The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today reported first quarter net income of $8.4 million, compared to a net loss of $176.3 million (net income of $3.8 million on a normalised basis) in the first quarter of 2010. The first quarter of 2010 included an other-than-temporary impairment loss of $60.5 million and realised losses on securities of $113.8 million.
Brad Kopp, Butterfield’s President & Chief Executive Officer, commented, ”We are pleased to report a first quarter profit following a difficult transitional year. The fact that we are able to do so whilst operating in a challenging, low-interest rate economy, reflects the underlying strength of our franchise, as illustrated by the stability of deposits and loan balances, and increased focus on balance sheet management.”
2010 was a restructuring period for Butterfield. During the year, the Bank raised $420 million of new capital from institutional investors and $130 million from a successful Rights Offering to existing shareholders, which allowed management to proactively address the problems of underperforming assets—non-performing hospitality loans and asset-backed securities investments—that had hindered the company’s financial performance. In 2010, Butterfield sold largely all of the asset-backed securities in its investment portfolio (leading to the substantial Q1 2010 net loss) and took decisive actions to restructure, settle or otherwise address non-performing assets in its credit portfolio. In addition, the Bank’s focus on expense management yielded sustainable operational savings.
Mr. Kopp said, “Over the past twelve months we have concentrated our efforts on de-risking the balance sheet and rationalising our business model. We emerged from 2010 with a strong balance sheet, over $1 billion of capital, and an executive management team that is focused on developing our core businesses of community banking and wealth management. Although the protracted economic recovery and persistent low interest rates are challenging for the Bank, with our first quarter profit, we are already seeing the benefit of that restructuring and rationalisation.”
Brad Rowse, Chief Financial Officer, commented, “With the sale in 2010 of securities previously held in the Bank’s available-for-sale portfolio, Butterfield had a significant amount of excess liquidity which we began to invest in higher-yielding, low risk securities in the last quarter of the 2010. We are beginning to see the benefit of that strategy and, despite the low-rate environment in which we are currently operating, our quarterly net interest income before provision for credit losses, at $51.4 million, was up over 20% year on year.”
Mr. Rowse continued, “Non-interest income was down in Q1 2011 versus the same period in 2010 by 16.8% due principally to lower foreign exchange and asset management revenues, down 14.0% and 6.1%, respectively, which are reflective of current economic circumstances in our markets, as well as the comparative impact of non-recurring items that occurred last year.”
During the first quarter of 2011, Butterfield announced an agreement to sell its equity interest in fund administrator Butterfield Fulcrum. Fund administration is no longer considered by management to be a core business for the Bank. The sale will close in the second quarter and trigger a distribution of approximately $0.40 per Contingent Value Convertible Preference (“CVCP”) share. Under the 2010 Rights Offering, investors received a combination of Butterfield CVCP shares and common shares in exchange for each Rights Share purchased. CVCP shares are convertible to common shares at a conversion ratio of 1:1.
The Bank continued to focus on expense management to reflect the current operating environment. Overall, there was an 18.1% reduction in expenses as the prior year included fees related to the stand-by line of credit of $7.0 million, $3.3 million of organisational change costs and $5.8 million of expenses on vesting of stock options on the change of control.
The Bank continues to make good progress under a technology programme that will deliver new core banking and peripheral systems in its largest jurisdictions, Bermuda and the Cayman Islands. Butterfield’s Cayman operations successfully converted to the new platform over the past weekend. Bermuda is scheduled to convert to the new technology platform late in the third quarter.
Wilton Dolloff, Executive Vice President and Chief Operating Officer, said “When fully implemented, our new systems will allow Butterfield to operate more efficiently, with economies realised via straight through processing, and centrally managed development and support. The new systems will also allow for quicker delivery of new products to multiple markets and better online services.”
The Board declared $4.0 million of dividends on the Bank's 8% Non-Cumulative Perpetual Limited Voting Preference Shares to be paid on 15 June 2011 to Preference shareholders of record on 1 June 2011. No common share dividend was declared.
ANALYSIS AND DISCUSSION OF QUARTERLY RESULTS Q1 2011 COMPARED to Q1 2010
3 months ended 31 March
|Net interest income
|Net realised losses and OTTI on investments
|Total net revenue before provision for credit losses
|Provision for credit losses
|Total net revenue after provision for credit losses
|Total net income before taxes
|Dividends and guarantee fee of preferred shares
|Net earnings/(loss) attribuable to common shareholders
|Net earnings/(loss) per common share
|Adjusted weighted average number of common shares (thousands)
COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 31 MARCH 2011 COMPARED WITH THE QUARTER ENDED 31 MARCH 2010
The Bank recorded net income of $8.4 million for the three months ended 31 March, 2011 compared to a net loss of $176.3 million in the same period during the prior year.
The Bank’s total revenue before gains and losses and provisions of $85.1 million increased by 2.2% from $83.3 million in Q1 2010, which reflected increased net interest income, up $8.6 million year on year, partially offset by a decrease in non-interest income of $6.8 million year on year.
Credit provisions increased by $2.8 million from $1 million in the prior year, to $3.8 million in the current year. The increase was largely a reflection of the ongoing difficulties in the economies in which the Bank operates, but remains well controlled at an annual rate of under 40 basis points (0.4%).
Operating expenses decreased by $15.9 million from $87.8 million in 2010 to $71.9 million in 2011. This primarily reflected the impact of transitional costs in Q1 2010, reduced headcount, down 122 year on year to 1,477 at 31 March 2011, and enhanced controls on corporate expenditures.
Net Interest Income
Net interest income before provisions for credit losses increased by 20.1% from $42.8 million in Q1 2010 to $51.4 million in Q1 2011 primarily due to the 43 basis points improvement in margin from 1.89% in Q1 2010 to 2.32% in Q1 2011. The cost of interest bearing deposits improved 12 basis points to 54 basis points as a result of disciplined pricing.
The Bank made net provisions for credit losses in Q1 2011 of $3.8 million, compared to $1 million in Q1 2010. As at 31 March 2011 the Bank had non-accrual loans of $146.9 million, down from $159.5 million at 31 December 2010, equivalent to 3.6% of total loans, with specific provisions for such loans of $34.5 million, representing a coverage ratio of 23.5%.
Non-interest income decreased by 16.8%, from $40.5 million in Q1 2010 to $33.7 million in Q1 2011, primarily due to the following:
- to reduced values of assets under management and reduced management fees due to low yields;
- Banking fees were down 3.5% in Q1 2011 at $9.0 million, compared to $9.3 million in Q1 2010, primarily as a result of reduced loan volumes;
- Foreign exchange revenues were $1.2 million lower, year on year, on reduced transaction volumes;
- Trust revenues remained in line with prior year levels;
- Custody revenues were $3.2 million, compared to $3.6 million in Q1 2010, down 10.2% principally due to declining assets under administration from administered banking in Guernsey; and
- In Q1 2010, other non-interest income included:
- $5.8 million of unclaimed balances and dividends;
- $0.3 million receivable due from the sale of property in 2009; and
- Losses on investments in affiliates of $0.6 million (versus an income of $0.1 million in Q1 2011).
Total non-interest expenses decreased year on year by $15.9 million, or 18.2%, to $71.9 million as a result of the following:
- Costs of salaries and benefits decreased by $11.7 million year on year of which $9.1 million relates to organisational change costs and share based compensation expenses that occurred as all stock options and deferred incentive shares immediately vested on the equity investment comprising the capital raise in Q1 2010. In addition, $3.5 million related to savings on post-retirement health care expenses offset by an increase of $1.0 million in provision for incentives;
- Technology expenses increased by $0.6 million as a result of a higher run rate of service provider costs of $1.1 million offset by lower depreciation of $0.5 million on software assets.
- Professional and outside services increased by $2.1 million year on year as Q1 2010 included the recovery of $1.6 million of litigation fees following the successful settlement of a trust case in Guernsey. In addition, $1.2 million relates to balance sheet management advisory expenses partially offset by savings of $0.7 million on consultancy costs from cost containment measures;
- Other expenses decreased by $7.2 million, principally driven by $7.0 million of fees incurred with Canadian Imperial Bank of Commerce (CIBC) for the commitment for a line of credit in Q1 2010. The facility was terminated by the Bank in Q1 2011.
Net income tax for Q1 2011 was an expense of $0.2 million compared to a benefit of $2.5 million in Q1 2010. The decreased tax benefit was due to the absence of investment losses in our taxable jurisdictions in 2011.
COMMENTARY ON BALANCE SHEET FOR THE QUARTER ENDED 31 MARCH 2011 COMPARED WITH THE YEAR ENDED 31 DECEMBER 2010
Total assets of the Bank were $9.5 billion at 31 March 2011, down $0.2 billion from year end 2010. The Bank maintained a highly liquid position at 31 March 2011 with cash and cash equivalents, deposits with banks and investments representing 52.5% of total assets, down $113 million from $5.1 billion at year end 2010 to $5.0 billion at 31 March, 2011.
In Q1 2011, a change in accounting policy resulted in liquid, safe investments with an initial term of less than 3 months being included in cash and cash equivalents rather than investments. Prior periods have been restated accordingly.
The loan portfolio decreased by $16.8 million to $4.0 billion at 31 March 2011. Allowance for credit losses at Q1 2011 totaled $70.5 million, an increase of $3.8 million from year end 2010. The movement in the allowance is mainly the result of additional provisions taken during the quarter, partially offset by a settlement of a hospitality loan in the quarter.
The loan portfolio represented 42.5% of total assets at the end of Q1 2011, compared to 42.0% at year end 2010, whilst loans as a percentage of customer deposits increased from approximately 49.6% at year end 2010 to 49.7% at the end of Q1 2011.
Non-accrual loans decreased by 7.9%, which was primarily due to repayments on non-accrual loans received during the quarter. Gross of allowance for loan losses, non-accrual loans represented 3.6% of total loans at the end of Q1 2011 compared to 3.9% at year end 2010.Net non-accrual loans represented 2.8% of net total loans at the end of Q1 2011, down from 3.2% at year end 2010.
The ratio of gross non-accrual loans to tangible common equity and provisions for loan losses (also known as the “Texas ratio”) was 23.2% at Q1 2011 compared to 25.7% at year end 2010.
The investment portfolio decreased by $0.2 billion to $2.5 billion as at 31 March 2011, reflecting the reclassification of balances to cash & cash equivalents partially offset by further purchases of US Agency securities during the quarter.
Shareholders’ equity increased during the first quarter by $8.4 million to $817.7 million. The ratio of total capital to risk weighted assets (also known as the “total capital ratio”) was 22.3% at Q1 2011 compared to 21.6% at year end 2010. The strength of our balance sheet is further shown by the increase in the ratio of tangible common equity to tangible assets from 4.9% in the prior year to 6.0% in the current quarter.
Book value per common share increased 12% to $1.11 from $0.99 in the year-ago quarter.
REVIEW OF RESULTS OF OPERATIONS BY SIGNIFICANT BANK OPERATIONS
Net income of $3.1 million for Q1 2011 represented an improvement, year on year, of $162.9 million, primarily due to other-than-temporary impairments on held to maturity investments and realised losses on asset-backed securities held in the Available For Sale portfolio in Q1 2010.
Revenue before gains and losses and credit provisions increased year on year by $1.3 million, or 2.7%, from $48.6 million for Q1 2010 to $49.9 million for Q1 2011. This reflects lower fee revenues resulting from a decline in assets under management more than offset by higher net interest income as margins increased by 43 basis points year on year. Credit provisions were $2.7 million in Q1 2011 compared to a release of $0.3 million in Q1 2010, primarily due to additional provisions taken during the quarter relating to the hospitality industry loan portfolio and residential mortgages.
Net interest income before loan loss provisions was $6.1 million higher year on year from increased yields on interest earning assets complemented by lower rates on deposit liabilities.
Non-interest income of $16.7 million in Q1 2011 was down 19.8% versus Q1 2010 due primarily to the write back of $5.8 million of unclaimed balances and dividends in Q1 2010 In addition, there increases in asset management and bank services fees were offset by lower foreign exchange and custody revenues.
Total assets as at 31 March 2011 decreased by 11.9% to $4.6 billion from year end 2010, reflecting a decrease in deposit liabilities.
Client assets under administration ended the quarter at $43.5 billion, whilst assets under management decreased by 1.7% to $3.6 billion.
The Cayman bank posted net income of $3.0 million for Q1 2011, compared to a net loss of $10.3 million in Q1 2010. Excluding investment losses recorded in Q1 2010, net income from operations improved by $1.7 million.
Net interest income before loan loss provisions was $2.3 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 2010.
Loan loss provisions of $0.9 million were $0.6 million ahead of prior year levels on continued loan growth.
Non-interest income of $7.5 million in Q1 2011 was down $1.2 million (13.9%) on Q1 2010 as card services expenses are now netted against the related income rather than being included within expenses. Net card services margins were $0.2 million ahead of Q1 2010 results, foreign exchange revenues were $0.2 million below Q1 2010 results, whilst the equity pick-up from investments in affiliates (an insurance company) was $0.1 million below Q1 2010 results.
Total revenues, after credit provisions and gains and losses, of $15.5 million were $12.1 million above Q1 2010 results, primarily due to the realised investment losses incurred in the prior year of $11.6 million offset by improving net interest income.
Non-interest expenses of $12.5 million were $1.2 million below prior year levels. Q1 2010 results included accelerated amortisation of stock option costs of $1.0 million triggered on the equity investment comprising the Group's capital raise exercise.
Technology and communications costs associated with the banking platform transformation increased as did professional services costs associated with heightened focus on asset and liability management across the Group. These increased costs were offset by the reallocation of card services expenses.
Total assets at 31 March 2011 were $2.2 billion, up $180.8 million from year end 2010, reflecting increasing activity in hedge fund, captive insurance and corporate client deposits. Loans increased by $113.9 million year on year, with commercial loan growth led by several large participations, whilst residential mortgages experienced steady growth.
Client assets under administration ended the quarter at $4.7 billion, representing an increase of $118 million from year end 2010, whilst assets under management remained unchanged at $1.1 billion.
Net income increased by $0.5 million (£0.3 million) to $1.7 million (£1.1 million) in 2011.
Total revenue after credit losses and gains and losses were up $2.0 million (£1.1million) to $9.3 million (£5.8 million) in Q1 2011, compared to $7.3 million (£4.7 million) in Q1 2010. Interest income was flat year on year.
Non-interest income decreased $0.01 million (£0.1 million) year on year due to lower administered banking revenues of $0.3 million (£0.2 million) as two mandates were lost however there was growth in Trust revenues of $0.15 million (£0.1million) whilst all other business lines are broadly in line with 2010.
Total assets at 31 March 2011 of $1.7 billion (£1 billion) were consistent with year end 2010.
Client assets under administration ended the quarter at $17 billion (£10.6 billion), up from $16.5 billion at year end 2010, reflecting growth in custody net asset values.
The Bank recorded a net loss of $0.03 million in Q1 2011, compared to net loss of $7.7 million (£4.9 million) in Q1 2010. Total revenue before gains and losses of $5.2 million (£3.2 million) was up $0.4 million (£0.1 million) in Q1 2011 compared to Q1 2010.
Net interest income before credit losses at $2.8 million (£1.7 million) was up $0.3 million (£0.1 million) year on year on disciplined deposit pricing and an increase in margins of 26 basis points.
Provision for credit losses of $0.2 million (£0.2 million) was down $0.2 million (£0.1 million) year on year, due to the raising of the general loan allowance in Q1 2010.
Non-interest income at $2.6 million (£1.6 million) was down $0.2 million (£0.2 million) on Q1 2010. Total non-interest expenses excluding income taxes at $5.2 million (£3.4 million) were in line with 2010.
Total assets stood at $1.0 billion (£0.6 billion) at end Q1 2011, compared to $1.1 billion (£0.7 billion) at end 2010. The decrease is primarily due to reduced investments on a reduction of client deposits based on strict pricing discipline. The loan portfolio remained relatively stable, increasing by $1 million to $416 million at end Q1 2011.
Assets under management totalling $0.7 billion (£0.4 billion), were unchanged from year end 2010, whilst client assets under administration at end Q1 2011 amounted to $1.3 billion (£0.8 billion), again in line with end 2010.
“Other jurisdictions” include Barbados, Switzerland and The Bahamas. The other jurisdictions recorded combined net income of $0.9 million for Q1 2011 compared to a net loss of $0.6 million for Q1 2010. The increase in net income in Barbados and The Bahamas is primarily due to cost containment measures.
Shareholders are invited to hear Bradley Rowse, Butterfield’s Executive Vice President & Chief Financial Officer, provide a detailed review of the Bank’s quarterly results via a recorded webcast available from Wednesday, 27 April 2011. Please visit the Investor Relations section of the Bank’s website, www.butterfieldgroup.com, for details.