Butterfield Reports First Quarter Profit
- Q1 2014 net income of $23.2 million, up $9.9 million or 74.3% over Q1 2013.
- Core earnings of $23.2 million, up $7.9 million or 51.6%.
- Core cash return on tangible common equity improves to 12.9%
- Core cash earnings per share of $0.04, up from $0.02 in 2013
- Board declares interim dividend of $0.01 per common share
- Strong capital position maintained with a total capital ratio of 23.1%
Hamilton, Bermuda─28 April 2014: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced net income for the first quarter of $23.2 million ($0.03 per share on a fully diluted basis) compared to $13.3 million ($0.02 per share on a fully diluted basis) in 2013. Core earnings for the first quarter were $23.2 million, an improvement of $7.9 million or 51.6% over the first quarter 2013. The core cash return on average tangible common equity ratio improved to 12.9% in the first quarter of 2014 compared to 7.5% in the first quarter of 2013.
During the first quarter, the Bank announced that it had reached an agreement in principle to expand its trust and fiduciary services presence in Guernsey—one of Butterfield’s core markets—through the acquisition of Legis Group’s trust and fiduciary services business. The transaction, which closed on 1 April, will enhance Butterfield’s market presence.
Brendan McDonagh, Butterfield’s Chairman and Chief Executive Officer said, “We are pleased to report another strong quarter of double-digit core returns to common shareholders at 12.9%. Our strategy of managing our balance sheet, investing in our core businesses, and our focus on business development and cost efficiency resulted in year-on-year core earnings growth of $7.9 million or 51.6%.
“Capital management is a key pillar of Butterfield’s strategy to maximise shareholder value. Butterfield has continued to build organic capital over and above already very high capital ratios. We deploy excess capital to enhance shareholder returns and liquidity, through the payment of dividends and share buy-backs, and to acquisitions that will strengthen our business in our core markets. The acquisition of Legis Group’s trust and fiduciary services business in Guernsey is an example of the latter.
“During the first quarter, the Bank retired $90 million in subordinated capital, repurchased $3.5 million of common and preference shares, and paid $11.0 million in common dividends to shareholders. These capital actions, combined with core earnings growth, resulted in a doubling of the core cash earnings per common share to $0.04 for the first quarter of 2014 from $0.02 for the same quarter last year.”
Financial highlights of the quarter ended 31 March 2014 (with comparisons to the first quarter 2013):
- Net income of $23.2 million, up $9.9 million or 74.3% from $13.3 million
- Core earnings of $23.2 million, up $7.9 million or 51.6%
- Core cash return on average tangible common equity of 12.9%, up from 7.5%
- Core cash return on average assets of 1.0%, up from 0.7%
- Core efficiency ratio of 69.5%, improved from 75.2%
John Maragliano, Butterfield’s Chief Financial Officer said, “Both net income and core earnings are showing meaningful year-over-year improvement due to a combination of increased business volumes, cost containment and the continued focus on prudent asset and liability management strategies that targets a stable net interest margin throughout the interest rate cycle. These activities are driving revenue growth and creating a more stable and efficient expense base that when combined with steady provisions for loan losses, are resulting in significant improvement in the bank’s performance ratios. The core efficiency ratio improved to 69.5%, down 570 basis points from the first quarter of 2013. Our balance sheet grew $140 million off the back of deposit growth from targeted business segments but loan demand is lagging and volumes declined to $4.0 billion from $4.1 billion last quarter.
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 and a cancellation 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. Under the Bank’s share buy-back programmes, the total shares acquired or purchased for cancellation during the quarter ended 31 March 2014 amounted to 1.8 million common shares to be held as treasury shares at an average cost of $1.96 per share (total cost of $3.5 million). Preference share buybacks were immaterial.
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 June 2014 to preference shareholders of record on 1 June 2014.
The Board also declared an interim dividend of $0.01 per common and contingent value convertible preference share to be paid on 30 May 2014 to shareholders of record on 16 May 2014.
During the first quarter, the Bank called a $90 million tranche of subordinated debt lowering the outstanding subordinated debt balance by 43% from $207 million to $117 million.
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.
COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 31 MARCH 2014 COMPARED WITH THE QUARTER ENDED 31 MARCH 2013
Core earnings for the quarter ended 31 March 2014 were $23.2 million, up $7.9 million from 2013, an improvement of 51.6%. Total net income for the first quarter of 2014 was $23.2 million; an increase of $9.9 million compared to first quarter 2013 net income of $13.3 million. The increase in net income was driven largely by an $8.0 million increase in net revenues before provisions for credit losses and other gains from $82.0 million in the first quarter of 2013 to $90.0 million in the first quarter of 2014.
The $8.0 million improvement reflects a $6.3 million increase in net interest income driven principally by higher yields earned on the investment portfolio ($3.2 million), lower subordinated debt costs ($1.7 million), and higher levels of interest income on loans ($1.7 million). Non-interest income also improved by $1.7 million due primarily to higher banking fees of $1.1 million and increased foreign exchange volumes that increased fees by $0.5 million.
Provisions for credit losses were $3.5 million, an improvement of $1.1 million from 2013.
Total other gains of $1.2 million are up $0.6 million from a gain of $0.6 million during 2013.
Total operating expenses improved to $64.4 million, a decrease of $0.2 million from $64.6 million in 2013.
Net Interest Income
Net interest income before provision for credit losses increased by $6.3 million to $58.4 million in the first quarter of 2014, compared to $52.1 million during the first quarter of 2013.
- Total interest income increased by $4.9 million to $65.0 million, a result of $3.2 million higher investment revenues due to a 51 basis point increase in yields. Additionally, loan interest income improved by $1.7 million attributable largely to an increase in average balances of $142 million, whilst yields remained stable;
- Total interest expense declined by $1.4 million primarily from $1.7 million of lower subordinated debt interest expense as a result of the redemption of both the 2008 issuance - Series A, $53 million, 7.59% subordinated debt, effective 27 May 2013 and the 2005 issuance – Series A, $90 million, 4.81% subordinated debt, effective 2 January 2014. Partially offsetting the decrease was an increase in interest expense owing entirely to increased customer balances as the cost of funds remained flat year over year;
- Average interest-earning assets were $8.5 billion, up $0.1 billion compared to the first quarter of 2013 driven primarily by an increase in customer deposits that were used to fund increased lending activities and the repayment of subordinated debt. The yield on average interest-earning assets was 3.09% in the first quarter of 2014, compared to 2.89% in the first quarter of 2013.
Non-interest income improved from $29.9 million in the first quarter of 2013 to $31.6 million in the first quarter of 2014. The $1.7 million (5.7%) improvement is attributed to:
- Banking services revenue improved by $1.1 million or 14.6% from $7.2 million to $8.3 million over last year due to higher credit card activity as a result of increased volumes from the merchant business and higher levels of customer purchases;
- Foreign exchange revenue grew by $0.5 million or 7.7% from $7.1 million to $7.6 million in the first quarter of 2014, due mainly to an increase in customer-driven foreign exchange activity.
Provision for Credit Losses
The Bank’s net provision for credit losses was $3.5 million in the quarter, improving $1.1 million compared to the $4.6 million recorded in the same period last year. By comparison, the current quarter has lower provisions on larger commercial mortgages but is offset by an increase in provisions on residential mortgages.
Other Gains (Losses)
Other gains of $1.2 million during the first quarter in 2014 were up $0.6 million due principally to a $1.1 million unrealised gain recognised in the first quarter 2014 on a private equity investment.
Total non-interest expenses improved by $0.2 million from $64.6 million to $64.4 million in the first quarter of 2014 due primarily to:
- Total salaries and benefits costs were $30.8 million during the first quarter 2014, down $2.5 million compared to first quarter 2013 as a result of lower early retirement and redundancy costs combined with lower staffing levels. Staff count on a full-time equivalency basis, at quarter-end was 1,120 (excluding students), compared to 1,174 a year ago;
- Technology costs increased by $0.5 million, driven by $0.8 million higher depreciation expenses from IT investments made in our European operations during 2013, offset by technology savings of $0.3 million; and
- Professional services expenses increased by $1.1 million due to costs associated with the Legis acquisition and special projects.
BALANCE SHEET COMMENTARY AT 31 MARCH 2014 COMPARED WITH 31 DECEMBER 2013
Total assets of the Bank were $9.0 billion at 31 March 2014, up $0.1 billion from 31 December 2013. The Bank maintained a highly liquid position at 31 March 2014 with $4.6 billion of cash and cash equivalents plus short and long-term investments representing 51.4% of total assets, an improvement from 49.6% at 31 December in 2013.
The loan portfolio totalled $4.0 billion at the end of the quarter, down $0.1 billion from year-end 2013. The decline was driven by significant prepayment of commercial loans and weak residential mortgage demand across the jurisdictions combined with paydowns on the existing portfolio.
Allowance for credit losses at 31 March 2014 totalled $52.7 million, a decrease of $0.1 million from the prior year. The movement in the allowance was mainly the result of additional provisions of $4.0 million (before recoveries of $0.6 million) taken during the quarter, net of $4.1 million in charge-offs and foreign exchange movements.
The loan portfolio represented 44% of total assets at 31 March 2014 (31 December 2013: 46%), the decline attributable to the lower loan balances and higher total deposits. Similarly, loans as a percentage of customer deposits was lower at 52%, compared to 54% at year-end 2013.
As at 31 March 2014, the Bank had gross non-accrual loans of $90.4 million representing 2.2% 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 to proceeds from the first quarter 2014 sale of a hospitality loan that was in receivership.
Net non-accrual loans, were $67.5 million, equivalent to 1.7% of net loans, after specific provisions of $22.9 million. This compares favorably to the year-end 2013 figures where net non-accrual loans were $82.0 million. The specific provision coverage ratio of 25.3% improved from 21.2% at 31 December 2013.
Non-performing loans, which include non-accrual loans and accruing loans past due by 90 days or more, totalled $108.6 million as at 31 March 2014, down $8.1 million from year-end 2013. The decrease is driven by the proceeds from the sale of the hospitality loan partially offset by an increase in non-performing residential mortgages.
The investment portfolio was $2.8 billion as at 31 March 2014, compared to $2.6 billion at year-end 2013. The increased investment was placed in shorter-duration certificates of deposit and liquid US government agency securities. The investment book was made up of high quality assets with 97% invested in securities rated A or higher. Total net unrealised losses on the portfolio improved by $25.9 million from a loss position of $57.5 million at year-end 2013 to $31.6 million at 31 March 2014. The improvement relates to a decrease in longer-term interest rates.
Customer deposits increased $0.2 billion to $7.8 billion from $7.6 billion at year-end 2013.
REVIEW OF RESULTS OF MAJOR OPERATIONS
Net income before gains and losses was $11.4 million at 31 March 2014, up $6.8 million from $4.6 million in the first quarter of 2013, due principally to cost management initiatives and higher non-interest and investment income. Net gains improved from $0.5 million in the first quarter of 2013 to $1.2 million in the first quarter of 2014. Net income after gains and losses was $12.7 million, an increase of $7.6 million from $5.1 million in the first quarter of 2013.
Net interest income before provisions for credit losses increased by $3.3 million to $35.5 million in the first quarter of 2014 due to higher investment income and lower subordinated debt expense.
Provisions for credit losses were $3.7 million, down from $4.3 million in the first quarter of 2013.
Non-interest income of $15.1 million in the first quarter of 2014 was up $0.8 million, or 5.6%, reflecting higher banking and foreign exchange revenues, offset by lower asset management fees.
Non-interest expenses declined by $1.9 million to $35.5 million in the first quarter of 2014 due to lower staffing levels, savings from more efficient use of technology, and other expense management initiatives.
Total assets as at 31 March 2014 were $4.7 billion, up $0.1 billion from year-end 2013. Customer deposits ended the year at $3.7 billion, up $0.1 billion from year-end 2013, and loan balances ended the year at $2.0 billion, a decrease of $0.1 billion from year-end 2013.
Client assets under administration for the trust and custody businesses were $35.2 billion and $31.4 billion, respectively, whilst assets under management were $2.8 billion. Each of the portfolios remained consistent to year-end levels.
Quarterly net income before gains and losses at 31 March 2014 was $9.0 million, up $3.8 million from the prior year. The increase was due primarily to an improvement in loan interest income, banking fees, asset management revenues and foreign exchange commissions. These revenue improvements were complemented by salary expense reductions associated with early retirement programmes initiated in 2013.
Net interest income before loan loss provisions was $14.1 million in the first quarter of 2014, an improvement of $2.1 million compared to the first quarter of 2013. The increase was driven primarily by an improvement in loan income of $2.1 million as loan balances increased $217 million from the first quarter of 2013. Investment income declined $0.1 million on lower LIBOR rates that were partially offset by lower deposit liability costs of $0.1 million.
We released $0.3 million of credit loss provisions in the first quarter of 2014 compared to $0.2 million of provisions taken in the first quarter of 2013. The release reflected the $21 million decline in loans since 31 December 2013 driven by early commercial loan repayments in the current quarter.
Non-interest income was $8.3 million, up $0.4 million from the first quarter of 2013. The increase was due primarily to higher banking fees driven by wire transfer and paper statement fees, asset management revenues, and foreign exchange revenues partially offset by lower trust income.
Non-interest expenses decreased $0.9 million year over year to $13.5 million, driven primarily by improvements in salary and employee benefit costs of $1.2 million, due to lower headcount following early retirement and redundancy costs of $1.0 million recorded in the first quarter 2013. Partially offsetting the personnel expense variance were increases for technology depreciation and software maintenance costs driven by technology projects in 2013. Marketing investment was also up quarter to quarter.
Total assets at 31 March 2014 were $2.3 billion, consistent with year-end 2013 levels. Loans decreased by $21 million from year-end 2013 to $1.0 billion.
Client assets under administration for the trust and custody businesses were $1.7 billion and $1.4 billion, respectively, whilst assets under management were $0.6 billion at year end. Each portfolio remained stable from year-end levels.
Guernsey posted net income before gains and losses of $1.0 million in the first quarter of 2014, compared to $2.2 million in 2013, a decrease of $1.2 million, due primarily to higher non-interest expenses.
Net interest income before provision for credit losses increased by $0.1 million to $5.0 million in the first quarter of 2014, compared to $4.9 million last year attributable to favourable exchange rate fluctuations. Underlying the foreign exchange fluctuations, higher yields on our investment portfolio were offset by higher interest expense and lower inter-bank yields. Interest expense increased by $0.3 million as a greater proportion of customer deposits moved towards higher rate, longer-term notice accounts.
Provisions for credit losses were nil compared to $0.1 million in 2013.
Non-interest income increased $0.3 million to $5.1 million due to favourable 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 administered banking services income.
Total expenses at $9.1 million were $1.5 million higher than 2013 due to increases in salary, technology and property expenses.
Total assets at 31 March 2013 of $1.5 billion were up slightly from $1.4 billion at year-end 2013 driven by higher customer deposit balances.
Client assets under administration for the trust business were $10.3 billion at the end of the first quarter of 2014, up slightly from $10.1 billion at year-end 2013. Assets under administration for the custody and administered banking businesses were $9.3 billion, down $0.4 billion from year-end 2013. Client assets under management were unchanged at $0.4 billion.
The United Kingdom recorded net income of $0.5 million in the first quarter of 2014, down $0.3 million as compared to $0.8 million in the first quarter of 2013.
Total revenue before gains and losses of $5.8 million showed an improvement of $1.1 million.
Net interest income before credit provisions of $3.8 million was up $0.7 million from $3.1 million in the first quarter of 2013 following the revised pricing strategy on customer deposit products to reflect UK market rates implemented in the second quarter of 2013.
The net provision impact in the first quarter of 2014 was nil with a provision for a specific loan loss of $0.2 million netting against the release from the general provision due to the decrease in the lending book. There were no provisions for loan losses in the first quarter of 2013.
Operating expenses at $5.2 million in the first quarter of 2014 were $1.2 million greater than the first quarter of 2013. Following the banking system upgrade during 2013, the system cost is now being depreciated over its useful life.
Total assets at $0.8 billion at end the first quarter of 2014 were in line with year-end 2013 total assets. Loan balances were $0.5 billion at the end of the first quarter 2014, stable compared with year-end 2013. Customer deposit balances at end of the first quarter 2014 of $0.6 billion were also unchanged from year-end 2013 position.
Assets under management of $0.3 billion were unchanged from year-end 2013. Custody client assets under administration at the end of the first quarter 2014 amounted to $1.7 billion, up from $1.5 billion at year-end.