The Bank of N.T. Butterfield & Son Limited today [Feb 13] announced net income for the year ended 31 December 2016 of $115.9 million, an increase of $38.2 million compared to $77.7 million earned a year ago.
The $42 million premium on the preference share redemption resulted in a $0.05 per share decrease in earnings per share to $1.18. After removing the effects of non-core items, core earnings for the full year were $138.6 million, an increase of $24.7 million compared to 2015.
The Board declared a dividend for the quarter ended 31 December 2016 of $0.32 per common share, a three-fold increase from the prior quarter and the same quarter in the previous year.
Michael Collins, Butterfield’s Chief Executive Officer, said, “In 2016, Butterfield executed its strategy by completing a successful initial public offering on the New York Stock Exchange, improving liquidity for shareholders and providing the Bank with access to international capital.
“Our Community Banking and Wealth Management businesses performed well in 2016, leading to a 22% increase in core net income. During the year, we acquired and successfully integrated HSBC’s wealth management business in Bermuda and completed the wind-down of our UK private bank.
“Having repositioned the Bank to jurisdictions in which we have scale, we are now focused on growing our community banking market share while cautiously expanding our wealth management business through trust acquisitions.
“Butterfield’s business model produces high risk-adjusted returns relative to our US regional bank peers. In 2016, we recorded core return on average common tangible equity of 20% without the level of credit exposure inherent in a typical US regional bank.
“Butterfield has an $11 billion balance sheet comprising $3.6 billion in loans and $7.2 billion in cash and securities, which are invested primarily in US government and federal agencies. With high barriers to entry in each of our jurisdictions, we are uniquely positioned to service the global private wealth emanating from Asia, Europe, and Latin America.
“Following the successful IPO, we used $212 million of capital to repurchase all of the outstanding preferred shares eliminating $16 million of annual preference dividends and government guarantee fees, funds that we expect to deploy for the benefit of our common shareholders.
“The Bank’s shares have performed well, increasing in value by approximately 40% since the IPO. The Board has declared a common dividend of $0.32 per share for Q4 2016, which is more than three times the $0.10 quarterly dividend paid to common shareholders for the fourth quarter of 2015.”
Michael Schrum, Butterfield’s Chief Financial Officer, said, “Butterfield performed well in 2016, delivering year-over year improvements in both non-interest income and net interest income.
“2016 non-interest income rose by $7.3 million on a combination of increased banking fee revenues, trust services revenues and asset management revenues, which were enhanced by the acquisition of the HSBC Bermuda private banking investment management and trust businesses in Bermuda during the second quarter.
“The HSBC acquisition was largely responsible for the year-on-year increase in deposits of nearly $1 billion, which, against a backdrop of limited loan demand in our core markets, drove the Bank to direct more funds to its investment portfolio, which grew from $3.2 billion at year-end 2015 to $4.4 billion at year-end 2016. Funds were invested primarily in US government agency securities and 93.7% of the Bank’s investment portfolio is held in A-orbetter-rated securities.
“The asset quality of the Bank’s loan portfolio is similarly strong, with non-performing loans as a percentage of total loans amounting to 1.6%.
“Operating expenses rose just $0.7 million to $285.9 million in 2016, despite increased salary and related costs resulting from the HSBC Bermuda acquisition, significant redundancy costs associated with the London wind-down and $8.5 million of costs associated with the vesting of performance-based options triggered by the IPO in September.
“Significant core-expense savings were realised through the reduction of professional and outside services costs, which decreased by $8.8 million in 2016, driving and improvement in the Bank’s core efficiency ratio of 220 basis points to 63.8%.
“The increase in December 2016 to the benchmark US dollar interest rate led the Bank to increase both its Cayman prime rate and Bermuda dollar base rate by 25 basis points; the latter representing the first such increase in eight years.
“This change, along with potential future rate adjustments to be implemented concurrently with the US Federal Reserve funds rate increases anticipated in 2017 and beyond, are expected to improve a widening of Butterfield’s interest spreads, which would in turn lead to expansion in our net interest margin and net interest income.”
“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,” the Bank said.
“As the Bank has strong organic capital generation and high quality capital, Butterfield is well positioned 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 31 December 2016 was 17.6% as calculated under Basel III, which was effective for reporting purposes beginning on 1 January 2016. As of 31 December 2015, the Bank reported its total capital ratio under Basel II at 19.0%. Both of these ratios are significantly above regulatory requirements.
“The Board remains committed to a balanced capital return policy. The Board declared an interim dividend of $0.32 per common share to be paid on 27 March 2017 to shareholders of record on 13 March 2017, which represents a significant increase in dividend return for investors from the prior year.
“As was previously noted, the Bank redeemed for cancellation all of the outstanding preference shares. This eliminated approximately $16 million of dividend and guarantee fees for the preference shares which will be accretive to common shareholders. The Bank also purchased an outstanding warrant for cancellation for $0.1 million during the period.
Share Repurchase Activity
“Under the Bank’s share buy-back programmes, the total shares acquired or purchased for cancellation during the year ended 31 December 2016 amounted to 97,053 common shares to be held as treasury shares at an average cost of $16.36 per share [total cost of $1.6 million]. All outstanding preference shares were repurchased during the year ended 31 December 2016 for a total of $212.1 million.
“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.
“The repurchase of shares pursuant to the buy-back programme is subject to the approval of the Bermuda Monetary Authority [BMA]. However, the Bank has no current plans to repurchase any common shares under this programme which expires on 31 March 2017.”