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27 October 2011
Butterfield Reports Third Quarter Profit

Butterfield Reports Third Quarter Profit

 

Hamilton, Bermuda- 27 October 2011: The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today reported third quarter net income of $11.2 million ($0.01 per share on a fully diluted basis), compared to a net loss of $18.6 million in the third quarter of 2010 ($0.04 loss per share on a fully diluted basis). 

 

Year-to-date net income for the nine months ended 30 September 2011 was $31.4 million as compared to a year-to-date net loss of $194.8 million for the period ended 30 September 2010. Cash earnings (before the amortisation of intangibles) during the period totalled $35.6 million compared to a loss of $190.5 million for the prior year.  Year-to-date earnings per share totalled $0.03 on a fully diluted basis, versus a $0.47 year-to-date loss per share for the period ended 30 September 2010.

 

Bradford Kopp, Butterfield’s President & Chief Executive Officer, said, “The continuing progress across major profit drivers in our business: net interest margin, expense control and credit quality drives our results this quarter and underscores the progress the bank has made in turning its operations around in the wake of its recapitalisation. We have now delivered three straight quarters of profitability and our on-going initiatives give us comfort that both revenues and expenses will improve in the quarters to come”

 

Mr. Kopp continued, “Credit quality has trended positively and we have significantly reduced exposures to continental Europe, with no direct sovereign debt and exposure to the banking sector limited to deposits or government-guaranteed notes. In addition to reduced risk, our balance sheet now boasts capital and liquidity ratios that are amongst the highest in the industry.”

 

Butterfield’s net interest margin improved to 2.46% in the third quarter of 2011, up from 2.02% during the like quarter a year ago; the increase derived principally from disciplined deposit pricing and allocation of investments to longer duration securities.  This improvement was offset by lower income on decreased transaction volumes and lower assets under management and administration.

 

Non-interest expenses of $73.9 million were down slightly versus the third quarter of 2010, despite a number of non-recurring items in Q3 2011.  The efficiency ratio improved significantly to 82.3% from 92.1% at the end of Q3 2010. 

 

Brad Rowse, Chief Financial Officer, said, “We have de-risked the balance sheet, instituted improved management of interest rate risk to improve net interest margin while staying with simple, lower risk investments, developed good lending opportunities and will soon implement our new core banking system in Bermuda. With this strong progress, we are now well positioned to focus on our efficiency.  We have made good progress, improving the efficiency ratio by nearly ten percent over last year.  However, we have more work to do to manage our operating costs.  In particular, we are focused on controlling expenses by refining processes and improving coordination of functional support across jurisdictional lines. Our goal is to further improve our efficiency ratio to a level that is more consistent with industry standards while maintaining our dedication to risk management and a high level of customer service.”

 

Between 30 September 2010 and 30 September 2011, the Bank reduced headcount by 128 across all jurisdictions, leading to a net annualised reduction in salaries and benefits (net of provision for incentives and employment services) of $4.0 million (comparing the final month of the quarter to the year-ago period). 

 

As noted above, Butterfield also continues to make good progress with a major technology initiative that is expected to contribute substantially to long-term operational efficiencies when it is fully implemented.  Under this initiative, the Cayman Islands subsidiary began operating on a new set of core banking and peripheral applications in April 2011. A similar conversion is on track for completion in Bermuda in the fourth quarter.  The Bank has a large number of employees in Bermuda dedicated to ensuring a successful systems conversion and to assisting clients with understanding and adapting to new banking processes and interfaces.

 

The Bank maintains a strong capital position relative to industry norms.  At 30 September 2011, Butterfield had a total capital ratio of 22.5% and a tier 1 capital ratio of 16.8%.  Its ratio of tangible common equity to tangible assets of 6.5% and tangible total equity ratio of 8.7% reflect the strength of the balance sheet.  

 

Despite a protracted global economic slowdown, Butterfield’s customer deposit base has remained stable in its two largest markets, Bermuda and the Cayman Islands.  Deposits decreased modestly in the United Kingdom during the quarter due to a reduced focus on non-core institutional business in that jurisdiction.

 

The Bank’s liquidity also remains strong, with 48.7% of total assets held in cash, cash equivalents, short-term and long-term investments. Butterfield does not rely on inter-bank borrowing or other wholesale borrowing to fund its balance sheet.

 

The Bank experienced growth in its loan book during 2011, with loans increasing by $212.2 million, mainly in Cayman and Guernsey.  At 30 September 2011, loans represented 46.0% of total assets.  The quality of the credit portfolio continues to improve with non performing loans falling to 3.41% of total loans, or only 1.57% of total assets, and delinquency trends remaining stable.   

 

Mr. Rowse said, “The fact that we have managed to continue to improve the quality of assets in our loan book, following the derisking of our investment portfolio, during the current period of economic dislocation is an achievement that we are pleased with.  We see further, high quality credit opportunities developing in Guernsey and the UK, and we are well positioned to capitalise on them to realise further growth in the loan book.”

 

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 2011 to Preference shareholders of record on 1 December 2011.  No common dividend was declared. A one-time dividend of $3.2 million ($0.42 per share) was also paid to holders of Butterfield Contingent Value Convertible Preference Shares (“CVCP Shares”) during the quarter.

 

ANALYSIS AND DISCUSSION OF QUARTERLY RESULTS Q3 2011

Balance Sheet

 

 

As at

(in $ millions)

 

 

30 September 2011

31 December 2010

Cash and cash equivalents

 

 

2,285.2

2,429.7

Investments

 

 

2,166.9

2,629.1

Loans, net of allowance for credit losses

 

 

4,255.6

4,043.4

Premises, equipment and computer software

 

 

272.1

262.0

Total assets

 

 

9,243.2

9,623.1

Total deposits

 

 

7,909.6

8,228.1

Subordinated capital

 

 

267.8

282.8

Shareholders' equity

 

 

850.5

809.3


Liquidation preference of Preferred Shares

 

 

200.0

200.0

Common equity

 

 

650.5

609.3

Key Balance Sheet Ratios:

 

 

 

 

Book value per share

 

 

$1.17

$1.10

Tangible book value per share

 

 

$1.08

$0.99

Tier 1 capital ratio

 

 

16.8%

15.7%

Total capital ratio

 

 

22.5%

21.6%

Tangible common equity ratio

 

 

6.52%

5.79%

Tangible total equity ratio

 

 

8.70%

7.90%

Income Statement

Three months ended 30 September

Nine months ended 30 September

(in $ millions)

2011

2010

2011

2010

Non-interest income

33.1

34.0

99.6

112.2

Net interest income

55.0

46.2

159.2

131.8

 

 

 

 

 

Other gains(losses)

1.3

(7.6)

3.5

(177.6)

Total net revenue before provision for credit losses

89.4

72.6

262.3

66.4

Provision for credit losses

(3.8)

(16.1)

(10.3)

(24.8)

Total net revenue after provision for credit losses

85.6

56.5

252.0

41.6

Total expenses

73.9

75.3

219.5

238.8

Total net income before taxes

11.7

(18.8)

32.5

(197.2)

Income tax

(0.5)

0.2

(1.1)

2.4

Net income

11.2

(18.6)

31.4

(194.8)

Dividends and guarantee fee of preferred shares

(4.5)

(4.5)

(13.5)

(13.5)

Dividends on contingent value convertible preferred shares

0.1

-

(3.3)

-

Net earnings / (loss) attributable to common shareholders

6.8

(23.1)

14.6

(208.3)

Cash earnings (before amortisation of intangibles)

12.6

(17.2)

35.6

(190.5)

Net earnings / (loss) per common share

 

 

 

 

- Basic

0.01

(0.04)

0.03

(0.47)

- Diluted

0.01

(0.04)

0.03

(0.47)

Adjusted weighted average number of common shares (thousands)

554,765

546,539

554,610

447,010

 

 

 

 

 

Key Financial Ratios

 

 

 

 

Return on assets

0.48%

(0.77%)

0.45%

(2.71%)

Return on Common Shareholders' equity

4.14%

(14.10%)

3.09%

(58.9%)

Net interest margin

2.46%

2.02%

2.37%

1.93%

Efficiency ratio

82.3%

92.1%

83.2%

96.1%

Non Performing Loans/Gross Loans

 

 

3.4%

5.1%

Non Performing Loans/Total Assets

 

 

1.6%

2.3%

 


COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 30 SEPTEMBER 2011 COMPARED WITH THE QUARTER ENDED 30 SEPTEMBER 2010

Net Income

The Bank recorded net income of $11.2 million for the three months ended 30 September 2011 compared to a net loss of $18.6 million in the prior year.

The Bank’s total revenue before gains and losses and provisions of $89.4 million increased by 23.1% from $72.6 million in Q3 2010, which reflected enhanced net interest income, up $8.8 million, partially offset by lower non-interest income, down $0.9 million year on year.

Credit provisions decreased by $12.3 million from $16.1 million in the prior year, to $3.8 million in the current quarter. The change was largely a reflection of the actions taken in 2010 to mitigate the Bank’s exposures to the hospitality industry, but also a reflection of the Bank having worked closely with its clients during difficult economic times.

Operating expenses decreased by $1.4 million from $75.3 million in 2010 to $73.9 million in 2011. This primarily reflected the impact of transitional costs in the third quarter of 2010, reduced headcount, down 128 year-on-year, and enhanced controls on corporate expenditures. 

Net Interest Income

Net interest income before provisions for credit losses increased by 19.0% from $46.2 million in Q3 2010 to $55.0 million in Q3 2011 as net interest margin improved from 202 basis points in Q3 2010 to 246 basis points in Q3 2011. Improved allocation of investments in the Bank’s portfolio to increase duration with low risk investments, and higher levels of lending, combined with disciplined deposit pricing to drive the change in net interest margin.

Non-Interest Income

Non-interest income decreased by 2.6%, from $34.0 million in Q3 2010 to $33.1 million in Q3 2011, primarily due to the following:

·         Asset management fees declined by $0.8 million from Q3 2010 levels due to reduced values of assets under management and reduced management fees, particularly in regards to the Bank’s Money Market Fund;

·         Banking fees were down 9.2% in Q3 2011 to $7.9 million, compared to $8.7 million in Q3 2010, primarily as a result of reduced volumes;

·         Trust revenues were $0.5 million lower year on year due to non-recurring fee revenue in 2010; 

·         Custody revenues were $3.0 million, compared to $3.4 million in Q3 2010, down 11.8% principally due to declining assets under administration from administered banking in Guernsey; and

·         In Q3 2011, other non-interest income included equity pick-up of affiliates of $0.7 million.

Non-Interest Expense

Total non-interest expenses decreased year on year by $1.4 million, or 1.9%, to $73.9 million as a result of the following:

·   Costs of salaries and benefits decreased by $0.5 million year on year reflecting reduced headcount, offset by increased employment services of $0.5 million;

·   Technology expenses decreased by $0.6 million as a result of a major technology project implementation in the Cayman Islands and ongoing progress in Bermuda;

·   Professional, outside services increased by $1.6 million due to expenditures on a project designed to streamline the organisational structure and enhance operational efficiency to yield long-term improvements in operating costs and provision for a guarantee of revenues to a service provider where full utilisation is no longer expected;

·   Total other expenses decreased by $2.2 million due to decreases in other non-interest expenses.

Gains/Losses

·   Net realised gains on available for sale investments increased by $1.3 million to $0.9 million in Q3 2011 due primarily to the sale of US agencies and certificates of deposit.

·   Net other gains increased by $1.7 million as a result of the settlement of subordinated debt of $15 million, resulting in a gain of $1.1 million.

 

COMMENTARY ON BALANCE SHEET AT 30 SEPTEMBER 2011 COMPARED WITH 31 DECEMBER 2010 

Total Assets

Total assets of the Bank were $9.2 billion at 30 September 2011, down $0.4 billion from year-end 2010. The Bank maintained a highly liquid position at 30 September 2011 with cash and cash equivalents, short and long-term investments representing 48.7% of total assets, down $0.6 billion from $5.1 billion at year-end 2010 to $4.5 billion at 30 September 2011.

Loans Receivable

The loan portfolio increased by $212.2 million to $4.3 billion at 30 September 2011.  Allowance for credit losses at Q3 2011 totalled $72.6 million, an increase of $5.8 million from year-end 2010. The movement in the allowance is mainly the result of additional provisions taken during the nine months ending 30 September 2011.

The loan portfolio represented 46.0% of total assets at the end of Q3 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 54.3% at the end of Q3 2011.

As at 30 September 2011, the Bank had non-accrual loans representing 3.4% of total loans (1.6% of total assets) at the end of Q3 2011 compared to 3.9% at year-end 2010. Net non-accrual loans were $110.4 million, equivalent to 2.6% of total loans, after specific provisions for such loans of $37.2 million. 

Investments

The investment portfolio decreased by $462.2 million to $2.2 billion as at 30 September 2011 due to the previously mentioned sale of US agency securities and certificates of deposits which was slightly offset by investment of funds in the BNY Mellon Butterfield Income Advantage Fund, which was launched during the quarter.


REVIEW OF RESULTS OF OPERATIONS

Bermuda

Net income of $7.6 million for Q3 2011 represented an improvement, year on year, of $21.7 million. The primary drivers of the gain were higher net interest income and reduced non-interest expenditures.

Revenue before gains and losses increased, year on year, by $15.5 million, or 48.4%, from $32.0 million for Q3 2010 to $47.5 million for Q3 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 44 basis points year on year. Credit provisions were $2.0 million in Q3 2011 compared to $13.4 million in Q3 2010, primarily due to additional provisions taken during the prior year’s quarter relating to the hospitality industry loan portfolio and residential mortgages.

Net interest income before loan loss provisions was $4.3 million higher, year on year, from increased yields on interest earning assets complemented by lower rates on deposit liabilities.

Non-interest income of $15.9 million in Q3 2011 was down 2.5% versus Q3 2010, due to lower asset management fees and trust revenues.

Total assets as at 30 September 2011 decreased by 9.6% to $4.7 billion from year-end 2010, reflecting a decrease in deposit liabilities.

Client assets under administration ended the quarter at $44.1 billion, whilst assets under management decreased by 0.4 billion to $3.2 billion.

Cayman Islands

Cayman posted net income of $3.2 million for Q3 2011, compared to net income of $2.7 million in Q3 2010, an improvement of $0.5 million.

Revenue before gains and losses of $15.7 million remained unchanged from prior year.

Net interest income before loan loss provisions was $2.1 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 $1.2 million were $1.1 million above prior-year levels, the increase attributed to certain commercial and personal loans and general provisioning to cover overall loan growth. 

Non-interest income of $7.4 million in Q3 2011 was down $1.1 million (12.9%) on Q3 2010, as card services expenses are now netted against the related income rather than being included within expenses. Net card services revenues were $0.5 million below Q3 2010 results, banking revenues were marginally ahead of Q3 2010 results, whilst the equity pick-up from investments in affiliates (an insurance company) was $ 0.3 million ahead of Q3 2010 results.

Non-interest expenses of $14.0 million were $1.0 million above prior year levels. Butterfield in Cayman converted to a new banking technology platform during the second quarter, including online banking, ATM, merchant and card processing applications. Increase in Q3 2011 expenditures over the prior year were primarily related to that conversion with salaries and staff benefits reflecting high levels of overtime and employment services costs, whilst technology and communications reflect higher IT outsourcing costs and full quarter depreciation on our technology assets. Increases in professional services costs associated with heightened focus on asset and liability management were offset by the reallocation of card services expenses referred to above.   

Total assets at 30 September 2011 were $2.0 billion, down $75.1 million from year-end 2010, reflecting lower levels of hedge fund client deposits. Loans increased by $138.4 million from year-end, with commercial loan growth led by several participations, whilst Cayman residential mortgages experienced steady growth. Butterfield in Cayman also absorbed the residential mortgage portfolio of The Bahamas earlier in the year.

Client assets under administration ended the quarter at $4.25 billion, representing a decrease of $0.3 billion from year-end 2010, whilst assets under management declined by $0.1 billion to $1.05 billion.

Guernsey

Guernsey businesses posted net income of $3.0 million for Q3 2011, compared to net income of $1.4 million in Q3 2010, an improvement of $1.6 million.

Revenue before gains and losses was up $1.9 million to $10.8 million in Q3 2011, compared to $8.9 million in Q3 2010.

Net interest income increased $2.3 million to $5.5 million in Q3 2011, compared to $3.2 million in Q3 2010, from loan growth and the purchase of higher-yielding investment assets.

Non-interest income decreased $0.4 million year on year, due to higher trust revenues of $0.1 million and asset management revenues of $0.1 million, offset by lower custody revenues of $0.4 million and foreign exchange revenues of $0.3 million.

Total assets at 30 September 2011 of $1.8 billion, were $132.0 million higher than year-end 2010.

Client assets under administration ended the quarter at $17.0 billion, up from $16.4 billion at year-end 2010, reflecting growth in trust assets under administration and custody net asset values.

United Kingdom

The UK recorded a net profit of $0.2 million in Q3 2011, compared to net loss of $1.5 million in Q3 2010, an improvement of $1.7 million.

Total revenue before gains and losses of $5.8 million was up $3.4 million in Q3 2011 compared to Q3 2010. Net interest income before credit losses at $3.3 million was up $0.8 million year on year.  No provision for credit losses was required in Q3 2011.

Non-interest income at $2.6 million was up $0.4 million from Q3 2010 reflecting foreign exchange movement. Total non-interest expenses, at $5.6 million, were up $1.7 million compared to Q3 2010.

Total assets stood at $1.0 billion at the end of Q3 2011, compared to $1.1 billion at year-end 2010. The primary asset movements were the increase in the value of the loan portfolio by $21 million to $436 million at the end of Q3 2011, versus $415 million at year-end 2010, and the reduction in debt securities as a result of client deposit repayments.

Assets under management totalling $0.6 billion were unchanged from year-end 2010, whilst client assets under administration at Q3 2011 amounted to $1.4 billion, an increase of $0.2 billion from year-end 2010.

 

 

Shareholders are invited to hear Brad 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 Friday, 28 October 2011.  Please visit the Investor Relations section of the Bank’s website, www.butterfieldgroup.com, for details.

 

Notes:

 

Certain statements in this release may be deemed to include “forward-looking statements” and are based on Management’s current expectations and are subject to uncertainty and changes in circumstances.  Actual results may differ materially from those included in these statements due to a variety of factors including worldwide economic conditions, success in business retention and obtaining new business and other factors.

 

This release is neither an offer to sell nor a solicitation of an offer to buy any securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale is unlawful.  Securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws. 

The Bank of N.T. Butterfield & Son Limited (“Butterfield”) is Bermuda’s first and largest independent bank, and a specialist provider of international financial services. The Butterfield Group offers a full range of community banking services in Bermuda, Barbados and the Cayman Islands, encompassing retail and corporate banking and treasury activities. In the wealth management area, the Group provides private banking, asset management, investment advisory and personal trust services from its headquarters in Bermuda and subsidiary offices in The Bahamas, the Cayman Islands, Guernsey, Switzerland and the United Kingdom. Butterfield also provides services to corporate and institutional clients from offices in Bermuda, The Bahamas, the Cayman Islands and Guernsey, which include asset management and corporate trust services.

 

Butterfield is a publicly traded corporation with shares listed on the Bermuda and Cayman Islands stock exchanges.  Butterfield’s share price is published daily in The Royal Gazette (www.theroyalgazette.com) and is also available on Bloomberg Financial Markets (symbol: NTB BH) and the Bermuda Stock Exchange website (www.bsx.com).  Further details on the Butterfield Group can be obtained from our website at: www.butterfieldgroup.com.

 

Investor Relations Contact:                                               Media Relations Contact:                                  

John Maragliano                                                                      Mark Johnson

Senior Vice President, Finance                                               Vice President, Communications, Brand & Public Affairs

The Bank of N.T. Butterfield & Son Limited                             The Bank of N.T. Butterfield & Son Limited

Phone: (441) 299 3050                                                           Phone: (441) 299 1624

Fax: (441) 295 2899                                                               E-mail: mark.johnson@butterfieldgroup.com

E-mail: john.maragliano@butterfieldgroup.com                               

 

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