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Butterfield Reports Third Quarter Profit

  • Third quarter core earnings of $27.1 million, up $2.6 million or 10.6%
  • Core cash return on tangible common equity improves to 15.4%, up from 14.3%
  • Core cash earnings per share of $0.04
  • Board declares interim dividend of $0.01 per common share
  • Strong capital position maintained with a total capital ratio of 23.2%


Hamilton, Bermuda─28 October 2014: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced net income for the third quarter ended 30 September 2014 of $22.8 million ($0.03 per share on a fully diluted basis) compared to $21.6 million ($0.03 per share on a fully diluted basis) in the same quarter a year ago. Core earnings(1) for the third quarter were $27.1 million, an improvement of $2.6 million or 10.6% over the third quarter of 2013, which drove an improvement in the core cash return on average tangible common equity ratio to 15.4%, compared to 14.3% in the third quarter of 2013. Core earnings for the third quarter of 2014 included certain one-time items totalling $2.6 million, which are not expected to recur.

Year-to-date core earnings for the nine months ended 30 September 2014 were $76.2 million ($0.11 per share on a fully diluted basis), up $16.2 million (27.0%) from $60.0 million for the nine-month period ended 30 September 2013. Year-to-date net income for the nine months ended 30 September 2014 increased by $5.7 million to $73.5 million, compared to a year-to-date net income of $67.8 million for the nine-month period ended 30 September 2013.

Brendan McDonagh, Butterfield’s Chairman and Chief Executive Officer, said, “Our quarterly and year-to-date results demonstrate the efficacy of our approach to creating sustainable value in the Butterfield franchise. That approach involves ongoing diligence in the management of costs and the deployment of capital to low-risk acquisitions in businesses and jurisdictions where we have a meaningful market presence and demonstrated expertise.

“The impact of our second quarter acquisition of the Legis Group’s trust and fiduciary services business in Guernsey on our core results serves as a solid proof of concept; that business having an accretive impact to core cash earnings per share of nearly 5% .

“Similarly, our acquisition of parts of HSBC’s retail and corporate banking business in the Cayman Islands, which will be completed in the fourth quarter, will enhance our deposit base, providing us with expanded lending and investment opportunities to drive revenue growth, without a marked increase in associated operating costs.

“The impact of these kinds of acquisitions, along with the gradual strengthening of quality in our commercial loan book, is providing incremental improvements in quarterly core earnings, even against a backdrop of low economic growth and low interest rates in our major markets. With each subsequent quarter of growth, our capital position is further strengthened, providing us with the means to continue to enhance shareholder returns through dividend payments and share buy-backs. We are pleased to report that the core cash return on tangible common equity in the third quarter improved to 15.4%.”

See table below for reconciliation of US GAAP results to core earnings.

Financial highlights for the quarter ended 30 September 2014 (with comparisons to the third quarter of 2013):

  • Core earnings of $27.1 million, up $2.6 million or 10.6%
  • Core cash return on average tangible common equity of 15.4%, up from 14.3%
  • Core return on average assets of 1.2%, up from 1.1%
  • Core efficiency ratio of 67.3%, improved from 67.8%
  • Net interest margin of 2.78%, improved from 2.72%
  • Non-accrual loans of $70.1 million improved by 32.6%


John Maragliano, Butterfield’s Chief Financial Officer, said, “The Bank’s core earnings for the quarter and the year to date showed solid growth driven by revenue growth and ongoing cost management. Non-interest income improved by $2.5 million on higher Trust revenue, attributed largely to the Legis business coming on stream. The Bank continues to exercise diligence in managing our operating expenses. Although core operating expenses increased by $2.9 million, a substantial portion of this increase is associated with absorbing the Legis business and personnel in Guernsey. Measured against revenues that increased by 6%, our core efficiency ratio improved to 67.3% in the third quarter including the net cash contribution of $0.8 million from Legis.

“The balance sheet continues to strengthen each quarter as the quality of the loan portfolio stabilises. Non-performing loans were down $23 million year to date owing to the sales of Bermuda hotel properties that had been in receivership since 2011 offset by modest deterioration in the residential mortgage book. On a year-to-date basis, non-accrual loans declined by 33% to $70.1 million representing 1.7% of total gross loans, compared to 2.5% at 31 December 2013. The Bank continues to work with customers who are facing economic difficulty.”


Capital Management

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 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 30 September 2014 amounted to 3.2 million common shares to be held as treasury shares at an average cost of $1.99 per share (total cost of $6.3 million) and 311 preference shares at an average cost of $1,171 per share (total cost of $0.4 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 15 December 2014 to preference shareholders of record on 1 December 2014.

The Board also declared an interim dividend of $0.01 per common and contingent value convertible preference share to be paid on 28 November 2014 to shareholders of record on 14 November 2014.


ANALYSIS AND DISCUSSION OF THIRD QUARTER RESULTS
Q3-2014_Image.jpg
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 and trends. The table below shows the reconciliation of net income in accordance with US GAAP to core earnings.
Q3-2014_Image_2.jpg

COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 30 SEPTEMBER 2014 COMPARED WITH THE QUARTER ENDED 30 SEPTEMBER 2013

Net Income

Core earnings for the quarter ended 30 September 2014 improved by 10.6%, up $2.6 million from 2013 to $27.1 million. Total net income for the third quarter, including net non-core items of $4.3 million (2013: $2.9 million) was $22.8 million compared to net income of $21.6 million in the third quarter of 2013.

The $2.6 million core earnings improvement reflects a $1.9 million increase in net interest income, of which $1.6 million is from recovered loan income from a former non-performing loan. Non-interest income increased by $2.5 million, which is attributable primarily to higher trust income from the Legis acquisition. Provision for credit losses were lower by $2.3 million as the prior-year quarter included large provisions on legacy commercial loan facilities. These increases were offset by a $1.3 million increase in core losses, driven by losses on trading investments and other real estate owned (“OREO”) properties, and a $2.9 million increase in core operating expenses.

Net Interest Income

Net interest income before provisions for credit losses increased by $1.9 million to $60.6 million in the third quarter of 2014, compared to $58.7 million during the third quarter of 2013.

  • Total interest income increased by $2.0 million to $67.3 million, due to a volume-driven increase in investment income of $0.9 million and a $1.2 million increase in loan interest income largely attributable to one-off default interest received on the repayment of a large loan facility during the third quarter.
  • Total interest expense remained flat at $6.7 million.
  • Average interest-earning assets were $8.7 billion, up $0.1 billion compared to the third quarter of 2013, driven primarily by an increase in customer deposits that were used to fund increased investment purchases and the repayment of subordinated debt. The yield on average interest-earning assets was unchanged at 3.0%, year over year. Balance sheet growth drove the overall increase in net interest income.


Non-Interest Income

Non-interest income improved from $31.0 million in the third quarter of 2013 to $33.5 million in the third quarter of 2014. The $2.5 million (8.1%) improvement is attributed to incremental trust revenues earned from the recently acquired Legis trust business and an increase in fees earned from new business growth.

Provision for Credit Losses

The Bank’s net provision for credit losses was $1.4 million in the quarter, improving $2.3 million compared to the $3.7 million recorded in the same period last year. By comparison, the current quarter requires fewer provisions particularly on larger commercial mortgages.

Other Gains (Losses)

Core losses of $1.0 million are up $1.3 million due to $0.9 million of increased losses on OREO properties and $0.3 million of increased losses on investments classified as trading.

Operating Expense

Core operating expenses increased by $2.9 million (4.6%) from $61.6 million in the third quarter of 2013 to $64.5 million in the third quarter of 2014, of which $1.7 million relates to the consolidation of Legis Trust.

Core net salaries and benefit costs were $30.9 million in the third quarter of 2014, up $1.0 million from increased staff costs resulting from the consolidation of Legis Trust as well as increased staff benefits offset by cost savings from reduced headcount and a one-time release $1.0 million of pension expense from the closure of a defined benefit pension plan. Headcount on a full-time equivalency basis at quarter-end was 1,136, compared to 1,142 a year ago.

Other notable core operating expense increases total $1.8 million due primarily to a $0.5 million increase in technology and communications expense from the investment in new banking systems in Europe, a $0.6 million increase in professional and outside services and a $0.3 million increase in amortisation of intangibles.

Non-core expenses decreased by $0.1 million in the third quarter of 2014 due primarily to the 2013 early retirement and redundancy programme offset by the 2014 costs associated with a stringent compliance review programme of customer data to ensure our files meet internationally recognised standards.


BALANCE SHEET COMMENTARY AT 30 SEPTEMBER 2014 COMPARED WITH 31 DECEMBER 2013

Total Assets

Total assets of the Bank were $9.0 billion at 30 September 2014, up $0.1 billion from 31 December 2013. The Bank maintained a highly liquid position at 30 September 2014 with $4.6 billion of cash and cash equivalents plus short and long-term investments representing 51.0% of total assets, an improvement from 49.6% at 31 December 2013.

Loans Receivable

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 weak residential mortgage demand across the jurisdictions, combined with paydowns on the existing portfolio.

Allowance for credit losses at 30 September 2014 totalled $49.1 million, a decrease of $3.7 million from the $52.8 million recorded at year-end 2013. The movement in the allowance was mainly the result of additional provisions of $9.9 million (net of recoveries of $1.8 million) recorded during the first nine months of the year, and $13.6 million in charge-offs and foreign exchange movements.

The loan portfolio represented 44% of total assets at 30 September 2014 compared to 46% at 31 December 2013; the decline attributable to the lower loan balances and higher total deposits. Similarly, loans as a percentage of customer deposits was lower at 51%, compared to 54% at year-end 2013.

As at 30 September 2014, the Bank had gross non-accrual loans of $70.1 million representing 1.7% 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 $51.4 million, equivalent to 1.3% of net loans, after specific provisions of $18.8 million. This compares favourably to year-end 2013 where net non-accrual loans were $82.0 million. The specific provision coverage ratio of 26.8% improved considerably from 21.2% at 31 December 2013 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 non-accrual loans and accruing loans past due by 90 days or more, totalled $93.5 million as at 30 September 2014, down $23.1 million from year-end 2013. The decrease is driven by the proceeds from the aforementioned sales of hospitality loans partially offset by an increase in non-performing residential mortgages.

Investments

The investment portfolio was $2.9 billion as at 30 September 2014, compared to $2.6 billion at year-end 2013. The increased portfolio size was due to purchases of shorter-duration certificates of deposit and liquid US government and federal agency securities. The investment portfolio holds high quality assets with 99.8% invested in securities rated “A” or higher. Total net unrealised losses on the portfolio improved by $44.2 million from a loss position of $57.5 million at year-end 2013 to $13.3 million at 30 September 2014. The improvement relates primarily to a decrease in longer-term US Treasury interest rates.

Deposits

Average customer deposits of $7.8 billion for the nine months ending 30 September 2014 increased by $0.3 billion from $7.5 billion for the nine months ending 31 December 2013. On a period-end basis, customer deposits increased $0.2 billion to $7.8 billion from $7.6 billion at year-end 2013.


REVIEW OF RESULTS OF MAJOR OPERATIONS

Bermuda

Net income before gains and losses was $14.5 million in the third quarter of 2014, up $4.4 million from $10.1 million in the third quarter of 2013, due principally to reductions in compensation costs and provision for credit losses, higher investment income and one-time severance costs and operational losses incurred in the third quarter of 2013 that did not repeat in the current quarter, all partially offset by higher professional fees.

Net losses increased by $2.6 million from a net gain of $0.9 million in the third quarter of 2013 to a net loss of $1.7 million in the third quarter of 2014, due principally to property write-downs and losses on investments classified as trading.

Net interest income before provisions for credit losses increased by $0.6 million to $35.9 million in the third quarter of 2014 due to a volume-driven increase in investment income partially offset by a volume-driven decrease in loan interest income.

Provision for credit losses of $0.4 million were down $1.9 million from the third quarter of 2013.

Non-interest income of $15.2 million in the third quarter of 2014 was down $0.2 million, or 1.4%, reflecting lower asset management, banking and trust revenues partially offset by higher revenues from custody and foreign exchange.

Non-interest expenses decreased by $2.2 million to $36.3 million in the third quarter of 2014 due to a reduction in compensation costs and one-time severance costs and operational losses incurred in the third quarter of 2013, all partially offset by higher professional fees and fraud provisions.

Total assets as at 30 September 2014 were $4.8 billion, up $0.2 billion from year-end 2013. Customer deposits ended the period at $3.9 billion, up $0.3 billion from year-end 2013, and loan balances ended the period at $2.2 billion, consistent with year-end 2013.

Client assets under administration were $34.5 billion for the trust and corporate services business and $30.6 billion for the custody business, whilst assets under management were $2.4 billion.

Cayman Islands

Net income before gains and losses for the third quarter ending 30 September 2014 was $8.1 million, up $0.8 million from the third quarter in 2013. The increase was due primarily to increases in interest income on loans and investments, offset by acquisition integration and other project costs.

Net interest income before provisions for credit losses was $15.1 million in the third quarter of 2014, an improvement of $1.1 million compared to the third quarter of 2013. The increase was driven by increases in loan balances of $49 million and investment balances of $149 million from 30 September 2013.

Cayman recorded $0.5 million in credit loss provisions in the third quarter of 2014 compared to $1.3 million of provisions taken in the third quarter of 2013.

Non-interest income was $8.0 million, an improvement of $0.1 million on the third quarter of 2013. The increase was due primarily to increased banking fees and commissions on higher debit and credit card volumes.

Non-interest expenses increased $1.1 million, year over year, to $14.5 million, driven primarily by acquisition integration and other project costs, as well as increased loan servicing and technology servicing costs.

Total assets at 30 September 2014 were $2.2 billion, a decrease of $0.1 billion from year-end 2013 levels, whilst customer deposits ended the period at $1.9 billion down $0.1 billion.

Client assets under administration were $3.3 billion for the trust and corporate services business and $1.4 billion for the custody business, whilst assets under management were $0.6 billion.

Guernsey

Guernsey’s quarterly results now include Legis Trust - the acquisition having closed on 1 April 2014.

Guernsey recorded net income before gains and losses of $1.2 million in the third quarter of 2014, compared to $1.8 million in 2013, a decrease of $0.6 million, due primarily to increased technology depreciation and professional service fees offset by the net impact of the Legis acquisition.

Net interest income, before provision for credit losses, declined by $0.7 million to $4.3 million, in the third quarter of 2014, compared to $5.0 million last year. Weakening interbank and investment yields and increased inter-group subordinated debt interest have contributed to the decrease.

Provisions for credit losses were $nil during the third quarter of 2014.

Non-interest income increased by $2.3 million to $7.0 million attributable to additional revenues earned from the acquired business together with higher asset management, custody and other administration services fees earned.

Total expenses at $10.0 million were $2.3 million higher than 2013 due primarily to additional expenses attributable to the acquired business and an increase in technology and amortisation expenses.

Total assets at 30 September 2014 of $1.4 billion remained flat with year-end 2013.

Client assets under administration for the trust business were $42.5 billion at the end of the third quarter of 2014, up from $10.1 billion at year-end 2013; the increase was attributable to the acquired business. Assets under administration for the custody and administered banking businesses were $9.4 billion. Client assets under management were unchanged at $0.4 billion.

United Kingdom

The United Kingdom recorded net income before gains and losses of $0.7 million in the third quarter of 2014, down $0.4 million as compared to $1.1 million in the third quarter of 2013, due primarily to higher non-interest expenses.

Net interest income before credit provisions of $5.3 million was up $1.0 million from $4.3 million in the third quarter of 2013 due to receiving $1.6 million of default interest on the repayment of a large loan facility.

Provisions for credit losses were $0.6 million during the third quarter of 2014 due to additional provisions required on commercial mortgage loans.

Operating expenses at $5.9 million in the third quarter of 2014 were $1.1 million greater than the third quarter of 2013 due to $0.6 million one-off property and professional costs, and increases in technology and non-income tax expenses.

Total assets at $0.9 billion at the end of the third quarter of 2014 were up $30 million from year-end 2013. Loan balances were $0.4 billion at the end of the third quarter of 2014, down $0.1 billion compared to year-end 2013. Customer deposit balances of $0.6 billion at the end of the third quarter of 2014 were unchanged from year-end 2013 position.

Assets under management of $0.3 billion at the end of the third quarter of 2014 were unchanged from year-end 2013. Custody client assets under administration at the end of the third quarter of 2014 amounted to $1.9 billion, up $0.3 billion from $1.6 billion at year-end.

 

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