One hundred and fifty
00 100
ANNUAL REPORT
2007
1
Who we are.
Butterfield Bank Group is a diversified,
international financial services company. We
were established in Bermuda in 1858, where
today we are the largest independent bank.
In addition to Bermuda, we operate in nine
international financial centres. We have total
assets of $11.9 billion, client assets under
management of approximately $12 billion
and over $145.7 billion of client assets under
administration. We employ 1,850 people around
the world. Butterfield Bank is a publicly traded
corporation with a primary share listing on the
Bermuda Stock Exchange and a secondary
listing on the Cayman Islands Stock Exchange.
1904
3
What we do.
We offer a full range of community banking
services in Bermuda, Barbados and the
Cayman Islands, encompassing retail and
corporate banking and treasury activities. In the
wealth management area, we provide private
banking, asset management and personal trust
services from Bermuda, The Bahamas, the
Cayman Islands, Guernsey, Hong Kong, Malta,
Switzerland and the United Kingdom. We also
provide services to corporate and institutional
clients from Bermuda, The Bahamas, Canada,
the Cayman Islands and Guernsey, which
include investment and pension fund
administration, asset management, custody
and corporate trust services.
1960
7
9
For Shareholders.
...provide consistent and superior returns to
our shareholders...
1968
Non-Bermudian 29.7%
Bermudian 70.3%
1 – 999 Shares 0.7%
1,000 – 4,999 Shares 3.3%
5,000 – 9,999 Shares 3.1%
10,000 – 49,000 Shares 13.3%
50,000 – 99,999 Shares 11.7%
100,000 and above Shares 67.9%
Share Ownership: Bermudian / Non-Bermudian
Distribution of Shares by Number Held
Non-Bermudian 29.7%
Bermudian 70.3%
1 – 999 Shares 0.7%
1,000 – 4,999 Shares 3.3%
5,000 – 9,999 Shares 3.1%
10,000 – 49,000 Shares 13.3%
50,000 – 99,999 Shares 11.7%
100,000 and above Shares 67.9%
Share Ownership: Bermudian / Non-Bermudian
Distribution of Shares by Number Held
Net Income ($ millions)
Earnings Per Share ($) Diluted
Return on Equity (%)
Return on Assets (%)
146.0
134.1
109.4
90.5
70.8
1.06
0.85
1.68
1.53
1.28
21.2
17.9
24.6
25.2
23.6
1.2
1.3
1.2
1.1
1.0
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
2003
2004
2005
2006
2007
Annual Dividend Declared ($)
Market Value & Net Book Value per Share ($)
0.52
0.56
0.48
0.60
0.64
2003
2004
2005
2006
2007
20.00
15.00
10.00
5.00
0
11.02
4.64
11.16
5.19
14.12
5.90
18.75
18.25
6.46
7.44
Dec 03
Dec 04
Dec 05
Dec 06
Dec 07
Market Value
Book Value
21
For Employees.
...offer security and opportunities to
our employees...
1981
25
For Communities.
...making a valuable contribution to the
communities in which we operate...
1966
29
For Customers.
…customer-focused, efficient and ethical
delivery of banking and other selected
financial services…
1983
35
For Generations.
1986
41
Managements’
Discussion &
Analysis of Results
of Operations &
Financial Condition
Results of Operations
Shareholder Value
Share Purchase Activity
Performance Indicators
Jurisdiction Overviews
Bermuda
The Bahamas
Barbados
Canada
Cayman Islands
Guernsey
Hong Kong
Malta
Switzerland
United Kingdom
43
44
45
45
46
46
47
48
48
49
50
50
51
51
52
1989
53
55
55
56
56
57
58
59
60
61
62
63
64
65
66
67
Financials.
Financial Overview
Income
Expenses
Balance Sheet
Taxes
Capital
Selected Quarterly Results of
Operations
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
1965
55
55
Financial Overview
Income
Total revenue for the Group after provisions was $470.0 million for the year ended 31 December 2007, up $54.9 million, or 13.2%, from $415.1 million for
the same period a year ago. Net interest income before provisions for credit losses increased by 15.8% to $252.6 million. The increase reflects growth in
average interest earning assets, up 14.9% to $11.5 billion, and the Group’s continually successful asset/liability management strategies. As a result, the net
interest margin widened by 0.03% to 2.18%.
We continue to be appropriately reserved with total provisions of $26.9 million. Non-performing loans totalled $36.8 million as at 31 December 2007, up
from $29.1 million a year ago, the increase reflecting loan growth in the commercial loan and mortgage portfolios. 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 $2.0 million, compared to $3.0 million last year.
Non-interest income grew by 13.4% to $219.7 million, reflecting business growth, notably from foreign exchange (+17.1%), trust and custody (+16.7%),
investment & pension fund administration (+14.2%), and asset management (+10.9%).
An unrealised gain of $3.2 million was recorded in respect of trading securities, principally mutual funds managed by the Bank, and there was a $0.2 million
gain on sale of an affiliate in respect of a Bermuda based company. Other (losses)/gains netted to a loss of $3.7 million, reflecting gains made from the sale
of equity positions in a credit card processing company ($3.4 million) and a fund administration company ($1.0 million), and the sale and lease-back of
premises in Cayman ($0.6 million) offset by losses from the write down of an investment in a Bermuda based financial services company ($2.4 million) and
an unrealised loss of $6.3 million on a credit derivative transaction entered into with a related party.
Changes in Net Interest Income
(In $ thousands)
For the year ended 31 December
2007
2006
Average
balance
Interest
Rate
Average
balance
Interest
Rate
Assets
Cash and deposits with banks
Investments
Loans
Interest earning assets
Other assets
Total assets
Liabilities
Deposits
Subordinated capital
Interest bearing liabilities
3,005,511
4,569,566
3,922,337
11,497,414
124,609
253,831
282,711
661,151
4.15%
5.55%
7.21%
5.75%
3,308,586
3,317,309
3,384,718
10,010,613
129,908
163,348
234,772
528,028
473,076
11,970,490
-
661,151
-
5.52%
389,083
10,399,696
-
528,028
9,731,178
281,750
10,012,928
395,681
14,853
410,534
4.07%
5.27%
4.10%
8,415,621
278,963
8,694,584
298,254
14,553
312,807
Non-interest bearing current accounts
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Spread
Net interest margin
1,114,722
262,960
11,390,610
579,880
11,970,490
Note: Underlying assets and liabilities are comprised of various currencies.
-
-
-
-
410,534
3.60%
964,496
195,115
9,854,195
-
-
312,807
545,501
10,399,696
1.65%
2.18%
3.93%
4.92%
6.94%
5.27%
-
5.08%
3.54%
5.22%
3.60%
-
-
3.17%
1.67%
2.15%
Annual Report 2007
Expenses
The efficiency ratio was 65.7%, compared to 64.8% in 2006, reflecting that growth in the Group’s operating expenses, up 14.4%, was higher than the
percentage increase for operating income, up 13.2% year on year.
The increase in the operating expense primarily reflected the expanding size of the Group, with salaries and employee benefits up 13.7% to
$184.8 million, accounting for 58.3% of total Group operating expenses, compared with 58.6% last year. There was a significant increase in costs relating
to professional and outside services, up 48.0% to $22.3 million, reflecting a number of technology, risk management and client services initiatives. Property
costs increased year on year by 24.6%, principally reflecting increased depreciation relating to the refurbishment of and improvements made to the Bank’s
Rosebank operations centre in Bermuda.
As at 31 December 2007 there were 843 employees in Bermuda, down from 845 a year ago. Overseas, the total headcount increased by 122 to 1,007
primarily due to continued growth in Cayman (+23), Guernsey (+14), the acquisition of the Bentley Reid Group (+44) and the establishment of a fund
administration operations centre in Halifax, Nova Scotia (+32).
Balance Sheet
Total assets increased by 7.0% to $11.9 billion, up from $11.1 billion a year ago. This increase reflects the rise in the customer deposit base, up year on
year by $0.7 billion, or 7.1%, to $10.4 billion, which included an 8.2% increase in non-interest bearing deposits to $1.0 billion. The increase in the customer
deposit base was primarily employed in funding growth in our loan portfolio, up 9.7% to $4.1 billion, and our held to maturity investment portfolio, up year
on year by 35.7% to $3.8 billion. Cash and deposits with banks reduced year on year by 20.1% to $2.5 billion, reflecting increased investments in AAA/AA
rated floating rate note securities. Available for sale securities; principally bank certificates of deposit, reduced slightly by 3.2% to $0.9 billion whilst trading
investments, at $0.1 billion, were at the same level as a year ago. There was no other than temporary impairment recorded in respect of held to maturity
investments and the fair value of the portfolio, at $3.6 billion, represented 95.7% of amortised cost. The Balance sheet remains highly liquid with a loans
to customer deposits ratio of 39.5% and loans to total assets ratio of 34.6%.
Marketing 2.2%
Amortisation of intangible
assets 2.1%
Non-income taxes 4.4%
Professional and
outside services 6.9%
Property 9.5%
Technology and
Communications 8.9%
Other Income 2.0%
Net Interest Income 53.3%
Distribution of 2007
Total Expense
Distribution of 2007
Expenses by Location
Other expenses 6.8%
Income Taxes 2.2%
Salaries and other
employee benefits
57.0%
Barbados 3.6%
Cayman 17.2%
Guernsey 14.4%
Switzerland 0.4%
The Bahamas 2.7%
UK 8.6%
Distribution of 2007
Total Revenue
Distribution of 2007
Total Revenue by Location
Trust & Custody 8.1%
Asset Management 8.1%
Investment & Pension
Fund Administration 11.1%
The Bahamas 2.5%
Barbados 2.5%
UK 6.7%
Guernsey 13.4%
Banking Services 9.2%
Cayman 23.9%
Foreign Exchange Revenue 8.2%
Bermuda 53.1%
Switzerland 0.0%
Bermuda 51.0%
57
The Bank has previously viewed the mortgage-backed and other asset-backed securities markets as good sources of yield, liquidity and transparency of
information on issuers and underlying collateral. Through the ALCO Committee, the Bank monitors its investments with exposure to the US residential market, as
well as exposures to other residential and commercial mortgage-backed securities and other forms of asset-backed securities through timely reporting, the use
of industry standard models and sources of information and specialists within the Bank to interpret the results of stress testing. The Bank’s policy is to invest in
senior tranches of investment grade asset-backed securities. As at 31 December 2007 investments in US residential collateralised mortgage obligations (CMO’s),
had a carrying value (amortised cost) of $478.7 million with a fair value of $371.2 million and represented 12.8% of total held to maturity investments. Total
holdings of CMO’s as at 31 December 2007, including residential CMO’s, were $828.5 million with a fair value of $713.2 million and represented 22.1% of total
held to maturity investments.
Investment Portfolio
by Long Term Debt Rating
Other asset-backed securities had a carrying value (amortised cost) of $632.9 million with a fair value of $593.8 million and represented 16.9% of held to
maturity investments.
Other 1.2%
In light of the market instability and complexity in fair value and other-than-temporary impairment determinations, a large degree of judgement is involved in
the assessments. The Bank continues to have exposure to these markets and as such there exists a level of uncertainty as to the impact of future events in these
markets and declines in the US economy, that may affect management’s views on other-than-temporary impairment, ultimately resulting in possible write-downs
to fair value. However, based on current economic conditions, management believes that the Bank will collect all amounts due according to the contractual
terms of the securities. By rating category, holdings of US residential mortgage-backed securities were as follows: AAA: 60.1%; AA: 33.1%; BBB: 2.8%.
AA 40.8%
A 14.6%
BBB 1.0%
Taxes
AAA 42.4%
For the period under review the corporation tax of the Group was $7.0 million compared to $3.8 million for the same period a year ago, reflecting increased
taxable earnings in Guernsey and the UK. Corporation taxes of $4.9 million in Guernsey, $2.0 million in the UK and $0.1 million in Barbados were incurred
for the year. As a result, the Group’s effective corporation tax rate increased from 2.8% a year ago to 4.6%. Non-income taxes of $14.2 million were also
paid across the Group, up 8.5% from $13.0 million the previous year, primarily reflecting an increase in employee related taxes.
Other 1.2%
BBB 1.0%
A 14.6%
AAA 42.4%
Investment Portfolio
by Long Term Debt Rating
Lending by Location
Barbados 3.6%
UK 14.7%
The Bahamas 1.0%
AA 40.8%
Guernsey 11.2%
Bermuda 61.0%
Cayman 8.5%
Group Loans by Type
Lending by Location
Other Consumer Loans 10.8%
Commercial and Industrial 23.8%
Barbados 3.6%
UK 14.7%
The Bahamas 1.0%
Residential Mortgages 33.4%
Commercial Real Estate 23.8%
Guernsey 11.2%
Bermuda 61.0%
Credit Card 1.8%
Financial Institutions and Government 6.4%
Cayman 8.5%
Annual Report 2007
Capital
The Group continues to maintain a strong capital base that ensures stability and allows us to take advantage of opportunities for growth.
At 31 December 2007 the risk weighted total capital ratio was 13.0%, compared to the 10.0% minimum requirement of the Bermuda Monetary Authority
(BMA). Of the total, the Tier 1 ratio was 8.6%, compared to a 5% minimum requirement. Shareholders’ equity increased by $79.8 million, or 14.5% over
a year ago, reflecting the increase in retained earnings offset by share buy-backs.
Weighted risk assets rose year on year by 16.0% to $6.3 billion, primarily due to growth in loans and investments. The loan to the Stock Option Trust of
$41.6 million is in respect of potential obligations under the Bank’s Stock Option Plan and is deducted from shareholders’ equity as treasury stock. The
increase in the loan from $37.0 million the previous year reflects the purchase of 597,818 Bank shares by the Stock Option Trust at a cost of $22.7 million,
offset by repayments from cash received on the exercise of stock options by employees.
During the period under review, the Bank issued 74,522 new shares and transferred 232,392 treasury shares under the Dividend Re-investment Programme,
which represents a cash savings of $12.5 million, or 23.0% of the total dividend paid. As a result of the stock split in August 2007, 59,637,346 new shares
were issued. Under the Share Buy-Back Plan, the Bank purchased and cancelled 125,603 shares, at a cost of $7.4 million and purchased and held
as treasury stock, 967,119 shares at a cost of $38.1 million.
Capital Composition
(In $ thousands)
For the year ended 31 December
2007
2006
Tier 1 capital
Tier 2 capital
Deductions *
Total capital
547,801
296,922
(21,413 )
823,310
488,131
266,185
(18,722 )
735,594
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
* Deductions from capital comprise investments in affiliates.
487,158
1,795,446
3,169,395
360,335
533,420
6,345,754
623,260
1,091,422
2,867,821
285,450
600,715
5,468,668
8.6%
4.7%
(0.3% )
13.0%
8.9%
4.9%
(0.3% )
13.5%
59
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
2007
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 ($) *
Basic
Diluted
Return on shareholders’ equity (%)
65,924
56,121
122,045
87,289
34,756
0.41
0.40
22.9
63,786
57,238
121,024
81,378
39,646
0.47
0.46
27.1
61,649
54,400
116,049
80,140
35,909
0.42
0.41
25.1
59,258
51,587
110,845
75,161
35,684
0.42
0.41
25.8
Quarter ended
31 December
30 September
30 June
31 March
2006
Net interest income after provision for credit losses
Total fees and other income
Total revenue
Total non-interest expense
Net income for the quarter
Earnings per share ($) *
Basic
Diluted
Return on shareholders’ equity (%)
57,688
49,581
107,269
74,786
32,483
0.38
0.37
22.7
55,058
51,018
106,076
71,424
34,652
0.41
0.39
24.5
53,573
51,078
104,651
70,794
33,857
0.40
0.39
25.0
48,902
48,154
97,056
63,965
33,091
0.39
0.38
26.3
* All prior period per share data have been restated to reflect the three for one stock split in August 2007 and the one for ten stock dividend in August 2006.
Annual Report 2007
Financial Summary
(In $ thousands, except per share data)
Year ended 31 December
2007
2006
2005
2004
2003
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
Salaries and other employee benefits
Other non-interest expenses
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 (diluted)
Dividends declared
Net book value
Number of employees
Bermuda
Overseas
Total
2,517,012
4,744,989
4,124,764
215,379
11,910,920
10,747,971
284,191
629,330
250,617
219,346
184,751
139,217
145,995
54,366
1.2%
25.2%
37.2%
7.7%
13.0%
65.7%
1.68
0.64
7.44
843
1,007
1,850
3,151,191
3,786,793
3,760,745
171,326
11,132,802
10,042,832
280,168
549,553
215,221
199,831
162,504
118,465
134,083
46,496
1.3%
24.6%
34.7%
7.5%
13.5%
64.8%
1.53
0.60
6.46
845
885
1,730
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
38,504
1.2%
23.6%
35.2%
8.4%
13.1%
66.4%
1.28
0.56
5.90
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
148,075
163,090
127,459
93,240
90,466
32,217
1.1%
21.2%
35.6%
6.6%
10.7%
69.1%
1.06
0.52
5.19
786
766
1,552
Shareholder data
Number of shareholders
Number of common shares (in thousands) *
4,201
84,553
3,915
28,375
3,878
25,429
3,778
22,745
2,912,383
2,638,253
1,954,716
99,979
7,733,806
7,122,577
122,871
382,095
115,066
118,985
100,104
63,109
70,838
26,809
1.0%
17.9%
37.8%
6.5%
13.0%
67.7%
0.85
0.48
4.64
734
647
1,381
3,581
20,643
* Actual outstanding; excludes common shares held as treasury stock and common shares held by the Bank’s Stock Option Trust.
All prior period per share data have been restated to reflect the three for one stock split in August 2007.
All prior period per share data, with the exception of dividends, have been restated to reflect the one for ten stock dividends in August 2006, 2005, 2004 and 2003.
The number of shares in 2007 increased primarily due to the three for one stock split.
The number of shares in 2006, 2005 and 2004 increased primarily due to the issue of the stock dividends.
61
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
29 February 2008
Richard J. Ferrett
Executive Vice President & Chief Financial Officer
29 February 2008
Annual Report 2007
Independent Auditors’ Report to the Shareholders
63
Consolidated Balance Sheet
As at 31 December (In $ thousands)
2007
2006
Assets
Cash and demand deposits with banks
Term deposits with banks
Total cash and deposits with banks
Investments
Trading
Available for sale
Held to maturity
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
Employee future benefits
Accrued interest
Dividend payable
Other liabilities
Total other liabilities
Subordinated capital
Total liabilities
Shareholders’ equity
Common share capital ($1.00 par: Authorised shares 100,000,000)
Additional paid in capital
Retained earnings
Less: treasury common stock
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
267,261
2,249,751
2,517,012
58,534
932,238
3,754,217
4,744,989
4,124,764
215,379
68,597
25,260
81,230
133,689
11,910,920
1,042,062
9,399,517
306,392
10,747,971
98,063
34,774
14,081
102,510
249,428
284,191
11,281,590
89,456
455,114
167,607
(71,576 )
(11,271 )
629,330
11,910,920
341,582
2,809,609
3,151,191
56,471
963,355
2,766,967
3,786,793
3,760,745
171,326
64,163
25,018
69,685
103,881
11,132,802
964,496
8,791,163
287,173
10,042,832
107,191
33,409
13,178
106,471
260,249
280,168
10,583,249
29,870
514,872
76,881
(37,039 )
(35,031 )
549,553
11,132,802
Robert A. Mulderig
Chairman of the Board
Robert J. Stewart
Vice Chairman
Alan R. Thompson
President & Chief Executive Officer
Annual Report 2007
Consolidated Statement of Income
For the year ended 31 December (In $ thousands, except per share data)
2007
2006
Non-interest income
Investment and pension fund administration
Banking
Foreign exchange revenue
Asset management
Trust and custody
Other non-interest income
Total non-interest income
Interest income
Loans
Investments
Deposits with banks
Total interest income
Interest expense
Deposits
Subordinated capital
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Realised/unrealised gains on trading securities
Gain on sale of affiliates
Other (losses) gains
Total revenue
Non-interest expense
Salaries and other employee benefits
Property
Technology and communications
Professional and outside services
Non-income taxes
Marketing
Amortisation of intangible assets
Other expenses
Total non-interest expense
Net income before income taxes
Income taxes
Net income
Earnings per share
Basic
Diluted
Earnings per share comparative figures have been restated for the three for one stock split in August 2007.
The accompanying notes are an integral part of these consolidated financial statements.
52,301
43,266
38,717
38,260
38,112
9,026
219,682
284,695
253,831
124,608
663,134
395,681
14,853
410,534
252,600
(1,983 )
250,617
3,221
170
(3,727 )
469,963
184,751
30,856
28,741
22,304
14,152
7,131
6,916
22,140
316,991
152,972
(6,977 )
145,995
1.72
1.68
45,798
41,289
33,053
34,492
32,650
6,372
193,654
237,769
163,348
129,908
531,025
298,254
14,553
312,807
218,218
(2,997 )
215,221
1,608
2,144
2,425
415,052
162,504
24,770
26,531
15,071
13,045
6,932
6,352
21,972
277,177
137,875
(3,792 )
134,083
1.58
1.53
65
Consolidated Statement of Changes in Shareholders’ Equity
and Comprehensive Income
For the year ended 31 December (In $ thousands)
Common share capital
Authorised: 100,000,000 shares (2006: 100,000,000) of par value $1 each
Issued
Issued and outstanding at beginning of year
(January 2007: 29,869,754 shares; January 2006: 26,947,915 shares)
Dividend reinvestment
(December 2007: 306,914 shares; December 2006: 263,435 shares)
of which issued from treasury common stock
(December 2007: 232,392 shares; December 2006: nil shares)
Stock dividend
(December 2007: nil shares; December 2006: 2,706,063 shares)
Stock split
(December 2007: 59,637,346 shares; December 2006: nil shares)
Shares repurchased and cancelled
(December 2007: 125,603 shares; December 2006: 47,659 shares)
Issued and outstanding at end of year
(December 2007: 89,456,019 shares; December 2006: 29,869,754 shares)
Additional paid in capital
Balance at beginning of year
Dividend reinvestment
of which related to treasury common stock
Stock split
Stock dividend
Issued under directors’ and executive officers’ and employees’ stock option plans
Common shares repurchased and cancelled
Balance at end of year
Retained earnings
Appropriated - general reserve
Unappropriated at beginning of year
Net income for year
Cash dividends declared
Stock dividend
Balance at end of year
Accumulated other comprehensive loss
Balance at beginning of year
Net change in unrealised gains and losses on translation of net investment in foreign operations
Net change in unrealised gains and losses on available for sale securities
Net change in unrealised gains and losses on cash flow hedges
Net change in employee future benefits
Net change in minimum pension liability
Balance at end of year
Treasury common stock
Balance at beginning of year (January 2007: 1,494,584 shares; January 2006: 1,519,203 shares)
Net purchases
Balance at end of year
(December 2007: 4,903,324 shares; December 2006: 1,494,584 shares)
Total shareholders’ equity
Comprehensive income
Net income
Other comprehensive income (loss)
Total comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
Annual Report 2007
2007
2006
29,870
26,948
307
(232 )
264
-
-
2,706
59,637
(126 )
-
(48 )
89,456
29,870
514,872
12,403
(8,197 )
(59,637 )
-
2,959
(7,286 )
455,114
100,000
(23,119 )
145,995
(55,269 )
-
167,607
(35,031 )
542
(398 )
38
23,578
-
(11,271 )
(37,039 )
(34,537 )
(71,576 )
341,647
14,804
-
-
158,371
2,666
(2,616 )
514,872
100,000
52,501
134,083
(48,626 )
(161,077 )
76,881
(322 )
5,465
(446 )
1,134
(41,266 )
404
(35,031 )
(25,548 )
(11,491 )
(37,039 )
629,330
549,553
145,995
23,760
169,755
134,083
(34,709 )
99,374
Consolidated Statement of Cash Flows
For the year ended 31 December (In $ thousands)
Cash flows from operating activities
Net income
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortisation
Increase in carrying value of investments in affiliates
Share-based compensation
Gain on sale of affiliate
Gain on sale of premises and equipment
Gain on sale of private equity investments
Provision for credit losses
Increase in accrued interest receivable
Increase in other assets
Increase in accrued interest payable
Increase (decrease) in other liabilities
Net change in trading account securities
Cash provided by operating activities
Cash flows from investing activities
Net decrease increase in term deposits with banks
Net additions to premises, equipment and computer software
Net increase 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 private equity investment
Net proceeds on sale of affiliate
Purchase of subsidiary
Cash used in investing activities
Cash flows from financing activities
Net increase in demand and term deposit liabilities
Proceeds from dividend re-investment plan
Common shares repurchased
Treasury stock
Cash dividends paid
Cash provided by financing activities
Effect of exchange rates on cash and demand deposits with banks
Net (decrease) increase in cash and demand deposits with banks
Cash and demand deposits with banks: beginning of period
Cash and demand deposits with banks: end of period
Supplemental disclosure of cash flow information
Cash interest paid
Cash income tax paid
The accompanying notes are an integral part of these consolidated financial statements.
2007
2006
145,995
134,083
27,536 21,009
(1,051 ) (4,204)
2,959 2,328
(170 ) (635)
(569 ) (1,509)
(4,388 ) (1,501)
1,983 2,997
(4,069 ) (16,708)
(15,608 ) (27,521)
1,114
12,724
3,273 (344 )
120,719
86,758
207,477
157,005
(1,872 )
155,133
573,681
(59,152 )
(348,491 )
1,980,152
(2,981,357 )
4,019,843
(3,964,763 )
4,388
2,344
(28,353 )
(801,708 )
664,323
12,478
(45,564 )
(4,582 )
(54,366 )
572,289
21,486
(42,621 )
(575,187 )
734,672
(1,240,278 )
2,685,099
(3,030,445 )
1,501
635
-
(1,445,138 )
1,470,924
15,066
(2,664 )
(11,491 )
(46,496 )
1,425,339
(35 )
(794 )
(74,321 )
186,884
341,582
267,261
154,698
341,582
411,082
5,428
300,956
2,741
67
Notes to Consolidated Financial Statements
For the year ended 31 December 2007 (All amounts are expressed in thousands of Bermuda dollars unless otherwise stated)
Note 1: Significant Accounting Policies
(a) Basis of Presentation and Use of Estimates and Assumptions
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, including the provision for credit losses, the
fair value of financial instruments, the fair value of investments, litigation provisions, variable interest entities, pensions and post-retirement medical benefit
plan benefits, the carrying value of goodwill and intangible assets require management to make subjective or complex judgments and 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 because the Bank is not the beneficiary of these assets.
(e) Investments
Investments include debt and equity securities. Debt securities include bonds, notes, certificates of deposit, redeemable preferred stock, as well as certain
loan or asset backed and structured securities subject to prepayment risk. Equity securities include common and non-redeemable preferred stocks. Debt
securities classified as “held to maturity” represent securities that the Bank has both the ability and the intent to hold until maturity and are carried at
amortised cost adjusted to recognise other than temporary impairment, except for money market mutual funds which are carried at market value, which
approximates cost plus accrued and reinvested interest since acquisition. Debt securities and marketable equity securities classified as “available for sale”
are carried at fair value, with unrealised gains and losses reported in other comprehensive income, with the exception of other than temporary impairments
which are included in net 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 or independent pricing services when available, or if quoted market prices or independent pricing
services 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 sale transaction.
Annual Report 2007
(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. The entire
balance of an account is contractually delinquent if the minimum payment of principal or interest is not received by the specified due date. Delinquency is
reported on loans that are 30 days or more past due.
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 lending portfolio. 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 allowance 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 Allowance
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, instalment, 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 more frequently 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 re-evaluated annually and
an impairment test is carried out if certain indicators of impairment exist.
69
(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 Post-retirement Benefits Other Than Pensions
(FAS 106). Both plans are also accounted for in accordance with FAS No. 158 (FAS 158), Employers’ Accounting for Defined Benefit Pension and Other
Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R).
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 plans, 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
revised accounting standards.
Annual Report 2007
For each of the defined benefit pension plans and for the post-retirement medical benefits plan, the asset (liability) recognised for accounting purposes is
reported in other assets and employee future benefits.
For the defined contribution pension plans the Bank and participating employees provide an annual contribution based on each participating employee’s
pensionable earnings. Amounts paid are expensed in the period.
(n) Share-Based Compensation
The Bank has a number of share-based compensation plans for eligible employees. In accordance with FAS No. 123R Share-Based Payment (FAS 123R),
the Bank follows the fair value method of accounting for share-based compensation plans. The fair value of share-based awards that eventually vest is
amortised over the vesting period of the award.
(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 Non-refundable 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.
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. Had a ready market for the instruments existed, the differences could be material. 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 and credit agency ratings and outlooks. The Bank does not reduce the book value of financial assets to their fair values, unless they are
other-than-temporarily impaired, 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.
71
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 determined based on the quoted market price or independent pricing services when available, or if
quoted market prices or independent pricing services are not available, discounted expected cash flows using market rates commensurate with the
credit quality and maturity of the investment.
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: The fair value of the subordinated capital has been estimated by discounting the contractual cash flows, using current
market interest rates.
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 to 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)
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.
ii)
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 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.
(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 common shares outstanding during the year and adjusted for the stock
split and the stock dividend declared during the years ended 31 December 2007 and 2006 (see also Notes 18 and 23). The dilutive effect of share-based
compensation plans was calculated using the treasury stock method, whereby the proceeds received from the exercise of share-based awards are assumed
to be used to repurchase outstanding common shares, using the quarterly average market price of the Bank’s shares for the period.
Annual Report 2007
(u) Consolidation of Variable Interest Entities
FIN 46R requires beneficiaries of variable interests 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
On 29 October 2007, the Bank acquired all outstanding shares of Bentley Reid Group Limited (Bentley Reid), a privately-held, international wealth
management company with offices in Hong Kong, London and Malta for consideration of £13.8 million ($28.4 million) paid in cash. The purchase agreement
provides for contingent payments in years 2009 and 2010 of up to £5.3 million ($10.5 million). Management has assessed that the contingency amounts
are not probable and therefore have not been accounted for at this time. The payments will be accounted for as and when they are probable and will be
recorded as additional goodwill at that time.
The following table summarises the total consideration in respect of the acquisition of Bentley Reid:
Fair value of assets acquired
Cash and deposits with banks
Premises, equipment and computer software
Intangible assets - customer relationships
Other assets
Total assets
Fair value of liabilities assumed
Other liabilities
Fair value of identifiable net assets acquired
Total purchase consideration
Bentley Reid
9,154
2,069
17,705
2,206
31,134
2,781
28,353
28,353
Note 3: Cash and Deposits with Banks
31 December
Unrestricted
Non-interest earning
Cash and demand deposits
Bermuda Non-Bermuda
Total
Bermuda Non-Bermuda
Total
2007
2006
56,667
41,622
98,289
27,062
22,955
50,017
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
255,443
-
-
255,443
2,010,071
43,117
64,123
2,117,311
2,265,514
43,117
64,123
2,372,754
183,815
-
-
183,815
2,745,502
77,458
78,719
2,901,679
2,929,317
77,458
78,719
3,085,494
Total unrestricted cash and deposits
312,110
2,158,933
2,471,043
210,877
2,924,634
3,135,511
Affected by drawing restrictions related to minimum reserve
and derivative margin requirements
Non-interest earning
Demand deposits
-
27,876
27,876
-
12,795
12,795
Interest earning
Deposits maturing within three months
Total restricted deposits
5,032
5,032
13,061
40,937
18,093
45,969
2,885
2,885
-
12,795
2,885
15,680
Total cash and deposits with banks
317,142
2,199,870
2,517,012
213,762
2,937,429
3,151,191
Restricted cash of $5.032 million in Bermuda reflects collateral posted against interest rate swaps.
73
Note 4: Investments
The following table presents securities by remaining term to maturity:
31 December 2007
Trading
Debt securities issued by non-US governments
Corporate securities and other
Total trading
Available for sale
Certificates of deposit
Debt securities issued by non-US governments
Corporate debt securities
Equity securities
Total available for sale
Held to maturity
US government and federal agencies/corporations
Certificates of deposit
Collateralised mortgage obligations
Debt securities issued by non-US governments
Corporate debt securities
Other, primarily asset-backed securities
Total held to maturity
Total investments
Total by currency
Bermuda dollars
US dollars
Other
Total investments
Remaining term to maturity
Within
3 months
3 to 12
months
1 to 5
years
Over No specific
maturity
5 years
Carrying
value
-
-
-
731
-
731
4,304
-
4,304
5,572
-
5,572
-
-
1,838
-
1,838
-
-
-
-
-
4,496
-
87,699
14,395
1,346,894
49,986
1,503,470
136,248
-
740,781
17,827
45,981
473,755
1,414,592
-
47,927
47,927
10,607
47,927
58,534
-
-
-
331
331
-
-
-
1,887
-
-
1,887
918,073
11,996
1,838
331
932,238
200,731
230,412
828,480
76,311
1,785,376
632,907
3,754,217
669,729
11,996
-
-
681,725
-
81,152
-
19,997
186,419
90,831
378,399
248,344
-
-
-
248,344
59,987
149,260
-
22,205
206,082
18,335
455,869
1,060,124
704,944
1,507,774
1,422,002
50,145
4,744,989
-
270,411
789,713
1,060,124
-
352,388
352,556
704,944
-
1,160,218
347,556
1,507,774
-
1,249,561
172,441
1,422,002
492
45,323
4,330
50,145
492
3,077,901
1,666,596
4,744,989
Annual Report 2007
31 December 2006
Trading
Debt securities issued by non-US governments
Corporate securities and other
Total trading
Available for sale
Certificates of deposit
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
Certificates of deposit
Collateralised mortgage obligations
Debt securities issued by non-US governments
Corporate debt securities
Other, primarily asset-backed securities
Total held to maturity
Total investments
Total by currency
Bermuda dollars
US dollars
Other
Total investments
Within
3 months
3 to 12
months
Remaining term to maturity
Over 5
years
1 to 5
years
No specific
maturity
Carrying
value
-
-
-
559
3
562
3,847
-
3,847
6,351
-
6,351
-
-
1,650
-
-
1,650
-
-
-
-
-
-
64,645
-
-
60,396
1,130,477
44,413
1,299,931
158,977
-
279,393
14,407
113,568
159,142
725,487
-
45,711
45,711
10,757
45,714
56,471
-
-
-
223
-
223
-
-
-
-
-
-
-
836,285
27,265
1,650
223
97,932
963,355
223,622
217,162
279,393
80,261
1,743,450
223,079
2,766,967
464,226
27,265
-
-
97,932
589,423
-
167,162
-
-
152,003
-
319,165
372,059
-
-
-
-
372,059
-
50,000
-
5,458
347,402
19,524
422,384
908,588
795,005
1,303,778
733,488
45,934
3,786,793
-
364,042
544,546
908,588
-
393,328
401,677
795,005
-
1,138,242
165,536
1,303,778
-
573,015
160,473
733,488
2,787
40,925
2,222
45,934
2,787
2,509,552
1,274,454
3,786,793
Investments at carrying value includes $3,062 million (2006: $2,159 million) of floating-rate instruments and $1,634 million (2006: $1,582 million) of fixed-rate
instruments. The approximate yield on floating-rate securities at 31 December 2007 was 5.22% (2006: 5.61%), while the approximate yield on fixed-rate securities
was 5.67% (2006: 5.39%).
Certificates of deposit with a carrying value of $50.0 million included in the Held to maturity category are restricted from sale in accordance with a credit
enhancement agreement.
75
The cost of available for sale securities, the amortised cost of held to maturity securities and their estimated fair values were as follows:
31 December
Available for sale
Certificates of deposit
Debt securities issued by non-US governments
Corporate debt securities
Equity securities
Other, primarily asset-backed securities
Total available for sale
31 December
Held to maturity
US government and federal agencies/corporations
Certificates of deposit
Collateralised mortgage obligations
Debt securities issued by non-US governments
Corporate debt securities
Other, primarily asset-backed securities
Total held to maturity
2007
Gross
Gross
unrealised unrealised
losses
gains
Cost
Fair
value
2006
Gross
Gross
unrealised unrealised
losses
gains
Cost
Fair
value
916,187
11,996
1,838
192
-
930,213
2,004
-
-
139
-
2,143
(118 )
-
-
-
-
(118 )
918,073
11,996
1,838
331
-
932,238
836,826
27,265
1,650
223
97,931
963,895
-
-
-
-
1
1
(541 )
-
-
-
-
(541 )
836,285
27,265
1,650
223
97,932
963,355
2007
Gross
Gross
Amortised unrealised unrealised
losses
gains
Cost
2006
Gross
Gross
Fair Amortised unrealised unrealised
losses
gains
Cost
value
Fair
value
200,731
230,412
828,480
76,311
1,785,376
632,907
3,754,217
113
133
719
809
853
(821 )
(48 )
(115,976 )
(36 )
223,622
200,023
217,162
230,497
279,393
713,223
80,261
77,084
(14,317 ) 1,771,912 1,743,450
223,079
599,241
(164,889 ) 3,591,980 2,766,967
25 (33,691)
2,652
397
68
61
125
1,427
337
2,415
(849 )
-
(128 )
(543 )
(2,080 )
(9,190 )
(12,790 )
223,170
217,230
279,326
79,843
1,742,797
214,226
2,756,592
The following table shows the fair value and gross unrealised losses of the Bank’s investments with unrealised losses that are not deemed to be other-than-temporarily
impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealised loss position:
31 December 2007
Available for sale
Certificates of deposit
Held to maturity
US government and federal agencies/corporations
Certificates of deposit
Collateralised mortgage obligations
Debt securities issued by non-US governments
Corporate debt securities
Other, primarily asset-backed securities
Total held to maturity securities
with unrealised losses
Less than 12 months
12 months or more
Gross
unrealised
losses
Fair
value
Gross
Fair unrealised
losses
value
Total
Total
gross
fair unrealised
losses
value
221,248
(118 )
-
-
221,248
(118 )
95,228
115,108
509,804
-
1,116,584
(553 )
(48 )
(113,931 )
-
(12,775 )
507,628 (24,900)
47,287
-
134,776
40,958
205,356
48,498
(268 )
-
(2,045 )
(36 )
(1,542 )
(8,791 )
142,515
115,108
727,595
40,958
1,321,940
473,111
(821 )
(48 )
(127,702 )
(36 )
(14,317 )
(21,965 )
2,344,352
(152,207 )
476,875
(12,682 )
2,821,227
(164,889 )
Total securities with unrealised losses
2,565,600
(152,325 )
476,875
(12,682 )
3,042,475
(165,007 )
Annual Report 2007
31 December 2006
Available for sale
Certificates of deposit
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 securities
with unrealised losses
Less than 12 months
12 months or more
Fair
value
Gross
unrealised
losses
Gross
unrealised
losses
Fair
value
Total
Total
gross
fair unrealised
losses
value
831,839
(541 )
-
-
831,839
(541 )
35,162
113,455
-
313,482
39,117
(89 )
(78 )
-
(270 )
(53 )
63,885
35,218
39,399
277,480
64,076
(760 )
(50 )
(543 )
(1,810 )
(9,137 )
99,047
148,673
39,399
590,962
103,193
(849 )
(128 )
(543 )
(2,080 )
(9,190 )
501,216
(490 )
480,058
(12,300 )
981,274
(12,790 )
Total securities with unrealised losses
1,333,055
(1,031 )
480,058
(12,300 )
1,813,113
(13,331 )
Management conducts an ongoing review to identify and evaluate securities that show objective indications of possible impairment. An investment is
considered impaired if its unrealised losses represent impairment that is considered to be other-than-temporary.
To assess whether an other-than-temporary impairment has occurred, management must make certain judgments and estimates and in determining whether
a loss is temporary factors considered include the extent of the unrealised loss, the length of time that the security has been in an unrealised loss position,
the financial condition of the issuer, prospects for recovery in fair value, and the Bank’s ability and intent to hold the investment for a period of time
sufficient to allow for any anticipated recovery. If the decline is considered to be other-than-temporary, a write-down is recorded in the Consolidated
Statement of Income.
Unrealised losses for US Government and federal agencies/corporations, Collateralised mortgage obligations, Debt securities issued by non-US governments,
Corporate debt securities and Other, primarily asset-backed securities, were due to interest rate changes and widening credit spreads caused by the recent
disruption in the financial markets, the weakening of the US housing market, and credit rating downgrades of certain securities in the marketplace. However,
given that a substantial portion of these securities are investment grade securities, the unrealised losses are primarily in higher rated securities, we believe
these losses are a result of technical spread widening rather than fundamental deterioration and we have the ability and intent to hold these investments
until there is a recovery of fair value, which may be at maturity, the Bank believes it is probable that it will be able to collect all amounts due according to
the contractual terms of the investments. Accordingly, the Bank does not consider these investments to be other-than-temporarily impaired
as at 31 December 2007.
The fair value of the Bank’s collateralised mortgage obligations related exposure depends on market conditions and assumptions that are subject to change
over time. The Bank expects that market conditions will continue to evolve, and that the fair value of the Bank’s positions will frequently change. The degree
of judgement involved in determining the fair value of an investment security is dependent upon the availability of quoted market prices or observable
market parameters. When observable market prices and parameters do not exist as was in certain circumstances the case at 31 December 2007, judgement
is necessary to estimate fair value which gives rise to added uncertainty in the valuation process and assessment of whether a security is considered other-
than-temporarily impaired. The valuation process takes into consideration factors such as interest rate changes, movements in credit spreads, default rate
assumptions, prepayment assumptions, type and quality of collateral, and market sentiment.
Management has supplemented its fair value and impairment analyses by stress testing collateralised mortgage obligations where the fair value is significantly
lower than amortised cost using a widely employed industry modeling and analytics software tool. This analytics software tool provides an extensive, accurate,
and timely set of structured securities deal models and data, covering the wide range of asset backed securities, collateralised mortgage obligations, residential
collateralised mortgage obligations, and collateralised debt obligations (including collateralised bond obligations and collateralised loan obligations) deals.
Investments in collateralised mortgage obligations with fair values significantly lower than amortised cost were stress tested using various loss severity scenarios
and based on the results the Bank has concluded that there is no other-than-temporary impairment in the Bank’s portfolio of investments. Specific risk factors of
the underlying collateral were considered in other-than-temporary impairment assessments, specifically, the vintage of the underlying loans, the percentage of
first lien loan mortgages, home owner/owner occupied properties, geographic location and diversification, loan to value ratios and FICO scores, and seniority of
tranche. Stress tests assumed a combination of: slow prepayment rates, high annual default rates, and recovery rates of only 50% on each default. Based on the
Bank’s stress testing, which management believes is an extreme scenario, potential principal impairments to these pools is remote.
77
In respect of the following categories, the Bank does not consider those investments to be other-than-temporarily impaired at 31 December 2007:
Certificates of deposit
The unrealised losses on the Bank’s certificates of deposit were due to interest rate changes. However, given that all of these securities are investment grade
securities, and we have the ability and intent to hold these investments until there is a recovery of fair value, which may be at maturity, the Bank believes
that it will collect all amounts due according to the contractual terms of the investments.
US Government and federal agencies/corporations
The unrealised losses on the Bank’s investments in US Treasury obligations and direct obligations of US government agencies were due to interest rate changes.
However, given that all of these securities are investment grade securities, and we have the ability and intent to hold these investments until there is a recovery
of fair value, which may be at maturity, the Bank believes that it will collect all amounts due according to the contractual terms of the investments.
Collateralised mortgage obligations
The unrealised losses on the Bank’s investments in collateralised mortgage obligations were due to interest rate changes and widening credit spreads
caused by the recent disruption in the financial markets, the weakening of the US housing market, and credit rating downgrades of certain securities in the
marketplace. However, given that a substantial portion of these securities are investment grade securities, management assesses each security individually
for impairment, and we have the ability and intent to hold these investments until there is a recovery of fair value, which may be at maturity, the Bank
believes that a significant deterioration has not occurred as it is not probable that all amounts due (principal and interest) will not be collected.
Debt securities issued by non-US governments
The unrealised losses on the Bank’s investments in non-US government debt securities obligations and direct obligations of non-US government agencies
were due to interest rate changes. Given that these securities are investment grade, and we have the ability and intent to hold these investments until there
is a recovery of fair value, which may be at maturity, the Bank believes that a significant deterioration has not occurred as it is not probable that all amounts
due (principal and interest) will not be collected.
Corporate debt securities
The unrealised losses on the Bank’s investments in corporate bonds were due to interest rate changes and widening credit spreads and credit rating
downgrades of certain securities in the marketplace. However, given that these securities are predominantly investment grade, and we have the ability and
intent to hold these investments until there is a recovery of fair value, which may be at maturity, the Bank believes that a significant deterioration has not
occurred as it is not probable that all amounts due (principal and interest) will not be collected.
Other, primarily asset-backed securities
The unrealised losses on the Bank’s other investments, primarily asset-backed securities were due to interest rate changes and widening credit spreads
caused by the recent disruption in the financial markets, and credit rating downgrades of certain securities in the marketplace. However, given that a
substantial portion of these securities are investment grade securities, management assesses each security individually for impairment, and the Bank has
the ability and intent to hold these investments until there is a recovery of fair value, which may be at maturity, management believes that a significant
deterioration has not occurred as it is not probable that all amounts due (principal and interest) will not be collected. In August 2007, the Bank purchased
from a related party, namely the AAAm rated Butterfield Money Market Fund Ltd. (BMMFL), $93 million of collateralised mortgage obligations at its best
estimate of fair value at the time. The Bank holds the purchased securities in its held to maturity portfolio.
The following table presents realised and unrealised gains and losses on trading securities:
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.
2007
2006
3,252
(31 )
3,221
2,103
(495 )
1,608
Annual Report 2007
Note 5: Loans
The composition of the loan portfolio at each of the indicated dates was as follows:
31 December
Bermuda
620,973
Commercial loans
Commercial and industrial
Commercial real estate
194,911
Commercial mortgage
194,130
Construction
211,596
Financial institutions
15,600
Government
42,758
Overdrafts
1,279,968
Total commercial loans
Less allowance for credit losses on commercial loans
(12,206 )
Total commercial loans after allowance for credit losses 1,267,762
Consumer loans
59,301
Automobile financing
51,185
Credit card
1,053,387
Mortgages
7,734
Overdrafts
80,580
Other consumer
1,252,187
Total consumer loans
Less allowance for credit losses on consumer loans
(8,965 )
Total consumer loans after allowance for credit losses 1,243,222
2007
Non-
Bermuda
Total
Bermuda
2006
Non-
Bermuda
Total
156,245
777,218
467,222
183,749
650,971
588,065
11,351
35,880
3,017
167,701
962,259
(1,757 )
960,502
782,976
205,481
247,476
18,617
210,459
2,242,227
(13,963 )
2,228,264
6,106
22,109
333,795
6,447
288,778
657,235
(3,958 )
653,277
65,407
73,294
1,387,182
14,181
369,359
1,909,423
(12,923 )
1,896,500
123,123
138,055
422,528
21,600
24,995
1,197,523
(12,734 )
1,184,789
60,068
42,385
904,339
4,514
76,787
1,088,093
(7,628 )
1,080,465
485,179
7,920
26,392
-
214,627
917,867
(1,763 )
916,104
7,419
18,879
352,906
16,254
187,537
582,995
(3,608 )
579,387
608,302
145,975
448,920
21,600
239,622
2,115,390
(14,497 )
2,100,893
67,487
61,264
1,257,245
20,768
264,324
1,671,088
(11,236 )
1,659,852
Total loans
Less allowance for credit losses
Net loans
2,532,155
(21,171 )
2,510,984
1,619,494
(5,715 )
1,613,779
4,151,650
(26,886 )
4,124,764
2,285,616
(20,362 )
2,265,254
1,500,862
(5,371 )
1,495,491
3,786,478
(25,733 )
3,760,745
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 2007 is 7.21% (2006: 6.94%).
79
The table below sets forth information about the Bank’s non-accrual loans:
31 December
Commercial loans - Bermuda
Commercial loans - Non-Bermuda
Consumer loans - Bermuda
Consumer loans - Non-Bermuda
Mortgages - Bermuda
Mortgages - Non-Bermuda
Total
Gross
3,354
12,650
1,416
1,381
11,321
6,628
36,750
2007
Allowance
Total
Gross
2006
Allowance
(2,272 )
(201 )
1,082
12,449
(179 )
(747 )
(165 )
(300 )
(3,864 )
1,237
634
11,156
6,328
32,886
5,082
7,201
1,524
1,053
7,714
6,514
29,088
(2,484 )
(226 )
(51 )
(610 )
(165 )
(79 )
(3,615 )
Total
2,598
6,975
1,473
443
7,549
6,435
25,473
For the year ended 31 December 2007, the amount of gross interest income that would have been recorded had impaired loans been current was $3.1 million
(2006: $2.8 million). For the year ended 31 December 2007, the Bank recovered overdue interest of $0.4 million (2006: $0.2 million) on impaired loans that were
repaid in the year. The average balance of impaired loans during the year ended 31 December 2007 was $34.7 million (2006: $28.5 million).
The table below summarises the changes in the allowances for credit losses:
Year ended 31 December
Allowance for credit losses at beginning of year
Provision this year
Recoveries
Charge-offs
Allowance for credit losses at end of year
Specific
allowances
2007
General
allowance
3,615
2,794
316
(2,860 )
3,865
22,118
(811 )
2,380
(666 )
23,021
Specific
allowances
2006
General
allowances
4,104
1,871
400
(2,760 )
3,615
20,630
1,126
996
(634 )
22,118
Total
25,733
1,983
2,696
(3,526 )
26,886
Total
24,734
2,997
1,396
(3,394 )
25,733
The table below presents information about the loan delinquencies, and charge-offs:
31 December
loans
past due Charge-offs
2007
Loans 90
delinquent days or more
Total
Total
2006
Loans 90
delinquent days or more
past due
loans
Credit card
Automobile financing
Other consumer and mortgages
Consumer loans
Commercial loans
Total loans reported
6,001
2,563
51,854
60,418
35,694
96,112
788
1,524
19,668
21,980
16,293
38,273
1,534
238
1,126
2,898
628
3,526
4,770
2,513
30,409
37,692
12,165
49,857
502
441
20,001
20,944
8,967
29,911
Annual Report 2007
Charge-offs
1,204
27
188
1,419
310
1,729
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 include 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
Banks and financial services
Commercial and merchandising
Governments
Individuals
Primary industry and manufacturing
Real estate
Transport and communication
Sub-total
General allowance
Total
2007
On-balance Off-balance Total credit
exposure
sheet
sheet
2006
On-balance Off-balance
sheet
sheet
Total credit
exposure
482,765
595,596
29,049
1,824,497
57,787
1,132,237
25,855
4,147,786
(23,022 )
4,124,764
610,577
275,756
-
179,814
37,370
140,681
2,803
1,247,001
-
1,247,001
1,093,342
871,352
29,049
2,004,311
95,157
1,272,918
28,658
5,394,787
(23,022 )
5,371,765
851,643
444,696
21,600
1,659,580
28,731
755,089
21,524
3,782,863
(22,118 )
3,760,745
818,742
252,723
2,400
156,834
36,476
156,169
11,731
1,435,075
-
1,435,075
1,670,385
697,419
24,000
1,816,414
65,207
911,258
33,255
5,217,938
(22,118 )
5,195,820
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
2007
On-balance Off-balance Total credit
exposure
sheet
sheet
2006
On-balance Off-balance
sheet
sheet
Total credit
exposure
2,529,540
148,447
351,776
465,663
41,368
610,992
4,147,786
(23,022 )
4,124,764
661,089
4,091
137,227
333,850
-
110,744
1,247,001
-
1,247,001
3,190,629
152,538
489,003
799,513
41,368
721,736
5,394,787
(23,022 )
5,371,765
2,282,917
125,044
343,710
451,046
13,598
566,548
3,782,863
(22,118 )
3,760,745
1,016,157
29,467
110,242
163,940
-
115,269
1,435,075
-
1,435,075
3,299,074
154,511
453,952
614,986
13,598
681,817
5,217,938
(22,118 )
5,195,820
81
Note 7: Premises, Equipment and Computer Software
The following table summarises land, buildings, equipment and computer software:
2007
Accumulated Net carrying
value
Cost depreciation
2006
Accumulated
Cos t depreciation
Net carrying
value
13,726
154,737
60,332
86,254
315,049
-
(34,537 )
(39,033 )
(26,100 )
(99,670 )
13,571
126,218
50,366
66,055
256,210
-
(29,757 )
(30,907 )
(24,220 )
(84,884 )
13,726
120,200
21,299
60,154
215,379
2007
6,026
3,075
6,803
15,904
31 December
Land
Buildings
Equipment
Computer software
Total
31 December
Depreciation
Buildings (included in property expense)
Equipment (included in property expense)
Computer hardware and software (included in technology expense)
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
Balance as at 31 December 2005
Foreign exchange translation adjustment
Balance as at 31 December 2006
Foreign exchange translation adjustment
Balance as at 31 December 2007
Other intangible assets
31 December
Bermuda
Barbados
Cayman
Guernsey
The Bahamas
United Kingdom
Customer relationships
Barbados
Guernsey
The
Bahamas
United
Kingdom
7,343
1,020
8,363
114
8,477
1,923
-
1,923
-
1,923
5,220
-
5,220
-
5,220
2007
8,354
1,158
9,512
128
9,640
2006
Gross
carrying Accumulated
amount amortisation
26,063
6,681
1,211
52,504
7,790
20,477
114,726
(2,003 )
(1,816 )
(268 )
(21,147 )
(2,819 )
(5,443 )
(33,496 )
Net
carrying
amount
24,060
4,865
943
31,357
4,971
15,034
81,230
Gross
carrying Accumulated
amount amortisation
8,337
6,681
1,211
51,801
7,790
20,219
96,039
(1,250 )
(1,371 )
(188 )
(17,381 )
(2,142 )
(4,022 )
(26,354 )
There have been no impairment losses for the years ended 31 December 2007 and 2006. The estimated aggregate amortisation expense for each of the succeeding
years until 31 December 2012 is $7.8 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 2007, the
Bank acquired new customer relationships for $17.7 million (2006: nil) as a result of the aquisition of Bentley Reid and this has been included in the Bermuda segment
based on management reporting lines, the amortisation expense amounted to $6.9 million (2006: $6.3 million) and the foreign exchange translation adjustment
increased the net carrying amount by $0.7 million (2006: $6.4 million).
Annual Report 2007
13,571
96,461
19,459
41,835
171,326
2006
3,755
3,549
6,552
13,856
Total
22,840
2,178
25,018
242
25,260
Net
carrying
amount
7,087
5,310
1,023
34,420
5,648
16,197
69,685
Note 9: Customer Deposits and Deposits from Banks
(a) By Maturity
31 December
Customers
Banks
Total
Customers
2007
2006
Banks
Total
Demand deposits
Demand deposits - Non-interest bearing
Demand deposits - Interest bearing
Sub-total - demand deposits
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
1,042,062
4,869,122
5,911,184
-
154,769
154,769
1,042,062
5,023,891
6,065,953
964,496
4,779,115
5,743,611
-
49,248
49,248
964,496
4,828,363
5,792,859
4,153,351
178,814
198,230
4,530,395
147,080
4,543
-
151,623
4,300,431
183,357
198,230
4,682,018
3,594,235
200,471
217,342
4,012,048
233,097
2,995
1,833
237,925
3,827,332
203,466
219,175
4,249,973
Total
10,441,579
306,392
10,747,971
9,755,659
287,173
10,042,832
(b) By Type and Location
31 December
Bermuda
Customers
Banks
Barbados
Customers
Banks
Cayman
Customers
Banks
Guernsey
Customers
Banks
The Bahamas
Customers
Banks
United Kingdom
Customers
Banks
Total Customers
Total Banks
Total
2007
2006
Payable Payable on a
fixed date
on demand
Total
Payable Payable on a
fixed date
on demand
Total
2,229,386
86,562
1,626,180
27,078
3,855,566
113,640
2,273,826
-
1,558,952
-
3,832,778
-
165,532
2,566
60,609
20,549
226,141
23,115
123,621
-
45,886
16,156
169,507
16,156
1,518,295
12,848
839,220
98,709
2,357,515
111,557
1,646,663
38,198
727,156
78,782
2,373,819
116,980
962,832
44,649
1,143,182
506
2,106,014
45,155
717,452
8,346
892,275
10,037
1,609,727
18,383
72,393
-
81,967
-
154,360
-
61,444
-
78,454
1,558
139,898
1,558
962,746
8,144
5,911,184
154,769
6,065,953
779,237
4,781
1,741,983
12,925
4,530,395 10,441,579
306,392
4,682,018 10,747,971
151,623
920,605
2,704
5,743,611
49,248
5,792,859
709,325
131,392
4,012,048
237,925
4,249,973
1,629,930
134,096
9,755,659
287,173
10,042,832
83
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.
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.
2007
Post-retirement
medical benefit
plan
Pension
plans
Pension
plans
Accumulated benefit obligation at end of year
109,978
-
112,720
Change in projected benefit obligation
Opening projected benefit obligation
Service cost
Employee contributions
Interest cost
Benefits paid
Settlement of liability
Actuarial (gain) loss
Foreign exchange translation adjustment
Closing projected benefit obligation
Change in plan assets
Opening fair value of plan assets
Actual return on plan assets
Employer contribution
Employee contributions
Benefits paid
Cost of settlement
Foreign exchange translation adjustment
Closing fair value of plan assets
Funded status
Surplus (deficit) of plan assets over
projected benefit obligation at measurement date
Employer contribution during the period from
measurement date to fiscal year end
Net asset (liability) recognised
Amounts recognised in the balance sheet consist of:
Prepaid benefit cost included in other assets
Accrued pension benefit cost included in
employee future benefits liability
Net asset (liability) recognised in the balance sheet
122,378
3,529
332
6,632
(4,450 )
(2,969 )
(5,982 )
742
120,212
122,729
6,682
8,541
400
(4,450 )
(2,603 )
708
132,007
11,795
167
11,962
11,962
-
11,962
106,656
2,612
-
6,192
(1,240 )
-
(16,068 )
-
98,152
-
-
1,240
-
(1,240 )
-
-
-
(98,152 )
89
(98,063 )
-
(98,063 )
(98,063 )
Before-tax amounts recognised in accumulated other comprehensive loss consist of:
3,542
Net actuarial gain (loss)
(89 )
Past service cost
Net amount recognised in accumulated other comprehensive loss 3,453
(21,141 )
-
(21,141 )
112,228
3,634
386
6,293
(5,079 )
-
(1,586 )
6,502
122,378
97,260
9,853
14,623
386
(5,079 )
-
5,686
122,729
351
161
512
1,130
(618 )
512
(161 )
(127 )
(288 )
2006
Post-retirement
medical benefit
plan
-
97,245
2,358
-
5,893
(1,569 )
-
2,729
-
106,656
-
-
1,569
-
(1,569 )
-
-
-
(106,656 )
83
(106,573 )
-
(106,573 )
(106,573 )
(40,409 )
-
(40,409 )
Annual Report 2007
The following table presents the expense constituents of the Bank’s defined benefit pension plans and the Bank’s post-retirement medical benefit plan:
Annual benefit expense
Service cost
Interest cost
Expected return on plan assets
Amortisation of past service cost
Amortisation of net actuarial loss
Gain on settlement
Defined benefit expense
Defined contribution expense
Total benefit expense
Other changes recognised in other comprehensive income
Net gain arising during the period
Amortisation of past service cost
Amortisation of net actuarial loss
Total changes recognised in other comprehensive income
2007
Post-retirement
medical benefit
plan
Pension
plans
2006
Post-retirement
medical benefit
plan
Pension
plans
3,529
6,632
(8,191 )
40
578
(366 )
2,222
5,281
7,503
3,692
40
578
4,310
2,612
6,192
N/A
-
3,200
-
12,004
-
12,004
16,068
-
3,200
19,268
3,634
6,293
(6,746 )
37
(52 )
-
3,166
4,589
7,755
N/A
N/A
N/A
N/A
2,358
5,893
N/A
-
3,368
-
11,619
-
11,619
N/A
N/A
N/A
N/A
The estimated portions of the net actuarial loss and past service cost for the pension plans that will be amortised from accumulated other comprehensive loss into
benefit expense over the next fiscal year are nil. The estimated portion of the net actuarial loss for the post-retirement medical benefit plan that will be amortised
from accumulated other comprehensive loss into benefit expense over the next fiscal year is $1.2 million.
31 December
Actuarial assumptions used to
determine annual benefit expense
2007
Post-retirement
medical benefit
plan
Pension
plans
2006
Post-retirement
medical benefit
plan
Pension
plans
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
5.35%
3.65%
6.55%
N/A
5.75%
N/A
N/A
10% to 5% in 2013
5.45%
3.80%
6.45%
N/A
6.00%
N/A
N/A
11% to 5% in 2013
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
6.25%
4.00%
N/A
6.70%
N/A
9% to 5% in 2013
5.35%
3.65%
N/A
5.75%
N/A
10% to 5% in 2013
For 2007, 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
$1.9 million increase (2006: $1.7 million) and a $1.5 million decrease (2006: $1.3 million), respectively, and on the benefit obligation a $17.6 million increase
(2006: $19.5 million) and a $14.3 million decrease (2006: $15.7 million), 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.
85
The weighted average actual and target asset allocations of the pension plans by asset category, are as follows:
31 December
Actual allocation
Target allocation
Actual allocation
Target allocation
2007
2006
Asset category
Equity securities (including equity mutual funds)
Debt securities (including debt mutual funds)
Other
Total
46%
44%
10%
100%
46%
52%
2%
100%
49%
32%
19%
100%
46%
43%
11%
100%
At 31 December 2007, 38.1% (2006: 34.8%) 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 2007, 3.1% (2006: 3.3%) of the plans’ 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 2008 Bank contribution to, and estimated benefit payments for the next ten years under, the pension and post-retirement medical benefit plans
are as follows:
Pension plans
Post-retirement medical
benefit plan
Estimated Bank contributions for 2008
3,300
3,510
Estimated benefit payments by year:
2008
2009
2010
2011
2012
2013-2017
3,600
4,300
4,700
5,000
5,200
30,200
3,510
3,925
4,363
4,773
5,140
31,433
The projected benefit obligation and fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets were nil and nil as
at 31 December 2007 ($93.2 million and $92.6 million respectively, as at 31 December 2006).
As at 31 December 2007 and 2006 there were no pension plans with an excess of accumulated benefit obligations over the plan assets.
Note 11: Commitments, Credit Related Arrangements and Contingencies
Commitments
The Bank was committed to expenditures under contract for software development and construction of $12.6 million and nil respectively, as at
31 December 2007 (2006: $3.3 million and $23.0 million). Rental expense for premises leased on a long-term basis for the year ended 31 December 2007
amounted to $7.9 million (2006: $5.7 million).
The following table summarises the Bank’s commitments for software development and long-term leases:
Year
2008
2009
2010
2011
2012
2013 & thereafter
19,559
6,566
5,273
5,081
5,093
7,094
Annual Report 2007
Credit Related Arrangements
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.
The Bank considers the fees collected in connection with the issuance of standby letters of credit to be representative of the fair value of its obligation
undertaken in issuing the guarantee. In accordance with applicable accounting standards related to guarantees, the Bank defers fees collected in connection
with the issuance of standby letters of credit. The fees are then recognised in income proportionately over the life of standby letters of credit agreements.
The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the
time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance
for possible loan losses.
The following table presents the credit related arrangements with contractual amounts representing credit risk as follows:
31 December
Gross
2007
Collateral
Net
Gross
2006
Collateral
Net
Commitments to extend credit
1,245,604
511,669
733,935
959,495
182,514
776,981
Letters of credit
Standby
Documentary and commercial
Guarantees
Forward guarantees
Total
407,656
2,381
16,744
1,527
1,673,912
350,983
2,381
10,283
1,527
876,843
56,673
-
6,461
-
797,069
492,220
2,422
15,667
1,741
1,471,545
443,098
2,422
9,164
1,741
638,939
49,122
-
6,503
-
832,606
Collateral is shown at estimated market value less selling cost. Where cash is the collateral, this is shown gross including interest income.
The Bank has a facility by one of its custodians, whereby the Bank may offer up to US$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 to set-off against securities held of 110% of the utilised facility. At
31 December 2007, $97.5 million (2006: $27.8 million) 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, with the following exception: the Bank has an interest in interpleader
proceedings in New York Southern Federal District Court concerning the priority of payments relating to an investment security in which the Bank has an
interest in an amount of $13.5 million, which is the carrying value. Given the significant uncertainty surrounding this matter, it is reasonably possible that a
loss will arise. However due to the significant uncertainty surrounding this matter an estimate of the potential loss in carrying value cannot be determined
and no provision has been made.
87
Note 12: Interest Income
Loans
The following table presents the components of loan interest income:
Year ended 31 December
Mortgages
Other loans
Amortisation of loan origination fees (net of amortised costs)
Total loan interest income
2007
144,240
134,190
278,430
6,265
284,695
Balance of unamortised loan fees as at 31 December
13,723
2006
111,783
120,893
232,676
5,093
237,769
12,528
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, Switzerland, The Bahamas, and the United Kingdom.
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 community, commercial and private banking 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.
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 Fund Services Limited, which provides valuation, accounting,
corporate and shareholder services, and Butterfield Trust (Bermuda) Limited which provides trust, estate, company management and custody 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, 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, investment and pension fund administration services and wealth management and fiduciary services.
The Switzerland segment provides wealth management and fiduciary 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.
Annual Report 2007
Operating segment information follows:
31 December
2007
2006
Total Assets
Bermuda
Community Banking
Wealth Management & Fiduciary Services and
Investment & Pension Fund Administration
Real Estate
Total Bermuda
Barbados
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Total overseas
Less: inter-segment eliminations
Total
Business Area Analysis
5,419,174
4,857,125
38,680
101,913
5,559,767
277,297
2,729,334
2,368,565
537
181,671
1,999,093
7,556,497
(1,205,344 )
11,910,920
37,532
82,735
4,977,392
213,449
2,792,777
1,809,527
351
155,398
1,985,942
6,957,444
(802,034 )
11,132,802
Net interest income
Year ended 31 December 2007
Customer Intersegment
Allowance Fees and
for credit
other
losses
Net Income
after
central
income revenue expenses allocations allocations* allocations
Net Income
before
central Central
Total
Total
146,817 (16,317 )
(2,332 )
33,282 161,450 120,908
40,542 18,246
58,788
Bermuda
Community Banking
Wealth Management & Fiduciary
Services and Investment &
Pension Fund Administration
Real Estate
Sub-total Bermuda
-
-
146,817
526
(1,268 )
(17,059 )
-
-
(2,332 )
82,922 83,448 47,563
1,119 10,221
118,591 246,017 178,692
2,387
35,885 (18,587 )
9,102
(9,102 )
8,761
67,325
1,039
Barbados
13,808
Cayman
Guernsey
4,514
Switzerland - (35)
2,981
The Bahamas
(5,248 )
United Kingdom
17,059
Sub-total overseas
418
30,850
105,783
7,323
48,603
18,589
42
352
-
-
-
(45 )
349
3,750 12,154 11,983
52,447 115,210 57,981
41,495 64,598 48,380
1,296
206
8,654 12,053
8,987
6,807 32,364 29,288
113,394 236,585 157,915
241
171
57,229
16,218
(1,090 )
3,066
3,076
78,670
(30 )
(6,549 )
(1,640 )
-
(292 )
(250 )
(8,761 )
17,298
-
76,086
141
50,680
14,578
(1,090 )
2,774
2,826
69,909
Total income
252,600
-
(1,983 )
231,985 482,602 336,607
145,995
-
145,995
Less: inter-segment eliminations
(principally rent and management fees)
-
252,600
-
-
-
(1,983 )
(12,639 )
(12,639 ) (12,639 )
219,346 469,963 323,968
-
145,995
-
-
-
145,995
Total
*This includes the allocation of property costs to the Bermuda business lines. In addition, it includes the charge out of the central costs across the Group.
89
Net interest income
Customer Intersegment
Allowance Fees and
other
income
for credit
losses
Net Income
before
central
Net Income
after
central
allocations allocations* allocations
Central
Total
Total
revenue expenses
Year ended 31 December 2006
Bermuda
Community Banking
Wealth Management & Fiduciary
Services and Investment &
Pension Fund Administration
Real Estate
Sub-total Bermuda
Barbados
Cayman
Guernsey
Switzerland
The Bahamas
United Kingdom
Sub-total overseas
119,740
(2,931 )
(1,902 )
34,712 149,619
110,660
38,959
-
38,959
-
-
119,740
8,785
53,133
15,391
4
(360 )
21,525
98,478
688
(1,235 )
(3,478 )
144
2,955
1,728
-
2,535
(3,884 )
3,478
-
-
(1,902 )
75,244
3,811
75,932
2,576
113,767 228,127
42,318
9,050
162,028
(479 )
(615 )
-
-
(1 )
-
(1,095 )
3,845
43,643
33,250
-
6,907
7,726
12,295
99,116
50,369
4
9,081
25,367
95,371 196,232
11,320
45,724
39,468
244
6,874
24,618
128,248
33,614
(6,474 )
66,099
975
53,392
10,901
(240 )
2,207
749
67,984
-
-
-
-
-
-
-
-
-
-
33,614
(6,474 )
66,099
975
53,392
10,901
(240 )
2,207
749
67,984
Total income
218,218
-
(2,997 )
209,138 424,359
290,276
134,083
-
134,083
Less: inter-segment eliminations
(principally rent and management fees)
-
218,218
-
-
-
(2,997 )
(9,307 )
(9,307 )
199,831 415,052
(9,307 )
280,969
-
134,083
-
-
-
134,083
Total
For the year ended 31 December 2007, included within other expenses are the following income tax expense amounts: Guernsey $4.9 million (2006: $3.5 million),
United Kingdom $2.0 million (2006: $0.1 million) and Barbados $0.1 million (2006: $0.1 million). Transactions between operating segments principally include
interbank deposits and rent which are recorded based upon market rates, and management fees, which are recorded based on the cost of the services provided.
(b) Revenues by Products and Services
The principal sources of revenues by products and services are disclosed separately in the Consolidated Statement of Income.
Note 14: Accounting for Derivative Instruments and Risk Management
The Bank uses derivatives in the asset and liability management (ALM) of positions and to assist customers with their risk management objectives. The Bank
primarily enters into derivative contracts as part of its overall interest rate risk management strategy to minimise significant unplanned fluctuations in earnings
that are caused by interest rate volatility. The Bank’s goal is to manage interest rate sensitivity by modifying the repricing or maturity characteristics of certain
consolidated balance sheet assets and liabilities so that movements in interest rates do not adversely affect the net interest margin.
The Bank’s derivative contracts principally involve over the counter transactions that are privately negotiated between the Bank and the counterparty to the
contract. Derivative instruments that are used as part of the Bank’s interest rate risk management strategy include interest rate swaps and option contracts that
have indices related to the pricing of specific consolidated balance sheet assets and liabilities. Interest rate swaps generally involve the exchange of fixed and
variable-rate interest payments between two parties, based on a common notional principal amount and maturity date. Interest rate options represent contracts
that allow the holder of the option to receive cash or purchase, sell, or enter into a financial instrument at a specified price within a specified period.
The Bank pursues opportunities to reduce its exposure to credit losses on derivatives by entering into International Swaps and Derivatives Association Master
Agreements (ISDAs). Depending on the nature of the derivative transaction, bilateral collateral arrangements may be used as well. When the Bank is engaged
in more than one outstanding derivative transaction with the same counterparty, and also has a legally enforceable master netting agreement with that
counterparty, the ”net” marked to market exposure represents the netting of the positive and negative exposures with that counterparty. When there is a net
negative exposure, the Bank regards its credit exposure to the counterparty as being zero. The net marked to market position with a particular counterparty
represents a reasonable measure of credit risk when there is a legally enforceable master netting agreement between the Bank and that counterparty.
On 31 October 2007 the Bank provided credit enhancement to a related party, namely BMMFL. Under the credit enhancement agreement (the Agreement), the
Bank is committed to compensate BMMFL subject to a maximum of $50.0 million should specific identified investment holdings in BMMFL have a fair value less
than their carrying value and BMMFL is required to draw down on the obligation in order to retain its credit rating from the ratings agency. The decision by the
ratings agency with regard to the rating requirements is outside the control of the Bank. In consideration, the Bank receives a fee of $1.3 million during the six
month period covered by the Agreement ending 30 April 2008. As at 31 December 2007 the Bank has recognised a derivative liability for the fair value of the
credit derivative of $6.3 million. The Agreement may be terminated without being drawn down before its term expires in certain circumstances, including if the
underlying asset backed commercial paper is sold or restructured into securities at a price equal to or more than its then amortised cost. The value of the
Annual Report 2007
derivative liability has been determined based on marked-to-market fair valuation based on the difference between fair market value and the amortised
cost of the covered investments. This marked-to-market unrealised loss may be reversed in a subsequent period to the extent that the unrealised loss on
the covered investments are reduced due to increases in the market value of the covered investments.
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 2007 the Bank recognised a net loss of nil (2006: $0.1 million) reported as other income in the Consolidated
Statement of Income, which represented the ineffective portion of all fair value hedges. As of 31 December 2007 the Bank has recorded the fair value of
derivative instrument assets of $0.1 million (2006: $1.5 million) in other assets and derivative instrument liabilities of $5.1 million (2006: $6.2 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 loss 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 2007 and 2006, there was no hedge ineffectiveness related to cash flow hedges. As of 31 December 2007 and 2006 there was no deferred
net gains or losses on derivative instruments accumulated in other comprehensive income that 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 nil months (2006: 2
months). As of 31 December 2007, the Bank has recorded the fair value of derivative instrument of $0.1 million (2006: nil) in other liabilities.
(c) 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
Trading
ALM
Total value
Trading
ALM
Total value
2007
2006
Interest rate contracts
Interest rate swaps
Interest rate caps and currency options
Sub-total
Other derivatives
Spot and forward foreign exchange
Credit derivative
Sub-total
Total notional amount of financial
derivatives outstanding
40,000
38,686
78,686
407,676
-
407,676
447,676
38,686
486,362
2,763
43,810
46,573
476,332
-
476,332
479,095
43,810
522,905
11,826,492
50,000
11,876,492
-
-
-
11,826,492
50,000
11,876,492
7,369,599
-
7,369,599
-
-
-
7,369,599
-
7,369,599
11,955,178
407,676
12,362,854
7,416,172
476,332
7,892,504
Included in the notional amounts for cash flow hedges using interest rate swaps for 31 December 2007, are nil (2006: $25.0 million), pertaining to specific floating-
rate notes included in the investment portfolio which were classified as held to maturity. Included in the notional amounts for fair value hedges using interest rate
swaps for 2007, are $166.0 million (2006: $86.4 million) pertaining to specific loans, $125.0 million (2006: $125.0 million) pertaining to subordinated debt, and
$116.6 million (2006: $245.6 million) pertaining to fixed-rate deposits.
91
(d) 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
Credit derivative
Interest rate caps and currency options
Total fair value
Positive
2007
Negative
Net
Positive
1,085
71,692
-
1,039
73,816
5,884
77,475
6,250
1,039
90,648
(4,799 )
(5,783 )
(6,250 )
-
(16,832 )
1,485
25,410
-
1,286
28,181
2006
Negative
6,891
27,095
-
1,233
35,219
Net
(5,406 )
(1,685 )
-
53
(7,038 )
(e) 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 2007
Interest rate contracts
Interest rate swaps
Interest rate caps and currency options
Sub-total
Other derivatives
Spot and forward foreign exchange
Credit derivative
Sub-total
Within
6 months
6 to 12
months
1 to 3
years
3 to 5
years
After
5 years
Total
254,582
3,970
258,552
18,333
-
18,333
84,597
-
84,597
17,073
34,716
51,789
73,091
-
73,091
447,676
38,686
486,362
11,731,335
50,000
11,781,335
84,210
-
84,210
10,947
-
10,947
-
-
-
-
-
-
11,826,492
50,000
11,876,492
Total notional amount by remaining maturity
12,039,887
102,543
95,544
51,789
73,091
12,362,854
31 December 2006
Interest rate contracts
Interest rate swaps
Interest rate caps and currency options
Sub-total
Other derivatives
Spot and forward foreign exchange
Within
6 months
6 to 12
months
1 to 3
years
3 to 5
years
After
5 years
Total
196,182
16,750
212,932
47,223
12,250
59,473
102,305
3,917
106,222
58,344
10,893
69,237
75,041
-
75,041
479,095
43,810
522,905
7,325,246
38,760
110
5,483
-
7,369,599
Total notional amount by remaining maturity
7,538,178
98,233
106,332
74,720
75,041
7,892,504
Annual Report 2007
(f) 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 and currency options
Sub-total
Other derivatives
Spot and forward foreign exchange
Trading
-
1,039
1,039
2007
ALM
1,085
-
1,085
Total value
Trading
1,085
1,039
2,124
5
1,286
1,291
2006
ALM
1,480
-
1,480
Total value
1,485
1,286
2,771
71,692
-
71,692
25,410
-
25,410
Total replacement cost
72,731
1,085
73,816
26,701
1,480
28,181
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 107). Accordingly, certain amounts which are not considered financial instruments are excluded from the table. For investments with an
indicator of impairment, management has 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 (depreciation ) Carrying value
2007
Appreciation/
2006
Appreciation/
(depreciation)
Fair value
Financial assets
Cash and deposits with banks
Investments
Trading
Available for sale
Held to maturity
Loans
Commercial, net of allowance for credit losses
Consumer, net of allowance for credit losses
Other assets
Financial liabilities
Customer deposits
Demand deposits
Term deposits
Deposits, financial institutions
Other liabilities
Subordinated capital
2,517,012
2,517,012
-
3,151,191
3,151,191
-
58,534
932,238
3,754,217
58,534
932,238
3,591,980
-
-
(162,237 )
56,471
963,355
2,766,967
56,471
963,355
2,756,592
2,228,264
1,896,500
118,504
2,225,280
1,896,965
118,504
(2,984 )
465
-
2,100,893
1,659,852
434,073
2,097,201
1,660,992
434,073
5,911,184
4,530,395
306,392
65,741
284,191
5,911,184
4,526,335
306,392
65,741
290,993
-
4,060
-
-
(6,802 )
5,743,611
4,012,048
287,173
260,249
280,168
5,743,611
4,015,231
287,173
260,249
274,836
-
-
(10,375 )
(3,692 )
1,140
-
-
(3,183 )
-
-
5,332
93
Note 16: Interest Rate Risk
The following table sets out the assets, liabilities and shareholders’ equity 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 2007 (in $ millions)
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
Non-interest
5 years bearing funds
Total
Earlier of contractual maturity or repricing date
Assets
Cash and deposits with banks
Investments
Loans
Premises, equipment and computer software
Other assets
Total assets
Liabilities and shareholders’ equity
Shareholders’ equity
Deposits
Other liabilities
Subordinated capital (a)
Total liabilities and shareholders’ equity
2,284
3,987
3,478
-
-
9,749
-
7,807
-
125
7,932
43
301
215
-
-
559
-
1,517
-
-
1,517
Interest rate sensitivity gap
1,817 (958)
64
236
52
-
-
352
-
183
-
-
183
169
126
-
-
126
48
47
175 209 (4)
215
-
309
-
694
256
-
-
301
-
186
-
100
286
-
13
-
60
73
629
1,042
250
(1 )
1,920
15
183
(1,226 )
Cumulative interest rate sensitivity gap
1,817
859
1,028
1,043
1,226
-
2,517
4,745
4,125
215
309
11,911
629
10,748
250
284
11,911
-
-
31 December 2006 (in $ millions)
Within 3
months
3 to 6
months
6 to 12
months
1 to 5
years
After
5 years
Non-interest
bearing funds
Total
Earlier of contractual maturity or repricing date
Assets
Cash and deposits with banks
Investments
Loans
Premises, equipment and computer software
Other assets
Total assets
Liabilities and shareholders’ equity
Shareholders’ equity
Deposits
Other liabilities
Subordinated capital (a)
Total liabilities and shareholders’ equity
2,932
2,886
3,430
-
-
9,248
-
8,384
-
125
8,509
77
318
150
-
-
545
-
272
-
-
272
79
252
28
-
-
359
-
203
-
-
203
-
216
141
-
-
357
-
212
-
90
302
Interest rate sensitivity gap
739
273
156
55
-
69
50
-
-
119
-
89
-
70
78
41
63
46
(38 )
171
263
505
550
64
260
(5 )
1,769
(1,264 )
Cumulative interest rate sensitivity gap
739
1,012
1,168
1,223
1,264
-
(a) Includes interest rate swaps with fair value of $0.7 million (2006: $4.6 million), that are highly effective, designated and qualify as fair value hedges.
3,151
3,787
3,761
171
263
11,133
550
10,043
260
280
11,133
-
-
Annual Report 2007
Note 17: Subordinated Capital
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 $9.9 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 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 $1.7 million (2006: $1.5 million) and is included in interest
expense - subordinated capital 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 2007:
Within
1 year
1 to 5
years
After
5 years
Carrying
value
Subordinated capital
Bermuda
2003 issuance - Series A
2003 issuance - Series B
2005 issuance - Series A
2005 issuance - Series B
Subsidiary
Other (a)
Total
Fixed-rate
Fixed-rate
Fixed-rate
Fixed-rate
Fixed-rate
3,621
2,421
4,329
3,066
922
-
14,359
16,547
9,682
18,845
12,264
13,153
-
70,491
78,000
80,050
47,000
62,130
90,000
102,415
60,000
86,076
-
9,926
- (735)
284,191
330,671
(a) Other includes interest rate swaps with notional amount of $125 million, that are highly effective, designated and qualify as fair value hedges.
Note 18: Earnings per Share
Earnings per share has been calculated using the weighted average number of common shares outstanding during the year after deduction of the shares
held as treasury stock and adjusted for the stock split and the stock dividend declared during the years ended 31 December 2007 and 2006 (see also Note
23). The dilutive effect of share-based compensation plans was calculated using the treasury stock method, whereby the proceeds received from the exercise
of share-based awards 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)
2007
2006
145,995
134,083
89,514
(4,734 )
84,780
1.72
89,307
(4,440 )
84,867
1.58
95
31 December
Diluted 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)
Stock options (in thousands)
Adjusted weighted average number of diluted common shares (in thousands)
2007
2006
145,995
134,083
89,514
(4,734 )
2,137
86,917
1.68
89,307
(4,440 )
2,520
87,387
1.53
Note 19: Share-Based Payment
As at 31 December 2007, the Bank has three share-based compensation plans, which are described below. The compensation cost that has been charged
against net income for those plans for the year ended 31 December 2007 was $5.4 million (2006: $3.7 million). The total income tax benefit recognised in
the income statement for share-based compensation arrangements for the year ended 31 December 2007 was $0.1 million (2006: $0.1 million).
Stock Option Plan
At the Annual General Meeting of Shareholders held on 29 October 1997, the Directors were granted authority to implement a Stock Option Plan for
executive officers and employees.
Under the Bank’s 1997 Stock Option Plan (the 1997 Plan), options to purchase common shares of the Bank may be granted to employees and directors of
the Bank that entitle the holder to purchase one common share at a subscription price equal to the market price on the effective date of the grant. Option
exercise prices are stated and payable in Bermuda dollars. Generally, grants vest 25 percent at the end of each year for four years. The committee that
administers the 1997 Plan has the discretion to vary the period during which the holder has the right to exercise options and, in certain circumstances, may
accelerate the right of the holder to exercise options, but in no case shall the exercise period exceed ten years.
The Board of Directors of the Bank has established at 9,000,000 the current maximum number of common shares which may be issued or transferred by the
Stock Option Trust pursuant to exercise of options.
At 31 December 2007, the Bank held as treasury stock 4,903,324 common shares (2006: 1,494,584) that can be used to satisfy the Bank’s obligations with
respect to the Stock Option Plan.
Directors’ and Executive Officers’ Stock Option Plan
2007
2006
31 December
Number of
stock options
Weighted Weighted
average average life
remaining
exercise
(years)
price ($)
Aggregate
intrinsic
Number of
value ($) stock options
541,899
Outstanding at beginning of year
80,000
Granted (prior to 2007 stock split)
(75,204 )
Exercised (prior to 2007 stock split)
-
Stock dividend granted
Stock split
1,093,390
Exercised (after 2007 stock split) (241,037)
1,399,048
Outstanding at end of year
769,109
Vested and exercisable at end of year
30.96
58.25
19.89
-
12.16
7.80
12.91
10.32
614,698
100,000
(228,517 )
55,718
-
-
541,899
334,303
6.87
5.87
7,752
6,099
Weighted
average
exercise
price ($)
27.82
50.00
23.63
29.22
-
-
30.96
25.44
Annual Report 2007
Employees’ Stock Option Plan
31 December
Outstanding at beginning of year
Granted (prior to 2007 stock split)
Exercised (prior to 2007 stock split)
Forfeited/cancelled (prior to 2007 stock split)
Stock dividend granted
Stock split
Granted (after 2007 stock split)
Exercised (after 2007 stock split)
Forfeited/cancelled (after 2007 stock split)
Outstanding at end of year
Vested and exercisable at end of year
Number of
shares
transferable
upon exercise
2007
Weighted Weighted
average average life
remaining
exercise
(years)
price ($)
2006
Number of
shares
Aggregate
intrinsic
transferable
value ($) upon exercise
Weighted
average
exercise
price ($)
1,705,521
564,455
(291,193 )
(34,439 )
-
3,888,492
6,000
(575,753 )
(88,289 )
5,174,794
1,836,223
34.87
58.25
27.03
15.56
-
14.24
20.50
9.08
16.59
14.78
11.05
1,407,065
489,471
(345,914 )
(34,894 )
189,793
-
-
-
-
1,705,521
686,223
30.00
50.12
24.55
37.81
34.16
-
-
-
-
34.87
24.57
7.56
6.19
19,919
13,264
The weighted average fair value of stock options granted in the year ended 31 December 2007 was $6.54 per stock option (2006: $6.53), calculated using
the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
Year Ended 31 December
2007
2006
Projected dividend yield
Risk-free interest rate
Projected volatility
Expected life (years) 5.0 5.0
3.70%
4.80%
14%
4.00%
4.60%
16%
The projected dividend yield and volatility are based on the historical dividends paid and trading prices of the Bank’s common shares. The risk-free interest
rate for periods within the expected life of the option is based on the U.S. Treasuries yield curve in effect at the time of grant. The Bank uses historical data
to estimate expected option life and employee termination rates; separate groups of employees that have similar historical exercise behaviour are
considered separately for valuation purposes.
The compensation cost related to the Plan that has been charged against the income for the year ended 31 December 2007 was $2.9 million
(2006: $2.4 million). The total intrinsic value of options exercised during the year ended 31 December 2007 was $24.2 million (2006: $13.1 million).
As at 31 December 2007, there was $3.5 million of total unrecognised compensation cost related to non-vested options granted under the Plan. That cost is
expected to be recognised over a weighted average period of 2.3 years.
Deferred Incentive Plan
Under its Deferred Incentive Plan as approved by the Board of Directors, the Bank grants restricted common shares to selected members of the management
team. Shares are granted fully vested and are affected by transfer restrictions which are lifted at a rate of 33 percent at the end of each year for three
years. The fair value of each restricted common share granted under the Deferred Incentive Plan was estimated based on the grant date market price of the
Bank’s common shares discounted by 25% for their transfer restrictions. The discount for transfer restrictions was based, among other factors, on published
restricted stock studies. During the year ended 31 December 2007, 35,442 restricted shares were granted (2006: 32,569). The fair value of common shares
granted during the year ended 31 December 2007 was $1.5 million (2006: $1.3 million).
Executive Long-Term Incentive Restricted Shares Plan
The purpose of the Executive Long-Term Incentive Restricted Share Plan is to provide to selected executives of the Bank and certain subsidiaries of the
Bank compensation opportunities that are compatible with shareholder interests that will encourage share ownership and that will enhance the Bank’s
ability to retain key executives. Under its Executive Long-Term Incentive Restricted Share Plan, the Bank grants restricted shares to selected members of the
management team. Shares are granted unvested and vest at a rate of 25 percent at the end of each year for four years. In certain circumstances, including
retirement, shares vest on an accelerated basis. The fair value of each common share granted under the Executive Long-Term Incentive Restricted Share Plan
was based on the grant date market price of the Bank’s common shares. During the year ended 31 December 2007, 23,532 shares were granted (2006: nil).
The fair value of common shares granted during the year ended 31 December 2007 was $1.4 million (2006: nil). As at 31 December 2007, there was
$0.4 million of total unrecognised compensation cost related to non-vested shares granted under the Plan. That cost is expected to be recognised over
a weighted average period of 2.6 years.
97
Note 20: Share Buy-Back Plan
During the year, 125,603 common shares (2006: 47,659) were purchased and cancelled at a cost of $7.4 million (2006: $2.7 million) and 967,119 common
shares were purchased to be held as treasury stock at a cost of $38.1 million (2006: nil shares at a cost of nil).
During the same period, the Bank’s Stock Option Trust bought 597,818 common shares at a cost of $22.7 million (2006: 431,132 common shares at a cost
of $25.1 million) and the Bank’s Charitable Foundation bought nil common shares at a cost of nil (2006: 192,899 common shares at a cost of $11.0 million).
The Bank has the present intention to repurchase over the twelve month period commencing 1 January 2008, up to 3,000,000 of its common shares of par
value $1 each, pursuant to its share repurchase programme authorised by 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 than the last independent trade for a ‘round lot’,
defined as 100 shares or more.
The BSX is advised monthly of shares repurchased and cancelled by the Bank and shares purchased by both the Stock Option Trust and the Charitable Foundation.
Note 21: Dividend Re-Investment and Employee Common Stock Purchase Plans
The Bank’s dividend re-investment and employee common stock direct purchase plans permit participants to purchase, at 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: Capital Structure
The Bank’s authorised common share capital is $100,000,000 (par value: $1.00).
At the Annual General Meeting of Shareholders held on 18 April 2007, the Directors were granted authority to issue redeemable preference share capital of
US $1,000,000 (par value US $0.01) and £500,000 (par value of £0.01). The redeemable preference share capital is issuable with such powers, preferences
and other rights, limitations and restrictions as may be determined appropriate by the Directors.
Note 23: Stock Split and Stock Dividend
Shareholders of record at the close of business on 17 August 2007 were issued two additional shares of Butterfield Bank common stock on 31 August 2007
for each one share held as of the record date. All prior period per share data have been restated to reflect the three for one stock split.
In August 2006, the Bank distributed a 10% stock dividend to shareholders of record on 7 August 2006. All prior period per share data have been restated
to reflect the stock dividend.
Note 24: Variable Interest Entities
The effect of FIN 46R was a decrease in the Bank’s net assets of approximately $1.9 million for the year ended 31 December 2007 (2006: increase of
$1.4 million). The change primarily relates to the Bank’s venture capital investment subsidiary (Butterfield Vencap Limited). Butterfield Vencap Limited holds
investments in private 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 or receive a majority of the residual returns of these companies.
As at 31 December 2007 the total assets of variable interest entities consolidated in the balance sheet is $31.4 million (2006: $40.2 million).
Note 25: Income Taxes
The Bank is not subject to any taxes in Bermuda, The Bahamas and Cayman on either income or capital gains under current laws in those jurisdictions.
The Bank’s income tax expense for all periods presented relates to income from operations and is attributable to subsidiaries and offices in various other
jurisdictions that are subject to the relevant taxes in those jurisdictions.
Annual Report 2007
31 December
Income taxes in Consolidated Statement of Income
Current
Deferred
Total tax expense
Deferred income tax asset
Tax loss carried forward
General bad debt allowance
Pension liability
Allowance for compensated absence
Onerous leases
Other
Total asset
Deferred income tax liability
Net deferred income tax asset
2007
6,977
-
6,977
444
-
707
31
147
2,831
4,160
1,338
2,822
2006
3,061
731
3,792
3,953
20
912
34
145
704
5,768
266
5,502
For the years ended 31 December 2007 and 2006, there were no unrecognised tax benefits and the tax related interest and penalties recognised in net
income were nil. The Bank is no longer subject to federal, state and local income tax examinations by tax authorities for years before 1998.
Note 26: Future Accounting Developments
(a) Fair Value Measurement
In September 2006, the Financial Accounting Standards Board issued FAS No. 157, Fair Value Measurement (FAS 157), which addresses how companies
should measure fair value when required for recognition or disclosure purposes under US generally accepted accounting principles. Specifically, FAS 157
creates a common definition of fair value and will require expanded disclosures about fair value measurements. FAS 157 will be effective for fiscal years
beginning after 15 November 2007 and, therefore, effective from the Bank’s first quarter in 2008. The effect of adoption will not be material.
In February 2007, the Financial Accounting Standards Board issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(FAS 159), which permits companies to choose to measure many financial instruments and certain other items at fair value which are not currently required
to be measured at fair value. FAS 159 is effective for financial statements issued for fiscal years beginning after 15 November 2007, and therefore, effective
from the Bank’s first quarter in 2008. Management is currently evaluating the effect of adoption.
(b) Business Combinations
In December 2007, the Financial Accounting Standards Board issued FAS No. 141 (Revised), Business Combinations (FAS 141R), which addresses how
companies should recognise and measure assets and liabilities acquired through business combinations. FAS 141R is designed to improve the relevance and
comparability of financial information relating to business combinations. FAS 141R will be effective for fiscal years beginning after 15 December 2008 and
therefore, effective from the Bank’s first quarter in 2009. Management is currently evaluating the effect of adoption.
(c) Non-controlling Interests in Consolidated Financial Statements
In December 2007, the Financial Accounting Standards Board issued FAS No. 160, Non-controlling Interest in Consolidated Financial Statements
(FAS 160), which addresses how companies should measure and present non-controlling interests. FAS 160 is designed to improve the relevance,
comparability, and transparency of financial information relating to non-controlling interests. FAS 160 will be effective for fiscal years beginning after
15 December 2008 and therefore, effective from the Bank’s first quarter in 2009. Management is currently evaluating the effect of adoption.
Note 27: Subsequent Events
On 15 January 2008 the Bank provided credit enhancement to BMMFL. Under the credit enhancement agreement (the Agreement), the Bank is committed
to compensate BMMFL subject to a maximum of $51.0 million should specific identified investment holdings in BMMFL have a fair value less than their carrying
value and BMMFL is required to draw down on the obligation in order to retain its credit rating from the ratings agency. The decision by the ratings agency with
regard to the rating requirements is outside the control of the Bank. In consideration, the Bank is entitled to receive a fee of $1.5 million during the six month
period covered by the Agreement. The Agreement may be terminated without being drawn down before its term expires in certain circumstances, including if the
underlying asset backed commercial paper is sold or restructured into securities at a price equal to or more than its then amortised cost.
On 25 February 2008 the Bank purchased from BMMFL $75.0 million of asset backed security for fair market value of $73.565 million, and placed these
securities into the held to maturity portfolio. The holdings of the asset backed security are high quality with no direct exposure to sub-prime, mid-prime,
or second lien mortgages.
99
Directory.
Shareholders’ Information
Principal Offices & Subsidiaries
101
103
2007
101
Shareholders’
Information
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
Exchange Listing
and Executive Officers of the Bank in the shares of the Bank as at
The Bank’s shares are listed on the Bermuda Stock Exchange (BSX)
31 December 2007 were 1,441,125 shares. With the exception of
and the Cayman Islands Stock Exchange (CSX), located at:
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
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
contract expires on 30 June 2009.
Dividend Payment
Cayman Islands Stock Exchange
(Secondary Listing)
Elizabethan Square, 4th Floor
Dividends approved by the Board are paid quarterly, normally
occurring in November, March, May and August.
P.O. Box 2408
GT, Grand Cayman
Cayman Islands
Tel: (345) 945 6060
Fax: (345) 945 6061
www.csx.com.ky
Annual Report 2007
Share Dealing Service
Butterfield Securities (Bermuda) Limited
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3972
Fax: (441) 292 9947
E-mail: contact@bntb.bm
Share Price
Published daily in The Royal Gazette in Bermuda and available
on Bloomberg Financial Markets (symbol: NTB BH).
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 2008,
up to 3,000,000 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 2007, 3,000,000 shares represented 3.4% of total
issued shares of the Bank. This intention is subject to appropriate
market conditions and repurchases will only be made in the best
Also available on the BSX and CSX websites.
interests of the Bank. The Directors consider that share repurchase
Dividend Reinvestment Plan
Details are available from Butterfield Fund Services (Bermuda)
Limited (E-mail: contact@bntb.bm) and on our website,
is an excellent means of enhancing shareholder value while
increasing earnings per share.
In the 12 months to 31 December 2007, shares repurchased and
cancelled totalled* 376,809 shares at an average price of $19.65 and
www.butterfieldbank.com, under “About Us | Shareholder Information.”
aggregate cost of $7.4 million while shares repurchased and held
Certain restrictions apply.
Registrar and Transfer Agent
Butterfield Fund Services (Bermuda) Limited
Rosebank Centre
11 Bermudiana Road
Pembroke, HM 11
Bermuda
Tel: (441) 299 3882
Fax: (441) 295 6759
E-mail: contact@bntb.bm
Head Office
The Bank of N.T. Butterfield & Son Limited
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 295 1111
Fax: (441) 292 4365
E-mail: contact@bntb.bm
Media Relations &
Publication Requests
Marketing & Communications
Tel: (441) 299 1624 or (441) 298 4610
E-mail: markjohnson@bntb.bm or stuartroberts@bntb.bm
Investor Relations
Chief Financial Officer
Tel: (441) 299 1643
E-mail: richardferrett@bntb.bm
as treasury shares totalled 1,907,119 shares at an average price of
$20.00 and aggregate cost of $38.1 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 prearranged 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 those cancelled or held as treasury shares.
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 2007 totalled* 1,094,354 shares at on average price
of $20.73 and aggregate cost of $22.7 million.
(*Numbers have been adjusted to reflect the stock split during 2007
of two new shares issued for each share held.)
Large Shareholders
The following professional nominees at 31 December 2007 were
registered holders of 5% or more of the issued share capital:
Harcourt & Co. (15.8%), Palmar Limited (6.2%), Wilson & Co. (5.1%).
Known beneficial holdings of 5% or more of issued share capital at
that date were: Bermuda Life Insurance Company Limited (7.1%).
103
Principal Offices & Subsidiaries
Field Real Estate Holdings Limited
Real Estate Holding
This list does not include all companies in the Group.
The Bank of N.T. Butterfield & Son Limited
Holding Company, Community Banking, Private Banking,
Credit, Treasury Services
65 Front Street,
Hamilton, HM 12
Bermuda
Tel: (441) 295 1111
Fax: (441) 292 4365
Head Office
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 295 1111
Fax: (441) 292 4365
S.W.I.F.T. BNTB BM HM
E-mail: contact@bntb.bm
Mailing Address:
P.O. Box HM 195
Hamilton, HM AX
Bermuda
Bermuda
Butterfield Asset Management Limited
Investment Management, Brokerage Services
Managing Director: Ian Coulman
65 Front Street
Hamilton, HM 12
Bermuda
Tel: (441) 299 3817
Fax: (441) 292 9947
E-mail: contact@bntb.bm
Butterfield Fund Services (Bermuda) Limited
Investment & Pension Fund Administration
Managing Director: Douglas Lang
Rosebank Centre
11 Bermudiana Road
Pembroke, HM 11
Bermuda
Tel: (441) 299 3882
Fax: (441) 295 6759
E-mail: contact@bntb.bm
Butterfield Trust (Bermuda) Limited
Grosvenor Trust Company Limited
Personal Trust, Corporate Trust
Managing Director: Michelle Wolfe
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
Private Banking, Personal Trust, Corporate Trust
Managing Director: Robert Lotmore
3rd floor, Montague Sterling Centre, East Bay Street
P.O. Box N-3242
Nassau, N.P.
The Bahamas
Tel: (242) 393 8622
Fax: (242) 393 3772
E-mail: info@butterfieldbank.bs
Butterfield Fund Services (Bahamas) Limited
Investment & Pension Fund Administration
Managing Director: Heather Bellot
2nd floor, Montague Sterling Centre, East Bay Street
P.O. Box N-674
Nassau, N.P.
The Bahamas
Tel: (242) 393 8622
Fax: (242) 393 3772
E-mail: info@butterfieldbank.bs
Barbados
Butterfield Bank (Barbados) Limited
Community Banking
Director: Lloyd Wiggan
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
Representative Office
Vice President: Caroline Prow
Belleville Corporate Centre
38 Pine Road
Belleville, St Michael
Barbados
Tel: (246) 430 1650
Fax: (246) 436 7999
E-mail: carolineprow@butterfield.bb
Annual Report 2007
Canada
Butterfield Fund Services (Canada) Limited
Fund Administration
Managing Director: Sylvain Lacoursière
2nd Floor, Summit Place
1601 Lower Water Street
Halifax, Nova Scotia
Canada B3J 3P6
Tel: (902) 493 7601
Fax: (902) 493 7630
E-mail: sylvainlacoursiere@bntb.bm
Cayman Islands
Butterfield Bank (Cayman) Limited
Community Banking, Private Banking, Asset
Management, Personal Trust, Corporate Trust
Managing Director: Conor O’Dea
Butterfield House
68 Fort Street
P.O. Box 705
Grand Cayman KY1-1107
Cayman Islands
Tel: (345) 949 7055
Fax: (345) 949 7004
E-mail: info@butterfieldbank.ky
Butterfield Fund Services (Cayman) Limited
Investment & Pension Fund Administration
Managing Director: John Lewis
Butterfield House
68 Fort Street
P.O. Box 705
Grand Cayman KY1-1107
Cayman Islands
Tel: (345) 949 7055
Fax: (345) 949 7004
E-mail: fund.admin@butterfieldbank.ky
Guernsey
Butterfield Bank (Guernsey) Limited
Private Client and Institutional Banking and Credit,
Investment Management, Custody and Custodian
Trustee Services
Managing Director: Robert Moore
P.O. Box 25
Regency Court
Glategny Esplanade
St Peter Port, Guernsey GY1 3AP
Channel Islands
Tel: (44) 1481 711 521
Fax: (44) 1481 714 533
E-mail: info@butterfield.gg
Butterfield Trust (Guernsey) Limited
Fiduciary Services
Managing Director: Paul Hodgson
P.O. Box 25
Regency Court
Glategny Esplanade
St Peter Port, Guernsey GY1 3AP
Channel Islands
Tel: (44) 1481 711 521
Fax: (44) 1481 714 533
E-mail: info@butterfield.gg
Butterfield Fund Services (Guernsey) Limited
Investment & Pension Fund Administration
Managing Director: Patrick Firth
P.O. Box 25
Regency Court
Glategny Esplanade
St Peter Port, Guernsey GY1 3AP
Channel Islands
Tel: (44) 1481 720 321
Fax: (44) 1481 716 117
E-mail: info@butterfield.gg
Hong Kong
Bentley Asia Limited
Personal Trust
Bentley Capital (Pacific) Ltd
Asset Management
Bentley Reid & Co. (Pacific) Ltd
Wealth Advisory and Management
Deputy Chairman: Nic Bentley
24th Floor, Diamond Exchange Building
8-10 Duddell Street
Central
Hong Kong
Tel: (852) 2810 1233
Fax: (852) 2810 0849
E-mail: admin@bentleyreid.com.hk
Malta
Bentley Trust Limited
Personal Trust, Company Administration
Managing Director: Malcolm Becker
Level 7, Portomaso Tower
St Julians
PTM 01
Malta
Tel: (356) 21 37 8828
Fax: (356) 21 37 8383
E-mail: admin@bentleytrust.com.mt
Switzerland
Butterfield Trust (Switzerland) Limited
Trust and Company Services
Country Head, Managing Director: Jim Parker
Boulevard des Tranchées 16
1206 Geneva, Switzerland
Tel: (41) 22 839 0000
Fax: (41) 22 830 0099
E-mail: info@butterfield.ch
Butterfield Asset Management
(Switzerland) Limited
Asset Management, Funds Advisory
Managing Director: Iain Little
Talstrasse 37
CH-8022
Zurich, Switzerland
Tel: (41) 43 888 6488
Fax: (41) 43 888 6489
E-mail: info@butterfield.ch
United Kingdom
Butterfield Bank (UK) Limited
Private Banking, Credit, Treasury Services
Managing Director: George Bogucki
99 Gresham Street
London, EC2V 7NG
United Kingdom
Tel: (44) 207 776 6700
Fax: (44) 207 776 6701
E-mail: info@butterfieldprivatebank.co.uk
Butterfield International Private Office Limited
Global and Independent Asset Structuring Services
Managing Director: Katie Booth
99 Gresham Street
London, EC2V 7NG
United Kingdom
Tel: (44) 207 776 6700
Fax: (44) 207 776 6701
E-mail: info@butterfieldprivatebank.co.uk
Bentley Capital (Europe) Ltd
Asset Management
Bentley Reid & Co. (Europe) Ltd
Wealth Advisory and Management
Managing Director: Rupert Bentley
99 Gresham Street
London, EC2V 7NG
United Kingdom
Tel: (44) 207 776 6700
Fax: (44) 207 776 6701
E-mail: administrator@bentleycapital.co.uk