T h e B a n k o f N . T. B u t t e r f i e l d & S o n L i m i t e d
65 Fr on t Street , Ha mil ton, Berm uda
w w w. b u t t e r f i e l d b a n k . c o m
A N N U A L R E P O R T | 2 0 0 4
B E R M U D A | B A H A M A S | B A R B A D O S | C A Y M A N I S L A N D S | G U E R N S E Y | U N I T E D K I N G D O M
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Performance Highlights
For the year ended 31 December 2004
Net income $90.5 million
Up from $70.8 million in 2003
Return on Equity 21.2%
Up from 17.9% in 2003
Diluted Earnings Per Share $3.86
Up from $3.07 in 2003
Acquisitions:
The Bahamas
Deerfield Fund Services Limited
February 2004
Bermuda
Grosvenor Trust Company Limited
October 2004
UK & Guernsey
Leopold Joseph Holdings plc
April 2004
Awards:
Bank of the Year 2004
Awarded by The Banker magazine
to Butterfield Bank in Bermuda
and the Cayman Islands, September 2004
Contents
Financial & Statistical Summary
Corporate Profile
Chairman’s Letter to the Shareholders
President & Chief Executive Officer’s Report
Management’s Discussion and Analysis of Results
of Operations and Financial Condition
Financial Overview
Financial Summary
Management’s Financial Reporting Responsibility
Auditors’ Report to the Shareholders
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in
Shareholders’ Equity and Comprehensive Income
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Board of Directors & Principal Board Committees
Directors’ Code of Practice and Group Code of Conduct
Directors’ and Executive Officers’ Share Interests
and Directors’ Service Contracts
Management
Principal Group Companies
Shareholder Information
Principal Offices & Subsidiaries
2
3
4
5
6
18
23
24
25
26
27
28
29
30
61
61
61
62
62
63
64
Financial & Statistical Summary
2
(In $ thousands except share data)
31 December 2004
31 December 2003
31 December 2002
(unaudited)
30 June 2002
Year ended
Year ended
Net income from continuing operations
Profit (Loss) from discontinued operations
Net income
Net income per share (Diluted)
Including discontinued operations
Excluding discontinued operations
At Year End
Total assets
Cash and deposits with banks
Investments
Loans
Deposits from customers
Deposits from banks
Subordinated capital and senior debt
Shareholders’ equity
Net book value per share
Market value per share
Number of shares (in thousands)*
Number of shareholders
Number of employees
Financial Ratios
Return on assets**
Return on equity**
Total capital funds to total assets ratio
90,466
-
90,466
$3.86
$3.86
8,630,383
2,396,724
3,266,400
2,645,331
7,404,855
502,595
142,333
428,030
$18.84
$40.50
22,714
3,778
1,552
1.1%
21.2%
6.6%
70,838
-
70,838
$3.07
$3.07
7,733,806
2,912,383
2,638,253
1,954,716
6,612,303
510,274
122,871
382,095
$16.83
$40.00
20,643
3,581
1,381
1.0%
17.9%
6.5%
83,743
184
83,927
$3.26
$3.26
6,007,874
1,989,159
2,073,112
1,767,088
5,156,111
360,105
75,000
338,799
$15.05
$27.73
18,603
3,322
1,200
1.2%
20.5%
6.9%
* Excludes shares purchased by the Bank for the Stock Option Trust.
** Excludes discontinued operations and gain on sale of subsidiaries.
Comparative per share data has been restated to reflect the 1 for 10 stock dividends in August 2004, 2003 and 2001.
Data for 2004 and 2003 is shown under US GAAP and for 2002 under Canadian GAAP.
All percentages here and in the report that follows are based on actual rather than rounded numbers.
81,416
873
82,289
$3.44
$3.40
5,738,044
2,027,225
1,831,142
1,696,775
4,787,228
429,138
75,000
335,167
$14.39
$30.00
19,247
3,364
1,229
1.2%
21.2%
7.0%
Jun 01Jun 02Dec 02(unaudited)Dec 03Dec 0460.764.466.770.890.5for 12 months to 30 Junefor 12 months to 31 DecemberNet Income ($m)**Jun 01Jun 02Dec 02(unaudited)Dec 03Dec 042.753.403.263.073.86for 12 months to 30 Junefor 12 months to 31 DecemberJun 01Jun 02Dec 02(unaudited)Dec 03Dec 04for 12 months to 30 Junefor 12 months to 31 DecemberEarnings Per Share ($) (Diluted)**22.721.220.517.921.2Return on Equity (%)** Corporate Profile
3
The Butterfield Bank
Group is a full service
community bank and a
provider of specialised
offshore financial
services. Our
headquarters and
largest operations are
in Bermuda, where we
were established in
1858 as the island’s
first bank and
continue to play an
important role in
the local economy.
With additional
operations located
in The Bahamas,
Barbados, the Cayman
Islands, Guernsey and
the United Kingdom,
we have $9.5 billion
of assets under
management and
over $80 billion of
client assets under
management and
administration.
We provide a full range of
Our performance is a direct result
community banking services
of the efforts of our dedicated
for institutional and individual
employees who work together to
customers in Barbados, Bermuda
deliver quality financial services,
and the Cayman Islands,
encompassing retail and
build business and enhance
shareholder value. At 31
corporate banking and treasury
December 2004 we had a total
activities. As a specialist offshore
of 1,552 employees, 786 in
financial services group, we also
Bermuda and 766 overseas.
provide private banking, wealth
We believe that a positive work
management and fiduciary
environment, with effective
services, and institutional and
employee training, development
pension fund administration in
and communication, benefits
The Bahamas, Bermuda, the
our customers through quality
Cayman Islands, Guernsey and
service and our shareholders
the United Kingdom. Our success
through long-term improvements
is built on a set of fundamental
in results.
strengths: sound corporate
values, a stable customer base,
strong liquidity position and
solid core businesses.
Involvement in the communities
in which we operate is important
to the Butterfield Bank Group.
We support a variety of projects
Our home country regulator is
and organisations that invest in
the Bermuda Monetary Authority,
areas such as youth development,
which operates in accordance
healthcare, social causes, sports,
with Basel principles and
maintains close contacts
heritage and the arts. Our
educational scholarships and
with regulators in the other
bursaries help young people
jurisdictions where we have
fulfil their potential and achieve
offices. Our common stock is
their dreams. We take an active
listed on The Bermuda Stock
role in community events and
Exchange and the Cayman
encourage the efforts of the many
Islands Stock Exchange. We have
employees who give their own
over 3,700 shareholders with
time and energy to a multitude
24.3 million shares outstanding.
of charitable causes. Collectively
and individually, we take action
to make our communities better.
Chairman’s Letter to the Shareholders
4
On behalf of the Board of Directors, it is my pleasure to report that the Butterfield Bank Group
has again performed well under economic conditions that continue to challenge the global
market. The year ended 31 December 2004 was a period of growth and accomplishment,
both strategically and financially.
The Group has maintained its course with a clearly defined strategy across all our business lines. This strategy, developed
by executive management, has produced consistently strong financial results and continues to enhance shareholder value.
The current business model is proven to be sound, as these results attest.
We have expanded our geographic diversification with key acquisitions in Bermuda, Guernsey, the United Kingdom and
The Bahamas. This growth speaks to our increasing strength and stability, as well as our commitment to continue building
and expanding core businesses.
Reflecting our ongoing strong earnings performance and our commitment to enhancing shareholder value, in July 2004 the
Board approved a one-for-ten bonus share issue, as it had the prior year. This bonus equates to a 10% stock dividend and,
combined with the 12-month cash dividend of $1.55 per share, gave shareholders an impressive return on their investment.
This year we bade farewell to a valued and respected colleague. Geoffrey Bell retired from the Board in January 2005,
following his appointment as a Puisne judge of the Bermuda Supreme Court. Mr. Bell was elected to the Board in 1987 and
made a number of significant contributions, most recently as Chair of the Corporate Governance Committee. On behalf of
the Board, I would like to thank him for his 17 years of service and wish him well on his move to the Bench.
I would like to express sincere thanks to the Group’s dedicated management team and employees whose expertise and
dedication has made it possible for us to continue to achieve strong results. I also thank our shareholders and customers
for their steadfast support, amid a climate of change within our industry. You are essential to our success and we will work
to continue to earn your loyalty as we move forward.
James A.C. King, JP
Chairman of the Board
President & Chief Executive Officer’s Report
5
The year 2004 was one of growth and change for the Butterfield Bank Group, as our tested
strategy has again delivered solid financial results in a highly competitive environment.
Our net income for 2004 was $90.5 million, increasing by 27.7% from last year and we
experienced a good return on shareholders’ equity at 21.2%. This performance can be
attributed to the overall strength of our core businesses and the commitment and skill of
our employees.
We made significant acquisitions in 2004, acquiring Leopold Joseph Holdings plc, with operations in Guernsey and the
United Kingdom, Deerfield Fund Services Limited in The Bahamas, and Grosvenor Trust Company Limited in Bermuda.
The transition of these acquisitions into the Butterfield Bank Group is progressing well with promising growth potential.
In 2004 the Group re-branded across all jurisdictions. This re-branding to the name Butterfield Bank is a positive initiative
for the Group and will contribute to a consistent, group-wide identity as we continue to expand internationally.
A cornerstone of our business is value added customer service. In Bermuda we entered into a partnership with MasterCard
and American Airlines and launched the Butterfield / AAdvantage® MasterCard®, a popular credit card. We will continue to
seek other innovative products and services that meet the needs of our customers.
Our resiliency and strength was underscored after Hurricane Ivan severely damaged the infrastructure of our Cayman
operations. Other offices in the Group immediately went to the aid of colleagues, assisting them in re-establishing their
operations within several days. Additionally, we made a substantial contribution to the entire community to help with
their recovery efforts.
2004 also saw the launch of a Service Initiative training programme in Bermuda for all Bank employees, which will
enable them to better serve each other and our customers. We see this internal training as a key element to achieving
our overall goals.
Our community activities remain a priority as we recognise our responsibility to give back to the jurisdictions in which we
operate. In 2004 we supported a wide variety of causes in our communities, with the active involvement of our employees.
On behalf of management, I would like to express appreciation to the Board of Directors for their support, advice and
oversight. I also thank our employees, shareholders, customers and partners, all of whom contribute to the Butterfield
Bank Group’s reputation as a respected business and strong community partner.
Alan R. Thompson
President & Chief Executive Officer
Management’s Discussion and Analysis of
Results of Operations and Financial Condition
6
Richard J. Ferrett Executive Vice President & Chief Financial Officer
C. Wendell Emery Executive Vice President, Operations & Information Technology
Graham C. Brooks Executive Vice President, International
Peter J.M. Rodger Senior Vice President & Group Legal Adviser, Secretary to the Board
From left to right:
All references to the
Butterfield Bank Group
or “the Group” refer to
The Bank of N.T. Butterfield
& Son Limited and its
subsidiaries on a
consolidated basis.
Management’s discussion and
The Bahamas in February 2004
analysis of results of operations
and Grosvenor Trust Company
and financial condition should
Limited was acquired in
be read in conjunction with the
Bermuda in October 2004.
Group’s Consolidated Financial
These businesses performed
Statements, beginning on page
in line with expectations during
26, and the notes to those
the period of time that they
financial statements, which
have been part of the Butterfield
begin on page 30. These
Bank Group.
statements and notes have been
prepared in accordance with
Results of operations for the
generally accepted accounting
year ended 31 December 2004
principles in the United States
compared with the year ended
of America (US GAAP). The
31 December 2003.
Group changed its accounting
convention from Canadian GAAP
The Butterfield Bank Group
in 2004; as a result, 2003
achieved net income of $90.5
comparatives have been
million for the year ended
restated under US GAAP.
31 December 2004, representing
During 2004, three acquisitions
over the same period last year.
a 27.7% increase in net income
were made which impacted
results. Leopold Joseph Holdings
plc was acquired in April 2004
and integrated with the Group’s
United Kingdom and Guernsey
operations; Deerfield Fund
Services Limited was acquired in
From left to right:
Michael A. McWatt Senior Vice President, Credit Risk Management
Sheila M. Brown Senior Vice President, Investment Services
Lloyd O. Wiggan Senior Vice President, Retail Banking
7
Net interest income, before credit
The Group’s balance sheet remains
Asset quality remained a strength
related provisions, at $151.0
highly liquid. Deposits with banks
across the Group. Non performing
million, was a record and is up
and investments increased year on
loans totalled $20.5 million at
year on year by $32.9 million, or
year by 2.1% to $5.7 billion and
year-end 2004, representing 0.8%
27.9%, reflecting balance sheet
represents 65.6% of total assets,
of total loans, down from 0.9% a
growth, an increase in the loan
compared to 71.8% a year earlier.
year ago. As at 31 December 2004
portfolio and a benefit from the
The loan to assets ratio at year
the General Provision for loan
rise in US and UK interest rates.
end 2004 stood at 30.7%, up from
losses of $21.9 million was
The period under review saw
25.3% a year earlier. Loans
equivalent to 0.8% of total loans.
increases in both US and UK
increased by $690.6 million, or
In addition, there is a specific
interest rates, with five increases
35.3%, year on year. This increase
provision of $1.9 million held for
in US interest rates and four
reflects the ability across the
possible shortfalls in the security
increases in UK interest rates,
Group to meet new demand for
held for non-performing loans.
all of 0.25%.
lending products, particularly in
In total, therefore, loan provisions
the community banking business
were $23.8 million, or 0.9% of the
Also significant was the growth
in Bermuda, which produced loan
loan portfolio. Delinquency and
in non-interest income, which
growth of $252.6 million, up 17.4%,
charge-off ratios continued to be
increased year on year by
and in the Cayman Islands, where
well below industry average.
$33.5 million, or 27.3%, to
growth was $38.2 million, up
$156.5 million. This reflects strong
14.2%. The acquisition of Leopold
growth across all revenue lines,
Joseph’s businesses was the
notably from our fund
primary reason for the growth in
administration businesses
the loan portfolios in Guernsey
(+52.7%), asset management
and the UK, which increased by
(+38.4%), trust and investment
$72.6 million, or 64.1% and $328.7
services (+29.8%) and banking
million, or 575.0% respectively.
services (+16.0%).
Management’s Discussion and Analysis of
Results of Operations and Financial Condition
8
Bob W. Wilson Senior Vice President, Corporate Banking
Fred H. Tesch Senior Vice President, Group Internal Audit
Graham M. Jack Managing Director, Butterfield Trust (Bermuda) Limited
Ian M. Coulman Managing Director, Butterfield Asset Management Limited
From left to right:
The year saw a significant
fourth quarter the Board
share increased year on year by
increase in customer deposits,
approved a dividend increase of
11.9% to $18.84.
which were up $0.8 billion,
3 cents.
or 12.0%, year on year to $7.4
An important productivity
billion, again primarily due to
Performance Indicators
indicator is the efficiency ratio,
the acquisition of Leopold
Joseph. Substantial inflows of
short-term customer deposits
continued over the year from
clients whose third party
investment funds are
administered by the Group
in Cayman.
During the year 459,232 shares
were repurchased and cancelled,
at an average cost of $42.19 per
share. The total dividend for the
period was $1.55 per share, an
increase of 12 cents or 8.4% over
the same period last year, and
represents a 37.2% payout on
net income for the period. In
addition, for the second
consecutive year, a one-for-ten
bonus share issue was made in
August 2004, which equates to a
10% share dividend, and for the
The Group’s overall strength and
performance are indicated by
certain key measures. Return on
shareholders’ equity was 21.2%
for the period, up from 17.9% in
2003. Diluted earnings per share
were $3.86, up 79 cents, or
25.7%, compared with $3.07
last year.
The net interest margin and
interest rate spread both
remained unchanged year
on year at 1.9% and 1.6%
respectively. Average interest-
earning assets increased year
on year by 30.6% to $7.9 billion.
The increase in the return on
assets, up 0.1% on 2003 to 1.1%,
reflected the strong earnings
growth achieved in 2004.
The Group’s net book value per
which is operating expenses
(excluding corporation tax and
amortisation of intangible
assets) expressed as a
percentage of operating income
(excluding credit provisions).
For the year ended 31 December
2004, the Group’s efficiency ratio
was 69.1%, up from 67.7% a year
ago. The increase was due to a
higher year on year growth rate
for non interest expense, up
36.6%, than for total revenue,
which grew by 32.9%. This
reflects the acquisition and
integration costs associated with
the purchase of Leopold Joseph,
together with increased
expenses in Cayman relating to
Hurricane Ivan.
From left to right:
Donna E. Harvey Maybury Senior Vice President, Human Resources
James R. Stewart Senior Vice President, Enterprise Risk Management
Michael O’Mahoney Senior Vice President, Treasury
9
Outlook
The Group re-branding, which was launched in 2004, has made ‘Butterfield’ an increasingly recognised brand
wherever the Group operates, particularly in the markets entered over the past two years. Whilst 2005 is expected
to present the continued challenge of increased competition, the Group’s business model is expected to continue
effectively to generate enhanced shareholder value as long as the economies in which the Group operates remain
robust. Recently-acquired companies are anticipated to perform in line with expectations in 2005. The Group will
therefore continue with the strategy that has returned a strong performance over the past several years, namely to
maintain a conservative approach and continue to focus on core business lines.
Bermuda
10
W. Aaron M. Spencer Senior Vice President, Operations
D. John Charlick Senior Vice President, Strategic Projects
Andrew R. Collins Managing Director, Butterfield Fund Services (Bermuda) Limited
From left to right:
The Butterfield Bank Group
has its headquarters and
largest operation in Bermuda.
Home to over half the Group’s
employees, Bermuda-based
businesses provide community
banking, wealth management,
fiduciary services and
investment and pension fund
administration services. These
are offered through The Bank
of N.T. Butterfield & Son
Limited, under the brand
name of Butterfield Bank, and
its wholly-owned subsidiaries:
Butterfield Asset Management
Limited, Butterfield Trust
(Bermuda) Limited, Butterfield
Fund Services (Bermuda)
Limited and Promisant
(Technology) Limited.
In 2004, the Group’s Bermuda
operations thrived in a fast-paced,
changing market. For the third
consecutive year, Butterfield Bank was
named ‘Bank of the Year’ in Bermuda
by The Banker magazine, recognising
its impressive performance in
the jurisdiction. While the competitive
environment in Bermuda intensified
with the acquisition of a local
competitor by a global bank, the
continued focus on the Group’s core
strategy successfully attracted and
retained customers, producing
impressive results for all businesses
on the island. With quality customer
service a cornerstone of the Group’s
strategy, Bermuda operations focused
on operational efficiency, product
innovation and enhancing the all-
round customer experience, through
continued investment in premises,
people, IT infrastructure, data
and systems.
During the period under review in
Bermuda, total income increased year
on year by 24.2% to $192.0 million,
reflecting record levels of both net
interest and non-interest income.
Included in non-interest income was a
$5.8 million realised gain from the sale
of a venture capital investment. Assets
under administration in Bermuda were
up 26.1% to $33.3 billion.
Butterfield Bank
Corporate, private and retail banking
and treasury businesses in Bermuda
comprise Butterfield Bank’s Community
Banking operations and all have
maintained strong performances in
2004. Demonstrating the Bank’s
strength in retaining and attracting
business in an increasingly competitive
market, a 48.1% year on year increase in
net income was achieved, up from $31.8
million in 2003 to $47.1 million in 2004,
reflecting increased net interest income
as a result of strong loan growth and a
12 basis point increase in the net
interest margin. Average interest
earning assets were $3.8 billion in 2004
compared with $3.5 billion last year.
Corporate Lending experienced
significant growth, as its quality
products and effective relationship
management proved an ideal fit for
both local and international customers.
The corporate loan portfolio increased
year on year by 26.0% to $0.8 billion,
reflecting strength in the local economy.
Corporate Lending continues to remain
vigilant in its approach to loan quality.
Letters of Credit income was ahead of
expectations although volume grew at
a slower rate than in previous years.
Private Banking expanded during 2004,
by dedicating quality resources to
acquiring new business and continuing
to build strong relationships with high
net worth private clients. This area is
viewed as a growth opportunity.
Retail Banking experienced another
year of growth and cemented its
position as Bermuda’s premier provider
of community banking services in July
2004 with the launch of the only credit
card in Bermuda offering access to the
internationally recognised AAdvantage®
miles programme. A significant number
of new customers have been attracted
to the Group by the Butterfield /
AAdvantage® MasterCard® and,
following its launch, 88% of new credit
card applications in 2004 were for this
particular card.
11
Consumer Credit yet again recorded
strong growth in 2004, with mortgage
and consumer loan balances increasing
by 10.0% to $0.9 billion. A focused and
pro-active marketing strategy attracted
significant new business, strengthened
existing relationships and expanded
referral arrangements. Specialised
Consumer Credit training, meanwhile,
ensured a continued focus on technical
skills, quality customer service and
cross-selling capabilities.
Improvements to products, delivery
channels and fraud protection
technology kept the Group in line with
global standards. With a focus on
electronic services, in the fourth quarter
of 2004 the Group began upgrading the
ATM network in Bermuda, offering
newer technology and greater security.
Having exceeded 1 million transactions
since its launch in 2001, in 2004
Butterfield Direct Internet Banking
continued to show strong growth
in both numbers of users and
transactions. The Group is committed
to ongoing technology investments
in this delivery channel to provide
enhanced functionality and security.
Work continued on the physical
infrastructure in Bermuda with
renovations on-going in the Rosebank
building in Hamilton. Additionally,
an extensive refurbishment of the
St. George’s branch was completed
and work will begin on the Somerset
branch in 2005.
Butterfield Asset Management
Providing investment management,
advisory and brokerage services to
institutional and private clients,
Butterfield Asset Management Limited
(BAM) manages the family of eight
Butterfield Funds, as well as Butterfield
Bank Group’s own investment portfolios.
BAM reported 2004 net income of $13.5
million, an increase of 20.8% over 2003.
Client assets invested in Butterfield
Funds managed in Bermuda rose
9.3% year on year to $5.0 billion at 31
December 2004, while total client
assets under management grew from
$7.1 billion at the end of 2003, to $7.5
billion at year end, an increase of 6.3%.
Considerable growth was achieved
in BAM’s Fund of Funds product,
Butterfield Select, which grew by 61.5%.
Also displaying strong growth were the
Butterfield US Dollar Bond, which grew
by 32.1%, and the Butterfield Money
Market Funds which, in dollar terms,
attracted well over half of all BAM’s
new client assets.
BAM’s strong performance was powered
by consistent marketing to prospective
and existing clients. It actively marketed
wealth management services,
implementing a pro-active strategy
to attract trust companies and
intermediaries. BAM also continued
to develop its relationship with the
insurance industry by attending the
major insurance conferences in
Bermuda and abroad, including RIMS.
Additionally, BAM conducted a series
of presentations during the year, which
successfully attracted new investors
to the funds.
Butterfield Trust (Bermuda)
Providing a comprehensive range of
trust, estate, company management
and custody services, Butterfield Trust
(Bermuda) Limited (BTB) focuses on
local and international clients, both
corporate and individual.
During the year under review client
assets under custody increased by $0.7
billion to $17.5 billion, up 4.2% from
2003. BTB experienced significant
growth in hedge fund business and
attracted new business from existing
clients. Personal trust business
continued to expand, as wealthy
families recognised the importance
of the flexibility and independence
BTB provides when managing their
international financial affairs in
an increasingly more regulated
environment. The net income for
BTB, at $6.8 million, increased by
53.2% from 2003.
In the last quarter of the year,
Grosvenor Trust Company Limited, a
Jun 01Jun 02Dec 02Butterfield Funds3,061 3,749 4,123 4,551 4,976Discretionary2,091 2,151 2,077, 2,508 2,531Total5,152 5,900 6,200 7,059 7,507Dec 03Dec 045,1525,9006,2007,0597,507Assets Under Management by Butterfield Asset Management ($m) Overseas Subsidiaries
12
specialist trust company in Bermuda,
was acquired and now operates
as a wholly-owned subsidiary of BTB.
With a well-established and select
group of clients, Grosvenor Trust is
complementary to BTB’s existing trust
business. Its acquisition is consistent
with the Group’s ongoing strategy
of growth in core products
and services.
Positioned well for further growth,
BTB continued in 2004 to strengthen
its senior management team, improve
customer service and cost efficiencies
and enhance operational effectiveness.
Butterfield Fund Services (Bermuda)
Providing valuation, accounting,
corporate and shareholder services to
offshore hedge funds and mutual funds,
Butterfield Fund Services (Bermuda)
Limited (BFS) also offers corporate
pension administration services to
insurance companies and international
pension funds.
For the year ended 31 December 2004
net income was $7.2 million, up 78.6%
compared with $4.0 million the previous
year. Net assets under administration,
excluding the Butterfield Funds,
increased by 74.0% from $9.6 billion in
2003 to $16.7 billion as at 31 December
2004. Yet again this year, BFS
significantly increased its client base
and continued to provide personalised,
professional service to a variety of
investment and pension funds.
In 2004 customers of BFS again
provided substantial business to
other areas of the Group in Bermuda,
including Treasury, Credit and
Butterfield Asset Management.
The Bahamas
Robert V. Lotmore
Managing Director,
Butterfield Bank
(Bahamas) Limited
Butterfield Bank (Bahamas) Limited
was established in 2003 through the
acquisition of Thorand Bank & Trust
and Leopold Joseph (Bahamas) Limited
and provides private banking, wealth
management and fiduciary services.
Butterfield Fund Services (Bahamas)
Limited was established in February
2004 through the acquisition of
Deerfield Fund Services Limited and
provides fund administration services.
At 31 December 2004 the Group’s total
assets in The Bahamas were $63.4
million, up from $18.4 million the
previous year, and net income was
$0.7 million. Client assets under
administration were $4.4 billion,
up 248.9% from $1.3 billion in 2003,
reflecting the acquisition.
Butterfield Bank (Bahamas)
Butterfield Bank (Bahamas) Limited
focuses on providing a premier
service, creating tailored solutions for
international, high net worth clients
with wealth management needs. Areas
of expertise include private banking,
trust administration and custody.
With The Bahamas attracting high net
worth individuals looking to buy real
estate, Butterfield Bank (Bahamas)
launched a new US Dollar mortgage
programme in October 2004 aimed to
service this niche market and create
opportunities to cross-sell other
products and services. Already receiving
strong interest, this product is expected
to be an area of growth in 2005. By 31
December 2004, the total lending
portfolio in The Bahamas was $2.9
million, compared to $26,000 the
previous year.
Butterfield Fund Services (Bahamas)
The acquisition of Deerfield Fund
Services Limited, a Bahamas-based
fund administrator, was consistent
with the Group’s strategy of growth in
its core businesses and complemented
existing operations in The Bahamas.
Re-named Butterfield Fund Services
(Bahamas) Limited, the business
provides fund administration services
for offshore hedge funds, mutual funds
and pension funds, and grew overall
assets under administration for the year
to $2.9 billion.
Barbados
Mariano R. Browne
Managing Director,
Butterfield Bank
(Barbados) Limited
The Group’s principal business in
Barbados is a comprehensive banking
service to the local community offered
through Butterfield Bank (Barbados)
Limited, which was formed in December
2003 through the acquisition of The
Mutual Bank of The Caribbean Inc.
A separate entity, Butterfield Asset
Management (Barbados) Limited,
acts as a representative office for
investment business. The priority in
13
Barbados for 2004 was to complete
a re-branding process, which was
successfully achieved by the end of the
first quarter of 2004. At 31 December
2004, total assets were $173.3 million,
up 11.6% from the previous year.
Net income for 2004 was $0.3 million.
Butterfield Bank (Barbados)
Headquartered in Bridgetown with
three additional branches, Butterfield
Bank (Barbados) Limited’s range of
community banking services includes
personal and commercial loans and
overdrafts; savings, chequing and
fixed deposit accounts; 24-hour
ATM facilities; credit cards; and
foreign exchange.
Ensuring existing customers received
a consistent level of service with the
newly-branded bank was key in
establishing a solid performance in
2004. Butterfield Bank (Barbados)
moved swiftly to build its reputation as
a dedicated community banker with the
launch of the “Butterfieldninetyfive”
mortgage in the second quarter of 2004.
“Butterfieldninetyfive” provides 95%
financing and has the lowest fixed
rate for mortgages in Barbados.
This product spear-headed an
encouraging first year for the
mortgage portfolio in 2004.
Butterfield Asset Management
(Barbados)
A separate operation from the
community bank, Butterfield Asset
Management (Barbados) Limited
acts as a representative office for
the services of Butterfield Asset
Management Limited, meeting the
corporate investment needs of
organisations such as captive insurance
companies, international businesses
and trusts.
CAYMAN ISLANDS
Conor J. O’Dea
Managing Director,
Butterfield Bank
(Cayman) Limited
A comprehensive range of services is
offered in Cayman to the local and
international market. Services are
offered through Butterfield Bank
(Cayman) Limited, Butterfield Asset
Management (Cayman) Ltd. and
Butterfield Fund Services (Cayman)
Limited. They provide community
and commercial banking services,
investment management, custody,
trust and company administration
and investment and pension fund
administration services.
In 2004, Butterfield Bank (Cayman)
was named ‘Bank of the Year’ in
Cayman by The Banker magazine,
in recognition of the strength of its
service and its position as the premier
community bank in the jurisdiction.
Customer service remained a key focus,
resulting in another year of strong
growth in all business areas.
Success was achieved despite the
impact of Hurricane Ivan, the Category
5 storm which devastated the Cayman
Islands on 12 September 2004 and
affected all businesses in the
jurisdiction. With solid business
continuity plans in place, however,
disruption to clients was minimised
with the Butterfield Bank Group
supporting its Cayman Islands
operations from other locations for a
short period of time. Open within four
days for limited services, the Cayman
Islands operations were able to offer
a full service to customers on and off
island within a week of the storm’s
passing. Butterfield Bank (Cayman)
took on a lead role in helping to rebuild
the community, and made the first
donation to the Cayman Islands
National Recovery Fund with US$1
million. To support employees whose
commitment saw them back at work
within days of the hurricane, various
initiatives were offered, ranging from
counselling to clothing and day-care
for their children.
Net income for the Cayman Islands in
2004 was $24.7 million, representing
an increase of 6.4% over 2003. A loss of
$1.9 million was recorded for the year
in respect of a minority shareholding
in Island Heritage Insurance Company
Limited. Nevertheless, total income
increased year on year by 14.7% to
$56.3 million and the Return on Equity
for the year was 22.2%. Total assets
increased year on year by 17.7%
to $2.3 billion, reflecting continued
growth in customer deposits.
Butterfield Bank (Cayman)
Butterfield Bank (Cayman) Limited’s
community banking business
experienced another strong year
of growth in the Cayman Islands,
Overseas Subsidiaries
14
increasing market share and further
reinforcing its position as a leading
provider of banking services to
individuals and businesses in the
jurisdiction. With five locations,
seven ATMs including a drive-through,
a web site, online banking and debit
and credit cards allied to a wide range
of credit facilities, the Bank’s
comprehensive delivery channels are
supported by a strong reputation for
excellent customer service.
Strong demand for credit continued
during the year, with the lending
portfolio growing by $38.1 million,
from $268.4 million the previous year
to $306.5 million, an increase of 14.2%.
Following Hurricane Ivan, Butterfield
Bank (Cayman) has been actively
managing its loan portfolio and remains
confident that the quality of lending
decisions, allied to good administration
of the portfolio, will minimise losses.
In common with other banks in
Cayman, a repayment moratorium was
granted on residential mortgages and
personal loans until January 2005, but
continued to accrue interest payable in
appropriate cases. Following a review
of the loan portfolio post-Hurricane
Ivan, credit provisions were increased
by $3 million.
Focusing on increasing convenience
for customers and improving efficiency
for the Bank, a firm commitment to
investment in technology has been
maintained. Cayman’s highly successful
internet banking service, Butterfield
Online, was enhanced both in terms of
functionality and network infrastructure
with security features upgraded to
ensure the integrity of the system.
Butterfield Asset Management
(Cayman)
Butterfield Asset Management
(Cayman) Limited’s wealth management
team experienced a successful year,
reporting steady growth of institutional
and private client assets under
management. Total client assets under
management at 31 December 2004,
increased 3.7% to $726 million.
Butterfield Fund Services (Cayman)
Providing full administration services to
hedge funds, mutual funds and pension
funds, Butterfield Fund Services
(Cayman) Limited experienced strong
growth during 2004, driven by effective
business development allied to a strong
commitment to client servicing. Assets
under administration in the Cayman
Islands increased by 44.3% to $25.0
billion.
GUERNSEY
Robert S. Moore
Managing Director,
Butterfield Bank
(Guernsey) Limited
Services offered in Guernsey comprise
private banking, wealth management
and fiduciary services, administered
banking services, and investment and
pension fund administration services.
They are offered through Butterfield
Bank (Guernsey) Limited, Butterfield
Trust (Guernsey) Limited and Butterfield
Fund Services (Guernsey) Limited.
In October 2004 the operations of
Leopold Joseph & Sons (Guernsey)
Limited were amalgamated with the
Group’s existing private banking
business, following Leopold Joseph’s
acquisition, in April 2004. Both as a
result of this acquisition and growth in
existing business, total client deposits
at 31 December 2004 increased by
47.1% to $1.3 billion, up from $0.9
billion the previous year.
Overall in 2004, post tax net income
of $2.6 million was achieved, up 11.1%
compared to 2003. Revenue growth of
20.3%, to $35.0 million, was off-set by
a rise in expenses of 21.1% from $26.8
million to $32.5 million, which included
a $1.1 million provision in respect of
leasehold premises vacated following a
move to new premises in St. Peter Port.
A tax credit of $0.4 million was
recognised, primarily reflecting the
amalgamation of the Guernsey-based
businesses of Leopold Joseph.
The Guernsey operations have $17
billion in assets under administration,
of which $0.6 billion are also
administered elsewhere in the Group.
Butterfield Bank (Guernsey)
During the year under review Butterfield
Bank (Guernsey) Limited continued to
cultivate quality client relationships,
offering a full range of multi-currency
deposits, loans and foreign exchange
dealing. Enhancements to Butterfield
Online, the Group’s internet banking
service offered in Guernsey, were
introduced to provide additional
flexibility for professional financial
intermediaries.
15
15
Butterfield Bank (Guernsey) provides
discretionary portfolio management to
a range of corporate and high net worth
individuals and families. Assets under
management for Guernsey clients
increased to $854 million at 31
December 2004, up 23.8% from
$690 million the previous year.
Serving institutions from the UK,
North America and Europe, the Group
is also Guernsey’s market leader for
administered banking services,
providing customer services, operation,
accounting, compliance and corporate
secretarial services for leading financial
institutions seeking outsourced
solutions. This business experienced
an 8% year on year increase in assets
under administration.
Butterfield Trust (Guernsey)
Fiduciary services offered by Butterfield
Trust (Guernsey) Limited include
tailored and sophisticated trust and
company administration services for
wealthy families and institutions.
Butterfield Fund Services (Guernsey)
Butterfield Fund Services (Guernsey)
Limited provides a full range of
administration services to offshore
funds of hedge funds, property funds
and other specialist investment funds.
As the jurisdiction’s largest specialist
in administration of Cayman and
other non-Guernsey funds, Butterfield
Fund Services (Guernsey) has $6.3
billion assets under administration,
of which $1.1 billion represent assets
held as custodian by Butterfield
Bank (Guernsey).
The Group in Guernsey also provides
custodian services for institutional
clients which are not administered by
Butterfield Fund Services (Guernsey)
and provides custodian services to
corporate and high net worth
individuals, resulting in total assets
held as custodian of $2.5 billion.
UNITED KINGDOM
Paul A. Turtle
Managing Director,
Butterfield Bank
(UK) Limited
A private banking service is offered
from London by Butterfield Bank
(UK) Limited, under the brand of
Butterfield Private Bank.
Butterfield Private Bank
In April 2004 the purchase of Leopold
Joseph Holdings plc, a company first
established in London in 1919, was
concluded and by the year-end full
integration had been successfully
completed of its operations in London
and Guernsey with those of the Group.
The acquisition of Leopold Joseph
supports the Group’s strategy of growth
in its core private banking business in
the UK. The acquisition also enables
the Group to expand its service offering
through Leopold Joseph’s
comprehensive investment
management service, a service not
previously offered in London.
The combined businesses in the UK
operate from 99 Gresham Street in the
City, adjacent to the Bank of England,
with over 100 employees. The efforts
of the management team enabled the
two banks to operate as one entity
within six months of the acquisition.
All clients have been retained and there
have also been healthy increases in
deposit and lending balances during
2004, as new client relationships have
been won. The loan portfolio in the UK
has increased year on year by $328.7
million to $385.9 million, reflecting the
acquisition, and similarly customer
deposits increased year on year by
$413.9 million to $803.1 million.
The year saw a $14.9 million increase
in total income, to $19.3 million,
though a post tax loss of $7.2 million
was recorded in 2004, reflecting
exceptional charge-offs of $5.0 million
taken in respect of a lease on premises
vacated at the year-end and redundancy
costs. Butterfield Private Bank is well
placed to execute its strategic plan to
focus on the provision of private
banking and wealth management
services to high net worth clients.
Total assets at 2004 year-end were
$1.1 billion compared to $0.5 billion
at the same stage a year earlier.
Client assets under management
in the UK now total $738 million,
directly as a result of the acquisition.
Well-positioned to meet the financial
service requirements of high net
worth individuals and their families,
Butterfield Private Bank provides a
Family Office Banking service. The Bank
is also a provider of self-invested
Overseas Subsidiaries
16
pension plans. Legislation due to take
effect from April 2006 should encourage
high earners to make greater
contributions to their pensions and
to self manage their investments.
Butterfield Private Bank has therefore
entered into a number of joint venture
arrangements with pension
practitioners, providing deposit
banking, investment management
services and lending to permit gearing
within the pension to purchase certain
classes of property.
Butterfield Private Bank’s strategy
remains unchanged, essentially to focus
on the provision of private banking
services to high net worth individuals
in the UK. These services are primarily
distributed through financial
intermediaries who advise high net
worth individuals, and efforts have
continued this year to build the brand
awareness of Butterfield Private Bank.
Outstanding customer service remains
a critical part of Butterfield Private
Bank’s service offering in the UK and
which differentiates it from competitors.
M i s s i o n S t a t e m e n t
Butterfield Bank will provide consistent and superior
returns to our shareholders, offer security and opportunities
to our employees, and be recognised as making a valuable
contribution to the communities in which we operate by
a focused, efficient and ethical delivery of banking and
other selected financial services.
Financial Report
17
Financial Overview
Financial Summary
Management’s Financial Reporting Responsibility
Auditors’ Report to the Shareholders
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Changes in
Shareholders’ Equity and Comprehensive Income
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
18
23
24
25
26
27
28
29
30
Financial Overview
18
Income
Total income for the Group after provisions was $311.2 million for the year ended 31 December 2004, up $77.1 million, or 32.9% from $234.1 million
for the same period a year ago. Net interest income before provisions for credit losses increased by 27.9% to $151.0 million. The increase reflects growth
in average interest earning assets and successful asset/liability management strategies.
We continue to be appropriately reserved with total provisions of $23.8 million. Non-accrual loans totalled $20.5 million as at 31 December 2004 up
from $17.4 million a year ago reflecting loan growth, and represent 0.8% of the total loan portfolio, compared to 0.9% a year ago. Provisions in respect
of credit losses charged to income were $2.9 million, compared to $3.0 million last year.
Non-interest income grew by 27.3% to $156.5 million, reflecting growth across all revenue lines, notably from Investment & Pension Fund Administration
(+52.7%), Asset Management (+38.4%), Foreign Exchange (+34.6%), Trust & Investment Services (+29.8%) and Banking Services (+16.0%).
Changes in Net Interest Income
For the year ended 31 December (In $ thousands)
Assets
Cash and deposits with banks
Investments
Loans
Earning assets
Other assets
Total Assets
Liabilities
Deposits
Subordinated capital and senior debt
Interest bearing liabilities
Non interest bearing current accounts
Other liabilities
Total Liabilities
Shareholders’ Equity
Total Liabilities and
Shareholders’ Equity
Spread
Net Interest Margin
Average
Balance
2,654,554
2,952,326
2,300,024
7,906,904
275,191
8,182,095
6,444,827
132,602
6,577,429
1,070,187
129,247
7,776,863
405,232
2004
Interest
46,275
89,553
130,743
266,571
-
266,571
115,249
3,247
118,496
-
-
118,496
-
8,182,095
-
Average
Balance
2,020,828
2,238,746
1,794,253
6,053,827
183,395
6,237,222
4,753,899
117,308
4,871,207
921,321
79,209
5,871,737
365,485
2003
Interest
36,165
60,791
101,598
198,554
-
198,554
80,965
2,523
83,488
-
-
83,488
-
6,237,222
-
Rate
1.7%
3.0%
5.7%
3.4%
-
3.3%
1.8%
2.4%
1.8%
-
-
1.5%
-
-
1.6%
1.9%
Rate
1.8%
2.7%
5.7%
3.3%
-
3.2%
1.7%
2.2%
1.7%
-
-
1.4%
-
-
1.6%
1.9%
Note: Underlying assets and liabilities are comprised of various currencies.
19
Expenses
Operating expenses were $222.4 million during the period under review, up 36.6% from $162.8 million last year, compared to a 32.9% growth in
operating revenues. The increase primarily reflects the expanding size of the Group through acquisitions with salaries and employee benefits up 27.3%
to $127.5 million. In addition, an increase of 60.1% was seen in property and systems costs, reflecting continued spending on infrastructure
development as we build and improve our businesses.
At 31 December 2004 we had 786 employees in Bermuda, up from 734 a year ago, reflecting business growth, particularly in our Wealth Management
& Investment Services and Investment & Pension Fund Administration businesses, where the headcount increased year on year by 21 and 19 respectively.
Overseas, the total headcount increased by 119 to 766 primarily due to the acquisition in the UK (78) and growth in our Cayman business (16).
We remain committed to the prudent management of the expense base and continually seek opportunities to improve our efficiency. Whilst the efficiency
ratio of 69.1% in 2004 was up from 67.7% in 2003, the increase was primarily due to costs associated with the Leopold Joseph acquisition and
‘one-off’ expenses in Cayman as a result of Hurricane Ivan.
Distribution of 2004 Total ExpensesSalaries & Other Employee Benefits 57.3%Other Expenses 14.7%Non-Corporation Taxes 4.9%Marketing 2.2%Systems & Communications 8.8%Property12.1%Distribution of 2004 Expenses by LocationBermuda 54.2%Barbados 3.6%The Bahamas 2.3%UK 11.7%Guernsey 14.3%Cayman 13.9% Financial Overview
20
Balance Sheet
Total assets increased by 11.6% to $8.6 billion, up from $7.7 billion a year ago. This increase reflects the substantial rise in the customer deposit base,
up year on year by $0.8 billion, or 12.0%, to $7.4 billion, primarily due to the acquisition of Leopold Joseph. The increase in the customer deposit base
was primarily employed in our investment and loan portfolios, up year on year by 23.8% and 35.3% respectively to $3.3 billion and $2.6 billion.
The balance sheet remains highly liquid with a loans to customer deposits ratio of 35.7%. and loans to total assets ratio of 30.7%.
Bermuda 63.8%Barbados 3.2%UK 14.8%Guernsey 6.9%Cayman 11.3%Lending by LocationAAA 30.7%AA 43.0%Other 1.1%BBB 2.3%A 22.9%Investment Portfolio by Long-Term Debt Rating 21
Taxes
For the period under review the net corporation tax of the Group was a credit of $1.7 million compared to an expense of $0.4 million for the same
period a year ago. Tax credits of $1.6 million in the UK and $0.4 million in Guernsey were offset by a corporation tax expense of $0.2 million in Barbados.
We also paid $10.8 million in non profits taxes across the Group, up from $8.6 million the previous year reflecting increased employee and ‘value added’
taxes in the UK due to the acquisition.
Capital
The Group’s strategy is to maintain a strong capital base that ensures stability and allows us to take advantage of opportunities for growth.
At 31 December 2004 the risk weighted total capital ratio was 10.7%, compared to the 10.0% minimum requirement of the Bermuda Monetary
Authority. Of the total, the Tier 1 ratio was 7.2%, compared to a 5% minimum requirement. Shareholders’ equity increased by $45.9 million, or 12.0%,
over a year ago, reflecting the increase in retained earnings less share buy-backs.
Weighted risk assets rose year on year by 18.2% to $4.4 billion, primarily due to growth in the loan, investments and letters of credit portfolios.
The loan to the Stock Option Trust (reflected as Treasury Stock in the financial statements) is in respect of potential obligations under the Group’s Stock
Option Plan and is deducted from shareholders’ equity. The loan declined by $5.6 million, or 18.0%, to $25.5 million, reflecting repayment from cash
received on the exercise of stock options by directors and employees.
The acquisition of Leopold Joseph increased the amount of lower tier 2 subordinated capital notes in issuance by $9.6 million (£5 million). The notes
issued by Leopold Joseph are redeemable in 2012.
During the period under review, the Group issued 207,109 shares under the Dividend Re-investment Programme, which represents a cash savings of
$8.9 million, or 26.6% of the total dividend declared. As a result of the one-for-ten stock dividend in August 2004 2,217,927 new shares were also
issued. Under the Share Buy-Back Plan, the Group purchased and cancelled 459,232 shares, at a cost of $19.4 million, as part of our strategy to enhance
shareholder value.
Commerical Real Estate 19.0%Commercial and Industrial 18.6%Other Consumer Loans 13.2%Mortgages 34.1%Credit card 1.9%Financial Institutions & Government 13.2%Bermuda Loans by Type Financial Overview
22
Managing Risk
Risk is inherent in virtually all of the Group’s daily activities. In fact, managing risk is a cornerstone of our business. We have established risk management
structures, policies and procedures to identify, prioritise and manage risks across the Group in order to develop our businesses with an appropriate
balance between risk and reward.
Credit risk, market risk and liquidity risk are managed through appropriate controls and reporting systems. The Asset and Liability Management
Committee (ALCO) and the Risk Policy Committee of the Board of Directors play an integral role in identifying, reviewing and managing financial and
operational risk.
Operational risk refers to the risk of loss caused by internal or external events such as procedural failures, errors or fraud. We mitigate this risk through
the application of properly risk-adjusted internal controls, sound business processes, good decision-making, effective project execution and risk
transfer techniques.
The Group established an Enterprise Risk Management (ERM) function to identify, report and manage all types of risk by business line or process.
Through ERM, we identify and assign ownership for market, credit and operational risks, develop risk priorities, approve appropriate mitigation strategies,
and examine the cause-and-effect relationships between individual product risks. We also ensure that adequate and comprehensive risk data are
available to support decision-making and that risk reporting is effective, reliable and timely.
The Risk Review Committee, chaired by the Chief Financial Officer, also reviews and monitors business/event risks, insurance coverage, transactions and
operational controls, operating losses and frauds, business continuity, potential regulatory changes, legal risks and compliance with financial and
business conduct regulations. The Board’s Audit and Compliance Committee reviews internal audit, compliance and litigation reports.
The Group Internal Audit function is independent from the Group's day-to-day operations, and has access to all activities conducted by the Group,
including those of its branches and subsidiaries. Group Internal Audit is accountable only to the Board via the Audit and Compliance Committee and
the Group's Chief Executive Officer.
23
Financial Summary
(In $ thousands except share data)
At Year End
Cash and deposits with banks
Investments
Loans, less allowance for credit losses
Premises, equipment and computer software
Total assets
Total deposits
Subordinated capital and senior debt
Shareholders' equity
For the Year
Net interest income, after provision
for credit losses
Non-interest income
Gain on sale of subsidiaries
Salaries and other employee benefits
Other non-interest expenses
Net income from continuing operations
Net income
Dividends declared
Financial Ratios
Return on assets**
Return on shareholders' equity**
Dividend payout ratio
Total capital funds to
total assets ratio
Risk weighted capital ratio
Efficiency ratio
Per share ($)#
Net income from continuing
operations (Diluted)
Net income (Diluted)
Dividends
Net book value
Number of Employees
Bermuda
Overseas
Total
Shareholder Data
Number of shareholders
Number of shares (000)*
Year ended
31 December
2004
31 December
2003
31 December
2002
2,396,724
3,266,400
2,645,331
126,031
8,630,383
7,907,450
142,333
428,030
148,075
156,487
-
127,459
94,962
90,466
90,466
33,635
1.1%
21.2%
37.2%
6.6%
10.7%
69.1%
3.86
3.86
1.55
18.84
786
766
1,552
2,912,383
2,638,253
1,954,716
99,979
7,733,806
7,122,577
122,871
382,095
115,066
122,950
-
100,104
62,729
70,838
70,838
27,471
1.0%
17.9%
38.8%
6.5%
13.0%
67.7%
3.07
3.07
1.43
16.83
734
647
1,381
1,989,159
2,073,112
1,767,088
96,419
6,007,874
5,516,216
75,000
338,799
(unaudited)
97,503
114,832
17,013
88,612
56,993
83,743
83,927
25,769
1.2%
20.5%
30.7%
6.9%
13.1%
66.4%
3.26
3.26
1.37
15.05
724
476
1,200
Year ended
30 June
2002
2,027,225
1,831,142
1,696,775
98,536
5,738,044
5,216,366
75,000
335,167
97,237
109,322
17,013
88,623
53,533
81,416
82,289
24,681
1.2%
21.2%
30.0%
7.0%
13.8%
61.9%
3.40
3.44
1.31
14.39
749
480
1,229
3,778
22,714
3,581
20,643
3,322
18,603
3,364
19,247
* The number of shares excludes shares purchased by the Bank for the Stock Option Trust.
Per share data, with the exception of dividends has been restated to reflect the 1 for 10 stock dividends in August 2004, 2003 and 2001.
The number of shares in 2004 increased primarily due to the issue of the stock dividend.
** Exclusive of discontinued operations and gain on sale of subsidiaries.
# Inclusive of gain on sale of subsidiaries.
Data for 2004 and 2003 is shown under US GAAP and for 2002 and 2001 under Canadian GAAP.
30 June
2001
1,691,423
1,882,479
1,451,773
97,690
5,197,804
4,700,723
75,000
286,525
100,213
91,775
-
72,024
53,232
66,732
60,742
20,525
1.2%
22.7%
33.8%
7.2%
14.8%
61.8%
2.75
2.51
1.05
12.27
744
418
1,162
3,619
17,571
24
Management’s Financial Reporting Responsibility
The Management of The Bank of N.T. Butterfield & Son Limited is responsible for the preparation of the consolidated financial statements contained in
this Report, which covers all of the interests of the Bank. Management has fully disclosed its income, assets, liabilities and off balance sheet commitments.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and,
where appropriate, are based on the best estimates and judgement of management.
Management has established and maintains a system of financial reporting and internal controls to provide reasonable assurance that transactions are
properly authorised and recorded, assets are protected against unauthorised use or disposition and liabilities are recognised. These procedures include
the careful selection and training of qualified staff, the establishment of organisational structures providing an appropriate and well-defined division of
responsibilities, and the communication of policies and standards of business conduct throughout the Bank.
The system of internal controls is further supported by a professional staff of internal auditors who conduct periodic inspections of all aspects of the
Bank’s operations. In addition, the Bank’s Head of Group Internal Audit has full and free access to the Audit & Compliance Committee of the Board
of Directors.
The Audit & Compliance Committee, composed entirely of directors who are not employees of the Bank, reviews the financial statements before
such statements are approved by the Board of Directors and submitted to the Bank’s shareholders. The Committee meets and consults regularly
with Management, the internal auditors and the independent accountants to review the scope and results of their work.
Under the provisions of the Bermuda Monetary Authority Act 1969, the Bermuda Monetary Authority is charged with the supervision of the Bank.
Such supervision is in line with international practices and combines a comprehensive system of statistical returns, providing a detailed breakdown
of the balance sheet and statement of income accounts of the Bank, and regular meetings with the senior management of the Bank. Such regular
reviews are intended to satisfy the Authority that the safety and interests of the depositors, creditors and shareholders of the Bank are being duly
observed and that the Bank is in a sound financial condition.
The accounting firm of PricewaterhouseCoopers, the shareholders’ independent auditors, has examined the consolidated financial statements of the
Bank in accordance with auditing standards generally accepted in the United States of America and have expressed their opinion in their report to
the shareholders. The auditors have unrestricted access to, and meet periodically with, the Audit & Compliance Committee to review their findings
regarding internal controls over the financial reporting process, auditing matters and financial reporting issues. Management has made available
to PricewaterhouseCoopers all of the Bank’s financial records and related data as well as the minutes of shareholders’ and directors’ meetings.
Alan R. Thompson
President & Chief Executive Officer
4 March 2005
Richard J. Ferrett
Executive Vice President & Chief Financial Officer
4 March 2005
25
Auditors’ Report to the Shareholders
To the Shareholders of The Bank of N.T. Butterfield & Son Limited
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, changes in shareholders’ equity and comprehensive income, and of
cash flows present fairly, in all material respects, the financial position of The Bank of N.T.
Butterfield & Son Limited at December 31, 2004 and December 31, 2003, and the results
of its operations and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial statements are
the responsibility of the Bank’s management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We believe our
audits provide a reasonable basis for our opinion.
Financials
26
Consolidated Balance Sheet
As at 31 December (In $ thousands)
Assets
Cash and demand deposits with banks
Term deposits with banks
Total cash and deposits with banks
Investments
Held to maturity
Available for sale
Trading
Total investments
Loans, less allowance for credit losses
Premises, equipment and computer software
Accrued interest
Goodwill and other intangible assets
Other assets
Total assets
Liabilities
Deposits
Non-interest bearing
Interest bearing
Customers
Banks
Total deposits
Accrued interest
Dividend payable
Other liabilities
Total other liabilities
Subordinated capital and senior debt
Total liabilities
Shareholders' equity
Share capital ($1.00 par: Authorised shares 70,000,000)
Additional paid in capital
Retained earnings
Less: treasury stock
Accumulated other comprehensive income
Total shareholders' equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
2004
2003
164,431
2,232,293
2,396,724
2,592,824
29,681
643,895
3,266,400
2,645,331
126,031
30,843
106,043
59,011
8,630,383
111,702
2,800,681
2,912,383
2,450,887
27,815
159,551
2,638,253
1,954,716
99,979
22,828
48,154
57,493
7,733,806
999,826
1,140,548
6,405,029
502,595
7,907,450
9,120
9,235
134,215
152,570
142,333
8,202,353
24,301
229,495
188,674
(25,471)
11,031
428,030
8,630,383
5,471,755
510,274
7,122,577
7,632
7,817
90,814
106,263
122,871
7,351,711
22,335
149,454
224,002
(31,058)
17,362
382,095
7,733,806
James A.C. King, JP
Chairman of the Board
Robert J. Stewart, JP
Vice Chairman
Alan R. Thompson
President & Chief Executive Officer
Consolidated Statement of Income
For the year ended 31 December (In $ thousands, except per share data)
Non-interest income
Trust and investment services
Asset management
Investment and pension fund administration
Banking services
Foreign exchange revenue
Other non-interest income
Total non-interest income
Interest income
Deposits with banks
Loans
Investments
Total interest income
Interest expense
Deposits and other
Subordinated capital and senior debt
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income, after provision for credit losses
Other income (loss)
Gain on sale of affiliate
Realised / unrealized gains on trading securities
Realised gains on available for sale securities
Total revenue
Non-interest expense
Salaries and other employee benefits
Property
Systems and communications
Marketing
Other expenses
Total non-interest expense
Income before taxes
Income taxes
Income after taxes
Net income
Earnings per share
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
Earnings per share comparative figures have been restated for the 1 for 10 stock dividend in August 2004.
27
2004
2003
28,690
28,706
34,339
36,396
25,488
2,868
156,487
46,275
133,637
89,553
269,465
115,249
3,247
118,496
150,969
(2,894)
148,075
(156)
5,750
647
362
311,165
127,459
26,970
19,589
4,836
43,567
222,421
88,744
1,722
90,466
90,466
3.98
3.86
22,109
20,741
22,570
31,385
18,943
7,202
122,950
36,165
104,584
60,791
201,540
80,965
2,523
83,488
118,052
(2,986)
115,066
(4,254)
-
233
56
234,051
100,104
16,843
17,275
2,709
25,902
162,833
71,218
(380)
70,838
70,838
3.14
3.07
Financials
28
Consolidated Statement of Changes in Shareholders' Equity and Comprehensive Income
For the year ended 31 December (In $ thousands)
Share capital
Authorised: 70,000,000 shares (2003: 70,000,000 shares) of par value $1.00 each
Issued
Issued and outstanding at beginning of year
(January 2004: 22,335,533 shares; January 2003: 20,443,030 shares)
Dividend reinvestment
(December 2004: 207,109 shares; December 2003: 234,027 shares)
Stock dividend
(December 2004: 2,217,927 shares; December 2003: 2,037,470 shares)
Shares repurchased and cancelled
(December 2004: 459,232 shares; December 2003: 378,994 shares)
Issued and outstanding at end of year
(December 2004: 24,301,337 shares; December 2003: 22,335,533 shares)
Additional paid in capital
Balance at beginning of year
Dividend reinvestment
Stock dividend
Issued under executive and employee share plans
Shares repurchased and cancelled
Balance at end of year
Retained earnings
Balance at beginning of year
Net income for year
Cash divided on common shares
Stock dividend
Balance at end of year
2004
2003
22,335
20,443
207
2,218
(459)
234
2,037
(379)
24,301
22,335
149,454
8,659
89,941
413
(18,972)
229,495
124,002
90,466
214,468
(33,635)
(92,159)
88,674
84,692
7,854
68,500
1,219
(12,811)
149,454
151,172
70,838
222,010
(27,471)
(70,537)
124,002
Appropriate retained earnings – general reserve
100,000
100,000
Accumulated other comprehensive income
Net unrealised gains on translation of net investment in foreign operations
Net unrealised gains on available for sale securities
Net unrealised losses on cash flow hedges
Balance at end of year
Treasury stock
Balance at beginning of year
(January 2004:1,692,698 shares; January 2003: 1,839,743 shares)
Purchases and forfeitures
Balance at end of year
(December 2004: 1,556,476 shares; December 2003: 1,692,698 shares)
Total shareholders' equity
Comprehensive income
Net income
Other comprehensive income (loss)
Total comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
17,362
4,455
201
(10,987)
11,031
(31,058)
5,587
(25,471)
11,432
8,915
63
(3,048)
17,362
(36,449)
5,391
(31,058)
428,030
382,095
90,466
(6,331)
84,135
70,838
5,930
76,768
Consolidated Statement of Cash Flows
For the year ended 31 December (In $thousands)
Cash Flows From Operating Activities
Net income for the year
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortisation
Change in carrying value of investment in affiliate
Gain on sale of affiliate
Provision for loan losses
Increase in accrued interest receivable
Increase in other assets
Decrease (increase) in accrued interest payable
Increase in other liabilities
Net change in trading account securities
Cash provided by operating activities
Cash Flows From Investing Activities
Term deposits with banks
Additions to premises, equipment and computer software
Net change in loans
Held to maturity securities: proceeds from maturities
Purchases
Available for sale securities: purchases
Net proceeds on sale of affiliate
Net purchase of subsidiaries
Cash used in investing activities
Cash Flow From Financing Activities
Increase in demand and term deposit liabilities
Issuance of subordinated capital and senior debt
Proceeds from dividend re-investment plan
Redemption of shares
Treasury stock
Cash dividends
Cash (used in) / from financing activities
Effect of exchange rates on cash and from demand deposits with banks
Net increase in cash and demand deposits with banks
Cash and demand deposits with banks: beginning of year
Cash and demand deposits with banks: end of year
Supplemental disclosure of cash flow information
Amount of interest paid in the year
Amount of income tax paid in the year
The accompanying notes are an integral part of these consolidated financial statements.
29
2004
2003
90,466
70,838
18,390
1,543
(5,750)
2,894
(8,015)
(6,549)
1,488
23,473
117,940
13,561
131,501
647,946
(34,732)
(432,538)
623,860
(765,797)
(2,008)
8,250
(116,626)
(71,645)
19,718
10,000
8,866
(19,431)
5,587
(32,217)
(7,477)
350
52,729
111,702
164,431
14,880
2,032
-
2,986
(1,515)
(11,777)
(366)
14,475
91,553
(61,407)
30,146
(823,913)
(13,100)
(131,092)
400,593
(863,215)
(6,414)
-
(31,063)
(1,468,204)
1,463,003
50,000
8,088
(13,190)
5,391
(26,809)
1,486,483
174
48,599
63,103
111,702
117,008
1,649
83,854
1,078
Financials
30
Notes to Consolidated Financial Statements
For the year ended 31 December 2004 (All amounts are expressed in thousands of Bermuda dollars unless otherwise stated)
NOTE 1: Significant Accounting Policies
(a) Basis of Presentation
The accounting and financial reporting policies of The Bank of N.T. Butterfield & Son Limited (The Bank) and its subsidiaries conform to Generally
Accepted Accounting Principles in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Such
estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified.
(b) Basis of Consolidation
The Bank consolidates subsidiaries where it holds, directly or indirectly, more than 50% of the voting rights or where it exercises control. Entities
where the Bank holds 20% to 50% of the voting rights and/or has the ability to exercise significant influence, other than investments of
designated venture interest entities (VIEs), are accounted for under the equity method, and the pro rata share of their income (loss) is included
in other income. The Bank consolidates entities deemed to be variable interest entities when the Bank is determined to be the primary beneficiary
under SFAS Interpretation No. 46 Consolidation of Variable Interest Entities (FIN 46).
(c) Foreign Currency Translation
Assets, liabilities, revenues and expenses denominated in US dollars are translated to Bermuda dollars at par. Assets and liabilities arising from
other foreign currency transactions are translated into Bermuda dollars at the rates of exchange prevailing at the transaction date.
The resulting gains or losses are included in foreign exchange revenue in the Consolidated Statement of Income.
The assets and liabilities of foreign currency based subsidiaries are translated at the rate of exchange prevailing on the balance sheet date while
associated revenues and expenses are translated to Bermuda dollars at the average rates of exchange prevailing throughout the period.
Unrealised translation gains or losses on investments in foreign currency based subsidiaries are recorded as a separate component of
shareholders' equity within accumulated other comprehensive income. Such gains and losses are recorded in the Consolidated Statement of
Income only when realised.
(d) Assets Held in Trust or Custody
Securities and properties (other than cash and deposits held with the Bank and its subsidiaries) held in trust, custody, agency or fiduciary capacity
for customers are not included in the Consolidated Balance Sheet since the Bank is not the beneficiary of these assets.
(e) Investments
Investments include debt and equity securities. Debt securities include bonds, notes, redeemable preferred stock, as well as certain loan or asset
backed and structured securities subject to prepayment risk. Equity securities include common and non-redeemable preferred stocks. Debt
securities classified as "held to maturity" represent securities that the Bank has both the ability and the intent to hold until maturity and are
carried at amortised cost adjusted to recognise other than temporary impairment, except for money market mutual funds which are carried at
market value, which approximates cost plus accrued and reinvested interest since acquisition. Debt securities and marketable equity securities
classified as "available for sale" are carried at fair value, with unrealised gains and losses reported in Other Comprehensive Income. Debt and
equity securities classified as "trading" securities are carried at fair value, with the unrealised gains and losses included in the Consolidated
Statement of Income as gains and losses on trading.
Fair value is determined based on the quoted market price when available or, if quoted market prices are not available, discounted expected cash
flows using market rates commensurate with the credit quality and maturity of the investment. In respect of held to maturity or available for sale
securities, declines in fair value that are determined to be other than temporary are charged to earnings. Accrual of income is suspended in
respect of debt securities that are in default, or on which it is unlikely that future interest payments will be made as scheduled. Realised gains
and losses on sales of investments are included in earnings on a specific identified cost basis.
31
Venture capital investments are recorded at fair value with adjustments to fair value being recognised in investment income. In assessing fair
value, management reviews meaningful third party transactions in the private market and the results of applying acceptable valuation
methodologies to current and projected cash flows. In the absence of persuasive evidence to the contrary, management generally considers cost
to be the best indicator of fair value. Due to the dynamic nature of assumptions used in establishing fair values, the values reflected in the
consolidated financial statements may differ materially from the values that would be determined by negotiations held between parties in a
sales transaction.
(f) Loans
Loans are reported at the principal amount outstanding, net of allowance for credit losses, unearned income and net deferred loan fees. Interest
income is recognised over the term of the loan using the interest method, or on a basis approximating a level rate of return over the term of the
loan, except for loans classified as non-accrual. Non-accrual loans are those on which the accrual of interest is discontinued. Loans are placed
on non-accrual status immediately if, in the opinion of management, full payment of principal or interest is in doubt or when principal or interest
is 90 days past due, unless the loan is fully secured and any collection efforts are reasonably expected to result in repayment of all amounts due
under the contractual terms of the loan. Interest accrued but not collected at the date a loan is placed on non-accrual status is reversed against
interest income. In addition, the amortisation of net deferred loan fees is suspended. Interest income on non-accrual loans is recognised only to
the extent it is received in cash. However, where there is doubt regarding the ultimate collectivity of the loan principal, all cash thereafter received
is applied to reduce the carrying value of the loan. Loans are restored to accrual status only when interest and principal payments are brought
current and future payments are reasonably assured.
Credit card loans that are contractually 180 days past due and consumer loans with an outstanding balance under $100,000 that are
contractually 180 days past due are automatically written off.
The Bank accounts for and discloses non-accrual commercial loans as impaired loans, and recognises their interest income as previously
discussed for non-accrual loans. Accordingly, interest income on these loans is recognised after the entire recorded investment is recovered, and
interest is actually received. In addition, the amortisation of net deferred loan fees is suspended.
(g) Allowance for Credit Losses
The Bank maintains an allowance for credit losses, which in management’s opinion is adequate to absorb all incurred credit related losses in its
portfolio relating to on and off balance sheet financial instruments. The allowance for credit losses consists of specific provisions and a general
provision, each of which is reviewed on a regular basis. The allowance for credit losses is included as a reduction of the related asset category.
(h) Specific Provisions
Specific provisions are determined on an item by item basis and reflect the associated estimated credit loss. The specific provision for loan loss
is computed as the difference between the recorded investment in the loan and present value of expected future cash flows from the loan.
The effective rate of return on the loan is used for discounting the cash flows. However, when foreclosure of a collateral-dependent loan is
probable, the Bank measures impairment based on the fair value of the collateral. The Bank considers estimated costs to sell, on a discounted
basis, in the measurement of impairment if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loan. If
the measurement of an impaired loan is less than the recorded investment in the loan, then the Bank recognises impairment by creating a
valuation allowance with a corresponding charge to bad debt expense.
(i) General Provisions
The allowance for credit losses attributed to the remaining portfolio is established through a process that estimates the probable loss inherent
in the portfolio based upon various analyses. These analyses consider historical and projected default rates and loss severities, internal risk
ratings, and geographic, industry, and other environmental factors. Management also considers overall portfolio indicators including trends in
internally risk rated exposures, cash-basis loans, historical and forecasted write-offs, and a review of industry, geographic and portfolio
concentrations, including current developments within those segments. In addition, management considers the current business strategy and
credit process, including limit setting and compliance, credit approvals, loan underwriting criteria and loan workout procedures.
Each portfolio of smaller balance, homogeneous loans, including consumer mortgage, installment, revolving credit, and most other consumer
loans, is collectively evaluated for impairment. The allowance for credit losses attributed to these loans is established via a process that estimates
the probable losses inherent in the portfolio, based upon various analyses. Management considers overall portfolio indicators including historical
credit losses; delinquent, non-performing, and classified loans; trends in volumes and terms of loans; an evaluation of overall credit quality;
the credit process, including lending policies and procedures; and economic, geographical, product, and other environmental factors.
Financials
32
(j) Business Combinations, Goodwill and Intangible Assets
All business combinations are accounted for using the purchase method. Identifiable intangible assets (mostly customer relationships) are
recognised separately from goodwill and are initially valued using discounted cash flow calculations and other recognised valuation techniques.
Goodwill represents the excess of the price paid for the acquisition of a business over the fair value of the net assets acquired. Goodwill is not
amortised but is tested at least annually for impairment at the reporting unit level, if events or circumstances such as adverse changes in the
business climate indicate there may be impairment. If the carrying amount of a reporting unit, including the allocated goodwill, exceeds its fair
value, goodwill impairment is measured as the excess of the carrying amount of the reporting unit's allocated goodwill over the implied fair value
of the goodwill. Other acquired intangible assets with finite lives are amortised on a straight line basis over their estimated useful lives, not
exceeding 15 years. An impairment test is carried out if certain indicators of impairment exist.
(k) Premises, Equipment and Computer Software
Premises, equipment and software, including leasehold improvements, are carried at cost less accumulated depreciation. The Bank generally
computes depreciation using the straight-line method over the estimated useful life of an asset, which is 50 years for premises, and 3 to 10 years
for other equipment. For leasehold improvements the Bank uses the straight-line method over the lesser of the remaining term of the leased
facility or the estimated economic life of the improvement. The Bank capitalises certain costs associated with the acquisition or development of
internal use software. Once the software is ready for its intended use, these costs are amortised on a straight-line basis over the software's
expected useful life, which is 5 years. If deemed significant the Bank will capitalise interest cost in accordance with SFAS No. 34 Capitalisation
of Interest Cost.
(l) Derivatives
In accordance with SFAS No. 133, all derivatives are recognised on the Consolidated Balance Sheet at their fair value. SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138 and No. 149, establishes accounting and reporting standards for
financial derivatives, including certain financial derivatives embedded in other contracts and hedging activities. On the date that the Bank enters
into a derivative contract, it designates the derivative as either: a hedge of the fair value of a recognised asset or liability (a fair value hedge);
a hedge of a forecasted transaction or the variability of cash flows that are to be received or paid in connection with a recognised asset or liability
(a cash flow hedge), or an instrument that is held for trading or non-hedging purposes (a trading or non-hedging instrument).
Changes in the fair value of a derivative that is highly effective, and that is designated and qualifies as a fair value hedge, along with changes
in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in current period earnings. Changes in the
fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is
effective, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows of the hedged transaction.
Any hedge ineffectiveness is recorded in current period earnings. Changes in the fair value of a derivative that is highly effective as and that is
designated and qualifies as a foreign currency hedge is recorded in either current period earnings or other comprehensive income, depending on
whether the hedging relationship satisfies the criteria for a fair value or cash flow hedge. If, however, a derivative is used as a hedge of a net
investment in a foreign operation, the changes in the derivative’s fair value, to the extent that the derivative is effective as a hedge, are recorded
in the cumulative translation adjustment account within other comprehensive income. Changes in the fair value of derivative trading and
non-hedging instruments are reported in current period earnings.
The Bank formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or
foreign currency hedges to specific assets and liabilities on the consolidated balance sheet or specific firm commitments or forecasted
transactions. The Bank also formally assesses whether the derivatives that are used in hedging transactions have been highly effective in
offsetting changes in the fair value or cash flows of hedged items and whether those derivatives may be expected to remain highly effective
in future periods. When it is determined that a derivative has ceased to be highly effective as a hedge, the Bank discontinues hedge
accounting prospectively.
For those hedge relationships that are terminated, hedge designations that are removed, or forecasted transactions that are no longer expected
to occur, the hedge accounting treatment described in the paragraphs above is no longer applied and the end-user derivative is terminated or
transferred to the trading account. For fair value hedges, any changes to the hedged item remain as part of the basis of the asset or liability and
are ultimately reflected as an element of the yield. For cash flow hedges, any changes in fair value of the end-user derivative remain in other
comprehensive income and are included in retained earnings of future periods when earnings are also affected by the variability of the hedged
cash flows. If the forecasted transaction is no longer likely to occur, any changes in fair value of the end-user derivatives are immediately reflected
in other income.
33
(m) Employee Future Benefits
The Bank maintains trusteed pension plans for substantially all employees including non-contributory defined benefit plans and a number of
defined contribution plans. Benefits under the defined benefit plans are primarily based on the employee's years of credited service and average
annual salary during the final years of employment as defined in the plans. The Bank also provides post-retirement medical benefits for
substantially all retired Bermuda based employees.
The Bank’s defined benefit pension plans are accounted for with SFAS 87 and SFAS 88. It’s postretirement medical and life insurance plans are
accounted for in accordance with SFAS 106. Expense for the defined benefit pension plans and the post-retirement medical benefits plan is
comprised of (a) the actuarially determined benefits for the current year's service, (b) imputed interest on the actuarially determined liability of
the plan, (c) in the case of the defined benefit pension plan, the expected investment return on the market value of plan assets and (d)
amortisation of certain items over the expected average remaining service life of employees in the case of the defined benefit pension plans, and
the expected average remaining service life to full eligibility age of employees covered by the plan in the case of the post-retirement medical
benefits plan. The items amortised are amounts arising as a result of experience gains and losses, changes in assumptions, plan amendments
and the change in the net pension asset or post-retirement medical benefits liability arising on adoption of the revised accounting standard.
For the defined benefit pension plans the cumulative difference between the funding contributions and the expense is reported in other assets.
For the post-retirement medical benefits plan, the liability recognised for accounting purposes is reported in other liabilities.
The defined contribution pension plans provide an annual contribution based on each participating employee's pensionable earnings. Amounts
paid are expensed in the period.
(n) Stock Based Compensation
The Bank has a stock option plan for all eligible employees. The Bank follows the intrinsic value method of accounting for stock options. Since
the exercise price is set at an amount equal to the closing price on the day prior to the grant of the stock options, no compensation expense is
recognised on the day of the grant.
(o) Revenue Recognition
Trust and investment services fees include fees for private and institutional trust, executorship, and custody services. These fees are recognised
as revenue when the Bank has rendered all services to the clients and is entitled to collect the fee from the client, as long as there are no other
contingencies associated with the fee.
Asset management fees include fees for investment management, investment advice and brokerage services. Investment management fees are
recognised over the period in which the related service is provided, on a net asset value basis. Investment advice and brokerage services fees are
recognised in the period in which the related service is provided.
Investment and pension fund administration fees include fees for pension fund administration, institutional fund administration, registration and
transfer agent and corporate services. Pension and institutional fund administration fees are recognised as revenue when the Bank has rendered
all services to the clients and is entitled to collect the fee from the client, as long as there are no other contingencies associated with the fee.
All other fees are recognised as revenue over the period of the relationship.
Banking services fees primarily include fees for certain loan origination, letters of credit, other financial guarantees, compensating balances and
other financial services related products. Certain loan origination fees are primarily overdraft and other revolving lines of credit fees. These fees
are recognised as revenue over the period of the underlying facilities. Letters of credit fees are recognised as revenue over the period in which
the related service is provided. All other fees are recognised as revenue in the period in which the service is provided.
Loan interest income includes the amortisation of non-refundable loan origination and commitment fees. These fees are deferred (except for
certain retrospectively determined fees meeting specified criteria) and recognised as an adjustment of yield over the life of the related loan.
In accordance with SFAS No. 91 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases, these loan origination and commitment fees are offset by their related direct cost and only the net amounts are deferred and
amortised into interest income.
Dividend and interest income on all securities, including amortisation of premiums and discounts on debt securities held for investment, are
included in investment income in the Consolidated Statement of Income.
Financials
34
(p) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale. The accounting for an asset or liability may differ based on the type of instrument and / or its
use in a trading or investing strategy. Generally, the measurement framework recorded in financial statements is based on of the following:
– At fair value on the Consolidated Balance Sheet, with changes in fair value recorded each period in the Consolidated Statement of Income.
– At fair value on the Consolidated Balance Sheet, with changes in fair value recorded each period as a separate component of shareholders'
equity and as part of other comprehensive income.
– At cost (less other than temporary impairments), with changes in fair value not recorded in the financial statements but disclosed in the notes.
– At the lower of cost or fair value.
Fair value amounts represent estimates of the consideration that would currently be agreed upon between knowledgeable, willing parties who
are under no compulsion to act and is best evidenced by a quoted market price, if one exists. Some of the Bank’s financial instruments lack an
available trading market. Therefore, these instruments have been valued using present value or other valuation techniques and may not
necessarily be indicative of the amounts realisable in an immediate settlement of the instruments. In addition, the calculation of estimated fair
value is based on market conditions at a specific point in time and may not be reflective of future fair values.
The book value of financial assets and financial liabilities held for purposes other than trading may exceed their fair value due primarily to
changes in interest rates. In such instances, the Bank does not reduce the book value of these financial assets and financial liabilities to their
fair values as it is the Bank’s intention to hold them until maturity. The fair values disclosed exclude premises and equipment and certain other
assets and liabilities as these are not financial instruments.
The following methods and assumptions were used in the determination of the fair value of financial instruments:
i)
Cash and deposits with banks: The fair value of cash and deposits with banks, being short term in nature, is deemed to equate to the
carrying value.
Investments: The fair values of investments is based upon quoted market prices where available.
ii)
iii) Loans: The majority of loans are variable rate and re-priced in response to changes in market rates and hence the fair value has been
estimated as the carrying value.
For fixed-rate loans, the fair value has been estimated by performing a discounted cash flow calculation using market rates for similar loans
made at the balance sheet date.
iv) Accrued interest: The carrying values of accrued interest receivable and payable are assumed to approximate their fair values given their
short-term nature.
v) Deposits: The fair value of fixed-rate deposits has been estimated by discounting the contractual cash flows, using market interest rates
offered at the balance sheet date for deposits of similar terms.
The fair value of deposits with no stated maturity date is deemed to equate to the carrying value.
vi) Subordinated capital: The fair value of the subordinated capital is based on current market pricing.
vii) Derivatives: Fair value of exchange traded derivatives is based on quoted market prices. Fair value of over the counter derivatives is
calculated as the net present value of contractual cash flows using prevailing market rates.
The aggregate of the estimated fair value of amounts presented does not represent management’s estimate of the underlying value of the Bank.
(q) Credit Related Arrangements
In the normal course of business, the Bank enters into various commitments to meet the credit requirements of its customers. Such commitments,
which are not included in the Consolidated Balance Sheets, include:
i)
ii)
Commitments to extend credit which represent undertakings to make credit available in the form of loans or other financing for specific
amounts and maturities, subject to certain conditions.
Standby letters of credit, which represent irrevocable obligations to make payments to third parties in the event that the customer is unable
to meet its financial obligations.
iii) Documentary and commercial letters of credit, primarily related to the import of goods into Bermuda by customers, which represent
agreements to honor drafts presented by third parties upon completion of specific activities.
These credit arrangements are subject to the Bank's normal credit standards and collateral is obtained where appropriate. The contractual
amounts for these commitments set out in the table in Note 11 represent the maximum payments the Bank would have to make should the
contracts be fully drawn, the counterparty default, and any collateral held prove to be of no value. As many of these arrangements will expire or
35
terminate without being drawn upon or fully collateralised, the contractual amounts do not necessarily represent future cash requirements.
The Bank does not carry any liability for these obligations.
(r) Income Taxes
The Bank uses the asset and liability method whereby income taxes reflect the expected future tax consequences of temporary differences
between the financial statements carrying amounts of assets and liabilities and their respective tax bases. Accordingly, a deferred income tax
asset or liability is determined for each temporary difference based on the enacted tax rates to be in effect on the expected reversal date of the
temporary difference. Income taxes on the Consolidated Statement of Income include the current and deferred portions of the income taxes.
Income taxes applicable to items charged or credited directly to shareholders’ equity are included in such items.
Net deferred income taxes assets or liabilities accumulated as a result of temporary differences are included in other assets or other liabilities,
respectively. A valuation allowance is established to reduce deferred income tax assets to the amount more likely than not to be realised.
(s) Consolidated Statement of Cash Flows
For the purposes of the Consolidated Statement of Cash Flows, cash and demand deposits with banks include cash and demand deposits; vault
cash and cash in transit where the Bank holds the related assets.
(t) Earnings Per Share
Earnings per share has been calculated using the weighted average number of shares outstanding during the year and adjusted for the stock
dividends declared during the year ended 31 December 2004 and 2003 (see also Note 18). The dilutive effect of stock options was calculated
using the treasury stock method, whereby the proceeds received from the exercise of stock options are assumed to be used to repurchase
outstanding shares, using the quarterly average market price of the Bank’s shares for the period.
(u) Consolidation of Variable Interest Entities
In December 2003 the FASB issued interpretation No. 46(R), Consolidation of Variable Interest Entities. This interpretation addresses consolidation
by a business enterprise of a VIE. FIN 46(R) requires a variable interest holder to consolidate the VIE if that party will absorb a majority of the
expected losses of the VIE, receive a majority of residual returns of the VIE, or both. This party is considered the primary beneficiary of the entity.
The determination of whether a firm meets the criteria to be considered the primary beneficiary of a VIE requires an evaluation of all transaction
(such as investments, loans and fee arrangements) with the entity. The foundation of this evaluation is an expected-loss calculation prescribed
by FIN 46(R) (note 23).
(v) Impairment or Disposal of Long-Lived Assets
An impairment loss is recognised when the carrying amount of a long-lived asset to be held and used exceeds the sum of the undiscounted cash
flows expected from its use and disposal. The impairment recognised is measured as the amount by which the carrying amount of the asset
exceeds its fair value. Long-lived assets that are to be disposed of other than by sale are classified and accounted for as held for use until the
date of disposal or abandonment. Assets that meet certain criteria are classified as held for sale and are measured at the lower of their carrying
amounts or fair value, less costs of sale.
NOTE 2: Significant Acquisitions
On 2 February 2004, the Bank acquired all the outstanding shares of Deerfield Fund Services Limited, a fund administration services provider based in
The Bahamas for $4.3 million paid in cash. The company was renamed Butterfield Fund Services (Bahamas) Limited in 2004.
On 5 February 2004, the Bank announced that Bank of Butterfield (UK) Limited had made a cash offer for the entire and to be issued share capital of
Leopold Joseph Holdings plc. (Leopold Joseph) subject to Leopold Joseph shareholder and appropriate regulatory approvals. The cash offer was £9.50
in cash per Leopold Joseph share, valuing the existing issued share capital of Leopold Joseph at approximately £55.1 million ($103.6 million). The offer
price, which had the unanimous recommendation of the directors of Leopold Joseph, represented a premium of 11.1% to the closing price of £8.55 per
share on 4 February 2004, being the last business day prior to the announcement of the offer. On 2 April 2004, the Bank announced that it had acquired
all the outstanding common shares of Leopold Joseph and that all the conditions of the Bank's offer had been satisfied unconditionally. The principal
activities of Leopold Joseph were private banking, treasury, investment management, offshore company administration and trust services to companies
and high net worth individuals and families. The company was renamed Butterfield Bank (UK) Limited in 2004.
Financials
36
On 8 October 2004, the Bank acquired all outstanding shares of Grosvenor Trust Company Limited (Grosvenor) a specialist trust business based in
Bermuda for $8.7 million. The total consideration in respect of this acquisition was paid in cash.
On 4 March 2003, the Bank acquired Promisant (Technology) Limited (PTL) and certain tangible fixed assets of Promisant Holdings Ltd. (PHL) for $2
million. PTL is a Bermuda based provider of multi-currency payment processing services to Bermudian and international merchants and was a wholly-
owned subsidiary of PHL, a company in which the Bank had a venture capital equity investment. During 2003 PHL was wound down and the Bank
wrote-off its remaining investment of $4.6 million which was a charge to investment income. In addition the Bank charged off a $0.7 million working
capital loan to PHL against general provisions in 2003.
On 22 August 2003, the Bank acquired all the outstanding common shares of Thorand Bank and Trust Limited and on 3 September 2003 the Bank
acquired all the outstanding common shares of Leopold Joseph (Bahamas) Limited. The total consideration in respect of these acquisitions was $11.9
million and was paid in cash. Subsequent to the acquisitions, the Bank merged the operations of the two companies into Butterfield Bank (Bahamas)
Limited and these results are included in the Consolidated Statement of Income from the dates of their acquisition. The principal activities of the acquired
companies is private client business comprising primarily trust and related services to high net worth individuals.
On 4 December 2003, the Bank acquired all the outstanding common shares of The Mutual Bank of the Caribbean Inc., a Barbados community bank,
from its majority shareholder, Sagicor Financial Corporation, and its minority shareholders. The total consideration in respect of this acquisition was
$18.1 million and was paid in cash. The company was renamed Butterfield Bank (Barbados) Limited in 2004.
The following table summarises the total consideration in respect of significant acquisitions.
Fair value of assets acquired
Cash and deposits with banks
Investments
Loans
Premises, equipment and computer software
Intangible assets – Customer relationships
Intangible assets – Goodwill
Other assets
Total assets
Fair value of liabilities assumed
Deposits
Other liabilities
Subordinated capital
Total liabilities
Fair value of identifiable net assets acquired
Total purchase consideration
Deerfield
2004
Leopold Joseph
Grosvenor
Total
205
-
-
173
2,700
1,031
290
4,399
-
149
-
149
4,250
4,250
78,957
497,258
260,971
4,126
32,439
13,695
13,466
900,912
765,155
23,229
8,892
797,276
103,636
103,636
396
-
-
41
8,337
-
988
9,762
-
1,022
-
1,022
8,740
8,740
79,558
497,258
260,971
4,340
43,476
14,726
14,744
915,073
765,155
24,400
8,892
798,447
116,626
116,626
2003
Total
50,712
42,901
61,517
3,486
11,446
6,112
5,029
181,203
139,513
10,627
-
150,140
31,063
31,063
37
NOTE 3: Cash and Deposits with Banks
31 December
Unrestricted
Non-interest earning
Cash and demand deposits
Bermuda Other currencies
Total
Bermuda Other currencies
Total
2004
2003
118,975
25,651
144,626
69,468
24,201
93,669
Interest earning
Cash and demand deposits
Term deposits maturing within six months
Term deposits maturing within six to twelve months
Sub-total – Interest earnings
124,688
10,000
-
134,688
160,042
284,730
1,898,352 1,908,352
39,211
2,097,605 2,232,293
39,211
-
-
-
-
92,079
92,079
2,570,321 2,570,321
138,281
2,800,681 2,800,681
138,281
Total unrestricted cash and deposits
Affected by drawing restrictions related to minimum
reserve and derivative margin requirements
Non-interest earning
Cash and demand deposits
Total cash and deposits with Banks
253,663
2,123,256 2,376,919
69,468
2,824,882 2,894,350
1,535
255,198
18,270
19,805
2,141,526 2,396,724
-
69,468
18,033
18,033
2,842,915 2,912,383
NOTE 4: Investments
Trading
Trading assets include debt and equity securities held for trading purposes that the Bank owns ("long" positions). Included in trading assets are
the reported receivables (unrealised gains) and payables (unrealised losses) related to derivatives. These amounts include the effect of netting as
permitted under FASB Interpretation No. 39 Offsetting Amounts Related to Certain Contracts (FIN 39). Trading positions are carried at fair value
on the Consolidated Balance Sheet.
31 December
Trading revenue
Equities (a)
Fixed income and other (b)
Total
(a) Includes equity securities and equity derivatives.
(b) Includes bonds and commercial paper, and interest rate and foreign exchange derivatives.
Trading assets
The following table presents the fair value of trading assets and liabilities for the dates indicated:
31 December
Debt and equity instruments
Certificates of deposit, bankers acceptances and commercial paper
Debt securities issued by non-US governments
Corporate securities and other
Total net trading
The following table presents realised gains and losses from available for sale securities:
31 December
Realised gains
Realised losses
Net realised gains
2004
2003
307
340
647
147
86
233
2004
2003
628,147
12,475
3,273
643,895
153,943
-
5,608
159,551
2004
362
-
362
2003
56
-
56
Financials
38
Available for Sale
The amortised cost and estimated fair value of available for sale and held to maturity securities were as follows for the dates indicated:
2004
2003
31 December
Available for sale
Corporate debt securities
Equity securities
Other, primarily asset-backed securities
Total available for sale
Held to maturity
US government and federal
agencies/corporations
Collateralised mortgage obligations
Debt securities issued by
non-US governments
Corporate debt securities
Other, primarily asset-backed
securities
Total held to maturity
Gross
Amortised unrealised unrealised
(losses)
Gross
gains
cost
Fair value
Gross
Gross
Amortised unrealised unrealised
(losses)
gains
cost
Fair value
26,304
2,890
223
29,417
-
264
-
264
-
-
-
-
26,304
3,154
223
29,681
23,966
3,563
223
27,752
-
63
-
63
-
-
-
-
23,966
3,626
223
27,815
85,421
242,249
364
111
(36)
(378)
85,749
241,982
40,480
414,867
57,246
2,023,810
228
3,560
(4)
179,618
57,470
(1,363) 2,026,007 1,739,847
1,343
1,519
1,719
4,956
-
(226)
41,823
416,160
181,238
(99)
(676) 1,744,127
184,098
2,592,824
335
4,598
(8,452)
175,981
(10,233) 2,587,189
76,075
2,450,887
468
10,005
(6,822)
69,721
(7,823) 2,453,069
Investments include $707,165 (2003: $538,457) of fixed-rate instruments and $2,521,170 (2003: $1,921,973) of floating-rate instruments.
The approximate yield on floating rate securities at 31 December 2004 was 2.69% (2003: 1.79%), while the approximate yield on fixed rate
securities was 5.31% (2003: 4.53%).
The following table presents the maturity of securities by remaining term to maturity:
31 December 2004
Available for sale
Corporate debt securities
Equity securities
Other, primarily asset backed securities
Total available for sale
Held to maturity
US government and federal agencies/corporations
Collateralised mortgage obligations
Debt securities issued by non-US governments
Corporate debt securities
Other, primarily asset-backed securities
Total held to maturity
Remaining term to maturity
Within
3 months
3 to 12
months
1 to 5
years
Over 5
years
No
specific
maturity
Carrying
value
24,934
-
-
24,934
-
-
-
-
-
-
-
-
19,983
-
5,755
379,834
-
405,572
20,191
-
7,935
318,226
-
346,352
-
32,168
35,048
1,300,871
37,617
1,405,704
1,370
-
-
1,370
45,248
210,081
18,723
9,984
120,523
404,559
-
3,154
223
3,377
-
-
4,667
-
25,970
30,637
26,304
3,154
223
29,681
85,422
242,249
72,128
2,008,915
184,110
2,592,824
39
31 December 2004
Trading
Debt and equity instruments
Certificates of deposit, bankers acceptances
and commercial paper
Debt securities issued by non-US governments
Corporate securities and other
Total debt and equity instruments
Remaining term to maturity
Within
3 months
3 to 12
months
1 to 5
years
Over 5
years
No
specific
maturity
Carrying
value
513,966
-
-
513,966
114,181
747
-
114,928
-
3,376
-
3,376
-
8,353
-
8,353
-
-
3,272
3,272
628,147
12,476
3,272
643,895
Total investments
944,472
461,280
1,409,080
414,282
37,286
3,266,400
Total by currency (in US dollars equivalent)
Bermuda dollars
US dollars
Other
Total Investments
-
339,861
604,611
944,472
-
289,273
172,007
461,280
-
1,326,445
82,635
1,409,080
-
379,236
35,046
414,282
3,154
32,448
1,684
37,286
3,154
2,367,263
895,983
3,266,400
Remaining term to maturity
Within
3 months
3 to 12
months
1 to 5
years
Over 5
years
-
-
-
-
-
-
-
-
-
-
-
-
-
15,004
8,491
285,632
-
309,127
40,479
17,029
162,295
1,065,198
5,587
1,290,588
-
382,787
26,176
-
53,670
462,633
No
specific
maturity
-
3,626
223
3,849
-
-
-
-
16,821
16,821
Carrying
value
23,966
3,626
223
27,815
40,479
414,867
196,962
1,722,501
76,078
2,450,887
31 December 2003
Available for sale
Corporate debt securities
Equity securities
Other, primarily asset-backed securities
Total available for sale
Held to maturity
US government and federal agencies/corporations
Collateralised mortgage obligations
Debt securities issued by non-US governments
Corporate debt securities
Other, primarily asset-backed securities
Total held to maturity
Trading
Debt and equity instruments
Certificates of deposit, bankers acceptances
and commercial paper
Corporate securities and other
Total debt and equity instruments
23,966
-
-
23,966
-
47
-
371,671
-
371,718
153,943
-
153,943
-
-
-
-
-
-
-
-
-
-
5,608
5,608
153,943
5,608
159,551
Total investments
549,627
309,127
1,290,588
462,633
26,278
2,638,253
Total by currency (in US dollars equivalent)
Bermuda dollars
US dollars
Other
Total investments
-
373,375
176,252
549,627
-
285,562
23,565
309,127
-
1,118,268
172,320
1,290,588
-
420,732
41,901
462,633
3,626
21,030
1,622
26,278
3,626
2,218,967
415,660
2,638,253
Financials
40
NOTE 5: Loans
The composition of the loan portfolio at each of the indicated dates was as follows:
31 December
Commercial loans
Commercial and industrial
Commercial real estate:
Commercial mortgages
Construction
Financial institutions
Government
Total commercial loans
Less allowance for credit losses on commercial loans
Total commercial loans after allowance for credit losses
Consumer loans
Credit card
Automobile financing
Mortgages
Other consumer
Total consumer loans
Less allowance for credit losses on consumer loans
Total consumer loans after allowance for credit losses
Total loans
Less allowance for credit losses
Net loans
2004
Non-
Bermuda
Bermuda
Total
Bermuda
2003
Non-
Bermuda
Total
375,390
121,765
497,155
314,547
97,845
412,392
61,500
134,839
249,520
24,853
846,102
(10,588)
835,514
34,814
47,099
702,200
73,881
857,994
(5,578)
852,416
1,704,096
(16,166)
1,687,930
306,186
5,164
63,217
13,983
510,315
(3,051)
507,264
16,618
8,102
207,562
222,459
454,741
(4,604)
450,137
965,056
(7,655)
957,401
367,686
140,003
312,737
38,836
1,356,417
(13,639)
1,342,778
51,432
55,201
909,762
296,340
1,312,735
(10,182)
1,302,553
60,964
38,384
245,980
11,500
671,375
(11,010)
660,365
31,596
45,421
631,946
71,125
780,088
(5,929)
774,159
2,669,152
(23,821)
2,645,331
1,451,463
(16,939)
1,434,524
90,104
2,389
36,324
23,703
250,365
(2,676)
247,689
13,701
7,250
171,244
82,579
274,774
(2,271)
272,503
525,139
(4,947)
520,192
151,068
40,773
282,304
35,203
921,740
(13,686)
908,054
45,297
52,671
803,190
153,704
1,054,862
(8,200)
1,046,662
1,976,602
(21,886)
1,954,716
The principal means of securing residential mortgages, personal, credit card and business loans are charges over assets and guarantees. Mortgage loans
are generally repayable over periods of up to thirty years and personal, credit card, business and government loans are generally repayable over terms
not exceeding five years. The effective yield on total loans as at 31 December 2004 is 6.32% (2003: 5.88%). During the year loans of $35 million were
purchased from other parties at fair value. The premium or discount over book value is amortised over the life of the loan.
The table below sets forth information about the Bank's impaired loans:
31 December
Commercial loans – Bermuda
Commercial loans – Non-Bermuda
Consumer loans and credit cards – Bermuda
Consumer loans and credit cards – Non-Bermuda
Mortgages – Bermuda
Mortgages – Non-Bermuda
Total
Gross
2,557
9,019
1,072
726
1,203
5,895
20,472
2004
Allowance
(716)
(484)
(237)
(374)
-
(107)
(1,918)
Total
1,841
8,535
835
352
1,203
5,788
18,554
Gross
4,802
4,585
1,393
1,044
1,831
3,711
17,366
2003
Allowance
(2,197)
(1,030)
(233)
(308)
-
(181)
(3,949)
Total
2,605
3,555
1,160
736
1,831
3,530
13,417
For the year ended 31 December 2004, the amount of gross interest income that would have been recorded had impaired loans been current was
$2,666 (2003: $2,933). For the year ended 31 December 2004, the Bank recovered overdue interest of $172 (2003: $59) on impaired loans that were
repaid in the year. The average balance of impaired loans during the year ended 31 December 2004 was $18,429 (2003: $20,572).
41
The table below summarises the changes in the allowance for loan losses:
31 December
Allowance for loan losses at beginning of year
Allowance this year
Recoveries
Charge-off
Other
Allowance for loan losses at end of year
Specific
Provisions
3,949
723
2,215
(5,330)
361
1,918
2004
General
Provisions
17,937
2,171
3,204
(1,053)
(356)
21,903
Total
21,886
2,894
5,419
(6,383)
5
23,821
Specific
Provisions
7,624
(345)
5,163
(9,095)
602
3,949
2003
General
Provisions
17,686
3,331
(2,968)
(48)
(64)
17,937
Total
25,310
2,986
2,195
(9,143)
538
21,886
The table below presents information about loan delinquencies and net charge-offs:
31 December
Credit card
Automobile financing
Other consumer
Consumer loans
Commercial loans
Total loans reported
Total
2004
Loans 90
delinquent days or more
past due
loans
Net
charge-offs
Total
2003
Loans 90
delinquent days or more
past due
loans
3,812
872
25,882
30,566
12,563
43,129
587
569
12,969
14,125
11,168
25,293
763
554
1,286
2,603
3,780
6,383
2,775
665
21,150
24,590
13,448
38,038
927
167
11,973
13,067
9,559
22,626
Net
charge-offs
1,336
161
704
2,201
6,942
9,143
NOTE 6: Credit Risk Concentrations
Concentrations of credit risk arise when a number of customers are engaged in similar business activities, are in the same geographic region, or when
they have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic
conditions. The Bank regularly monitors various segments of its credit risk portfolio to assess potential concentrations of risks and to obtain collateral
when deemed necessary. In the Bank's commercial portfolio, risk concentrations are primarily evaluated by industry and also by geographic region.
In the consumer portfolio, concentrations are primarily evaluated by products. Credit exposures includes loans, guarantees and acceptances, letters of
credit and commitments for undrawn lines of credit.
The following table summarises the credit exposure of the Bank by business sector:
31 December
Primary industry and manufacturing
Commercial and merchandising
Real estate
Transport and communication
Bank and financial services
Governments
Individuals
Sub-total
General provisions
Total
2004
95,155
572,940
1,340,454
56,322
938,413
38,474
944,747
3,986,505
(21,903)
3,964,602
2003
59,609
570,035
825,864
32,047
1,018,962
35,203
519,944
3,061,664
(17,937)
3,043,727
Financials
42
The following table summarises the credit exposure by the Bank by region:
31 December
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
UK
Sub-total
General provision
Total
2004
2,752,005
84,148
428,962
225,902
2,904
492,584
3,986,505
(21,903)
3,964,602
2003
2,364,581
61,446
408,257
134,348
-
93,032
3,061,664
(17,937)
3,043,727
NOTE 7: Premises, Equipment and Computer Software
The following table summarises premises, equipment and computer software:
31 December
Land
Buildings
Equipment
Computer software
Total
31 December
Depreciation
Buildings and equipment (included in property expense)
Software (included in systems and communication expense)
Total depreciation charged to operating expenses
2004
Accumulated
Depreciation
-
30,633
47,281
39,079
116,993
Net
carrying
value
12,345
75,274
14,881
23,531
126,031
Cost
12,345
90,183
57,699
45,728
205,955
Cost
12,345
105,907
62,162
62,610
243,024
2003
Accumulated
Depreciation
-
28,683
45,676
31,617
105,976
Net
carrying
value
12,345
61,500
12,023
14,111
99,979
2004
2003
6,686
6,334
13,020
5,815
6,707
12,522
The Bank has outstanding capital commitments of approximately $25 million as at 31 December 2004 in respect of building refurbishments and system
improvements. During the year the Bank capitalised certain cost associated with the development of software amounting to $16.9 million. These costs
are included in computer software costs above.
43
Note 8: Goodwill and Other Intangible Assets
The following table presents the goodwill and other intangible assets by business segment:
Goodwill
Business segment
Barbados
Guernsey
Balance as at 31 December 2002
Goodwill acquired during the year
Foreign exchange translation adjustment
Balance as at 31 December 2003
Goodwill acquired during the year
Foreign exchange translation adjustment
Balance as at 31 December 2004
Other Intangibles
31 December
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
UK
Customer relationships
-
5,220
-
5,220
-
-
5,220
Gross
carrying
amount
8,337
6,681
1,211
50,740
7,790
19,831
94,590
2,720
-
294
3,014
4,758
419
8,191
2004
Accumulated
amortisation
(139)
(482)
(27)
(10,202)
(1,067)
(1,268)
(13,185)
The
Bahamas
-
892
-
892
1,031
-
1,923
Net
carrying
amount
8,198
6,199
1,184
40,538
6,723
18,563
81,405
United
Kingdom
-
-
-
-
8,937
367
9,304
Gross
carrying
amount
-
6,488
-
35,265
5,090
-
46,843
Total
2,720
6,112
294
9,126
14,726
786
24,638
2003
Accumulated
amortisation
-
-
-
(7,675)
(140)
-
(7,815)
Net
carrying
amount
-
6,488
-
27,590
4,950
-
39,028
There have been no impairment losses for the years ended 31 December 2004 and 2003.
The estimated aggregate amortisation expense for each of the succeeding years until 31 December 2008 is $6.6 million.
Customer relationships are valued based on the present value of net cash flows expected to be derived solely from the recurring customer base existing
as at the date of acquisition. Customer relationship intangible assets may or may not arise from contracts. During 2004, the Bank acquired new customer
relationships for $44.9 million, the amortisation expenses amounted to $5.4 million.
Financials
44
NOTE 9: Customer Deposits and Deposits from Banks
(a) By maturity
31 December
Customer and bank demand deposits
Customer deposits – Current accounts – Non-Interest Bearing
Customer deposits – Current accounts – Interest Bearing
Sub-total – demand deposits
2004
2003
999,826
3,878,707
4,878,533
1,140,547
3,048,157
4,188,704
2,690,114
105,695
233,108
3,028,917
2,576,235
110,615
247,023
2,933,873
7,907,450
7,122,577
Customer and bank term deposits
Term deposits maturing within six months
Term deposits maturing within six to twelve months
Term deposits maturing after twelve months
Sub-total – term deposits
Total
(b) By Type and Location
31 December
Bermuda
Customers
Banks
Cayman
Customers
Banks
Guernsey
Customers
Banks
Other International
Customers
Banks
Total
The effective yield on deposits at 31 December 2004 was 2.2% (2003: 1.5%).
2004
2003
Payable
On Demand
Payable on a
fixed date
Payable
Total On Demand
Payable on a
fixed date
Total
2,098,322
223,951
1,069,535
-
3,167,857
223,951
2,087,514
241,768
1,461,037
-
3,548,551
241,768
1,528,645
-
438,140
184,943
1,966,785
184,943
1,308,029
-
387,237
151,767
1,695,266
151,767
524,102
5,711
756,042
488
1,280,144
6,199
379,574
4,938
474,067
19,891
853,641
24,829
497,802
-
4,878,533
492,267
87,502
3,028,917
990,069
87,502
7,907,450
166,881
-
4,188,704
347,963
91,911
2,933,873
514,844
91,911
7,122,577
45
NOTE 10: Employee Future Benefits
The Bank maintains trusteed pension plans including non-contributory defined benefit plans and a number of defined contribution plans, and provides
post-retirement medical benefits to its qualifying retirees. The defined benefit provisions under the pension plans are generally based upon years of
service and average salary during the final years of employment. The defined benefit plans are non-contributory and the funding required is provided by
the Bank, based upon the advice of an independent actuary.
Effective 1 September 2000, the Bank implemented a defined contribution pension plan for its Bermuda based employees. Funding of the plan is
determined based upon the provisions of the plan and is shared with the employees. All employees under age 45 were transferred into this plan.
All Bermuda based employees joining the Bank after this date will automatically join this defined contribution plan.
Substantially all of the pension assets are invested in equity, fixed income and other marketable securities.
The following table presents the financial position of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefit plan.
The benefit obligations and plan assets are measured as at 31 December.
Accumulated benefit obligation at end of year
98,084
-
71,188
-
2004
Pension Plans
Post-Retirement
Medical Benefit Plan
Pension Plans
2003
Post-Retirement
Medical Benefit Plan
Change in projected benefit obligation
Projected benefit obligation at beginning of year
New acquisitions
Service cost
Employee contributions
Interest cost
Benefits paid
Past service cost
Actuarial losses
Foreign currency exchange rate changes
Projected benefit obligation at end of year
Change in plan assets
Fair value of plan assets at beginning of year
New acquisitions
Actual return on plan assets
Employer contributions
Employee contributions
Benefits paid
Foreign currency exchange rate changes
Fair value of plan assets at end of year
Funded status
Excess (deficit) of plan assets over
projected benefit obligation at end of year
Employer contributions during the period from
measurement date to fiscal year end
Unamortised net actuarial loss
Unamortised past service cost
Net amount recognised
77,093
21,610
4,443
180
5,278
(3,496)
221
(2,002)
2,188
105,515
66,352
15,524
3,427
2,830
180
(3,496)
1,631
86,448
(19,067)
255
2,138
201
(16,473)
75,821
-
1,472
-
4,755
(560)
-
1,036
-
82,524
-
-
-
560
-
(560)
-
-
64,166
1,237
3,288
4
4,060
(3,268)
-
6,114
1,492
77,093
58,203
982
7,767
1,656
4
(3,268)
1,008
66,352
(82,524)
(10,741)
-
36,874
-
(45,650)
-
2,544
-
(8,197)
50,551
-
1,252
-
3,305
(1,919)
-
22,632
-
75,821
-
-
-
1,919
-
(1,919)
-
-
(75,821)
-
39,013
-
(36,808)
Financials
46
Amounts recognised in balance sheet consist of:
Accrued benefit asset included in other assets
Accrued benefit (liability) included in other liabilities
Accumulated other comprehensive (income)
Net amount recognised
Annual benefit expense
Service cost
Interest cost
Expected return on plan assets
Amortisation of past service cost
Amortisation of actuarial loss
Defined benefit expense
Defined contribution expense
Total benefit expense
31 December
Actuarial assumptions used to
determine annual benefit expense
Weighted average discount rate
Weighted average rate of compensation increases
Weighted average expected long-term
rate of return on plan assets
Weighted average annual
medical cost increase rate
Actuarial assumptions used to
determine benefit obligations at end of year
Weighted average discount rate
Weighted average rate of compensation increases
Weighted average annual
medical cost increase rate
2004
Pension Plans
Post-Retirement
Medical Benefit Plan
Pension Plans
2003
Post-Retirement
Medical Benefit Plan
(16,473)
-
(16,473)
4,443
5,278
(5,046)
28
21
4,724
3,121
7,845
(45,650)
-
(45,650)
1,472
4,755
-
-
3,175
9,402
-
9,402
(9,013)
816
(8,197)
3,287
4,060
(3,937)
-
-
3,410
2,508
5,918
(36,808)
-
(36,808)
1,252
3,305
-
-
1,272
5,829
-
5,829
2004
Pension Plans
Post-Retirement
Medical Benefit Plan
Pension Plans
2003
Post-Retirement
Medical Benefit Plan
5.75%
4.15%
6.55%
N/A
5.60%
3.70%
N/A
6.25%
N/A
N/A
12% to 5%
in 2011
6.00%
N/A
11% to 5%
in 2011
6.35%
3.90%
6.85%
N/A
5.85%
3.85%
N/A
6.50%
N/A
N/A
6% to 5%
in 2004
6.25%
N/A
12% to 5%
in 2011
For 2004, the effect of one percentage point increase or decrease in the assumed medical cost increase rate on the aggregate of service and interest
costs is a $1.3 million increase and a $0.9 million decrease, respectively, and on the benefit obligation a $14 million increase and a $13 million
decrease, respectively.
To develop the expected long-term rate of return on assets assumption for each plan, the Bank considered the historical returns and the future
expectations for returns for each asset class, as well as the target asset allocations of the funds.
47
The weighted average actual and target asset allocations of the pension plans by asset category, are as follows:
31 December
Asset category
Equity securities (including equity mutual funds)
Equity/debt balanced mutual funds
Debt securities (including debt mutual funds)
Other
Total
2004
2003
Actual Allocation
Target Allocation
Actual Allocation
Target Allocation
46%
17%
31%
6%
100%
51%
-
49%
-
100%
39%
19%
35%
7%
100%
45%
-
55%
-
100%
At 31 December 2004, 50.8% (2003: 49.9) of the assets of the pension plans were mutual funds and alternative investments managed or administered
by wholly-owned subsidiaries of the Bank. On 31 December 1.8% (2003: 1.9%) of these mutual funds assets were invested in common shares of
the Bank.
The investments of the pension funds are diversified across a range of asset classes and are diversified within each asset class. The assets are generally
actively managed with the goal of adding some incremental value through security selection and asset allocation.
Estimated 2005 Bank contribution to, and estimated benefit payments for the next 10 years under, the pension and medical benefit plan are as follows:
Estimated Bank contributions
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
Year
2005
2005
2006
2007
2008
2009
2010-2014
Pension Plans
6,700
3,400
3,600
3,700
3,900
4,200
25,900
Post-Retirement Medical Benefit Plan
2,700
2,700
3,000
3,300
3,700
3,900
24,200
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were $103
million and $84 million respectively, as at 31 December 2004 ($77 million and $66 million respectively, as at 31 December 2003).
NOTE 11: Commitments, Credit Related Arrangements and Contingencies
Commitments
The Bank was committed to expenditures under contract for software development and construction of $8.7 million and $25 million respectively, as at
31 December 2004. Rental expense for premises leased on a long-term basis for the year ended 31 December 2004 amounted to $8.2 million
(2003: $3.3 million).
The following table summarises the Bank's commitments for construction, computer software development and long-term leases:
Year
2005
2006
2007
2008
2009
2010 & thereafter
8,159
9,192
5,305
4,612
4,515
10,127
Total rental expense was as follows:
Year ended 31 December
Gross rentals
Sub-lease rentals
Net rental expense
2004
4,896
-
4,896
2003
2,134
(198)
1,936
Financials
48
Credit Related Arrangements
The following table presents the credit related arrangements with contractual amounts representing credit risk as follows:
31 December
Commitments to extend credit
Commitments to invest
Letters of Credit
Standby
Documentary and commercial
Guarantees
Securities lending
Forward guarantees
Total
Gross
650,973
2,464
544,587
3,025
15,296
-
2,151
1,218,496
2004
Collateral
Net
Gross
156,106
2,464
494,867
-
34,221
4,521
515,432
2,599
11,074
-
2,151
689,826
29,155
426
4,222
-
-
528,670
514,997
4,036
10,821
-
1,504
570,100
2003
Collateral
34,221
4,521
493,544
3,689
3,276
-
1,154
540,405
Net
-
-
21,453
347
7,545
-
350
29,695
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, this is shown gross including interest income.
Standby letters of credit and letters of guarantee are issued at the request of a Bank customer in order to secure the customer’s payment or performance
obligations to a third party. These guarantees represent an irrevocable obligation of the Bank to pay the third party beneficiary upon presentation of the
guarantee and satisfaction of the documentary requirements stipulated therein, without investigation as to the validity of the beneficiary’s claim against
the customer. Generally, the term of the standby letters of credit does note exceed one year, while the term of the guarantees does not exceed four years.
The types and amounts of collateral security held by the Bank for these standby letters of credit and guarantees is generally the same as for loans.
Legal Proceedings
There are a number of actions and legal proceedings pending against the Bank and its subsidiaries which arose in the normal course of its business.
Management, after reviewing all actions proceeding, pending against or involving the Bank and its subsidiaries, considers that the resolution of these
matters would not be material to the consolidated financial position of the Bank.
NOTE 12: Interest Income
Loans
The following table presents the components of loan interest income:
Year ended 31 December
Mortgages
Other loans
Amortisation of loan origination fees
(net of amortised costs)
Total loan interest income
2004
68,212
63,203
131,415
2,222
133,637
2003
57,025
45,699
102,724
1,860
104,584
Balance of unamortised loan fees as at 31 December
9,195
7,430
49
NOTE 13: Segmented Information
(a) Operating Segments: For management reporting purposes, the operations of the Bank are grouped into the following nine business segments
based upon the geographic location of the Bank’s operations: Bermuda (which is further sub-divided based on products and services into Community
Banking, Wealth Management and Fiduciary Services and Investment and Pension Fund Administration, and Real Estate), Barbados, Cayman, Guernsey,
The Bahamas, United Kingdom and Hong Kong. Accounting policies of the reportable segments are the same as those described in Note 1.
The Bermuda Community Banking segment provides a full range of retail and corporate services. Retail services are offered to individuals and small to
medium sized businesses through five branch locations and through telephone banking, Internet banking, Automated Teller Machines (ATMs) and debit
cards. Retail services include deposit services, consumer and mortgage lending, credit cards and personal insurance products. Corporate services include
commercial lending and mortgages, cash management, payroll services, remote banking, and letters of credit. Community Banking also includes treasury
operations and Promisant (Technology) Limited.
The Bermuda Wealth Management and Fiduciary Services and Investment and Pension Fund Administration segment consists of Butterfield Asset
Management Limited, which provides investment management, advisory and brokerage services, Butterfield Trust (Bermuda) Limited which provides
trust, estate, company management and custody services, and Butterfield Fund Services (Bermuda) Limited, which provides valuation, accounting,
corporate and shareholder services.
The Real Estate segment consists of the Bank's investments in real estate and all related costs. This segment also includes rental revenues from third parties.
The Barbados segment provides a range of community and commercial banking services through three branch locations, ATMs and debit cards.
Services include deposit services, consumer and mortgage lending, credit cards and personal insurance products.
The Cayman segment provides a comprehensive range of community and commercial banking services to private and corporate customers through four
branches and through telephone banking, Internet banking, ATMs and debit cards. Wealth management and fiduciary services and investment and
pension fund administration services are also provided.
The Guernsey segment provides a broad range of services to private clients and financial institutions including, private banking and treasury services,
Internet banking, administered bank services, wealth management and fiduciary services and investment and pension fund administration services.
The Bahamas segment provides institutional, corporate and private clients with a range of wealth management & fiduciary services and investment fund
administration services.
The United Kingdom segment provides a broad range of services including private banking and treasury services, Internet banking and wealth
management and fiduciary services to high net worth individuals and privately owned businesses.
The Hong Kong segment provides investment and pension fund administration and custody services and represents the Bank's 20% investment in Dexia
Holdings (Hong Kong) Limited. The restricted branch license in Hong Kong was taken over by Dexia in April 2003.
Operating segment information follows:
31 December
2004
2003
Total Assets
Bermuda
Community Banking
Wealth Management & Fiduciary Services and
Investment & Pension Fund Administration
Real Estate
Total Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Hong Kong
Total
3,435,708
3,991,190
28,952
65,082
3,529,742
173,324
2,322,657
1,442,522
63,433
1,096,629
2,076
8,630,383
28,889
52,137
4,072,216
155,372
1,973,977
974,428
18,429
537,404
1,980
7,733,806
Financials
50
Business Area Analysis
31 December 2004
Customer Intersegment Loan Losses
Income
Net Interest Income
Provisions for
Fees and Other
Total
Net
Income Expenses Amortisation Expenses Income
Other Depreciation &
Total
Community Banking
Wealth Management & Fiduciary
Services and Investment &
Pension Fund Administration
Real Estate
Sub-total Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Hong Kong
Sub-total Overseas
94,275
363
1,437 38,941 135,016 82,479
5,388 87,867 47,149
-
-
94,275
5,608
29,037
7,378
131
14,540
-
56,694
249
(1,114)
(502)
(6)
1,835
1,649
389
(3,365)
-
502
- 55,357 55,606 27,531
5,632
-
1,437 96,813 192,023 115,642
1,401
2,515
706 28,237 27,369
1,581
7,213 (5,812)
7,675 123,317 68,706
(721)
3,576
8,457
6,572
(3,582) 28,972 56,262 28,767
- 26,015 35,042 29,273
4,454
5,861
5,369
8,137 19,312 24,081
-
688
(4,331) 72,757 125,622 93,147
(28)
-
-
688
1,561
324
8,133
2,775 31,542 24,720
3,193 32,466 2,576
668
5,193
2,447 26,528 (7,216)
688
10,715 103,862 21,760
739
-
-
Total Income
150,969
-
(2,894) 169,570 317,645 208,789
18,390 227,179 90,466
less: Inter-segment eliminations
(principally rent and
management fees)
Total
150,969
-
(6,480)
(2,894) 163,090 311,165 202,309
(6,480)
(6,480)
-
-
(6,480)
18,390 220,699 90,466
31 December 2003
Customer
Intersegment
Loan Losses
Income
Income Expenses
Other Depreciation &
Amortisation
Total
Expenses
Net
Income
Net Interest Income
Provisions for
Fees and Other
Total
83,952
(338)
(1,731)
28,884 110,767
73,823
5,107
78,930 31,837
Community Banking
Wealth Management & Fiduciary
Services and Investment &
Pension Fund Administration
Real Estate
Sub-total Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Hong Kong
Sub-total Overseas
-
-
83,952
408
24,022
5,528
90
4,028
24
34,100
Total Income
118,052
less: Inter-segment eliminations
(principally rent and
management fees)
Total
-
118,052
331
(1,157)
(1,164)
-
294
1,580
-
(709)
(1)
1,164
-
-
-
-
-
(1,731)
(741)
(858)
325
-
12
7
(1,255)
42,195
42,526
22,257
4,771
1,287
2,444
73,523 154,580 100,851
355
25,593
21,697
1,298
1,056
582
50,581
22
49,051
29,130
1,388
4,387
612
84,590
-
480
23,457
22,513
968
4,811
372
52,601
575
22,832 19,694
(5,031)
6,318
1,547
7,229 108,080 46,500
121
2,366
4,298
181
684
1
7,651
601
(579)
25,823 23,228
2,319
26,811
1,149
239
(1,108)
5,495
239
373
60,252 24,338
(2,986) 124,104 239,170 153,452
14,880 168,332
70,838
-
(5,630)
(2,986) 118,474 233,540 147,822
(5,630)
(5,630)
-
-
(5,630)
14,880 162,702 70,838
51
For the year ended 31 December 2004, included within other expenses are the following income tax expense/(refund) amounts: Guernsey ($376)
(2003: $908), UK ($1,551), (2003: $(435)) and Barbados $192 (2003: $22). Transactions between operating segments principally include interbank
deposits and rent which are recorded based upon market rates, and management fees, which are recorded based on the cost of the services provided.
(b) Revenues by Products and Services: The principal sources of revenues by products and services are disclosed separately in the Consolidated
Statement of Income.
NOTE 14: Accounting for Derivative Instruments and Risk Management
The Bank uses derivatives in the asset and liability management (ALM) of positions and to assist customers with their risk management objectives.
The Bank primarily enters into derivative contracts as part of its overall interest rate risk management strategy to minimise significant unplanned
fluctuations in earnings that are caused by interest rate volatility. The Bank’s goal is to manage interest rate sensitivity by modifying the repricing or
maturity characteristics of certain consolidated balance sheet assets and liabilities so that movements in interest rates do not adversely affect the
net interest margin.
The Bank’s derivative contracts principally involve over the counter transactions that are privately negotiated between the Bank and the counterparty to
the contract. Derivative instruments that are used as part of the Bank’s interest rate risk management strategy include interest rate swaps and option
contracts that have indices related to the pricing of specific consolidated balance sheet assets and liabilities. Interest rate swaps generally involve the
exchange of fixed and variable-rate interest payments between two parties, based on a common notional principal amount and maturity date.
Interest rate options represent contracts that allow the holder of the option to receive cash or purchase, sell, or enter into a financial instrument at a
specified price within a specified period.
The Bank pursues opportunities to reduce its exposure to credit losses on derivatives by entering into International Swaps and Derivatives Association
Master Agreements (ISDAs). Depending on the nature of the derivative transaction, bilateral collateral arrangements may be used as well. When the
Bank is engaged in more than one outstanding derivative transaction with the same counterparty, and also has a legally enforceable master netting
agreement with that counterparty, the "net" marked to market exposure represents the netting of the positive and negative exposures with that
counterparty. When there is a net negative exposure, the Bank regards its credit exposure to the counterparty as being zero. The net marked to market
position with a particular counterparty represents a reasonable measure of credit risk when there is a legally enforceable master netting agreement
between the Bank and that counterparty.
(a) Fair Value Hedges
The Bank enters into interest rate swaps to convert its fixed rate long term debt to floating rate debt, and convert fixed rate deposits to floating
rate deposits.
For the year ended 31 December 2004 the Bank recognised a net loss of $0.2 million (2003: $0.1 million) reported as other income in the Consolidated
Statement of Income, which represented the ineffective portion of all fair-value hedges. As of 31 December 2004 the Bank has recorded the fair value
of derivative instrument assets of $0.4 million (2003: $0.6 million) in other assets and derivative instrument liabilities of $3.2 million (2003: $3.5 million)
other liabilities.
(b) Cash Flow Hedges
The Bank uses interest rate swaps to convert floating-rate notes to fixed-rate instruments. These swaps, which qualify for hedge accounting, have the
pay rate indexed to the rates received on the Bank’s variable-rate assets and the receive rate indexed to rates paid on the Bank’s various
deposit liabilities.
For cash flow hedges, gains and losses on derivative contracts that are reclassified from accumulated other comprehensive income to current-period
earnings are included in the line item in which the hedged item is recorded in the same period the forecasted transaction affects earnings. As at 31
December 2004 and 2003, there was no hedge ineffectiveness related to cash flow hedges. As of 31 December 2004, $1.9 million (2003: $9.0 million)
of the deferred net gains on derivative instruments accumulated in other comprehensive income are expected to be reclassified as earnings during the
next twelve months. The maximum term over which the Bank is hedging its exposure to the variability of future cash flows is 3 years. As of 31 December
2004, the Bank has recorded the fair value of derivative instrument assets of $2.9 million (2003: $12.5 million) in other assets and $1.4 million
(2003: nil) in other liabilities.
Financials
52
Notional Amounts: The following table provides the aggregate notional amounts of derivative contracts outstanding listed by type and divided
between those used for trading (non-hedging) and those used in hedging activities. The notional amounts are not recorded as assets or liabilities on the
Consolidated Balance Sheet as they represent the face amount of the contract to which a rate or price is applied to determine the amount of cash flows
to be exchanged. Notional amounts represent the volume of outstanding transactions and do not represent the potential gain or loss associated with
market risk or credit risk of such instruments.
31 December
Interest rate contracts
Interest rate swaps
Interest rate caps
Total
Foreign exchange contracts
Spot and forwards
Currency options
Total
Trading
59,593
66,000
125,593
2,415,658
5,130
2,420,788
2004
ALM
595,320
-
595,320
Total Value
Trading
654,913
66,000
720,913
171,000
66,000
237,000
-
-
-
2,415,658
5,130
2,420,788
1,199,397
-
1,199,397
2003
ALM
637,307
-
637,307
12,599
-
12,599
Total Value
808,307
66,000
874,307
1,211,996
-
1,211,996
Total notional amount of financial
derivatives outstanding
2,546,381
595,320
3,141,701
1,436,397
649,906
2,086,303
Included in the notional amounts for cash flow hedges using interest rate swaps for 31 December 2004, are $372.8 million (2003: $444.9 million),
pertaining to specific floating rate notes included in the investment portfolio which were classified as held to maturity. Included in the notional amounts
for fair value hedges using interest rate swaps for 2004, are $29.8 million (2003: $23.7 million), pertaining to specific loans, $125 million (2003: $125
million), pertaining to subordinated debt, and $24.5 million (2003: $24.5 million), pertaining to deposits.
(c) Fair Value
Derivative instruments,
in the absence of any compensating up-front cash payments, generally have no market value at inception.
They obtain value, positive or negative, as relevant interest rates, exchange rates, equity or commodity prices or indices change, such that previously
contracted derivative transactions have become more or less favourable than what can be negotiated under current market conditions for contracts with
the same remaining period to maturity. The potential for derivatives to increase or decrease in value as a result of the foregoing factors is generally
referred to as market risk. Market risk is managed within clearly defined parameters as prescribed by senior management of the Bank. The following
table shows the marked to market fair value of all derivative contracts outstanding. This is defined as the profit (loss) associated with replacing the
derivative contracts at prevailing market prices
31 December
Derivative financial instruments
Interest rate swaps
Spot and forward foreign exchange
Interest rate caps and currency options
Total
Positive
3,690
26,555
506
30,751
2004
Negative
4,271
23,734
477
28,482
Net
Positive
(581)
2,821
29
2,269
13,471
18,270
592
32,333
2003
Negative
3,897
17,846
479
22,222
Net
9,574
424
113
10,111
(d) Remaining Maturity
The following table summarises the remaining term to maturity of the notional amounts of the Bank’s derivative instruments by type:
31 December 2004
Interest rate contracts
Interest rate swaps
Interest rate caps
Sub-total
Foreign exchange contracts
Spot and forwards
Currency options
Sub-total
Total by remaining maturity
31 December 2003
Interest Rate Contracts
Interest rate swaps
Interest rate caps
Sub-total
Foreign exchange contracts
Spot and forwards
Total by remaining maturity
Within
6 months
6 to 12
months
1 to 3
years
3 to 5
years
97,373
-
97,373
2,280,033
-
2,280,033
2,377,406
111,511
-
111,511
124,496
5,130
129,626
241,137
275,797
66,000
341,797
11,129
-
11,129
352,926
100,659
-
100,659
-
-
-
100,659
After 5
years
69,573
-
69,573
-
-
-
69,573
Within
6 months
6 to 12
months
1 to 3
years
3 to 5
years
After 5
years
150,118
-
150,118
1,146,079
1,296,197
112,757
-
112,757
55,688
168,445
371,156
-
371,156
10,229
381,385
154,667
66,000
220,667
-
220,667
19,609
-
19,609
-
19,609
1,211,996
2,086,303
53
Total
654,913
66,000
720,913
2,415,658
5,130
2,420,788
3,141,701
Total
808,307
66,000
874,307
(e) Replacement Cost
The following table reflects the replacement cost of all derivative contracts outstanding. This is defined as the cost of replacing, at current market rates,
all contracts that have a positive fair value before factoring in the impact of master netting agreements. The replacement cost of an instrument
is dependent upon its terms relative to prevailing market prices and will fluctuate as market prices change and as the derivative approaches its
scheduled maturity.
31 December
Interest rate contracts
Interest rate swaps
Interest rate caps
Sub-total
Foreign exchange contracts
Spot and forwards
Currency options
Total replacement cost
Trading
-
305
305
26,555
201
26,756
2004
ALM
3,690
-
3,690
Total Value
Trading
3,690
305
3,995
-
592
592
-
-
-
26,555
201
26,756
16,351
1,919
18,270
2003
ALM
13,367
-
13,367
-
104
104
Total Value
13,367
592
13,959
16,351
2,023
18,374
Financials
54
NOTE 15: Fair Value of Financial Instruments
The following table presents the carrying value and fair value of financial assets and liabilities value under SFAS NO. 107 Disclosures about Fair Value of
Financial Instruments. Accordingly, certain amounts which are not considered financial instruments are excluded from the table. For investments with an
indicator of impairment management have considered the available evidence, including discussions with rating agencies. Based on this and because the
Bank has the ability and the intent to hold such securities to maturity, the Bank believes it will recover the full carrying value of the security. Should specific
circumstances dictate that the Bank may not be able to hold such securities to maturity, such as a significant deterioration of credit worthiness of the
issuer, the Bank may reassess whether a market value below carrying value represents an other than temporary impairment.
31 December
Carrying value
Fair value
Appreciation /
(depreciation)
Carrying value
Fair value
Appreciation /
(depreciation)
2004
2003
Financial assets
Cash and deposits with banks
Investments:
Held-to-maturity
Available-for-sale
Trading
Loans:
Commercial, net of allowance for credit losses
Consumer, net of allowance for credit losses
Other assets
Total financial assets
Financial liabilities
Customer deposits:
Demand deposits
Term deposits
Deposits, Financial institution
Other liabilities
Subordinated capital and senior debt
Total financial liabilities
2,396,724
2,396,724
-
2,912,383
2,912,383
-
2,592,824
29,681
643,895
2,587,189
29,681
643,895
1,342,778
1,302,553
321,928
8,630,383
1,343,503
1,304,684
321,928
8,627,604
(5,635)
-
-
725
2,131
-
(2,779)
2,450,887
27,815
159,551
2,453,068
27,815
159,551
908,054
1,046,662
228,454
7,733,806
908,543
1,048,834
228,454
7,738,648
4,663,654
2,771,201
502,595
152,570
142,333
8,202,353
4,633,654
2,762,101
502,595
152,570
142,333
8,193,253
-
9,100
-
-
-
9,100
3,917,244
2,695,059
510,274
106,263
122,871
7,351,711
3,917,244
2,685,005
510,274
106,263
122,871
7,341,657
2,181
-
-
489
2,172
-
4,842
-
10,054
-
-
-
10,054
55
NOTE 16: Interest Rate Risk
The following table sets out the assets, liabilities and off-balance sheet instruments on the date of the earlier of contractual maturity or repricing date.
Use of this table to derive information about the Bank’s interest rate risk position is limited by the fact that customers may choose to terminate their
financial instruments at a date earlier than the contractual maturity or repricing date. Examples of this include fixed-rate mortgages, which are shown
at contractual maturity but which may pre-pay earlier, and certain term deposits, which are shown at contractual maturity but which may be withdrawn
before their contractual maturity, and certain investments which have call or pre-payment features.
31 December 2004 (in $millions)
Assets
Cash and deposits with banks
Investments
Loans
Premises, equipment and
computer software
Other assets
Total Assets
Liabilities
Shareholders’ equity
Deposits
Other liabilities
Subordinated capital and senior debt (a)
Total Liabilities
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
31 December 2003 (in $millions)
Assets
Cash and deposits with banks
Investments
Loans
Premises, equipment and
computer software
Other assets
Total Assets
Liabilities
Shareholders’ equity
Deposits
Other liabilities
Subordinated capital (a)
Total Liabilities
Interest rate sensitivity gap
Cumulative interest rate sensitivity gap
3 months 6 months
but
within
1 year
but
within
6 months
1 year
but
within
5 years
Within
3 months
Non-
interest
bearing
funds
After 5
years
2,131
945
2,427
-
-
5,503
-
6,464
-
(2)
6,462
(959)
(959)
64
461
12
-
-
537
-
138
-
-
138
399
38
1,404
11
-
-
1,453
-
94
-
-
94
1,359
-
408
99
-
-
507
-
210
-
-
210
297
-
43
87
-
-
130
-
-
-
144
144
164
5
9
126
196
500
428
1,001
153
-
1,582
(14)
(1,082)
(560)
799
1,096
1,082
-
3 months
but
within
6 months
6 months
but
within
1 year
1 year
but
within
5 years
Within
3 months
After 5
years
2,647
550
1,765
-
-
4,962
-
5,452
-
(2)
5,450
(488)
(488)
78
309
6
-
-
393
-
167
-
-
167
226
(262)
75
1,290
35
-
-
1,400
-
109
-
-
109
1,291
1,029
-
463
88
-
-
551
-
254
-
-
254
297
-
26
48
-
-
74
-
-
-
125
125
(51)
1,326
1,275
Non-
interest
bearing
funds
112
-
13
100
129
354
382
1,141
106
-
1,629
(1,275)
-
(a) Includes interest rate swaps with fair value of ($2 million), that are highly effective, designated and quality as fair valve hedges.
Total
2,397
3,266
2,645
126
196
8,630
428
7,907
153
142
8,630
-
-
Total
2,912
2,638
1,955
100
129
7,734
382
7,123
106
123
7,734
-
-
Financials
56
NOTE 17: Subordinated Capital and Senior Debt
On 28 May 2003, the Bank issued US $125 million of Subordinated Lower Tier II capital notes. The notes were issued at par and in two tranches, namely
US $78 million in Series A notes due 2013 and US $47 million in Series B notes due 2018. The issuance was by way of private placement with US
institutional investors. The notes are listed on The Bermuda Stock Exchange in the specialist debt securities category. Part proceeds of the issue were
used to repay the entire amount of the US $75 million outstanding subordinated notes redeemed in July 2003.
The notes issued under Series A will pay a fixed coupon until 27 May 2008 when they become redeemable in whole at the option of the Bank. The Series
B notes will pay a fixed coupon until 27 May 2013 when they also become redeemable in whole at the Bank’s option. The Series A notes were priced
at a spread of 1.25% over the 5-year US Treasury yield and the Series B notes were priced at a spread of 1.35% over the 10-year US Treasury yield.
On 2 April 2004, in conjunction with the acquisition of Leopold Joseph, the Bank assumed a subordinated debt of £5 million which is included in the
balance sheet in the amount of $9 million. The issuance was by way of private placement in the UK and pays a fixed coupon of 9.29% until April 2012
when it becomes redeemable in whole at the option of the Bank and 10.29% thereafter until August 2017.
On 5 April 2004, as part of the consideration to the shareholders of Leopold Joseph, the Bank of Butterfield (UK) Limited issued a Senior debt of £5.2
million which is included in the Consolidated Balance Sheet in the amount of $10 million. The issue was exclusively to the shareholders of Leopold
Joseph and pays a variable rate of interest of 3 months LIBOR plus 30 basis points until April 2009 when it becomes redeemable in whole at the option
of the Bank.
The following table presents the contractual maturity and interest payments for subordinated debt issued by the Bank as at 31 December 2004
($ millions)
With in 1 Year
1 to 5 Years
After 5 Years
Carrying Value 2004
Subordinated debt
Parent Company
Series A
Series B
Subsidiaries
Senior debt
Subsidiaries
Other (a)
Total
Fixed rate
Fixed rate
Fixed rate
Variable rate
3
2
1
1
-
7
12
10
4
2
-
28
89
68
17
-
-
174
78
47
9
10
(2)
142
(a) Other includes interest rate swaps with notional amount of $125 million, that are highly effective, designated and qualify as fair value hedges.
NOTE 18: Earnings per Share
Earnings per share has been calculated using the weighted average number of shares outstanding during the year after deduction of the shares held as
Treasury Stock and adjusted for the stock dividends declared during the year ended 31 December 2004 and 2003 (see also Note 24). The dilutive effect
of stock options was calculated using the treasury stock method, whereby the proceeds received from the exercise of stock options are assumed to be
used to repurchase outstanding shares, using the average market price of the Bank’s shares for the period.
31 December
Basic earnings per share
Net Income for the year
Weighted average number of common shares issued (in thousands)
Weighted average number of common shares held as Treasury Stock (in thousands)
Adjusted weighted average number of common shares (in thousands)
2004
90,466
24,428
(1,679)
22,749
3.98
2003
70,838
24,647
(2,061)
22,586
3.14
57
Diluted earnings per share
Net Income for the year
Average number of common shares issued (in thousands)
Average number of common shares held as Treasury stock (in thousands)
Stock options (Note 1 (q))
Adjusted weighted average number of diluted common shares (in thousands)
2004
90,466
24,428
(1,679)
668
23,417
3.86
2003
70,838
24,647
(2,060)
508
23,095
3.07
NOTE 19: Stock Option Plan
At the Annual General Meeting of Shareholders held on 29 October 1997, the directors were granted authority to implement a Stock Option Plan for
directors and employees.
Under the Bank’s 1997 Stock Option Plan (the 1997 Plan), options to purchase common shares of the Bank may be granted to employees and directors
of the Bank that entitle the holder to purchase one common share at a subscription price related to the market value prior to the effective date of the
grant. Subscription prices are stated and payable in price related to the market value prior to the effective date of the grant. Subscription prices are
stated and payable in Bermuda dollars for the options. Generally, grants vest 25 percent at the end of each year for four years. The committee that
administers the 1997 Plan has the discretion to vary the period during which the holder has the right to exercise options and, in certain circumstances,
may accelerate the right of the holder to exercise options, but in no case shall the exercise period exceed ten years.
The current maximum number of common shares reserved for issuance by the Board of Directors of the Company under the 1997 Plan is 2,662,000.
At 31 December 2004, the Bank held as Treasury Stock 1,556,476 shares (2003: 1,692,698) that will be used to satisfy the Bank’s obligations with
respect to the Stock Option Plan.
Directors’ and Officers' Stock Option Plan
31 December
Outstanding at beginning of year
Granted
Stock dividend granted
Exercised
Forfeited / cancelled
Outstanding at end of year
Vested and exercisable at end of year
Number of
Stock Options
385,471
117,211
45,616
(28,069)
-
520,229
290,888
2004
Weighted
Average Exercise
Price ($)
20.87
40.18
24.92
22.94
-
25.47
18.66
Number of
Stock Options
323,689
69,443
35,800
(43,461)
-
385,471
217,931
2003
Weighted
Average Exercise
Price ($)
18.75
26.53
20.32
13.67
-
20.87
17.24
Characteristics of Options Granted to Directors and Executive Officers as at 31 December 2004
Exercise Price Range
12.03 – 21.68
21.69 – 26.51
26.52 – 31.34
31.35 – 36.17
36.18 – 41.00
Total
Outstanding
Weighted
Average
Life
Remaining
4
6
6
4
8
6
Number
of Shares
151,443
131,610
106,844
2,067
128,265
520,229
Exercisable
Weighted
Average
Exercise
Price ($)
12.56
24.20
27.55
32.59
40.15
25.47
Number
of Shares
151,443
88,681
49,486
734
544
290,888
Weighted
Average
Exercise
Price ($)
12.56
23.90
27.51
32.50
37.87
18.66
Financials
58
Employees Stock Option Plan
Outstanding at beginning of year
Granted
Stock dividend granted
Exercised
Forfeited/cancelled
Outstanding at end of year
Vested and exercisable at end of year
2004
2003
Weighted
Number of
Stock Options
984,639
424,240
120,965
(231,393)
(80,985)
1,217,466
521,134
Average Exercise
Price ($)
22.08
40.23
28.26
19.84
32.88
28.72
21.06
Weighted
Number of
Stock Options
1,061,111
159,305
110,396
(274,143)
(72,030)
984,639
421,316
Average Exercise
Price ($)
20.08
25.29
21.28
15.39
24.03
22.07
19.05
Characteristics of Options Granted to Employees as at 31 December 2004
Exercise Price Range
12.03 – 21.68
21.69 – 26.51
26.52 – 31.34
31.35 – 36.17
36.18 – 41.00
Total
Outstanding
Weighted
Average
Life
Remaining
5
7
7
-
9
8
Number
of Shares
178,551
345,483
271,818
-
421,614
1,217,466
Exercisable
Weighted
Average
Exercise
Price ($)
12.42
24.12
27.44
-
40.23
28.72
Number
of Shares
178,551
206,315
130,108
-
6,160
521,134
Weighted
Average
Exercise
Price ($)
12.42
23.94
27.44
-
40.23
21.06
The weighted average fair value of stock options granted in the year ended 31 December 2004, was $6.80 per share (2003: $3.70), using the Black-
Scholes option-pricing model with the following weighted average assumptions:
31 December
Dividend yield
Risk free interest rate
Historical volatility
Expected lives
2004
3.14%
3.17%
20%
5.0
2003
4.58%
3.09%
20%
5.0
Had compensation cost been determined based on the fair value of the stock option awards at the date of grant, net income and earnings per share
would have been reduced to the pro-forma amounts shown below:
31 December
Net income as reported
Net income – pro-forma
Earnings per share – as reported (basic)
Earnings per share – pro-forma (basic)
2004
90,466
89,122
3.98
3.92
2003
70,838
70,156
3.14
3.11
59
NOTE 20: Share Buy-Back Plan
During the year under review, 459,232 shares (31 December 2003: 378,994) were purchased and cancelled at a cost of $19,431 (31 December 2003: $13,190).
The Board of Directors of the Bank has present intention to repurchase over the twelve month period commencing 1 January 2005 up to 2 million of
its ordinary shares of par value $1 each, pursuant to its share repurchase programme authorised by the shareholders on 29 October 1997. The Directors
consider that share repurchase is an excellent means of enhancing shareholders value, while increasing earnings per share. This intention is subject to
appropriate market conditions and repurchases will only be made in the best interest of the Bank.
From time to time the Bank's associates, insiders and insiders' associates as defined by the Bermuda Stock Exchange (BSX) regulations may sell shares
which may result in such shares being repurchased pursuant to the programme, but under BSX Regulation such trades must not be pre-arranged and all
repurchases must be made in the open market. Prices paid by the Bank must not, according to BSX Regulations, be higher than the last independent trade.
The Bank advises the BSX monthly of shares repurchased and cancelled.
NOTE 21: Dividend Re-Investment and Common Stock Purchase Plans
The Bank’s dividend re-investment and common stock direct purchase plans permit participants to purchase, at fair market value, shares of the Bank’s
common stock by re-investment of dividends and / or optional cash payments, subject to the terms of each plan.
NOTE 22: Stock Dividend
In August 2004 and August 2003 the Bank distributed a 10% stock dividend to shareholders of record on 5 August 2004 and 5 August 2003
respectively. All prior period per share amounts have been restated to reflect the stock dividend.
NOTE 23: Variable Interest Entities
Effective 1 January 2004 the Bank implemented FIN 46(R). The effect of the adoption of FIN 46(R) was a decrease in the Bank's assets of approximately
$0.5 million as at 31 December 2004. The decrease primarily relates to the Bank's venture capital investment (Butterfield Vencap Limited). Butterfield
Vencap Limited holds investments in private and listed companies where the nature of the investment relationship is such that the Bank, through
Butterfield Vencap Limited may absorb a majority of the expected losses of these companies or receive a majority of the residual returns of
these companies.
Upon adoption of FIN 46, the assets, liabilities and noncontrolling interest of VIE’s were generally measured at the amounts at which such interest would
have been carried had FIN 46(R) been effective when the Bank first met the conditions to be considered the primary beneficiary. In cases where historical
information was limited the valuation of VIE’s was based on the fair value. The difference between the net amount added to the balance sheet and the
amount of any previously recognised interest in any newly consolidated entity was recognised as cumulative effect of accounting change at December
2003 which resulted in a $0.4 million after tax adjustment to the Bank's consolidated earnings. As at 31 December 2004 the total assets of VIE’s
consolidated in the balance sheet is $10.7 million.
Financials
60
NOTE 24: Income Taxes
The Bank is not subject to any taxes in Bermuda on either income or capital gains under current Bermuda law. The Bank’s income tax expense or benefit
for all period presented relates to income from continuing operations and is attributable to subsidiaries and offices in various other jurisdictions that are
subject to the relevant taxes in those jurisdictions.
31 December
Income taxes in consolidated statement of income
Current
Deferred
Total (credit) /debit
Deferred income tax asset
Tax loss carried forward
General loan provision
General bad debt provision
Pension liability provision
Provision for compensated absence
Onerous leases
Other (non significant)
Total assets
Deferred income tax liability
Depreciation
Net unrealised gain on derivatives
Total liability
Net deferred income tax asset
2004
(422)
(1,300)
(1,722)
8,168
-
39
1,186
40
225
214
9,872
2,367
16
2,383
7,489
2003
1,187
(807)
380
4,549
158
36
1,109
39
-
60
5,951
2,944
-
2,944
3,007
NOTE 25: Future Accounting Developments
a) Share-based payments
In December 2004, the Financial Accounting Standards Board issued a revised version (FAS123R) of the previously issued FAS123 Accounting for Stock-
Based Compensation. Under FAS123R, share-based payments classified as equity, such as the Bank’s stock option plan, are measured and recognised
in the statement of income at their fair value for all periods beginning after 15 June 2005. Under the original FAS123, the Bank chose the option to
present such compensation costs are measured at their fair value as a pro-forma impact which is presented in note 21 to financial statements but not
in the income statement. FAS123R is effective for the Bank’s third quarter of fiscal 2005 and management is currently evaluating the effect of adoption
which may be material.
b) EITF 03-1 The meaning of other-than-temporary impairment and its application to certain investments
The Emerging Issues Task Force (EITF) has issued pronouncement EITF 03-1. The meaning of other-than-temporary impairment and its applications to
certain investments. As originally proposed, EITF 03-1 would require an investor to treat securities (in the available for sale category and certain other
cost-basis investments) whose fair value is below cost as impaired securities. If the entity can establish its intent and ability to hold that security until
its value has recovered to cost, then this impairment is considered as temporary. In the absence of such declared intent and/or ability, any reduction in
fair value should be treated as "other than temporary" impairment, with reduction in fair value adjusted in the income statement. Further, sale of
securities which are declared to be held for a reasonable period of time (until the value has recovered to cost) may be used as a basis for establishing
a pattern of non-compliance with the declared intent. The FASB has delayed the original effective date of 30 September 2004, and an extended
commencement period is in effect.
It is not expected that this pronouncement will have a significant impact on the financial statements of the Bank.
Directory
61
BOARD OF DIRECTORS &
PRINCIPAL BOARD COMMITTEES
2
James A. C. King, JP, Chairman
Chairman, KeyTech Ltd.
Chairman, Argus Insurance Co. Ltd.
1, 3
Robert J. Stewart, JP, Vice Chairman
Chairman, Island Circle Limited, Bermuda
Director, Shell Trust (Bermuda) Limited
3
Geoffrey R. Bell, QC
Formerly Senior Counsel,
Appleby, Spurling & Hunter
Retired from the Board 4 January 2005
2, 4
Arlene Brock
Lawyer / Mediator
2, 5
Brian Duperreault
Chairman, ACE Limited
Director, Tyco International Ltd.
1, 5
Roderick A. Ferguson III, JP
Chairman, Gorham’s Ltd.
Chairman, Purvis Ltd.
Director, KeyTech Ltd.
5
A.L. Vincent Ingham, JP
Executive Vice President & Chief Operating
Officer, BELCO Holdings Limited
Director, BELCO Holdings Limited
3, 5
Sheila G. Manderson
Chief Executive Officer, KeyTech Ltd.
1, 2
Robert A. Mulderig
Retired Chairman & Chief Executive Officer,
Mutual Risk Management Ltd.
Chairman, Woodmont Trust Co. Ltd.
1
Robert Steinhoff
Retired Senior Partner, KPMG
Chairman, Insurance Advisory Committee
3,4
Alan R. Thompson*
President & Chief Executive Officer,
The Bank of N. T. Butterfield & Son Limited
4,5
Glenn M. Titterton
Chairman, BF&M Insurance Group
Retired President & Chief Executive Officer,
BF&M Insurance Group
1,4
Harry Wilken*
President, Jardine Matheson
International Services Limited
John R. Wright*
Retired Bank Chief Executive
*Non Bermudian
Principal Board Committees:
1 Audit & Compliance Committee
2 Risk Policy Committee
3 Corporate Governance Committee
4 Scholarship Committee
5 Human Resources Committee
Directors’ Code of Practice and Group Code of Conduct
The Directors have adopted a Code of Best Practice based upon recommended principles of corporate governance. In implementing the Code,
the Board meets regularly, retains full effective control over the Bank, and monitors executive management. A Group Code of Conduct applies
to directors and employees and imposes the Bank’s principles of business, including ethics and conflicts of interest. Copies of the Codes can be
accessed on www.butterfieldbank.bm/web2000/about/shareholder_info.asp
Directors’ and Executive Officers’ Share Interests and Directors’ Service Contracts
Pursuant to Regulation 6.8(3) of section IIA of The Bermuda Stock Exchange Listing Regulations, the total interests of all directors and executive
officers of the Bank in the shares of the Bank as at 31 December 2004 were 732,028 shares. With the exception of those participating in the
Shareholders’ Dividend Reinvestment Plan or the Stock Option Plan, no rights to subscribe for shares in the Bank have been granted to or
exercised by any director or officer. None of the Directors or Executive Officers had any interest in any debt securities issued by the Bank or
its subsidiaries.
There are no service contracts with directors, except for Alan R. Thompson, President & Chief Executive Officer, whose contract expires on
28 January 2006.
Non-Bermudian 29.7%Bermudian 70.3%Split of Share Ownership Bermudian/Non-Bermudian100,000 and above Shares 47.0%50,000 – 99,999 Shares 11.5%10,000 – 49,000 Shares 24.5%5,000 – 9,999 Shares 6.2%1,000 - 4,999 Shares 8.1%1-999 Shares 2.7%Distribution of Shares by Number Held Directory
62
MANAGEMENT
Alan R. Thompson
President & Chief Executive Officer
Graham C. Brooks
Executive Vice President,
International
C. Wendell Emery, MBE, JP
Executive Vice President,
Operations & Information Technology
Richard J. Ferrett
Executive Vice President,
Chief Financial Officer
Mariano R. Browne
Managing Director,
Butterfield Bank (Barbados) Limited
Sheila M. Brown
Senior Vice President,
Investment Services
D. John Charlick
Senior Vice President,
Strategic Projects
Andrew R. Collins
Managing Director,
Butterfield Fund Services (Bermuda) Limited
PRINCIPAL GROUP COMPANIES
This list does not include all companies in
the Group. It includes all companies that
materially contribute to the profit or loss
or assets of the Group.
The Bank of N.T. Butterfield
& Son Limited
Bermuda
Holding company, banking,
credit and treasury services
Butterfield Asset Management Limited
Bermuda
Investment management and
capital market services
Butterfield Fund Services
(Bermuda) Limited
Bermuda
Investment and pension
fund administration services
Butterfield Trust (Bermuda) Limited
Bermuda
Trust and private banking services
Ian M. Coulman
Managing Director,
Butterfield Asset Management Limited
Michael J. Preuss
Managing Director,
Promisant (Technology) Limited
Donna E. Harvey Maybury
Senior Vice President,
Human Resources
Graham M. Jack
Managing Director,
Butterfield Trust (Bermuda) Limited
Robert V. Lotmore
Managing Director,
Butterfield Bank (Bahamas) Limited
Michael A. McWatt
Senior Vice President,
Credit Risk Management
Conor O’Dea
Managing Director,
Butterfield Bank (Cayman) Limited
Michael O’Mahoney
Senior Vice President,
Treasury
Robert S. Moore
Managing Director,
Butterfield Bank (Guernsey) Limited
Peter J.M. Rodger
Senior Vice President & Group Legal Adviser,
Secretary to the Board
W. Aaron M. Spencer
Senior Vice President,
Operations
James R. Stewart
Senior Vice President,
Enterprise Risk Management
Fred H. Tesch
Senior Vice President,
Group Internal Audit
Paul A. Turtle
Managing Director,
Butterfield Bank (UK) Limited
Lloyd O. Wiggan
Senior Vice President,
Retail Banking
Bob W. Wilson
Senior Vice President,
Corporate Banking
Grosvenor Trust Company Limited
Bermuda
Trust and private banking services
Field Real Estate Holdings Limited
Bermuda
Real estate holding
Promisant (Technology) Limited
Bermuda
Multi-currency payment processing
Butterfield Bank (Bahamas) Limited
The Bahamas
Private banking, treasury, wealth
management and fiduciary services,
and fund administration services
Butterfield Bank (Cayman) Limited
Cayman Islands
Banking, credit, treasury, wealth
management and fiduciary services,
and investment and pension fund
administration services
Butterfield Bank (Guernsey) Limited
Guernsey
Private banking, treasury and wealth
management services
Butterfield Fund Managers
(Guernsey) Limited
Guernsey
Investment and pension fund
administration services
Butterfield Bank (Barbados) Limited
Barbados
Banking, credit and treasury services
Butterfield Trust (Guernsey) Limited
Guernsey
Fiduciary services
Butterfield Bank (UK) Limited
United Kingdom
Private banking, credit, treasury and
investment management services
63
SHAREHOLDER INFORMATION
Dividend Payment
Payment of dividends is quarterly,
normally occurring in November,
March, May and August.
Exchange Listing
The Bank’s shares are listed on The Bermuda
Stock Exchange (BSX) and the Cayman
Islands Stock Exchange (CSX), located at:
The Bermuda Stock Exchange
(Primary Listing)
Phase 1 – 3rd Floor,
Washington Mall, Church Street,
Hamilton HM 11, Bermuda
Tel: (441) 292-7212 or (441) 292-7213
Fax: (441) 292-7619
www.bsx.com
Cayman Islands Stock Exchange
(Secondary Listing)
Elizabethan Square, 4th Floor, P.O.
Box 2408 GT, Grand Cayman,
Cayman Islands
Tel: (345) 945-6060
Fax: (345) 945-6061
www.csx.com.ky
Share Dealing Service
Butterfield Securities
(Bermuda) Limited
65 Front Street, Hamilton, Bermuda
Tel: (441) 299-3972
Fax: (441) 296-8867
Share Price
Published daily in The Royal Gazette in
Bermuda and available on Bloomberg
Financial Markets (symbol: NTB BH).
Also available on the BSX web site.
Dividend Reinvestment Plan
Details are available from Butterfield
Fund Services (Bermuda) Limited.
Certain restrictions apply.
Registrar and Transfer Agent
Butterfield Fund Services
(Bermuda) Limited
Rosebank Centre
11 Bermudiana Road
Pembroke, Bermuda
Tel: (441) 298-6464
Fax: (441) 295-6759
E-mail: contact@bntb.bm
Head Office
The Bank of N. T.
Butterfield & Son Limited
65 Front Street
Hamilton, Bermuda
Tel: (441) 295-1111
Fax: (441) 292-4365
E-mail: contact@bntb.bm
MAILING ADDRESS
P. O. Box HM 195
Hamilton HM AX, Bermuda
www.butterfieldbank.com
Media Relations / Publication Requests
Marketing & Communications
Tel: (441) 298-6463 or (441) 298-4682
E-mail: annalowry@bntb.bm or
karencabral@bntb.bm
Investor Relations
Chief Financial Officer
Tel: (441) 299-1643
E-mail: richardferrett@bntb.bm
Written Notice of Share Repurchase
Programme – BSX Regulation 6.38
The Board of Directors of the Bank
announced the intention to repurchase over
the 12 month period commencing 1 January
2005, up to 2,000,000 of its ordinary shares
of par value $1 each pursuant to its share
repurchase programme authorised by
shareholders on 29 October, 1997.
As at 31 December, 2004, 2,000,000 shares
represented 8.2% of total issued shares of
the Bank. This intention is subject to
appropriate market conditions and
repurchases will only be made in the best
interests of the Bank. The Directors consider
that share repurchase is an excellent means
of enhancing shareholder value while
increasing earnings per share.
Shares repurchased and cancelled in the
12 months to 31 December 2004 totalled
459,232 at an average price of $42.19
and aggregate cost of $19.4 million.
From time to time the Bank’s associates,
insiders, and insiders’ associates as defined
in the BSX Regulations may sell shares
which may result in being repurchased
pursuant to the programme, but under
BSX Regulations such trades must not be
pre-arranged and all repurchases must be
made in the open market. Prices paid by
the Bank must not, according to BSX
Regulations, be higher than the last
independent trade.
The Bank will continue to advise the
BSX monthly of shares repurchased
and cancelled.
Large Shareholders
The following professional nominees at
31 December 2004 were registered holders
of 5% or more of the issued share capital:
Harcourt & Co. (16.4%) and Murdoch
& Co. (5.2%).
Known beneficial holdings of 5% or more
of issued share capital, at that date,
were: Bermuda Life Insurance Company
Limited (6.6%); Jardine Strategic Holdings
Limited (6.5%); and the Bank’s Stock
Option Trust (6.4%).
Jun 01Jun 02Dec 02Dec 03Dec 041.051.311.371.431.55for 12 months to 30 Junefor 12 months to 31 DecemberAnnual Dividend ($)1020304050Dec 02June 02June 01Dec 03Dec 04Market Value & Net Book Value per Share ($)2001-2003 Book Values Restated for Stock DividendsBook Value12.27 14.39 15.05 16.83 18.84Market Value31.50 33.00 30.50 44.00 40.50JFMAMJJASONDMarket Price per Share 1 January 2004 to 31 December 2004 ($)20.0025.0030.0035.0040.0045.0050.00 Directory
64
GUERNSEY
Butterfield Bank (Guernsey) Limited
Managing Director: Robert S. Moore
Butterfield Fund Services
(Guernsey) Limited
Managing Director: Patrick A.S. Firth
Butterfield Trust (Guernsey) Limited
Managing Director: Paul D.H. Hodgson
Regency Court, Glategny Esplanade,
St Peter Port, Guernsey GY 3AP,
Channel Islands
Tel: (01481) 711521
Fax:(01481) 714533
E-mail: info@butterfield.gg
www.bankofbutterfield.gg
UNITED KINGDOM
Butterfield Bank (UK) Limited
Managing Director: Paul A. Turtle
99 Gresham Street, London EC2V 7NG
Tel: (020) 7776-6700
Fax: (020) 7776-6701
E-mail: info@butterfieldprivatebank.co.uk
www.butterfieldprivatebank.co.uk
PRINCIPAL BERMUDA OFFICES
& SUBSIDIARIES
PRINCIPAL OVERSEAS OFFICES
& SUBSIDIARIES
THE BAHAMAS
Butterfield Bank (Bahamas) Limited
Managing Director: Robert V. Lotmore
Montague Sterling Centre, East Bay Street
P.O. Box N-3242
Nassau, Bahamas
Tel: (242) 393-8622
Fax: (242) 393-3772
E-mail: info@butterfieldbank.bs
BARBADOS
Butterfield Bank (Barbados) Limited
Managing Director: Mariano R. Browne
The Mutual Building, 1 Beckwith Place,
Lower Broad Street, Bridgetown, Barbados
Tel: (246) 431-4500
Fax:(246) 246-0222
E-mail: contact@bankofbutterfield.bb
Butterfield Asset Management
(Barbados) Limited
Vice President: Caroline J. Prow
Belleville Corporate Centre, 38 Pine Road,
Bellville, St Michael, Barbados
Tel: (246) 430-1650
Fax: (246) 436-7999
E-mail: carolineprow@butterfield.bb
CAYMAN ISLANDS
Butterfield Bank (Cayman) Limited
Managing Director: Conor O’Dea
Butterfield House, 68 Fort Street,
P.O. Box 705 GT
George Town, Grand Cayman,
Cayman Islands
Tel: (345) 949-7055
Fax: (345) 949-7004
E-mail: info@butterfieldbank.ky
www. butterfieldbank.ky
HEAD OFFICE
The Bank of N.T. Butterfield
& Son Limited
President & CEO: Alan R. Thompson
65 Front Street, Hamilton HM 12
P.O. Box HM 195
Hamilton HM AX
Bermuda
Tel: (441) 295-1111
Fax: (441) 292-4365
S.W.I.F.T.: BNTB BM HM
E-mail: contact@bntb.bm
www.butterfieldbank.com
BERMUDA SUBSIDIARIES
Butterfield Asset Management Limited
Managing Director: Ian M. Coulman
65 Front Street, Hamilton HM 12, Bermuda
Tel: (441) 299-3817
Fax: (441) 292-9947
E-mail: contact@bntb.bm
www.bam.bm
Butterfield Fund Services
(Bermuda) Limited
Managing Director: Andrew R. Collins
Rosebank Centre, 11 Bermudiana Road,
Pembroke, Bermuda
Tel: (441) 298-6464
Fax: (441) 295-6759
E-mail: contact@bntb.bm
Butterfield Trust (Bermuda) Limited
Managing Director: Graham M. Jack
65 Front Street, Hamilton HM 12, Bermuda
Tel: (441) 299-3286
Fax: (441) 296-8832
E-mail: contact@bntb.bm
Promisant (Technology) Ltd.
Managing Director: Michael J. Preuss
Park Place, 55 Par-La-Ville Road,
Hamilton HM 11, Bermuda
Tel: (441) 299-1341
Fax: (441) 296-6562
E-mail: contact@bntb.bm
www.promisant.bm
T h e B a n k o f N . T. B u t t e r f i e l d & S o n L i m i t e d
65 Fr on t Street , Ha mil ton, Berm uda
w w w. b u t t e r f i e l d b a n k . c o m
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