Butterfield Bank yesterday announced a first-quarter net loss of $20.8 million, after writing down the value of a US mortgage-linked investment by $37.5 million.

Chief executive officer Alan Thompson said Butterfield had felt the impact of the recession as revenues slumped and demand for loans fell, although operations remained profitable.

But he also saw reasons for optimism — notably an improvement in market valuations of its held-to-maturity portfolio.

Net income before gains and losses was $18.1 million for the first three months of 2009, compared to $35.4 million in the same period last year.

The bank's net loss broke down to 22 cents per diluted share, compared to net income of $36.9 million, or 38 cents per share, in the first quarter of 2008.

Net interest income before credit provisions fell 27 percent compared to the prior year period to $49.3 million — a reflection of low interest rates around the world and a 14 percent decrease in Butterfield's average interest-earning assets during the quarter.

Non-interest income, which includes fees from services such as asset management and trusts, fell 31 percent, or $18.6 million, to $40.6 million. Much of the decline was due to the sale of fund administration businesses to Fulcrum Group last year, businesses that generated revenue of $12.8 billion last year.

The quarterly dividend paid to holders of common shares will be unchanged at eight cents per share - four cents in cash and four cents in common shares - payable on June 5 to shareholders of record on May 15.

The $37.5 million write-down related to a single collateralised mortgage obligation (CMO) — a security backed by packaged US residential housing loans — whose market value has been impaired by the continuing slump in the US housing market.

The write-down was in line with estimates of potentially problematic CMOs totalling some $44 million published by Butterfield in its 2008 annual report at the end of last year, and in line with separate stress tests conducted by the bank and regulator the Bermuda Monetary Authority.

"Other than that, the portfolio was pretty steady in the first quarter," Mr. Thompson told The Royal Gazette. "The difference between the book value and the mark-to-market value of items in our held-to-maturity portfolio came down by $18 million. We are starting to see some stabilisation."

An improvement in the US housing market was the biggest macro-economic development that could positively influence the fortunes of the Butterfield's mortgage-linked investments, Mr. Thompson said.

"There are signs that housing sales are starting to pick up and refinancing is picking up and there is an increasing number of people saying that housing is starting to bottom, as the Government stimulus and TARP (Troubled Asset Relief Programme) money starts to take effect," he added.

Last week, Butterfield's bank financial strength rating was downgraded from C to C- by credit rating agency Moody's, which said further write-downs of some investments were possible and could weaken the bank's capital position.

The bank's high-quality and easily available capital, or so-called Tier 1 capital, ended the quarter at 7.7 percent. When including the $200 million Government-guaratnteed capital raise that will happen within weeks, that figure would have been 11.1 percent — a healthy figure when compared to the average of around nine percent among US banks, Mr. Thompson said.

Many banks worldwide have had problems similar to Butterfield, but Mr. Thompson sees positive signs emerging. "Hopefully, as an industry, we are working our way through this and the darkest days are behind us," he said.

The bank's figures showed some signs of the impact of the downturn impacting Bermuda, as non-performing loans on the Island increased by $4 million.

"The quality of the Bermuda loan book continues to be very good," Mr. Thompson said. "We are seeing lower loan demand for new projects, but non-performing loans are at 0.8 percent, which is very low by anybody's standards.

"But I am worried about it. Bermuda will not be immune forever."

Butterfield's share price has plunged 66 percent this year to date and closed yesterday at $3.50 on the Bermuda Stock Exchange.

"We're disappointed with the performance of our stock, but the stock market is not something we can control," Mr. Thompson said. Most of the selling had been done by US institutional investors, he added.

"We think that as the economy grows, the financials will grow and generate good returns for shareholders."

Butterfield, which has operations in eight other jurisdictions, saw a $527 million fall in total assets held in Bermuda, reflecting lower levels of deposits related to fund administration clients.

Net income for the Bermuda operations fell by almost two thirds to $5.5 million, but there was a $2 billion growth (7.5 percent) in the assets under administration, reflecting an increase in trust assets under administration. The Cayman Islands unit saw net income fall to $7.5 million, compared $11.6 million last year, primarily because of the fall in interest rates.