Investors bail out Butterfield

Business as usual in Cayman

Bank of N.T. Butterfield and Son
Limited, the parent company to Butterfield Bank (Cayman), Ltd, received a$550
million injection through the sale of shares to institutional investors
Tuesday.

Funds affiliated with several
institutional investors purchased a combination of common shares and
mandatorily convertible preference shares at a price of $1.21 per share.

The sale came after the Butterfield
Group announced a net loss of $213.4 million for the year ended 31 December, 2009.

In a press conference on Tuesday, Butterfield
Bank (Cayman) Limited Managing Director Conor’ O’Dea portrayed the investment as
a turnaround for the bank as it purged its portfolio of toxic assets like subprime
securities in order to remonetise, paving the way for a more conservative
investment strategy from now on.

Butterfield also announced that CEO
Alan Thompson had been replaced by former President and Chief Financial Officer
Bradford Kopp.

“With the actions we have taken,
our balance sheet will be essentially cleared of all problematic assets by the
end of Q1 this year,” said Mr. O’Dea.

“We will be a well capitalised
bank, with pro forma year-end Tier 1 and total capital ratios of 13.5 per cent
and 18.7 per cent, comfortably in excess of regulatory requirements.”

However, he admitted the deal,
though good for Butterfield’s customers, and employees, was “bad news for
shareholders,” noting the share price drop of three per cent last week would
dip even further from Monday’s closing price of $2.85.

“We considered a number of
alternatives for raising capital and we believe that this is the best solution;
one that looks after the interests of all our stakeholders: shareholders,
employees, customers and members of our communities.”

Mr. O’Dea said Butterfield’s loss
resulted from a write-down of mortgage-backed securities and high loan loss
provisions, compared to an audited net income of $4.8 million in 2008.

In 2009, Butterfield raised $200
million in a preference share issue.

Butterfield’s Cayman operations
actually recorded a net income before investment gains and losses of $8.4
million. However, loan loss provisions increased by $7.2 million following specific
credit provisions of a hospitality loan of $6.8 million.

 “Butterfield Group may incur a further loss in
the range of $150 to $175 million in the first quarter of 2010 related to the
investment portfolio restructuring, at which point the balance sheet would effectively
be de-risked,” said Mr. O’Dea.

Bermuda’s Royal Gazette reported
that the bank’s Bermuda segment fared worst of the operations in nine
jurisdictions, posting a net loss of $208.4 million last year, with a major
factor in the loss being a $94.3 million credit provision on “hospitality
loans”.

 A press release stated Carlyle and CIBC purchased
approximately $150 million each of common and mandatorily convertible
preference shares and other investors, including the Wellcome Trust, the Bermuda
Government Pension Funds, Julian Robertson, and Goshen Investments, LLC collectively
purchased an additional $250 million of common shares and mandatorily
convertible preference shares.

The release also states current
Butterfield shareholders, with some exceptions, will be invited to subscribe on
a pro-rata basis to an offering in which they will have the right to invest an
additional $130 million in common shares at the same price.

Mr. O’Dea said neither Carlyle nor
CIBC will own more than 22.8 per cent of Butterfield.

Reporting on the deal, Canada’s
Globe and Mail noted that CIBC has also indirectly invested $26-million in
Butterfield, resulting in a total investment of $176-million.

In return for its investment, CIBC
will nominate two directors to the Butterfield board, as will Carlyle Group.

Responding to the news, Fitch
Ratings downgraded Butterfield’s individual rating from C to F.

“Although Fitch views the capital
raise as a positive, the impact to the tangible common equity ratio is modest,”
the agency said in a press release.

“Given the economic downturn and
potential for an increase in [non-performing loans] and [net charge-offs],
Fitch believes the pro forma equity capital provides only a modest cushion
should BNTB experience any credit deterioration in its core loan portfolio.”

Though challenges remain for the bank,
Mr. O’Dea is optimistic.

  “We are
pleased with the financial performance of Cayman operations against the
backdrop of a severe global recession,” he said, and said the bank has no plans
of any redundancies and will not be changing its name.

‘It’s business as usual,” he said.

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