at Bank of Butterfield
The Group achieved record core earnings for the year of $35 million; but $32.5 million in necessary exceptional charges reduced net income to $2.5 million.
Hamilton, Bermuda, 4 August 1998 - The Bank of N.T. Butterfield & Son Limited reported record core business earnings of $35 million for the fiscal year ended 30 June 1998. After exceptional charges of $6.4 million the Net Income from continuing operations was $28.6 million. However, after additional exceptional one-time charges, relating primarily to discontinued business in the United Kingdom, Net Income for the year was $2.5 million. This compares with $8.1 million, after $21.5 million in exceptional charges, a year ago. This year's numbers, of course, are subject to final audit.
"We know that our strategy of building on core strengths is succeeding, as evidenced by the good earnings performances of our Asset Management, Cayman, Guernsey and Treasury businesses. Obviously, we would like to have seen our success reflected in a strong net income number, but are satisfied that our core results, overall, demonstrate significant performance improvement. Furthermore, we know that our prudent approach to provisioning, particularly with regard to those businesses now exited, was right, and very necessary, to strengthen the balance sheet, paving the way for steady growth," said Calum Johnston, President and Chief Executive Officer.
At 30 June 1998, total revenues from core businesses (before exceptional items but after a charge of $2.4 million in respect of accounting changes relating to post-retirement employee medical health care benefits) was $35 million, up 18% on a like year-on-year comparison with 1997, indicating the soundness of our key businesses. Whilst interest income only increased by 1.3%, to $72.8 million, this reflected the continued prudent approach to provisioning and a reduced loan book as a result of the discontinued businesses. It masked, in particular, the fact that investment portfolio income increased significantly during the year in review because of the Group's prudent asset/liability management strategies.
Non-interest income accounted for 52% of total income (48% for 1997) at $77.9 million, which was up 16% on the previous year, reflecting the Group's continued drive to increase fee income as a percentage of total revenue. The biggest contributors to the increase in fees were the Asset Management businesses which include Investment Management, Trust & Mutual Fund Administration. The growth of our award winning family of Butterfield funds was important, particularly the Money Market fund which is rated AAAm by Standard and Poors.
Outside Bermuda, excellent performances were seen from the Group's Grand Cayman and Guernsey businesses, which saw increases in earnings of 22% and 19%, respectively. Also, the Hong Kong operation was modestly profitable in a difficult economic environment compared to losses in previous years.
Operating expenses increased by 5.8% from a year ago to $115.7 million. Once again, a disproportionate amount of expense was associated with the Bermuda banking operation, where a number of cost-efficiency initiatives have been now launched. The cost to income ratio for Bank of Butterfield Group overall, before exceptional items, was 76.8%, compared on a like basis with the previous year of 78.7%; evidencing an underlying trend in the right direction. However, after exceptional items this reduced to 98% (94% in 1997). The bank is determined to improve the performance of its Bermuda based retail banking operations.
Strong capital ratios for the year were accompanied by a sound balance sheet that resulted from a conservative approach to provisioning and prudent liquidity management. In the fourth quarter of financial year 1998, management elected to write off certain items and provide for others, as categorised below:
· A $26 million charge directly relates to the Group's discontinued United Kingdom business. This is primarily in anticipation of calls on some guarantees given early in the financial year to secure the agreement of other banks to take over certain loans and to provide funding for a business that was sold in the United Kingdom. The charge for discontinued business is related to the decision in 1997 to close the London branch and certain UK businesses. In 1997, a $16.8 million charge was taken with respect to these businesses.
· A $4 million charge was taken with regard to resolving outstanding reconciliation issues in the Group's Bermuda businesses, primarily Banking. These issues were vigorously addressed by the current management team during the year in review. They arose, primarily, as a result of inefficient internal processes which have now been corrected.
· A $2.5 million charge for various miscellaneous items was taken to ensure the integrity of the Group's balance sheet. None was material in itself. They related to items such as outstanding goodwill, the book value of a redundant computer system, and the residual compensation of officers retired or resigned.
· The cost of post-retirement medical benefits historically has been charged annually to income on a €˜pay-as-you-go' basis. In fiscal year 1998, the decision was taken to account for post-retirement medical benefits on an accrual basis, as is generally accepted best practice accounting in a number of major international jurisdictions, including the United States. The Group follows Canadian GAAP and it is envisaged that such accounting methodology will be adopted by the Canadian Institute of Chartered Accountants in the near future. This accounting change resulted in an additional charge to 1997/98 earnings of $2.4 million and a re-statement of prior period retained earnings downwards by $27.5 million.
The impact of the exceptional charges is evident in the financial performance indicators used by the Group. When the exceptional items are included in year-end 1998 measures, Return on Equity (ROE) was 0.9%, Earnings Per Share (EPS) was $0.12 and Return on Assets (ROA) was 0.1%. Without taking into account the one-time charges, ROE was 12.6%, EPS was $1.74 and ROA was 0.71%. These figures compare with year-end 1997, when, after exceptional charges, 1997 ROE was 3.6%, EPS was $0.40 and ROA was 0.25%; before exceptional charges, ROE was 10.4%, EPS was $1.45 and ROA stood at 0.83%.
Mr Johnston said, "Without question, we have considerable work to do in the year ahead and I am satisfied we have now created the solid base necessary from which to build for the future. Our progress will come from continually improving service to our customers, prudent risk management, the hard work of staff, and the leadership of the new management team that is now in place. They are an expert group, enthusiastic about developing our businesses, while making changes to improve productivity, customer satisfaction and shareholder value."
The Group's progress during the year was reflected in the share price, which stood at $16.00 on 30 June 1998, up from $11.25 as at 30 June 1997. The full year dividend was $0.64 per share, up 28% from the $0.50 per share the preceding year; with a fourth quarter dividend declared of $0.16 per share.
The strategy to enhance shareholder value was the drive behind a share buy-back programme that, between November 1997 and 30 June 1998, resulted in the repurchase of 819,852 shares for a total of $12.1 million. This strategy also was a driving force for the Group's successful debut entry into the international capital markets. The Bank issued US $75 million of Subordinated Floating Rate Notes, due on 1 July 2008. The Notes, which were listed on the Bermuda and Luxembourg stock exchanges, strengthened the Group's consolidated total capital position, which as at 30 June 1998 was 13.2%, well above regulatory requirements.
Mr Johnston has also re-organised and strengthened his Executive team. David M. Brierley, a former colleague from The Bank of Nova Scotia, joined the bank and is now Senior Vice President in charge of Credit Risk Management; Executive Vice President, Graham Brooks was given responsibility for all international offices as well as the Group's Private Banking and Asset Management businesses; C Wendell Emery was named Executive Vice President, Operations; Richard J. Ferrett was named Executive Vice President & Chief Financial Officer; Senior Vice President Janet M. Nearon was given new responsibility as head of the newly formed Customer & Staff Relations unit; Patricia G. Bean was named Senior Vice President, Human Resources; Ronald E Simmons was named Senior Vice President and Chief Accountant.
At 30 June 1998, Bank of Butterfield had total assets of $5 billion for the first time in its history, up 13% from $4.4 billion last year. This increase, which was particularly evident in the second half of the year, was fuelled by strong customer deposit growth, primarily in Bermuda and Guernsey, plus the impact of the additional $75 million of subordinated debt capital. Also at year-end, the Group had over $17.25 billion of clients' assets under administration, compared to $15.4 billion the year before. Total deposits stood at $4.61 billion, up 13% from last year's $4.08 billion, reflecting the continued strong customer base.
The Bank of Butterfield organisation is a vital community bank and niche offshore financial services company that has chosen it markets, knows them well, and uses its knowledge to benefit institutional and individual clients. The bank offers a full range of banking, credit, investment, treasury, trust and custody services through its headquarters and four branches in Bermuda, as well as offices in Grand Cayman, Guernsey, Hong Kong and the United Kingdom. The bank has organised core business lines into Private Banking & Wealth Management, Treasury and Capital Markets, and Community Banking.
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