Butterfield Executive Chairman, Brendan McDonagh to Step Down From Post
Butterfield Reports Third Quarter Profit
- Q3 2015 core earnings(1) of $29.3 million, up $2.2 million (8.1%) over Q3 2014
- Return on average common equity improves to 15.0%
- Diluted earnings per share of $0.05, up $0.02 from $0.03 in 2014(2)
- Board declares interim dividend of $0.01 per common share
Hamilton, Bermuda─26 October 2015: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced core earnings for the third quarter ended 30 September 2015 of $29.3 million, an improvement of $2.2 million compared to $27.1 million earned in the same quarter a year ago. The return on average common equity for the third quarter improved to 15.0% in 2015, compared to 10.9% in the third quarter of 2014. Reported net income for the third quarter was $25.7 million ($0.05 per share on a fully diluted basis) compared to $22.8 million ($0.03 per share on a fully diluted basis) in the same quarter a year ago, up $2.9 million.
Commenting on the events of the quarter, Michael Collins, Chief Executive Officer said, “Our third quarter results are strong, and with core earnings up by 8.1% year on year, and a growing customer deposit base in both Cayman and Bermuda. We will continue to explore prudent acquisitions in markets where we have significant market share and business expertise, building upon the successful acquisitions we completed in 2014.
“The high degree of liquidity within the Bank’s investment portfolio and our conservative balance sheet position (with loans representing 38.9% of total assets) supports our ability to continue to pursue compelling acquisition opportunities going forward.
“It’s also our intention to continue to return value more directly to shareholders via share repurchases and common dividend payments. Butterfield again declared an interim dividend of $0.01 per common share from Q3 earnings, and repurchased $0.6 million worth of common shares to support trading liquidity.”
Michael Schrum, Chief Financial Officer said, “The $2.2 million year-over-year increase in Q3 core earnings was driven by improved credit provisions on a loan portfolio that continues to return value, along with higher fees earned on banking services and foreign exchange. Complementing those developments were decreased core expenses associated with lower property and professional services costs.
(1) See table below for reconciliation of US GAAP results to core earnings.
(2) Significantly augmented by the CIBC share repurchase in April of 2015. Please see further details below.
“Net interest income before credit provisions was down by 1.1% year over year due to lower credit demand and our net interest margin that fell slightly to 2.48% on lower investment yields. The Bank, however, remains well positioned to benefit from any future increases in interest rates.”
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 eight million common shares.
In addition, the Board approved, with effect from 5 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 quarter ended 30 September 2015 amounted to 0.4 million common shares to be held as treasury shares at an average cost of $1.73 per share (total cost of $0.6 million) and nil preference shares.
The Board declared quarterly dividends of $20 per share on the Bank’s 8% non-cumulative perpetual voting preference shares, to be paid on 15 December 2015 to preference shareholders of record on 1 December 2015.
The Board also declared an interim dividend of $0.01 per common share to be paid on 27 November 2015 to shareholders of record on 13 November 2015.
The Bank today announced that Brendan McDonagh, Executive Chairman, has informed the Board of his plans to step down from his post at the Company, effective immediately. Mr. McDonagh has agreed to continue to be available to the Board and the Bank’s senior management to ensure a seamless transition.
Mr. McDonagh joined Butterfield in April 2012 as a Director and Executive Chairman, and was appointed Chairman and Chief Executive Officer in August 2012. During his tenure, Mr. McDonagh presided over a significant turnaround of Butterfield’s performance.
For the full year 2011, Butterfield reported Net Income of $40 million, compared with $79 million for the first nine months of 2015. Return on common shareholders equity has improved from 3% at the end of 2011 to 15% at 30 September 2015. The improvements were achieved despite headwinds from a low interest rate environment and lagging economic recovery in key markets.
Barclay Simmons, formerly Vice Chairman and who was appointed to the position of Non-Executive Chairman, said: “Brendan’s experience and leadership over the last several years have played a critically important role in improving the Bank’s performance and generating improved shareholder returns. Brendan focused on improving the Bank’s operational focus as well as investing in growth and managing risks and expenses. We appreciate Brendan’s many contributions and wish him continued success in his future endeavors.”
Mr. McDonagh commented: “I am gratified by the across-the-board improvement in performance and shareholder value. I am proud of what we have achieved as a team and am confident that I am leaving Butterfield poised to succeed through its next period of growth and prosperity.”
During McDonagh’s tenure, Butterfield completed the acquisitions of Legis Group Holdings’ Guernsey-based trust and corporate services business and HSBC’s corporate and retail banking business in the Cayman Islands. Both of these acquisitions allowed the Bank to expand and complement its existing business and further establish itself in those lines of business.
CIBC Share Repurchase
On 27 April 2015, the Bank announced that it had reached an agreement with Canadian Imperial Bank of Commerce (“CIBC”) to repurchase for cancellation the majority of CIBC’s shareholding in Butterfield. CIBC owned 19% of Butterfield’s issued and outstanding common equity comprising 103,434,232 common shares. On 30 April 2015, Butterfield repurchased for cancellation 80,000,000 shares held by CIBC for $1.50 per share, for a total of $120 million.
The remaining CIBC shareholding in Butterfield (representing 23,434,232 shares) were taken up by Carlyle Global Financial Services, L.P. at $1.50 per share and subsequently sold to other investors.
On 13 August 2015, the Bank announced that it had repurchased for cancellation 4,000,000 common shares at $1.49 per share of the 23,434,232 shares which were taken up by Carlyle Global Financial Services, L.P. and subsequently sold to other investors.
ANALYSIS AND DISCUSSION OF THIRD QUARTER RESULTS
(1) Includes both common and, for the three-month period ended 31 March 2015, contingent value convertible preferred equity. The contingent value convertible preferred equity was converted to common equity as of 31 March 2015.
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) Premium paid on preference share buy-back was not adjusted as management views the transaction as non-core.
COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 30 SEPTEMBER 2015 COMPARED WITH THE QUARTER ENDED 30 SEPTEMBER 2014
Core earnings for the quarter ended 30 September 2015 were $29.3 million, up $2.2 million from $27.1 million in 2014, an improvement of 8.1%. After including non-core items outside the course of normal business of ($3.6) million in the third quarter of 2015 and ($4.3) million in 2014, total net income for the third quarter of 2015 was $25.7 million, an increase of $2.9 million compared to third quarter of 2014 net income of $22.8 million.
The $2.2 million core earnings improvement is made up mainly of the following:
- A $0.7 million increase in non-interest income driven principally by higher bank service fees of $0.8 million and higher foreign exchange revenue of $0.5 million, both driven by volume increases, slightly offset by lower custody fees of $0.4 million;
- A $0.5 million reduction in provision for credit losses as a result of the improvement in non-accrual loans and improved recoveries. The improvement in the credit quality of the loan book results in lower provisioning levels;
- A $1.2 million increase in other gains (losses) as a result of losses experienced in the third quarter of the prior year as a result of the revaluation of certain properties; and
- A $0.4 million dollar reduction in core expenses as a result of lower property maintenance costs, lower electrical costs, lower professional service costs and a relative reduction in fraud provisions due to the absence of a large US fraud event from the third quarter of the prior year.
The year-to-date net interest margin fell by 0.26% to 2.48% in the third quarter of 2015 relative to the year-end net interest margin due primarily to lower yields on the investment portfolio driven by lower yields on long term treasury market rates as well as a management decision to shorten duration of the investment portfolio, which will position the Bank favourably in a rising rate environment.
Core operating expenses decreased by $0.4 million from $64.6 million to $64.2 million in the third quarter of 2015.
Core salaries and benefits costs were $31.4 million in the quarter, up $0.5 million from an increase in post-retirement medical expense and pension costs, slightly offset by a reduction in salaries. Headcount on a full-time equivalency basis at quarter-end was 1,128, down 8 compared to 1,136 in the third quarter of 2014.
Other notable core operating expense variances include:
- Property expenses decreased by $0.8 million due to lower electricity costs and lower property maintenance costs;
- Professional and outside services decreased by $0.3 million due to decreased consultancy fees; and
- Technology and communications expenses increased by $0.6 million on higher software maintenance costs.
Non-core expenses decreased by $0.2 million in the third quarter 2015.
BALANCE SHEET COMMENTARY AT 30 SEPTEMBER 2015 COMPARED WITH 31 DECEMBER 2014
Total assets of the Bank were $10.2 billion at 30 September 2015, up $0.3 billion from 31 December 2014. The Bank maintained a highly liquid position at 30 September 2015 with $5.5 billion of cash due from banks plus short and long-term investments, excluding held-to-maturity investments, representing 53.9% of total assets, compared with 51.8% at 31 December 2014.
The loan portfolio totalled $4.0 billion at the end of the quarter, down $45.5 million from year-end 2014. The movement was due primarily to prepayments on the commercial portfolio. As at 30 September 2015, gross loans written totalled $539.9 million, offset by net pay downs of $556.7 million.
Allowance for credit losses at 30 September 2015 totalled $48.2 million, an increase of $0.7 million from year-end. The movement was due mainly to additional allowances in the UK.
The loan portfolio represented 38.9% of total assets at 30 September 2015 (31 December 2014: 40.8%), whilst loans as a percentage of customer deposits decreased from 46.6% at year-end 2014 to 43.7% at quarter end.
As at 30 September 2015, the Bank had gross non-accrual loans of $68.2 million, representing 1.7% of total gross loans, a decrease from the $71.8 million, or 1.8%, of total loans at year-end 2014. The decrease reflects the Bank’s maintenance and steady reduction in the level of non-accrual loans from year-end whilst working closely with clients prior to having difficulty servicing their debts. Net non-accrual loans were $48.3 million, equivalent to 1.2% of net loans, after specific provisions of $20.0 million, resulting in a specific provision coverage ratio of 29.3% compared to 26.2% at 31 December 2014.
Non-performing loans, which include gross non-accrual loans and accruing loans past due by 90 days or more, totalled $90.1 million as at 30 September 2015, down from $103.5 million at year-end 2014. This is a result of maintaining the non-performing portfolio at existing levels by continued, proactive engagement with our clients.
The investment portfolio was $3.3 billion at 30 September 2015, compared to $3.0 billion at 31 December 2014. The increased portfolio size was due to purchases of liquid US government and federal agency securities. Portfolio run off and maturities of $112.2 million were reinvested primarily in US government and federal agency securities that totalled $2.7 billion, or 81.3% of the total investment portfolio. Certificates of deposit of $37.7 million were reinvested in sovereign debt classified as short-term investments.
The investment portfolio was made up of high quality assets with 99.8% invested in A-or-better-rated securities. The investment yield decreased by 10 basis points to 2.12% from the third quarter compared to the second quarter as maturities and portfolio runoff were all reinvested in floating rate assets yielding short-term rates. Total net unrealised gains were $15.9 million, compared to an unrealised gain of $9.9 million at year-end 2014; the increase due largely to a decrease in longer-term US risk free rates.
Average customer deposits increased by $0.7 billion to $9.0 billion in the third quarter of 2015 from $8.1 billion in the fourth quarter of 2014. On a period-end basis, customer deposits increased to $9.1 billion from $8.6 billion at year-end 2014.
REVIEW OF RESULTS OF MAJOR OPERATIONS
Net income before gains and losses was $15.0 million at 30 September 2015, up $0.5 million from $14.5 million in the third quarter of 2014, due to increased net interest income and lower non-interest expense partially offset by lower non-interest income and increased provision expense. Net other gains of $0.2 million during the third quarter of 2015 were favourable by $1.9 million, compared to net loss of $1.7 million in the third quarter of 2014, due primarily to $0.5 million of gains on the revaluation of OREO properties in the third quarter of 2015 against $0.9 million of losses in the third quarter of 2014, coupled with a one-off loss in the third quarter of 2014 from a sale of a fixed asset property. Net income after gains and losses was $15.2 million, an increase of $2.3 million from $12.9 million in the third quarter of 2014.
Net interest income before provisions for credit losses increased by $0.6 million to $36.6 million in the third quarter of 2015, due primarily to higher investment income earned on higher investment volumes, whilst lower interest expense on deposits and long-term debt was offset by lower loan interest on consumer loans, all driven by lower volumes.
Provision for credit losses was $0.6 million in the third quarter of 2015, up $0.2 million from the third quarter of 2014 when provisions were $0.4 million.
Non-interest income decreased $0.2 million to $15.0 million in the third quarter of 2015 due to lower foreign exchange, trust and rental income revenues partially offset by increased asset management and banking revenues.
Operating expenses decreased by $0.3 million to $35.9 million in the third quarter of 2015, due primarily to one-time recoveries in the third quarter of 2015 partially offset by increased IT sourcing and software maintenance expense.
Total assets as at 30 September 2015 were $5.1 billion, up $0.3 billion from year-end 2014. Customer deposits ended the period at $4.2 billion, up $0.4 billion from year-end 2014 as a result of new business. Customer loan balances ended the period at $2.1 billion, flat from year-end 2014.
Client assets under administration for the trust and custody businesses were $33.0 billion and $30.1 billion, respectively, whilst assets under management were $2.4 billion.
Net income before gains and losses was $11.4 million at 30 September 2015, up $3.3 million from $8.1 million in the third quarter of 2014. Net income growth was due primarily to increases in interest income on loans and investments and non-interest income led by volume driven foreign exchange income, banking, trust and asset management fees, partially offset by increased amortisation of intangible assets.
Net interest income before loan loss provisions was $16.6 million in the third quarter of 2015, an improvement of $1.6 million compared to the third quarter of 2014. The increase was driven primarily by an improvement in loan income of $1.0 million as average loan balances increased by $94.9 million from the third quarter of 2014, attributable largely to the HSBC Cayman transaction. Investment income was up $0.6 million resulting from an average increase of $198.1 million in fixed-rate securities and $307.0 million in floating-rate notes. Average customer deposits grew $979.8 million with only a marginal upward impact on deposit liability costs.
Credit provisions of $0.4 million in the third quarter of 2015 were $0.1 million lower than credit provisions in the third quarter of 2014. Non-interest income was $9.7 million, up $1.7 million from the third quarter of 2014. The increase was due primarily to volume driven growth in foreign exchange, banking fees and commissions driven by wire transfer, card services and account transaction service fees, along with trust and asset management fees.
Operating expenses increased $0.2 million to $14.6 million in the third quarter of 2015, driven primarily by increased amortisation of intangible assets following the acquisition of loans and deposits from HSBC Cayman in the fourth quarter of 2014.
Total assets at 30 September 2015 were $3.2 billion, up $0.3 billion from year-end 2014, reflecting higher client deposit levels. Net loans of $1.1 billion were $54.4 million below the year-end 2014 levels following several large commercial loan repayments. The available-for-sale investments of $1.1 billion were up $0.3 billion from year-end 2014.
Client assets under administration for the trust and custody businesses were $3.6 billion and $1.7 billion, respectively, whilst assets under management were $0.8 billion at 30 September 2015.
Guernsey posted net income before gains and losses of $0.2 million in the third quarter of 2015, compared to $1.2 million in third quarter of 2014. The year-on-year reduction is due primarily to adverse exchange rate movements affecting revenues.
Net interest income before provisions for credit losses decreased by $0.3 million to $4.0 million in the third quarter of 2015, compared to $4.3 million last year, due to adverse exchange rate movements. Provisions for credit losses were $nil, stable during the third quarter of 2014.
Non-interest income decreased $0.7 million to $6.3 million in the third quarter of 2015 attributable to adverse exchange rate movements of $0.6 million and lower banking revenue and custody revenues offset by increased trust revenues.
Operating expenses at $10.1 million were $0.1 million higher than 2014 due primarily to higher staff expenses offset by favourable exchange rate movements, lower amortisation and professional fees.
Total assets of $1.5 billion as at 30 September 2015 were down slightly from $1.6 billion at year-end 2014.
Client assets under administration for the trust and custody businesses were $32.2 billion and $6.4 billion, respectively, whilst assets under management were $0.4 billion at 30 September 2015.
The United Kingdom recorded a net loss of $1.0 million in the third quarter of 2015, down $1.7 million from net income of $0.7 million in the third quarter of 2014. Lower net interest income accounts for $2.6 million of the decrease, with the majority of this amount attributable to lower loan balances.
Net interest income before credit provisions of $2.7 million was down $2.6 million from $5.3 million in the third quarter of 2014. The decrease was due primarily to reduced loan interest income, which is due primarily to additional interest income received in the third quarter of 2014 from a previously written off facility.
Provisions for loan losses showed a net recovery of $0.1 million in the third quarter of 2015 compared to a net provision of $0.6 million in the third quarter of 2014. An additional provision of $0.1 million was raised on a commercial loan facility and was offset by a $0.2 million recovery on a commercial facility that was written off in 2014.
Operating expenses at $5.2 million in the third quarter of 2015 were $0.7 million lower than the third quarter of 2014 due primarily to a reduction in staff costs and property-related costs.
Total assets at $0.8 billion at the end of the third quarter of 2015 held flat from year-end 2014. Loan balances and customer deposit balances both remained flat from the year-end 2014 position at $0.4 billion and $0.6 billion, respectively.
Assets under management were $0.2 billion at 30 September 2015. Custody client assets under administration at the end of the third quarter of 2015 amounted to $1.6 billion.
Certain statements in this Release may be deemed to include “forward-looking statements” and are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors including worldwide economic conditions, success in business retention and obtaining new business and other factors.
This Release does not constitute an offer to sell securities, or a solicitation of an offer to buy securities, in any jurisdiction, including without limitation the United States of America. Securities may not be offered or sold in the United States of America absent registration or an exemption from registration under the U.S. Securities Act of 1933, as amended. A public offering of securities in the United States, if any such offering is made, will be made by means of a prospectus that may be obtained from The Bank of N.T. Butterfield & Son Limited ( “Butterfield”) containing detailed information about Butterfield and management, as well as financial statements.
Butterfield is specialist provider of international financial services. The Butterfield Group offers a full range of community banking services in Bermuda, and the Cayman Islands, encompassing retail and corporate banking and treasury activities. In the wealth management area, the Group provides private banking, asset management, investment advisory and personal trust services from its headquarters in Bermuda and subsidiary offices in The Bahamas, the Cayman Islands, Guernsey, Switzerland and the United Kingdom. Butterfield also provides services to corporate and institutional clients from offices in Bermuda, The Bahamas, the Cayman Islands and Guernsey, which include asset management and corporate trust services.
These financial results are subject to finalization following completion of financial and accounting procedures. The financial results are preliminary and are based upon the information available to management as of today's date. Therefore, it is possible that the Company’s actual results may differ materially from these estimates following completion of financial and accounting procedures, final adjustments and other developments that may arise between now and the time the third-quarter financial results are finalised.
Butterfield is publicly traded in Bermuda, and its shares are listed on the Bermuda Stock Exchange. Butterfield’s share price is published daily in The Royal Gazette (www.theroyalgazette.com) and is also available on Bloomberg Financial Markets (symbol: NTB BH) and the Bermuda Stock Exchange website (www.bsx.com). Further details on the Butterfield Group can be obtained from our website at: www.butterfieldgroup.com.