Bank Of Butterfield 2016 Q3 Net Income: $24M

October 25, 2016

The Bank of Butterfield & Son today announced net income for the third quarter ended 30 September 2016 of $24.0 million, a decrease of $4.8 million compared to $28.8 million earned in the same quarter a year ago, resulting in earnings per share of $0.41 on a fully diluted basis.

During the quarter, the Bank made important strategic progress, completing a successful public offering and a listing of its common shares on the New York Stock Exchange.

“The public offering in the United States marks a new chapter in the company’s history, providing the Bank with enhanced access to capital for the continued development and expansion of its core businesses, following a period of successful recovery from the impact of the global financial crisis,” the Bank said.

“After removing the effects of certain non-core items, core net income for the third quarter ended 30 September 2016 was $33.4 million, up 14.1% compared to $29.3 million earned in the same quarter a year ago.

“These non-core items were comprised primarily of option vesting costs from a legacy 2010 option plan related to the private equity recapitalisation of the Bank, and now fully vested, which resulted in $8.8 million of expenses, including related payroll taxes. There were some additional restructuring costs incurred in the orderly wind-down of the investment management business in the United Kingdom.

“The core earnings per share increased $0.07 to $0.60 per share. The return on average common equity decreased to 11.7% from 14.4% while the core return on average tangible common equity decreased slightly to 19.0% in the third quarter of 2016, compared to 19.3% in the third quarter of 2015, largely due to the dilutive effect of the recent issuance of common shares. Return on assets at 0.9% was down from 1.1% from Q3 2015.”

Michael Collins, Butterfield’s Chief Executive Officer, said, “During the quarter, Butterfield completed a successful public offering of common shares on the New York Stock Exchange.

“This is an important milestone in the Bank’s history, and we believe the market’s enthusiastic response to the public offering is validation of our strategy. The ownership of the Bank now includes a strong institutional ownership profile, which will form long-term partnerships with the Bank.

“The public offering consisted of 12,234,042 common shares; 5,957,447 shares sold by Butterfield and 6,276,595 shares sold by the institutional shareholders who participated in the Bank’s 2010 recapitalisation, including The Carlyle Group. We appreciate the support we received from those shareholders while the Bank went through the process of derisking its balance sheet and rationalising its business model.

“The Carlyle Group remains a significant shareholder, and David Zwiener joined the Butterfield Board as the second Carlyle representative in August. Wendall Brown, who had served as a Director since 2013, retired from the Board in August.

“Subsequent to quarter-end, Richard Venn, who had served as a Director since 2010 also retired from the Board. We thank both Wendall and Richard for their many contributions to the Bank.

“Butterfield is focused on growth as a leading community bank in Bermuda and the Cayman Islands and through the provision of wealth management services. This model continues to generate strong profits and good returns for our shareholders. Capital raised in the public offering will be deployed in the continued development and expansion of our businesses in our core markets.

“We have been pleased with the performance of our shares following the public offering in terms of volume and price stability. For the current third quarter earnings, we have declared a common dividend of $0.10 per share.”

Michael Schrum, Butterfield’s Chief Financial Officer, commented, “Butterfield had strong and improved performance for the third quarter of 2016, with increases in both net interest income and non-interest income.

“Net interest income before provisions for credit losses during the quarter increased by $5 million year over year, on a combination of growth in the Bermuda commercial loan book and an increase in the size of the investment portfolio, complemented by lower deposit expenses across the Group. The lower deposit expenses were helped largely by the repayment of the remaining deposits in the UK jurisdiction.

“Growth in non-interest income, composed primarily of increases in trust revenues and asset management fees, was attributable largely to the beneficial impact of the acquisition of the private banking trust and investment management business of HSBC Bermuda, which was completed earlier in the year.

“Although these increases drove growth in core earnings of $4.1 million, net income was down $4.8 million versus the third quarter of 2015, largely as the result of $8.8 million in non-core costs associated with the vesting of the 2010 legacy employee stock options programme triggered by the valuation achieved in the public offering.

“The quality of our loan book remains strong, though provisions for credit losses were increased, year-on-year, to $5.3 million from $3.1 million due to a specific provision established for a loan on a single Bermuda commercial property, as well as adjustments to our general provisions arising from changes to sovereign credit ratings in the UK and Bermuda.

“While overall operating expenses increased by $16.1 million to $80.6 million, this was largely due to the non-core items discussed above. Quarterly core operating expenses also increased by $3.4 million over the same quarter last year largely as a result of increase compliance-related costs, but expenses as a percentage of core revenues decreased[1]. The core efficiency ratio improved from 66.8% in Q3 2015 to 65.3% in Q3 2016.”

Capital Management

The Bank said, “Consistent with global banking industry reform, Bermuda banks began the implementation of the Basel III framework during 2016, which is improving the Bank’s loss absorption capabilities and introducing new regulatory liquidity rules.

“As the Bank has strong organic capital generation and high quality capital, Butterfield is in a robust position and can continue to serve customers with new loans, deposit products and general banking services, as well as meet emerging regulatory capital requirements.

“The current total capital ratio as at 30 September 2016 was 22.9% as calculated under Basel III, which is effective for reporting purposes starting 1 January 2016. As of 31 December 2015, the Bank reported its total capital ratio under Basel II at 19.0%. Both of these are significantly above regulatory requirements.

“The Board remains committed to a balanced capital return policy and declared quarterly dividends of $20 per share on the Bank’s 8% non-cumulative perpetual voting preference shares, to be paid on 15 December 2016 to preference shareholders of record on 1 December 2016.

“The Board also declared an interim dividend of $0.10 per common share to be paid on 28 November 2016 to shareholders of record on 14 November 2016.

Share Repurchase Activity

“Under the Bank’s share buy-back programmes, the total shares acquired or purchased for cancellation during the quarter ended 30 September 2016 amounted to 8,232 common shares to be held as treasury shares at an average cost of $16.54 per share [total cost of $0.1 million]. There were no preference shares repurchased during the quarter ended 30 September 2016.

“On 19 February 2016, the Board approved, with effect from 1 April 2016, the 2016 common share buy-back programme, authorising the purchase for treasury of up to 0.8 million common shares.”

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