Butterfield Reports 2014 Full Year Results
- 2014 core earnings(1) of $106.4 million, up $29.8 million, or 39%, year on year
- Core cash return on tangible common equity improves to 15.1%
- Core cash earnings per share of $0.17, up 55%
- Board declares fourth interim dividend of $0.01 per common share and a special dividend of $0.01 per common share
- Non-accrual loan balances reduced by 31.0% during the year
Hamilton, Bermuda─26 February 2015: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced core earnings for 2014 of $106.4 million, an improvement of $29.8 million over the $76.6 million earned in 2013. The core cash return on average tangible common equity improved to 15.1% in 2014, compared to 10.3% in 2013. Reported net income for the year ended 31 December 2014 was $98.3 million ($0.15 per share on a fully diluted basis) compared to $78.2 million ($0.11 per share on a fully diluted basis) in 2013, up $20.1 million year over year.
Brendan McDonagh, Butterfield’s Chairman and Chief Executive Officer, said, “Butterfield made excellent progress in building value for shareholders during 2014, raising the core cash return on tangible common equity to 15.1% and core cash earnings per share to $0.17, up substantially from 10.3% and $0.11, respectively, in 2013. That progress was driven by a continued focus on prudent expansion within our core businesses and markets, and diligent management of capital, expenses and risks. As a result of our focused strategy, Butterfield is a much stronger bank, our core earnings are stable and growing, and asset quality is solid.
“During the year, Butterfield enhanced our presence in the international trust and fiduciary services business with the second quarter acquisition of the Legis Group trust and corporate services business in Guernsey. The Bank similarly expanded its community banking presence in the Cayman Islands in the fourth quarter with the acquisition of select deposit and credit business from HSBC in that market. In both cases, the business acquired is complementary to and leverages Butterfield’s existing operations, which allowed the Bank to quickly and effectively integrate customer portfolios without the need for investment in infrastructure or premises. Both acquisitions have proved accretive to revenues and income.
“Coupled with our ongoing diligence in the management of our balance sheet, each successive quarter of profitability in 2014 has translated into growth of capital, which has enabled the Bank to deploy funds not only to beneficial acquisitions, but also to the retirement of subordinated debt, the repurchase of shares and the payment of common dividends to directly enhance shareholder returns, whilst maintaining strong capital ratios that are comfortably in excess of regulatory requirements..”
“The Bank has and continues to invest significant resources into the enhancement of our compliance and reporting procedures to fulfill regulatory obligations and ensure our records continue to meet international reporting standards. By the end of the second quarter, Butterfield was fully prepared for compliance with FATCA legislation, and we continue to work proactively with clients to ensure we have the necessary documentation on file to address current reporting requirements and respond to regulators’ requests under applicable laws. I would like to take this opportunity to thank our clients for their cooperation in this regard.
“I am pleased to note that Butterfield’s successes in 2014 were recognised with several prestigious industry awards conferred upon our businesses and people. Among them were The Banker’s ‘Bank of the Year 2014’ awards in both Bermuda and the Cayman Islands; the second consecutive year we have received the award in both jurisdictions, which is a testament to the hard work and dedicated focus of our employees on serving the needs of our stakeholders.”
(1)See table below for reconciliation of US GAAP results to core earnings.
Financial highlights of the year ended 31 December 2014 (with comparisons to year-end 2013):
- Net income of $98.3 million, up $20.1 million from $78.2 million
- Core earnings of $106.4 million, up $29.8 million from $76.6 million
- Total net revenue of $371.2 million, up $29.5 million, or 8.6%
- Core cash return on average tangible common equity of 15.1%, up from 10.3%
- Core cash return on average tangible assets of 1.2%, up from 0.9%
- Core efficiency ratio of 67.7%, improved from 71.6%
John Maragliano, Butterfield’s Chief Financial Officer, said, “By all financial measures, Butterfield has delivered a fourth consecutive year of solid earnings growth and continued balance sheet strength. Core earnings grew by $30 million compared to 2013 led by top line revenue growth driven largely by a strong performance within the Bank’s investment and loan portfolios, capital management actions which reduced the cost of subordinated debt, the accretive contribution of the two acquisitions, and a substantial decrease in net provisions for loan losses. Prudent management of operating expenses across the Group, coupled with increased revenues, saw the core efficiency ratio improve to 67.7% from 71.6% a year ago. The growth in core net income to over $100 million provides Butterfield with a stable source of organic capital. Combined with a 31% decrease in non-accrual loans and high quality investment portfolio, the balance sheet position continued to improve year over year. The growth in deposits of $1 billion in 2014 further improved the loan to deposit ratio to only 46% affording the Bank flexibility to capitalise on lending and investment opportunities going into 2015."
During the first quarter of 2014, the Board approved, with effect from 1 April 2014, the 2014 common share buy-back programme, authorising the purchase for treasury of up to 15 million common shares.
On 28 April 2014, the Board approved the 2014 preference share buy-back programme, authorising the purchase and cancellation of up to 26,600 preference shares.
On 26 February 2015, the Board approved, with effect from 1 April 2015, the 2015 common share buy-back programme, authorising the purchase for treasury of up to 8 million common shares.
In addition, the Board approved, with effect from 4 May 2015, the 2015 preference share buy-back programme, authorising the purchase and cancellation of up to 5,000 preference shares.
Under the Bank’s share buy-back programmes, the total shares acquired or purchased for cancellation during the year ended 31 December 2014 amounted to 8.6 million common shares to be held as treasury shares at an average cost of $1.99 per share (total cost of $17.0 million) and 560 preference shares at an average cost of $1,172 per share (total cost of $0.7 million).
The Board declared quarterly dividends of $20 per share on the Bank’s 8% non-cumulative perpetual voting preference shares, to be paid on 16 March 2015 to preference shareholders of record on 1 March 2015.
The Board also declared a fourth interim dividend of $0.01 per common and contingent value convertible preference share and a special dividend of $0.01 per common and contingent value convertible preference share to be paid on 27 March 2015 to shareholders of record on 13 March 2015.
As outlined in the March 2010 Rights Offering Prospectus, effective 31 March 2015, all contingent value convertible preference shares will convert to common shares at a ratio of 1:1.
During the first quarter of 2014, the Bank called a $90 million tranche of subordinated debt lowering the outstanding subordinated debt by 43% to $117 million from $207 million at the end of 2013.
ANALYSIS AND DISCUSSION OF FULL YEAR RESULTS
(1)Includes both common and contingemt value convertible preferred equilty.
Reconciliation of US GAAP Results to Core Earnings
Transactions viewed by management to be outside the normal course of business and unusual in nature are excluded from core earnings as they obscure financial analysis. The table below shows the reconciliation of net income in accordance with US GAAP to core earnings.
(1)See Premium paid on preference shares buy-back was not adjusted as management views the transaction as non-core.
COMMENTARY ON STATEMENT OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2014 COMPARED WITH THE YEAR ENDED 31 DECEMBER 2013
Core earnings for the year ended 31 December 2014 were $106.4 million, up $29.8 million from $76.6 million in 2013, an improvement of 38.9%. After including non-core items outside the course of normal business of $8.1 million in 2014 and ($1.6) million in 2013, total net income for 2014 was $98.3 million, an increase of $20.1 million compared to 2013 net income of $78.2 million.
The $29.8 million core earnings improvement reflects a $14.7 million increase in net interest income, driven principally by higher yields earned on the investment portfolio ($6.9 million), lower subordinated debt costs ($3.6 million), and higher levels of interest income on loans ($4.9 million). Non-interest income increased by $8.8 million which is attributable primarily to higher trust income of $7.9 million and a $1.8 million increase in banking fees earned. Provisions for credit losses were lower by $6.8 million as a result of the general provision release of $1.5 million and recoveries of $2.3 million in 2014 and higher provisions on legacy commercial loan facilities in the prior year. Core losses decreased by $2.7 million driven by reduced valuation allowances on other real estate owned (“OREO”) properties. These increases were offset by a $3.2 million increase in core operating expenses, defined as non-interest expenses and income taxes.
Net Interest Income
Net interest income increased by $14.7 million to $238.5 million in 2014, compared to $223.8 million at the end of 2013.
- Total interest income increased by $11.9 million to $265.1 million, a result of $6.9 million higher revenues on investments, due to a 6 basis point increase in investment yields and $222.5 million increase in average balances. Higher loan interest income of $4.9 million—due primarily to $2.6 million attributable to one-off interest received and a $52.1 million increase in average balances with stable yields—also contributed to the increase in total interest income.
- Total interest expense declined by $2.8 million. The decrease was primarily from $3.6 million lower subordinated debt interest expense from the retirement of the 2005 Series A and 2008 Series A subordinated debt issues, effective 2 January 2014 and 27 May 2013, respectively, offset by $0.9 million higher deposit expense from a $182.1 million increase in average balances.
- Average interest-earning assets were $8.7 billion and yielded 3.05% in 2014, up $0.2 billion year-on-year driven primarily by an increase in customer deposits, which were used to fund additional securities and loans.
Total non-interest income improved from $126.0 million in 2013 to $134.8 million. The increase is attributed to:
- Trust revenue increased from $30.4 million in 2013 to $38.3 million in 2014 due to the recently acquired Legis trust business, along with new business growth;
- Banking services revenue was up $1.8 million from $32.5 million a year ago, due primarily to higher credit card activity as a result of increased volumes from the merchant business and higher levels of customer purchases;
- Partially offsetting these increases, was lower asset management revenue of $0.3 million, driven mainly by reduced fees earned on the Butterfield Money Market Fund (“BMMF”) and other non-interest income that decreased by $0.4 million, due principally to a decrease in the current year’s equity pick-up in affiliates.
Provision for Credit Losses
The Bank’s net provision for credit losses in 2014 was $8.0 million compared to $14.8 million in 2013. Incremental provisions of $10.3 million were required principally for specific reserves pertaining to commercial and residential mortgages, partially offset by recoveries of $2.3 million. This compares to 2013 when the Bank required incremental provisions relating to specific reserves of $20.6 million that were partially offset by recoveries of $5.8 million.
Other Gains (Losses)
Core losses of $1.1 million in 2014 were down $2.7 million from $3.8 million in 2013 due primarily to a reduction of valuation allowances required on foreclosed properties of $3.2 million, offset by reduced gains on private equity investments. Non-core gains and losses booked in 2014 include a $8.7 million gain realised on the disposal of Avenir Pass-through note, a $1.1 million realised gain on private equity investment, $0.3 million of additional consideration received from a previously disposed entity, which was offset by the impairment of fixed assets of $2.0 million, and a fair value adjustment on the Legis contingent consideration of $1.1 million.
Core operating expenses increased by $3.2 million from $254.6 million in 2013 to $257.8 million in 2014. Core salaries and benefits costs were $124.2 million in 2014, up $1.6 million from 2013 from a $3.2 million increase in staff costs from the consolidation of the acquisitions, offset by cost savings from a full year benefit of the early retirement and redundancy programme at the end of 2013, as well as a $1.0 million one-time release of pension expense from the closure of a defined benefit pension plan. Headcount on a full-time equivalency basis at year-end was 1,164, up 31 compared to 1,133 a year ago as a result of the acquisitions.
Other notable core operating expense variances include:
- Technology and communications expenses increased by $2.2 million from increased depreciation relating to the new banking systems in our European businesses;
- Non income taxes increased by $0.9 million due to increased value-added tax levied in the UK.
- Amortisation of intangible assets increased by $0.9 million, due primarily to an increase in amortisation from the Legis Trust and HSBC acquisitions;
- Other non-interest expenses decreased by $2.1 million, driven mainly by lower operational losses.
Non-core expenses increased by $6.2 million in 2014 due primarily to costs associated with a stringent compliance review programme of customer data to ensure our files meet internationally recognised standards, business acquisition-related costs and a tax refund received, offset by reduced costs incurred on the early retirement and redundancy programmes and other one-off compensation costs.
BALANCE SHEET COMMENTARY AT 31 DECEMBER 2014 COMPARED WITH 31 DECEMBER 2013
Total assets of the Bank were $9.9 billion at 31 December 2014, up $1.0 billion from 2013. The Bank maintained a highly liquid position at 31 December 2014 with $5.4 billion of cash and cash equivalents plus short and long-term investments representing 55% of total assets, compared with 50% in 2013.
The loan portfolio totalled $4.0 billion at the end of 2014, down $69.0 million from year-end 2013. The movement was due primarily to the significant prepayments on the commercial and residential mortgage portfolio and unfavourable foreign exchange rate movements offset by the acquisition of the HSBC Cayman loan portfolio in November 2014. During the year, gross loans written totalled $476.8 million offset by pay downs of $619.8 million. In Bermuda, gross loans written totalled $194.2 million offset by pay downs of $225.7 million.
Allowance for credit losses at 31 December 2014 totalled $47.5 million, a decrease of $5.3 million from the prior year. The movement in the allowance was mainly the result of additional provisions of $10.3 million (including recoveries of $2.3 million) recorded during the year, and $15.6 million in charge-offs and foreign exchange movements.
The loan portfolio represented 41% of total assets at 31 December 2014 (31 December 2013: 46%), whilst loans as a percentage of customer deposits decreased from 54% at year-end 2013 to 47% in 2014.
As at 31 December 2014, the Bank had gross non-accrual loans of $71.8 million, representing 1.8% of total gross loans, reflecting an improvement from the $104.1 million, or 2.5%, of total loans at year-end 2013. The decrease was due mainly to proceeds from sales of hospitality loans that were in receivership. Net non-accrual loans were $53.0 million, equivalent to 1.3% of net loans, after specific provisions of $18.8 million, resulting in an improved specific provision coverage ratio of 26.2%, compared to 21.2% at 31 December 2013. The specific coverage ratio improved as the resolution of large commercial loans amplifies the coverage ratio on the more diversified and less concentrated remaining balance.
Non-performing loans, which include gross non-accrual loans and accruing loans past due by 90 days or more, totalled $103.5 million as at 31 December 2014, down $13.1 million from year-end 2013. The decrease is driven by the proceeds from the aforementioned sales of hospitality loans offset by the acquired HSBC Cayman delinquent loans and an increase in non-performing residential mortgages.
The investment portfolio was $3.0 billion as at 31 December 2014, compared to $2.6 billion as at 31 December 2013. The increased portfolio size was due to purchases of liquid US government and federal agency securities. A net decrease in non-US government and federal agency securities of $170 million was reinvested primarily in US government and federal agency securities that totalled $2.2 billion, or 74.5% of the total investment portfolio. New business acquisitions also contributed to the growth in the investment portfolio.
The investment book was made up of high quality assets with 99.8% invested in A-or-better-rated securities. The investment yield improved year on year by 6 basis points to 2.35% in 2014. Total net unrealised gains of the investment portfolio were $15.7 million, compared to an unrealised loss of $57.5 million at year-end 2013. The improvement in unrealised losses for the year related primarily to a decrease in longer-term US Treasury interest rates.
Average customer deposits increased by $0.4 billion to $7.9 billion in 2014. However, on a year-end basis, customer deposits were up $1.0 billion to $8.6 billion from $7.6 billion at year-end 2013, due primarily to the November 2014 acquisition of HSBC Cayman deposits.
REVIEW OF RESULTS OF MAJOR OPERATIONS
Net income before gains and losses was $53.3 million at 31 December 2014, up $19.5 million from $33.8 million in the prior year, due principally to higher investment income, restructuring initiatives in 2013, and lower provisions for credit losses and interest expense on subordinated debt, all partially offset by higher professional fees. Net gains of $6.9 million during the year were favourable by $3.4 million compared to net gains of $3.5 million in 2013, due primarily to one-off gains and reduced valuation allowances required on foreclosed properties. Net income after gains and losses was $60.2 million, an increase of $22.8 million from $37.4 million in the prior year.
Net interest income before provisions for credit losses increased by $7.8 million to $144.7 million in 2014 due to an increase of $6.3 million in investment income and a decrease of $3.6 million in subordinated debt expense, all partially offset by reduced loan interest revenue of $1.5 million due to lower average loan balances than in 2013 and $0.6 million of other items relating primarily to higher interest paid on deposits.
Provisions for credit losses were $6.4 million, down $6.3 million from the prior year, due largely to higher impairment of non-performing hospitality loans and residential mortgages in 2013.
Non-interest income of $60.7 million at 31 December 2014 remained flat, due primarily to $0.9 million of higher banking fees offset by asset management fees that were lower by $1.1 million.
Operating expenses declined by $5.3 million to $145.7 million in 2014 due to operational losses and restructuring initiatives in 2013, all partially offset by higher professional fees and fraud provisions.
Total assets as at 31 December 2014 were $4.8 billion, up $0.2 billion from year-end 2013. Customer deposits ended the year at $3.9 billion, up $0.3 billion from year-end 2013, and loan balances ended the year at $2.1 billion, flat from year-end 2013.
Client assets under administration for the trust and custody businesses were $33.7 billion and $29.8 billion, respectively, whilst assets under management were $2.3 billion.
Net income before gains and losses at 31 December 2014 was $33.5 million, up $7.6 million from $25.9 million in 2013. The increase was due primarily to increases in interest income on loans and investments, banking fees, foreign exchange income, and lower provision for credit losses, offset by acquisition integration and other project costs.
Net interest income before loan loss provisions was $59.4 million in 2014, an improvement of $7.4 million compared to 2013. The increase was driven primarily by an improvement in loan income of $6.8 million as loans increased by $153.0 million. Investment income was up $1.0 million resulting from an average increase of $23.3 million in fixed rate available-for-sale securities and $4.5 million in floating rate notes. Deposit liability costs of $1.9 million were unchanged from the prior year as the interest-cost impact from average growth in demand deposits was offset by a marginal decline in average time deposits.
Provisions for credit losses were $0.6 million compared to $3.6 million in 2013. Significant general provisions in the prior year (relating to the increase in commercial loans and specific provisions on certain residential mortgages and commercial loans) resulted in the year-over-year reduction of $3.0 million.
Non-interest income was $33.5 million, up $1.3 million year over year. The increase was due primarily to higher banking fees, driven by an increase in card, wire transfer and foreign exchange volumes, along with trust and asset management fees, partially offset by lower rental and other non-interest income.
Operating expenses increased $4.2 million, year over year, to $58.8 million, driven primarily by acquisition integration and other project costs, as well as growth in technology and loan servicing costs.
Total assets at 31 December 2014 were $2.9 billion, up $0.6 billion from year-end 2013, reflecting higher client deposit levels propelled by the acquisition of loans and deposits from HSBC Cayman in November 2014. Net loans increased by $0.2 billion from year-end 2013 to end the year at $1.1 billion. The available-for-sale investments, at $0.8 billion at the end of fiscal 2014, were up $0.3 billion, year over year.
Client assets under administration for the trust and custody businesses were $3.4 billion and $1.5 billion, respectively, whilst assets under management were $0.8 billion at year end.
Guernsey posted net income before gains and losses of $5.1 million in 2014, compared to $7.4 million in 2013. The decrease of $2.3 million was due primarily to lower net interest income from compressed yields on investments and higher non-interest expenses, in particular higher technology and professional fees offset by a tax refund received.
Net interest income before provisions for credit losses declined by $1.7 million to $18.1 million in 2014, compared to $19.8 million last year, attributable to weakening inter-bank and investment yields and increased inter-Group subordinated debt interest.
Provisions for credit losses were $0.2 million compared to $0.1 million in 2013.
Non-interest income increased $7.1 million to $26.8 million, attributable to additional revenues earned from the acquired Legis business together with higher asset management, custody and other administration services fees earned, offset by lower foreign exchange revenues.
Operating expenses at $39.6 million were $7.7 million higher than 2013 due primarily to additional expenses attributable to the acquired business and an increase in technology and amortisation expenses offset by a tax refund received.
Total assets at 31 December 2014 of $1.6 billion were up $0.2 billion from year-end 2013, driven by higher customer deposit balances that have increased cash and investment balances.
Client assets under administration for the trust business were $41.0 billion in 2014, up from $10.1 billion in 2013 and attributable to the acquired Legis business. Similarly, assets under administration for the custody and administered banking businesses were $9.2 billion, down $0.5 (4.2%) over 2013, due to adverse exchange rates. Client assets under management were $0.4 billion at year-end.
The United Kingdom recorded net income of $0.9 million in 2014, down $3.3 million from $4.2 million in 2013. The swing in credit provisions accounts for $2.4 million of the decrease, as a net recovery of $1.5 million was booked in 2013 compared to provisions of $0.9 million in 2014.
Net interest income before credit provisions of $16.2 million was up $1.3 million from $14.9 million at year-end 2013. The increase was due primarily to a one-off receipt of default loan interest of $1.6 million, but also due in part to the revised strategy on customer deposit products, which reduced interest expenses by $0.3 million compared to 2013.
Provisions for loan losses increased by $2.4 million. A net loss of $0.9 million was recorded in 2014, the majority of which related to two commercial loan facilities. This compares to a net recovery of $1.5 million in 2013 following recoveries from two previously written off facilities.
Operating expenses at $22.2 million were $2.3 million higher than 2013 due primarily to an increase in non-income taxes, as well as increased professional fees relating to external assistance and advice received on a number of projects associated with changing regulatory requirements.
Total assets at year-end 2014 were consistent with year-end 2013 at $0.8 billion. Loan balances were $0.4 billion in 2014, down $0.1 billion from year-end 2013. Customer deposit balances of $0.6 billion at year-end 2013 remained flat during 2014 to end the year at the same level.
Assets under management of $0.3 billion were unchanged from year-end 2013. Custody client assets under administration at the end of 2014 amounted to $1.9 billion.