The Bank of N.T. Butterfield & Son Limited (“Butterfield” or the “Bank”) today reported its first quarter 2009 financial results. Net income before gains and losses was $18.1 million for the quarter, compared to $35.4 million in Q1 2008. First quarter 2009 results were adversely affected by a $37.5 million write down of a single asset-backed security, resulting in a net loss of $20.8 million, or $0.22 per share on both a basic and fully diluted basis. This compares to net income for the first quarter of 2008 of $36.3 million, or $0.39 per share basic and $0.38 per share fully diluted.
Butterfield’s Board of Directors has approved a first quarter dividend of $0.08 per share, comprised of $0.04 in cash and $0.04 in common shares, payable on 5 June 2009 to shareholders of record on 15 May 2009. Both the amount and composition of the dividend are unchanged from the prior quarter.
Alan Thompson, President & Chief Executive Officer commented on Butterfield’s first quarter results: “Across the majority of our lines of business and jurisdictions, Butterfield felt the impact of the ongoing recession, with interest rates at historic lows and asset values languishing during the quarter. When coupled with the write down of one security in our investment portfolio, it was a disappointing quarter for us. There are, however, noteworthy positive developments in the first quarter results, including a decline in the difference between the book and market values of investments in the Bank’s held to maturity portfolio by $18 million, a reduction of operating expenses and continued good loan quality, with Bermuda’s non-accrual loans being 0.8% of loans.” He added, “In April, shareholders approved the issuance of preference shares to strengthen our capital position. Through the issuance of new capital, which has the full support of the Government of Bermuda, careful cost containment and adherence to our business strategy, we aim to improve our capital base.”
Mr. Thompson continued, “Butterfield enjoys considerable strengths: a well diversified franchise, excellent customer relationships, good loan quality, and an outstanding group of professional and talented employees. It is these strengths that form the foundation of our confidence in the future and our ability to continue to serve our customers and communities and, when economic conditions improve, to generate attractive returns for our shareholders.”
Richard Ferrett, Executive Vice President & Chief Financial Officer said, “The write down of $37.5 million on one security—a collateralised mortgage obligation (CMO) with exposure to the US residential market—was consistent with our stress test analysis. As we disclosed in the notes to our audited 2008 financial statements, management’s best estimate at the time of possible future discounts in the carrying value of potentially problematic CMOs was $44 million. In March, one of the securities that had been identified as at risk in the Bank’s 2008 year-end financial statements became other than temporarily impaired. This investment loss was also anticipated in stress tests prepared for the Bermuda Monetary Authority, and the write down is on the single largest instrument in the investment portfolio identified by our stress test analysis as potentially vulnerable to loss. Although this security continues to make interest payments, we do not believe the Bank will receive full repayment of both interest and principal and we wrote the security down to its market value.”
Mr. Ferrett continued, “Butterfield ceased making new investments in securities with exposure to the US residential mortgage market in June 2007; though we do continue to hold positions in asset-backed and mortgage-backed securities that were purchased before that date. As there is currently no active market for such securities, we believe it prudent to continue to hold them rather than looking to sell them at current levels. Our Tier 1 capital ratio ended the quarter at 7.7%, and our total capital ratio was 10.1%. When including the $200 million preference share raise which will be completed in Q2 2009, the tier 1 capital ratio would have been 11.1% and the total capital ratio would have been 14.5% on a pro forma basis.”
Butterfield did not early adopt FSP 115-a: Recognition and presentation of other-than-temporary impairment, the new accounting standard that changes the US GAAP impairment model, FSP 157-e: Determining whether a market is not active and a transaction is not distressed, the new accounting standard related to fair value of securities in an inactive market, or FSP 107-1: Interim disclosures about fair value of financial instruments. These accounting standards are effective for fiscal periods beginning after 15 March 2009 and therefore are effective from the Bank’s second quarter in 2009.
Q1 2009 compared to Q1 2008
Butterfield reported net income before gains and losses of $18.1 million for Q1 2009, compared to $35.4 million in Q1 2008. However, reported results for Q1 2009 were adversely affected by various gains and losses, principally relating to losses from investment securities and an unrealised gain from a credit support agreement with Butterfield Money Market Fund Limited (BMMFL). The make-up of other gains and losses was as follows:
- A net $0.1 million realised loss on the sale of securities;
- An unrealised loss of $0.2 million on trading securities, which primarily comprise seed money invested in Butterfield Select Funds;
A $40.9 million loss on Butterfield’s held to maturity (HTM) investment portfolio. This was made up of:
- a write-down to fair market value of $37.5 million in respect of a single CMO comprised of US residential mortgage related loans. This write-down reflects continued deterioration in the US housing market. Management used current loss severity assumptions published in March by a leading rating agency; the use of which resulted in the quarter end impairment testing showing a short fall in the expected cash flow of one security; the risk of impairment on which was described in ‘Note 4: Investments’ in the Bank’s audited 2008 financial statements under the heading ‘Significant risk and uncertainty’.
- A provision of $3.5 million was recorded in Q1 2009 in respect of an investment security, which is not a CMO, that is in default.
- An unrealised gain of $1.8 million stemming from a credit support agreement provided by the Bank to BMMFL; and
- An unrealised gain of $0.5 million on an investment in a credit card company.
In Q1 2008, the unrealised losses on trading securities was $1.1 million, and a net gain of $2.0 million was recorded in respect of other gains (losses) made up of an unrealised loss of $15.7 million on two credit support agreements provided by Butterfield to BMMFL, offset by realised and unrealised gains of $10.1 million and $7.8 million, respectively, in respect of investments in a credit card company.
Including the impact of gains and losses Butterfield had a net loss of $20.8 million for Q1 2009, compared to a net income of $36.3 million for Q1 2008, which equates with earnings per diluted share of ($0.22) in Q1 2009, compared to $0.38 in Q1 2008. Basic earnings per share, were ($0.22), compared to $0.39 for the like quarter a year ago. Revenues before gains and losses were $88.9 million in Q1 2009, compared to $126.2 million in Q1 2008, the year over year decline in part reflects: 1) the sale of the Fund Services businesses in September 2008; 2) the impact of the significant strengthening of the US dollar against the British Pound, which strengthened by 27.6% from the end of Q1 2008 to Q1 2009, and its impact on the translation of the revenues of Butterfield’s Guernsey and UK operations; 3) a decline in revenues associated with foreign exchange, asset management, trust and custody, reflecting lower net asset values and volumes; and 4) a decline in net interest income due to lower net interest margins and average interest earning assets, year on year.
For Q1 2009, non-interest income, at $40.6 million, was down 31.0%, or $18.2 million, year on year. This reflects the following factors: 1) the sale of the fund administration businesses to Fulcrum Group in September 2008; in Q1 2008, those businesses generated revenues of $12.8 million; 2) revenues from asset management declined by 30.7% to $7.5 million, reflecting the fall in asset values under management due primarily to world market conditions, with assets under management down year on year by 26.9% to $8.3 billion; 3) whilst fees from banking activities were down only 2.0%, to $8.9 million, foreign exchange revenue fell by 22.1% to 8.8 million, reflecting reduced volumes of customer driven transactions; 4) trust revenues declined by 6.8% to $6.5 million and custody and other administration services revenues declined by 20.6% to $3.7 million, both reflecting lower client net asset values and turnover; and 5) other non-interest income, in contrast, increased year on year by 59.3% to $5.3 million. Included in the $5.3 million is a fee of $2.3 million which relates to the credit support agreement with BMMF, a gain of $0.6 million on the carrying value of investments in affiliates, $1.1 million of a deferred gain of $4.5 million relating to the Transitional Services Agreement with Butterfield Fulcrum Group entered into in September 2008, which is being amortised over 12 months ending October 2009, a gain of $0.7 million on the sale of two vacant lots of land in Bermuda and rental income of $0.5 million.
Net Interest Income
Net interest income, before credit provisions, at $49.3 million in Q1 2009, is down by $18.3 million (27.1%) on Q1 2008. The reduction reflects the low level of interest rates worldwide, particularly in Bermuda, the United Kingdom and the United States, as a result of the declining global interest rate environment. Average interest earning assets were down year on year by $1.7 billion (14.0%) to $10.4 billion, which accounted for $9.5 million of the decrease in net interest income, while the net interest margin after credit provisions, at 1.89%, was down 35 basis points year on year, which accounted for the remaining $8.8 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 2009 of $1.0 million, compared to $0.2 million in the same quarter in 2008. Of the $1.0 million, $0.9 million and $0.2 million respectively relate to the Bermuda and Cayman loan portfolios, whilst there was a release of $0.1 million in respect of the Barbados loan portfolio. No credit provisions were required in respect of the loan portfolios in The Bahamas, Guernsey and the UK, as was the case for the like quarter a year ago.
Total operating expenses decreased year on year by $16.3 million, or 18.3%, to $72.9 million, of which $9.5 million is a result of the sale of the Fund Services businesses. Salaries and other employee benefits were down $8.9 million year on year, to $40.7 million, primarily reflecting reduced head count in respect of the former fund administration costs, and the impact of the strengthening US dollar. Professional and outside services costs have fallen $4.5 million, or 51.4%, to $4.2 million on the completion of the assessment and negotiation phase of Butterfield’s strategic information technology projects currently in the development phase. Total headcount at 31 March 2009 was 1,679 (Q1 2008: 1,897), of which 791 are located in Bermuda. The headcount decrease reflects the sale of the fund administration businesses.
Net income tax for the quarter ending 31 March 2009 was a credit of $2.1 million compared to a charge of $1.5 million. A tax credit of $2.3 million (Q1 2008: tax charge of $1.0 million) was recognised in the UK, reflecting an other-than-temporarily-impaired charge of $9.4 million in the UK’s HTM portfolio, which was offset by tax expense of $0.2 million (Q1 2008: tax charge of $0.5 million) in respect of the Barbados and Guernsey businesses.
31 March 2009 compared to 31 December 2008
Total cash and deposits with banks were $2.9 billion as at 31 March 2009, compared to $2.2 billion at 31 December 2008, and represented 27.7% of total assets, compared to 20.4% a year ago.
Total assets of the group as at 31 March 2009 were $10.6 billion, compared to $10.9 billion as at 31 December 2008. The decrease of $0.3 billion (3.3%) reflects a slight reduction of 1.8% in customer deposits, down $172 million to $9.2 billion, principally reflecting a lower level of deposits from clients of Butterfield Fulcrum Group.
The loan portfolio stood at $4.3 billion as at 31 March 2009, down $159 million (3.6%) on the position as at 31 December 2008, reflecting net loan repayments, in particular in Bermuda, down 3.5%, and Guernsey, down 21.9%; offset by increases in the Cayman and UK loan portfolios of 2.7% and 2.3% respectively The loan portfolio represents 40.3% of total assets at 31 March 2009, compared to 40.5% at 31 December 2008, whilst loans as a percentage of customer deposits was 46.1% at end Q1 2009 compared to 47.0% at end 2008. Non-performing loans totalled $46.2 million at 31 March 2009, representing 1.1% of total loans, compared to 0.8% at 2008 year end, the movement primarily reflecting increases in non-performing loans in the Bermuda and UK loan portfolios of $4.0 million and $5.5 million respectively. Within the Bermuda loan portfolio, non-performing loans totalled just 0.8% at 31 March 2009. Loan provisions totalled $28.8 million, up from $28.4 million the previous quarter, representing 0.7% of the loan portfolio compared to 0.6% at 31 December 2008 The coverage ratio of loan provisions to non-performing loans as at 31 March 2009 was 62.3% compared to 77.8% at the year-end 2008.
Total investments were $2.9 billion as at 31 March 2009, down $0.9 billion (23.3%) from the same quarter end the prior year. The trading portfolio stood at $45.8 million, down from $48.3 million the previous quarter; the available for sale portfolio was $353.5 million (Q4 2008: $579.8 million) and the held to maturity portfolio stood at $2,532.3 million (Q4 2008: $3,196.0 million); the reductions primarily reflecting maturities of bank certificates of deposit (CDs) and no new investments in securities other than bank CDs. The held to maturity investment portfolio at 31 March 2009 had net unrealised losses of $419 million, down from $437 million at 31 December 2008.
Shareholders’ equity decreased in Q1 2009 by $25.0 million (4.8%) to $493.4 million as at 31 March 2009, primarily reflecting the net loss for the quarter of $20.8 million and cash dividends declared of $3.8 million. In Q1 2009, Butterfield did not purchase shares under the Share Repurchase Programme, compared to 811,036 shares purchased and held as treasury stock at a cost of $14.4 million in the same quarter a year ago. Butterfield’s Board of Directors has declared a first quarter 2009 dividend of $0.08 per share, comprised of $0.04 in cash and $0.04 in common shares, payable on 5 June 2009 to shareholders of record on 15 May 2009.
Review of Results of Operations by Jurisdiction
JURISDICTIONS WITH BANKING OPERATIONS
Total revenue before gains and losses decreased year on year by $18.1 million, or 26.5%, to $50.0 million in Q1 2009. 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, partly due to the sale of the Fund Services businesses in September 2008, and lower fee revenues as a result of declining net asset values. As a result, net income before gains and losses was down $10.7 million to $5.5 million for Q1 2009. Total assets stood at $4.9 billion at 31 March 2009, down $527 million on year-end 2008, reflecting lower levels of customer deposits in respect of fund administration clients. Assets under management were $6.0 billion as at 31 March 2009, down from $6.7 billion at year-end 2008, reflecting the decline in asset values, whilst assets under administration increased by $2 billion (7.5%) during the quarter, reflecting growth in the trust assets under administration.
Total revenues before gains and losses were up 17.1% year on year to $3.8 million in Q1 2009 on strong earnings from net interest income. Net income before gains and loses was a record $1.3 million, up from $0.4 million a year earlier, partially reflecting good loan growth, up 21.3% to $185.6 million. Total assets were $258 million, down $7 million from that at year-end 2008.
Net income of $7.5 million, compared to $11.6 million a year earlier, was recorded in respect of Q1 2009. The decline reflects a reduction in net interest income due to the low level of US interest rates. At $10.8 million, net interest income was down 20.7% year on year, whilst non interest income declined at a far lower rate; down 2.3% to $9.1 million, when excluding the impact of the sale of the Fund Services businesses. Total assets, at $3.6 billion, were up $234 million on that at 31 December 2008 on strong customer deposit growth. Client assets under administration decreased by $0.3 billion to $5.1 billion, primarily from assets under custody.
Net income before gains and losses declined by $3.9 million to $1.4 million in Q1 2009 of which $1.4 million of the decline relates to the strengthening US dollar against the British Pound and $0.7 million relates to the sale of the Fund Services businesses in September 2008 as the related net income is no longer included in the results. Net interest income was the primary contributor to the decline in core earnings at £2.0 million, down £1.3 million or 39.6% due to a contraction in margins. Total assets ended the quarter at $1.4 billion (£1.0 billion), in line with that seen at year-end 2008. Client assets under administration ended the quarter at $17.0 billion (£11.8 billion), down marginally from $17.1 billion (£11.7 billion) at 2008 year-end, reflecting declines in net asset values
Net income of $0.2 million was recorded in Q1 2009, down from $0.7 million a year ago, reflecting the sale of the Fund Services businesses and declining net interest margins. Total revenues fell year on year by 38.6% to $1.9 million as a result. At quarter end, total assets were $152 million compared to $155 million at 31 December 2008, whilst client assets under administration were $2.4 billion, up from $2.3 billion at year-end 2008
Net income before gains and losses was $3.2 million in Q1 2009, compared to $1.6 million for the same quarter a year earlier. Total revenues before gains and losses were $5.8 million (£4.1 million), down $4.1 million from $9.9 million (£5.0 million) principally reflecting the decline of the British Pound against the US dollar and a £0.9 million decline in net interest income. Total assets stood at $1.3 billion (£0.9 billion), in line with that seen at 31 December 2008. Assets under management totalled $0.4 billion (£0.3 billion), again in line with the position at year-end 2008., while client assets under administration ended the quarter at $1.1 billion (£0.8 billion), compared to $1.2 billion (£0.8 billion) at 31 December 2008.
JURISDICTIONS WITH EXCLUSIVELY NON-BANKING OPERATIONS
A net loss of $0.1 million on revenues of $0.2 million was recorded in Q1 2009. Client assets under administration were $0.6 billion at 31 March 2009.
A net loss of $0.2 million on revenues of $0.6 million was recorded in Q1 2009.
A net loss of $0.7 million was recorded in Q1 2009 on revenues of $0.1 million, in line with that of a year ago.
Assets under management and administration
Assets under administration increased during the quarter by 2.7% to $55.0 billion at 31 March 2009, reflecting growth in Bermuda. Assets under investment management now stand at $8.3 billion, down from $9.1 billion at year-end 2008, due to falling asset values.
Certain statements in this release may be deemed to include “forward-looking statements” and are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from those included in these statements due to a variety of factors including worldwide economic conditions, success in business retention and obtaining new business and other factors.
This release is neither an offer to sell nor a solicitation of an offer to buy any securities and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offer, solicitation or sale is unlawful. Securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.
The Bank of N.T. Butterfield & Son Limited (“Butterfield”) is Bermuda’s first and largest independent bank, and a specialist provider of international financial services. The Butterfield group offers a full range of community banking services in Bermuda, Barbados and the Cayman Islands, encompassing retail and corporate banking and treasury activities. In the wealth management area, the Butterfield group provides private banking, asset management and personal trust services from its headquarters in Bermuda and subsidiary offices in The Bahamas, the Cayman Islands, Guernsey, Hong Kong, Malta, Switzerland and the United Kingdom. Butterfield also provides services to corporate and institutional clients from offices in Bermuda, The Bahamas, the Cayman Islands and Guernsey, which include asset management and corporate trust services.
Butterfield is a publicly traded corporation with shares listed on the Bermuda and Cayman Islands stock exchanges. Butterfield’s share price is published daily in The Royal Gazette (www.theroyalgazette.com) and is also available on Bloomberg Financial Markets (symbol: NTB BH) and the Bermuda Stock Exchange website (www.bsx.com). Further details on the Butterfield Group can be obtained from our website at: www.butterfieldgroup.com.
Investor Relations Contact:
Executive Vice President, Chief Financial Officer
The Bank of N.T. Butterfield & Son Limited
Phone: (441) 299 1643
Fax: (441) 295 1220
Media Relations Contacts:
Senior Vice President
The Bank of N.T. Butterfield & Son Limited
Phone: (441) 299 3979
Fax: (441) 295 3878
Assistant Vice President
The Bank of N.T. Butterfield & Son Limited
Phone: (441) 299 1624
Fax: (441) 295 3878