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Butterfield Reports Second Quarter 2018 Results

July 24, 2018

HAMILTON, Bermuda--(BUSINESS WIRE)--Jul 24, 2018--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 income 1 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 equity 1 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 ratio 1 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.

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 Items 1

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.

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