Carlyle Group expands its bank holdings

The Carlyle Group has expanded its portfolio of bank assets, announcing on March 2 a minority investment in N.T. Butterfield & Son, a Bermuda-based bank that, like so many others, hit a rough patch with bad investments in mortgage-backed securities.

Carlyle Group and the Canadian Imperial Bank of Commerce led a group that invested $550 million of equity in the 150-year-old bank. Carlyle Group and CIBC each invested $150 million for 22.5% stakes in the bank.

Other investors include the Wellcome Trust, Bermuda Government Pension Funds, Julian Robertson and Goshen Investments.

The deal marks the third investment in the banking industry for Carlyle Group, which in March 2008 recruited Olivier Sarkozy, the former joint global head of UBS’ global financial institutions group, to lead the financial services team that would try to capitalize on the banking industry’s troubles.

In July 2008, the Washington, D.C.-based firm invested $75 million in Boston Private Financial Holdings Inc., a financial services firm; in May 2009, it joined The Blackstone Group, Centerbridge Partners, John Kanas and WL Ross & Co. in a $900 million buyout of BankUnited FSB, a Coral Gables, Fla.-based bank with 86 branches. Both bank, like Butterfield, had run into financial difficulty and needed to raise fresh capital to stabilize their balance sheets.

Butterfield, which manages $9.6 billion, offers community banking services in Bermuda, Barbados and the Cayman Islands, including wealth management, private banking and personal trust services. The bank had a large securities portfolio, due to its modest loan holdings, which typically yield less than loans.

On the same day Butterfield announced the deal with Carlyle Group and CIBC, it reported an audited net loss of $213.4 million for the year ended Dec. 31, compared to net income of $4.8 million for 2008. The bank said in a statement that the losses resulted from a write-down of the bank’s mortgage-backed securities, as well as substantially higher commercial loan loss provisions. The bank expects it may lose $150 million to $175 million more in the first quarter of 2010 related to the restructuring of its investment portfolio .

Carlyle Group has been working on the deal for about a year, after Butterfield management approached Sarkozy about a possible investment. Carlyle Group invited CIBC as a co-investor because the bank had more experience investing in the Caribbean and because of its ability to further stabilize Butterfield given its perceived strength and ‘AA’ credit rating, Sarkozy said.

Sarkozy added that the bank’s asset management and custodial business generate about 50% of its revenue. “It’s a tremendously valuable franchise, very liquid and not very exposed to credit risk.” —Bernard Vaughan