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
6 5 F r o n t S t r e e t , H a m i l t o n H M 1 2 , B e r m u d a
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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B A H A M A S
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B A R B A D O S
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B E R M U D A
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C AY M A N I S L A N D S
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G U E R N S E Y
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U N I T E D K I N G D O M
Missi on S tat em en t
Butt erfield Bank wi ll pro vid e c on sist ent
and su perior r et ur ns t o ou r sha r eh ol d er s,
offer security and opp ort un it ie s to ou r e mp loy ees,
and be reco gn is ed as m a k in g a val u a bl e c o n t r ib ut i o n
to t he communiti es i n wh ich we op er a t e
by a customer focused, e ffi ci en t a nd eth ic al d el iv ery
of bankin g and o th er s ele cte d f in a n c ia l s er v ic es .
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
Jurisdictional Overview
Group Business Lines & Support Divisions
Financial Overview
Financial Summary
Management’s Financial Reporting Responsibility
Independent 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
10
16
17
23
24
25
26
27
28
29
30
61
61
61
62
62
63
64
1
Awards:
Awarded by Global Finance Magazine
Best Developed Market Bank in Bermuda
April 2005
Bank of the Year 2005
Awarded by The Banker Magazine
to Butterfield Bank in Bermuda
September 2005
Financial & Statistical Summary
(In $ thousands except per share data)
31 December 2005
31 December 2004
31 December 2003
Year ended
31 December 2002
(unaudited)
Net income from continuing operations
Profit from discontinued operations
Net income
Diluted earnings per share
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 shareholders' equity**
Total capital funds to total assets ratio
109,351
–
109,351
4.23
4.23
9,197,566
2,849,920
2,916,399
3,085,594
7,948,966
291,143
278,679
495,226
19.48
46.60
25,429
3,878
1,597
1.2%
23.6%
8.4%
90,466
–
90,466
3.51
3.51
8,630,383
2,396,724
3,266,400
2,645,331
7,404,855
502,595
142,333
428,030
17.13
36.82
22,745
3,778
1,552
1.1%
21.2%
6.6%
70,838
–
70,838
2.79
2.79
7,733,806
2,912,383
2,638,253
1,954,716
6,612,303
510,274
122,871
382,095
15.30
36.36
20,643
3,581
1,381
1.0%
17.9%
6.5%
83,743
184
83,927
2.96
2.96
6,007,874
1,989,159
2,073,112
1,767,088
5,156,111
360,105
75,000
338,799
13.68
25.21
18,603
3,322
1,200
1.2%
20.5%
6.9%
Excludes shares held by the Bank's 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 2005, 2004 and 2003.
Data for 2005, 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.
Net Income ($m)**
Earnings Per Share ($) (Diluted)**
Return on Equity (%)**
109.4
90.5
64.4
66.7
70.8
3.09
2.96
2.79
4.23
3.51
21.2
20.5
23.6
21.2
17.9
Dec 02
Jun 02
for 12 months
to 30 June
Dec 03
Dec 04
for 12 months
to 31 December
Dec 05
Dec 02
Jun 02
for 12 months
to 30 June
Dec 03
Dec 04
for 12 months
to 31 December
Dec 05
Dec 02
Jun 02
for 12 months
to 30 June
Dec 03
Dec 04
for 12 months
to 31 December
Dec 05
2
Corporate Profile
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 $9.4
billion of assets under
management and over
$102 billion of client
assets under administration.
We provide a full range
of community banking
services for institutional
and individual customers
in Barbados, Bermuda
and the Cayman Islands,
encompassing retail and
corporate banking and
treasury activities. As a
specialist offshore financial
services group, we also
provide private banking,
wealth management and
fiduciary services, and
institutional and pension
fund administration in
The Bahamas, Bermuda,
the Cayman Islands,
Guernsey and the
United Kingdom. Our
success is built on a set
of fundamental strengths:
sound corporate values,
a stable customer base,
strong liquidity and
capital positions, and
solid core businesses.
Our home country regulator
is the Bermuda Monetary
Authority, which operates
in accordance with Basel
principles and maintains close
contacts with regulators in
the other jurisdictions where
we have offices. Our common
stock is listed on The Bermuda
Stock Exchange and the
Cayman Islands Stock
Exchange. We have over 3,800
shareholders with 26.9 million
shares outstanding.
Our performance is a direct
result of the efforts of our
dedicated employees who
work together to deliver
quality financial services,
build business and enhance
shareholder value. At 31
December 2005 we had a total
of 1,597 employees, 789 in
Bermuda and 808 overseas.
We believe that a
positive work environment,
with effective employee
training, development and
communication, benefits
our customers through
quality service, and our
shareholders through long-
term improvements in results.
Involvement in the communities
in which we operate is
important to the Butterfield
Bank Group. We support
a variety of projects and
organisations that invest
in areas such as youth
development, healthcare,
social causes, sports, heritage
and the arts. Our educational
scholarships and bursaries
help young people fulfil their
potential and achieve their
dreams. We take an active
role in community events and
encourage the efforts of the
many employees who give
their own time and energy
to a multitude of charitable
causes. Collectively and
individually, we take action to
make our communities better.
3
Chairman’s Letter
to the Shareholders
On behalf of the Board of Directors, it gives me great pleasure to report that the
Butterfield Bank Group has again delivered impressive results at a time of challenging global
economic conditions. The year ended 31 December 2005 saw the Group continue to achieve
substantial strategic and financial growth.
The Strategic Review approved by the Board in 2003 was updated in 2005 and continues to provide a sound vision for the Group's
future: a commitment to building and judiciously expanding our core businesses. The figures for 2005 once again demonstrated the
strength of this proven business model in consistently producing solid financial results and continuing to build shareholder value.
The acquisitions made by the Group in the United Kingdom, The Bahamas and Bermuda in 2004 have now been successfully assimilated
into our core businesses and are beginning to contribute to the Group’s revenues. As we move into 2006 the Group can now focus on
building on this strong foundation in line with our strategic plan. The Group is now well positioned to offer first class seamless multi-
jurisdictional solutions and products to our increasingly diverse and sophisticated customer base.
For the third year running the Board approved a one-for-ten bonus share issue, which was distributed to shareholders in August 2005.
This bonus equated to a 10% stock dividend and combined with the 12-month cash dividend of $1.67 per share once again gave
shareholders an impressive return on their investment.
In closing, I wish to express my sincere gratitude to the Group's management team and employees for their expertise, dedication and
commitment which has produced these impressive results.
I also thank our shareholders and customers for their continued support. In today's highly competitive environment the Board values
your loyalty and pledges to continue working to earn the trust placed in us.
James A.C. King, JP
Chairman of the Board
4
President & Chief Executive
Officer's Report
I am pleased to report that in 2005, the Butterfield Bank Group delivered solid financial
results. The Group's net income for 2005 was $109.4 million, an increase of 20.9% on last year
with a return of 23.6% on shareholders' equity. These results reflect the strength of the Bank's
core businesses that underpin our balanced, international business model.
We were particularly pleased with the performance of our Cayman operations this year in making a full recovery from the damage
inflicted on their infrastructure by Hurricane Ivan in 2004. In addition we continue to be very satisfied with the progress made by
our operations in The Bahamas and Barbados. This year marked the first full 12 months of operation with Leopold Joseph Holdings plc,
which we acquired in April 2004. We continue to be pleased with the success of the integration of Leopold Joseph into our UK and
Guernsey operations and the improved financial performance as well as the quality of service it now enables us to offer our clients.
Our financial results in 2005 continue to reflect the balance and soundness of the Group's business model with approximately 70%
of our revenues being generated from banking business lines and 30% from fund administration, trust, asset management and related
areas. Interest income represents approximately half of our revenue with the balance generated from fees and customer generated
foreign exchange earnings. We believe this balance to be one of the Group's fundamental strengths. The increasingly international
nature of our business will be reflected in a product line approach for Butterfield Asset Management and Butterfield Fund Services
which will leverage our specialist strengths across all the Group's jurisdictions to better serve our customers.
Superior customer service is critical in today's competitive banking environment, and continually improving the customer experience
remains a priority across the Group. For example, we continued to focus on our Service Initiative Training programme, launched in
Bermuda in 2004.
We continue to be closely involved in all the communities in which we operate. We consider it our duty and responsibility to support
a wide range of local causes, events and organisations both financially and through direct involvement of our employees.
On behalf of the management team, I once again wish to express my appreciation to the Board of Directors for their continued
support, advice and oversight. I would also like to thank our employees, shareholders, customers and business partners for their
valuable contributions to another successful year.
Alan R. Thompson
President & Chief Executive Officer
5
Management’s Discussion and
Analysis of Results of Operations
and Financial Condition1
From left to right:
Sheila M. Brown Senior Vice President, Investment Services
Michael O’Mahoney Senior Vice President, Treasury
W. Aaron M. Spencer Senior Vice President, Operations
6
From left to right:
Graham C. Brooks Executive Vice President, International
Richard J. Ferrett Executive Vice President, Chief Financial Officer
C. Wendell Emery Executive Vice President, Operations & Information Technology
Peter J.M. Rodger Senior Vice President & Group Legal Adviser, Secretary to the Board
Results of operations
for the year ended 31
December 2005 compared
with the year ended
31 December 2004.
The Butterfield Bank Group2 achieved
net income of $109.4 million for
the year ended 31 December 2005,
representing a 20.9% increase in
net income over the same period last
year. The Group’s performance was
supported by the successful
integration of acquisitions made in
2004, including Leopold Joseph’s
businesses in the UK and Guernsey,
which began to perform in line with
expectations. This resulted in
increased net income from outside
Bermuda. The Bermuda businesses
represented 48.3% of Group net
income in 2005, compared to 75.9%
in 2004. Across all Group operations,
including Bermuda, a solid overall
performance was achieved.
Net interest income was a record, at
$185.3 million before credit related
provisions. Up year on year by
22.8%, the increase reflects balance
sheet growth, a 16.6% increase in
the loan portfolio and higher US
interest rates, which rose eight times
in 2005 to 4.25%. Non-interest
income also increased year on year
by $15.6 million, or 10.0%, to $172.1
million, reflecting strong growth
across all revenue lines.
The Group’s balance sheet remains
highly liquid, with a loan to customer
deposits ratio of 38.8%. Customer
deposits increased significantly by
7.3% year on year to $7.9 billion,
reflecting growth in Cayman, up
$219 million, the United Kingdom,
up $122 million, and Bermuda,
up $57 million.
Loan portfolio growth of 16.6%
to $3.1 billion across the Group’s
operations reflected our ability to
meet new demand for lending
products, with Bermuda’s community
banking business up 20.5%, the
United Kingdom up 9.7% and
Guernsey up 16.6%.
Non-performing loans totalled
$27.0 million at year-end 2005,
representing 0.9% of total loans,
compared to 0.8% a year ago.
As at 31 December 2005 the general
allowance for credit losses of $20.6
million was equivalent to 0.7% of
total loans. A specific allowance of
$4.1 million is held for possible
shortfalls in the security held for
non-performing loans. In total the
allowance for credit losses is
$24.7 million, or 0.8% of the loan
portfolio. Delinquency and charge-
off ratios continued to be well below
industry average.
1Management’s discussion and analysis of results of operations
and financial condition should be read in conjunction with the
Group’s Consolidated Financial Statements, beginning on page
26, and the notes to those financial statements, which begin
on page 30. These statements and notes have been prepared
in accordance with generally accepted accounting principles
in the United States of America (US GAAP).
2All 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.
7
Management’s Discussion and
Analysis of Results of Operations
and Financial Condition
Shareholder Value
Sustained strong performances have
enabled the Group to continue
building shareholder value and, for
the third consecutive year, a ‘one for
ten’ bonus share issue was made in
August 2005. This equates to a 10%
stock dividend. Additionally, for the
fourth quarter the Board approved a
dividend increase of 3 cents, resulting
in a total dividend for 2005 of $1.67
per share, an increase of 12 cents,
or 7.7%, over last year. The cash
dividend paid to shareholders in
2005 was $38.5 million, up 19.5%
on the previous year and represents
a 35.2% payout on net income
for the period. The increase in
shareholder value for the year,
defined as the increase in share price
plus dividends reinvested, was 31.4%.
Share Purchase Activity
Under the Share Buy-back Plan,
during the year 32,890 shares were
repurchased and cancelled at an
average cost of $41.46 per share.
In addition, the Stock Option Trust
bought 285,854 shares at an average
cost of $44.10 per share to satisfy
the Bank’s obligations with respect
to the Stock Option Plan.
Performance Indicators
The Group’s overall strength and
performance are indicated by
certain key measures. Return on
shareholders’ equity was 23.6% for
the period, up from 21.2% in 2004.
Diluted earnings per share was
$4.23, up 72 cents, or 20.5%
compared with $3.51 last year.
The Group’s efficiency ratio, which
is operating expenses (excluding
corporation tax and amortisation
of intangible assets) expressed as
a percentage of operating income
(excluding credit provisions and gain
on sale of subsidiaries and affiliates),
saw a year on year improvement,
from 69.1% the previous year to
66.4% in 2005.
8
From left to right:
Lloyd O. Wiggan Senior Vice President, Retail Banking
James R. Stewart Senior Vice President, Enterprise Risk Management
Ian M. Coulman Managing Director, Butterfield Asset Management
Andrew R. Collins Managing Director, Butterfield Fund Services (Bermuda) Limited
From left to right:
Michael A. McWatt Senior Vice President, Credit Risk Management
Bob W. Wilson Senior Vice President, Corporate and Private Banking
Donna E. Harvey Maybury Senior Vice President, Human Resources
9
Jurisdictional Overview
From left to right:
Graham M. Jack Managing Director, Butterfield Trust (Bermuda) Limited
Pete D. Ramsdale Senior Vice President, Chief Information Officer
Fred H. Tesch Senior Vice President, Group Internal Audit
10
The Bahamas
Robert V. Lotmore
Managing Director
Butterfield Bank
(Bahamas) Limited
The Group’s Bahamian operations provide
private banking, wealth management
and fiduciary services and investment
and pension fund administration through
Butterfield Bank (Bahamas) Limited
and Butterfield Fund Services
(Bahamas) Limited.
Total net income for The Bahamas in
2005 increased by 147.8% to $1.7
million from $0.7 million in 2004. At
31 December 2005 total assets in The
Bahamas were $96.9 million, an increase
of 52.8% from $63.4 million the previous
year. Total assets under administration
in The Bahamas stood at $4.0 billion
at year-end.
Butterfield Bank (Bahamas)
Butterfield Bank (Bahamas) Limited
provides a premier service, administering
tailored solutions for international, high
net worth and corporate clients with
wealth management needs. Areas of
expertise include private banking,
fiduciary services and global custody.
Total assets under administration at 31
December 2005 were $2.4 billion.
During the year much focus was placed
on business growth and on enhancing
the Group’s Bahamas presence locally
and internationally. Led by private
banking, Butterfield Bank (Bahamas)
saw strong growth, with international
recognition gained through targeted
marketing efforts. At 31 December 2005
the total lending portfolio had increased
by 78.3%, or $2.3 million, year on year
to $5.2 million, due in part to the Bank’s
mortgage product.
Butterfield Fund Services (Bahamas)
Butterfield Fund Services (Bahamas)
Limited is a specialist provider of
administration services to the investment
and pension fund industry. It offers
Net Asset Value (“NAV”) calculations,
accounting, corporate and shareholder
services to alternative investment,
hedge, mutual and pension funds. The
introduction of innovative products
like SMART Funds, which are regulated
vehicles for investment funds, and the
support of The Bahamas’ progressive
investment fund legislation, introduced
in 2003, have assisted growth in 2005.
Barbados
Mariano R. Browne
Managing Director
Butterfield Bank
(Barbados) Limited
The Group’s Barbados operations
provide a comprehensive range of
banking services through Butterfield
Bank (Barbados) Limited, a full service
community and commercial bank.
A separate entity, Butterfield Asset
Management (Barbados) Limited, acts
as a representative office for the Group’s
investment business.
Total net income for Barbados in 2005
was $1.4 million, an increase of $1.1
million from 2004. This reflects a
significant increase of 29.4% in loan
growth, improvement in the quality
of the loan portfolio that reduced
provisions for loan losses by $0.5 million
year on year, and a rising interest rate
environment. At 31 December 2005,
total assets in Barbados were $194.4
million, an increase of 12.2% from
$173.3 million in 2004.
11
Services (Bermuda) Limited and
Butterfield Trust (Bermuda) Limited.
Home to the Group’s headquarters and
largest operations, Bermuda continued
to deliver a solid financial performance
in 2005. This performance was recognised
by The Banker magazine, which named
Butterfield Bank as Bermuda's Bank of
the Year for the fourth consecutive year
and by Global Finance Magazine which
awarded the Bank Best Developed
Market Bank in Bermuda. To improve the
all-round customer experience, premises
continued to be refurbished and, as part
of our service programme, service
training took place for over 80% of
employees in the jurisdiction.
In 2005, total revenues for the Bermuda
operations increased by $13.9 million,
or 7.4%, to $200.1 million when
excluding a $5.8 million realised gain
in 2004 from the sale of a venture capital
investment. The year also saw a 35.6%
increase in assets under administration,
up $11.9 billion to $45.2 billion.
Operating expenses increased by 19.4%
in 2005, reflecting investment in people,
technology and risk management, and
the increasing cost of health care
in Bermuda.
Butterfield Bank
Working under the brand of Butterfield
Bank, the Group’s community banking
operations in Bermuda comprise
corporate, private and retail banking
and treasury services. In 2005, these
businesses achieved a 5.8% year on
year increase in total revenues before
provisions for credit losses, and excluding
the above realised gain in 2004. Net
interest income was up 13.0% to $106.9
million, reflecting strong loan growth
and a 6.8% increase in average interest
earning assets to $4.0 billion. Net income
in 2004 was driven up by a significant
one-off loan recovery and investment
gain. This has impacted the year on year
net income comparison for 2005, which
fell to $28.1 million, despite solid
revenue increases across the community
banking businesses.
Retail Banking saw substantial growth
during 2005, especially in the areas
of residential mortgage and personal
lending, which increased year on year
by 13.1% to $0.9 billion. Debit and
credit card business continued to grow
aggressively, with the Butterfield/
AAdvantage© MasterCard® credit card
portfolio showing impressive growth
during its first full year. This new credit
card now represents 49.1% of total
personal credit card expenditures at
year-end 2005. Overall, credit card
outstandings grew 11.8% year on year.
Investments in electronic banking
included a complete upgrade for the
Island’s Butterfield Direct ATM network,
with all ATMs being replaced.
Additionally, free security tokens were
introduced to protect the growing
number of corporate and individual
customers using the Bank’s online
banking service, Butterfield Direct
Internet Banking, from potential internet
fraud. Their introduction set a new
standard of security for online banking
in Bermuda, with the security tokens
being recognised by banks around the
world as providing one of the most
secure log-in processes.
The growth of Corporate Banking in
2005 exceeded expectations with the
loan portfolio growing by 28.0%, to
$1.1 billion. In excess of $400 million
was written in new loans. This strong
performance reflected a buoyant local
economy, close relationships with
customers and an ability to execute
opportunities quickly and efficiently.
A highly selective approach to corporate
lending maintained loan quality and the
diversity of the portfolio. Letters of
Credit business reduced slightly due to
a falling demand in the market although
fee income held up reasonably well.
Private Banking continued to grow
during 2005 by maintaining its focus
on building long-term relationships with
high net worth clients. The business
will be moving in 2006 to the former
Butterfield Bank (Barbados)
Butterfield Bank (Barbados) Limited is
headquartered in the commercial centre
of Bridgetown, the capital city, with
three other branches in commercial
and suburban areas. The Bank’s range
of community banking services includes
personal and commercial loans, overdraft
facilities, credit cards, ATMs, merchant
and e-commerce facilities, and fixed
deposit, chequing and saving accounts.
The Bank has successfully established
itself in the Barbados market by providing
consistently high levels of customer
service and offering products to meet
the needs of the local community.
In 2005, the total lending portfolio
grew by $24.9 million to $109.5 million.
Residential mortgages introduced in 2004
are now a significant portion of the loan
portfolio amounting to 30.3% of total
loans. Investments increased by 53.7%
to $64.5 million and customer deposits
grew 14.9% to $159.4 million.
Butterfield Asset
Management (Barbados)
Butterfield Asset Management (Barbados)
Limited acts as a local representative for
the Group’s investment business services,
meeting the asset and cash management
needs of captive insurance companies,
international businesses, trusts and
private clients.
Bermuda
The Group’s Bermuda operations provide
community banking, asset management,
trust and investment and pension fund
administration services through The Bank
of N. T. Butterfield & Son Limited under
the Butterfield Bank brand and its wholly
owned subsidiaries: Butterfield Asset
Management Limited, Butterfield Fund
12
Bermuda Monetary Authority Building
in Hamilton which was purchased by
the Group in 2005 and is currently
undergoing refurbishment. To be called
Butterfield House, the new offices will
enable Private Banking to offer clients
greater privacy and improved services.
Butterfield Trust (Bermuda)
Providing a comprehensive range of
trust, estate and company administration,
company management and custody
services, Butterfield Trust (Bermuda)
Limited (BTBL) focuses on local and
international clients, both corporate
and individual. BTBL’s operations
comprise Trust Administration Services
and Investment Services. Grosvenor Trust
Company Limited, a wholly owned
subsidiary of BTBL that was acquired in
the last quarter of 2004, was successfully
integrated in 2005 within Trust
Administration Services, although
Grosvenor's identity has been retained.
BTBL reported 2005 net income of $7.3
million, an increase of 8.7% over 2004.
Net income from Trust Administration
Services was $4.1 million, slightly down
from $4.2 million in 2004 reflecting the
lower level of estate fees earned.
Personal trust business continued to
expand, attracting families who value
the flexibility and independence provided
by BTBL’s customised services when
managing their financial affairs in
today's increasingly regulated
international environment.
Supporting Butterfield Trust and the
Bank, the Investment Services
department provides comprehensive
custodial services including safekeeping
of assets, trade settlement, income
collection, funds transfer and capital
reorganisation processing. In 2005
Investment Services enjoyed a record
year with net income of $3.2 million,
up 25.1% on 2004, and completed major
upgrades of its core record-keeping and
payments systems. The year saw a 28.2%
increase in total revenues, to $9.8
million, driven by significant growth in
external trust company and mutual funds
business. At year-end, the department
had $17.8 billion in assets under custody,
up from $17.5 billion the previous year.
Butterfield Asset Management
Butterfield Asset Management Limited
(BAM) provides discretionary and
advisory investment management and
brokerage services to a wide range of
individual investors and organisations,
and manages the family of ten
Butterfield Funds as well as the Group's
investment portfolios.
BAM reported 2005 net income of $14.1
million, an increase of 4.9% over 2004.
Assets under management by BAM,
including client assets invested in
Butterfield Funds, rose by $0.1 billion
to $7.6 billion. The year again saw
significant growth in Butterfield Select,
BAM's Fund of Funds product, which
rose by 31.3% to $342.7 million and the
Butterfield Liquid Reserve, which rose
19.5% to $522.5 million.
In Bermuda, BAM's strong performance
was driven by its consistent proven
investment strategy and by actively
marketing wealth management services
to private clients, trust companies and
intermediaries. Having launched a new
web site early in 2005, BAM also
continued to develop close relationships
with the insurance industry and
co-ordinated the Bank's platinum level
sponsorship of the first Bermuda
Captive Conference.
In April BAM's Butterfield Select Fixed
Income Class fund won the Standard
& Poor's (S&P) award for the best three-
year performance of a US Dollar offshore
fixed income fund. Continuing to
innovate to meet customer’s investment
needs, BAM launched two new products
in 2005. The Butterfield Guaranteed
Equity Deposit offered investors a
guaranteed six-year fixed term deposit
with Butterfield Bank, while the
Butterfield Select Invest Fund provided
investors with an easy and affordable
way to invest, with exposure to more
than 50 internationally-recognised
funds for a minimum investment of
only US$1,000.
Butterfield Fund Services (Bermuda)
Butterfield Fund Services (Bermuda)
Limited (BFS Bermuda) provides
valuation, accounting, corporate and
shareholder services to offshore hedge
funds, pensions and mutual funds. It acts
for a number of the world’s leading
investment management groups as well
as accounting for the Bank’s portfolio
of assets, the share register of the
Group and administering the Butterfield
family of funds.
For the year ended 31 December 2005
net income was $9.5 million, up 32.9%
compared with $7.2 million the previous
year, reflecting another year in which
BFS Bermuda significantly increased
its client base. Net assets under
administration, excluding the Butterfield
Funds, increased by 58.7% from
$16.7 billion in 2004 to $26.5 billion
as at 31 December 2005.
Cayman Islands
Conor J. O’Dea
Managing Director
Butterfield Bank
(Cayman) Limited
The Group’s Cayman operations offer
a comprehensive range of services to the
local and international market through
Butterfield Bank (Cayman) Limited 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.
Butterfield Bank is currently the largest
private sector employer in financial
services in Cayman. The number of
13
growth and increased market share in
its community and commercial banking
services. Revenues were driven by a rise
in interest rates, robust foreign exchange
commissions and ongoing investment in
technology to enhance customer services
through ATM and internet banking.
Revenues from banking services
increased 21.2% year on year, up $1.3
million to $7.6 million, while foreign
exchange revenues rose $2.4 million,
or 32.4%, to $9.7 million.
The Cayman Islands’ economy has been
extremely robust over the past year.
This is mainly attributed to post-Ivan
rebuilding as well as new developments
in the real estate market. By successfully
managing its loan portfolio after
Hurricane Ivan the Bank was able to
release some of the Ivan-related credit
loss provisions that were set aside.
As a result, there was a $1.6 million net
release of provisions for credit losses in
2005, compared to a charge of $3.6
million the previous year. Investment
and Custody services experienced good
revenue growth increasing by 14.5%
to $5.2 million.
During 2005, ground was broken on the
Bank’s new headquarters, Butterfield
Place, which will be a showcase building
and is due for completion in 2007. The
development will be the first seven storey
building in George Town, designed to the
highest standards and comprising 60,000
square feet of office space together with
a six-level parking garage.
Butterfield Miles, the loyalty programme
with Cayman Airways, earned customers
over six million air miles in its first year.
The programme awards Bank customers
free air miles on the national flight
carrier every time they make a purchase
with their Butterfield Bank VISA Gold
credit card. An innovative service for
prepaid mobile phone customers,
“iTopUp with Butterfield”, was
introduced by Butterfield Bank (Cayman)
in April 2004. Through this service
prepaid telecom customers can “top up”
their phone balance using any local debit
card at all Butterfield Bank ATMs. The
service has seen significant growth in
volume since its introduction.
Butterfield Fund Services (Cayman)
Butterfield Fund Services (Cayman)
Limited (BFS Cayman) provides investment
and pension fund administration services.
BFS Cayman took on the administration
of 49 new hedge funds in 2005. Revenues
rose from $8.1 million in 2004 to $10.1
million, up 24.9% year on year. BFS
Cayman now has 50 employees, up
from 35 last year.
Guernsey
Robert S. Moore
Managing Director
Butterfield Bank
(Guernsey) Limited
The Group’s Guernsey operations offer
private banking, wealth management
and fiduciary services, administered
banking services, and investment and
pension fund administration services.
These services are offered through
Butterfield Bank (Guernsey) Limited,
Butterfield Trust (Guernsey) Limited
and Butterfield Fund Services
(Guernsey) Limited.
A positive international economic
environment and generally strong
investment market conditions provided
a supportive backdrop for the Guernsey
operations in 2005. Pre-tax net income
in Guernsey increased from $2.2 million
in 2004 to $8.2 million. Post-tax net
income was increased from $2.6 million
in 2004 to $7.2 million. In 2004 a tax
credit of $0.4 million was recognised,
compared to a tax expense of $1.0
million in 2005. Total revenues in
Guernsey rose by 14.5% to $40.1 million.
Private client business, including deposit
and loan volumes, grew strongly and
the benefits of the acquisition of
Leopold Joseph Guernsey in 2004 also
impacted positively on operating profits.
Institutional client business registered
high growth levels on all fronts,
including fund administration,
custody services and administered
banking services.
employees increased from 273 in 2004
to 317 in 2005 reflecting growth in all
business divisions. The Bank continued
to develop comprehensive training
and employment programmes in
Cayman and remains committed to
providing quality career growth and
educational opportunities for ambitious
young Caymanians.
In 2005, the Cayman operations
continued to play a leading role in
the Islands’ recovery from the devastation
caused by Hurricane Ivan in September
2004, and the Bank’s services and
community involvement were key factors
in rebuilding Cayman’s physical and
economic infrastructure during the year.
Butterfield Bank sponsored and hosted
a Cinema Premiere of “36 Hours in
September”, a Hurricane Ivan
documentary benefiting the Cayman
Islands National Recovery Fund that we
had helped launch in 2004.
Net income was $45.8 million, up 85.3%
over 2004, which represents a return on
equity of 33.0%, up from 20.2% in 2004.
Net interest income before provisions
for credit losses was up 42.7% on 2004
at $44.1 million, while non-interest
income totalled $36.5 million, an increase
of 26.1% on 2004. Total income was up
46.1%, or $25.9 million to $82.2 million.
The efficiency ratio saw a significant
improvement, from 52.7% in 2004 to
45.2% and the net interest margin
widened by 0.7% to 2.4%. Total assets
increased year on year from $2.3 billion
to $2.6 billion, reflecting continued
growth in customer deposits. Total assets
under administration at 31 December
2005 were $31.7 billion, up 26.5% from
$25.0 billion at year-end 2004.
Butterfield Bank (Cayman)
The Bank continued to achieve solid
14
Total assets under administration in
Guernsey stood at $20.2 billion, an
increase of 23.0% from 2004.
Butterfield Bank (Guernsey)
Butterfield Bank (Guernsey) Limited
provides quality banking services
tailored to the needs of private and
institutional clients.
Customer deposits increased by 4.5%
to $1.4 billion, while loans outstanding
at 31 December 2005 stood at $214.9
million, an increase of 16.6% from 2004
with good growth both in property-
related lending and in facilities
collateralised by securities portfolios.
Net interest income increased by 40.1%
to $12.6 million, while banking and
foreign exchange fees and commissions
increased by 13.3% to $11.4 million.
Total assets under management,
primarily for high net worth individuals
and families, stood at $869 million,
an increase of $15 million year on year.
Guernsey continued to be a market
leader for administered banking – the
provision of outsourcing solutions such
as operational, accounting, compliance
and corporate secretarial services – for
Guernsey branches and subsidiaries of
leading international banks and other
financial institutions. This business line
saw further growth in 2005, with assets
under administration increasing by 29.2%
to $7.1 billion.
Custody Services also registered strong
business growth. Institutional custody
clients, including sponsors of both
Guernsey and non-Guernsey regulated
investment funds, continue to be
attracted by the combination of
technical expertise and high quality
service that the Bank offers. Custody
assets under administration increased
more than 100% in 2005, by $2.6 billion
to $5.1 billion.
Butterfield Trust (Guernsey)
Fiduciary services offered by Butterfield
Trust (Guernsey) Limited include tailored
trust and company administration
services for institutional families, and
sophisticated structures for corporate
and institutional clients. The latter
includes employee benefit trusts, and
outsourcing support for the investment
management, finance company and trust
company operations of leading financial
services companies.
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. It is the
jurisdiction’s largest specialist in
administration of Cayman and other non-
Guernsey funds. In partnership with other
companies in the Group it also provides
administration solutions for family offices.
Total assets under administration at 31
December 2005 stood at $6.6 billion,
up from $6.1 billion a year ago.
The United Kingdom
Paul A. Turtle
Managing Director
Butterfield Bank
(UK) Limited
The Group's UK operation offers a full
private banking service targeting high
net worth individuals and their families
with interests in the UK who are either
UK or non-UK residents, through
Butterfield Bank (UK) Limited, under
the brand of Butterfield Private Bank.
The acquisition of Leopold Joseph
Holdings plc in 2004 has impacted
earnings positively. Total revenues for the
UK in 2005 increased by 16.8% to $22.6
million. A post-tax loss of $0.3 million
was recorded, compared to a loss of $7.2
million in 2004. The loan portfolio in the
UK increased by 8.6% to $423.2 million,
while customer deposits increased year
on year by 15.0% to $929.1 million.
Total assets in the UK increased year on
year by 22.7% when expressed in sterling
terms, reflecting strong growth in
customer deposits. However, due to the
UK pound weakening by 10.3% during
2005, when expressed in dollar terms
the growth reduces to 10.0%, with total
assets ending the year at $1.2 billion.
A key element of Butterfield Private
Bank's strategic direction includes
involvement with the pensions market
for high earners in the UK. During the
year substantial progress was made to
become one of the UK’s major providers
of Self Invested Personal Pensions (SIPPs).
From April 2006, higher annual levels of
pension contributions will be permitted
and the range of investments allowed
will also be expanded. Butterfield Private
Bank provides full banking services for
SIPPs, lending to assist gearing within
SIPPs to purchase commercial property
and full discretionary investment
management for the pension fund.
To identify clients looking to extend
business activities or investments in the
UK, Butterfield Private Bank works closely
with professional financial advisors in
the UK and other Group offices.
The Bank has continued to strengthen
its ability to meet the financial service
requirements of high net worth clients
through integrated services comprising
high interest deposit banking, lending for
residential and commercial property
investment and discretionary investment
management. Its Family Office offers a
more holistic-based approach to meeting
the needs of high net worth individuals
and their families.
With a distinctive approach to
investments and the abilities and
discretion of its financial advisors,
Butterfield Private Bank has a solid
platform and an advantage in a highly
competitive market.
15
Group Business Lines &
Support Divisions
Human Resources
While complying with local regulations and
employment law in its different jurisdictions,
the Group has an over-riding philosophy with
regards to retaining and attracting quality people.
Embracing a ‘total rewards’ approach, the Group
aims to create an all-round rewarding and service-
oriented environment. In 2005 this has meant
improving premises, having competitive and
meaningful benefits, recognising and rewarding
performing employees and investing
in training and development for employees.
The Group provides ongoing training and
development opportunities for all its employees,
co-ordinating and facilitating programmes
ranging from technical skills to personal and
professional development. The programmes help
maintain the Bank’s high quality of customer
service, enhance the workplace experience and
ensure that Butterfield Bank remains a
competitive employer in all its jurisdictions.
Technology
The Group is moving towards a common
approach to technology and finding areas
of synergy across different jurisdictions and
businesses that often require different systems.
In 2005, investment in technology has helped
streamline the Group’s operations and support
the delivery of new products and services. In
Bermuda, the project to replace the core banking
system has progressed with the software
having now been received in preparation for
a 2006 implementation.
2005 also saw the commencement of a project
to develop a single Butterfield Bank Group
website. This is a critical development that will
enable the Group to provide additional capabilities
as customer demand for access to information
and online transactions continues to rise. During
the year, work was also completed on developing
the Group’s Financial Systems Roadmap – a key
activity in order to build capabilities in Bermuda
and standardise across the Group.
Risk Management
Risk is inherent in virtually all of the Group’s
daily activities and, as such, managing risk is
a cornerstone of our business. Established risk
management structures, policies and procedures
are in place to identify, prioritise and manage
risks across the Group in order to develop
businesses with an appropriate balance
between risk and reward.
The three key risk types faced by the Group are
credit risk, market risk and operational risk. Credit
Risk is the risk of loss associated with the failure
of a borrower or counterparty to fulfil its financial
or contractual obligation to the Bank. The Group
manages its credit risk through comprehensive
governance and management processes, including
Group Asset Management
Bruce Albrecht
Senior Vice President
Group Head of
Asset Management
The Group’s Asset Management businesses
provide investment management and brokerage
services to institutional and private clients from
The Bahamas, Barbados, Bermuda, Cayman,
Guernsey and the UK. In 2005, Asset
Management strengthened its senior
management team by appointing a Senior Vice
President, Head of Group Asset Management.
The creation of this new position reflected the
increasingly significant role that the Asset
Management businesses play across the Group
and the importance of developing it as a
consistent offering to clients going forward.
In 2005, Group revenues from Asset Management
were $34.7 million, up 20.8% on $28.7 million
in 2004. Group Assets under Management at
year end 2005 were $9.4 billion.
Group Fund Services
Frank J. Sebestyen, III
Senior Vice President
Group Head of
Fund Services
From 2006, we will be working to more closely
integrate our fund services businesses across
jurisdictions under a Senior Vice President, Head
of Group Fund Services. Fund Services specialises
in providing third party administration for
investment and pension funds in Bermuda, The
Bahamas, the Cayman Islands and Guernsey
and acts for a number of the world’s leading
investment management groups. The international
client base serviced by Fund Services, along with
the desire to seek efficiencies, make a more cohesive
approach a natural progression for the business.
Across all four jurisdictions, Fund Services
employs over 200 employees, has assets under
administration in excess of $61 billion, and
provides full administration services to over 750
mutual and hedge funds.
16
established credit policies, guidelines and clearly
defined credit authorities. The Group Credit
Committee, chaired by the President & Chief
Executive Officer, provides a forum to review
credit exposures, establish and review credit
policies and approve selected credit transactions
for the Group.
The Enterprise Risk Management (ERM) function
identifies, manages and reports on all types of
risk by business line or process. ERM identifies
and assigns ownership for market and operational
risks, develops risk priorities, approves appropriate
mitigation strategies, and examines the cause-and-
effect relationships between individual product
risks. It also ensures 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 Head
of Enterprise Risk Management, 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.
Market risk and liquidity risk are managed
through appropriate controls and reporting
systems. The Asset and Liability Management
Committee (ALCO), chaired by the Chief Financial
Officer, 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 successfully addressed several incidents
throughout the year in several of its jurisdictions.
During the island-wide power outage in Bermuda
in July, Butterfield Bank was one of the few
Hamilton businesses that were able to remain
open and continue to serve its customers. Full
disaster tests were conducted in respect of two
major operations over the year with positive results.
The Compliance function within ERM, seeks
to ensure the Group is adequately safeguarded
from criminals and fraud. Undertaking Know
Your Customer research, monitoring of account
activity, working with regulators and assisting
with criminal investigations, Compliance is an
integrated part of the Group’s business processes.
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.
Financial Overview
Income
Total income for the Group after provisions was $355.1 million for the year ended 31 December 2005, up $44.0 million, or 14.1% from $311.2
million for the same period a year ago. Net interest income before provision for credit losses increased by 22.8% to $185.3 million. The increase
reflects growth in average interest earning assets, which was up 11.6% to $8.8 billion, and the Group’s continually successful asset/liability
management strategies. As a result the net interest margin widened by 0.2% to 2.1% and the interest rate spread increased by 0.1% to 1.7%.
The Group continues to be appropriately reserved with total provisions of $24.7 million. Non-performing loans totalled $27.0 million as at
31 December 2005, up from $20.5 million a year ago, reflecting loan growth. They represent 0.9% of the total loan portfolio, compared to 0.8%
a year ago. Provisions in respect of credit losses charged to income were $3.2 million, compared to $2.9 million last year.
Non-interest income grew by 10.0% to $172.1 million, reflecting growth across all revenue lines, notably from asset management (+20.8%),
foreign exchange (+17.3%), and investment & pension fund administration (+15.4%).
Other revenues during the year totalled $0.9 million, down from $6.6 million the previous year reflecting a $5.8 million gain on sale of an affiliate
in 2004.
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
2005
2004
Average
balance
Interest
Rate
Average
balance
Interest
Rate
2,660,107
3,307,160
2,855,086
8,822,353
69,346
129,092
180,743
379,181
2.6%
3.9%
6.3%
4.3%
2,654,554
2,952,327
2,300,024
7,906,904
333,286
9,155,639
–
379,181
–
4.1%
275,191
8,182,095
188,493
8,514
197,007
–
–
197,007
7,345,378
223,335
7,568,713
963,599
157,380
8,689,692
465,947
9,155,639
6,444,827
132,602
6,577,429
1,070,187
129,248
7,776,863
405,232
8,182,095
2.6%
3.8%
2.6%
–
–
2.3%
1.7%
2.1%
46,275
89,553
130,743
266,571
–
266,571
115,249
3,247
118,496
–
–
118,496
1.7%
3.0%
5.7%
3.4%
–
3.3%
1.8%
2.4%
1.8%
–
–
1.5%
1.6%
1.9%
Note: Underlying assets and liabilities are comprised of various currencies.
17
Financial Overview
Expenses
The Group remains committed to the prudent management of its expense base and continually seeks opportunities to improve efficiency.
The efficiency ratio was 66.4% in 2005, down from 69.1% in 2004, reflecting the growth in the Group’s operating revenue, up 14.1%, was higher
than the percentage increase for operating expenses, which were up 9.8% year on year.
The operating expense increase primarily reflected the expanding size of the Group with salaries and employee benefits up 13.2% to $144.3
million, and accounting for 59.1% of total Group operating expenses, compared with 57.3% last year. Increases of 16.5% and 17.0% respectively
were seen in systems and communication and marketing costs, reflecting continued spending on information systems and marketing as we build
and improve our operations.
At 31 December 2005 there were 789 employees in Bermuda, up from 786 a year ago. Overseas, the total headcount increased by 42 to 808
primarily due to continued growth in Cayman.
Other Expenses 13.2%
Non-Corporation Taxes 4.9%
Marketing 2.3%
Systems & Communications 9.3%
Property 11.2%
Distribution Of 2005 Total Expenses
Cayman 14.4%
Guernsey 12.7%
UK 9.0%
Barbados 3.6%
The Bahamas 2.0%
Salaries & Other
Employee Benefits 59.1%
Bermuda 58.3%
Distribution Of 2005 Expenses By Location
18
Balance Sheet
Total assets increased by 6.6% to $9.2 billion, up from $8.6 billion a year ago. This increase reflects the rise in the customer deposit base, up year
on year by $0.5 billion, or 7.3%, to $7.9 billion. The increase in the customer deposit base was primarily employed in term deposits with banks,
and in funding our loan portfolios, which were both up year on year by 20.7% and 16.6% respectively to $2.7 billion and $3.1 billion. The Balance
Sheet remains highly liquid with a loans to customer deposits ratio of 38.8% and loans to total assets ratio of 33.5%.
A 29.3%
BBB 0.7%
Other 1.8%
AAA 25.3%
AA 42.9%
Investment Portfolio By Long Term Debt Rating
Cayman 9.9%
Guernsey 6.9%
UK 13.5%
Barbados 3.5%
The Bahamas 0.2%
Bermuda 66.0%
Lending By Location
19
Financial Overview
Financial Institutions
& Government 12.8%
Credit Card 1.9%
Mortgages 33.8%
Commercial Real Estate 23.0%
Commercial & Industrial 17.9%
Other Consumer Loans 10.6%
Group Loans By Type
Taxes
For the period under review the corporation tax of the Group was an expense of $1.6 million compared to a credit of $1.7 million for the same
period a year ago. Corporation tax of $0.9 million in Guernsey, $0.6 million in Barbados and $0.1 million in the UK was incurred for the year.
$11.9 million in non-profits taxes was also paid across the Group, up from $10.8 million in the previous year, primarily reflecting an increase in
employer related payroll tax paid in Bermuda.
Capital and Liquidity
The Group continues to maintain a strong capital base that ensures stability and allows it to take advantage of opportunities for growth.
At 31 December 2005 the risk weighted total capital ratio was 13.1%, compared to the 10.0% minimum requirement of the Bermuda Monetary
Authority, and up from 10.7% a year ago. Of the total, the Tier 1 ratio was 8.6%, compared to a 5% minimum requirement and 7.3% at year-end
2004. Shareholders’ equity increased by $67.2 million, or 15.7%, over a year ago reflecting the increase in retained earnings less share buy-backs.
Weighted risk assets rose year on year by 5.8% to $4.7 billion, primarily due to growth in loans and deposits with banks, offset by reductions
in investments and letters of credit. The loan to the Stock Option Trust of $25.5 million is in respect of potential obligations under the Group’s
Stock Option Plan and is deducted from shareholders’ equity as treasury stock. The loan remained at the same level as a year ago, reflecting
repayments from cash received on the exercise of stock options by directors and employees, offset by the purchase by the Trust of 285,854 shares
at a total cost of $12.6 million during the year.
20
In June 2005 the Group successfully issued US$150 million of subordinated lower tier II capital notes by way of a private placement with US
institutional investors. The notes were issued in two tranches, namely US$90 million in Series A notes due 2015, and US$60 million in Series B
notes due 2020. The Series A notes were priced at a coupon of 1.00% over the five year US Treasury yield and Series B notes at 1.10% over the
ten year US Treasury yield. This brings the Group’s total subordinated capital issued to $283.6 million and provides capital financing to support
business growth.
During the year under review, the Group issued 242,738 shares under the Dividend Re-investment Programme, which represents a cash savings
of $10.6 million, or 26.4% of the total dividend declared. As a result of the one-for-ten stock dividend in August 2005 2,436,730 new shares were
also issued. Under the Share Buy-Back Plan, the Bank repurchased and cancelled 32,890 shares, at a cost of $1.4 million.
Capital Composition
(In $ thousands)
For the year ended 31 December
Tier 1 capital
Tier 2 capital
Deductions*
Total capital
Weighted Risk Assets
(In $ thousands)
Cash and inter-bank placements
Investments
Loans
Other assets
Off-balance sheet items
Total weighted risk assets
Capital Ratios (%)
Tier 1
Tier 2
Deductions*
Total
2005
2004
402,766
222,012
(13,351)
611,427
321,987
156,496
(4,272)
474,211
569,030
874,306
2,407,471
218,971
611,571
4,681,349
471,518
1,064,824
2,005,775
189,583
691,594
4,423,294
8.6%
4.7%
(0.2%)
13.1%
7.3%
3.5%
(0.1%)
10.7%
*Deductions from capital comprise investments in affiliates
21
Financial Overview
Selected Quarterly Results of Operations
(Unaudited, in $ thousands except per share data and ratios)
Quarter ended
31 December
30 September
30 June
31 March
2005
Net interest income after provision for credit losses
Total fees and other income
Total revenue
Total non-interest expense
Net income for the quarter
Earnings per share ($)*
Basic
Diluted
Return on shareholders’ equity (%)
47,918
42,638
90,556
66,218
24,338
0.97
0.93
19.7
47,602
43,919
91,521
60,893
30,628
1.21
1.18
25.7
45,760
44,564
90,324
60,274
30,050
1.19
1.17
27.3
40,894
41,834
82,728
58,393
24,335
0.97
0.95
22.7
Quarter ended
31 December
30 September
30 June
31 March
2004
Net interest income after provision for credit losses
Total fees and other income
Gain on sale of affiliate
Total revenue
Total non-interest expense
Net income for the quarter
Earnings per share ($)*
Basic
Diluted
Return on shareholders’ equity (%)
38,340
40,105
–
78,445
56,858
21,587
0.87
0.84
19.3
43,011
39,851
–
82,862
60,012
22,850
0.91
0.89
22.0
35,151
41,067
–
76,218
55,879
20,339
0.81
0.79
20.1
31,573
36,317
5,750
73,640
47,950
25,690
1.03
0.99
25.5
*Comparative per share data has been restated to reflect the 1 for 10 stock dividends in August 2005 and 2004.
22
Financial Summary
(In thousands of Bermuda dollars, except per share data)
At year end
Cash and deposits with banks
Investments
Loans, net of 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
Fee and other income
Gain on sale of subsidiaries
Salaries and other employee benefits
Other non-interest expenses
Net income from continuing operations
Net income
Dividends paid
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 declared
Net book value
Number of employees
Bermuda
Overseas
Total
Shareholder data
Number of shareholders
Number of shares (in thousands)**
31 December
2005
31 December
2004
Year ended
31 December
2003
31 December
2002
30 June
2002
2,849,920
2,916,399
3,085,594
141,708
9,197,566
8,240,109
278,679
495,226
182,174
172,955
–
144,331
101,447
109,351
109,351
38,504
1.2%
23.6%
35.2%
8.4%
13.1%
66.4%
4.23
4.23
1.67
19.48
789
808
1,597
2,396,724
3,266,400
2,645,331
126,031
8,630,383
7,907,450
142,333
428,030
2,912,383
2,638,253
1,954,716
99,979
7,733,806
7,122,577
122,871
382,095
148,075
163,090
–
127,459
93,240
90,466
90,466
32,217
1.1%
21.2%
35.6%
6.6%
10.7%
69.1%
3.51
3.51
1.55
17.13
786
766
1,552
115,066
118,985
–
100,104
63,109
70,838
70,838
26,809
1.0%
17.9%
37.8%
6.5%
13.0%
67.7%
2.79
2.79
1.43
15.30
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
25,432
1.2%
20.5%
30.3%
6.9%
13.1%
66.4%
2.96
2.96
1.37
13.68
724
476
1,200
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
24,081
1.2%
21.2%
29.3%
7.0%
13.8%
61.9%
3.09
3.12
1.31
13.08
749
480
1,229
3,878
25,429
3,778
22,745
3,581
20,643
3,322
18,603
3,364
19,247
* Excludes discontinued operations and gain on sale of subsidiaries.
**Excludes shares held by the Bank's Stock Option Trust.
Comparative per share data, with the exception of dividends has been restated to reflect the 1 for 10 stock dividends in August 2005, 2004 and
2003. The number of shares in 2005 increased primarily due to the issue of the stock dividend.
# Inclusive of gain on sale of subsidiaries.
Data for 2005, 2004 and 2003 is shown under US GAAP and for 2002 under Canadian GAAP.
23
Financial Overview
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 our external independent auditors 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
2 March 2006
Richard J. Ferrett
Executive Vice President & Chief Financial Officer
2 March 2006
24
Independent Auditors’ Report to the Shareholders
25
Financials
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, net of allowance for credit losses
Premises, equipment and computer software
Accrued interest
Goodwill
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.
2005
2004
154,698
2,695,222
2,849,920
164,431
2,232,293
2,396,724
2,233,577
546,302
136,520
2,916,399
3,085,594
141,708
44,648
22,840
69,622
66,835
9,197,566
2,592,824
29,681
643,895
3,266,400
2,645,331
126,031
30,843
24,638
81,405
59,011
8,630,383
858,358
999,826
7,090,608
291,143
8,240,109
19,093
11,049
153,410
183,552
278,679
8,702,340
26,948
341,647
152,501
(25,548)
(322)
495,226
9,197,566
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
James A.C. King, JP
Chairman of the Board
Robert J. Stewart, JP
Vice Chairman
Alan R. Thompson
President & Chief Executive Officer
26
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
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 loss
Gain on sale of affiliate
Realised / unrealised 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
Net income before income taxes
Income 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 2005.
2005
2004
29,309
34,687
39,617
36,404
29,894
2,188
172,099
69,346
183,915
129,092
382,353
188,493
8,514
197,007
185,346
(3,172)
182,174
(129)
–
895
90
355,129
144,331
27,301
22,813
5,658
44,047
244,150
110,979
(1,628)
109,351
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
4.34
4.23
3.62
3.51
27
Financials
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 (2004: 70,000,000) of par value $1 each
Issued
Issued and outstanding at beginning of year
(January 2005: 24,301,337 shares; January 2004: 22,335,533 shares)
Dividend reinvestment
(December 2005: 242,738 shares; December 2004: 207,109 shares)
Stock dividend
(December 2005: 2,436,730 shares; December 2004: 2,217,927 shares)
Shares repurchased and cancelled
(December 2005: 32,890 shares; December 2004: 459,232 shares)
Issued and outstanding at end of year
(December 2005: 26,947,915; December 2004: 24,301,337 shares)
Additional paid in capital
Balance at beginning of year
Dividend reinvestment
Stock dividend
Issued under directors' and executive officers' and employees’ stock option plans
Shares repurchased and cancelled
Balance at end of year
Retained earnings
Balance at beginning of year
Net income for year
Cash dividends declared
Stock dividend
Balance at end of year
2005
2004
24,301
22,335
243
207
2,437
2,218
(33)
(459)
26,948
24,301
229,495
10,395
102,769
321
(1,333)
341,647
88,674
109,351
198,025
(40,318)
(105,206)
52,501
149,454
8,659
89,941
413
(18,972)
229,495
124,002
90,466
214,468
(33,635)
(92,159)
88,674
Appropriated retained earnings – general reserve
100,000
100,000
Accumulated other comprehensive income
Balance at beginning of year
Net change in unrealised gains (losses) on translation of net investment in foreign operations
Net change in unrealised gains (losses) on available for sale securities
Net change in unrealised losses on cash flow hedges
Net change in minimum pension liability
Balance at end of year
Treasury stock
Balance at beginning of year (January 2005: 1,556,476 shares; January 2004: 1,692,698 shares)
Net issuances (purchases)
Balance at end of year
(December 2005: 1,519,203 shares; December 2004: 1,556,476 shares)
Total shareholders' equity
Comprehensive income
Net income
Other comprehensive loss
Total comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
28
11,031
(7,752)
(328)
(2,869)
(404)
(322)
(25,471)
(77)
(25,548)
17,362
4,455.
201.
(10,987)
–.
11,031.
(31,058)
5,587.
(25,471)
495,226
428,030
109,351
(11,353)
97,998
90,466
(6,331)
84,135
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
Write down of equipment and computer software
Change in carrying value of investment in affiliate
Gain on sale of affiliate
Realised gain on sale of available for sale securities
Provision for credit losses
Increase in accrued interest receivable
Increase in other assets
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
Held to maturity securities: purchases
Available for sale securities: proceeds from sale and maturities
Available for sale securities: purchases
Net proceeds on sale of affiliate
Purchase of subsidiaries
Cash used in investing activities
Cash flows from financing activities
Increase in demand and term deposit liabilities
Issuance of subordinated capital and senior debt
Repayment of senior debt
Proceeds from dividend re-investment plan
Shares repurchased and cancelled
Treasury stock
Cash dividends paid
Cash provided by (used in) financing activities
Effect of exchange rates on cash and demand deposits with banks
Net increase (decrease) 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.
2005
2004
109,351
90,466
20,822
1,100
833
–.
(90)
3,172
(15,237)
(10,359)
10,743
30,280
150,615
487,611
638,226
(555,669)
(35,569)
(504,151)
1,168,313
(883,195)
731,186.
(1,263,259)
–
–.
(1,342,344)
583,108
150,000
(9,666)
10,638
(1,366)
(77)
(38,504)
694,133.
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)
252
350
(9,733)
52,729.
164,431
154,698
111,702
164,431
187,429
322
117,008
1,649
29
Financials
Notes to Consolidated Financial Statements
For the year ended 31 December 2005 (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
in designated variable 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 VIEs when the Bank is determined to be the primary beneficiary under the Financial
Accounting Standards Board (FASB) interpretation No. 46 (Revised 2003) Consolidation of Variable Interest Entities (FIN 46R).
(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 balance sheet 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, adjusted to recognise other than temporary impairment 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 from which it is unlikely that future interest payments will be received as scheduled. Realised gains and
losses on sales of investments are included in earnings on a specific identified cost basis.
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.
30
(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 allowances and a general
allowance, 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 Allowances
Specific allowances are determined on an item by item basis and reflect the associated estimated credit loss. The specific allowances for credit 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 Allowances
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 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 (defined as loans with payments contractually over 30 days past due), 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.
(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 tested
annually for impairment at the reporting unit level, or 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. Intangible assets' estimated
lives are reevaluated annually and an impairment test is carried out if certain indicators of impairment exist.
31
Financials
(k) Premises, Equipment and Computer Software
Land, building, equipment and computer 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 buildings, 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 between 5 and 7 years. If deemed significant the Bank will capitalise interest cost in accordance with FAS No. 34
Capitalisation of Interest Cost (FAS 34).
(l) Derivatives
In accordance with FAS No. 133 Accounting for Derivative Instruments and Hedging Activities (FAS 133), all derivatives are recognised on the
Consolidated Balance Sheet at their fair value. FAS 133, as amended by FAS No. 138 Accounting for Certain Derivative Instruments and Certain
Hedging Activities (FAS 138) and FAS No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (FAS 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.
(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 in accordance with FAS No. 87 Employers' Accounting for Pensions (FAS 87) and FAS
No. 88 Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits (FAS 88). Its post-
retirement medical and life insurance plans are accounted for in accordance with FAS No. 106 Employers' Accounting for Postretirement Benefits
Other Than Pensions (FAS 106).
32
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 each of the defined benefit pension plans, the cumulative excess (deficit) of funding contributions over expenses is reported in other assets
(other liabilities). 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 of the grant of stock options, no compensation cost 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 FAS No. 91 Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases
(FAS 91), 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.
(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 one 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.
33
Financials
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.
ii)
Investments: The fair values of investments are based upon quoted market prices where available.
iii) Loans: The majority of loans are variable rate and re-price 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 and senior debt: The fair value of the subordinated capital and senior debt 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 Sheet, 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 honour 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 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 tax 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.
34
(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 2005 (see also Notes 18 and 22). 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
FIN 46R requires a VIE 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 an entity meets the
criteria to be considered the primary beneficiary of a VIE requires an evaluation of all transactions (such as investments, loans and fee
arrangements) with the entity.
(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
There were no significant acquisitions in 2005.
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.
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.
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
2005
Deerfield
2004
Leopold Joseph
Grosvenor
Total
–
–
–
–
–
–
–
–
205
–
–
173
2,700
1,031
290
4,399
78,957
497,258
260,971
4,126
32,439
13,695
13,466
900,912
396
–
–
41
8,337
–
988
9,762
79,558
497,258
260,971
4,340
43,476
14,726
14,744
915,073
35
Financials
Fair value of liabilities assumed
Deposits
Other liabilities
Subordinated capital
Total liabilities
Fair value of identifiable net assets acquired
Total purchase consideration
NOTE 3: Cash and Deposits with Banks
31 December
Unrestricted
Non-interest earning
Cash and demand deposits
2005
Deerfield
2004
Leopold Joseph
Grosvenor
Total
–
–
–
–
–
–
–
149
–
149
4,250
4,250
765,155
23,229
8,892
797,276
103,636
103,636
–
1,022
–
1,022
8,740
8,740
765,155
24,400
8,892
798,447
116,626
116,626
2005
Bermuda Non-Bermuda
Total
2004
Bermuda Non-Bermuda
Total
22,962
16,200
39,162
118,975
25,651
144,626
Interest earning
Deposits maturing within three months and on demand
Deposits maturing between three to six months
Deposits maturing between six to twelve months
Sub-total – Interest earning
307,898
–
–
307,898
1,628,157
810,453
58,235
2,496,845
1,936,055
810,453
58,235
2,804,743
124,688
10,000
–
134,688
160,042
1,898,352
39,211
2,097,605
284,730
1,908,352
39,211
2,232,293
Total unrestricted cash and deposits
330,860
2,513,045
2,843,905
253,663
2,123,256
2,376,919
Affected by drawing restrictions related to minimum
reserve and derivative margin requirements
Interest earning
Deposits maturing within three months
Subtotal – Interest earning
Total restricted deposits
1,586
1,586
1,586
4,429
4,429
4,429
6,015
6,015
6,015
1,535
1,535
18,270
18,270
19,805
19,805
1,535
18,270
19,805
Total cash and deposits with banks
332,446
2,517,474
2,849,920
255,198
2,141,526
2,396,724
NOTE 4: Investments
Trading
Trading assets include debt and equity securities held for trading purposes that the Bank owns ("long" positions). Trading positions are carried
at fair value on the Consolidated Balance Sheet.
31 December
Realised / unrealised gains (losses) on trading securities
Equities (a)
Fixed income and other (b)
Total
(a) Includes equity securities and equity derivatives.
(b) Includes bonds, commercial paper, interest rate and foreign exchange derivatives.
2005
2004
1,084
(189)
895
307
340.
647
36
Trading assets
The following table presents the fair value of trading assets and liabilities:
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
Available for sale
The following table presents realised gains and losses from available for sale securities:
31 December
Realised gains
Realised losses
Net realised gains
2005
2004
86,185
10,631
39,704
136,520
628,147
12,475
3,273
643,895
2005
2004
90
–
90
362
–
362
The amortised cost and estimated fair value of available for sale and held to maturity securities were as follows:
31 December
cost
gains
losses Fair value
2005
Gross
Amortised unrealised unrealised
Gross
2004
Amortised
cost
Gross
unrealised
gains
Gross
unrealised
losses
Fair value
Available for sale
Debt securities issued by non-US governments
Corporate debt securities
Equity securities
Other, primarily asset-backed securities
Total available for sale
42,669
468,996
301
34,400
546,366
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
96,628
151,135
93,517
1,662,515
229,782
2,233,577
–
67
–
3
70
–
(134)
–
–
(134)
42,669
468,929
301
34,403
546,302
–
26,304
2,890
223
29,417
99
106
177
1,315
124
1,821
(716)
(157)
(703)
96,011
151,084
92,991
(2,662) 1,661,168
(11,117)
218,789
(15,355) 2,220,043
85,421
242,249
57,246
2,023,810
184,098
2,592,824
–
–
264
–
264
364
111
228
3,560
335
4,598
–
–
–
–
–
–
26,304
3,154
223
29,681
(36)
(378)
(4)
85,749
241,982
57,470
(1,363) 2,026,007
(8,452)
175,981
(10,233) 2,587,189
Investments at carrying value includes $1,738,105 (2004: $2,521,170) of floating-rate instruments and $1,144,491 (2004: $707,165) of fixed-rate
instruments. The approximate yield on floating rate securities at 31 December 2005 was 4.36% (2004: 2.69%), while the approximate yield
on fixed rate securities was 4.46% (2004: 5.31%).
37
Financials
The following table presents securities by remaining term to maturity:
31 December 2005
Available for sale
Debt securities issued by non-US governments
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
Certificates of deposit, bankers acceptances
and commercial paper
Debt securities issued by non-US governments
Corporate securities and other
Total trading
Within
3 months
3 to 12
months
1 to 5
years
Over
5 years
No specific
maturity
Carrying
value
Remaining term to maturity
33,226
207,094
–
–
240,320
–
–
5,003
161,603
–
166,606
–
260,185
–
34,403
294,588
–
–
3,178
266,427
–
269,605
9,443
–
–
–
9,443
59,950
–
71,761
1,229,485
48,888
1,410,084
–
1,650
–
–
1,650
36,678
151,134
13,576
5,000
180,894
387,282
–
–
301
–
301
42,669
468,929
301
34,403
546,302
–
–
–
–
–
–
96,628
151,134
93,518
1,662,515
229,782
2,233,577
73,285
–
219
73,504
12,901
828
–
13,729
–
2,126
692
2,818
–
7,677
–
7,677
–
–
38,792
38,792
86,186
10,631
39,703
136,520
Total investments
480,430
577,922
1,422,345
396,609
39,093
2,916,399
Total by currency (in Bermuda dollars equivalent)
Bermuda dollars
US dollars
Other
Total investments
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
61
217,295
263,074
480,430
–
194,576
383,346
577,922
–
1,350,436
71,909
1,422,345
–
370,949
25,660
396,609
800
28,536
9,757
39,093
861
2,161,792
753,746
2,916,399
Within
3 months
3 to 12
months
1 to 5
years
Over
5 years
No specific
maturity
Carrying
value
Remaining term to maturity
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
38
31 December 2004
Trading
Certificates of deposit, bankers acceptances
and commercial paper
Debt securities issued by non-US governments
Corporate securities and other
Total trading
Within
3 months
3 to 12
months
1 to 5
years
Over
5 years
No specific
maturity
Carrying
value
Remaining term to maturity
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 Bermuda dollars equivalent)
Bermuda dollars
US dollars
Other
Total investments
NOTE 5: Loans
–
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
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
2005
Bermuda Non-Bermuda
Total
2004
Bermuda Non-Bermuda
Total
468,803
87,718
556,521
375,390
121,765
497,155
133,626
Commercial mortgage
140,101
Construction
321,383
Financial institutions
19,303
Government
1,083,216
Total commercial loans
Less allowance for credit losses on commercial loans
(13,765)
Total commercial loans after allowance for credit losses 1,069,451
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
38,990
52,919
799,922
78,378
970,209
(5,978)
964,231
431,440
8,980
58,156
–
586,294
(2,158)
584,136
18,254
8,948
252,549
190,858
470,609
(2,833)
467,776
565,066
149,081
379,539
19,303
1,669,510
(15,923)
1,653,587
57,244
61,867
1,052,471
269,236
1,440,818
(8,811)
1,432,007
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
Total loans
Less allowance for credit losses
Net loans
2,053,425
(19,743)
2,033,682
1,056,903
(4,991)
1,051,912
3,110,328
(24,734)
3,085,594
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
2,669,152
(23,821)
2,645,331
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 2005 is 6.37% (2004: 6.32%). During the
year loans of nil (2004: $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.
39
Financials
The table below sets forth information about the Bank's impaired loans:
31 December
Commercial loans – Bermuda
Commercial loans – Non-Bermuda
Consumer loans – Bermuda
Consumer loans – Non-Bermuda
Mortgages – Bermuda
Mortgages – Non-Bermuda
Total
Gross
6,293
7,791
900
2,700
4,597
4,681
26,962
2005
Allowance
(2,625)
(729)
(165)
(358)
(165)
(62)
(4,104)
Total
3,668
7,062
735
2,342
4,432
4,619
22,858
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
For the year ended 31 December 2005, the amount of gross interest income that would have been recorded had impaired loans been current was
$2,711 (2004: $2,666). For the year ended 31 December 2005, the Bank recovered overdue interest of $529 (2004: $172) on impaired loans that
were repaid in the year. The average balance of impaired loans during the year ended 31 December 2005 was $24,705 (2004: $18,429).
The table below summarises the changes in the allowance for credit losses:
Year ended 31 December
Specific
allowances
2005
General
allowance
Allowance for credit losses at beginning of year
Provision this year
Recoveries
Charge-offs
Other
Allowance for credit losses at end of year
1,918
4,464
255
(2,528)
(5)
4,104
21,903
(1,292)
1,195
(1,176)
–
20,630
Total
23,821
3,172
1,450
(3,704)
(5)
24,734
Specific
allowances
3,949
723
2,215
(5,330)
361
1,918
2004
General
allowance
17,937
2,171
3,204
(1,053)
(356)
21,903
The table below presents information about the loan delinquencies, and charge-offs:
31 December
Credit card
Automobile financing
Other consumer and mortgages
Consumer loans
Commercial loans
Total loans reported
Total
delinquent
loans
2005
Loans 90
days or more
past due
Charge-Offs
Total
delinquent
loans
2004
Loans 90
days or more
past due
4,198
765
22,637
27,600
6,433
34,033
845
369
11,798
13,012
5,127
18,139
897
42
2,431
3,370
334
3,704
3,812
872
25,882
30,566
12,563
43,129
587
569
12,969
14,125
11,168
25,293
Total
21,886
2,894
5,419
(6,383)
5
23,821
Charge-offs
763
554
1,286
2,603
3,780
6,383
40
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 allowance
Total
The following table summarises the credit exposure of the Bank by region:
31 December
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Sub-total
General allowance
Total
2005
2004
55,679
725,874
967,681
30,994
1,262,226
19,303
1,378,195
4,439,952
(20,630)
4,419,322
95,155
572,940
1,340,454
56,322
938,413
38,474
944,747
3,986,505
(21,903)
3,964,602
2005
2004
3,029,684
119,620
444,276
324,196
5,182
516,994
4,439,952
(20,630)
4,419,322
2,752,005
84,148
428,962
225,902
2,904
492,584
3,986,505
(21,903)
3,964,602
41
Financials
NOTE 7: Premises, Equipment and Computer Software
The following table summarises land, buildings, equipment and computer software:
31 December
Land
Buildings
Equipment
Computer software
Total
31 December
2005
Accumulated
depreciation
Net carrying
value
–
(28,403)
(25,229)
(19,172)
(72,804)
11,997
81,339
17,696
30,676
141,708
Cost
11,997
109,742
42,925
49,848
214,512
Cost
12,345
105,907
62,162
62,610
243,024
Depreciation
Buildings and equipment (included in property expenses)
Computer software (included in systems and communication expenses)
Total depreciation charged to operating expenses
NOTE 8: Goodwill and Other Intangible Assets
The following table presents goodwill and other intangible assets by business segment:
Goodwill
Business segment
Barbados
Guernsey
Balance as at 31 December 2003
Goodwill acquired during the year
Foreign exchange translation adjustment
Balance as at 31 December 2004
Foreign exchange translation adjustment
Balance as at 31 December 2005
Other intangible assets
31 December
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Customer relationships
5,220
–
–
5,220
–
5,220
2005
Gross
carrying
amount
8,337
6,681
1,211
45,491
7,790
17,905
87,415
Accumulated
amortisation
(695)
(926)
(108)
(12,205)
(1,465)
(2,394)
(17,793)
3,014
4,758
419
8,191
(848)
7,343
Net
carrying
amount
7,642
5,755
1,103
33,286
6,325
15,511
69,622
2004
Accumulated
depreciation
Net carrying
value
–
(30,633)
(47,281)
(39,079)
(116,993)
12,345
75,274
14,881
23,531
126,031
2005
2004
6,633
7,698
14,331
6,686
6,334
13,020
The
Bahamas
United
Kingdom
892
1,031
–
1,923
–
1,923
Gross
carrying
amount
8,337
6,681
1,211
50,740
7,790
19,831
94,590
–
8,937
367
9,304
(950)
8,354
2004
Accumulated
amortisation
(139)
(482)
(27)
(10,202)
(1,067)
(1,268)
(13,185)
Total
9,126
14,726
786
24,638
(1,798)
22,840
Net
carrying
amount
8,198
6,199
1,184
40,538
6,723
18,563
81,405
There have been no impairment losses for the years ended 31 December 2005 and 2004. The estimated aggregate amortisation expense for each of the
succeeding years until 31 December 2009 is $6.0 million. Customer relationships are initially 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 2005, the Bank did not acquire new customer relationships (2004: $44.9 million), the amortisation expense
amounted to $6.3 million (2004: $5.4 million) and the foreign exchange translation adjustment decreased the net carrying amount by $5.5 million
(2004: increased by $3.2 million).
42
NOTE 9: Customer Deposits and Deposits from Banks
(a) By maturity
31 December
Customer and bank demand deposits
Demand deposits – Non-interest bearing
Demand deposits – Interest bearing
Sub-total – demand deposits
Customer and bank term deposits
Term deposits maturing within six months
Term deposits maturing between six to twelve months
Term deposits maturing after twelve months
Sub-total – term deposits
Total
(b) By type and location
2005
2004
858,358
3,964,017
4,822,375
3,086,510
148,667
182,557
3,417,734
999,826
3,878,707
4,878,533
2,690,114
105,695
233,108
3,028,917
8,240,109
7,907,450
31 December
Bermuda
Customers
Banks
Cayman
Customers
Banks
Guernsey
Customers
Banks
Other international
Customers
Banks
Total
Payable
on demand
2005
Payable on a
fixed date
Total
Payable
on demand
2004
Payable on a
fixed date
Total
1,970,607
8,069
1,243,597
24,831
3,214,204
32,900
2,098,322
223,951
1,069,535
–
3,167,857
223,951
1,522,129
55,185
689,696
75,994
2,211,825
131,179
1,528,645
–
438,140
184,943
1,966,785
184,943
654,654
5,681
695,709
2,005
1,350,363
7,686
524,102
5,711
756,042
488
1,280,144
6,199
594,803
11,247
4,822,375
577,771
108,131
3,417,734
1,172,574
119,378
8,240,109
497,802
–
4,878,533
492,267
87,502
3,028,917
990,069
87,502
7,907,450
The effective yield on deposits at 31 December 2005 was 2.6% (2004: 2.2%).
43
Financials
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 30 November.
2005
Post-retirement
Pension plans medical benefit plan
2004
Pension plans
Post-retirement
medical benefit plan
Accumulated benefit obligation at end of year
103,713
–
98,084
–
Change in projected benefit obligation
Opening projected benefit obligation
Acquisitions
Service cost
Employee contributions
Interest cost
Benefits paid
Past service cost
Actuarial loss (gain)
Foreign currency exchange rate changes
Closing projected benefit obligation
Change in plan assets
Opening fair value of plan assets
New acquisitions
Actual return on plan assets
Employer contribution
Employee contributions
Benefits paid
Foreign currency exchange rate changes
Closing fair value of plan assets
Funded status
Deficit of plan assets over
projected benefit obligation at end of year
Employer contribution during the period from
measurement date to fiscal year end
Unamortised net actuarial loss
Unamortised past service cost
Net amount recognised
105,515
–
3,748
272
5,729
(3,650)
–
5,342
(4,728)
112,228
86,448
–
8,461
9,348
272
(3,650)
(3,619)
97,260
(14,968)
5,176
4,854
146
(4,792)
82,524
–
2,256
–
5,572
(1,257)
–
8,150
–
97,245
–
–
–
1,257
–
(1,257)
–
–
(97,245)
–
41,048
–
(56,197)
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)
–
–
(82,524)
–
36,874
–
(45,650)
44
2005
Post-retirement
Pension plans medical benefit plan
2004
Pension plans
Post-retirement
medical benefit plan
Amounts recognised in balance sheet consist of
Prepaid pension benefit cost included in other assets
Accrued pension benefit cost 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 (gain) loss
Defined benefit expense
Defined contribution expense
Total benefit expense
180
(5,376)
404
(4,792)
3,748
5,729
(5,733)
36
(71)
3,709
3,378
7,087
2005
–
(56,197)
–
(56,197)
2,256
5,572
–
–
3,976
11,804
–
11,804
–
(16,473)
–
(16,473)
4,443
5,278
(5,046)
28
21
4,724
3,121
7,845
2004
–
(45,650)
–
(45,650)
1,472
4,755
–
–
3,175
9,402
–
9,402
December 31
Post-retirement
Pension plans medical benefit plan
Pension plans
Post-retirement
medical benefit plan
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
5.60%
3.70%
6.50%
N/A
5.45%
3.80%
N/A
6.00%
N/A
N/A
12% to 5%
in 2013
6.00%
N/A
11% to 5%
in 2013
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
For 2005, the effect of a one percentage point increase or decrease in the assumed medical cost increase rate on the aggregate of service and
interest costs is a $1.6 million increase and a $1.2 million decrease, respectively, and on the benefit obligation a $16.8 million increase and
a $13.6 million decrease, respectively.
To develop the expected long-term rate of return on the plan 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. The weighted average discount rate
used to determine benefit obligations at the end of the year is derived from interest rates on high quality corporate bonds with maturities that
match the expected benefit payments.
45
Financials
The weighted average actual and target asset allocations of the pension plans by asset category, are as follows:
31 December
2005
Actual allocation
Target allocation
2004
Actual allocation
Target allocation
Asset category
Equity securities (including equity mutual funds)
Debt securities (including debt mutual funds)
Other
Total
55%
40%
5%
100%
50%
50%
–
100%
57%
37%
6%
100%
51%
49%
–
100%
At 31 December 2005, 52.6% (2004: 50.8%) of the assets of the pension plans were mutual funds and alternative investments managed or
administered by wholly-owned subsidiaries of the Bank. At 31 December 2005, 2.0% (2004: 1.8%) 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 2006 Bank contribution to, and estimated benefit payments for the next ten years under, the pension and post-retirement medical
benefit plans are as follows:
Year
Pension plans
Post-retirement medical benefit plan
Estimated Bank contributions
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
Estimated benefit payments
2006
2006
2007
2008
2009
2010
2011-2015
5,400
3,400
3,700
3,900
4,000
4,300
27,500
2,760
2,760
3,087
3,510
3,925
4,363
27,598
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were
$110 million and $94 million respectively, as at 31 December 2005 ($103 million and $84 million respectively, as at 31 December 2004).
NOTE 11: Commitments, Credit Related Arrangements and Contingencies
Commitments
The Bank was committed to expenditures under contract for software development and construction of $5.4 million and $29.5 million respectively,
as at 31 December 2005 (2004: $8.7 million and $25 million). Rental expense for premises leased on a long-term basis for the year ended
31 December 2005 amounted to $5.1 million (2004: $4.9 million).
The following table summarises the Bank's commitments for construction, software development and long-term leases:
27,464
17,445
4,712
4,560
4,243
5,652
Year
2006
2007
2008
2009
2010
2011 & thereafter
46
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
Forward guarantees
Total
Gross
2005
Collateral
Net
Gross
2004
Collateral
Net
775,689
–
245,875
–
529,814
–
650,973
2,464
156,106
2,464
494,867
–
560,419
2,324
37,441
2,846
1,378,719
529,593
2,324
32,347
2,846
812,985
30,826
–
5,094
–
565,734
544,587
3,025
15,296
2,151
1,218,496
515,432
2,599
11,074
2,151
689,826
29,155
426
4,222
–
528,670
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 not 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 represented by deposits with the Bank or a charge over assets held in mutual funds.
During the year, the Bank was provided with a facility by one of its custodians, whereby the Bank may offer up to $150 million of standby letters
of credit to its customers on a fully secured basis. Under the standard terms of the facility, the custodian has the right of set-off against securities
held of 110% of the utilised facility. At 31 December 2005, $20.4 million (2004: nil) of standby letters of credit were issued under this facility.
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 and proceedings, 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
2005
2004
Mortgages
Other loans
Amortisation of loan origination fees (net of amortised costs)
Total loan interest income
85,134
95,201
180,335
3,580
183,915
68,212
63,203
131,415
2,222
133,637
Balance of unamortised loan fees as at 31 December
10,843
9,195
47
Financials
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 & Fiduciary Services and Investment & Pension Fund Administration, and Real Estate), Barbados, Cayman, Guernsey,
The Bahamas, the 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, corporate and treasury 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. Treasury services include
money market and foreign exchange activities. Community Banking also includes treasury operations and Promisant (Technology) Limited.
The Bermuda Wealth Management & Fiduciary Services and Investment & 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 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 four branch locations, ATMs and debit cards. Services
include deposit services, commercial banking, consumer and mortgage lending and credit cards.
The Cayman segment provides a comprehensive range of community and commercial banking services to private and corporate customers through five
locations and through 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 RBC
Dexia Investor Services Limited (formerly Dexia Holdings (Hong Kong) Limited).
Operating segment information follows:
31 December
2005
2004
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 overseas
4,459,464
4,176,846
32,432
76,265
4,568,161
194,433
2,579,080
1,495,284
96,903
1,206,154
233
5,572,087
28,952
65,082
4,270,880
173,324
2,322,657
1,442,522
63,433
1,096,629
2,076
5,100,641
Less: inter-segment eliminations
Total
(942,682)
9,197,566
(741,138)
8,630,383
48
Business Area Analysis
Year ended 31 December 2005
Net interest income Allowance for
Fees and
Customer Intersegment credit losses other income
Total
revenue
Other Depreciation &
amortisation
expenses
Total
expenses Net income
Bermuda
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
112,658
(5,730)
(4,513)
28,285
130,700
96,893
5,709
102,602
28,098
–
–
112,658
7,934
37,345
10,993
(301)
16,717
–
72,688
342
(1,115)
(6,503)
–
6,717
1,652
1,354
(3,220)
–
6,503
–
–
(4,513)
67,692
2,518
98,495
68,034
1,403
200,137
35,907
5,692
138,492
1,160
1,925
8,794
37,067
7,617
147,286
(255)
1,622
–
(26)
–
–
1,341
3,495
36,520
27,493
5,763
9,058
639
82,968
11,174
82,204
40,138
6,790
22,555
639
163,500
8,136
33,454
28,622
4,476
20,284
–
94,972
1,595
2,935
4,310
659
2,529
–
12,028
9,731
36,389
32,932
5,135
22,813
–
107,000
30,967
(6,214)
52,851
1,443
45,815
7,206
1,655
(258)
639
56,500
Total income
185,346
–
(3,172)
181,463
363,637
233,464
20,822
254,286
109,351
Less: inter-segment eliminations
(principally rent and management fees)
Total
–
185,346
–
–
–
(3,172)
(8,508)
172,955
(8,508)
355,129
(8,508)
224,956
–
20,822
(8,508)
245,778
–
109,351
Year ended 31 December 2004
Customer Intersegment
Net interest income Allowance for
Fees and
credit losses other income
Total
revenue
Other Depreciation &
amortisation
expenses
Total
expenses Net income
94,275
363
1,437
38,941
135,016
82,479
5,388
87,867
47,149
Bermuda
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
5,608
29,037
7,378
131
14,540
–
56,694
Total income
150,969
Less: inter-segment eliminations
(principally rent and management fees)
Total
–
150,969
249
(1,114)
(502)
(6)
1,835
1,649
389
(3,365)
–
502
–
–
–
–
–
1,437
(721)
(3,582)
–
(28)
–
–
(4,331)
55,357
2,515
96,813
3,576
28,972
26,015
5,369
8,137
688
72,757
55,606
1,401
192,023
8,457
56,262
35,042
5,861
19,312
688
125,622
27,531
5,632
115,642
6,572
28,767
29,273
4,454
24,081
–
93,147
706
1,581
7,675
1,561
2,775
3,193
739
2,447
–
10,715
28,237
7,213
123,317
8,133
31,542
32,466
5,193
26,528
–
103,862
27,369
(5,812)
68,706
324
24,720
2,576
668
(7,216)
688
21,760
(2,894)
169,570
317,645
208,789
18,390
227,179
90,466
–
(2,894)
(6,480)
163,090
(6,480)
311,165
(6,480)
202,309
–
18,390
(6,480)
220,699
–
90,466
For the year ended 31 December 2005, included within other expenses are the following income tax expense / (refund) amounts: Guernsey $984
(2004: ($376)), United Kingdom $60 (2004: ($1,551)), and Barbados $584 (2004: $192). 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.
49
Financials
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.
Included in other assets (other liabilities) are the reported receivables and unrealised gains (payables and 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).
(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 2005 the Bank recognised a net loss of $0.4 million (2004: $0.2 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 2005 the Bank has
recorded the fair value of derivative instrument assets of $1.3 million (2004: $0.4 million) in other assets and derivative instrument liabilities of
$7.2 million (2004: $3.2 million) in 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 2005 and 2004, there was no hedge ineffectiveness related to cash flow hedges. As of 31 December 2005, ($0.5) million
(2004: $1.9 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 2 years (2004: 3 years). As of 31 December 2005, the Bank has recorded the fair value of derivative instrument assets of $0.2 million
(2004: $2.9 million) in other assets and $1.5 million (2004: $1.4 million) in other liabilities.
50
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
Sub-total
Foreign exchange contracts
Spot and forwards
Currency options
Sub-total
Trading
2005
ALM Total value
Trading
2004
ALM
Total value
26,748
52,332
79,080
444,204
–
444,204
470,952
52,332
523,284
59,593
66,000
125,593
595,320
–
595,320
654,913
66,000
720,913
5,604,472
–
5,604,472
–
–
–
5,604,472
–
5,604,472
2,415,658
5,130
2,420,788
–
–
–
2,415,658
5,130
2,420,788
Total notional amount of financial
derivatives outstanding
5,683,552
444,204
6,127,756
2,546,381
595,320
3,141,701
Included in the notional amounts for cash flow hedges using interest rate swaps for 31 December 2005, are $225.2 million (2004: $372.8 million),
pertaining to specific floating rate notes included in the investment portfolio which were classified as held to maturity, and $12.9 million
(2004: nil) pertaining to floating rate deposits. Included in the notional amounts for fair value hedges using interest rate swaps for 2005,
are $51.2 million (2004: $29.8 million) pertaining to specific loans, $125 million (2004: $125 million) pertaining to subordinated debt,
and $42.8 million (2004: $24.5 million), pertaining to fixed rate 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 fair value
Positive
2005
Negative
Net
Positive
1,519
26,318
1,136
28,973
8,740
24,613
1,070
34,423
(7,221)
1,705
66
(5,450)
3,690
26,555
506
30,751
2004
Negative
4,271
23,734
477
28,482
Net
(581)
2,821
29
2,269
51
Financials
(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 2005
Within 6 months
6 to12 months
1 to 3 years
3 to 5 years
After 5 years
Total
Interest rate contracts
Interest rate swaps
Interest rate caps
Sub-total
Foreign exchange contracts
Spot and forwards
Currency options
Sub-total
Total notional amount
by remaining maturity
158,310
–
158,310
78,380
24,000
102,380
130,663
17,440
148,103
22,157
10,892
33,049
81,443
–
81,443
470,953
52,332
523,285
5,560,957
–
5,560,957
39,891
–
39,891
3,624
–
3,624
–
–
–
–
–
–
5,604,472
–
5,604,472
5,719,267
142,271
151,727
33,049
81,443
6,127,757
31 December 2004
Within 6 months
6 to 12 months
1 to 3 years
3 to 5 years
After 5 years
Total
Interest rate contracts
Interest rate swaps
Interest rate caps
Sub-total
Foreign exchange contracts
Spot and forwards
Currency options
Sub-total
Total notional amount
by remaining maturity
97,373
–
97,373
2,280,033
–
2,280,033
111,511
–
111,511
124,496
5,130
129,626
275,797
66,000
341,797
100,659
–
100,659
69,573
–
69,573
654,913
66,000
720,913
11,129
–
11,129
–
–
–
–
–
–
2,415,658
5,130
2,420,788
2,377,406
241,137
352,926
100,659
69,573
3,141,701
(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
Sub-total
Trading
156
1,136
1,292
26,318
–
26,318
2005
ALM
1,364
–
1,364
–
–
–
Total value
Trading
1,520
1,136
2,656
26,318
–
26,318
–
305
305
26,555
201
26,756
2004
ALM
3,690
–
3,690
–
–
–
Total value
3,690
305
3,995
26,555
201
26,756
Total replacement cost
27,610
1,364
28,974
27,061
3,690
30,751
52
NOTE 15: Fair Value of Financial Instruments
The following table presents the carrying value and fair value of financial assets and liabilities under FAS No. 107 Disclosures About Fair Value
of Financial Instruments (FAS No. 107). 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)
2005
2004
2,849,920
2,849,920
–
2,396,724
2,396,724
–
Financial assets
Cash and deposits with banks
Investments
Held to maturity
Available for sale
Trading
Loans
Commercial, net of allowance for credit losses 1,653,587
1,432,007
Consumer, net of allowance for credit losses
345,653
9,197,566
Other assets
Total financial assets
2,233,577
546,302
136,520
2,220,043
546,302
136,520
1,653,265
1,432,443
345,653
9,184,146
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits, financial institutions
Other liabilities
Subordinated capital and senior debt
Total financial liabilities
4,742,193
3,206,773
291,143
183,552
278,679
8,702,340
4,742,193
3,209,043
291,143
183,552
275,408
8,701,339
(13,534)
–
–
(322)
436
–
(13,420)
–
(2,270)
–
–
3,271
1,001
2,592,824
29,681
643,895
1,342,778
1,302,553
321,928
8,630,383
2,587,189
29,681
643,895
1,343,503
1,304,684
321,928
8,627,604
4,633,654
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
(5,635)
–
–
725
2,131
–
(2,779)
–
9,100
–
–
–
9,100
53
Financials
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 2005 (in $ millions)
Within 3
months
Assets
Cash and demand 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
1,943
1,745
2,948
–
–
6,636
–
6,183
–
125
6,308
328
328
Earlier of contractual maturity or repricing date
1 to 5
years
After Non-interest
5 years bearing funds
6 to 12
months
3 to 6
months
810
353
26
–
–
1,189
–
913
–
–
913
276
604
58
355
9
–
–
422
–
103
–
–
103
319
923
–
368
118
–
–
486
–
144
–
90
234
252
–
56
21
–
–
77
–
39
–
69
108
39
39
(36)
142
204
388
495
858
184
(5)
1,532
(31)
(1,144)
1,175
1,144
–
31 December 2004 (in $ millions)
Within 3
months
3 to 6
months
Earlier of contractual maturity or repricing date
After
5 years
6 to 12
months
1 to 5
years
Non-interest
bearing funds
Assets
Cash and demand 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
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
481
428
1,001
153
–
1,582
(14)
(1,082)
(560)
799
1,096
1,082
–
Total
2,850
2,916
3,086
142
204
9,198
495
8,240
184
279
9,198
–
–
Total
2,397
3,266
2,645
126
196
8,630
428
7,907
153
142
8,630
–
–
(a) Includes interest rate swaps with fair value of ($4.9 million) (2004: ($2 million)), that are highly effective, designated and qualify as fair value hedges.
54
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 (BSX) 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 pays a fixed coupon of 3.94% until 27 May 2008 when they become redeemable in whole at the option of the
Bank. The Series B notes pays a fixed coupon of 5.15% 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 $8.6 million. The issuance was by way of private placement in the United Kingdom 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’s UK subsidiary, the Bank of Butterfield (UK) Limited
issued senior debt of £5.2 million which was included in the Consolidated Balance Sheet in the amount of $10 million. The issue was exclusively
to the shareholder's of Leopold Joseph and paid a variable rate of interest of 3 months LIBOR plus 30 basis points. The debt was repaid in full on
4 January 2005.
On 27 June 2005, the Bank issued US $150 million of Subordinated Lower Tier II capital notes. The notes were issued at par in two tranches, namely
US $90 million in Series A notes due 2015 and US $60 million in Series B notes due 2020. The issuance was by way of private placement with US
institutional investors. The notes are listed on The BSX in the specialist debt securities category.
The notes issued under Series A pays a fixed coupon of 4.81% until 2 July 2010, when they will become redeemable in whole at the Bank's option.
The Series B notes pays a fixed coupon of 5.11% until 2 July 2015 when they also become redeemable in whole at the Bank’s option. The Series
A notes were priced at a spread of 1.00% over the 5-year US Treasury yield and the Series B notes were priced at a spread of 1.10% over the
10-year US Treasury yield.
Interest capitalised in accordance with FAS 34 during the year amounted to $1,165 (2004: $461) and is included in interest expense – subordinated
capital and senior debt in the Consolidated Statement of Income.
The following table presents the contractual maturity and interest payments for subordinated capital issued by the Bank as at 31 December 2005:
Subordinated capital
Bermuda
2003 issuance – Series A
2003 issuance – Series B
2005 issuance – Series A
2005 issuance – Series B
Subsidiary
Other (a)
Total
Within 1 year
1 to 5 years
After 5 years
Carrying value
Fixed rate
Fixed rate
Fixed rate
Fixed rate
Fixed rate
–
3,073
2,421
4,377
3,100
799
–
13,770
90,293
9,682
107,316
12,264
3,195
–
222,750
7,683
65,154
21,645
90,660
14,222
–
199,364
78,000
47,000
90,000
60,000
8,600
(4,921)
278,679
(a) Other includes interest rate swaps with notional amount of $125 million, that are highly effective, designated and qualify as fair value hedges.
55
Financials
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 2005 and 2004 (see also Note 22).
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)
31 December
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 (in thousands)
Adjusted weighted average number of diluted common shares (in thousands)
2005
2004
109,351
90,466
26,830
(1,632)
25,198
4.34
26,882
(1,862)
25,020
3.62
2005
2004
109,351
90,466
26,830
(1,632)
674
25,872
4.23
26,882
(1,862)
736
25,756
3.51
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 equal to the market price on 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 3,000,000.
On 12 December 2005, the Board of Directors of the Bank approved the acceleration of the vesting of all outstanding unvested stock options
(the Acceleration) for certain classes of employees. The Acceleration was effective for all such options outstanding on 25 November 2005, all of
which were granted by the Bank when the accounting rules permitted use of the intrinsic value method of accounting for stock options. All of the
other terms and conditions applicable to such outstanding stock option grants still apply. Under Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees (APB 25), the Acceleration resulted in recognition of stock-based compensation expense of $0.3 million
which was determined by measuring the intrinsic value on the date of the modification of the options that otherwise would have expired
unexercised. The Company's decision to accelerate the vesting of these options was made to reduce administrative burden and in anticipation of
compensation expense to be recorded in connection with outstanding unvested stock options issued to employees subsequent to the effective
date of FAS No. 123 (Revised 2004) Share Based Payment (FAS 123R).
The compensation expense that would have been recognised in the income statements for the years 2006 to 2009 as a result of the adoption of
FAS 123R had the Acceleration not taken place is $0.7 million. As a result of the Acceleration, options to purchase 206,588 shares of the Bank’s
common stock became immediately exercisable.
56
At 31 December 2005, the Bank held as treasury stock 1,519,203 shares (2004: 1,556,476) that will be used to satisfy the Bank’s obligations with
respect to the Stock Option Plan.
Directors’ and Executive Officers' Stock Option Plan
2005
31 December
Outstanding at beginning of year
Granted
Stock dividend granted
Exercised
Forfeited / cancelled
Outstanding at end of year
Vested and exercisable at end of year
Characteristics of Options Granted to Directors and
Executive Officers as at 31 December 2005
Exercise Price Range
10.94 – 12.23
21.17 – 25.16
25.35 – 31.61
33.51 – 38.86
45.00 – 46.55
Total
31 December
Outstanding at beginning of year
Granted
Stock dividend granted
Exercised
Forfeited / cancelled
Outstanding at end of year
Vested and exercisable at end of year
Characteristics of Options Granted to Employees
as at 31 December 2005
Exercise Price Range
10.94 – 12.23
21.17
22.99 – 24.95
36.57 – 37.73
Total
Weighted
average
stock options exercise price ($)
Number of
Number of
stock options
2004
Weighted
average
exercise price ($)
520,229
129,425
60,937
(95,893)
–
614,698
311,265
25.47
38.48
26.42
15.98
–
27.82
20.81
385,471
117,211
45,616
(28,069)
–
520,229
290,888
20.87
40.18
24.92
22.94
–
25.47
18.66
Outstanding
Weighted
average life
Weighted
Number
average
of shares remaining (years) exercise price ($)
Exercisable
Weighted
Number
average
of shares exercise price ($)
107,005
215,449
10,001
268,734
13,509
614,698
3.7
5.3
2.6
7.4
4.8
5.9
11.46
23.38
27.07
37.03
45.71
27.82
107,005
160,983
5,835
37,442
–
311,265
11.46
23.17
27.06
36.46
–
20.81
Weighted
average
stock options exercise price ($)
Number of
Number of
stock options
2004
Weighted
average
exercise price ($)
1,217,466
495,309
159,708
(350,820)
(114,598)
1,407,065
708,588
28.72
37.53
29.65
25.65
34.07
30.00
24.87
984,639
424,240
120,965
(231,393)
(80,985)
1,217,466
521,134
22.08
40.23
28.26
19.84
32.88
28.72
21.06
Outstanding
Weighted
average life
Weighted
Number
average
of shares remaining (years) exercise price ($)
Exercisable
Weighted
Number
average
of shares exercise price ($)
115,459
162,139
345,232
784,237
1,407,067
4.0
5.5
6.7
8.7
7.4
11.27
21.17
24.30
37.09
30.00
115,459
162,139
242,710
188,280
708,588
11.27
21.17
24.47
36.91
24.87
57
Employees Stock Option Plan
2005
Financials
The weighted average fair value of stock options granted in the year ended 31 December 2005 was $5.18 per stock option (2004: $6.80),
calculated using the Black-Scholes option-pricing model with the following weighted average assumptions:
Year Ended 31 December
Projected dividend yield
Risk free interest rate
Projected volatility
Expected life
2005
2004
4.00%
3.71%
19%
5.0
3.14%
3.17%
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:
Year Ended 31 December
Net income as reported
Net income – pro-forma
Earnings per share – as reported (basic)
Earnings per share – pro-forma (basic)
NOTE 20: Share Buy-Back Plan
2005
2004
109,351
107,560
4.34
4.27
90,466
89,122
3.62
3.56
During the year under review, 32,890 shares (2004: 459,232) were purchased and cancelled at a cost of $1.4 million (2004: $19.4 million).
During the same period, the Bank's Stock Option Trust bought 285,854 shares at a cost of $12.6 million (2004: nil).
The Bank has the present intention to repurchase over the twelve month period commencing 1 January 2006, up to 2,000,000 million of its
ordinary shares of par value $1 each, pursuant to its share repurchase programme authorised by the shareholders on 29 October 1997.
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 BSX regulations may sell shares which may result in
such shares 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 then the last independent trade.
The BSX is advised monthly of shares repurchased and cancelled by the Bank and shares purchased by the Stock Option Trust.
58
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 2005 and August 2004, the Bank distributed a 10% stock dividend to shareholders of record on 5 August 2005 and 5 August 2004
respectively. All prior period per share amounts have been restated to reflect the stock dividend.
NOTE 23: Variable Interest Entities
The effect of FIN 46R was a decrease in the Bank's net assets of approximately $0.6 million for the year ended 31 December 2005 (2004: $0.5
million). The decrease primarily relates to the Bank's venture capital investment subsidiary (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.
As at 31 December 2005 the total assets of VIEs consolidated in the balance sheet is $17.7 million (2004: $10.7 million).
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 periods 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
2005
2004
Income taxes in consolidated statement of income
Current
Deferred
Total tax expense (recovery)
Deferred income tax asset
Tax loss carried forward
General bad debt allowance
Pension liability allowance
Allowance for compensated absence
Onerous leases
Other
Total asset
Deferred income tax liability
Depreciation
Net unrealised gain on derivatives
Other
Total liability
1,358
270
1,628
3,229
33
2,230
14
190
495
6,191
–
–
3
3
Net deferred income tax asset
6,188
(422)
(1,300)
(1,722)
8,168
39
1,186
40
225
214
9,872
2,367
16
–
2,383
7,489
59
Financials
NOTE 25: Future Accounting Developments
a) Share-based payment
In December 2004, the Financial Accounting Standards Board issued a revised version (FAS 123R) of the previously issued FAS 123 Accounting for
Stock-Based Compensation. Under FAS 123R, share-based payments classified as equity, such as the Bank’s stock option plan, will be measured
and recognised in the statement of income at their fair value. Under the original FAS 123, the Bank chose the option to present such compensation
costs not in the consolidated statement of income but instead measured at their fair value as a pro-forma item which is presented in note 19 to
the consolidated financial statements for the year ended 31 December 2004, as set out in the Annual Report and in note 4 to these interim financial
statements.
Following a further pronouncement in April 2005, FAS 123R will now be effective for all periods beginning after 1 January 2006 and, therefore,
effective from the Bank’s first quarter in 2006.
b) Pension and post-retirement medical benefits accounting and disclosures
The FASB is expected to issue an exposure draft in March 2006 proposing changes that would require the Bank to recognise a balance sheet asset
or liability equal to the full amount of its net surplus or deficit in the pension and other post-retirement benefit plans, with the corresponding
income or loss included in other comprehensive income. Management is currently evaluating the effect of adoption which may be material.
60
Directory
BOARD OF DIRECTORS &
PRINCIPAL BOARD COMMITTEES
Committees indicated by numbers
2
James A. C. King, JP, Chairman
Chairman, KeyTech Ltd.
Chairman, Argus Insurance Co. Ltd.
1
Robert J. Stewart, JP, Vice Chairman
Chairman, Island Circle Limited, Bermuda
Director, Shell Trust (Bermuda) Limited
2
Arlene Brock
Lawyer / Mediator
Retired from the Board 11 April 2005
2, 4
Brian Duperreault
Chairman, ACE Limited
Director, Tyco International Ltd.
1, 4
Roderick A. Ferguson III, JP
Chairman, Gorham’s Ltd.
Chairman, Purvis Ltd.
Deputy Chairman, KeyTech Ltd.
4
A.L. Vincent Ingham, JP
Executive Vice President & Chief Operating
Officer, BELCO Holdings Limited
Director, BELCO Holdings Limited
3, 4
Sheila G. Manderson
Chief Executive Officer, KeyTech Ltd.
1, 3
Robert A. Mulderig
Retired Chairman & Chief Executive
Officer, Mutual Risk Management Ltd.
Chairman, Woodmont Trust Co. Ltd.
1, 2
Robert Steinhoff,
Retired Partner, KPMG
Director, Argus Insurance Co. Ltd.
3
Alan R. Thompson*
President & Chief Executive Officer,
The Bank of N. T. Butterfield & Son Limited
3, 4
Glenn M. Titterton
Chairman, BF&M Insurance Group
Retired President & Chief Executive
Officer, BF&M Insurance Group
Chairman, Insurance Corporation of
Barbados Limited
1, 2
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 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.com/web2000/shareholder_info.
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 2005 were 899,201 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
30 June 2007.
Non-Bermudian 30.3%
50,000-99,999 Shares 11.1%
Bermudian 69.7%
10,000-49,999 Shares 25.0%
100,000 & Above Shares 47.9%
5,000-9,999 Shares 5.6%
1,000-4,999 Shares 7.9%
1-999 Shares 2.5%
Split Of Share Ownership: Bermudian / Non-Bermudian
Distribution Of Shares By Number Held
61
Directory
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
Bruce Albrecht
Senior Vice President,
Group Head of Asset Management
Mariano R. Browne
Managing Director,
Butterfield Bank (Barbados) Limited
Sheila M. Brown
Senior Vice President,
Investment Services
Andrew R. Collins
Managing Director,
Butterfield Fund Services (Bermuda) Limited
Ian M. Coulman
Managing Director,
Butterfield Asset Management 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
62
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
Pete D. Ramsdale
Senior Vice President,
Chief Information Officer
Peter J.M. Rodger
Senior Vice President & Group Legal
Adviser, Secretary to the Board
Frank J. Sebestyen, III
Senior Vice President,
Group Head of Fund Services
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 and Private Banking
Grosvenor Trust Company Limited
Bermuda
Trust and private banking services
Field Real Estate Holdings Limited
Bermuda
Real estate holding
Butterfield Bank (Bahamas) Limited
The Bahamas
Private banking, treasury, wealth
management and fiduciary services,
and fund administration services
Butterfield Fund Services
(Bahamas) Limited
The Bahamas
Investment and pension fund
administration services
Butterfield Bank (Barbados) Limited
Barbados
Banking, credit and treasury services
Butterfield Bank (Cayman) Limited
Cayman Islands
Banking, credit, treasury, wealth
management and fiduciary services
Butterfield Fund Services
(Cayman) Limited
Cayman Islands
Investment and pension fund
administration services
Butterfield Bank (Guernsey) Limited
Guernsey
Private banking, treasury and
wealth management services
Butterfield Fund Services
(Guernsey) Limited
Guernsey
Investment and pension fund
Administration services
Butterfield Trust (Guernsey) Limited
Guernsey
Fiduciary services
Butterfield Bank (UK) Limited
United Kingdom
Private banking, credit, treasury and
investment management services
SHAREHOLDER INFORMATION
Dividend Payment
Payment of dividends is quarterly, 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 Exhange (CSX), located at:
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 (Secondary Listing)
Elizabethan Square, 4th Floor, P.O. Box 2408
GT, Grand Cayman, Cayman Islands
Tel: (345) 945-6060
Fax: (345) 945-6061
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
(www.bsx.com).
Dividend Reinvestment Plan
Details are available from Butterfield Fund
Services (Bermuda) Limited.
Certain restrictions apply.
Annual Dividend Declared ($)
1.67
1.55
1.43
1.37
1.31
Dec 02
Jun 02
for 12 months
to 30 June
Dec 03
Dec 04
for 12 months
to 31 December
Dec 05
Directory
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.bankofbutterfield.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
2006, 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, 2005, 2,000,000 shares
represented 7.4% 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 2005 totalled
32,890 at an average price of $41.46 and
aggregate cost of $1,365,448 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.
In addition and separate to the above, the
Bank’s Stock Option Trust may from time to
time purchase shares of the Bank through
the BSX to satisfy the Bank’s obligations
with respect to the Stock Option Plan, and
such purchases will likewise be advised to
the BSX monthly. Shares purchased in this
way in the 12 months to 31 December, 2005
totaled 285,854 shares at an average price
of $44.10 and aggregate cost of $12,621,318.
Large Shareholders
The following professional nominees at
31 December 2005 were registered holders
of 5% or more of the issued share capital:
Harcourt & Co. (15.2%), Palmar Limited
(5.72%) and Murdoch & Co. (5.14%).
Known beneficial holdings of 5% or more
of issued share capital, at that date, were:
Bermuda Life Insurance Company Limited
(6.83%); Jardine Strategic Holdings Limited
(6.57%); and the Bank’s Stock Option
Trust (5.85%).
Market Value & Net Book Value per Share ($)
50
40
30
20
10
June 02
Dec 02
Dec 03
Dec 04
Dec 05
Market Value
Book Value
63
Directory
PRINCIPAL BERMUDA OFFICES
& SUBSIDIARIES
PRINCIPAL OVERSEAS OFFICES
& SUBSIDIARIES
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) 299-3954
Fax: (441) 295-6759
E-mail: andrewcollins@bntb.bm
Butterfield Trust (Bermuda) Limited
Managing Director: Graham M. Jack
65 Front Street,
Hamilton HM 12, Bermuda
Tel: (441) 299-3980
Fax: (441) 292-1258
E-mail: contact@bntb.bm
THE BAHAMAS
Butterfield Bank (Bahamas) Limited
Managing Director: Robert V. Lotmore
GUERNSEY
Butterfield Bank (Guernsey) Limited
Managing Director: Robert S. Moore
Butterfield Trust (Guernsey) Limited
Managing Director: Paul D.H. Hodgson
P.O. Box 25, Regency Court, Glategny
Esplanade, St Peter Port, Guernsey GY1 3AP,
Channel Islands
Tel: (01481) 711-521
Fax: (01481) 714-533
E-mail: info@butterfield.gg
www.butterfieldbank.gg
Butterfield Fund Services
(Guernsey) Limited
Managing Director: Patrick A.S. Firth
P.O. Box 211, Regency Court, Glategny
Esplanade, St Peter Port, Guernsey GY1 3AP,
Channel Islands
Tel: (01481) 720-321
Fax: (01481) 716-117
E-mail: info@butterfield.gg
www.butterfieldbank.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
Butterfield Fund Services
(Bahamas) Limited
Managing Director: Heather Bellot
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
1st Floor, Carlisle House, Hincks Street,
Bridgetown, Barbados
Tel: (246) 431-4500
Fax: (246) 430-0221
E-mail: contact@butterfieldbank.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 Fund Services
(Cayman) Limited
Managing Director: John Lewis
Butterfield House, 68 Fort Street,
George Town, P.O. Box 705 GT
Grand Cayman, Cayman Islands
Tel: (345) 949-7055
Fax: (345) 949-7004
E-mail: info@butterfieldbank.ky
www.butterfieldbank.ky
64
Missi on S tat em en t
Butt erfield Bank wi ll pro vid e c on sist ent
and su perior r et ur ns t o ou r sha r eh ol d er s,
offer security and opp ort un it ie s to ou r e mp loy ees,
and be reco gn is ed as m a k in g a val u a bl e c o n t r ib ut i o n
to t he communiti es i n wh ich we op er a t e
by a customer focused, e ffi ci en t a nd eth ic al d el iv ery
of bankin g and o th er s ele cte d f in a n c ia l s er v ic es .
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
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