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30 April 2012
Butterfield Reports First Quarter Profit

The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today reported first quarter net income of $14.7 million ($0.02 per share on a fully diluted basis), compared to net income of $8.4 million in the first quarter of 2011 ($0.01 per share on a fully diluted basis).  Cash earnings (before the amortisation of intangibles) during the period totalled $16.1 million compared to $9.8 million for the prior year.

 

Financial highlights of first quarter results (with comparisons to first quarter 2011):

 

  • Net income at $14.7 million, up 75.4%
  • Net interest income at $52.1 million, up 9.5%
  • Net interest margin at 2.64%, up 9.5%
  • Return on assets at 0.66%, up 83.3%
  • Return on equity of 6.3%, up from 2.55%
  • Efficiency ratio improved to 79.7% from 82.8%

 

Bradford Kopp, Butterfield’s President & Chief Executive Officer, said, “We are pleased to be able to report a fifth consecutive quarter of profit and a first quarter performance that is substantially improved over last year.  This is a significant achievement in an environment of continued low interest rates and protracted economic recovery that creates challenges for all banks.”

 

Mr. Kopp continued, “Improvements in our first quarter net income, which increased by $6.3 million or 75.4% versus the same three-month period last year, were largely the result of increases in net interest income of $4.5 million, driven by improved yields on the Bank’s investments and ongoing discipline in deposit pricing.  Taking a more strategic view of our investment portfolio, coupled with ongoing diligence in the management of credit quality, operational risks and expenses, Butterfield has made significant strides in rebuilding profits and positioning the Bank for improvements in Shareholder value.  As such, these are the major themes that will continue to shape our business strategy going forward.”

 

The Board declared $4.0 million of dividends on the Bank’s 8% Non-Cumulative Perpetual Voting Preference Shares to be paid on 15 June 2012 to Preference Shareholders of record on 1 June 2012.  No Common dividend was declared.

 

Bradley Rowse, Executive Vice President and Chief Financial Officer said, “Like most banks, Butterfield continues to experience decreased volumes and demand for some services—foreign exchange and transactional business, for example—as a consequence of the economic slowdown.  But our stable deposit base and unique mix of retail and international wealth management revenue streams mean that Butterfield is in a better position than many financial services institutions to continue to generate increasing revenues in a difficult market.  In addition, whilst our efficiency ratio remains high at just under 80%, we are pleased with the 3% improvement from the prior year, especially given temporary increases in costs during the quarter related to the 2011 launch of our new banking system in Bermuda and Cayman. With our strong Balance Sheet and improving efficiency, we have built a platform for sustainable growth.”

 

ANALYSIS AND DISCUSSION OF QUARTERLY RESULTS Q1 2012

Balance Sheet











As at

(in $ millions)

31 March 2012

31 December 2011

Cash and cash equivalents

1,568.1

1,979.5

Investments

2,493.3

2,089.7

Loans, net of allowance for credit losses

4,328.9

4,247.3

Premises, equipment and computer software

274.2

276.1

Total assets

8,894.1

8,824.1

Total deposits

7,507.3

7,525.4

Subordinated capital

260.0

267.8

Shareholders' equity

857.8

829.7

Liquidation preference on Preference Shares

200.0

200.0

Common equity

657.8

629.7

Key Balance Sheet Ratios:























Book value per Share

$1.18

$1.14

Tangible book value per Share

$1.10

$1.05

Tier 1 capital ratio

17.3%

17.7%

Total capital ratio

22.7%

23.5%

Tangible common equity ratio

6.88%

6.62%

Tangible total equity ratio

9.15%

8.90%

Non-accrual loans/gross loans

3.21%

2.84%

Non-performing assets/total assets

1.90%

1.70%

Income Statement











Three months ended 31 March

(in $ millions)

2012

2011

Non-interest income

33.3

33.7

Net interest income before provision for credit losses

55.9

51.4

Total net revenue before other gains (losses) and provision for credit losses

89.2

85.1

Other gains (losses)

2.5

(0.9)

Provision for credit losses

(3.8)

(3.8)

Total net revenue

87.9

80.4

Total expenses

72.5

71.9

Total net income before taxes

15.4

8.5

Income tax

(0.7)

(0.1)

Net income

14.7

8.4

Dividends and guarantee fee of Preference Shares

4.5

4.5

Net earnings attributable to Common Shareholders

10.2

3.9

Cash earnings (before amortisation of intangibles)

16.1

9.8

Net earnings per Share





















- Basic

0.02

0.01

- Diluted

0.02

0.01

Adjusted weighted average number of Common Shares (thousands)

555,099

554,531

Key Financial Ratios

31 March 2012

31 March 2011

Return on assets

0.66%

0.36%

Return on Common Shareholders' equity

6.32%

2.55%

Net interest margin

2.64%

2.41%

Efficiency ratio

79.74%

82.81%


 

COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 31 MARCH 2012 COMPARED WITH THE QUARTER ENDED 31 MARCH 2011

 

Net Income

 

The Bank recorded net income of $14.7 million for the three months ended 31 March 2012 compared to net income of $8.4 million in the prior year. The Bank’s total revenue before gains and losses and provision of $89.2 million increased by 4.8% from $85.1 million in Q1 2011, which reflected enhanced net interest income, up $4.5 million, partially offset by lower non-interest income, down $0.4 million year on year.

 

Provisions for credit losses were $3.8 million in the first quarter of 2012, unchanged from the prior year.  Realised gains of $2.5 million in the first quarter were reflective of the sale of certain investments as part of the Bank’s asset and liability management strategy.

 

Operating expenses increased marginally by $0.6 million from $71.9 million in the first quarter of 2011 to $72.5 million in the first quarter of 2012. This reflects the increased technology costs in relation to the new core banking systems implemented in Cayman and Bermuda subsequent to the first quarter of 2011.

 

Net Interest Income

 

Net interest income before provision for credit losses increased by 8.7% from $51.4 million in the first quarter of 2011 to $55.9 million in the first quarter of 2012. The net interest margin improved by 23 basis points from 2.41% in the first quarter of 2011 to 2.64% in the first quarter of 2012 on higher levels of lending and continued investments in longer duration securities to match expected maturities on liabilities combined with disciplined deposit pricing.

 

Non-Interest Income

 

Non-interest income was $33.3 million in the first quarter of 2012 compared to $33.7 million in the first quarter of  2011; the decrease attributed to:

 

  • An increase in asset management fees of 8.7% to $6.2 million in the first quarter of 2012 due to increased management fees in the Bank’s Money Market Fund.

 

  • Banking services revenue of $8.2 million in the current period was down $0.8 million from $9.0 million a year ago, primarily as a result of reduced volumes and one-off fees earned in the prior year.

 

  • Foreign exchange revenue of $6.9 million for the quarter was down $0.5 million compared to the first quarter of 2011 as a result of decreased volumes from customer led transactions.

 

  • Trust revenues of $7.8 million were up year on year primarily due to timing of income recognition for time-based services.

 

  • Custody revenues of $2.8 million, compared to $3.2 million in the first quarter of 2011 were down $0.4 million principally due to declining assets under administration from administered banking and custody services in Guernsey.

 

  • Other non-interest income of $1.4 million, which primarily includes rental income and the return on our investment in affiliates.

 

Non-Interest Expense

 

Non-interest expenses have increased by $0.6 million, or 0.9%, to $72.5 million as a result of the following:

 

  • Salaries and employee benefits increased by $0.3 million year on year; the increase reflecting increased costs from overtime and temporary employees to assist with post-system conversion issues, as well as higher staff incentive costs, offset by salary savings from reduced headcount, down 133 to 1,344 globally from 1,477 a year ago.

 

  • Technology and communications expenses have increased by $1.4 million as a result of increased depreciation costs related to the systems implementation projects that are now live in Bermuda and Cayman.

 

  • Professional and outside services expenses increased by $0.5 million primarily due to a one-time credit of $0.3 million recorded in the prior year and our continued investment in efficiency projects.

 

  • Other expenses decreased by $1.2 million in part due to decreases in custody fees, lower general expenses, and fee savings from the cancellation of the line of credit with CIBC.

 

COMMENTARY ON BALANCE SHEET AT 31 MARCH 2012 COMPARED WITH 31 DECEMBER 2011


Total Assets


Total assets of the Bank were $8.9 billion at 31 March 2012, up $70.0 million from year-end 2011. The Bank maintained a highly liquid position at 31 March 2012 with cash and cash equivalents, and short and long-term investments representing 46.1% of total assets, in line with year-end 2011 at $4.1 billion.

 

Loans Receivable

 

The loan portfolio increased by $81.6 million to $4.3 billion at 31 March 2012.  Allowance for credit losses at Q1 2012 totalled $64.9 million, an increase of $3.4 million from year-end 2011. The movement in the allowance is mainly the result of additional provisions taken during the three months ending 31 March 2012.

 

The loan portfolio represented 48.7% of total assets at the end of the first quarter of 2012, compared to 48.1% at year-end 2011, whilst loans as a percentage of customer deposits increased from approximately 57.4% at year-end 2011 to 58.6% at the end of the first quarter of 2012.

 

As at 31 March 2012, the Bank had non-accrual loans representing 3.2% of total loans compared to 2.8% at year-end 2011. Net non-accrual loans were $113.5 million, equivalent to 2.6% of total loans, after specific provisions for such loans of $27.5 million.  Certain segments of the loan portfolio require close monitoring given the current economic conditions in our largest jurisdictions.

 

Investments

 

The investment portfolio increased by $0.4 billion to $2.5 billion as at 31 March 2012 due primarily to additional purchases of US agency securities and certificates of deposits. The Bank held approximately $0.5 billion in US treasury securities over year-end 2011 as a conservative response to the uncertainty in Europe. This investment was unwound in the quarter and partially reinvested, with $135.3 million of additional investments in the held to maturity portfolio.

 

REVIEW OF RESULTS OF OPERATIONS

 

Bermuda

 

Net income of $5.8 million for the first quarter of 2012 represented a year-on-year improvement of $2.7 million. The primary drivers of the gain were higher increased realised gains and reduced non-interest expenditures, partially offset by reduced non-interest income and increased provisions for credit losses.

 

Revenue before gains and losses decreased, year on year, by $1.6 million, or 3.4%, from $47.3 million for the first quarter of 2011 to $45.6 million for the first quarter of 2012. Credit provisions were $3.3 million in the first quarter of 2012 compared to $2.7 million in the first quarter of 2011, primarily due to additional provisions taken during the current year’s quarter relating to the residential mortgage portfolio.

 

Net interest income before loan loss provisions was $0.1 million lower, year on year, from decreased yields on interest-earning assets, partially offset by lower rates on deposit liabilities.

 

Non-interest income of $15.8 million in the first quarter of 2012 was down 5.4% versus the first quarter of 2011, due to lower banking income and foreign exchange revenues.

 

Total assets as at 31 March 2012 increased by 1.3% to $4.6 billion from year-end 2011, reflecting an increase in deposit liabilities.

 

Cayman Islands

 

Net income increased by $2.9 million (98.7%) to $5.8 million compared to $3.0 million the same quarter a year ago.

 

Net interest income before loan loss provisions was $1.9 million ahead of prior-year results on widening margins from continued loan growth and the reinvestment in higher yielding fixed income securities during the second half of 2011. Loan loss provisions of $0.2 million were $0.7 million below prior-year levels. Non-interest income of $8.5 million in the first quarter of 2012 was up $1.0 million or 13.9% on the first quarter of 2011, reflecting increased banking fees and commissions, up $0.3 million on increased net card revenues, service charges and letter of credit fees in the current quarter. There was an increase in foreign exchange income of $0.4 million, due to higher volumes and a significant increase of $0.3 million in the return on affiliates. Subsequent to the first quarter, the Bank sold its 27.76% interest in the Island Heritage insurance company.

 

Non-interest expenses of $13.5 million were $1.0 million above prior-year levels. The increase in first quarter 2012 expenditures over the prior year was primarily related to an increase in incentive and stock based compensation costs, up on prior-year levels by $0.2 million, and an $0.8 million increase in technology and communications costs related to the depreciation on the technology assets implemented in the second quarter of 2011.

 

Total assets at 31 March 2012 were $2.0 billion, up $63.6 million from year-end 2011, reflecting higher corporate client deposit levels. Loans decreased by $10 million from year-end reflecting a seasonal reduction in corporate overdrafts.

 

Client assets under administration ended the quarter at $3.6 billion, representing a decrease of $0.2 billion from year-end 2011, whilst assets under management declined by $0.6 million to $1.0 billion.

 

Guernsey

 

Guernsey businesses posted first quarter net income of $2.5 million, compared to $1.7 million for 2011, an improvement of $0.8 million or 42.9%.

 

Revenue before gains and losses was up $1.6 million to $10.6 million in the first quarter of 2012, compared to $9.0 million in the first quarter of 2011.

 

Net interest income increased $2.6 million to $5.7 million in the first quarter of 2012, compared to $3.1 million in the first quarter of 2011, from loan growth and the purchase of higher-yielding investment assets.

 

Non-interest income decreased $0.7 million year on year, due to lower custody revenues of $0.4 million and foreign exchange revenues of $0.2 million.

 

Total assets at 31 March 2012, at $1.4 billion, were $38.6 million higher than year-end 2011.

 

Client assets under administration ended the quarter at $18.5 billion, up from $16.2 billion at year-end 2011, reflecting growth in trust assets under administration and custody net asset values.

 

United Kingdom

 

The UK recorded a net profit of $0.8 million in the first quarter of 2012, an improvement of $0.8 million compared to the first quarter of 2011.

 

Total revenue before gains and losses of $6.1 million was up $1.0 million in the first quarter of 2012 compared to the first quarter of 2011. Net interest income before credit losses at $3.5 million was up $0.6 million year on year.  The growth reflects the increase in the UK loan balance. No provision for credit losses was required in the first quarter of 2012.

 

Non-interest income at $2.4 million was down $0.2 million from the first quarter of 2011. Total non-interest expenses, at $5.3 million, were $0.1 million higher compared to the first quarter of 2011.

 

Total assets stood at $1.0 billion at the end of the first quarter of 2012. The primary asset movements were the increase in the value of the loan portfolio by $63.2 million to $478.9 million at the end of the first quarter of 2012, versus $415.7 million at year-end 2011. A reduction in debt securities reflects the loan growth and client deposit repayments.

 

Assets under management totalling $0.7 billion were unchanged from year-end 2011, whilst client assets under administration at at the end of the first quarter of 2012 amounted to $1.3 billion, an increase of $0.1 billion from year-end 2011.

 

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