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27 April 2010
Butterfield Reports Q1 2010 Financial Results

The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today announced a first quarter net loss of $176.3 million or a loss of $0.75 per share on a fully-diluted basis, compared with diluted loss per share of $0.22 in Q1 2009.

   

Brad Kopp, President & Chief Executive Officer, commented on Butterfield’s first quarter results: “As we disclosed in our year-end results and reiterated at our shareholders’ Annual General Meeting earlier this month, Butterfield anticipated incurring further investment losses of up to $175 million in the first quarter as a consequence of our strategic restructuring and de-risking of the Bank’s balance sheet.  Under this initiative, we sold $820.1 million of asset-backed securities in March, which, combined with further other-than-temporary impairment charges, contributed to overall quarterly losses on asset-backed securities of $174.3 million.  We have now largely diminished the balance sheet exposure to potentially problematic securities, allowing us to focus our resources on returning our businesses to a state of healthy growth.”

 

Despite the losses reported in Q1 2010, the Bank’s regulatory capital base totalled over $1 billion as at 31 March 2010 with a total capital ratio of 20.0% and a tier 1 ratio of 14.3%, up 9.9% and 7.1% respectively, a record high for the Bank.  The Bank’s capital ratios are now well in excess of the Bermuda Monetary Authority’s prescribed minimum Tier 1 ratio and the Individual Capital Guidance for total capital set by the BMA under the Basel II framework. Tangible common equity ratio ended the quarter at 4.9%, stronger than the 4.7% forecasted for the quarter.

 

On 2 March 2010, Butterfield announced the details of a balance sheet restructuring programme under which $550 million of new common equity was issued to a group of institutional investors, providing capital to offset loss provisions in respect of underperforming hospitality loans and enabling the Bank to take steps to de-risk its balance sheet by selling the majority of its asset-backed securities and collapsing its Held To Maturity investment portfolio.  As part of the agreement with the new investors, legacy shareholders received rights to purchase up to $130 million of common equity, which will reduce proportionately the ownership interest of the new investors.  The rights offering began on 12 April 2010 and will continue through the close of business on 11 May 2010.

 

Commenting on the rights offering, Mr. Kopp said, “We have held many rights offering information sessions over the past two weeks, and we have been extremely pleased with the level of interest that the community has shown in this unique investment opportunity.  With a substantially de-risked and liquid balance sheet and strong capital ratios, we believe the Bank is well positioned for a return to profitability and healthy growth in the medium term, as interest rates rebound.  We are pleased that we’re able to give our loyal shareholders, many of whom have experienced a substantial decrease in the value of their investments in the Bank over the past two years, the opportunity to participate in the future growth of the Bank.”

 

In keeping with its recently announced decision to suspend common dividend payments until the Bank returns to a position of sustainable profitability, Butterfield’s Board of Directors did not declare a dividend on common shares for the first quarter of 2010. We continue to pay our regular $4 million quarterly preference share dividend.

 

Michael Collins, Senior Executive Vice President in charge of the Bank’s Bermuda operations, shared his views on Butterfield’s Q1 performance, saying, “Thanks to a functionally and geographically diversified operating model, Butterfield normally enjoyed a good balance of interest and non-interest income.  Unfortunately, over the past couple of years, our revenues have been suppressed as a consequence of both low interest rates and low asset values on the world’s financial markets.  In Q1, net interest income was down by more than $6 million for the quarter on interest rates that continue to be at historic lows in Bermuda, the United States and United Kingdom.  Non-interest income was flat, year over year, on slightly reduced revenues associated primarily with lower valuations of our Butterfield Funds.”

 

Normalised Group Results

 

(in $ millions) Q1 2010 Q1 2009
Non interest income 35.4 35.7
Net interest income 42.8 49.8

Total revenue before provision for credit losses

Provision for credit losses

78.2

 

(1.1)

85.0

 

(1.0)

Total normalised net income before taxes

Income tax

4.1

 

(0.3)

11.1

 

-

Net normalised income

Dividends and guarantee fee of preferred shares

3.8

 

(4.5)

11.1

 

-

Normalised (loss) / earnings attributable to common shareholders (0.7) 11.1

Normalised (loss) / earnings per share

   -Basic

   -Diluted

US GAAP loss per share

   -Basic

   -Diluted

 

-

-

 

 

-

-

 

-

-

 

 

-

-

 

 

Note: Transactions that are viewed by Management not to be in the normal course of day to day business and are unusual in nature are excluded from normalised earnings as they obscure or distort the analysis of trends.

 

 

(in $ millions) March 2010 March 2009
Net US GAAP loss as reported (176.3) (20.8)
Items recognised in Other gains and losses
Net realised/unrealised losses on available for sale securities
   Sale of AFS portfolio 113.8 -
   OTTI - SIVs 60.5 -
Trading Revenues (0.9) (0.3)
Net realised/unrealised losses on HTM securities - 40.8
Net other gains (0.1) (1.9)
Sub-total 173.3 38.6
Items recognised in Other non-interest income
Write off of unclaimed balances and dividends (5.8) -
Other 0.6 (4.6)
Sub-total (5.2) (4.6)
Items recognised in Non interest expenses
Salaries and other employee benefits:
   Vesting of options & ELTIP shares on change of control 5.8 -
   Other 3.3 -
Property: other 0.3 -
Other professional services: recovery of legal fees (1.6) -
Other expenses: commitment fee for $500 million line of credit 7.0 -
Taxes: tax credit in the UK due to realised losses on investments (2.8) (2.1)
Sub-total 12.0 (2.1)
Total adjustments 180.1 31.9
Total normalised earnings 3.8 11.1
Dividends and guarantee fee of preferred shares (4.5) -
Normalised (loss)/earnings attributable to common shareholders (0.7) 11.1

 

ANALYSIS AND DISCUSSION OF QUARTERLY RESULTS Q1 2010 COMPARED TO Q1 2009


Net Income


Butterfield reported a net loss of $176.3 million for the three months ended 31 March 2010, compared to a net loss of $20.8 million in the prior year.  The Q1 2010 net loss reflects losses on asset-backed securities that were sold during the quarter and reductions in the carrying value of remaining securities that became other-than-temporarily impaired during the quarter. Results were also affected by the March 2010 capital raise and associated change of control of the Bank. The make-up of other gains and losses was as follows:

 

• A $174.3 million loss on the sale of securities from Butterfield’s Available For Sale investment portfolio. This is comprised of:

 

 1) Realised losses of $113.8 million on the sale of asset-backed securities held in the Available For Sale portfolio

 

 2) Other-than-temporary impairments of $60.5 million on the Bank’s holdings of Structured Investment Vehicles (SIVs)

 

• Trading gains and losses of $0.9 million, which primarily comprise seed money invested in Butterfield Select Funds and investments in two credit card companies

 

• Net other gains of $0.1 million comprising a gain on cash flow hedges of $1.6 million offset by the write-down of $1.5 million of the amount receivable from the Charitable Trust Foundation to the Bank’s closing share price of $1.45 per share

 

Non-Interest Income


Non-interest income, at $40.5 million, was down $0.1 million, year-on-year, reflecting decreases in the values of assets under management.  Specifically: 


• Asset management revenues were down $1.5 million as net asset values of assets under management declined


• Non-interest revenues from banking were up $0.3 million mainly due to loan exit fees in the UK (of which £0.2 million was from one client)


• Foreign exchange remained in line with prior year


• Trust revenues increased by $0.7 million year on year on an increase in assets under administration of 3.8% from $26.9 billion to $27.9 billion


• Other non-interest income includes the following items:


- A write off of $5.8 million of unclaimed balances and dividends


- The write off of a $0.3 million receivable due from the sale of property in 2009


- Losses on investments in affiliates of $0.4 million

 

As a result of the items recorded in ‘Other non-interest income’, total normalised non-interest income was $35.4 million in Q1 2010, compared to $35.8 million a year ago.

 

Net Interest Income


Net interest income, before credit provisions, at $42.8 million in Q1 2010, is down by $6.5 million (13.0%) versus Q1 2009. The reduction reflects lower margins from historically low interest rates worldwide, particularly in Bermuda, the United Kingdom and the United States, as well as decreased values of interest-earning assets. Average interest earning assets were down $1.2 billion (11.1%) year on year to $9.2 billion, which accounted for $5.5 million of the decrease in net interest income, whilst the net interest margin before credit provisions, at 1.89%, was down 4 basis points year on year, which accounted for the remaining $0.9 million of the decrease in net interest income.  The contraction in the net interest margin is a direct result of the low interest rate environment and the inability of the Bank to pass on in full interest rate cuts to depositors as yields on short-dated assets reprice at historically low rates.


In line with the Group’s provisioning policy, the Bank made net provisions for credit losses for Q1 2010 of $1.1 million, in line with Q1 2009. Of the $1.1 million, $0.6 million, $0.3 million and $0.5 million respectively relate to the Barbados, Cayman and UK loan portfolios, whilst there was a release of $0.3 million in respect of the Bermuda loan portfolio. No credit provisions were required in respect of the loan portfolios in The Bahamas or Guernsey.

 

Non-interest expense


Total operating expenses increased year on year by $14.9 million, or 20.4%, to $87.8 million, of which $14.8 million was from the following one-off items:


• An accrual of $3.3 million was made in Q1 2010 in connection with retention and staff-related benefits


• Salaries and other employee benefits also reflected a charge of $5.8 million related to share-based compensation expenses that occurred as all stock options and deferred incentive shares immediately vested on the equity investment in March


• Under Property expenses, previously capitalised planning costs of $0.3 million were written off as the Bank cancelled non-critical premises upgrades during the quarter


• Professional and outside services expenses included the recovery of  $1.6 million of litigation fees following the successful settlement of a trust case in Guernsey


• Included in Other expenses are $7 million fees incurred with the Bank to Canadian Imperial Bank of Commerce (CIBC) for the commitment for a line of credit.


After adjusting for all the above one-off items, total ‘normalised’ non-interest expenses in Q1 2010 of $73.0 million were in line with Q1 2009 of $72.9 million.

Total headcount at 31 March 2010 was 1,581 (Q1 2009: 1,685), of which 749 employees are located in Bermuda compared with 797 a year ago.

 

Income taxes


Net income tax for the quarter ending 31 March 2010 was a credit of $2.5 million compared to a credit of $2.1 million in the first quarter of 2009. A tax credit of $2.8 million was recognised in the UK, reflecting the realised loss on sale of asset backed securities, which was offset by tax expense of $0.2 million in respect of our Barbados business.

 

Balance Sheet


31 March 2010 compared to 31 December 2009


Total assets of the Group increased to $10.1 billion at 31 March 2010, compared to $9.6 billion as at 31 December 2009. This was largely due to the $550 million capital raise in March 2010 and a $45 million increase in customer deposits.  At 31 March 2010, cash and deposits with banks represented 32.6% of total assets, compared to 20.7% a year ago. 

 

The loan portfolio was $4.1 billion at 31 March 2010, down $103.9 million (2.4%) versus 31 December 2009.  The Group’s loan portfolio is experiencing higher net run-offs, coupled with a reduced corporate business pipeline.

 

The loan portfolio represented 40.9% of total assets at 31 March 2010, compared to 44.0% at 31 December 2009, whilst loans as a percentage of customer deposits was 47.6% at end Q1 2010 compared to 49.2% at end 2009.

 

Non-performing loans totalled $234.6 million at 31 March 2010, representing 5.5% of total loans, compared to 5.4% at 2009 year end, the movement primarily reflecting increases in non-performing residential mortgages in the Bermuda, The Bahamas and Barbados loan portfolios of $2.0 million, $0.6 million and $0.3 million, respectively. UK non-performing loans have decreased by $1.8 million since 31 December 2009, due to the repayment of a delinquent loan of $1.6 million.

 

Loan allowances at 31 March 2010 totalled $131 million, up from $130.3 million the previous quarter, representing 2.4% of the loan portfolio compared to 2.3% at 31 December 2009. The coverage ratio of loan allowances to non-performing loans as at 31 March 2010 was 55.8%, the same as year end.

 

Total investments were $2.2 billion as at 31 March 2010, down $0.7 billion (24.5%) from 31 December 2009 as a result of the sale of $820.1 million of asset-backed securities in the quarter. The Trading portfolio stood at $46.0 million, down from $47.8 million the previous quarter; the Available For Sale portfolio was $2,183 million (Q4 2009: $2,067 million) and the Held To Maturity portfolio was nil (Q4 2009: $839 million).

 

The remaining Held To Maturity portfolio as at 31 December 2009 was transferred to the Available For Sale  portfolio in March 2010 as the Bank no longer had the intent, following the capital raise, to hold these securities to maturity. During Q1 2010, the Bank concluded its strategy to de-risk the balance sheet through the sale of asset-backed securities totalling $820 million in sale proceeds and resulting in a net realised loss to earnings of $113.8 million.

 

Shareholders’ equity increased in Q1 2010 by $393.5 million (110.7%) to $749.0 million as at 31 March 2010, primarily reflecting the proceeds of the capital raise (net of related transaction costs) of $512.5 million and a net loss for the quarter of $176.3 million.


 
Review of Results of Operations by Jurisdiction

 

JURISDICTIONS WITH BANKING OPERATIONS

 

Bermuda

Total revenue before gains and losses decreased year on year by $1.7 million, or 3.4%, to $48.3 million in Q1 2010. This reflects declining net interest margins in the Community Banking segment as a result of the historically low interest rate environment, in conjunction with decreasing non-interest income from the Wealth Management & Fiduciary Services segment, due to lower fee revenues as a result of declining net asset values, offset by an increase in non-interest income in the Banking segment due to the write back of unclaimed balances and dividends. 

 

Total expenses increased by $13.4 million, from $44.5 million to $57.9 million, in Q1 2010. This was as a result of $3.3 million share based compensation expense due to accelerated vesting of options and deferred incentive shares as a result of the equity investment in March. In addition, the Bank paid $2 million to CIBC for the commitment for a line of credit and accrued an additional $5 million for the liquidity facility of $500 million.

 

As a result, net income before gains and losses was down $15.1 million to a loss of $9.6 million for Q1 2010 from a profit of $5.5 million in Q1 2009.

 

Total assets stood at $5.2 billion at 31 March 2010, up $554 million on year-end 2009, reflecting the capital raise.

 

Assets under management were $3.8 billion as at 31 March 2010, down from $4.0 billion at year-end 2009, reflecting a decline in asset values. Assets under administration decreased by $1 billion (3.2%) during the quarter, mainly reflecting a decline in custody assets from $19.4 billion to $18.3 billion.


 

Barbados

Total revenues before gains and losses were down 14.8% year on year to $3.3 million in Q1 2010, reflecting the provision for credit losses taken in Q1 2010 of $0.6 million, compared to a release in Q1 2009 of $0.1 million, offset by continued strong earnings from net interest income, as 43% of the loan portfolio is in fixed-rate loans.

 

Total non-interest expenses were up $0.9 million due to the accelerated vesting of options as a result of the change of control of the Bank.

 

As a result, the net loss before gains and loses was $0.2 million, down from net income of $1.3 million a year earlier. Total assets were $270 million, down $7.5 million from that at year-end 2009.

 

Cayman Islands

Total revenues before gains and losses were down $5.0 million to $14.9 million from $19.9 million a year ago. Net interest income decreased by $4.4 million as a result of significantly lower inter-bank interest rates and lower volumes. Non interest income decreased by $0.4 million due to decreased foreign exchange revenues on lower overall volumes, offset partially by increased pricing for banking services introduced in the current quarter. In addition, the expiry of the amortisation of the gain on the sale of our Fund Services businesses, in line with the transitional services agreement, was unfavourable to Other non-interest income.

 

Non interest expenses were up $1.3 million primarily due to the charge off of deferred stock option expenses, which immediately vested on the change of control. In addition there was an increase in bank license and work permit fees in January 2010.

 

Net income before gains and losses decreased by $6.2 million to $1.3 million. Net realised investment losses of $11.6 million resulted from the sale of securities in the Available For Sale portfolio, consistent with the Bank’s strategy to de-risk the balance sheet. As a result, net loss for Q1 2010 was $10.3 million compared to a profit of $6.4 million a year ago.

 

Total assets at 31 March 2010 were $2.5 billion, down $135 million from $2.6 billion at year end 2009, resulting from normal course cyclical cash flows in our hedge fund and  captive insurance clients. Loans increased by $50 million over the past year. Client assets under administration ended the quarter at $4.6 billion, down from $5.0 billion at 2009 year-end, reflecting underlying client consolidation while assets under management was unchanged at $ 1.2 billion.


 

Guernsey

Total revenue before gains and losses were up $0.4 million to $8.7 million in Q1 2010 compared to $ 8.3 million a year ago.

 

Interest income was relatively unchanged from prior year as higher spreads on longer duration deposits were offset by foreign exchange rate movements.

 

Non interest income increased $0.4 million year over year due to new trust business and increased fees. Modest improvements in custody fees and other banking fees were offset by a reduction in foreign exchange revenues.

 

Non interest expenses have decreased by $0.9 million over the prior year due to the recovery of legal fees of £1.1 million. This was offset by £300,000 of accelerated vesting of stock options in Q1 that were not charged in the prior year.

 

Net income before gains and losses increased by $1.3 million to $2.7 million in Q1 2010. Losses of $1.5 million resulted from the sale of securities from the Available For Sale portfolio as part of the Group’s asset restructuring strategy.

 

Total assets ended the quarter at $1.7 billion (£1.0 billion), down by $169 million from $1.5 billion (£0.9 billion) at year end 2009 in dollar terms but was up in Pounds due to strong growth in customer deposits.

 

Client assets under administration ended the quarter at $16.3 billion (£10.8 billion), down from $18.8 billion (£11.6 billion) at year end 2009, reflecting declines in net asset values and a decline in balances associated with the loss of a major managed bank client.

 

The Bahamas

Total revenue before gains and losses were in line with last year at $1.9 million. Total non interest expenses were up $0.1 million to $1.9 million due to the accelerated vesting of options. As a result there was a minimal net loss at the end of Q1 2010.


 

United Kingdom

Total revenue before gains and losses were down $1.0 million in Q1 2010 compared to Q1 2009. Net interest income was down $1.4 million compared to the prior year as floating rate assets re-priced as interest rates continued to decline. Non interest income increased by $0.9 million as assets under management have increased from £268 million to £372 million year on year, generating additional investment management fees in addition to significant net commission. Lending fees include exit fees in Q1 2010 for two clients totalling £240,000.

 

Total non interest expenses decreased by $0.2 million year on year. This was primarily a result of total headcount reducing from 133 at end March 2009 to 109 at end March 2010.

 

Net income before gains and losses was $2.4 million in Q1 2010, compared to $3.2 million for the same quarter a year earlier. As part of the Bank’s de-risking strategy, a loss of $10.1 million was booked in Q1 2010 on the sale of securities from the Available For Sale portfolio. As a result, the UK reported a net loss of $7.7 million for Q1 2010 compared to a loss of $6.4 million in Q1 2009.

 

Total assets stood at $1.2 billion (£0.8 billion) at the end of March, compared to $1.3 billion (£0.8 billion) at 31 December 2009. Over the last 12 months the UK has reduced the size of its loan book as part of its liquidity strategy and objective of maintaining only loans of the highest quality’.


 
Assets under management totalled $0.6 billion (£0.4 billion), consistent with year-end 2009, whilst client assets under administration ended the quarter at $1.0 billion (£0.7 billion), compared to $1.2 billion (£0.7 billion) at 31 December 2009.

 

JURISDICTIONS WITH EXCLUSIVELY NON-BANKING OPERATIONS

 

Malta

Net income of $0.1 million on revenues of $0.4 million was recorded in Q1 2010, as trust fee income has increased as a result of increases in both time billed and new business set-up fees compared to the same period last year. 

 

Client assets under administration were $0.7 billion at 31 March 2010 versus $0.6 million in the prior year.

 

Hong Kong

Net income of $0.8 million on revenues of $1.2 million was recorded in Q1 2010, as non interest income has increased by $0.7 million over the prior year due to higher recurring fees, a reflection of increasing portfolio values and the intake of new investment management clients, together with one-off commissions. Non interest expenses were lower in Q1 2010 by $0.3 million due to lower amortisation of intangible assets as a result of impairment taken at year end. This was offset by an increase in salaries and staff benefits as a result of accelerated vesting of options and higher commissions paid on the bond commission revenue.


Switzerland

A net loss of $0.5 million was recorded in Q1 2010 on revenues of $0.1 million, compared to a net loss of $0.8 million in Q1 2009. The decrease in the net loss is mainly driven from the decrease in expenses due to the closure of the Zurich office.

 

 

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