The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today reported third quarter core earnings of $11.5 million ($0.01 per Share on a fully diluted basis) compared to $11.3 million in the third quarter of 2011. Total net income for the third quarter was $18.8 million, including $7.3 million of net income from discontinued operations primarily from the sale of Barbados.  Cash earnings (before amortisation of intangibles) for the period totalled $20.1 million compared to $12.6 million in the third quarter of 2011.

 

 

 

 

Butterfield Reports Third Quarter Profit
 
Hamilton, Bermuda--30 October 2012: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today reported third quarter core earnings of $11.5 million ($0.01 per Share on a fully diluted basis) compared to $11.3 million in the third quarter of 2011. Total net income for the third quarter was $18.8 million, including $7.3 million of net income from discontinued operations primarily from the sale of Barbados.  Cash earnings (before amortisation of intangibles) for the period totalled $20.1 million compared to $12.6 million in the third quarter of 2011.

 

Year-to-date core earnings for the nine months ended 30 September 2012 were $37.9 million, up 38.5% compared to $27.3 million for the nine-month period ended 30 September 2011. Cash earnings (before amortisation of intangibles) for the period totalled $53.8 million, an increase of $18.2 million over the $35.6 million for the prior year.  Year-to-date core earnings per Share of $0.05 on a fully diluted basis nearly doubled from the $0.03 per Share in the prior year.  Book value per Share grew 9.4% year-on-year to end the quarter at $1.28 per Share compared to $1.17 per Share last year.  The year-to-date cash return on tangible common equity nearly doubled to 8.6% from 4.4% a year ago.

 

During the quarter, Butterfield sold its wholly-owned Barbados subsidiary, Butterfield Bank (Barbados) Limited, to Trinidad and Tobago-based First Citizens Bank Limited (“First Citizens”) for a net gain of $7.2 million. As a result, the Barbados segment has been reported in discontinued operations (See Note (1) at the end of this News Release for details).  The operating results from this business were immaterial on a per Share basis; however, year-to-date net income includes the $7.2 million net gain on the sale of the Barbados business, or $0.01 per Share.
 
Brendan McDonagh, Butterfield’s Chairman & Chief Executive Officer, said, “The Board and Management team are focused on improving Shareholder value as our key priority.  To that end, we have emphasized our focus on core earnings to drive sustainable value. We completed the sale of our subsidiary in Barbados to effect a shift of capital to initiatives and businesses that offer the potential for greater Shareholder return.  In addition, we continued to repurchase Shares under the Share Buyback Programme announced in May, providing enhanced market liquidity to benefit Shareholders.” 
 
He added, “We were pleased to receive a report from Standard & Poor’s affirming the Bank’s A-/A-2 ratings at the end of the quarter, which highlighted Butterfield’s strong and improving capital position, very conservative liquidity position and the improving quality of our loan portfolio against a backdrop of ongoing economic difficulties.  We view that report as a solid endorsement of our strategy.”
 
Financial highlights of the third quarter results (with comparisons to third quarter 2011):
·         Core earnings of $11.5 million, up $0.2 million
·         Net interest income before credit losses at $52.0 million, down 0.1%
·         Net interest margin at 2.53%, up from 2.48%
·         Tangible common equity ratio of 7.72%, up from 6.78%
·         Return on assets at 0.85%, up from 0.48%
·         Cash return on tangible common equity of 9.53%, up from 5.44%
·         Efficiency ratio of 80.4%, improved from 82.3%
 

Bradley Rowse, Butterfield’s Chief Financial Officer, said, “During the third quarter of 2012, Butterfield, like all banks, operated in a continuing environment of low and decreasing interest rates and ongoing economic challenges in our markets. Against that backdrop, by exercising disciplined deposit pricing and liquidity management, conservative investing and loan strategies, and our ongoing focus on managing expenses, Butterfield achieved a substantially improved ROE.

 

 

The Bank introduced a Share Buyback Programme on 1 May 2012 as a means to improve Shareholder liquidity and facilitate growth in Share value.  Under this Programme, up to six million Common Shares and 2,000 Preference Shares may be repurchased. In the third quarter of 2012, 1,682,937 Shares were purchased by the Bank at an average price of $ 1.23 per Share.  Since inception of the Programmme, a total of 2,216,351 Shares have been repurchased at an average price of $1.23.

 

 
The Board declared $4.0 million of dividends on the Bank’s 8% Non-Cumulative Perpetual Voting Preference Shares to be paid on 15 December 2012 to Preference Shareholders of record on 1 December 2012.  No Common dividend was declared.
 
ANALYSIS AND DISCUSSION OF QUARTERLY RESULTS Third Quarter 2012
Balance Sheet
 
 
As at
(in $ millions)
 
 
30 September 2012
31 December 2011
Cash and cash equivalents
 
 
1,599.9
1,902.7
Investments
 
 
2,685.1
2,061.6
Loans, net of allowance for credit losses
 
 
3,930.3
4,069.4
Premises, equipment and computer software
 
 
265.2
272.5
Total assets of continuing operations
 
 
8,686.0
8,517.4
Assets of discontinued operations
 
 
-
307.0
Total assets
 
 
8,686.0
8,824.4
Total deposits
 
 
7,304.8
7,256.6
Subordinated capital
 
 
260.0
267.8
Shareholders' equity
 
 
909.2
829.7
Liquidation preference of Preference Shares
 
 
200.0
200.0
Common equity
 
 
709.2
629.7
Key Balance Sheet Ratios:
 
 
 
 
Book value per Share
 
 
$1.28
$1.14
Tangible book value per Share
 
 
$1.20
$1.05
Tier 1 capital ratio
 
 
18.3%
17.7%
Total capital ratio
 
 
23.8%
23.5%
Tangible common equity ratio
 
 
7.72%
6.89%
Tangible total equity ratio
 
 
10.03%
9.25%
Non-accrual loans/gross loans
 
 
3.13%
2.67%
Non-performing assets/total assets
 
 
1.35%
1.25%
Income Statement
Three months ended 30 September
    Nine months ended 30 September
(in $ millions)
2012
2011
2012
2011
Non-interest income
32.2
32.4
97.2
97.3
Net interest income before provision for credit losses
52.0
52.1
159.2
150.5
Total net revenue before other gains (losses) and provision for credit losses
84.2
84.5
256.4
247.8
Other gains (losses)
(0.9)
1.3
4.5
3.4
Provision for credit losses
(2.9)
(3.3)
(11.3)
(9.8)
Total net revenue
80.4
82.5
249.6
241.4
Total expenses
68.9
70.8
206.9
210.1
Total net income before taxes
11.5
11.7
42.7
31.3
Income tax
-
(0.4)
(0.5)
(0.8)
Net income from continuing operations
11.5
11.3
42.2
30.5
Net income from discontinued operations
7.3
(0.1)
7.6
0.9
Net income
18.8
11.2
49.8
31.4
Dividends and guarantee fee of Preference Shares
(4.5)
(4.5)
(13.5)
(16.8)
Net earnings attributable to Common Shareholders
14.3
6.7
36.3
14.6
Cash earnings (before amortisation of intangibles)
20.1
12.6
53.8
35.6
Net earnings per Share
 
 
 
 
- Basic
0.03
0.01
0.07
0.03
- Diluted
0.03
0.01
0.07
0.03
Adjusted weighted average number of Common Shares (thousands)
555,106
554,765
555,279
554,610
Key Financial Ratios
 
 
 
 
Return on assets
0.85%
0.48%
0.75%
0.45%
Cash return on tangible common equity
9.53%
5.44%
8.62%
4.36%
Net interest margin
2.53%
2.48%
2.59%
2.38%
Efficiency ratio
80.4%
82.3%
79.2%
83.2%

 

Transactions that are viewed by Management not to be in the normal course of day to day business and 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

 

 
Three months ended 30 September
    Nine months ended 30 September
(in $ millions)
2012
2011
2012
2011
Net income
18.8
11.2
49.8
31.4
 
Non-core items:
 
 
 
 
Net income from discontinued operations
(7.3)
0.1
(7.6)
(0.9)
Net gain on sale of affiliate
-
-
(4.3)
(3.2)
Core earnings
11.5
11.3
37.9
27.3
EPS impact of non-core items
-
-
(0.01)
(0.01)
EPS core earnings – fully diluted
0.01
0.01
0.05
0.03

 

 
COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 30 SEPTEMBER 2012 COMPARED WITH THE QUARTER ENDED 30 SEPTEMBER 2011
 
Net Income
The Bank recorded net income of $18.8 million for the three months ended 30 September 2012 compared to net income of $11.2 million in the prior year, a 67.7% increase.
Total revenue before gains and credit provisions was $84.2 million in the third quarter of 2012, down $0.3 million from $84.5 million in the third quarter 2011, primarily reflecting a $0.2 million decrease in non-interest income.
Provisions for credit losses were $2.9 million in the third quarter of 2012, a decrease of $0.4 million from $3.3 million in the same quarter a year ago.
Net losses of $0.9 million are mainly due to the $1.3 million of revaluation adjustments on Other Real Estate properties. Prior year gains of $1.4 million primarily relate to repurchase and cancellation of a $15 million subordinated debt note resulting in a gain of $1.1 million.
Operating expenses decreased by $1.9 million from $70.8 million in the third quarter of 2011 to $68.9 million in the third quarter of 2012. Headcount reductions of 77 drove a $1.6 million reduction in salary costs offset by a $0.5 million reduction in salaries capitalised to projects and a $0.3 million increase in staff benefit costs. Other expense reductions include a $0.4 million decrease in marketing costs, a $1.7 million reduction in professional and outside services and other reductions totalling $0.6 million. These savings were offset by a $1.5 million increase in technology and communications costs driven by depreciation expense on previously capitalised system implementation costs.
 
Net Interest Income
Net interest income before provision for credit losses in the third quarter of 2012 was in line with the prior year at $52.0 million compared to $52.1 million last year. The net interest margin was 2.53% in the third quarter of 2012, which compares favourably to 2.48% last year, principally due to disciplined deposit pricing, which fell 10 basis points. However, interest earning asset yields fell slightly as the historically low interest rate environment put downward pressure on investment yields, combined with the $240 million repayment of the Bermuda Government loan in the quarter, the impact of which was mitigated by residential lending growth in our European operations and timing of the loan repayment.
 
Non-Interest Income
Total non-interest income was down $0.2 million to $32.2 million in the third quarter of 2012 compared to $32.4 million in the third quarter of 2011; the net decrease is attributed to:
·         Asset management revenue was $5.1 million in the third quarter of 2012  compared to $5.4 million during the same period last year; the decrease is principally a result of the termination of the management agreement with Bentley Reid in the second quarter of 2012, offset by an increase in fees earned on the Money Market Fund as a result of higher LIBOR rates;
·         Banking services revenue of $9.7 million was up $2.2 million from $7.5 million a year ago, primarily as a result of loan prepayment fees in the quarter;
·         Foreign exchange revenue of $5.8 million for the quarter was down $1.5 million compared to the third quarter of 2011, primarily due to a decline in customer transaction volumes;
·         Trust and custody revenues were down $0.7 million year on year predominantly attributable to lower assets under administration and lower transaction volumes than the prior year;
·         Other non-interest income was consistent with the prior year at $1.8 million; other income includes rental income and the return on our investment in affiliates.

 

Non-Interest Expense

Non-interest expenses have decreased by $1.9 million, or 2.8%, to $68.9 million in the third quarter of 2012 from $70.8 million in the third quarter of 2011 as a result of the following:

 

·         Salaries and employee benefits decreased by $0.8 million year on year, reflecting a $1.6 million savings in salary expense offset by a $0.8 million increase in other staff benefits.  Headcount at the end of the quarter was 1,179, down 77  from 1,256 a year ago on a full-time equivalency basis; 
·         Technology and communications expenses have increased by $1.5 million as a result of increased depreciation costs related to systems implementation projects that went live in Bermuda and Cayman during 2011; 
·         Property costs were $6.8 million, down $0.1 million from cost savings initiatives;
·         Professional and outside services expenses decreased by $1.7 million from the reduction in the use of consultants and other expense management initiatives; 
·         Other expenses decreased by $0.3 million, in part due to lower transaction processing fees as a result of lower volumes and a reduction in insurance costs compared to the prior year 
 
COMMENTARY ON BALANCE SHEET AT 30 SEPTEMBER 2012 COMPARED WITH 31 DECEMBER 2011
 
Total Assets
Total assets of the Bank were $8.7 billion at 30 September 2012, representing a $169 million increase over year-end. The Bank maintained a highly liquid position at 30 September 2012 with cash and cash equivalents plus short and long-term investments representing 49.7% of total assets, or $4.3 billion, which is up $336 million from year-end 2011.
 
Loans Receivable
The loan portfolio decreased by $0.1 billion to $3.9 billion at 30 September 2012.  Commercial lending declined by $265 million mainly owing to the repayment of the Bermuda Government loan, whilst consumer loans declined $32 million offset by a $160 million increase in residential mortgages, primarily in our European operations ($40 million of the increase relates to changes in foreign exchange rates).  Allowance for credit losses at the end of the third quarter of 2012 totalled $64.0 million, an increase of $8.5 million from year-end 2011. The movement in the allowance is mainly the result of additional provisions of $11.3 million taken during the nine months ending 30 September 2012 net of $3.1 million in charge-offs.
 
The loan portfolio represented 45.3% of total assets at the end of the third quarter of 2012, compared to 48.8% at year-end 2011, whilst loans as a percentage of customer deposits decreased from approximately 57.1% at year-end 2011 to 54.8% at the end of the third quarter of 2012.
 
As at 30 September 2012, the Bank had gross non-accrual loans of $125.1 million representing 3.1% of total loans compared to $110.1 million, or 2.7%, of total loans at year-end 2011. Although non-performing loans increased by $15.0 million, the Bank increased total reserves by $8.5 million resulting in a more conservative total-reserve-to-non-accrual-loan ratio of 51.2%, up from 50.4% at 31 December 2011. 
 
Net non-accrual loans were $92.1 million, equivalent to 2.3% of total loans, after specific provisions for such loans of $32.9 million, reflecting an improved specific coverage ratio of 26.4%, up from 21.3% at 31 December 2011.  We continue to closely monitor early warning stresses in our loan portfolio and work with customers who experience financial difficulty in the continuing recessionary environment in our largest jurisdictions.
 
Investments
The investment portfolio increased by $0.6 billion to $2.7 billion as at 30 September 2012 due primarily to additional purchases of US Government Agency securities and certificates of deposit. The Bank held approximately $0.5 billion in US Treasury securities over year-end 2011 as a conservative response to the heightened uncertainty in Europe; these funds have been re-deployed during 2012 in accordance with our prudent investment strategy.

 

REVIEW OF RESULTS OF OPERATIONS
Bermuda
Net income of $6.0 million in the third quarter of 2012 was down $1.6 million compared to $7.6 million recorded in the prior year.
Revenue before gains and losses and credit provisions decreased, year on year, by $0.2 million to $49.4 million in the third quarter of 2012 from $49.6 million in the third quarter of 2011.
Non-interest income of $18.0 million in the third quarter of 2012 was up $2.1 million versus the third quarter of 2011, primarily due to the loan repayment fee received from the Bermuda Government and increases in the Money Market Fund year over year, offset by lower foreign exchange revenue.
Net interest income before loan loss provisions decreased by $2.3 million year-on-year primarily due to the repayment of the Bermuda Government loan offset by lower deposit costs. 
Credit provisions were $1.6 million in the third quarter compared to $2.0 million in the third quarter of 2011 and were mainly attributable to the Bank’s residential mortgage portfolio.
Non-interest expenses improved by $1.4 million (3.2%) to $40.9 million, primarily driven by lower salary and employee benefits costs, lower professional and outside services costs and other expense reductions totalling $2.5 million, offset by $1.1 million of increase technology costs due to depreciation of newly implemented systems.
Total assets as at 30 September 2012 were $4.5 billion, down $0.1 billion compared with year-end.  Customer deposits ended the quarter at $3.3 billion, down $0.2 billion from year end, and loan balances decreased $0.3 billion to $2.2 billion.
Client assets under administration for the Trust and Custody businesses were $30.5 billion and $26.5 billion, respectively, whilst assets under management declined by $0.2 billion to $3.2 billion.
 
Cayman Islands
Net income increased by $1.3 million to $4.5 million compared to $3.2 million the same quarter a year ago.  This primarily reflects higher net interest income after provision for credit losses of $3.2 million offset, by lower non-interest income of $0.5 million and lower other gains of $1.6 million.
Non-interest income of $6.9 million in the third quarter of 2012 was down $0.5 million compared to the prior year, reflecting declines in trust and asset management fees, partially offset by improved banking fees and foreign exchange commissions. Net interest income before loan loss provisions was $11.3 million in the quarter, $1.8 million ahead of the prior year, driven primarily by the increase in investment income resulting from growth of $224 million in the fixed income investments and establishment of the held to maturity portfolio, which contributed to improved net interest margin of 2.31%, up from 2.10% in the same quarter a year ago. The loan loss recovery of $0.2 million in the third quarter of 2012 compared favourably to the $1.2 million specific provisioning on the Bahamian residential mortgage book in the third quarter of 2011.
Non-interest expenses of $13.9 million were $0.1 million below prior-year levels. The year-on-year decrease in third quarter 2012 expenditures was primarily related to a significant reduction in professional and outside services costs incurred following the reclassification of certain security pricing services in the prior-year quarter, offset by increases in salaries and other benefits costs (related to incentives relocations and recruiting) and increased technology and communications costs arising from increased depreciation and the introduction of a virtual private network system.
Total assets at 30 September 2012 were $2.1 billion, up $0.1 billion from year-end 2011, reflecting higher corporate client deposit levels. Loans decreased by $28 million from year-end 2011, reflecting significant principal repayments in a low interest rate environment.
Client assets under administration for the Trust and Custody businesses were $2.1 billion and $1.3 billion, respectively, whilst assets under management declined by $0.2 billion to $0.8 billion.
 
Guernsey
Butterfield in Guernsey posted third quarter 2012 net income of $2.3 million, compared to net income of $3.0 million in the third quarter of 2011, a decrease of $0.7 million or 23.3%.
Non-interest income decreased $0.5 million year on year, due to lower foreign exchange income and lower administered banking income.
Net interest income decreased $0.2 million to $5.3 million in the third quarter of 2012, compared to $5.5 million in the third quarter of 2011, from lower interest income as a result of faster repayments on agency investment assets and lower yields on interbank assets. Total assets at 30 September 2012 of $1.4 billion were consistent with year-end 2011.
Client assets under administration for the Trust and Custody businesses were $9.8 billion and $8.4 billion, respectively, up from year-end 2011, reflecting growth in trust assets under administration and custody net asset values.
 
United Kingdom
The United Kingdom recorded a net loss of $0.7 million in the third quarter of 2012, compared to a profit of $0.2 million in the third quarter of 2011.
Total revenue before gains and losses and credit provisions was $5.4 million, a decrease of $0.5 million from the third quarter of 2011. Non-interest income was $1.6 million, down $1.0 million as a result of the cancelation of the investment management agreement with our previously owned Bentley Reid business at the end of the second quarter, offset by stronger net interest income before credit provisions of $3.8 million, up $0.5 million from the prior year;  the increase primarily due to strong loan growth of $85.7 million year on year.
Provisions for credit losses of $1.4 million were required in the third quarter of 2012, due to a legacy commercial loan facility, compared to no credit losses last year.
Total non-interest expenses, at $4.7 million, were $0.8 million lower compared to the third quarter of 2011, due to continued cost management initiatives and the reduction in the UK headcount year-on-year.
Total assets stood at $0.9 billion at the end of the third quarter of 2012, down from $1.0 billion at 31 December 2011. Loan balances increased $88.5 million from $433.6 million, offset by a reduction in investment and cash balances. Customer deposit balances declined by $24.8 million to end the quarter at $710.2 million.

Assets under management totalling $0.2 billion decreased from $0.6 billion at year-end 2011 following the termination of the Bentley Reid investment management contract. Custody client assets under administration at the end of the third quarter of 2012 amounted to $1.5 billion, which is $0.2 billion higher than year-end 2011.

 
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, tangible common equity, tangible equity and head count 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.