Butterfield Reports First Quarter Profit
- Q1 2015 core earnings(1) of $29.0 million, up $5.8 million (25.0%) over Q1 2014
- Core cash return on average tangible common equity improves to 16.7%
- Core cash earnings per share of $0.05, up 25.0% from $0.04 in 2014
- Board declares interim dividend of $0.01 per common share
Hamilton, Bermuda─27 April 2015: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced core earnings for the first quarter ended 31 March 2015 of $29.0 million, an improvement of $5.8 million compared to $23.2 million earned in the same quarter a year ago. The core cash return on average tangible common equity for the first quarter improved to 16.7% in 2015, compared to 12.9% in the first quarter of 2014. Reported net income for the first quarter was $26.8 million ($0.04 per share on a fully diluted basis) compared to $23.2 million ($0.03 per share on a fully diluted basis) in the same quarter a year ago, up $3.6 million.
Brendan McDonagh, Butterfield’s Chairman and Chief Executive Officer, said, “The expansion of our core businesses in 2014 under a well-defined strategy for building sustainable value in the Butterfield franchise contributed significantly to our strong first quarter 2015 results that saw core earnings improve by 25% year over year. The acquisition last year of the Legis trust and fiduciary services business in Guernsey was the primary driver of growth in Group trust revenues of $2.3 million. Our acquisition of select community banking business from HSBC Cayman late last year similarly augmented the growth in net-interest and non-interest income in the Cayman Islands totalling $2.7 million and $1.3 million, respectively, contributing to overall increases at the Group level.
“The combined effect of expansion of our revenue-generating client base through acquisitions, careful expense management and continued improvement in asset quality will continue to drive organic growth of capital. We will continue to deploy excess capital to enhance shareholder value through the repurchase of shares, issuance of common dividends and accretive acquisitions that bolster our core businesses. Once again, the Board has declared a common dividend of $0.01 per share based on the Bank’s strong first quarter results.
“I am pleased to note that the Bank’s progress has been recognised by Global Finance magazine, which recently conferred upon Butterfield the award for Best Developed Market Bank 2015 – Bermuda. This accolade follows awards for private client and trust services in Cayman and Guernsey from Euromoney, and Bank of the Year awards in Bermuda and Cayman from The Banker.”
(1)See table below for reconciliation of US GAAP results to core earnings.
Financial highlights of the quarter ended 31 March 2015 (with comparisons to the first quarter of 2014):
- Net income of $26.8 million, up $3.6 million (15.8%) from $23.2 million
- Core earnings of $29.0 million, up $5.8 million from $23.2 million
- Total net revenue of $92.5 million, up $4.8 million, or 5.6%
- Core cash return on average tangible common equity of 16.7%, up from 12.9%
- Core cash return on average tangible assets of 1.2%, up from 1.0%
- Core efficiency ratio of 66.8%, improved from 69.5%
John Maragliano, Butterfield’s Chief Financial Officer, said, “We are pleased to report another quarter of double-digit earnings growth and a solid core cash return on equity of nearly 17% in the quarter. The $5.8 million year over year improvement in core earnings was largely driven by improved credit provisions and growth in the contribution from our Global Trust business; the latter largely a result of the acquisition of Legis in the second quarter of 2014. The improvement in credit provisions was a result of collections on non-accrual loans releasing allowances of $0.6 million, which outpaced our specific provisions of $0.5 million during the quarter compared to $3.5 million of net provisions required last year.
“With the exception of Cayman, where we assumed a sizeable portfolio of personal and corporate loans through the HSBC transaction, the size of the loan book in our major jurisdictions declined from repayments exceeding new loans written. Overall the size of the consolidated loan portfolio remained relatively flat year over year at $4 billion. However, we continue to see the quality of the portfolio improve, with the non-performing asset ratio now down to 1.0% of total assets. Improving asset quality, a low loan-to-deposit ratio of 46% and high capital ratios gives us the flexibility to take advantage of new opportunities to grow earnings per common share moving forward.
“The Bank continues to make progress in managing core operating expenses, with the core efficiency ratio improving by 270 basis points year over year to 66.8%.”
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 8 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 31 March 2015 amounted to 1.6 million common shares to be held as treasury shares at an average cost of $1.99 per share (total cost of $3.2 million) and 183 preference shares at an average cost of $1,152 per share (total cost of $0.2 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 June 2015 to preference shareholders of record on 1 June 2015.
The Board also declared an interim dividend of $0.01 per common share to be paid on 27 May 2015 to shareholders of record on 15 May 2015.
As outlined in the March 2010 Rights Offering Prospectus, effective 31 March 2015, all 6.9 million contingent value convertible preference shares (“CVCP shares”) were converted to common shares at a ratio of 1:1. There is no impact to earnings per share as the CVCP shares have always been considered common share equivalents for purposes of earnings per share and dividends.
Today (27 April 2015), in a separate news release, the Bank announced that it has reached an agreement with Canadian Imperial Bank of Commerce (“CIBC”) to repurchase for cancellation the majority of CIBC’s shareholding in Butterfield. CIBC owns 19% of Butterfield’s issued and outstanding common equity comprising 103,434,232 million common shares. On or prior to 30 April 2015, Butterfield will repurchase 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) is to be taken up by Carlyle Global Financial Services, L.P. at $1.50 per share.
ANALYSIS AND DISCUSSION OF FIRST QUARTER RESULTS
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 2015 COMPARED WITH THE QUARTER ENDED 31 MARCH 2014
Core earnings for the quarter ended 31 March 2015 were $29.0 million, up $5.8 million from $23.2 million in 2014, an improvement of 25.0%. After including non-core items outside the course of normal business of ($2.2) million in the first quarter of 2015 and $nil in 2014, total net income for the first quarter of 2015 was $26.8 million, an increase of $3.6 million compared to first quarter 2014 net income of $23.2 million.
The $5.8 million core earnings improvement is made up mainly of the following:
- A $2.5 million increase in non-interest income, which is attributable primarily to higher trust revenue of $2.3 million and a $0.2 million increase in income earned from affiliates;
- A $0.4 million increase in net interest income, driven principally by higher balances in the investment portfolio ($0.3 million), higher interest income on short-term investments ($0.5 million), and lower interest expense on deposits ($0.2 million), offset by lower levels of interest income on loans ($0.7 million);
- A $3.3 million reduction in provisions 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 is beginning to result in lower provisioning levels;
- Core losses increased by $0.5 million driven by a realised loss on a sale of a residential mortgage-backed security (“RMBS”) due to a ratings downgrade, and net losses on the Other Real Estate Owned (“OREO”) property book.
The net interest margin for the quarter fell by 0.29% to 2.48% in the first quarter 2015 due primarily to lower yields on the investment portfolio driven by lower yields on the US Treasury 10-year rate. Compounding the decline was the increase in the Bank’s holdings of cash and cash equivalents of $2.1 billion, up $0.3 billion from $1.8 billion at 31 March 2014, which earned lower interest income.
Core operating expenses decreased by $0.2 million from $63.4 million to $63.2 million in the first quarter of 2015.
Core salaries and benefits costs were $31.8 million in the quarter, up $1.2 million from the increase in headcount associated with the Legis acquisition. Headcount on a full-time equivalency basis at quarter-end was 1,140, up 20 compared to 1,120 a year ago as a result of the acquisition.
Other notable core operating expense variances include:
- Professional and outside services expenses decreased by $0.8 million from reduced consultancy costs;
- Property expenses decreased by $0.8 million due to lower electricity costs and lower property maintenance costs.
Non-core expenses increased by $1.3 million in the first quarter 2015 due primarily to costs associated with a stringent compliance review programme of customer data to ensure our files meet internationally recognised standards, and one-off compensation expenses.
BALANCE SHEET COMMENTARY AT 31 MARCH 2015 COMPARED WITH 31 DECEMBER 2014
Total assets of the Bank were $9.8 billion at 31 March 2015, down $58 million from 31 December 2014. The Bank maintained a highly liquid position at 31 March 2015 with $5.5 billion of cash and cash equivalents plus short and long-term investments representing 56.0% of total assets, compared with 55.3% at 31 December 2014.
The loan portfolio totalled $3.9 billion at the end of the quarter, down $97 million from year-end 2014. The movement was due primarily to the significant prepayments on the commercial and residential mortgage portfolio. As at 31 March 2015, gross loans written totalled $119 million, offset by net pay downs of $175 million. In Bermuda, gross loans written totalled $44.3 million offset by pay downs of $72.2 million.
Allowance for credit losses at 31 March 2015 totalled $46.8 million, a decrease of $0.7 million from year-end. The movement in the allowance was mainly the result of recoveries exceeding provisions for the quarter.
The loan portfolio represented 40.0% of total assets at 31 March 2015 (31 December 2014: 40.8%), whilst loans as a percentage of customer deposits decreased from 46.6% at year-end 2014 to 45.7% at quarter end.
As at 31 March 2015, the Bank had gross non-accrual loans of $72.3 million, representing 1.8% of total gross loans, a minor increase from the $71.8 million, or 1.8%, of total loans at year-end 2014. The increase was due mainly to maintaining the level of non-accrual loans at year-end levels and working closely with clients who are having difficulty servicing their debts. Net non-accrual loans were $54.1 million, equivalent to 1.4% of net loans, after specific provisions of $18.2 million, resulting in a specific provision coverage ratio of 25.2% 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 $101.4 million as at 31 March 2015, down $2.1 million from 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 $3.1 billion at 31 March 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. A net decrease in non-US government and non-federal agency securities of $37.8 million was reinvested primarily in US government and federal agency securities that totalled $2.4 billion, or 76.6% of the total investment portfolio.
The investment portfolio was made up of high quality assets with 99.8% invested in A-or-better-rated securities. The investment yield decreased during the quarter by 19 basis points to 2.16% due to unfavourable prepayment speeds on US agency securities as interest rates continued to decline. Total net unrealised gains were $34.2 million, compared to an unrealised gain of $15.7 million at year-end 2014; the decrease due largely to a decline in longer-term US Treasury interest rates.
Average customer deposits increased by $0.6 billion to $8.7 billion in the first quarter of 2015 from $8.1 billion in the fourth quarter of 2014. On a period-end basis, customer deposits held constant at $8.6 billion from year-end 2014.
REVIEW OF RESULTS OF MAJOR OPERATIONS
Net income before gains and losses was $14.9 million at 31 March 2015, up $3.5 million from $11.4 million in the first quarter of 2014, due principally to a $3.9 million favourable change in provision for credit losses. Net losses of $0.2 million during the first quarter of 2015 were unfavourable by $1.4 million compared to net gains of $1.2 million in the first quarter of 2014, due primarily to a one-off gain from a sale in an investment in Q1 2014 and a loss on a liquidated RMBS and a write-off of OREO property in Q1 2015. Net income after gains and losses was $14.7 million, an increase of $2.0 million from $12.7 million in the first quarter of 2014.
Net interest income before provisions for credit losses increased by $0.1 million to $35.6 million in the first quarter of 2015, due primarily to a reduction in deposit interest expense.
Provision for credit losses was a recovery of $0.2 million in the first quarter of 2015, down $3.9 million from the first quarter of 2014 when provisions were $3.7 million. The improvement was a result of large commercial provisions taken in Q1 2014 compared to much lower required provisions in Q1 2015, combined with recoveries.
Non-interest income increased $0.1 million to $14.9 million in the first quarter of 2015 due to lower foreign exchange revenues, offset by higher earnings from investments in affiliates.
Operating expenses increased by $0.6 million to $35.7 million in the first quarter of 2015, due primarily to higher pension and post-retirement health expenses resulting from a lower discount rate used to calculate the future obligations, increased operational losses, and one-off compensation costs. These were offset partially by lower costs for property, consultancy and core salaries. Total assets as at 31 March 2015 were $4.8 billion, holding flat from year-end 2014. Customer deposits ended the period at $3.8 billion, down $0.1 billion from year-end 2014, and customer loan balances ended the period at $2.0 billion, flat from year-end 2014.
Client assets under administration for the trust and custody businesses were $33.8 billion and $29.6 billion, respectively, whilst assets under management were $2.3 billion.
Quarterly net income before gains and losses at 31 March 2015 was $12.3 million, up $3.3 million from the prior year. Net income growth was due primarily to increases in interest income on loans and investments and non-interest income led by foreign exchange income and banking fees (all driven by higher volumes), offset by increased salary and employee benefit costs and increased amortisation of intangible assets.
Net interest income before loan loss provisions was $16.7 million in the first quarter of 2015, an improvement of $2.7 million compared to the first quarter of 2014. The increase was driven primarily by an improvement in loan income of $1.5 million as loan balances increased by $87 million from the first quarter of 2014, attributable largely to the HSBC transaction. Investment income was up $1.1 million resulting from an average increase of $273 million in fixed-rate securities and $94 million in floating-rate notes. Deposit liability costs increased by $0.1 million on $101 million growth in average time deposits.
Credit provisions was a release of $0.3 million in the first quarter of 2015 and was consistent with the $0.3 million released in the first quarter of 2014. Lower credit loss experience resulted in the release of provisions in each respective quarter.
Non-interest income was $9.6 million, up $1.3 million from the first quarter of 2014. The increase was due primarily to foreign exchange and banking fee volume growth, driven by wire transfer and card transactions, along with increased trust fees, partially offset by lower asset management and rental income.
Operating expenses increased $0.7 million to $14.2 million in the first quarter of 2015, driven primarily by salary and employee benefits on increased permanent and temporary head counts and healthcare insurance costs, along with increased amortisation of intangible assets following the acquisition of loans and deposits from HSBC Cayman in Q4 2014. Total assets at 31 March 2015 were $3.0 billion, up $0.1 billion from year-end 2014, reflecting higher client deposit levels. Net loans of $1.1 billion were down $37 million from year-end 2014 levels due to large repayments. The available-for-sale investments at 31 March 2015 of $0.9 billion were up $0.1 billion from year-end 2014.
Client assets under administration for the trust and custody businesses were $3.5 billion and $1.6 billion, respectively, whilst assets under management were $0.8 billion at 31 March 2015.
Guernsey posted net income before gains and losses of $1.0 million in the first quarter of 2015, compared to $1.0 million in first quarter of 2014. This amount remained flat quarter over quarter, due primarily to lower net interest income from compressed yields on investments and higher non-interest expenses, in particular higher technology and professional fees, offset by a tax refund received and additional revenues from the acquired business.
Net interest income before provisions for credit losses declined by $0.9 million to $4.1 million in the first quarter of 2015, compared to $5.0 million last year, attributable to weakening inter-bank and investment yields and increased inter-Group subordinated debt interest.
Provisions for credit losses were nil, consistent with 2014.
Non-interest income increased $1.4 million to $6.4 million, attributable to additional revenues earned from the acquired Legis business together with higher asset management, custody and other administration services fees, offset by lower foreign exchange revenues.
Operating expenses at $9.5 million were $0.4 million higher than 2014 due primarily to additional expenses attributable to the acquired business and an increase in other salary-related expenses.
Total assets of $1.6 billion as at 31 March 2015 were unchanged from year-end 2014.
Client assets under administration for the trust and custody business were $39.1 billion and $8.9 billion, respectively, whilst assets under management were $0.4 billion at 31 March 2015.
The United Kingdom recorded a net loss of $1.2 million in the first quarter of 2015, down $1.7 million from net income of $0.5 million in the first quarter of 2014. Lower interest income accounts for $1.3 million of the decrease, with the majority of the variance attributable to higher provisions for credit losses.
Net interest income before credit provisions of $2.4 million was down $1.4 million from $3.8 million in the first quarter of 2014. The decrease was due primarily to reduced loan interest income, which is a result of the $0.1 billion reduction in the loan book during 2014.
Net provisions for loan losses were $0.6 million in the first quarter of 2015 compared to nil in the first quarter of 2014. An additional provision of $0.7 million was raised on a commercial loan facility and was offset by $0.1 million of write-backs following property sales on two other facilities.
Operating expenses at $4.7 million in the first quarter of 2015 were $0.5 million lower than the first quarter of 2014 due primarily to a reduction in staff costs and property-related costs. There was a slight increase in professional fees relating to external consultancy costs associated with increased regulatory requirements.
Total assets at $0.8 billion at the end of the first 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 $0.3 billion at 31 March 2015. Custody client assets under administration at the end of the first quarter of 2015 amounted to $1.7 billion.