The Bank of N.T. Butterfield & Son Limited
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The Bank of N.T. Butterfield & Son Limited Butterfield is a diversified financial services company operating in nine jurisdictions. We have total assets of $9.6 billion and $60.7 billion of client assets under administration. We employ 1,606 people around the world. Butterfield is a publicly traded company with a primary share listing on the Bermuda Stock Exchange and a secondary listing on the Cayman Islands Stock Exchange. CHAIRMAN’S LETTER TO THE SHAREHOLDERS Butterfield is in the midst of the most important transition in its 152-year history. Over the past two years, we have realised significant losses on investments and felt the negative impact of the global financial crisis on our revenues. At year-end 2009, the Board decided that it was in the best interests of our shareholders for the Bank to take proactive steps to substantially de-risk the Balance Sheet. This action ended a protracted period of ongoing losses and the adverse effects this had on our share price and reputation in the market. Concurrently with this decision, the Board sought and secured new sources of capital to help offset the impact of the losses. Unfortunately, this capital raise was highly dilutive to shareholders. My objective with this letter is to provide a summary of the circumstances that led the Board to its decision, along with more details of the capital raising transaction. Prior to taking the actions we did, your Board considered several alternatives for increasing capital, and although we are aware that many shareholders are disappointed with our decision, we are confident that it was the best alternative for preserving the long-term value of the Butterfield franchise. 2009 RESULTS Following write downs of more than $210 million in 2008, we foresaw non-interest income), our operating profitability was also significantly the possibility of further problems in our held-to-maturity portfolio in diminished. Therefore, even with the successful $200 million early 2009. To increase the Bank’s capital as a means of offsetting these preference share offering behind us, it became necessary for the potential losses, Butterfield raised $200 million through a preference Bank to raise additional capital to remain in compliance with share offering in June. regulatory requirements. In the fourth quarter, it became apparent that we would again have to Upon this turn of events, and following two challenging years during take significant write downs on certain mortgage-backed securities and which the Bank’s performance had suffered from ongoing write downs large loss provisions on several corporate loans in the hospitality sector associated with investments in structured assets made prior to by year end. With 2009 revenues down by more than $93 million year- mid-2007, your Board sought a solution that would generate enough on-year on a normalised basis, (a function of historically low interest capital to allow us to, once and for all, clear problematic assets from the rates and depressed asset values that impaired our ability to generate Balance Sheet. 3 - OUR RESTRUCTURING AND RECAPITALISATION SoLUTION Under a comprehensive restructuring plan, the Bank took losses of Should the rights be fully subscribed, existing shareholders will $91 million on impaired securities in the fourth quarter. We also own 37% of the Bank. None of the new investors will own more than increased our provision for credit losses to $105 million; a figure that 22.8%, and they cannot seek to increase their ownership positions we believe represents adequate provisioning for loans over the in Butterfield for a period of four years without the prior approval anticipated duration of the recession. In addition, the restructuring plan of the Board. factors in anticipated investment losses in the range of $150 million to The Board is aware that many of our shareholders are disappointed $175 million in the first quarter of 2010 associated with the sale of most that they were not given the opportunity to approve the capital of the Bank’s remaining troubled assets. At the time of writing, raising transaction through a vote. Given the magnitude of the Bank’s I am pleased to report that the sale of these assets has been fourth quarter 2009 loss and an anticipated Q1 2010 loss, and against largely completed. a backdrop of speculation about the Bank among investors and To offset the losses, the Board secured $550 million of new capital the media, Butterfield’s Board of Directors determined that having through the sale of new Butterfield common equity to a group of new capital in place at the time we announced the loss for 2009 was investors led by The Carlyle Group and Canadian Imperial Bank essential to ease market uncertainty about the Bank. Our view was that of Commerce (“CIBC”). As part of this transaction, the Board negotiated if we had waited for a vote, that uncertainty would have done more a $130 million rights offering that will enable existing shareholders damage to the value of existing shareholders’ interests than proceeding to purchase shares at the same per-share price of $1.21 as the new with the transaction did. We therefore sought an exemption from the investors, giving them the opportunity to maintain a meaningful requirement for a shareholder vote from the Bermuda Stock Exchange proportional ownership position. The rights offering is backstopped and it was granted. by the new investors, meaning that the subscription rate of new shares With the transaction concluded, Butterfield is a well-capitalised bank. under the upcoming rights offering notwithstanding, the Bank had the On a pro-forma basis, factoring in the new capital and the anticipated net proceeds of the capital raise of $520 million in place at the time the Q1 2010 losses, our total capital at 31 December 2009 would have been transaction closed on 2 March 2010. $1.1 billion, putting our Tier 1 capital ratio at 13.5%, and our total capital ratio at 18.7%, well in excess of regulatory requirements. 4 DIVIDENDS It has long been the Bank’s policy to pay out a portion of earnings in has retired. Mr. Kopp, a career banker with more than 33 years the form of common dividends. Consistent with that policy, and with of experience, was instrumental in bringing our capital solution the Bank having posted a significant net loss for the year, the Board to fruition. The Board is impressed with Mr. Kopp’s insight and did not declare a fourth quarter dividend on common shares and has business acumen, and we are confident that he is the right person suspended the payment of common dividends until Butterfield returns to lead Butterfield. to a position of sustainable profitability. Dividend payments totalling At the Annual General Meeting of shareholders in September 2009, $0.24 per common share ($0.12 in cash and $0.12 in shares) were made I advised the attendees that we had commissioned an independent, during the first three quarters of 2009. Butterfield paid dividends third-party review and assessment of the Bank’s governance practices totalling $7.1 million on outstanding preference shares during 2009, and management hierarchy. In late 2009, the Board received the meaning the Government of Bermuda was not called upon to pay any evaluation and set about implementing a number of recommendations. portion of the dividends on these Government-guaranteed securities. We reconstituted the Board Ad Hoc I.T. Committee as a vehicle through GoVERNANCE which the Board of Directors will oversee matters pertaining to technology changes. We authorised changes in the Bank’s management Reflective of their ownership interests in the Bank, each of Carlyle and structures that will draw a clearer distinction between Group and CIBC will have two Directors join a 12-person Board. It is my opinion local management responsibilities and improve the level of head that the Board will benefit from the perspective and expertise of these office oversight of jurisdictional operations. Finally, we adjusted the seasoned, international bankers. composition of the various functional committees—Group Asset and Liability Committee, Group Risk Committee, Group Investment We announced on 2 March 2010 that the Board had appointed Bradford Committee, Group Credit Committee and Group Financial Institutions Kopp as Butterfield’s new President & Chief Executive Officer and Committee—to ensure that we have appropriate stakeholder a Director of the Bank. Mr. Kopp, who joined Butterfield as Chief representation by the correct mix of executives on each committee. Financial Officer in November, replaces Alan Thompson who 5 There have been several changes on the Board in recent months. Vince Ingham, a non-executive Director, retired from the Board in early March 2010. Upon his retirement from the Bank, Alan Thompson also retired from the Board of Directors. Patrick Tannock resigned as a Director in January 2010 for personal reasons. Graham Brooks, Butterfield’s Executive Vice President, International, retired from the Bank and the Board at the end of June. Glenn Titterton retired in April 2009. This past February, we were saddened by the untimely death of Harry Wilken, who had served on the Board with distinction for 12 years. With the difficulties of the last two years behind us and new investor partnerships in place, we are looking optimistically to the future. Butterfield is well capitalised. Our Balance Sheet will be substantially de-risked by the end of the first quarter of 2010. We now have world-class governance protocols and structures in place. The Board, Management and our new investors firmly believe the Bank is positioned for strong top-line and bottom-line growth as interest rates begin to rise. Although we view the dilutive effect that our capital raising transaction had on our current shareholders as unfortunate, we are pleased that we are able to offer them the opportunity to participate in the renewal and growth of the Butterfield franchise as we move forward.