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Butterfield Bank Reports Q2 2010 Financial Results (Excerpt)
Hamilton, Bermuda ─ 05 August, 2010 – The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced second quarter net income of $0.2 million compared with a net loss of $176.3 million for the first quarter 2010 and a net income of $10.3 million in the second quarter of 2009. On a normalised basis, net income was $2.2 million for Q2 2010 compared to normalised income of $4.1 million for Q1 2010 and $1.8 million for Q2 2009.
After adjusting for preference share dividends, the net loss available to common shareholders was $4.3 million resulting in a fully diluted loss of $0.01 per share compared to a diluted loss of $0.75 in Q1 2010.
Brad Kopp, Butterfield’s President & Chief Executive Officer, commented on the Bank’s second quarter results: “Butterfield continues to operate in difficult economies with continued historically low interest rates compressing margins and yielding lower investment returns. Against this backdrop, the Bank remains focused on expense management. We also took further steps in the quarter to de-risk the balance sheet, selling one of our remaining Structured Investment Vehicle investments, thereby reducing our exposure by $31.6 million and realising a gain of $5.0 million. This was offset by additional required reserves on two hospitality loans. Such actions further strengthen our balance sheet and help position us for future growth.”
The comprehensive recapitalisation of the Bank this year involved the largest ever Rights Offering in Bermuda during the quarter, which enabled the legacy shareholders to purchase up to $130 million of Rights Shares to increase proportionately their ownership interest in the Butterfield Group. The Rights Offering closed on 11 May 2010 with the Bank’s legacy shareholders and other investors having expressed confidence in the Bank, as evidenced by an oversubscription of the Rights.
Shareholders’ equity was also bolstered by a combination of changes to post-retirement health care benefits and improvements in market values of investments. Following an independent, tri-annual actuarial review, the healthcare liability was reduced by approximately $27 million reflecting changes in demographics and claims costs since 2007. Additionally the Bank amended the plan in the quarter for eligibility, benefits and cost sharing criteria which resulted in a further reduction of approximately $41 million. As at 30 June, the Bank still has a substantial obligation for post-retirement benefits in the amount of $78.7 million.
Mr. Kopp said, “I would like to stress that our primary responsibility is to reward our shareholders’, customers’ and employees’ loyalty by returning the Bank to profitability and rebuilding sustainable value in the Butterfield franchise. With a further de-risked balance sheet, a strong capital position, sound operating structure and a great team of dedicated employees, I am very confident in our ability to achieve that goal.”
At 30 June 2010, Butterfield had a tangible common equity ratio of 6.1%, total capital ratio of 21.7% and tier 1 capital ratio of 15.9%. Additionally, the Bank’s net book value per share increased to $1.17 per share, up from $0.99 per share at 31 March 2010.
COMMENTARY ON STATEMENT OF OPERATIONS FOR THE QUARTER ENDED 30 JUNE 2010 (“Q2 2010”) COMPARED WITH QUARTER ENDED 30 JUNE 2009 (“Q2 2009”)
Net Income
The Bank recorded net income of $0.2 million for Q2 2010 compared to a net income of $10.3 million recorded in Q2 2009.
The Bank’s total revenue before gains and losses decreased by 14%, which was primarily caused by the increase in loan provisions of $6.5 million year on year. Total non-interest expenditure decreased by 4% from the prior year as the Bank implements measures to minimise its operational expenditures.
Net Interest Income
Net interest income before provisions for credit losses decreased by 7% year on year from $46 million in Q2 2009 to $42.7 million in Q2 2010.
The decrease is due to the challenging banking markets prevalent in 2010, with worldwide historically low interest rates and the inability of the Bank to pass on in full interest rate cuts to depositors as yields on short-dated assets reprice at lower rates resulting in reduced net interest margin.
The reduction of the Bank’s average interest-earning assets by 3% from $9.6 billion in Q2 2009 to $9.3 billion in Q2 2010 resulted in a decrease in interest earned of $1.6 million. The net interest margin before credit provisions, at 1.8%, was down 8 basis points year on year, which accounted for the remaining $1.7 million of the decrease in net interest income.
The Bank made net provisions for credit losses for Q2 2010 of $7.6 million, compared to $1.1 million in Q2 2009. $5.5 million of the $7.6 million provision related to two large hospitality loan portfolios.
Non-Interest Income
Non-interest income decreased by 6% from $40.2 million in Q2 2009 to $37.7 million in Q2 2010 primarily due to the following:
Asset management revenues decreased by 1% as the net asset values of assets under management declined by $0.4 billion from $6.4 billion in Q2 2009 to $6.0 billion in Q2 2010;
Decrease of other non-interest income of $2.5 million is due to non-recurring elements recognised in other non-interest income. The second quarter of 2009 was positively impacted by higher equity pick-up in our affiliates, revenue recognition from the transitional agreements in relation to the sale of our fund services operations and fees earned on a credit derivative which has now expired;
Trust revenues increased by $0.5 million year on year due to an increase in assets under administration of 18% from $24.9 billion in Q2 2009 to $29.4 billion in Q2 2010.
Non-Interest Expense
Total non-interest expenses decreased year on year by $3.5 million (4.4%) to $75.6 million in Q2 2010. The decrease relates to the cost saving measures implemented by the Bank. The primary reason for the expense reduction is the decrease in number of employees from 1,683 in Q2 2009 to 1,569 in Q2 2010.
Income Taxes
Net income tax for the quarter ended 30 June 2010 was an expense of $0.3 million compared to an expense of $0.8 million in the second quarter of 2009. The reduction in the taxation is in relation to the reduced net income results.
COMMENTARY ON BALANCE SHEET FOR THE PERIOD ENDED 30 JUNE 2010 (“Q2 2010”) COMPARED WITH YEAR ENDED 31 DECEMBER 2009 (“YEAR END 2009”)
Total Assets
Total assets of the Group remained relatively unchanged at the end of Q2 2010 compared to year end 2009. The Bank maintained a highly liquid position at 30 June 2010 with cash and deposits with banks representing 26.9% of total assets, compared to 20.7% at year end 2009.
Loans Receivable
The loan portfolio decreased by 1.4% from $4,218 million at year end 2009 to $4,159 million at Q2 2010. Provision for loan allowances at Q2 2010 totalled $138 million, an increase of $8 million from year end 2009. The Group’s loan portfolio is experiencing higher net run-offs, coupled with a reduced corporate business pipeline.
The loan portfolio represented 42.9% of total assets at the end of Q2 2010, compared to 43.9% at year end 2009, whilst loans as a percentage of customer deposits increased by 1% from 49.2% at year end 2009 to 50.2% at the end of Q2 2010.
Non-accrual loans net of specific provisions increased by 11.5%. Net non-accrual loans represented 3.6% of net total loans in Q2 2010 compared to 3.2% at year end 2009. Gross of loan provisions, non-accrual loans represented 5.96% of total loans in Q2 2010 compared to 5.5% at year end 2009.
The ratio of gross non-accrual loans to tangible common equity and provisions for loan losses (also known as the “Texas ratio”) improved from 38% at 31 March 2010 to 35% at 30 June 2010 as a result of the increase in the Bank’s capital position.
Investments
The total investment portfolio decreased by $0.5 billion to $2.4 billion as at the end of Q2 2010, which reflects the previously announced sale of held to maturity securities conducted as part of the Bank’s strategy for de-risking the Balance sheet.
Post Retirement Medical Benefit Plan
At Q2 2010, the Bank conducted a tri-annual revaluation of its post retirement medical benefit obligations to qualifying retirees in Bermuda. Following the revaluation by an independent third party actuary, the associated liability for post retirement medical benefits decreased by approximately $27 million, primarily as a result of changes in demographics and claim cost development since 2007.
Additionally, effective 30 June 2010, the post retirement medical benefits were amended whereby eligibility, benefits and cost sharing were modified for current active employees. The benefits amendment resulted in a further reduction in the post retirement medical liability of approximately $41 million as at the end of Q2 2010. Benefits paid in the six month period ended 30 June 2010 amounted to $1.8 million.
As at 30 June 2010, the Bank's remaining liability for its post retirement medical benefit plan is $78.7 million.
Shareholders’ Equity
Shareholders’ equity increased in the six months ended 30 June 2010 by $493 million (138.5%) to $847.8 million, primarily reflecting the net proceeds of the capital raise of $521 million, changes to post-retirement health benefits, improvements in market values of investments which were off set by a net loss for the six months ending 30 June 2010 of $176.2 million.
REVIEW OF RESULTS OF OPERATIONS BY SIGNIFICANT BANK OPERATIONS
Bermuda
Net loss of $2.4 million for Q2 2010 represented a decrease year on year of $8.3 million, primarily due to additional loan loss provisioning in the quarter under review.
Total revenues before gains and losses of $39.5 million in Q2 2010 were $7.7 million below Q2 2009 results primarily due to the increased specific loan loss provisioning on one hospitality related property and the decrease in non-interest income for Q2 2010.
Net interest income before loan loss provisions was $0.6 million below prior year levels due to significantly lower inter-bank interest rates and lower client volumes.
Non-interest income of $17.8 million in Q2 2010 was down 15% versus the second quarter of 2009 due to reduced equity pick-up from affiliates and non-recurring income recognised in Q2 2009 for transitional service agreement and credit support fees.
Total assets at Q2 2010 increased by 7% to $5 billion from year end 2009 reflecting the net proceeds from the capital raise.
Client assets under administration increased by $5.2 billion from $29.4 billion in Q2 2009 to $34.6 billion in Q2 2010, whilst assets under management declined by 7.2% to $3.7 billion, reflecting the prevalent market conditions.
Net income of $0.8 million for Q2 2010 decreased year on year by $1.8 million, primarily due to additional loan loss provisioning in Q2 2010.
Total revenues of $13.7 million were $2.8 million below Q2 2009 results primarily due to the increased specific loan loss provisioning on four properties, which was slightly offset by an increase in non-interest income for Q2 2010.
Net interest income before loan loss provisions was $1.3 million below prior year levels due to significantly lower inter-bank interest rates and lower client volumes.
Non-interest income of $ 9.2 million in Q2 2010 was up $ 0.9 million (10.4%) on Q2 2009 resulting from volume-driven foreign exchange commissions and card processing revenues as well as an increased equity pick-up from Butterfield's investment in Island Heritage Insurance.
Total assets at the end of Q2 2010 were $ 2.2 billion down $365 million from year end 2009, reflecting the strong hedge fund subscription cash inflow cycle seen prior to the Bank's most recent year end. Loans increased by $9.4 million over twelve months, with growth in the personal lending portfolio offset by a marginal contraction of the commercial loan portfolio and prudent loan loss provisioning.
Client assets under administration ended Q2 2010 at $4.6 billion representing a decrease of $127 million from Q2 2009, whilst assets under management declined by $145 million, reflecting the turbulence experienced in the financial asset markets.
Guernsey
Net income increased by $1.5 million (£1 million) to $1.8 million (£1.2 million) in Q2 2010 driven by the higher revenue performance.
Total revenue was up $1.5 million (£1.3 million) to $9.3 million (£6.2 million) in Q2 2010 compared to $7.8 million (£4.9 million) in Q2 2009.
Interest income was up $0.5 million (£0.4 million) as higher spreads on longer duration assets have increased interest income.
Non-interest income increased $1.0 million (£0.9 million) year on year due to revenue increases in trust, custody fees, foreign exchange and investment management revenues offsetting a small reduction in other banking fees.
Total assets ended Q2 2010 at $1.7 billion (£1.0 billion), up by $0.2 billion (£0.1 billion) from $1.5 billion (£0.9 billion) at year end 2009, which is due to the strong growth in customer deposits.
Client assets under administration ended the quarter at $15.8 billion (£10.6 billion), down from $17.7 billion at Q2 2009, reflecting declines in net asset values and a decline in balances associated with the mandate for one administered banking client coming to an end.
United Kingdom
The Bank recorded a net loss before gains and losses of $0.05 million (net income of £0.02 million) in Q2 2010, compared to net income of $1.9 million (£1.2 million) for Q2 2009.
Total revenue before gains and losses of $4.8 million (£3.2 million) was down $3.5 million (£2.1 million) in Q2 2010 compared to Q2 2009.
Net interest income was down $2.2 million (£1.3 million) year on year, as in Q2 2009, the Bank still had a considerable proportion of its debt securities at high interest rates (yield of 1.8% in Q2 2009 versus 0.8% in Q2 2010) that had not reached maturity and repriced to reflect the lower Bank of England base rate of 0.5%.
Non-interest income decreased by $1.3 million (£0.8 million). The positive variance from the year on year increase in assets under management, from $422.4 million (£265 million) to $531.8 million (£355 million), generating additional investment management fees and significant commission, is offset by the one-off exceptional income the Bank had in Q2 2009 from loan exit fees and foreign exchange revenue following the disposal of a US dollar fixed rate note, giving an overall year on year decrease.
Total non-interest expenses decreased by $1.6 million (£1.0 million) year on year primarily due to the following:
- Q2 2009 included a cost for the Financial Services Compensation Scheme levy of $0.1 million (£0.1 million);
- Number of employees decreased from 123 at Q2 2009 to 105 at Q2 2010; and
- UK Corporation Tax in Q2 2009 was $1.0 million (£0.6 million) compared to $0.1 million (£0.1 million) in Q2 2010, reflecting the charge on the net taxable income in the relevant periods.
Total assets stood at $1.2 billion (£0.8 billion) at Q2 2010, compared to $1.3 billion (£0.8 billion) at year end 2009. The primary asset movement is the decrease in the loan portfolio by $77 million (£39 million), to $452 million (£302 million) at Q2 2010 from $529 million (£341 million) at year end 2009, as a result of significant loan repayments.
Assets under management totalled $0.5 billion (£0.4 billion), an increase of $0.1 billion compared to Q2 2009 as a result of both new client money and portfolio performance, whilst client assets under administration at Q2 2010 amounted to $1.0 billion (£0.7 billion) compared to $1.1 billion (£0.7 billion) at Q2 2009.
Other
Other jurisdictions comprised Barbados, Hong Kong, Malta, Switzerland and The Bahamas. The other jurisdictions recorded a combined net loss of $0.08 million for Q2 2010 compared to a net loss of $0.15 million for Q2 2009. The decrease in net loss is primarily due to an increase in net interest income.
For full financial results and a detailed review of the Group’s performance, please visit Butterfield’s website, www.butterfieldgroup.com.
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
Butterfield is a publicly traded corporation with shares listed on the Bermuda and
Media Relations Contacts at Butterfield Bank:
Dianne Brewer
Senior Vice President, Marketing &
Phone: (441) 299 3979 Fax: (441) 295 3878
E-mail: dianne.brewer@butterfieldgroup.com
Mark Johnson
Assistant Vice President
Phone: (441) 299 1624 Cellular: (441) 524 1025
Fax: (441) 295 3878