 31
December 2011 compared to 3.9% at year end 2010. Net non-accrual loans were $96.6 million,
equivalent to 2.3% of total loans, after specific provisions for such loans of $25.9 million.

 

The decrease of $32.6 million in net non-accrual loans from 2010 relates primarily to settlements
received on non-accrual loans, including real estate received on the settlement of a commercial real
estate mortgage amounting to $20.8 million and included as Other Real Estate Owned.

 

The Bank’s gross non-performing asset ratio remained constant at 1.7% in 2011.

 

Investments

 

The investment portfolio decreased by $0.5 billion to $2.1 billion in 2011, primarily due to the sale of the majority of our European exposures in the fourth quarter of 2011 and the purchase of US treasury bills, which are included in the cash and cash equivalents category.

 

JURISDICTIONAL REVIEW OF RESULTS

 

Bermuda

 

Net income of $25.8 million for 2011 represented an improvement of $208.9 million and, excluding significant 2010 non-recurring transactions of $182.8 million, increased by $26.1 million, primarily due to increased investments in loans and higher yielding investments, reduced deposit interest and decreased credit losses required as the Bank anticipated and subsequently provided for its hospitality industry exposure in 2010.

 

Revenue before gains and losses increased year on year by $38.8 million, or 24.4%, from $159.0 million
in 2010 to $197.8 million in 2011. This reflects lower fee revenues resulting from a decline in custody
fees more than offset by higher net interest income as margins increased by 57 basis points year on
year. Credit provisions were $1.2 million in 2011 compared to $25.6 million in 2010, primarily due to additional provisions taken during 2010 relating to the hospitality industry loan portfolio and residential
mortgages, but are also a reflection of the Bank having worked closely with its clients during difficult economic times to establish mutually agreeable and manageable repayment terms on outstanding credit facilities.

 

Net interest income before loan loss provisions increased by $18.6 million, due to increased yields on interest-earning assets complemented by lower rates on deposit liabilities.

 

Non-interest income of $67.1 million in 2011 was down 6.0% from 2010, primarily due to the write back
of unclaimed balances and dividends of $5.8 million in during 2010 and reduced custody revenues in
2011.

 

Total assets as at 31 December 2011 decreased by 11.8 % to $4.6 billion from 2010, primarily reflecting
a decrease in non-core deposits.

 

Client assets under administration ended 2011 at $46.5 billion, up $4.0 billion from $42.5 billion at year-
end 2010, whilst assets under management decreased by $0.2 billion from $3.6 billion at year-end 2010
to $3.4 billion in 2011.

 

Cayman Islands

 

Cayman recorded a net income of $11.0 million for 2011, an increase of $15.6 million from 2010, whilst revenue before gains and losses of $64.0 million represented an increase of $6.8 million from 2010.

 

Net interest income before loan loss provisions increased year on year by $8.8 million resulting from widening margins from continued loan growth and investment in higher yielding fixed income securities during the second half of 2011. Loan loss provisions of $4.0 million were consistent with prior-year levels.

 

Non-interest income of $30.7 million in 2011 was down $1.7 million (5.4 %) from 2010 based on reduced fee revenue, primarily from banking services.

 

Non-interest expenses of $55.0 million were $4.8 million above prior-year levels. Butterfield in Cayman converted to a new banking technology platform during the second quarter, including online banking,
ATM, merchant and card processing applications. The increase in 2011 expenditures over the prior year was primarily related to that conversion, with salaries and staff benefits reflecting high levels of
associated overtime and employment services costs, whilst technology and communications costs reflect higher IT outsourcing costs and depreciation on technology assets. Increases in professional services
costs associated with heightened focus on asset and liability management resulted in improved yields
from the investment portfolio.   
Total assets at 31 December 2011 were $2.0 billion, consistent with year-end 2010.

 

Loans increased by $0.1 billion year over year, with commercial loan growth led by several
participations, whilst Cayman residential mortgages experienced steady growth. The Bank’s Cayman business also absorbed the residential mortgage portfolio of the Bank’s operations in The Bahamas
earlier in the year.

 

Client assets under administration ended 2011 at $3.4 billion, down $1.2 billion from $4.6 billion at year-
end 2010, whilst assets under management decreased by $0.1 billion from $1.1 billion at year-end 2010
to $1.0 billion in 2011. 

 

Guernsey

 

Guernsey recorded net income of $9.4 million for 2011, compared to net income of $6.3 million in 2010,
an improvement of $3.1 million, due primarily to increased investment in residential mortgages and
higher yielding securities.

 

Revenue before gains and losses was up $4.0 million to $39.4 million in 2011, compared to $35.4 million
in 2010.

 

Net interest income increased $6.0 million to $18.4 million in 2011, compared to $12.4 million in 2010, as
a result of increased residential lending to high net worth individuals and the purchase of higher-yielding investment assets.

 

Non-interest income decreased $1.3 million year on year, as a result of the loss of two administered
bank mandates and lower foreign exchange revenues, compensated in part, by increases in asset management revenues.

 

Non-interest expenses increased by $2.6 million to $30.2 million for the year ended 31 December 2011,
due to increases in professional and advisory fees in 2011, in addition to a non-recurring expense
recovery in 2010.
Total assets at 31 December 2011 of $1.5 billion were $0.1 billion lower than year-end 2010.

 

Client assets under administration ended 2011 at $16.7 billion, up $0.2 billion from $16.5 billion at year-
end 2010, whilst assets under management decreased by $0.1 billion from $0.7 billion at year-end 2010
to $0.6 billion in 2011.

 

United Kingdom

 

The UK recorded a net loss of $3.3 million in 2011, compared to net loss of $13.8 million in 2010, an improvement of $10.5 million.

 

Total revenue before gains and losses was $16.9 million, up $4.6 million in 2011, compared to 2010 as a result of increased residential lending and investments in higher yielding securities in 2011.

 

Net interest income before credit losses, at $12.7 million, was up $3.3 million year on year.  Provision for credit losses was $6.7 million at 2011, a decrease of $0.4 million compared to 2010.

 

Non-interest income, at $10.9 million, was up $0.9 million from 2010, reflecting increases in other non-
interest income and asset management fees.
Total non-interest expenses, at $20.3 million, were $4.2 million higher compared to year-end 2010.

 

Total assets stood at $1.0 billion at the end of 2011, compared to $1.1 billion at year-end 2010, with the decrease in customer deposits, reflecting the strategic decision to exit non-core customer segments.

 

Client assets under administration ended 2011 at $1.3 billion, unchanged from year-end 2010, whilst
assets under management also remained unchanged year on year at $0.6 billion.


 

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