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Butterfield Reports First Quarter Profit
 
·         First quarter core earnings of $15.3 million, up $0.7 million
·         Net income of $13.3 million after non-core items totalling $2.0 million
·         Board declares first interim dividend of $0.01 per Common share
·         Strong capital position with a total capital ratio of  24.1%
 
Hamilton, Bermuda─30 April 2013: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced core earnings for the first quarter (“Q1”) ended 31 March 2013 of $15.3 million ($0.02 per Share on a fully diluted basis), compared to $14.6 million a year ago.  Net income for the quarter was $13.3 million, including non-core redundancy and early retirement costs of $2.0 million, compared to net income of $14.7 million in Q1 2012. The core cash return on average tangible common equity was 7.41% in Q1 2013 compared to 7.57% in Q1 2012 reflecting higher common equity in the current quarter.
 
Brendan McDonagh, Butterfield’s Chairman & Chief Executive Officer, said, “We are pleased with our core earnings improvement in today’s environment. We have taken steps to manage our capital levels through the share repurchase programme and the payment of a Common dividend during the quarter. As a result of our Q1 2013 financial performance, I am pleased to announce that the Board has declared a first interim dividend of $0.01 per Common share. The Bank is committed to its strategy of restoring long-term sustainable profitability. This requires us to continue to focus on our key geographies and customer segments.”
 
Financial highlights of the first quarter ended 31 March 2013 (with comparisons to the first quarter of 2012):
·         Core earnings of $15.3 million, up 5.0%
·         Net interest margin at 2.47%, down from 2.60%
·         Total non-interest expenses improved by $5.0 million, 7.3%
·         Core cash return on tangible common equity of 7.41%
·         Core efficiency ratio of 75.23%, improved from 79.74%
 
Brad Rowse, Butterfield’s Chief Financial Officer, said, “Our core earnings improvements were led by strong expense management. Excluding the non-core early retirement and redundancy costs, expenses were $62.6 million or more than 10% lower than one year ago. In spite of lower interest rates and slower economic activity, our core efficiency ratio is now 75% as the 6% drop in revenue was outpaced by the decisive action taken to achieve expense savings.  Our focus on all aspects of our businesses allowed the favourable overall result, despite the challenging economic conditions.”
 
Under the Bank’s Share Buy-back Programmes, the total shares acquired or purchased for cancellation from 1 May 2012 to 31 March 2013 amounted to 8.2 million Common Shares at an average price of $1.25 per Share (total cost of $10.2 million) and 4,639 Preference Shares at a cost of $5.7 million. During the quarter ended 31 March 2013 the Bank acquired 0.9 million Common Shares to be held as Treasury Shares at an average price of $1.32 per Share (total cost of $1.2 million), and purchased for cancellation 217 Preference Shares at a cost of $0.3 million. The Board cancelled the existing Common Share Buy-back Programme effective 1 April 2013 and implemented a new programme for the purchase of up to 10 million Common Shares. The Board today approved the renewal of the Preference Share Buy-back Programme for the purchase and cancellation of up to 8,000 Preference Shares.
 
The Board declared quarterly dividends of $20 per Share on the Bank’s 8% Non-Cumulative Perpetual Voting Preference Shares, to be paid on 18 June 2013 to Preference Shareholders of record on 1 June 2013. 
 
The Board also declared a first interim common dividend of $0.01 per Common and Contingent Value Convertible Preference Share to be paid on 23 May 2013 to shareholders of record on 9 May 2013.
 
ANALYSIS AND DISCUSSION OF THE FIRST QUARTER RESULTS
 
Balance Sheet
 
           As at
(in $ millions)
 
31-March-13
31-Dec-12
Cash and cash equivalents
 
1,813.2
             1,651.5
Investments and short-term investments
 
2,787.9
             2,957.9
Loans, net of allowance for credit losses
 
3,930.4
             3,956.0
Premises, equipment and computer software
 
240.8
                243.3
Other assets
 
173.9
                133.3
Total assets
 
8,946.2
             8,942.0
Total deposits
 
7,492.1
             7,502.3
Subordinated capital
 
260.0
                260.0
Other liabilities
 
358.4
                322.5
Total Liabilities
 
8,110.5
             8,084.8
Liquidation preference of Preference Shares
 
195.4
                195.6
Common equity
 
640.3
                661.6
Shareholders' equity
 
835.7
                857.2

 
 
 
 
     As at
Key Balance Sheet Ratios:
 
31-March-13
31-Dec-12
Tangible book value per Share
 
$1.13
$1.16
Tier 1 capital ratio
 
18.42%
18.53%
Total capital ratio
 
24.05%
24.18%
Tangible common equity ratio
 
6.95%
7.17%
Tangible total equity ratio
 
9.14%
9.36%
Non-accrual loans/gross loans
 
2.96%
2.83%
Non-performing assets/total assets
 
1.35%
1.35%
 
 
 
 
 
 
 
 
Income Statement
 
                     Quarter ended 31 March
(in $ millions)
 
2013
2012
Non-interest income
 
29.9
32.5
Net interest income before provision for credit losses
 
52.1
53.2
Total net revenue before provision for credit losses  and other gains (losses)
 
82.0
85.7
Provision for credit losses
 
(4.6)
(3.4)
Total other gains
 
0.6
2.5
Total net revenue
 
78.0
84.8
Total operating expenses
 
64.6
69.6
Total net income before taxes
 
13.4
15.2
Income tax expense
 
(0.1)
(0.6)
Net income from continuing operations
 
13.3
14.6
 
-
0.1
Net income
 
13.3
14.7
Dividends and guarantee fee of Preference Shares
 
4.4
4.5
Net earnings attributable to Common Shareholders
 
8.9
10.2
 
 
 
 
Net earnings per Share
 
 
 
- Basic
 
$0.02
$0.02
- Diluted
 
$0.02
$0.02
 
 
 
 
Adjusted weighted average number of participating shares on a fully diluted basis (1) (thousands)
 
553,902
556,405
Key Financial Ratios
 
 
 
Return on assets
 
0.57%
0.66%
Core cash return on average tangible common equity
 
7.41%
7.57%
Net interest margin
 
2.47%
2.60%
Core efficiency ratio
 
75.23%
79.74%
 
1) Includes both Common and Contingent Value Convertible Preferred equity. 
Transactions that are viewed by Management not to be in the normal course of day-to-day business and which are unusual in nature are excluded from core earnings as they obscure or distort the analysis of trends.  The table below shows the reconciliation of net income in accordance with US GAAP to core earnings.
 
Reconciliation of US GAAP Results to Core Earnings
 
Quarter ended 31 March
(in $ millions)
2013
2012
Net income
13.3
14.7
 
 
 
Non-core items:
 
 
Net income from discontinued operations
-
(0.1)
Early retirement programme and redundancies
2.0
-
Total non-core items
2.0
(0.1)
Core earnings
15.3
14.6
Preference dividend and guarantee fee
(4.4)
(4.5)
Amortisation of intangible assets
0.8
1.3
Core cash earnings to common
11.7
11.4
Core cash earnings per Share fully diluted
$0.02
$0.02
 
COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 31 MARCH 2013 COMPARED WITH THE QUARTER ENDED 31 MARCH 2012
 
Net Income
Core earnings for the quarter ended 31 March 2013 were $15.3 million, up $0.7 million from $14.6 million in Q1 2012.  Total net income for the first quarter, including net non-core expenses of $2.0 million (2012: gain of $0.1 million), was $13.3 million, compared to net income of $14.7 million in Q1 2012. 
Total net revenue before credit provisions and net gains was $82.0 million in Q1 2013, down $3.7 million from $85.7 million in Q1 2012, reflecting a $2.6 million decrease in non-interest income and lower net interest income, down $1.1 million from the prior year.
Provisions for credit losses were $4.6 million in Q1 2013, an increase of $1.2 million from $3.4 million in the same quarter the prior year, reflecting higher general provisions due to the current economic conditions.
Total other gains of $0.6 million in Q1 2013 were down $1.9 million from Q1 2012, primarily due to higher gains on the sale of available-for-sale securities in the prior year.
Operating expenses improved by $5.0 million (7.3%) from $69.6 million in Q1 2012 to $64.6 million in Q1 2013, but when excluding non-core expenses, the improvement was $7.0 million or 10.2%. Net salaries and benefits costs were $33.2 million in Q1 2013, down $1.8 million, inclusive of $2.0 million of early retirement and redundancy cost in Q1 2013.  Excluding this non-core expense, salaries and benefits costs were down $3.8 million (10.8%).  Other notable expense reductions, totalling $3.2 million from cost management initiatives, mainly comprise a $1.0 million reduction in professional and outside services costs, a $1.0 million decrease in technology and communications expense and a $0.6 million decrease in property costs. Income tax expense was $0.1 million compared to $0.6 million in Q1 2012.
 
Net Interest Income
Net interest income before provision for credit losses decreased by $1.1 million to $52.1 million in Q1 2013, compared to $53.2 million last year. 
·         Total interest income fell $1.9 million to $60.2 million as a result of a $3.8 million decrease in loan revenue largely due to the repayment of a $240 million Government loan in the prior year, offset by $1.9 million higher revenues from investments from a $0.5 billion increase in average investment balances.  The average yield on loans and investments in Q1 2013 was 4.63% and 2.04% respectively (Q1 2012: 4.74% and 2.12% respectively);
·         Total interest expense declined by $0.9 million primarily from lower interest expense on total deposits.  The average cost of funds in Q1 2013 fell by 6 basis points from 0.36% in Q1 2012 to 0.30% in Q1 2013 on average interest bearing deposits of $6.6 billion;
·         The decrease in net interest income was driven by a 13 basis point decrease in the net interest margin, from 2.60% in Q1 2012 to 2.47% in Q1 2013 mainly attributable to lower average loan balances in Q1 2013 that earned higher yields than can be earned on investments as well as falling interest rates.
·         Average interest earning assets were $8.6 billion in Q1 2013, up $0.4 billion, driven by an increase in average customer and total deposits.
 
Non-Interest Income
Total non-interest income was down $2.7 million to $29.9 million in Q1 2013, compared to $32.5 million in Q1 2012; the net decrease is primarily attributed to:
·         Asset management revenue decreased by $1.7 million from $6.2 million in Q1 2012 to $4.5 million in Q1 2013 primarily from falling USD Libor rates which impacts fees earned on the Butterfield Money Market fund (“BMMF”), net redemptions from the BMMF, and the termination of an investment management agreement subsequent to Q1 2012;
·         Banking services revenue of $7.2 million was down $0.6 million from $7.8 million a year ago, primarily as a result of loan prepayment penalty fees received during Q1 2012 in excess of the current quarter;
·         Foreign exchange revenue of $7.1 million for the quarter was up $0.4 million compared to Q1 2012, driven by a rebound in customer transaction volumes.
 
Non-Interest Expense
Non-interest expenses fell by $5.0 million, or 7.3%, to $64.6 million in Q1 2013 from $69.6 million in Q1 2012 primarily as a result of the following:
·         Net salaries and employee benefits decreased by $1.8 million year on year to $33.2 million in Q1 2013. Excluding the $2.0 million of early retirement and redundancy payments in Q1 2013, salary and employee benefits were $31.2 million in Q1 2013, down $3.8 million compared to the $35.0 million in Q1 2012.  The reduction was mainly driven by headcount reductions of 76 year on year, resulting in $2.5 million in lower salary, overtime and temporary employee costs, a reduction of $1.1 million in staff incentive expense, and a $0.5 million reduction in staff recruitment and employment services costs.  This was offset by a $0.3 million net increase in other staff benefits mainly attributable to increasing medical expenses, despite lower headcount. Headcount at the end of Q1 2013 was 1,154, compared to 1,230 a year ago on a full-time equivalency basis;
·         Technology and communications expenses decreased by $1.0 million to $13.3 million from expense control measures and lower deprecation expense;
·         Property costs declined by $0.6 million from $6.5 million in Q1 2012 to $5.8 million in Q1 2013, primarily due to lower depreciation expense due to the writedown of certain properties in the prior year;
·         Professional and outside services expenses decreased by $1.0 million from the reduction in the use of consultants and other professional services;
 
COMMENTARY ON BALANCE SHEET AT 31 MARCH 2013 COMPARED WITH 31 DECEMBER 2012
 
Total Assets
Total assets of the Bank were $8.9 billion at 31 March 2013, unchanged from 31 December 2012. The Bank maintained a highly liquid position at 31 March 2013 with cash and cash equivalents plus short and long-term investments representing 51.4% of total assets, or $4.6 billion which was in line with the prior year end.
Loans Receivable
The loan portfolio totalled $3.9 billion, down $25.6 million from year end.  Commercial loans totalled $1.2 billion, essentially unchanged from year-end.  Consumer loans declined $14.3 million to $258.5 million due to continued repayments—primarily credit cards and other consumer loans—whilst the residential mortgage book declined $16.9 million compared to year end due to net repayments.
Allowance for credit losses at 31 March 2013 totalled $60.7 million, an increase of $4.8 million since year end. The movement in the allowance is mainly the result of additional provisions of $5.9 million taken during the quarter (before recoveries of $1.3 million) net of $1.1 million in charge-offs and foreign exchange movements.
The loan portfolio represented 43.9% of total assets at 31 March 2013 (31 December 2012: 44.2%), whilst loans as a percentage of customer deposits decreased from approximately 53.6% at year-end 2012 to 52.8% at the end of Q1 2013.
As at 31 March 2013, the Bank had gross non-accrual loans of $117.9 million representing 3.0% of total gross loans compared to $113.4 million, or 2.8%, of total loans at year-end 2012. Net non-accrual loans were $87.7 million, equivalent to 2.2% of total loans, after specific provisions for such loans of $30.2 million, reflecting an improved specific coverage ratio of 25.6%, up from 23.6% at 31 December 2012.
Non-performing loans, which includes non-accrual loans and accruing loans past due by 90 days or more, totalled $148.7 million as at 31 March 2013, up $6.9 million from the year-end.  The increase is primarily the result of non-performing residential mortgages, higher by $9.2 million, offset by a $2.2 million reduction in non-performing commercial loans.  We continue to closely monitor early warning signs of stresses in our loan portfolio and work with customers who experience financial difficulty amidst ongoing economic challenges in many of our largest jurisdictions.
Investments
The investment portfolio was $2.8 billion as at 31 March 2013 compared to $2.9 billion as at
31 December 2012.  A net decrease in Certificates of Deposit of $0.3 billion was reinvested in US government and federal agency securities now totalling $1.6 billion (57%) of the total investment portfolio.   The investment book is made up of high quality assets with 98% invested in A-rated or better securities.   Total net unrealised gains of the total investment portfolio were $39.5 million compared to $48.8 million at year end, reflecting accretion to net income and changes in interest rates on the longer duration assets.
 
Deposits
Average customer deposits increased by $0.2 billion to $7.6 billion in Q1 2013 compared to $7.4 billion in Q4 2012. On a quarter-end basis, customer deposits were essentially flat since last year end at
$7.5 billion.

REVIEW OF RESULTS OF MAJOR OPERATIONS
 
Bermuda
Net income before gains and losses was $4.6 million in Q1 2013, up $1.1 million from $3.5 million in Q1 2012, but when excluding the $1.0 million of early retirement and redundancy costs in the current year, core net income before gains and losses was up $2.1 million year on year, attributable to results of cost management initiatives exceeding decreases in revenues. Gains and losses are primarily from the realised gains on sale of available-for-sale securities and were $1.9 million lower than the prior year.
Net interest income fell $1.0 million to $32.1 million in Q1 2013 due to reduced loan volumes, down $228 million, and related revenue, down $3.8 million, offset by an increase of $2.1 million in investment income and $1.0 million lower interest expenses on deposits.  The net interest margin declined from 3.3% in Q1 2012 to 3.1%, due primarily to lower deposit costs and increased investments that offset the impact of lower average loan balances.
Provisions for credit losses were $4.3 million, compared to $3.3 million in Q1 2012; the increase is mainly attributable to an increase in the general provision reflecting the current economic environment.
Non-interest income of $14.3 million in Q1 2013 was down 9.2%, reflecting lower revenues from banking, asset management, and trust and custody revenues, which were partially offset by increased foreign exchange revenue.
Gains and losses were $0.5 million compared to $2.3 million the year before, mainly reflecting realised investment gains of $2.3 million in Q1 2012 compared to none in the current quarter.
Total non-interest expenses declined by $4.6 million to $37.4 million in Q1 2013, compared to $42.1 million in Q1 2012.  Salary costs declined $1.7 million as a result of reduced headcount which ended the quarter at 579, down 54, partially due to the Bank’s voluntary early retirement programme, combined with natural attrition and redundancies.  Expense savings—principally from expense management initiatives— contributed an additional $2.9 million in cost reductions.
Total assets as at 31 March 2013 were $4.5 billion, down $0.2 billion from last year end. Customer deposits ended the quarter at $3.3 billion, down $0.1 billion from 31 December 2012, and loan balances increased by $0.1 billion to $2.3 billion.
Client assets under administration for the trust and custody businesses were $30.0 billion and
$27.7 billion, respectively, whilst assets under management declined by $0.1 billion to $3.0 billion.
 
Cayman Islands
Net income before gains and losses in Q1 2013 was $5.2 million compared to $5.6 million in the prior year.  The decrease reflects early retirement and redundancy costs of $ 1.0 million in the current quarter. The Bank sold an investment to one of its affiliates at its fair market value in Q1 2013 and realised a loss on the sale of $0.5 million, compared to a gain on a sale of $0.2 million in the prior year. Net income decreased by $1.2 million to $4.7 million in Q1 2013.
Non-interest income was $7.8 million compared to $8.5 million in the prior year. The decline was primarily due to the equity pick up of $0.4 million recorded in the prior year on the Bank's equity interest in Island Heritage Insurance, which was sold in Q2 2012. Increases in banking service fees year on year were partially offset by declines in asset management fees and foreign exchange commissions.      
Net interest income before loan loss provisions was $12.0 million in Q1 2013, an improvement of
$
1.3 million compared to the same quarter a year ago.  The increase was driven primarily by the increase in investment income resulting from an average increase of $270 million in the investment portfolio earning an average of 2.2%, which contributed to the improved net interest margin of 2.3%, up from 2.2% in Q1 2012.
Non-interest expenses increased $0.9 million, year over year, to $14.4 million reflecting the impact of the early retirement and redundancy costs of $1.0 million along with increased government license and work permit fees of $0.2 million. These increases were partially offset by reduced staff benefits, incentives and Share-based compensation, and decreased use of temporary employees charged to salaries and other employment benefits.  
Provisions for credit losses were $0.2 million, in line with Q1 the prior year.
Total assets at 31 March 2013 were $2.2 billion, up $0.1 billion from year-end 2012, reflecting higher corporate client deposit levels. Net loans increased by $7.7 million from year-end 2012 and ended the quarter at $713 million.
Client assets under administration for the trust and custody businesses were $1.6 billion and $1.4 billion, respectively, whilst assets under management declined by $0.1 billion to $0.7 billion during the quarter.
 
Guernsey
Guernsey posted net income of $2.2 million in Q1 2013, compared to net income of $2.5 million in Q1 2012, a decrease of $0.3 million (£0.1 million) of which the majority is due to the weakening of the GBP against the USD.
Net interest income declined by $0.8 million to $4.9 million in Q1 2013, compared to $5.7 million last year.  Average interest earning assets were $1.5 billion, in line with the prior year, but the average yield fell 23 basis points to 1.7%, despite higher average loan balances, due to the maturity of older investments resulting in a significant decrease in investment yields, down 1.0%.  As a result, the net interest margin fell 24 basis points from 1.54% in Q1 2012 to 1.31% in Q1 2013.
Provisions for credit losses of $0.1 million compare favourably to the $0.3 million recorded in the same quarter a year ago.
Non-interest income decreased $0.3 million (£0.1 million) to $4.8 million, mainly due to the weakening GBP, and lower foreign exchange revenue and income from administered banking services.
Total non-interest expenses, at $7.5 million, were $0.6 million (£0.2 million) lower than Q1 2012 primarily from the change in foreign exchange rates, a decrease in salary and employee benefit costs and lower professional services costs, down a combined $0.7 million, offset by an increase in technology costs from the upgrade of the core banking system, and higher software and communication costs in the quarter.
Total assets at 31 March 2013 of $1.7 billion were up $0.2 billion from year-end 2012.
Client assets under administration for the trust, custody and administered banking businesses were
$9.1 billion (Q4 2012: $9.9 billion), $7.4 billion (Q4 2012: $7.4 billion), and $1.5 billion (Q4 2012: $1.5 billion), respectively, reflecting solid growth in the trust and custody business lines offset by weakening GBP against USD.  Client assets under management were $0.4 billion lower than the prior year of $0.6 billion from matured mandates from a few large clients and the impact of weakening GBP against USD.
 
United Kingdom
The United Kingdom recorded net income of $0.8 million in Q1 2013, the same as Q1 2012, despite the impact of lower exchange rates.  Total revenue before gains and losses declined $1.5 million but was offset by reductions in expenses of $1.3 million and gains of $0.2 million.
Net interest income before credit provisions of $3.1 million was down $0.4 million from $3.5 million in Q1 2012.  The net interest margin fell 6 basis points to 1.43% in Q1 2013, largely due to lower yields on investments.
There were no provisions for loans losses recorded in Q1 2013 compared to a recovery of $0.3 million in Q1 2012.
Total assets stood at $0.9 billion as at 31 March 2013, consistent with year-end balances. Loan and deposit balances were largely flat in GBP terms at £315 million and £487 million, respectively.
Assets under management, totalling $0.2 billion were unchanged from 31 December 2012. Custody client assets under administration at the end of Q1 2013 amounted to $1.7 billion, also unchanged from year-end 2012. 
 
 
Notes:
 
(1) The results of Butterfield Bank (Barbados) Limited are presented as discontinued operations, and prior-period amounts have been adjusted accordingly. Revenues, non-interest expenses, income taxes, earnings before income taxes, net interest margin, return on tangible common equity, tangible equity and headcount throughout this News Release are from continuing operations (i.e., before discontinued operations) unless otherwise stated. Net income, earnings per Share, return on equity, and return on assets, throughout this news release are after discontinued operations unless otherwise stated.