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Butterfield Reports 2013 Full Year Results
 
·         Net income of $78.2 million, up $52.6 million
·         2013 core earnings of $76.6 million, up $21.7 million or 39.5% year on year
·         Core cash return on tangible common equity improves to 10.3%
·         Core cash earnings per share of $0.11, up 37.5% 
·         Board declares fourth interim dividend of $0.01 per common share and a special dividend of $0.01 per common share
·         Reduced non-performing asset balances during the year by $16.2 million or 11%
·         Strong capital position maintained with a total capital ratio of 23.7%


Hamilton, Bermuda─25 February 2014: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced core earnings for 2013 of $76.6 million, an improvement of $21.7 million over the $54.9 million earned in 2012.  Net income for the year ended 31 December 2013 was $78.2 million ($0.11 per share on a fully diluted basis) compared to $25.6 million ($0.01 per share on a fully diluted basis) in 2012, up $52.6 million year over year. The core cash return on average tangible common equity ratio improved to 10.3% in 2013 compared to 6.6% in 2012.

 

Brendan McDonagh, Butterfield’s Chairman & Chief Executive Officer, said, “Our focus on improving shareholder value through disciplined management of capital and expenses while prudently investing in our core businesses to generate revenue growth and sustainable returns is showing results. By virtually all measures, Butterfield delivered enhanced value to shareholders. Building upon the significant improvements we achieved in 2013, we will continue to pursue business opportunities under this strategic course.
 
"The Bank maintained strong capital ratios while actively managing and optimising its capital structure. In 2013, the Bank retired $53 million in subordinated capital, repurchased $20.3 million of common and preference shares and paid $38.5 million in common dividends to shareholders, declaring interim dividends each quarter.
 
"Subsequent to year end, we announced our intention to expand our trust and fiduciary services presence in Guernsey—one of our core markets—through the acquisition of Legis Group’s trust business; Butterfield’s first acquisition in seven years.  Legis Group was recently recognised as one of the leading international finance firms at the Citywealth International Finance Centre Awards and named Guernsey’s 2013 Trust Company of the Year. The transaction, which is expected to be completed during the current quarter, will enhance our trust client base and associated long-term revenues without the need to expand our geographic footprint.
 
“Improving financial performance has allowed Butterfield to continue to contribute to important causes within our communities.  During 2013, in all of our major markets, we were proud to support local organisations that are working to enhance prosperity, foster social progress and enrich the quality of lives.  The Bank’s financial support of local events and charities was complemented by the involvement of our employees who lent their time and expertise to worthy causes.”
 
Financial highlights of the year ended 31 December 2013 (with comparisons to year-end 2012):
·         Net income of $78.2 million, up $52.6 million from $25.6 million
·         Core earnings of $76.6 million, up $21.7 million from $54.9 million
·         Core non-interest expenses improved by $18.1 million or 6.7%
·         Core cash return on average tangible common equity of 10.3%, up from 6.6%
·         Core cash return on average assets of 0.9%, up from 0.6%
·         Core efficiency ratio of 71.6%, improved from 78.4%
 
John Maragliano, Butterfield’s Chief Financial Officer, said “We are pleased with the continued progress our businesses are making in delivering improved core results. Year over year growth in net income and core earnings drove significant improvements in our key performance ratios, most notably the core cash return on average tangible common equity of 10.3%, core cash return on average assets of 0.9%, and the core efficiency ratio of 71.6%.
 
"The increase in core earnings in 2013 was driven primarily by two factors: lower expenses due to improved operating efficiency; and enhanced revenue performance in the investment portfolio.
 
"Butterfield ended the year with a very strong capital position, a highly liquid balance sheet and improved asset quality, which positions us well.”
 
Capital Management
Effective 1 April 2013, the Board cancelled the 2012 common share buy-back programme and approved the 2013 common share buy-back programme for the purchase of up to 10 million common shares. On 2 December 2013, the Board increased the total number of common shares authorised to be purchased for treasury from 10 million to 15 million.
 
During the second quarter of 2013, the Board approved the 2013 preference share buy-back programme authorising in total the purchase and cancellation of up to 15,000 preference shares. On 2 December 2013, the Board increased the total number of preference shares authorised to be repurchased and cancelled from 15,000 to 26,600.
 
Under the Bank’s share buy-back programmes, the total shares acquired or purchased for cancellation during the year ended 31 December 2013 amounted to 4 million common shares to be held as treasury shares at an average cost of $1.39 per share (total cost of $5.6 million), and 11,972 preference shares purchased for cancellation at a cost of $14.7 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 17 March 2014 to preference shareholders of record on 1 March 2014. 
 
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, both to be paid on 28 March 2014 to shareholders of record on 14 March 2014.
 
In 2013, the Bank called $53 million (20%) of subordinated debt capital.  Subsequent to year end, the Bank also called a $90 million (35%) tranche of subordinated debt bringing the outstanding subordinated debt balance to $117 million from $260 million at the end of 2012.

 
 
ANALYSIS AND DISCUSSION OF FULL YEAR RESULTS
Income Statement
Year ended 31 December
(in $ millions)
2013
2012
Non-interest income
         126.0
         128.5
Net interest income before provision for credit losses
         223.8
         211.7
Total net revenue before provision for credit losses  and other gains (losses)
         349.8
         340.2
Provision for credit losses
          (14.8)
          (14.2)
Total other gains (losses)
             6.7
          (27.3)
Total net revenue
         341.7
         298.7
Total operating expenses
         (262.6)
         (274.8)
Total net income before taxes
           79.1
       23.9
Income tax expense
            (0.9)
            (5.9)
Net income from continuing operations
           78.2
          18.0
Net income from discontinued operations
                 -
             7.6
Net income
           78.2
           25.6
Dividends and guarantee fee of preference shares
          (17.0)
          (18.0)
Premium paid on preference shares buy-back
            (2.8)
            (1.0)
Net earnings attributable to common shareholders
           58.4
             6.6
 
 
 
Net earnings per share
 
 
- Basic
           0.11
0.01
- Diluted
           0.11
0.01
 
 
 
Adjusted weighted average number of participating shares on a fully diluted basis (1) (thousands)
     553,571
     556,357
Key Financial Ratios
 
 
Core return on average assets
0.9%
0.6%
Core cash return on average tangible common equity
10.3%
6.6%
Net interest margin (2)
2.64%
2.66%
Core efficiency ratio
71.6%
78.4%
 
(1)        Includes both common and contingent value convertible preferred equity.
(2)        During the second quarter of 2013, the Bank enhanced its net interest margin calculation by changing its balance sheet averages from monthly to daily averages. Prior periods have been restated for this change in methodology.

 
 
 
Balance Sheet as at 31 December
 
(in $ millions)
2013
   
2012
 
Cash and cash equivalents
      1,730.5
      1,542.5
 
Investments and short-term investments
      2,668.6
      2,957.9
 
Loans, net of allowance for credit losses
      4,088.2
      3,956.0
 
Premises, equipment and computer software
         240.6
         243.3
 
Other assets
142.9
         133.3
 
Total assets
      8,870.8
      8,833.0
 
Total deposits
      7,638.0
      7,393.2
 
Subordinated capital
         207.0
         260.0
 
Other liabilities
         223.2
         322.6
 
Total Liabilities
      8,068.2
      7,975.8
 
Liquidation preference of preference shares
         183.6
         195.6
 
Common equity
         619.0
         661.6
 
Shareholders' equity
         802.6
         857.2
 
 
 
 
Key Balance Sheet Ratios:
 
 
Tangible book value per share
1.09
1.16
Tier 1 capital ratio
19.6%
18.5%
Total capital ratio
23.7%
24.2%
Tangible common equity ratio
6.8%
7.3%
Tangible total equity ratio
           8.9%
9.5%
Non-accrual loans/gross loans
2.5%
2.8%
Non-performing assets/total assets
1.2%
1.4%

 
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.
Income Statement
Year ended 31 December
(in $ millions)
2013
2012
Net income
78.2
25.6
 
 
 
Non-core items:
 
 
Impairment of fixed assets
                 -
            14.5
 
Impairment of goodwill and intangible assets
            -
18.6
Net gain on sale of affiliate
          (0.4)
(4.2)
Additional consideration from previously disposed of entities
(0.8)
-
Write down of investment in affiliate
3.8
-
Realised gain on legal settlement
(13.1)
-
Early retirement programme and redundancies
             8.9
             2.2
Deferred tax valuation allowance and tax adjustments
                 -
           5.0
Onerous leases
                 -
0.8
Net income from discontinued operations
                 -
(7.6)
Total non-core items
            (1.6)
           29.3
Core earnings
           76.6
           54.9
Preference dividend and guarantee fee
          (17.0)
          (18.0)
Amortisation of intangible assets
             3.4
             5.0
Core cash earnings to common (1)
           63.0
           41.9
Core cash earnings per share fully diluted
           0.11
           0.08
(1)      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 2013 COMPARED WITH THE YEAR ENDED 31 DECEMBER 2012
Net Income
Core earnings for the year ended 31 December 2013 were $76.6 million, up $21.7 million from $54.9 million in 2012, an improvement of 39.5%. After adjusting for non-core items outside the course of normal business of ($1.6 million) in 2013 and $29.3 million in 2012, total net income for 2013 was $78.2 million, an increase of $52.6 million compared to 2012 net income of $25.6 million.
 
Total net revenue before credit provisions and net other gains was $349.8 million for the year, up $9.6 million from $340.2 million in 2012.  The $9.6 million improvement reflects a $12.1 million increase in net interest income driven principally by improved investment portfolio profitability.  Non-interest income declined slightly by $2.5 million, due primarily to lower asset management fees.
 
Provisions for credit losses were $14.8 million in 2013, an increase of $0.6 million from 2012.
 
Total other gains of $6.7 million for 2013 are up $34.0 million from a loss of $27.3 million in 2012. 
 
Total operating expenses improved to $262.6 million, a decrease of $12.2 million from $274.8 million in 2012. Included in 2013 and 2012 figures are non-core expenses of $8.9 million and $3.0 million, respectively.  After adjusting for these non-core items, core expenses were down $18.1 million. The improvement was driven mainly by salary and compensation-related decreases, and other cost-saving initiatives.
 
Income taxes declined by $5.0 million, reflecting the deferred tax valuation allowance recorded in 2012.
 
Net Interest Income
Net interest income increased by $12.1 million to $223.8 million in 2013, compared to $211.7 million at the end of 2012. 
·         Total interest income increased by $8.4 million to $253.2 million, a result of $11.8 million higher revenues on investments, due to a 29 basis point increase in investment yields and higher balances. This was partially offset by lower loan interest income of $3.7 million as higher yielding loans were replaced with new business volumes at lower yields.
·         Total interest expense declined by $3.7 million, primarily from lower subordinated debt interest expense as a result of the redemption of the 2008 issuance - Series A, $53 million, 7.59% subordinated debt, effective 27 May 2013.
·         Average interest-earning assets were $8.5 billion and yielded 2.99% in 2013, up $0.5 billion year-on-year, driven primarily by an increase in customer deposits, which were used to fund additional securities and loans.
 
Non-Interest Income
Total non-interest income declined slightly from $128.5 million in 2012 to $126.0 million. The decrease is attributed to:
·         Asset management revenue decreased from $22.3 million in 2012 to $18.1 million in 2013 due primarily to falling USD LIBOR, which impacted fees earned on the Butterfield Money Market Fund (“BMMF”);
·         Banking services revenue was down $1.2 million from $33.7 million a year ago, due primarily to loan prepayment penalty fees received in 2012;
·         Partially offsetting those decreases, foreign exchange revenue grew by $2.8 million or 10.5% from $26.5 million to $29.3 million in 2013, due mainly to increased foreign exchange volumes;
·         Trust revenue of $30.4 million for 2013 was up $1.3 million compared to 2012, due to the timing of income recognition combined with new business and growth in time-spent fees.
 
Provision for Credit Losses
The Bank’s net provision for credit losses in 2013 was $14.8 million compared to $14.2 million in 2012.  Incremental provisions of $20.6 million were required principally for specific reserves pertaining to commercial and residential mortgages, partially offset by recoveries of $5.8 million.  This compares to 2012 when the Bank required incremental provisions relating to specific reserves of $20.8 million that were partially offset by a general provision release and recoveries.
 
 
Other Gains (Losses)
Other gains of $6.7 million in 2013 are up $34.0 million from a reported loss of $27.3 million in 2012. 
·         The $34.0 million increase is largely the result of 2012 write downs of intangibles, goodwill, and fixed assets; all of which contributed significantly to the 2012 losses of $27.3 million.
·         The $6.7 million net gain in 2013 is due primarily to one-off gains totalling $15.5 million and was partially offset by valuation allowances required on foreclosed properties of $5.0 million and a write down of $3.8 million on an investment in affiliate.
 
Non-Interest Expense
Total non-interest expenses improved by $12.2 million or 4.4% from $274.8 million in 2012 to $262.6 million in 2013, due primarily to:
·         Total salaries and benefits costs were $131.1 million in 2013, down $6.4 million compared to 2012. 2013 included $8.5 million of early retirement, redundancy, and other staff-related non-core costs, compared to $2.2 million of non-core personnel costs in 2012. Excluding these non-core costs, core salaries and benefits costs were down $12.7 million or 9.4%, driven by staff reductions on a full-time equivalency basis of 98 year-on-year. Staff count on a full-time equivalency basis, at year-end 2013 was 1,133 (excluding students), compared to 1,231 a year ago;
·         Technology and communications expenses decreased by $3.5 million to $54.2 million from expense control measures and IT infrastructure rationalisation initiatives;
·         Property costs declined by $1.8 million from $26.1 million in 2012 to $24.3 million in the 2013, due primarily to lower depreciation expense resulting from the 2012 write down of certain properties;
·         Professional and outside services costs at $15.0 million were $0.4 million lower than the prior year, due primarily to cost control initiatives;
·         Amortisation of intangible assets decreased by $1.7 million, due primarily to the write down of intangible assets in the prior year;
·         Other non-interest expenses increased by $1.5 million, driven mainly by operational losses experienced in 2013.
 
BALANCE SHEET COMMENTARY AT 31 DECEMBER 2013 COMPARED WITH 31 DECEMBER 2012
Total Assets
Total assets of the Bank were $8.9 billion at 31 December 2013, up $38 million from 2012. The Bank maintained a highly liquid position at 31 December 2013 with $4.4 billion of cash and cash equivalents plus short and long-term investments representing 49.6% of total assets, consistent with 50.9% in 2012.  During 2013, Butterfield made certain portfolio transfers among the jurisdictions to enhance balance sheet management with particular respect to optimising liquidity. 
 
Loans Receivable
The loan portfolio totalled $4.1 billion at the end of 2013, up $132.3 million from year-end 2012.  Commercial loans grew by $84.9 million as result of loan growth during 2013. Commercial mortgages and consumer loans were relatively flat from 31 December 2012, whilst the residential mortgage book increased by $52.1 million, primarily in our European operations.
 
Allowance for credit losses at 31 December 2013 totalled $52.8 million, a decrease of $3.2 million from the prior year. The movement in the allowance was mainly the result of additional provisions of $20.6 million taken year to date (before recoveries of $5.8 million) net of $23.9 million in charge-offs and foreign exchange movements.
 
The loan portfolio represented 46% of total assets at 31 December 2013 (31 December 2012: 45%), whilst loans as a percentage of customer deposits remained stable at year end 2013 at 54%.
 
As at 31 December 2013, the Bank had gross non-accrual loans of $104.1 million representing 2.5% of total gross loans, reflecting an improvement from the $113.4 million, or 2.8%, of total loans at year-end 2012. Net non-accrual loans, were $82 million, equivalent to 2.0% of net loans, after specific provisions of $22.1 million, resulting in a decreased specific provision coverage ratio of 21.2%, compared to 23.6% at 31 December 2012. The decrease in the coverage ratios reflects the changing mix of non-accruals, which are more heavily weighted towards highly collateralised residential mortgages.
 
Non-performing loans, which include non-accrual loans and accruing loans past due by 90 days or more, totalled $116.6 million as at 31 December 2013, down $25.1 million from year-end 2012.  The decrease was primarily the result of $15.4 million of charge offs on commercial mortgages not considered recoverable and repayment of residential mortgages, resulting in a net decrease of $9.6 million in non-performing residential mortgages.
 
Investments
The investment portfolio was $2.6 billion as at 31 December 2013, compared to $2.9 billion as at 31 December 2012.  A net decrease in certificates of deposit of $0.5 billion was partially reinvested ($0.3 billion) in US government and federal agency securities that totalled $1.7 billion, or 66% of the total investment portfolio. The investment book was made up of high quality assets with 99% invested in A-or-better-rated securities. The investment yield improved year on year by 29 basis points to 2.29% in 2013. Total net unrealised losses of the investment portfolio were $57.5 million, compared to an unrealised gain of $48.8 million at year-end 2012. The movement in unrealised losses for the year to date related to the impact of changes in interest rates on the longer duration assets and is not credit related.
 
Deposits
Average customer deposits increased by $251 million to $7.5 billion in 2013. Similarly, on a year-end basis, customer deposits were up $331 million to $7.6 billion from $7.3 billion at year-end 2012.
 
REVIEW OF RESULTS OF MAJOR OPERATIONS
Bermuda
Net income before gains and losses was $33.8 million at 31 December 2013, up $8.7 million from $25.1 million in the prior year, despite a $3.8 million drop in revenue, due principally to cost management initiatives and higher income from our investment portfolio.  Net gains of $7.0 million during the year were favourable by $19.9 million compared to net losses of $13.0 million in 2012, primarily due to one-off gains and reduced valuation allowances required on foreclosed properties.  Net income after gains and losses was $40.8 million, an increase of $28.7 million from $12.1 million in the prior year.
 
Net interest income before provisions for credit losses increased by $6.1 million to $136.9 million in 2013 due to an increase of $11.2 million in investment income and $3.3 million in lower subordinated debt expense.  This was partially offset by reduced loan revenue of $8.4 million as a result of prepayments and soft loan demand, which drove a decline in the loan portfolio.
 
Provisions for credit losses were $12.7 million, up $6.3 million from the prior year, largely due to increased impairment of non-performing hospitality loans and residential mortgages.
 
Non-interest income of $62.0 million at 31 December 2013 was down $3.6 million, or 5.5%, reflecting lower revenues of $6.0 million from banking, asset management and custody fees, which were partially offset by increased foreign exchange revenues of $2.2 million.
 
Non-interest expenses declined by $12.5 million to $152.3 million in 2013 due to reduced headcount, a reduction in senior management compensation, savings from technology, and other expense management initiatives.
 
Total assets as at 31 December 2013 were $4.6 billion, consistent with year-end 2012.  Customer deposits ended the year at $3.6 billion, up $0.3 billion from year-end 2012, and loan balances ended the year at $2.1 billion, a decrease of $0.1 billion from year-end 2012.
 
Client assets under administration for the trust and custody businesses were $35.6 billion and $31.2 billion, respectively, whilst assets under management decreased by $0.3 billion to $2.8 billion from year-end 2012.
 
Cayman Islands
Net income before gains and losses at 31 December 2013 was $25.9 million, up $6.5 million from the prior year. The increase was due primarily to an improvement in loan and investment income, banking fees, foreign exchange and trust revenues, coupled with a reduction in salaries and technology expenses. Net income for the year was $25.4 million, an increase of $1.5 million from the prior year. 
 
Net interest income before loan loss provisions was $52.0 million in 2013, an improvement of $7.4 million compared to 2012.  The increase was driven primarily by an improvement in loan income of $3.8 million as loans increased by $246 million. Investment income was up $3.3 million resulting from an average $148 million increase in available-for-sale securities, but partially offset by a reduction of $86 million in floating rate notes. Deposit liability costs were $0.5 million lower following the maturity of the step-up deposit product in 2012.
 
Provisions for credit losses were $3.6 million compared to $1.3 million in the prior year. The increase of $2.3 million resulted primarily from a general provision increase relating to the increase in loans and specific provisions on certain residential mortgages and commercial loans.
 
Non-interest income was $32.2 million, up $1.2 million from the prior year. The increase was due primarily to higher banking fees driven by net card revenues, foreign exchange revenues, and trust income, partially offset by lower asset management revenues.
 
Non-interest expenses decreased $0.2 million, year over year, to $54.7 million (including $1.1 million in early retirement and severance costs). Improvements were noted in salaries that declined by $0.5 million due to lower headcount, technology costs, which declined by $0.8 million due to lower outsourcing costs, and marketing costs that were lower by $0.1 million.  These reductions were largely offset by increased government license and work permit fees of $0.7 million and increased loan administration fees of $0.5 million.
 
Total assets at 31 December 2013 were $2.3 billion, up $0.2 billion from year-end 2012, reflecting higher client deposit levels. Net loans increased by $0.3 billion from year-end 2012 to end at $1.0 billion. The available-for-sale investments, at $0.5 billion at the end of fiscal 2013, were down $0.1 billion, year over year.
 
Client assets under administration for the trust and custody businesses were $1.6 billion and $1.3 billion, respectively, whilst assets under management were $0.7 billion at year end.
 
Guernsey
Guernsey posted net income before gains and losses of $7.4 million in 2013, compared to $9.8 million in 2012, a decrease of $2.4 million, due primarily to higher interest and non-interest expenses.
 
Net interest income before provisions for credit losses declined by $1.8 million to $19.8 million in 2013, compared to $21.6 million last year, attributable to lower yields on our investment portfolio and higher interest expense.  This was partially offset by higher loan interest income from an increase in average loan balances.  Interest expense increased by $1.2 million as a greater proportion of customer deposits moved towards higher rate, longer-term notice accounts.
 
Provisions for credit losses were $0.1 million compared to $1.0 million in 2012. 
 
Non-interest income decreased $0.3 million to $19.7 million due to adverse exchange rate fluctuations. Underlying the foreign exchange fluctuations, improvements in foreign exchange activities and higher banking services revenues were offset by lower asset management and banking services income. 
 
Total expenses at $31.9 million were $1.1 million higher than 2012 due to increases in technology, property and other expenses.
 
Total assets at 31 December 2013 of $1.4 billion were lower than year-end 2012, driven by lower customer deposit balances that reduced investment balances.
 
Client assets under administration for the trust business were $10.1 billion in 2013, up slightly from $9.9 billion in 2012.  Similarly, assets under administration for the custody and administered banking businesses were $9.7 billion, up $0.7 (7.8%) over 2012. Client assets under management were lower than the prior year at $0.4 billion from loss of client mandates.
 
United Kingdom
The United Kingdom recorded net income of $4.2 million in 2013, up $28.8 million as compared to a loss of $24.6 million in 2012. The improvement is driven largely by 2012 events that included $16.6 million of goodwill and intangible write downs and a $5.0 million one-time tax adjustment. After excluding these 2012 items and adjusting 2013 net income for $1.1 million of non-core redundancy costs, core earnings were $5.3 million in 2013 compared to a 2012 loss of $3.0 million, an improvement of $8.3 million.
 
Net interest income before credit provisions of $14.9 million was up $0.7 million from $14.2 million at year-end 2012. The increase was due to a revised pricing strategy on customer deposit products, more reflective of the UK market, and higher levels of interest income collected on past due loans.
 
Provisions for loan losses improved by $7.0 million as 2013 recorded a net recovery of $1.5 million following recoveries from two previously written off facilities. This compares to loan losses of $5.5 million in 2012, relating to legacy commercial loan facilities.
 
Total assets at $0.8 billion at year-end were down $0.1 billion from year-end 2012 total assets of $0.9 billion. Loan balances were $0.5 billion in 2013, stable with from year-end 2012.  Customer deposit balances at year-end 2012 of $0.7 billion fell by $0.1 billion to $0.6 billion, largely due to a strategy adopted to focus on high net worth private clients and exit non-core clients.
 
Assets under management of $0.3 billion were up $0.1 billion from $0.2 billion at year-end 2012. Custody client assets under administration at the end of 2013 amounted to $1.5 billion.