Market Overview

Butterfield Reports Second Quarter 2018 Results

Share:
  • Net income of $49.7 million, or $0.89 per share;
  • Core net income1 of $51.7 million, or
    $0.93 per share;
  • Return on average common equity of 23.9%; core return on average
    tangible common equity
    1 of 27.6%;
  • Net interest margin of 3.20%;
  • Board declares a dividend for the quarter ended June 30, 2018
    of $0.38 per common share.

The Bank of N.T. Butterfield & Son Limited ("Butterfield" or "the Bank")
(BSX: NTB.BH)(NYSE:NTB) today announced financial results for the
quarter ended June 30, 2018.

Second quarter core net income1 was $51.7 million, or $0.93
per diluted common share, compared to $45.0 million, or $0.81 per
diluted common share in the previous quarter and $37.5 million, or $0.67
per diluted common share, for the second quarter of 2017.

The core return on average tangible common equity1 for the
second quarter of 2018 was 27.6%, up from 24.3% in the previous quarter
and 21.6% in the second quarter of 2017. The return on average assets
for the second quarter of 2018 was 1.8%, up from 1.6% in the previous
quarter and 1.3% in the second quarter of 2017. The core efficiency ratio1
for the second quarter of 2018 was 59.0% compared with 62.3% in the
previous quarter and 66.1% in the second quarter of 2017.

Commenting on the results, Michael Collins, Butterfield's Chairman and
Chief Executive Officer said: "The Bank continues to benefit from its
well positioned balance sheet, capital efficient non-interest income and
strategic asset deployment through its loan and investment portfolios.
The Deutsche Bank trust and banking acquisitions are progressing nicely
and add to our track record of executing well on acquisitions and
managing operational risks. The costs related to the integration and
closing of the Deutsche Bank deals have developed as we expected. I
remain confident in our ability to maximize shareholder value through
our businesses in core geographies, while continuing to seek out
accretive acquisitions in the trust and banking segments. I am
particularly pleased that we reported a core cost to income ratio of
59.0% this quarter, which is now in line with our longer-term
expectations for the Bank. This underlines our commitment to a strong
focus on cost discipline as the Bank continues to grow and achieve its
full potential."

Net interest income ("NII") for the second quarter of 2018 was $87.9
million, an increase of $6.1 million compared with NII of $81.8 million
in the previous quarter and $70.9 million in the second quarter of 2017.
Increased NII in the second quarter of 2018 was due to improved interest
income from the investment and loan portfolios. Increased rates
following the U.S. Fed funds rate rise benefited lending results overall
with corporate lending seeing slightly higher volume. Average customer
deposit balances of $10.1 billion were elevated during much of the
second quarter due to an inflow of transitory customer deposits. As
expected, these deposits started to decrease towards the end of the
quarter as period end deposit balances returned to more normal levels at
$9.7 billion as at June 30, 2018, and contributed to the large
sequential NII increase.

Net interest margin ("NIM") for the second quarter of 2018 was 3.20%, up
15 basis points from the NIM of 3.05% in the previous quarter and up 54
basis points from the NIM of 2.66% in the second quarter of 2017. This
NIM expansion is in line with expectations, and the Bank was able to
deploy additional liquidity into higher rates in May 2018.

Non-interest income was $41.9 million for the second quarter of 2018,
compared with $39.8 million in the previous quarter and $38.7 million in
the second quarter of 2017. This increase was due principally to the
inclusion of revenue from the newly acquired and integrated Deutsche
Bank trust business.

Non-interest expenses were $78.2 million in the second quarter of 2018,
compared with $77.4 million in the previous quarter and $75.3 million in
the second quarter of 2017. Non-interest expenses increased relative to
the previous quarter as a result of higher salaries and other employee
benefits due principally to the addition of the new trust teams. This
was partially offset by a decrease in professional and outside services
expense relating to business acquisitions (non-core), as well as
normalizing the cost profile of the Sarbanes-Oxley compliance program.

Results for the second quarter of 2018 included a release of provision
for credit losses of $0.5 million compared with a release for credit
losses of $1.9 million in the previous quarter and a provision for
credit losses of $0.5 million in the second quarter of 2017.

Capital Management

The current total capital ratio as at June 30, 2018 was 22.3% as
calculated under Basel III, which was effective for reporting purposes
beginning on January 1, 2016. As of December 31, 2017, the Bank reported
its total capital ratio under Basel III at 19.9%. Both of these ratios
are significantly above regulatory requirements.

The Board remains committed to a balanced capital return policy. The
Board again declared an interim dividend of $0.38 per common share to be
paid on August 17, 2018 to shareholders of record on August 6, 2018. In
addition to dividends, Butterfield currently has a Board approved share
repurchase authorization of up to one million common shares available
for capital management. The Bank did not repurchase any common shares in
the second quarter of 2018.

 

ANALYSIS AND DISCUSSION OF SECOND QUARTER RESULTS

 
Income statement Three months ended (Unaudited)
(in $ millions)   June 30, 2018   March 31, 2018   June 30, 2017
Non-interest income 41.9   39.8   38.7
Net interest income before provision for credit losses   87.4       79.9       71.5  
Total net revenue before provision for credit losses and other
gains (losses)
129.3 119.7 110.2
Provision for credit losses 0.5 1.9 (0.5 )
Total other gains (losses)   (1.6 )     0.4       2.0  
Total net revenue 128.3 122.0 111.6
Non-interest expenses   (78.2 )     (77.4 )     (75.3 )
Total net income before taxes 50.1 44.5 36.3
Income tax expense   (0.3 )     (0.4 )     (0.3 )
Net income 49.7 44.2 36.1
 
Net earnings per share                
Basic 0.90 0.80 0.66
Diluted 0.89 0.79 0.65
 
Per diluted share impact of other non-core items 1   0.04       0.02       0.02  
Core earnings per share on a fully diluted basis 1   0.93       0.81       0.67  
 
Adjusted weighted average number of participating shares on a fully
diluted basis (in thousands of shares)
55,904 55,813 55,580
 
Key financial ratios                
Return on common equity 23.9 % 21.8 % 19.0 %
Core return on average tangible common equity 1 27.6 % 24.3 % 21.6 %
Return on average assets 1.8 % 1.6 % 1.3 %
Net interest margin 3.20 % 3.05 % 2.66 %
Core efficiency ratio 1 59.0 % 62.3 % 66.1 %
 

(1)  See table "Reconciliation of US GAAP
Results to Core Earnings" below for reconciliation of US GAAP
results to non-GAAP measures

 
Balance Sheet   As at
(in $ millions)   June 30, 2018     December 31, 2017
Cash due from banks 1,756     1,535
Securities purchased under agreement to resell 89 179
Short-term investments 79 250
Investments in securities 4,727 4,706
Loans, net of allowance for credit losses 3,986 3,777
Premises, equipment and computer software 159 165
Goodwill and intangibles 77 61
Other assets   130       107  
Total assets   11,002       10,779  
 
Total deposits 9,718 9,536
Other liabilities 293 303
Long-term debt   143       117  
Total liabilities 10,154 9,956
Common shareholders' equity   849       823  
Total shareholders' equity   849       823  
Total liabilities and shareholders' equity   11,002       10,779  
 
Key Balance Sheet Ratios:   June 30, 2018     December 31, 2017
Common equity tier 1 capital ratio 19.1 % 18.2 %
Tier 1 capital ratio 19.1 % 18.2 %
Total capital ratio 22.3 % 19.9 %
Leverage ratio 7.2 % 6.9 %
Risk-Weighted Assets (in $ millions) 4,256.4 4,254.2
Risk-Weighted Assets / Total Assets 38.7 % 39.5 %
Tangible common equity ratio 7.1 % 7.1 %
Non-accrual loans/gross loans 1.1 % 1.2 %
Non-performing assets/total assets 0.4 % 0.4 %
Total coverage ratio 71.5 % 80.9 %
Specific coverage ratio 30.9 % 31.1 %
 

QUARTER ENDED JUNE 30, 2018 COMPARED WITH THE QUARTER ENDED MARCH 31,
2018

Net Income

Net income for the quarter ended June 30, 2018 was $49.7 million, up
$5.5 million from $44.2 million in the prior quarter.

The $5.5 million increase in net income in the quarter ended June 30,
2018 over the previous quarter was due principally to the following:

  • $7.5 million increase in net interest income before provision for
    credit losses, principally from interest earned on loans from slightly
    increased volumes and the impact of repricing, which increased yields,
    as well as increased yields on the investment portfolio and on
    short-term investments;
  • $4.6 million decrease in professional and outside services expense as
    a result of lower non-core costs associated with the recent
    acquisitions than in the prior quarter, and lower costs associated
    with the Sarbanes Oxley compliance program;
  • $2.2 million increase in non-interest income, principally as a result
    of increased trust revenue as a result of the recently closed
    acquisition of Deutsche Bank's Global Trust Solutions business;
  • $3.9 million increase in salaries and other employee benefits, due to
    the addition of new teams to service the expanded trust business, as
    well as annual compensation review increases;
  • $1.9 million decrease in other gains and losses, due principally to a
    non-core settlement loss on the de-risking of a defined benefit
    pension plan;
  • $1.4 million increase in provision for credit losses, due principally
    to a larger release in the prior quarter when compared to the release
    in the current quarter; and
  • $1.5 million increase in the remaining non-interest expense items, due
    to higher depreciation costs on certain IT assets and travel related
    expenditures and higher marketing costs.

Non-Core Items1

Non-core items resulted in net losses and expenses of $2.0 million in
the quarter ended June 30, 2018, an increase of $1.2 million from net
losses and expenses of $0.8 million in the prior quarter. Non-core items
for the period comprised principally:

  • $1.5 million in losses due to a non-core settlement loss on the
    de-risking of a defined benefit pension plan; and
  • $0.4 million of professional and outside services expenses associated
    with the previously announced acquisition of Deutsche Bank's banking
    businesses in the Cayman Islands, Guernsey and Jersey and the
    completed acquisition of Deutsche Bank's Global Trust Solutions
    business.

Management does not believe that the expenses, gains or losses
identified as non-core are indicative of the results of operations of
the Bank in the ordinary course of business.

(1) See table "Reconciliation of US GAAP Results to Core
Earnings" below for reconciliation of US GAAP results to non-GAAP
measures

BALANCE SHEET COMMENTARY AT JUNE 30, 2018 COMPARED WITH DECEMBER 31,
2017

Total Assets

Total assets of the Bank were $11.0 billion at June 30, 2018, up $0.2
billion from December 31, 2017. The Bank maintained a highly liquid
position at June 30, 2018, with $4.8 billion of cash and demand deposits
with banks, reverse repurchase agreements and short and long-term
investments, excluding held-to-maturity investments, representing 43.6%
of total assets, compared with 49.1% at December 31, 2017.

Loans Receivable

The loan portfolio totaled $4.0 billion at June 30, 2018, an increase of
$0.2 billion, due to new residential loan origination in the Channel
Islands and the UK, as well as small increases in government and
commercial lending in Bermuda.

Allowance for credit losses at June 30, 2018 totaled $31.5 million, a
decrease of $4.0 million from year-end 2017. The movement was due to
slightly lower general provisioning rates across several jurisdictions,
which was partially offset by several new specific provisions.

The loan portfolio represented 36.2% of total assets at June 30, 2018
(December 31, 2017: 35.0%), while loans as a percentage of customer
deposits increased from 39.7% at year-end 2017 to 41.1% at June 30,
2018, both of which are due to an increase in loans underwritten during
the quarter.

As of June 30, 2018, the Bank had gross non-accrual loans of $44.0
million, representing 1.1% of total gross loans, a slight increase from
the $43.9 million, or 1.2%, of total loans at year-end 2017. Net
non-accrual loans were $30.4 million, equivalent to 0.8% of net loans.
We continue to engage proactively with our clients who experience
financial difficulty.

Other real estate owned ("OREO") decreased by $4.2 million to $5.0
million for the second quarter ended June 30, 2018, primarily as a
result of sales transactions completed in the quarter.

Investment in Securities

The investment portfolio was $4.7 billion at June 30, 2018, stable from
December 31, 2017.

The investment portfolio was made up of high quality assets with 99.5%
invested in A-or-better-rated securities. The investment yield increased
slightly from the previous quarter to 2.7% as at June 30, 2018. Total
net unrealized losses were $92.0 million, compared to $19.2 million at
year-end 2017. The increase in unrealized losses is attributable largely
to continued increases in treasury rates during 2018.

Deposits

Average deposits were at $10.1 billion in the second quarter of 2018
compared to $9.7 billion in the fourth quarter of 2017. The cost of
deposits increased two basis points from the previous quarter to 14
basis points. Intra-quarter customer deposit levels were significantly
elevated for much of the second quarter of 2018 due to transitory
commercial activity of some trust customers but reduced towards quarter
end.

   

Average Balance Sheet2

 
For the three months ended
June 30, 2018     March 31, 2018     June 30, 2017
(in $ millions) Average

balance

($)

    Interest

($)

    Average

rate

(%)

Average
balance
($)
    Interest
($)
    Average
rate
(%)
Average

balance

($)

    Interest

($)

    Average

rate

(%)

Assets                        
Cash due from banks and short-term investments 2,348.0 7.9 1.36 2,173.8 5.0 0.94 2,636.9 4.5 0.68
Investment in securities 4,665.5 31.0 2.67 4,574.6 28.6 2.54 4,539.2 24.9 2.20
Trading 1.2 1.0 0.8
Available-for-sale 2,921.9 18.1 2.48 3,121.5 17.3 2.25 3,312.1 16.1 1.95
Held-to-maturity 1,742.4 12.9 2.98 1,452.0 11.3 3.16 1,226.3 8.9 2.90
Loans 3,957.6 53.7 5.44 3,861.2 50.5 5.31 3,606.8 46.0 5.11
Commercial 1,303.5 18.6 5.73 1,221.5 16.6 5.52 1,199.6 14.7 4.92
Consumer 2,654.1       35.1   5.30 2,639.6       33.9   5.21 2,407.1       31.2   5.20
Interest earning assets 10,971.1 92.7 3.39 10,609.5 84.2 3.22 10,782.9 75.3 2.80
Other assets 350.6         325.4         359.5        
Total assets 11,321.8       92.7       3.28   10,935.0       84.2       3.12   11,142.4       75.3       2.71  
Liabilities
Deposits 7,862.0 (3.6 ) (0.18 ) 7,411.3 (2.9 ) (0.16 ) 7,635.2 (2.7 ) (0.14 )
Securities sold under agreement to repurchase 1.8 (1.96 ) 1.8 (1.96 )
Long-term debt 130.2       (1.7 ) (5.25 ) 117.0       (1.3 ) (4.66 ) 117.0       (1.2 ) (4.20 )
Interest bearing liabilities 7,994.1 (5.3 ) (0.27 ) 7,530.1 (4.3 ) (0.23 ) 7,752.2 (3.9 ) (0.20 )
Non-interest bearing current accounts 2,213.4 2,366.3 2,377.6
Other liabilities 302.8         256.3         251.1        
Total liabilities 10,510.2 (5.3 ) (0.20 ) 10,152.7 (4.3 ) (0.17 ) 10,380.9 (3.9 ) (0.15 )
Shareholders' equity 811.5   782.3   761.5  
Total liabilities and shareholders' equity 11,321.8   10,935.0   11,142.4  
Non-interest-bearing funds net of

non-interest earning assets

(free balance)

2,977.1         3,079.5         3,030.7        
Net interest margin 87.4       3.20   79.9       3.05   71.5       2.66  

 

(2) Averages are based upon a daily averages for the
periods indicated.

 

Assets Under Administration and Assets Under Management

Total assets under administration for the trust and custody businesses
were $108.1 billion and $27.1 billion, respectively, while assets under
management were $5.0 billion as at June 30, 2018. This compares with
$95.4 billion, $27.5 billion and $5.0 billion, respectively, at December
31, 2017.

Reconciliation of US GAAP Results to Core Earnings

The table below shows the reconciliation of net income in accordance
with US GAAP to core earnings, a non-GAAP measure, which excludes
certain significant items that are included in our US GAAP results of
operations. We focus on core net income, which we calculate by adjusting
net income to exclude certain income or expense items that are not
representative of our business operations, or "non-core". Core net
income includes revenue, gains, losses and expense items incurred in the
normal course of business. We believe that expressing earnings and
certain other financial measures excluding these non-core items provides
a meaningful base for period-to-period comparisons, which management
believes will assist investors in analyzing the operating results of the
Bank and predicting future performance. We believe that presentation of
these non-GAAP financial measures will permit investors to assess the
performance of the Bank on the same basis as management.

   
Core Earnings Three months ended
(in $ millions except per share amounts)     June 30, 2018     March 31, 2018     June 30, 2017
Net income to common shareholders     49.7         44.2       36.1  
Non-core items        
Non-core (gains) losses
Gain on disposal of a pass-through note investment (formerly a SIV) (0.1 ) (0.9 )
Settlement loss on de-risking on a defined benefit plan     1.5                
Total non-core (gains) losses     1.4         (0.9 )      
Non-core expenses
Early retirement program, redundancies and other non-core
compensation costs
0.1
Tax compliance review costs 0.1 0.1 0.7
Business acquisition costs 0.4 1.6
Restructuring charges and related professional service fees                   0.6  
Total non-core expenses     0.6         1.7       1.4  
Total non-core items     2.0         0.8       1.4  
Core net income     51.7         45.0       37.5  
Core net income attributable to common shareholders     51.7         45.0       37.5  
 
Average common equity 833.5 820.7 759.2
Less: average goodwill and intangible assets     (83.0 )       (68.4 )     (61.6 )
Average tangible common equity     750.4         752.3       697.6  
Core earnings per share fully diluted 1     0.93         0.81       0.67  
Return on common equity     23.9 %       21.8 %     19.0 %
Core return on average tangible common equity     27.6 %       24.3 %     21.6 %
 
Non-interest expenses 78.2 77.4 75.3
Less: non-core expenses (0.6 ) (1.7 ) (1.4 )
Less: amortization of intangibles     (1.3 )       (1.1 )     (1.1 )
Core non-interest expenses before amortization of intangibles 76.3 74.6 72.8
Core revenue before other gains and losses and provision for credit
losses
    129.3         119.7       110.2  
Core efficiency ratio     59.0 %       62.3 %     66.1 %

Conference Call Information

Butterfield will host a conference call to discuss the Bank's results on
Wednesday, July 25, 2018 at 10:00 a.m. Eastern Daylight Time. Callers
may access the conference call by dialing +1 (844) 855 9501 (toll-free)
or +1 (412) 858 4603 (international) ten minutes prior to the start of
the call. A live webcast of the conference call, including a slide
presentation, will be available in the investor relations section of
Butterfield's website at www.butterfieldgroup.com.
A replay of the call will be archived on the Butterfield website
thereafter.

About Non-GAAP Financial Measures:

Certain statements in this release involve the use of non-GAAP financial
measures. We believe such measures provide useful information to
investors that is supplementary to our financial condition, results of
operations and cash flows computed in accordance with GAAP; however, our
non-GAAP financial measures have a number of limitations. As such,
investors should not view these disclosures as a substitute for results
determined in accordance with GAAP, and they are not necessarily
comparable to non-GAAP financial measures that other companies use.

Forward-Looking Statements:

Certain of the statements made in this release are forward-looking
statements within the meaning of the U.S. Private Securities Litigation
Reform Act of 1995. You can identify these forward-looking statements
through our use of words such as "may," "will," "anticipate," "assume,"
"should," "indicate," "would," "believe," "contemplate," "expect,"
"estimate," "continue," "plan," "point to," "project," "could,"
"intend," "target" and other similar words and expressions of the
future. Forward-looking statements include statements with respect to
our beliefs, plans, objectives, goals, expectations, anticipations,
assumptions, estimates, intentions, and future performance, and involve
known and unknown risks, uncertainties and other factors, which may be
beyond our control, and which may cause the actual results, performance,
capital, ownership or achievements of the Bank to be materially
different from future results, performance or achievements expressed or
implied by such forward-looking statements due to a variety of factors,
including worldwide economic conditions, the successful integration of
acquisitions, success in business retention and obtaining new business
and other factors. All statements other than statements of historical
fact are statements that could be forward-looking statements.

All forward-looking statements attributable to us are expressly
qualified in their entirety by this cautionary notice, including,
without limitation, those risks and uncertainties described in our
Securities and Exchange Commission ("SEC") reports and filings. Such
reports are available upon request from the Bank, or from the
SEC, including through the SEC's website at http://www.sec.gov.
We have no obligation and do not undertake to review, update, revise or
correct any of the forward-looking statements included herein, whether
as a result of new information, future events or other developments.

About Butterfield:

Butterfield is a full-service bank and wealth manager headquartered in
Hamilton, Bermuda, providing services to clients from Bermuda, the
Cayman Islands, Guernsey and Jersey, where our principal banking
operations are located, and The Bahamas, Switzerland, Singapore and the
United Kingdom, where we offer specialized financial services. Banking
services comprise deposit, cash management and lending solutions for
individual, business and institutional clients. Wealth management
services are composed of trust, private banking, asset management and
custody. In Bermuda, the Cayman Islands and Guernsey, we offer both
banking and wealth management. In The Bahamas, Singapore and
Switzerland, we offer select wealth management services. In the UK, we
offer residential property lending. In Jersey, we offer select banking
and wealth management services. Butterfield is publicly traded on the
New York Stock Exchange (symbol: NTB) and the Bermuda Stock Exchange
(symbol: NTB.BH). Further details on the Butterfield Group can be
obtained from our website at: www.butterfieldgroup.com.

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