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22 February 2011
Butterfield Reports 2010 Financial Results

Butterfield Reports 2010 Financial Results

 


Hamilton, Bermuda—22 February 2011: The Bank of N.T. Butterfield & Son Limited (“Butterfield”, “Group” or the “Bank”) today announced a loss for the full year ended 31 December 2010 of $207.6 million, or $0.47 per fully diluted share, compared to a loss of $213.4 million, or $2.34 per fully diluted share, in 2009.  On a normalised basis, net income was $14.8 million for 2010 compared to $21.0 million in 2009.

 


The Bank’s 2010 loss was driven primarily by non-recurring losses associated with the strategy to de-risk the balance sheet.  These included realised losses of $113.8 million on the sale of asset-backed securities in the first quarter, the recording of other-than-temporary impairments of $60.5 million in the first quarter on structured investment vehicles, net provisions of $31.8 million taken primarily in respect of large hospitality-related corporate loans, and restructuring costs of $12.4 million.

 


On a normalised basis, revenues from operations (before provisions for credit losses) were down only slightly, from $332.1 million at year-end 2009 to $321.3 million at year-end 2010.  Net interest income (before provisions for credit losses) was down 4% year on year to $178.9 million, owing to compressed margins in the low interest rate environment and limited loan demand.  Non-interest income declined by 1.9%, from $145.2 million in 2009 to $142.4 million, in line with global recessionary declines.  Expenses before one-time items declined from $300.5 million in 2009 to $294.8 million in 2010, despite expenditures on technology, asset-liability management and liquidity support.

 


Brad Kopp, Butterfield’s President & Chief Executive Officer, commented on the Bank’s full year results, saying “2010 was a year of building a strong foundation amongst challenging economics, starting with the successful capital raise bringing in new investors and an over-subscribed rights offering to our historical investor base.  The resultant strong capital base and good liquidity position allowed us to finalise the process of ridding the balance sheet of problematic assets and putting realisable values on remaining assets.  This leaves us with a strong capital base to withstand continued uncertainty in the global economic outlook and to support growth as our economies recover.” 

 


Olivier Sarkozy, who led the investment in the Bank on behalf of The Carlyle Group, said “While unfortunate, the losses realised over the course of the past fiscal year represent the culmination of the balance sheet restructuring that was necessary to put the Bank back on a path of prudent risk management and sustainable growth, as was envisioned at the time of the recapitalisation. We are pleased with the progress the Bank has made in this regard and happy that the Bank’s results are consistent with, if not slightly better than, our original projections.”

 

At 31 December 2010, Butterfield had a tangible common equity ratio of 5.8% (up from 0.9% a year ago), total capital ratio of 21.6% and tier 1 capital ratio of 15.7%. The Bank’s net book value per share was $1.09 at 31 December 2010.

 

With respect to the Bank’s overall asset quality, Mr. Kopp said, “The Bank minimised its balance sheet exposure to problematic investment securities in the first quarter. It was important for us to reduce our exposure on our balance sheet promptly and to re-invest in high quality securities, whilst ensuring appropriate liquidity.  Non-accrual loans at 31 December 2010 amounted to approximately $160 million, down from over $230 million a year ago, and equivalent to 3.9% of our total loan portfolio. Subsequent to year end, we settled a troubled hospitality loan, further reducing our non-accrual loans to 3.75% of total loans, compared to 5.37% a year earlier.  We continue to work with our borrowers to find mutually agreeable repayment solutions.” 

 

To date, the Bank has taken action to place two hotel properties in Bermuda in receivership.  This was deemed that to be the best course of action to protect the value of the assets and safeguard the interests of Butterfield shareholders.  The properties continue to operate under professional management overseen by the receivers, with a view to selling them as going concerns. 

 

During the year, Butterfield undertook restructurings in several of its businesses and jurisdictions, making changes in support of its strategy to focus resources on the core businesses of community banking and wealth management in jurisdictions where the Bank has a meaningful market presence.  As part of that strategy, discipline around expense management was increased and subsidiaries in Hong Kong and Malta were sold in the third quarter.  During the first quarter of 2011, the Bank also announced the sale of its minority holding in fund administrator, Butterfield Fulcrum Group, as fund administration no longer represents a core business for the Bank.   Butterfield will continue to be a leading provider of banking services to the fund administration industry, nonetheless.

 

The Bank also made substantial progress on the implementation of its upgraded technology platform and is now well placed to introduce new banking systems in the Cayman Islands and Bermuda in 2011.  This will be an important foundational step that will allow Butterfield to expand and improve its range of products and services. 

 

Looking ahead, Mr. Kopp commented, “Although the economic circumstances in the markets in which the Bank operates remain somewhat uncertain, our strategic focus on community banking and wealth management services, along with the strong capital foundation we have in place, will, I believe, allow us to achieve future growth and sustained profitability.”

 

Brad Rowse, Executive Vice President & Chief Financial Officer, commented, “We continued to face pressures from historically low interest rates throughout much of 2010, which constrained our net interest margin on lower deposit volumes. Our strong liquidity has allowed us to invest more of our asset base in high quality government-backed securities which yielded improved margins in Q4 and, combined with the relative stability of our fee income, positions us well for 2011. With respect to expense management, the Bank reduced headcount through a combination of a general hiring freeze, attrition and, in certain locations, restructuring that saw total personnel drop from 1,606 at year end 2009 to 1,519 at 31 December 2010. Maintaining the appropriate staffing levels in light of changing business volumes and the need for continued strength in customer service continues to be an area of focus.”

 

Normalised Group results


 

 

Year ended 31 December

(in $ millions)

2010

2009

Non-interest income


142.4

           145.2

Net interest income

178.9

           186.9

Total revenue before provision for credit losses

321.3

           332.1

Provision for credit losses

(10.1)

            (10.9)

Total revenue after provision for credit losses

311.2

           321.2

Total expenses

(294.8)

          (300.5)

Total normalised net income before taxes

16.4

             20.7

Income tax

(1.6)

             0.3

Net normalised income

14.8

             21.0

Dividends and guarantee fee of preferred shares

(18.0)

             (9.5)

Normalised (loss) / earnings attributable to common shareholders

(3.2)

11.5              

Normalised (loss) / earnings per common share

 

 

    - Basic

(0.01)

0.12

    - Diluted

(0.01)

0.12

 

 

 

 

 

Reconciliation of audited US GAAP results to normalised results

 

(in $ millions)

Year ended 31 December

 

2010

2009

 

Net income

Diluted EPS

Net income

Diluted EPS

Net (loss) income as reported

(207.6)

(0.47)

   (213.4)

    (2.34)

Non-core items:

 

 

 

 

Net other gains & losses (1)

172.9

0.36

    138.7

     1.45

Investments in affiliates

1.5

-

 1.7

0.02

Specific provision for credit losses (2)

31.8

0.06

      94.0

0.99

Legal fees pertaining to Liquidity facility

7.4

0.02

  -  

      -  

Non-recurring organisational change costs (3)

12.4

0.03

  -  

      -  

Non-recurring taxation credit

(3.6)

(0.01)

-

-

Net normalised income

14.8

(0.01)

      21.0

     0.12


 

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.

 

(1) Net other gains & losses include:


• Net realised losses of $107.0 million, of which $113.8 million relates to realised losses on the sale of asset-backed securities held in the available for sale portfolio, partially offset by realised gains of $1.9 million on the disposal of fixed income securities and realised gains of $4.7 million on the disposal of Structured Investment Vehicles (SIVs) during 2010
• Other-than-temporary impairments of $60.5 million on the Bank’s holdings of SIVs.
• Realised loss on the sale of the Bank’s subsidiaries in Hong Kong and Malta of $7.4 million
• Write-down of $3.8 million of previously capitalised software development no longer in use

 

(2)  Specific provisions for credit losses of $31.8 million primarily related to commercial mortgage facilities in the hospitality industry in Bermuda and The Bahamas, as well as private banking exposures in the UK 

 

(3) The organisational change costs are non-recurring expenses incurred, which comprise acceleration of vesting on stock options on change in control, restructuring fees relating to changes to executive management and rationalisation of headcount in various jurisdictions.  

 

COMMENTARY ON STATEMENT OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2010 (“2010”) COMPARED WITH YEAR ENDED 31 DECEMBER 2009 (“2009”)

 

Net Income


The Bank recorded a net loss of $207.6 million for 2010 compared to a net loss of $213.4 million recorded in 2009.
The Bank’s total revenue before gains and losses of $283.2 million increased by 21.2% from $233.7 million in 2009, which reflected substantially reduced loan loss provisions, down $62.9 million year on year, partially offset by declines in net interest income and non-interest income of $8 million and $5.5 million respectively. 
Excluding non-recurring restructuring items, operating expenses decreased $5 million from approximately $300 million in 2009 to $295 million to 2010. This reflects the impact of reduced headcount, down 87 to 1,519 at 31 December 2010, and enhanced controls on corporate expenditures.


 

Net Interest Income


Net interest income before provisions for credit losses decreased by 4.3% from $186.9 million in 2009 to $178.9 million in 2010.

 


Average interest earning assets of $9.1 billion, down $0.5 billion from a year ago, generated $9.6 million less in interest income, partially offset by an improved net interest margin of 2 basis points, equivalent to $1.6 million. 

 


The Bank made net provisions for credit losses in 2010 of $42 million, compared to $104.9 million in 2009. The incremental provisions were required for the specific reserves pertaining to the hospitality industry and UK private banking, as well as enhancements to general provisions, primarily in Bermuda. 

 


The Bank deemed that $94.2 million of hospitality-related and $8.1 million of private banking exposures were no longer recoverable during the year and consequently charged these amounts off against existing reserves. As at 31 December 2010 the Bank had non-accrual loans of $159.5 million, down from $233.4 million in 2009, equivalent to 3.9 % of total loans, with specific provisions for such loans of $30.3 million, representing a coverage ratio of 19%.

 


Non-Interest Income

 


Non-interest income was quite stable despite the economic conditions, decreasing by 3.6%, from $151.7 million in 2009 to $146.2 million in 2010, primarily due to the following: 


• Asset management fees declined by $2.7 million versus 2009 levels due to reduced values of assets under management and reduced management fees due to low yields;


• Foreign exchange revenues were $1.6 million lower, year on year, on reduced transaction volumes;


• Trust revenues rose to a record level of $30.5 million, up from $29.9 million in 2009, whilst assets under administration increased by $4.7 billion (14.4%) to $37.4 billion. This represents 20.9% of total non-interest income in 2010, up from 19.7% in 2009;


• Banking fees held up well but were down 1.0% in 2010 at $36.7 million, compared to $37.1 million in 2009, primarily as a result of reduced loan volumes; and


• In 2010, custody revenues were $13.6 million, compared to $13.8 million in 2009, down 1.4% principally due to declining assets under administration from administered banking in Guernsey.

 

 

Non-Interest Expense

 


For fiscal 2010, total non-interest expenses increased by $11.8 million, or 4%, to $312.3 million as a result of the following:

 


• Costs of salaries and benefits increased $2.2 million year over year as one-off reorganisational expenses totalling $12.4 million, higher incentive compensation and staff benefits more than offset savings from reduced headcount and professional expense. Headcount decreased from 1,606 at 31 December 2009 to 1,519 at year end 2010;


• Implementation costs for a major systems upgrade initiative drove technology expenses $3.9 million higher;


• Other expenses increased by $9.8 million, principally driven by $7.4 million of fees incurred for establishing a liquidity facility, as well as related monthly maintenance fees totalling $1.8 million during the year;


• Lower property expenses of $1.4 million due to reduced property maintenance and rental costs; and


• Tighter control on consultancy engagements produced savings on professional services expense incurred of $3.7 million.

 

Income Taxes

 


Net income tax for the year ended 31 December 2010 was a benefit of $2 million compared to a benefit of $0.3 million in 2009.  The increased tax benefit was due to incurred losses in our taxable jurisdictions.

 

 


COMMENTARY ON BALANCE SHEET FOR THE YEAR ENDED 31 DECEMBER 2010 (“2010”) COMPARED WITH YEAR ENDED 31 DECEMBER 2009 (“YEAR END 2009”)

 


Total Assets

 


Total assets of the Bank stood at $9.6 billion, unchanged from year end 2009. The Bank maintained a highly liquid position at 31 December 2010 with cash and deposits with banks and investments representing 53% of total assets, increasing by $100 million from $4.9 billion at year end 2009 to
$5 billion at year end 2010.

 

Loans Receivable


The loan portfolio decreased by 4% from $4.2 billion at year end 2009 to $4 billion at 2010.  Provision for loan allowances at year end 2010 totalled $66.8 million, a decrease of $63.5 million from year end 2009. The movement in the provision is the result of the Bank reassessing its hospitality industry loan portfolio recoverability, which resulted in partial charge offs of $94.2 million recorded in 2010. The charge offs were partially offset by year-to-date additional provision charges of $42 million.

 

The loan portfolio represented 42% of total assets at the end of 2010, compared to 44% at year end 2009, whilst loans as a percentage of customer deposits remained unchanged at approximately 49%.

 

Non-accrual loans net of specific provisions decreased by 4.2%, which was primarily due to additional provisions on hospitality industry loans.  Net non-accrual loans represented 3.2% of net total loans in 2010, unchanged from a year ago.  Gross of loan provisions, non-accrual loans represented 3.9% of total loans in 2010 compared to 5.4% at year end 2009.


The ratio of gross non-accrual loans to tangible common equity and provisions for loan losses (also known as the “Texas ratio”) was 25.7% at 31 December 2010.

 

Investments


The investment portfolio decreased by $0.1 billion to $2.8 billion as at the end of 2010, reflecting the sale of held to maturity securities in Q1 2010, which was partially off set by the acquisition of $1 billion of investment-grade US government agency mortgage-backed securities and $180 million of corporate debt securities explicitly guaranteed by non-US governments.

 

Post-Retirement Benefits

 

During Q2 2010 the Bank revalued its post-retirement medical benefit obligations which resulted in a decrease of approximately $27 million in the liability, primarily as a result of changes in demographics and claim cost development since 2007.  In addition, the post-retirement medical benefits were amended whereby eligibility, benefits and cost sharing were modified for current active employees. The benefits amendment resulted in a further reduction in the post-retirement medical liability of approximately $41 million. 

 

Benefits paid for the year ended 31 December 2010 amounted to $2.5 million.  As at 31 December 2010, the Bank's remaining liability for its post-retirement medical benefit plan is $81.1 million.

 

Shareholders’ Equity


Shareholders’ equity increased during the year ended 31 December 2010 by $453.8 million to $809.3 million, primarily reflecting the net proceeds of the capital raise of $521 million, changes to post-retirement health benefits and improvements in market values of investments which were partially offset by the net loss for the year.

 

 

REVIEW OF RESULTS OF OPERATIONS BY SIGNIFICANT BANK OPERATIONS


Bermuda

 

Net loss of $183.1 million for 2010 represented an improvement, year on year, of $25.4 million, primarily due to reduced loan loss provisioning related to hospitality industry loans being required in 2010.

 

Revenue before gains and losses and credit provisions decreased year over year by $3.0 million, or 1.6%, from $187.7 million for the year ended 31 December 2009 to $184.7 million for the year ended 31 December 2010. This reflects lower fee revenues resulting from a decline in assets under management, offset by higher net interest income as margins increased by 16 bps over prior year. Credit provisions were $25.6 million in 2010 compared to $94.3 million in 2009, primarily related to commercial mortgage facilities in the hospitality industry.

 

Net interest income before loan loss provisions was $3.6 million above prior year levels due to reduced interest expenditure incurred on deposit liabilities.

 

Non-interest income of $71.3 million in 2010 was down 7.7% versus 2009 due to increased equity pick-up losses from affiliates.

 

Total assets at the end of 2010 increased by 12.3% to $5.2 billion from year end 2009, reflecting the net proceeds from the capital raise.

 

Client assets under administration increased to $44 billion at year end 2010, whilst assets under management decreased by 8.4% to $3.6 billion.

 

Cayman Islands

 

Our Cayman businesses posted a net loss of $4.6 million for fiscal 2010, compared to net income of $9.5 million in 2009, primarily due to previously announced investment losses, lower net interest income and increased operating expenses.

 

Net interest income before loan loss provisions was $5.8 million below prior year levels due to significantly lower inter-bank interest rates available in fiscal 2010.

 

Loan loss provisions of $3.8 million were $4.0 million below prior year levels due to a $6.3 million charge taken in 2009 on a hotel property loan.

 

Non-interest income of $35.2 million in 2010 was up $0.4 million (1.1%) on 2009, resulting from increases in gross banking service fees, trust fees and foreign exchange commissions.

 

Total revenues, after credit provisions and gains and losses, of $48.3 million were $13.3 million below 2009 results, primarily due to the realised investment losses incurred of $11.6 million and a decline in net interest income, after provisions, of $1.8 million, marginally offset by increased non-interest income. The Bank’s investment in Island Heritage (an insurance company) returned $0.3 million over prior year results.

 

Non-interest expenses include a Q4 2010 charge of $0.3 million related to staff redundancies as part of an overall cost reduction and efficiency improvement plan initiated by the Bank in the jurisdiction. 

 

Total assets at the end of 2010 were $2 billion, down, $571 million from year end 2009, reflecting primarily the decline in hedge fund client deposits. Loans increased by $53.8 million over twelve months, with commercial loan growth led by a large participation while residential mortgages experienced steady growth.

 

Client assets under administration ended 2010 at $4.6 billion, representing a decrease of $435 million from prior year levels, whilst assets under management decreased by $101 million to $1.1 billion.

 

Guernsey

 

Net income increased by $2.9 million (£1.9 million) to $6.3 million (£4.1 million) in 2010.

 

Total revenue after gains and losses was up $0.6 million (£0.8 million) to $34.0 million (£22.0 million) in 2010, compared to $33.4 million (£21.2 million) in 2009.

 

Interest income was up $0.6 million (£0.4 million), due mainly to good deposit growth.

 

Non-interest income increased by $1.1 million (£0.9 million) year on year, due to growth in asset management, custody, foreign exchange and, in particular, the trust business.

 

Total assets at 31 December 2010 of $1.6 billion (£1 billion), were up by $0.1 billion from $1.5 billion (£0.9 billion) at year end 2009.  This was due to deposit growth of $104 million (£83.5 million) offset by year-on-year exchange translation variances. 

 

Client assets under administration ended the year at $16.4 billion (£10.5 billion), down from $18.8 billion at year end 2009, reflecting mandates for two administered banking clients coming to an end.

 

United Kingdom

 

Butterfield Bank (UK) Limited recorded a net loss of $13.8 million (£8.8 million) in 2010, compared to net loss of $3.6 million (£2.8 million) for 2009. The loss was partly the result of the disposal of the Bank’s entire portfolio of mortgage-backed floating rate notes in Q1 as part of Management’s strategy to de-risk the balance sheet. This generated a realised loss, net of tax, of $7.3 million (£4.7 million). In addition, provisions, totalling $7.1 million (£4.6 million), were raised in the year, which contributed to the net loss.

 

Total revenue before gains and losses of $12.3 million (£8.0 million) was down $13.2 million (£8.2 million) in 2010 compared to 2009, as a result of the specific loan provisions and the lower return the Bank achieved on its debt securities in 2010. During 2009, the Bank continued to hold a considerable proportion of its debt securities at high interest rates (yield of 2.0% in 2009 versus 0.8% in 2010) as they had not reached maturity and repriced to reflect the lower Bank of England base rate of 0.5%.

 

Net interest income before credit provisions, at $9.4 million (£6.1 million), was down $5.8 million (£3.6 million) year on year.

 

Credit provisions of $7.1 million (£4.6 million) were up $6.5 million (£4.2 million) year on year, due primarily to Management concerns regarding five problematic credit facilities.

 

Non-interest income, at $10 million (£6.5 million), was in line with 2009. Assets under management increased, generating additional investment management fees but this variance was offset by lower foreign exchange and investment management commissions and lending fees.

 

Total non-interest expenses after taxes, at $19.4 million (£12.4 million), were in line with 2009.

 

Total assets stood at $1.1 billion (£0.7 billion) at the end of 2010, compared to $1.3 billion (£0.8 billion) at year end 2009. The primary asset movement was the decrease in the value of the loan portfolio by $114.4 million (£61.3 million), to $414.5 million (£265.8 million) at year end 2010 from $528.9 million (£327.1 million) at year end 2009.  This was primarily the result of two loan facility repayments during the year.

 

Assets under management totalled $0.6 billion (£0.4 billion), an increase of $0.1 billion (£0.1 billion) compared to 2009, resulting from both new client money and portfolio performance, whilst client assets under administration at the end of 2010 amounted to $1.3 billion (£0.8 billion), compared to $1.2 billion (£0.7 billion) in 2009.

 

Other

 

“Other jurisdictions” include Barbados, Switzerland and The Bahamas.  The other jurisdictions recorded a combined net loss of $5.5 million for 2010 compared to a net loss of $2 million for 2009.  The increase in net loss is primarily due to credit provisions booked in The Bahamas.

 

 

For full financial results and a detailed review of the Group’s performance, please visit Butterfield’s website, www.butterfieldgroup.com.

Shareholders are invited to hear Brad Rowse, Butterfield’s Chief Financial Officer, provide a detailed review of the Bank’s annual results via a recorded webcast, available beginning this evening (Tuesday, 22 February 2011) at 6:00 p.m. Atlantic Standard Time.  Please visit the Investor Relations section of the Bank’s website, www.butterfieldgroup.com, for details.


 

 

Notes:

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. Butterfield also provides private banking, asset management and personal trust services from its headquarters in Bermuda and subsidiary offices in the Cayman Islands, Guernsey and the United Kingdom. In Switzerland and The Bahamas, Butterfield provides personal trust and company 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:   

John Maragliano

Senior Vice President, Finance   

The Bank of N.T. Butterfield & Son Limited  

Phone: (441) 298  4765    

Fax: (441) 295 2899    

E-mail: john.maragliano@butterfieldgroup.com

 

Media Relations Contacts:   
Dianne Brewer
Senior Vice President, Marketing & Corporate Communications
The Bank of N.T. Butterfield & Son Limited
Phone: (441) 299 3979
Fax: (441) 295 3878
 E-mail: dianne.brewer@butterfieldgroup.com

 

Mark Johnson  
Vice President, Communications, Brand & Public Affairs
The Bank of N.T. Butterfield & Son Limited
Phone: (441) 299 1624
Cellular: (441) 524 1025
Fax: (441) 295 3878
E-mail: mark.johnson@butterfieldgroup.com

 

 

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