Butterfield Reports 2008 Profit, Declares Quarterly Dividend, Obtains Commitment For $200M Of Additional Capital From Govt of Bermuda

Hamilton, Bermuda ─ 6 March 2009 - The Bank of N.T. Butterfield & Son Limited ("Butterfield") today reported audited net income for the full year ended 31 December 2008 of $4.8 million, or $0.05 per diluted share.  This compares to audited net income for the full year ended 31 December 2007 of $146.0 million, or $1.53 per diluted share.  Normalised 2008 net income, which excludes gains and losses, was $114 million.

Butterfield Group's total capital at 31 December 2008 was $694 million and shareholders' equity was $518 million.  The Group's tier 1 capital ratio at 31 December 2008 was 7.5% and its total capital ratio was 11.2%.  Although this capitalisation comfortably meets all present regulatory requirements, Butterfield will, subject to shareholder approval, establish an additional capital buffer to position the Bank to withstand a more pronounced and prolonged economic downturn.  The Bank will achieve this through the issuance of $200 million of non-convertible preference shares to be guaranteed and/or purchased by the Government of Bermuda.  In addition, to preserve capital, Butterfield will reduce its fourth quarter dividend on common shares.  These decisions are consistent with a recent Bermuda Monetary Authority directive to banks in Bermuda to establish a greater capital cushion.  On a proforma basis, as at 31 December 2008, the issuance of these preference shares would have raised Butterfield's tier 1 capital ratio to 10.6% and its total capital ratio to 15.1%.

Robert A. Mulderig, Butterfield's Chairman of the Board, said, "Butterfield recorded a profit for 2008 in a very challenging environment amid unprecedented turmoil in global financial markets and strains on the world's banking system.  Our results were driven by the strength of our underlying core businesses and a significant gain on the sale of our fund administration business, offset by incurred losses and write downs in a portion of our investment portfolio.  Butterfield's financial position is strong and our core businesses are solid.  To ensure that the Bank is best prepared for the future and consistent with a recent announcement from the Bermuda Monetary Authority, the Board acted to enhance the Bank's capital position.  The Board believes this additional capital will enable Butterfield to deal effectively with current market conditions and take advantage of longer term opportunities when the markets stabilise.  We are appreciative of the Government's support of our capital raise in a market that, even for a bank as highly rated as Butterfield, would have made it difficult to raise capital privately."

Normalised Results

Normalised net income for 2008, indicating the results from operations exclusive of gains and losses associated with investment and credit support write downs, goodwill impairment, and the extraordinary gain on the sale of Butterfield's Fund Services businesses, was $114 million (down 22.2% versus 2007 net income).  Normalised 2008 revenues were $464.4 million as compared to $470.3 million in 2007.  Normalised return on shareholders' equity was 18.1% in 2008, down from 25.2% in 2007.

Alan Thompson, Butterfield's President & Chief Executive Officer, commented on the Bank's performance, "Butterfield posted solid results in its core operating businesses despite difficulties in the global financial markets.  This included record earnings generated by our Barbados, UK and Guernsey businesses."  He added, "During the year, the Bank worked successfully to further strengthen our core businesses through investments in infrastructure and projects designed to improve our operating efficiency.  We believe that this work positions us to take advantage of opportunities when the current economic environment improves."

Balance Sheet

Butterfield's balance sheet remains strong.  The Bank's total assets as at 31 December 2008 were $10.9 billion.  Of this total, $3.3 billion was held in cash and deposits with banks.

Butterfield is pleased to be able to continue to support its customers through prudent lending.  The loan portfolio increased by 7.1% in 2008, or $294 million, to $4.4 billion and now represents 40.5% of assets.  Customer deposits at 31 December 2008 totalled $9.4 billion. The coverage ratio of loans by customer deposits was 2.13 times, or viewed another way, the Bank had a loans to customer deposits ratio of 47.0% at 31 December 2008.  The quality of the loan portfolio remains strong.  Non-performing loans totalled $38.9 million at 31 December 2008, representing 0.9% of total loans, the same as last year.  The allowance for credit losses totalled $28.4 million at year-end, compared to charge offs for the year of $4.0 million, and represents a coverage ratio of 72.9% of non-accrual loans.

Historically, the Bank has maintained an investment portfolio of high grade securities to provide diversification of risk, liquidity and improved yield.  This portfolio was designed to be well diversified, investing in highly rated securities.  Prior to July 2007, when Butterfield ceased investing in securities with exposure to the US residential mortgage market, the Bank had viewed highly rated mortgage-backed and other asset-backed securities as good sources of yield and liquidity with transparency of information on issuers and underlying collateral.  At the beginning of 2008, 98% of the Bank's investments were in securities rated €˜A' or higher.  With the collapse of the US residential mortgage market and the resulting global credit crisis, however, Butterfield incurred losses and write downs in 2008 of $151.8 million from declines in the carrying value of some securities.  These were primarily US residential mortgage-backed securities in the held to maturity investment portfolio that were deemed to be €˜other than temporarily impaired'.  Butterfield also had unrealised losses of $50.2 million stemming from two credit support agreements provided by the Bank to Butterfield Money Market Fund Limited. 

At 31 December 2008, the total mark-to-market discount on remaining US residential mortgage backed securities in the held to maturity investment portfolio was $161.7 million.  These securities were (and remain) current on all contractual principal and interest payments and do not indicate any permanent impairment.   Exclusive of these residential mortgage backed securities, total investments were $3.5 billion with a market value of $3.3 billion. Of the difference between the book and market values of the held to maturity portfolio of $437.3 million, 63% is primarily caused by the liquidity discount generated by the poorly functioning credit markets.  The remaining 37% is attributed to US residential mortgage backed securities.  As of 31 December 2008, 92% of the Bank's investments remained in securities rated €˜A' or higher. 

Butterfield also made an accelerated write down of $29.2 million on previously capitalised investments in technology during the year to facilitate investment in a cost effective, modern, Group-wide technology solution.

The realised and unrealised losses recorded during 2008, as noted above, were offset by a gain of $115.5 million from the sale of Butterfield's Fund Services businesses with those of Fulcrum Group in mid-September.

Mr. Thompson said, "Like many international banks, Butterfield felt the impact of market dislocation in a portion of our investment portfolio, which led to a substantial and adverse impact on our bottom line.  Obviously, we are disappointed that we had to recognise losses on some securities in the Bank's held to maturity investment portfolio that were investment grade when purchased, but which were deemed to have suffered €˜other than temporary impairment' during the year.  In the main, these securities had exposure to the US residential mortgage market.  Butterfield stopped investing in such securities in 2007." 

Capital Position and Capital Raise

At 31 December 2008, Butterfield's tier 1 capital ratio was 7.5% and its total capital ratio was 11.2%.  Whilst this capitalisation meets the current regulatory requirements of the Bermuda Monetary Authority, Butterfield has decided to enhance its capital position by raising $200 million via the issuance of preference shares qualifying as tier 1 capital of the Bank.  On a proforma basis, as at 31 December 2008, this action would have raised Butterfield Group's tier 1 capital ratio to 10.6% and its total capital ratio to 15.1%. 

The issuance of preference shares as a means to enhance Butterfield's long-term capital position is assured through the assistance of the Government of Bermuda, under the auspices of the Ministry of Finance.  The Government has agreed to support the offering of preference shares by guaranteeing the principal of, and dividend payments on, the preference shares.  In addition, the Government has committed to purchase any preference shares from this offering that are not subscribed by private investors.   

Butterfield expects to obtain the necessary shareholder approvals for this capital raise.    In exchange for the Government's commitments, the Bank has agreed to issue to the Government 10-year warrants to purchase four million shares, or some 4% of issued shares of the Bank, at an exercise price of $7.01 and to pay the Government a guarantee fee of 1% per annum with respect to the preference shares issued to private investors.  The preference shares to be issued will not be convertible into common shares. 

Dividend

Butterfield's Board of Directors has declared a fourth quarter dividend of $0.08 per share, comprised of $0.04 in cash and $0.04 in common shares, payable on 8 April 2009 to shareholders of record on 16 March 2009.  Shareholders in the Dividend Reinvestment Programme will receive common shares in lieu of cash as normal. This brings the twelve-month dividend to $0.56 per share, down from $0.64 per share in 2007.

Mr. Thompson said, "These capital actions, specifically our intent to issue preference shares as well as a reduction of the dividends on our common shares, are designed to strengthen our capital base.  We realise that dividend payments are important to our shareholders.  The decision to reduce the dividend was difficult, but we believe it was a prudent step to protect the health and strength of Butterfield."   He continued, "In the current environment, even banks as highly rated as Butterfield are facing challenges raising capital privately without some form of government support.  We are pleased that the Government of Bermuda has committed to assist Butterfield to strengthen our capital base by endorsing a public and private partnership solution for raising capital."

Financial highlights for the Year ended 31 December 2008 compared with the Year ended 31 December 2007 include:

Revenues from the asset management businesses increased by 8.0% year on year to $41.3 million;

Revenues from customer-driven foreign exchange increased 17.5% year on year to $45.5 million;

Revenues from the trust businesses increased by 2.6% year on year to $23.6 million;

Revenues from custody and other administrative services increased by 4.8% to $25.5 million;

Non-interest income from the banking businesses increased by 1.2% year on year to $37.6 million;

Net interest income before provisions for credit losses increased by 0.7% year on year to $254.5 million;

Record earnings were achieved by the Bank's operations in Barbados, Guernsey and the United Kingdom.

Richard Ferrett, Butterfield's Executive Vice President & Chief Financial Officer, commented, "With the influence of extraordinary gains and losses removed, Butterfield's core businesses proved to be resilient, generating $114 million in profit on a normalised basis which equates to $1.22 per diluted share and $1.23 per basic share, respectively,  

compared to the $0.05 per share (basic and diluted) reported.  Notable among the Bank's achievements for the year is the increase in revenues from asset management, trust and foreign exchange businesses despite adverse market conditions."

Assets under management at year end declined by 22.9% versus 2007 to $9.1 billion, reflecting declines in the value of some Butterfield investment funds, in step with ongoing dislocation in international securities markets during 2008.  Assets under administration at 31 December 2008 were $54 billion, down from $155 billion in 2007, reflecting the sale of Butterfield's Fund Services businesses in September 2008 and declining net asset values.

Review of Normalised Results of Operations by Jurisdiction

JURISDICTIONS WITH BANKING OPERATIONS

Bermuda

In Bermuda, total revenue increased year on year by $7.3 million, or 3.0%, to $253.4 million due in part to good growth in net interest income, up 9.6% to $133.4 million, offset by a $4.3 million, or 3.5%, decline in non-interest income. Normalised net income, at $47.9.million, was down from $67.3 million a year ago, reflecting both the sale of the Fund Services business and increased investment in infrastructure related projects. Total assets for the Community banking business, at $5.4 billion, were in line with a year earlier. Assets under management were $6.8 billion, down from $8.9 billion a year earlier, reflecting declines in asset values, whilst assets under administration in respect of trust and custody were $8 billion and $19 billion respectively, compared to $8 billion and $23 billion a year earlier.  The tier 1 capital ratio at 31 December 2008 was 15.6%.

The Bahamas

The Bahamian businesses achieved net income of $2.4 million, down from $3.1 million a year ago, reflecting the sale of the Fund Services business.  Total revenues fell year on year by 7.6% to $11.1 million as a result. At year end, total assets were $155 million compared to $182 million a year ago, whilst client assets under administration in respect of trust were $2.3 billion, down from $3.2 billion a year earlier reflecting declining asset values.  The tier 1 capital ratio at 31 December 2008 was 31.2%

Barbados

Barbados achieved a strong performance with total revenues up 8.9% year on year to $13.0 million.  This reflects a strong increase in net interest income of 11.3%, reflecting solid loan growth.  In addition, banking fees increased by some 3.2%.  As a result, normalised net income was a profit of $1.2 million.  When including gains from holdings of shares in credit card processing companies, net income was a record $3.2 million, which strengthened the tier 1 capital ratio at 31 December 2008 to 12.0%. 

Cayman Islands

Cayman achieved net income of $34.3 million, compared to $56.6 million in 2007. The decline reflects a significant reduction in net interest income due to falling interest rates. At $49.0 million, net interest income was down 22.0% year on year, whilst non interest income declined by 8.9% to $47.2 million, due to the sale of the Fund Services business. Total assets, at $3.3 billion, were up $600 million on strong customer deposit growth. Client assets under administration, excluding fund administration, decreased by 6.3% to $5.4 billion. The tier 1 capital ratio at 31 December 2008 was 13.1%.

Guernsey

In Guernsey, net income increased by $3.0 million, or 18.1%, to a record $19.2 million (£10.9 million). Total assets ended the year at $1.4 billion (£1.0 billion), down from $2.4 billion (£1.2 billion) a year earlier due principally to the appreciation of the US dollar against the British pound. Client assets under administration ended the year at $17.2 billion (£11.8 billion), down from $25.4 billion (£12.8 billion) a year earlier when excluding fund administration, reflecting declines in net asset values and the exchange rate movement. The tier 1 capital ratio at 31 December 2008 was 15.1%. 

United Kingdom

In the UK, Butterfield Private Bank continued its record setting pace, recording net income of $10.1 million (£5.1 million), up 224.3% year on year. Total revenues were up 20.8% to $39.1 million (£21.2 million), reflecting strong growth in net interest income, up 7.1% to $27.4 million (£14.8 million), and non interest income, up 72.2%, reflecting the growth in the asset management business. Total assets stood at $1.3 billion (£0.9 billion) down from $2.0 billion (£1.0 billion) a year earlier, principally due to the stronger US dollar.  Assets under management totalled $0.4 billion (£0.3 billion) compared to $0.7 billion (£0.4 billion) a year ago, while client assets under administration decreased ended the year at $1.2 billion (£0.8 billion), compared to $1.6 billion (£0.8 billion) the previous year.  The tier 1 capital ratio at 31 December 2008 was 11.0%.

JURISDICTIONS WITH EXCLUSIVELY NON-BANKING OPERATIONS

Hong Kong

Net income of $1.7 million was achieved on revenues of $3.9 million.

Malta

Butterfield Trust (Malta) limited recorded net income of $0.3 million in its first full year of operation, on revenues of $1.7 million.  Client assets under administration were $0.7 billion. 

Switzerland

A loss of $3.3 million was recorded on revenues of $0.3 million, reflecting start up costs associated with our two new businesses in Zurich and Geneva.

Summarising Butterfield's performance in 2008, Mr. Thompson noted, "Butterfield has been providing financial services to individuals, families and businesses for over 150 years.  Although largely a story of growth and expansion, there have been a few years in the Bank's history that were marked by business contractions; 2008 was one of those years.  Despite the challenges we were presented with, Butterfield generated a profit of $4.8 million."  He continued, "We remain optimistic about the future.  We have a strong franchise that is diversified by business line and geography.  We also enjoy strong competitive advantages in key markets, and we have talented, experienced employees and a loyal customer base.  Counting these among our strengths, I am confident that Butterfield will emerge from the current, difficult times as a stronger organisation that continues to adhere to its values of customer service, conservative lending and investing with geographic and functional diversity."

For full financial results and a detailed review of Butterfield's performance, please visit www.butterfieldgroup.com.

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. In the wealth management area, the 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:                                                                    

Richard Ferrett                                                

Executive Vice President, Chief Financial Officer

Phone: (441) 299 1643                                            

Fax: (441) 295 1220                                       

E-mail: richard.ferrett@butterfieldgroup.com                     

Media Relations Contacts:

Dianne Brewer

Senior Vice President

Phone: (441) 299 3979

Cellular: (441) 524 1077

Fax: (441) 295 3878

E-mail: dianne.brewer@ butterfieldgroup.com

Mark Johnson             

Assistant Vice President

Phone: (441) 299 1624

Cellular: (441) 524 1025

Fax: (441) 295 3878

E-mail: mark.johnson@bm.butterfieldgroup.com